In the good books
ASX Limited (ASX) was upgraded to Hold from Sell by Deutsche Bank.
ASX has made a strong start to the 2019 financial year from a cash market perspective, Deutsche Bank observes, with the value traded up 17% for the first four months of the year on a 17% increase in volume traded. The recent market correction, nevertheless, is expected to drag on capital raisings for the next six months. The pullback in the share price now means the stock is in line with fair value and the broker upgrades to Hold from Sell. Target of $58.50 is maintained.
Cochlear (COH) was upgraded to Buy from Neutral by City.
A US court has awarded damages of US$268 million against Cochlear in a patent infringement case. As the patent in the litigation has expired, the judgment will not disrupt the company’s business in the US. Cochlear will appeal the judgment, a process that is expected to take up to two years. To stay the execution of the outcome pending appeal, Cochlear will need to lodge a US$335 million insurance bond with the court. As a consequence of the recent fall in the share price, Citi has issued the upgrade. Target reduced to $202 from $220.
CSR Limited (CSR) was upgraded to Buy from Hold by Deutsche Bank.
First-half net profit was below expectations, largely because of a worse result from property, which is now heavily skewed to the second half. Deutsche Bank believes the company’s varied end markets help offset a decline in residential volumes and building product margins. The broker recognises some earnings risk in aluminium, but believes the alumina/aluminium link is likely to return to its historical ratio by the time CSR has a new contract in January 2020. The rating is upgraded to Buy from Hold as the stock is trading at a significant discount to peers. Target is $3.70.
Corporate Travel Management (CTD) was upgraded to Buy from Hold by Ord Minnett.
Ord Minnett suggests investors take the opportunity to build a position in the stock, after weakness stemming from the issues raised in the recent report on the company’s business signalled some sloppy attention to detail regarding patents and the status of offices. Organic growth, acquisitions and investment in technology are driving margins higher, and the broker believes the key to understanding this business is the importance of the scale and leverage this creates. Target is steady at $30.30.
Galaxy Resources (GXY) was upgraded to Overweight from Equal-weight by Morgan Stanley.
The upgrade comes after a significant correction in the share price. While maintaining a negative house view on lithium prices, the broker envisages a valuation gap has emerged which may close as near-term catalysts approach, such as the sale process at Sal de Vida and resource drilling results at Mount Cattlin. Moreover, after receiving cash from POSCO, the broker expects a cash balance of around US$270 million, roughly one-third of the market capitalisation. Target is raised to $2.90 from $2.85.
Independence Group (IGO) was upgraded to Equal-weight from Underweight by Morgan Stanley.
After recent commodity price weakness, Morgan Stanley envisages upside for the near term for both nickel and gold prices. Hence, valuation support has emerged for Independence Group, leading to an upgrade to Equal-weight from Underweight. Drilling currently under way at Nova could provide a near-term catalyst for the stock, the broker adds. Moreover, management has flagged a move to dividends based on free cash flow in the near future, which could improve yield significantly. Target is raised to $4.40 from $4.15.
Incitec Pivot Limited (IPL) was upgraded to Outperform from Neutral by Credit Suisse.
The broker suspects the market is playing catch-up on fertiliser prices and the tightening supply for explosives in eastern Australia. Assumptions for fertiliser prices drive upgrades to the broker’s earnings estimate. Target is increased to $4.33 from $4.02.
Mineral Resources (MIN) was upgraded to Accumulate from Hold by Ord Minnett.
Ord Minnett notes the global lithium sector has shown signs of life following a price increase for battery and industrial grade in China’s spot market. Despite the continued focus on spot prices, which the broker deems irrelevant, all other electric vehicle link data remain positive. The upgrade is on the back of share price weakness and a view that the risk/reward ratio is now skewed to the upside. Target is steady at $18.
Macquarie Group (MQG) was upgraded to Accumulate from Hold by Ord Minnett.
Net profit in the first half was ahead of Ord Minnett forecasts. The upgrade to guidance has come more quickly than usual, which the broker suggests reflects confidence in the outlook, as it does not yet include the Quadrant Energy sale. Strength appears set to continue for the near term and the broker raises FY19-21 profit forecasts by 7-9%. Rating is upgraded to Accumulate from Hold and the target elevated to $132 from $117.
