Brambles (BXB) was upgraded to Outperform from Neutral by Credit Suisse and to Equal-weight from Underweight by Morgan Stanley. B/H/S – 3/5/0. First quarter revenue growth of 6% was ahead of Credit Suisse forecasts. Management has indicated that price increases offset the majority of the cost inflation Brambles experienced in the quarter. Judging from press speculation, Credit Suisse observes significant private equity interest in the IFCO RPC business the company is seeking to sell or de-merge. The broker raises the target to $11.50 from $10.90. First half guidance was in line with Morgan Stanley’s expectations and this should move consensus estimates to more realistic levels. The broker believes inflation remains a risk, although conditions appear to be easing. The stock has outperformed the market by around 10% since just before its results, which Morgan Stanley believes reflects enthusiasm for the decision to separate out IFCO. Morgan Stanley raises the target to $10.30 from $9.90. Industry view is Cautious.
Domain Holdings Australia (DHG) was upgraded to Neutral from Sell by Citi. B/H/S – 2/3/1. Data suggest Domain’s market share has stabilised in key regions, particularly Melbourne, which leaves the company well positioned for when market conditions normalise. The broker is forecasting a rapid recovery in Sydney listing volumes from FY20. The stock’s PE still looks expensive in FY19, given a dip in earnings, but reasonable thereafter. It’s still a premium to REA Group (REA) but Citi expects a more rapid recovery for Domain on a Sydney rebound.
Flight Centre (FLT) was upgraded to Neutral from Underperform by Credit Suisse and Macquarie, to Overweight from Equal-weight by Morgan Stanley and to Add from Hold by Morgans. B/H/S – 4/4/0. Credit Suisse notes guidance for FY19 is around -5% below market estimates and the cause appears to be an underestimating of the impact of labour costs in Australia as well as the absence of credit card surcharge revenue in the UK. Target is reduced to $43.67 from $44.17.
With an FY19 PE of 16x Macquarie believes valuation is now largely addressed. Earnings risk is now more evenly balanced and, at current levels, Macquarie leans towards being a buyer, although awaits a more compelling valuation and confidence that the Australian leisure market has stabilised. Target is reduced to $47.00 from $48.80.
Morgan Stanley believes the pull back since the FY18 results provides an attractive entry point. The broker suggests US corporate business is under appreciated, noting Flight Centre now expects profits from overseas business to approach 50% during FY19. Morgan Stanley reduces the target to $59 from $63. Industry view: Cautious.
Morgans believes the stock has been oversold and is now trading at a material discount to the sector. The balance sheet is also strong and the company has an impressive track record in cash flow generation. Still, the broker cautions that patience is required and any re-rating will not occur until evidence the Australian business has recovered. Target is reduced to $51 from $59.
Regis Resources (RRL) was upgraded to Neutral from Sell by Citi. B/H/S – 2/5/1. September quarter production was in line with estimates and beat estimates on costs. The company is pushing ahead with the low-cost underground mining at Duketon. At McPhillamys a definitive feasibility study and environmental impact statement in the March quarter are expected to trigger a decision to mine. Target is raised to $4.25 from $3.75.
Virgin Australia Holdings (VAH) was upgraded to Neutral from Underperform by Credit Suisse. B/H/S – 0/2/2. First quarter revenue beat expectations and management expects second quarter revenue to rise 10% and underlying pre-tax profit to be at least $100 million in the first half. Credit Suisse increases first half estimates to $120 million. Target is steady at $0.20.
Worley Parsons (WOR) was upgraded to Neutral from Underperform by Credit Suisse. B/H/S – 2/4/0. WorleyParsons will acquire the energy, chemicals and resources division of Jacob’s Engineering for US$3.3 billion. The deal will be funded via an entitlement offer, debt and placement, leaving Jacob’s Engineering with 11% ownership of WorleyParsons. Credit Suisse estimates the price is reasonably full but the deal does provides an opportunity to capture new business from both geography and a sector perspective. Target is raised to $17.60 from $10.50.
In the not-so-good books
Cimic (CIM) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S – 2/3/0. Net profit for the nine months to September was up 12.6%, in line with Credit Suisse expectations. Work in hand is stable at $35 billion and management expects a further $35 billion in bidding opportunities this year. The broker maintains a target of $47.50, believing a premium rating for CIMIC is appropriate because of robust contract gains, order book and margins. Rating is downgraded to Neutral from Outperform.
Stockland (SGP) was downgraded to Underweight from Overweight by Morgan Stanley. B/H/S – 2/3/2. Morgan Stanley suggests the limited number of contracts on hand for FY20 could mean reductions to expectations if residential weakness persists. The company has only 974 contracts due to settle beyond FY19. As house price declines are accelerating, and price expectations are a key driver of future activity, Morgan Stanley reduces FY20 settlement forecast by -6%. Target is reduced to $4.15 from $4.60. Cautious industry view.
The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
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