Securities analysts in Australia are still issuing more recommendation downgrades than upgrades, but at least the gap between the two is narrowing noticeably.
Consensus price targets experienced wild swings, as they tend to do in the midst of reporting season. The good news is that positive swings have been larger, on average, than the negative adjustments, although individual swings have been either cathartic or gut-wrenching at times.
Local reporting season is being replaced with large numbers of stocks going ex-dividend this month.
In the good books
CABCHARGE AUSTRALIA LIMITED (CAB) was upgraded to Neutral from Sell by UBS. B/H/S: 0/2/0. In the wake of the FY18 results UBS upgrades and target is raised to $2.20 from $2.15. The result itself is labelled “good” and “in line”, with the admission that it missed consensus by 6%. UBS analysts have lifted estimates and are anticipating a return to growth, forecasting a three-year EPS CAGR of 11%.
NORTHERN STAR RESOURCES LTD (NST) was upgraded to Buy from Neutral by Citi and to Accumulate from Lighten by Ord Minnett. B/H/S: 3/1/2. The company has announced it will acquire the 250kozpa Pogo underground gold mine in Alaska from Sumitomo for US$260m/A$347m and Citi analysts are supportive of the deal, also because Northern Star is turning into a global gold producer, expanding in low-risk jurisdiction. Target price moves to $8.25 from $7.15. Rating upgraded to Buy from Neutral. Ord Minnett believes the asset is genuinely worth more in the bidders hands, valuing Pogo at $576 million, or 90cps. The broker’s FY19 group operating earnings forecast has increased 26% and EBITDA per share is 21% higher. Rating is upgraded to Accumulate from Lighten and target rises to $7.50 from $6.40.
NEWS CORPORATION (NWS) was upgraded to Neutral from Sell by UBS. B/H/S: 2/3/1. News Corp has confirmed the potential IPO of Foxtel at its FY18 result. While Foxtel has experienced significant pressure, UBS forecasts FY19 to be an earnings trough. Further out, the broker envisages cost reduction opportunities arising from the Foxtel/Fox Sports merger not yet factored in. UBS upgrades following the recent underperformance in the share price. Target is reduced to $20.10 from $20.75.
SANDFIRE RESOURCES NL (SFR) was upgraded to Neutral from Sell by Citi. B/H/S: 0/4/3. Citi notes the FY18 performance missed market consensus by some 5%, even though it marked a big improvement on FY17. The broker has upgraded to Neutral from Sell inspired by “valuation”. Price target gains 10c to $7.70. Equally noteworthy, the analysts retain the High Risk rating due to the short mine life at DeGrussa plus the need remains for cash to be reinvested in a new project.
SPARK INFRASTRUCTURE GROUP (SKI) was upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S: 1/5/1. Morgan Stanley believes the relative appeal of the stock is increasing in view of its asset efficiency and the investment pipeline. Grids will continue to play an important role in energy supply and investment rates will not slow in the 2020s. The broker reduces the target to $2.44 from $2.51. Industry view is Cautious.
TPG TELECOM LIMITED (TPM) was upgraded to Add from Hold by Morgans. B/H/S: 2/2/3. The company has announced a merger with Vodafone Australia. Morgans observes both businesses service the cost conscious end of the market with around 20% share. The broker finds few details regarding the medium-term prospects, such as cost and capital expenditure savings and therefore finds it difficult to value the combined group and has not changed forecasts. The broker continues to be disappointed by management’s unwillingness to answer fundamental investment questions such as potential synergies. Morgans upgrades to Add from Hold purely on backing David Teoh, who will become non-executive chairman of the merged group. Morgans raises the target to $10.40 from $5.41.
In the not-so-good books
CALTEX AUSTRALIA LIMITED (CTX) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/1/1. Credit Suisse introduces new retail assumptions for Caltex, which set a lower underlying EBIT for stores transitioning to corporate ownership. Wholesale earnings estimates are reduced, with a lower margin from a new Woolworths (WOW) wholesale agreement commencing August 1. The broker believes the pre-existing franchise profitability base has been unsustainably high. Target is reduced to $32.55 from $40.80.
