The week’s overall review of downgrades revealed seven of 27 moving to a fresh sell. The only discernible sectoral trend appeared to be in gold, with six downgrades. A number of stockbrokers have been signalling they find value is becoming increasingly hard to find after gold shares have rallied in response to an increasing gold price.
Gold miner Saracen Mineral Holdings received three downgrades of which only one moved to a Sell. Both Treasury Wine Estates and Adbri received two downgrades (incorporating one move to a Sell apiece). Adbri’s downgrade appeared more structural with the loss of a major contract with Alcoa.
The majority of material adjustments to earnings estimates were to the downside. Four of the top five movers were mid-cap resource stocks. The largest positive change was reserved for Webjet after strengthening its balance sheet with a EUR100m convertible note offering.
Total Buy ratings for the seven brokers monitored daily remains high at 48.71% of total ratings, versus 40.84% on Neutral/Hold, and 10.44% with a Sell rating.
In the good books
AFTERPAY LIMITED (APT) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/3/1
Afterpay is demonstrating better than expected credit quality control, points out Morgan Stanley. The company’s sales growth is accelerating and the broker notes the company is diversifying away from the fashion category via eBay. Afterpay is expected to deliver almost 60% in revenue CAGR (compounded annual growth rate) over FY20-22 while maintaining about 2% net transaction margin. The company is starting operations in Canada in the first quarter of FY21 along with a US in-store rollout. This is to solidify its early mover advantage by moving to an omni-channel platform, comments the broker. Morgan Stanley thinks Afterpay may use its $800m capital raising to look for M&A options so as to enter new geographies. Revenue forecasts for FY21-22 upgraded by circa 15%. The broker is of the opinion that Afterpay is under-owned by Australian institutional investors. Morgan Stanley upgrades to Overweight from Equal-weight with the target price increasing to $101 from $36. Industry view: In-line.
CML GROUP LIMITED (CGR) was upgraded to Add from Hold by Morgans B/H/S: 1/0/0
CML Group provided a trading update and FY20 earnings guidance. In June, new clients and higher volumes lifted the Invoice Financing division, while client attrition and risk metrics are consistent with the pre-covid-19 era. Management expects volumes to keep growing and be assisted by reduced Government assistance for SME funding. Uncertain SME business conditions leaves the Equipment Finance book below historical levels. While future FY20 guidance may be impacted by provisioning, management is confident of no material future credit losses. Morgans believes the company is well positioned to return to sustainable growth, with the key opportunity in Factoring, and the potential for acquisitions as smaller operators lack access to funding. The rating is increased to Add from Hold. The target price is $0.40.
TREASURY WINE ESTATES LIMITED (TWE) was upgraded to Neutral from Underperform by Macquarie B/H/S: 0/6/0
Macquarie observes the company has experienced an unprecedented second half, with wine volumes affected by the bushfires, oversupply in the US and the impact of the virus in China. Private-label pressures are expected to continue in the short term as oversupply builds in America. However, Macquarie assesses some confidence around consumption levels is starting to return in China. The broker downgrades estimates for FY20-22. Rating is upgraded to Neutral from Underperform and the target lifted to $11.50 from $9.30.
See downgrades below.
VOCUS GROUP LIMITED (VOC) was upgraded to Buy from Neutral by UBS B/H/S: 3/3/0
The share price has underperformed and UBS upgrades to Buy from Neutral on valuation grounds. The broker expects valuation will become more compelling once FY20-21 expenditure is cycled. However, estimates for earnings per share are lowered by -9% to reflect higher interest costs post the recent re-financing and more difficult execution against growth targets. Target is reduced to $3.60 from $3.85.
WEST AFRICAN RESOURCES LIMITED (WAF) was upgraded to Neutral from Underperform by Macquarie B/H/S: 0/1/0
Operating performance was in line in the June quarter while the cash position was better than Macquarie expected. Commercial production at Sanbrado was declared and the broker expects progressive production growth over the next year. Given the stronger net debt position and the rolling forward of valuation, Macquarie upgrades to Neutral from Underperform. Target is raised to $1 from $0.90.
In the not-so-good books
AGL ENERGY LIMITED (AGL) was downgraded to Underperform from Neutral by Macquarie B/H/S: 0/4/3
Macquarie assesses power pricing is a challenge for AGL Energy as falling fuel costs and weak demand have led to a drop in earnings. There is also the issue of the Alcoa contract which is nearing expiry. The broker suggests any renewal is likely to reflect the soft forward market. Rating is downgraded to Underperform from Neutral, as the broker says the decay in electricity pricing as well as expiry of historical gas contracts cannot be ignored. Target is raised to $15.91 from $15.87.
ALUMINA LIMITED (AWC) was downgraded to Neutral from Buy by Citi B/H/S: 2/3/1
Following a review of transfer pricing arrangements over a 20-year period, the Australian Taxation Office has claimed additional tax plus interest from the AWAC joint venture. In accordance with dispute resolution practices, 50% of the additional tax of $214m will be paid out of cash flow in the September quarter. No further payment will be made until final resolution of the matter. Citi revises 2020/21 earnings estimates down by -4% to reflect higher Australian dollar forecasts. Distribution estimates are reduced as well. Alumina Ltd valuation is reduced. The broker downgrades to Neutral from Buy and lowers the target to $1.60 from $1.80.