Orica (ORI) was upgraded to Outperform from Neutral by Credit Suisse.
Credit Suisse is confused as to whether the 2018 financial year result is merely about optics from a business that has been under pressure. The broker cites several reasons to be cautious because of the recent history and operating issues at Burrup. The upside case is created by a tightening of supply/demand in the Australia Pacific region. While not 100% convinced, Credit Suisse still suspects profits will be carried higher over the medium term. Target is raised to $19.08 from $17.60.
Oil Search (OSH) was upgraded to Neutral from Sell by Citi.
Citi now considers the ASX energy sector fairly priced, but ASX names are not being priced at a premium to global peers. Under price assumptions of US$70/bbl for oil and US$9/mmbtu for LNG in the long term, the stock would be trading at a -21% discount to the broker’s valuation, before considering the dividend yield. Target is raised to $7.42 from $7.07.
Smartgroup (SIQ) was upgraded to Add from Hold by Morgans.
Smartgroup’s share price has fallen some -20% since its peak post result in August, Morgans notes. While new car sales have indeed been weak in the September quarter, the broker expects novated demand has remained resilient, as suggested by peer McMillan Shakespeare. Consistent demand, combined with a focus on operational efficiencies and further acquisition potential, leads Morgans to consider the stock is now trading at a reasonable valuation. Target falls to $11.65 from $12.62.
Treasury Wine Estates (TWE) was upgraded to Outperform from Neutral by Macquarie, and to Overweight from Equal-weight by Morgan Stanley.
Macquarie reviews the investment thesis for Treasury Wine following the recent de-rating of the stock. The broker is increasingly convinced about margin improvement in the US, which remains a significant growth opportunity. The broker also expects the company to remain on the acquisition trail, principally focused on the US. Successful execution of US distribution changes presents margin upside of around 2-2.5%, in Macquarie’s opinion. Target is raised to $18.22 from $17.15.
Meanwhile, Morgan Stanley believes the sell-off since the FY18 results provides an attractive entry point to a unique growth story. Concerns regarding growth in China are overplayed and the broker suggests Treasury Wine’s earnings drivers are under appreciated. Target of $20 is retained.
Woodside Petroleum (WPL) was upgraded to Neutral from Sell by Citi.
Citi now considers the ASX energy sector fairly priced, but ASX names are not being priced at a premium to global peers. Under price assumptions of US$70/bbl for oil and US$9/mmbtu for LNG in the long term, the stock would be trading at a -14% discount to the broker’s valuation, before considering the dividend yield. Meanwhile, the changes announced by the Commonwealth Government to the petroleum resource rent tax have resulted in a -5% reduction to the broker’s valuation of Woodside. Target is reduced to $32.91 from $34.64.
Western Areas (WSA) was upgraded to Equal-weight from Underweight by Morgan Stanley.
As the project metrics at Odysseus have improved and there is upside for the nickel price, Morgan Stanley issues the upgrade. Nevertheless, limited mine life at the Forrestania assets and risks related to construction and commissioning of Odysseus provide higher pre-production expenditure estimates of $299 million. Target is reduced to $2.50 from $2.55.
Xerox (XRO) was upgraded to Buy from Lighten by Ord Minnett.
Ord Minnett observes the business has underperformed global peers over the past month, falling to what is now deemed an attractive entry price. First-half results are due on November 8 and the broker believes the focus will be on subscriber growth and acquisitions. Ord Minnett envisages 17% upside to its valuation. Target is increased to $48 from $42.
In the not-so-good books
Orica (ORI) was downgraded to Equal-weight from Overweight by Morgan Stanley.
Orica’s FY18 results were ahead of Morgan Stanley’s estimates, and Australia Pacific and Latin America stood out. EMEA disappointed. The broker considers the guidance vague albeit consistent with forecasts. Permanent repairs are expected to make the Burrup ammonium nitrate plant fully available for use in the first half of FY20. These issues of reliability cloud the medium-term outlook for the broker. Target is reduced to $17.90 from $18.90.
The above was compiled from reports on FNArena. 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.
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.