In the good books
Caltex (CTX) was upgraded to outperform from Neutral by Credit Suisse.
While uncertainties exist, Credit Suisse believes Caltex is on an undemanding multiple and there is increasing exposure to the convenience retail segment. The broker downgrades 2018 estimates to reflect guidance on retail margins and downtime at the Lytton facility, while outer-year upgrades are spread across fuel distribution and convenience. An alliance with Woolworths ((WOW)) reduces sourcing complexity and participation in the rewards program adds to the company’s market position. Credit Suisse upgrades to Outperform from Neutral and raises the target to $33.07 from $32.55. Without the distractions of contracts/M&A, better optimisation of fuels and infrastructure appears likely. The stock price at the time of writing was $26.92.
Lend Lease (LLC) was upgraded to Accumulate from Hold by Ord Minnett.
Ord Minnett has assumed a worst-case scenario for Lend Lease, including another material impairment and the engineering & services business being subjected to an orderly winding down. In such a scenario, the broker believes the company can return to a comfortable gearing position and avoid issuing dilutive equity. The broker forecasts Lend Lease will release $1.65bn in capital by divesting $550m of fund co-investments at the Barangaroo International towers and bring in a joint venture partner to One Sydney Harbour, its largest development project over the next five years. Ord Minnett upgrades to Accumulate from Hold and reduces the target to $15 from $16. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan. At time of writing the stock price was $12.78.
(See Lend Lease upgrade above)
Northern Star (NST) was upgraded to Outperform from Neutral by Macquarie.
Northern Star has made a $150m cash offer to acquire the 49% interest in East Kundana that it doesn’t already own. Macquarie believes consolidating the venture is a compelling option and the offer represents a discount to its valuation of the company’s 51% stake. The broker believes Northern Star is well-positioned to drive through a deal. Should the offer be successful, Northern Star will assume financial benefit from 1 January 2019. Rating is upgraded to Outperform from Neutral. Target is steady at $9.80 and at the time of writing the stock price was $8.20.
Seek (SEK) was upgraded to Neutral from Sell by UBS.
After the latest ANZ job advertising series and UBS proprietary data, the broker concludes that FY19 guidance, which indicates net profit of around $200m, should be secure. This view is held, despite the softening macro conditions and the slowing in domestic job growth. The broker believes the company still has cost levers to pull, even if the top line were to slow materially. Against revised estimates, the broker believes the stock is fairly valued. UBS upgrades to Neutral from Sell. Target is reduced to $18.50 from $19.50 and the stock price at the time of writing was $17.79.
In the not-so-good books
Elders (ELD) was downgraded to Reduce from Hold by Morgans.
Full-year results beat expectations, with underlying operating earnings 3.6% ahead of Morgans’ forecasts. In the broker’s view, the company has proven it can still grow earnings, despite the drought and a decline in cattle price. Management remains confident of delivering 5-10% earnings growth out to FY20, organically, through acquisitions and via cost control measures. Still, Morgans believes the stock is fully valued and downgrades to Reduce from Hold. Target is raised to $7.80 from $7.05 and at the time of writing the share price was $7.05.
Lend Lease (LLC) was downgraded to Neutral from Outperform by Macquarie, to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse.
The company has announced a $350m post-tax provision relating to engineering projects. Macquarie is disappointed with the outcome, which proves Lend Lease has not resolved the issues at NorthConnex. Given the uncertainty in engineering and despite the good medium-term prospects in global urban regeneration, Macquarie downgrades to Neutral from Outperform. This is the third provision that has been taken for NorthConnex, the broker suspects. The total impairment predominantly relates to projects that were previously identified, nevertheless, with major tunnelling projects still to be completed, the market will now assign a higher risk premium to these earnings, Macquarie points out. Target is reduced to $15.08 from $21.81. Citi lowers forecasts for FY19 earnings per share by -40% to reflect the downgrade. FY20 estimates are lowered by -14%. The broker is not sure the worst is behind the company, noting the engineering track record of Lend Lease is abysmal, with a loss of -$500m over the past five years. The broker reiterates a view that engineering should be spun off and any path to a recovery in the share price is now dependent on the company divesting the division in one form or another. Target is reduced to $15.06 from $22.36. Credit Suisse believes the shares have likely been oversold but the catalysts that will restore confidence in the business are some way off. The broker reduces FY19 estimates for operating earnings by -37%. A quick solution is likely to be a sale of the engineering business but the broker acknowledges this may not maximise shareholder value. Credit Suisse downgrades to Neutral and lowers the target to $16.20 from $19.30 but remember the current share price is $12.78!
(See Lend Lease upgrade above)
Primary Health Care (PRY) was downgraded to Neutral from Buy by Citi
Citi suspects FY19 net profit will be down on the prior year. At a macro level, the broker notes Medicare statistics for the September quarter were soft and the company has also found an issue in October with its payroll system, which resulted in medical centre staff being underpaid for the last seven years, with a -$18m underpayment likely to be paid out in cash. The Dorevitch Fair Work Commission determination has also indicated a post-tax impact on underlying net profit guidance of -$4.5m. The company hopes to offset this through cost reductions. Guidance is expected to be updated at the AGM on November 22. Citi downgrades to Neutral from Buy and reduces the target to $2.90 from $3.20. The current share price is $2.49.
Platinum Asset Management (PTM) was downgraded to Underperform from Neutral by Credit Suisse.
The company has reported a -5.5% fall in funds under management for October. Negative market movements drove the decline, despite a modest outperformance in the international fund and Asia fund. Inflows were slightly positive and largely from the retail channel. Factoring in the weaker market movements, Credit Suisse downgrades earnings by -6% for FY19 and -8% for FY20-21. Rating is downgraded to Underperform from Neutral, as the weak fund performance is likely to hamper flows. Target is reduced to $5.00 from $5.25 but it’s current stock price is $4.87.
Steadfast (SDF) was downgraded to Hold from Accumulate by Ord Minnett
The Australian Securities and Investments Commission (ASIC) has submitted a recommendation to the Hayne Royal Commission, recommending the removal of commissions for all insurance products. If this recommendation ultimately worked its way into legislation, Ord Minnett calculates it would have an adverse effect on Steadfast. The submission intends to fix problems related to products that provide little or no value to consumers, such as add-on insurance products and it is still too early to know if the recommendations will be accepted or become policy. Ord Minnett does not change earnings forecasts for Steadfast but increases its discount rate on valuation. The broker downgrades to Hold from Accumulate and reduces the target to $2.88 from $3.35. It’s current share price is $2.78.
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.
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