EVOLUTION MINING LIMITED (EVN) was downgraded to Sell from Neutral by Citi B/H/S: 1/3/3
Citi increases gold estimates, expecting prices will outperform consensus forecasts. Gold stocks are expected to grind higher although value is now harder to find. The broker downgrades Evolution Mining to Sell from Neutral on a relative basis and considers the re-rating overdone. Target is raised to $5.60 from $5.20.
GOODMAN GROUP (GMG) was downgraded to Neutral from Buy by Citi B/H/S: 2/4/0
Citi transfers to another analyst and resumes coverage of Goodman Group with a downgrade to Neutral from Buy. Despite a strong growth outlook the broker assesses the current price is 70% above historical averages and this limits the upside over the next 12 months. The pandemic has highlighted the need for more warehouse/logistics space and this is expected to drive development activity. Margins remain at elevated levels. Investment earnings have lagged in recent years but an improved portfolio and lower disposal activity going forward should mean earnings growth increases to around 11% per annum, the broker assesses. Target is reduced to $16.50 from $18.50.
NEWCREST MINING LIMITED (NCM) was downgraded to Neutral from Buy by Citi B/H/S: 2/4/1
Citi increases gold estimates, expecting prices will outperform consensus forecasts. Gold stocks are expected to grind higher although value is now harder to find. Newcrest Mining is downgraded to Neutral from Buy because of recent appreciation. According to Citi, further upside rests with the bellwether stock getting its historical premium back sooner via visibility on Red Chris. Target is raised to $37 from $35.
PEET & COMPANY LIMITED (PPC) was downgraded to Neutral from Outperform by Macquarie B/H/S: 0/1/0
FY20 operating earnings are expected to be in the range of $14-16m and the company will also recognise a -$45m provision because of a write-down of land values related to assets it is looking to divest. The delay in capital expenditure related to new projects pushes out the earnings recovery, Macquarie asserts, and downgrades to Neutral from Outperform. Target is lowered to $0.95 from $1.04.
PERSEUS MINING LIMITED (PRU) was downgraded to Neutral from Buy by Citi B/H/S: 0/3/0
Citi increases gold estimates, expecting prices will outperform consensus forecasts. Gold stocks are expected to grind higher although value is now harder to find. Citi downgrades Perseus Mining to Neutral from Buy after a 30% gain in the share price. Targets is raised to $1.60 from $1.40.
SARACEN MINERAL HOLDINGS LIMITED (SAR) was downgraded to Neutral from Buy by Citi, to Underperform from Neutral by Macquarie and to Neutral from Buy by UBS B/H/S: 0/4/1
Citi increases gold estimates, expecting prices will outperform consensus forecasts. Gold stocks are expected to grind higher although value is now harder to find. Citi has downgraded Saracen Mineral Holdings to Neutral. Target is raised to $6.10 from $5.30.
Gold production and sales were short of Macquarie’s estimates in the June quarter. Yet, growing confidence in the continuity of operations in respect of the pandemic impact is observed, given reversion to the previous operating strategy. Macquarie downgrades to Underperform from Neutral because of recent strength in the share price. Target is steady at $5.40.
UBS envisages a number of upcoming positive catalysts such as an update at Carosue Dam/Thunderbox and a comprehensive update on the the Super Pit opportunity. The June quarter production result has driven a -10% downgrade to underlying net profit forecasts for FY20 and the broker also trims production forecasts at the Super Pit which are now considered too optimistic. UBS notes Saracen Mineral Holdings is no longer trading at a material discount to peers and downgrades to Neutral from Buy. Target is raised to $6.30 from $5.60.
TREASURY WINE ESTATES LIMITED (TWE) was downgraded to Neutral from Buy by UBS and to Lighten from Hold by Ord Minnett B/H/S: 0/6/0
FY20 earnings (EBITS) guidance of $530-540m is below expectations and raises several questions for UBS. These include whether earnings in the Americas will fully recover. The broker envisages several areas of risk, given accelerating market share loss and uncertainty around industry oversupply. Margins also remain under pressure. With few upside catalysts for the short term and plenty of uncertainty, UBS downgrades to Neutral from Buy. Target is reduced to $11.80 from $14.80.
FY20 EBITS guidance is well below Ord Minnett’s forecasts. The broker reduces estimates by -15% for FY20 and by -26% for FY21. The broker observes the wine oversupply in the US has weighed while the recovery in the Americas, exposed to pandemic restrictions, is likely to be slow, creating a risk for the first half of FY21. The poor 2020 vintage in Australia also reduces future potential revenue. Rating is downgraded to Lighten from Hold. Target is reduced to $10 from $11.
See upgrade above.
WISETECH GLOBAL LIMITED (WTC) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 1/1/0
Ord Minnett suspects FY21 consensus estimates are too high. The broker finds the range of forecasts surprising for a stock that is leveraged to existing customer growth and has a higher proportion of recurring revenue. A recovery in top-line momentum or margin improvement is not anticipated until FY22 and, hence, the broker suspects the stock is exposed to a downside correction. Rating is downgraded to Lighten from Hold and the target raised to $19.60 from $19.00.
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.