MYOB GROUP LIMITED (MYO) was downgraded to Neutral from Buy by Citi. B/H/S: 1/5/1. Citi had gone quiet on this stock and now reports a new analyst has been put in charge. Direct result is a downgrade to Neutral from Buy post Friday’s interim report release. The failed acquisition of Reckon (RKN) assets has now been pulled out of modelling, triggering significant reductions in forecasts and a big drop in price target to $3.32 from $4.25.
OROCOBRE LIMITED (ORE) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 6/1/1. With an uncertain outlook on all key metrics, as well as downside risk for prices, Macquarie believes the job will become harder for Orocobre before it gets better. The company was upbeat about lithium markets but peers are reporting a more pessimistic outlook and 2019 is not yet contracted. As no guidance was provided the broker downgrades to Neutral from Outperform. Target is reduced to $5.00 from $6.20.
QUBE HOLDINGS LIMITED (QUB) was downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/4/1. Qube Holding’s FY18 result was below Credit Suisse’s and consensus expectations with soft EBIT offset by improvements at Patrick. Guidance for FY19 was less upbeat than Credit Suisse had expected. The broker struggles to see value at the current share price and downgrades the stock. Target is raised to $2.40 from $2.35.
RELIANCE WORLDWIDE CORPORATION LIMITED (RWC) was downgraded to Sell from Hold by Deutsche Bank. B/H/S: 3/1/1. FY18 earnings were weaker than Deutsche Bank expected. The broker is pleased with the upgrade to synergies from the John Guest acquisition but remains concerned about growth in the underlying US business, ex acquisitions. Given the risks, and the fact the stock still trades at 23 times FY20 price/earnings estimates, the broker downgrades to Sell from Hold. Target is $4.80.
STOCKLAND (SGP) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/3/1. Stockland’s FY18 result was in line with Credit Suisse and guidance. Management guided to 5-7% FFO growth in FY19 and DPS growth of 4%. The result highlighted the challenges Stockland faces in its retail division, with slowing growth and negative revaluations coming at a time when the company is trying to reduce its exposure to retail. Target is reduced to $4.35 from $4.56.
SIGMA HEALTHCARE LIMITED (SIG) was downgraded to Neutral from Buy by Citi. B/H/S: 0/2/2. Sigma has run up 20% since July, reflecting a forecast earnings recovery by FY20, post the loss of the Chemist Warehouse contract, and the possibility of an acquisition using the working capital saved by the loss of the contract. The broker sees the stock as now fully valued and downgrades to Neutral (High Risk).Target unchanged at 55c.
SANTOS LIMITED (STO) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/4/2. Since Santos rejected the bid from Harbour Energy it has been beholden upon management to prove their strategy could provide a better outcome, says Credit Suisse, which is not yet convinced. The stock may have run up 22% since May but the broker believes it’s all about the oil price and not about strategy. The broker retains a $6.35 target with oil price strength offsetting the loss of takeover premium, but downgrades to Neutral from Outperform on a number of risks.
VIRGIN AUSTRALIA HOLDINGS LIMITED (VAH) was downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 0/1/2. FY18 results beat Credit Suisse estimates. This was mainly because of a stronger performance from the domestic operations, along with higher margins. However, the domestic performance was offset by a weaker outcome in other segments. Target is lowered to $0.20 from $0.25
WISETECH GLOBAL LIMITED (WTC) was downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/2/2. Macquarie reviews its investment case following the 40% rally in the stock post the FY18 result. M&A assumptions have also increased. The broker believes the longer-term market penetration and opportunity with CargoWise One is substantial. Yet the current valuation implies a premium of more than 100% to domestic and international peers and, in order to justify current multiples, the market appears to be factoring in rapid expansion. Target is raised to $17.50 from $11.39.
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.
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.