Irrespective of a share market struggling to keep upward momentum going, with indices in negative territory year-to-date, stockbroking analysts are issuing more downgrades than upgrades, and this picture becomes decisively negative when we look at valuations and price targets, and at earnings forecasts.
Sticking to recommendations, for now, total tally for the week ending Friday 16 November 2018 accumulated to ten upgrades (of which Lend Lease accounted for two) and twelve downgrades (with Lend Lease accounting for three). The good news here is that seven out of ten upgrades went to Buy (or an equivalent).
On the negative side, five out of twelve downgrades shifted to Sell with Aveo Group, Elders, Factor Therapeutics, Platinum Management and Shopping Centres Australasia all receiving one. Aveo Group, having issued yet another profit warning, also received a second downgrade to Neutral.
Very little happened during the week in terms of positive revisions to valuations and price targets. There is, however, plenty to witness on the flipside where downward adjustments are large and plenty. Aveo Group suffered a blow of -27%, worse than Lend Lease’s -25%. Others on the week’s receiving side include McMillan Shakespeare, Steadfast Group, Lovisa Holdings and NextDC.
No second guessing as to why share prices remain under pressure from both macro-economic and micro perspectives. The out-of-season financial reports continue to drip-drop in this week. When it comes to negative news, however, it’s the June-seasoned companies that are doing most of the damage, led by the likes of Lend Lease, Pact Holdings, Aveo Holdings, and numerous retailers.
In the good books
AGL ENERGY LIMITED (AGL) was upgraded to Buy from Neutral by Citi .B/H/S: 3/2/3
Citi analysts had been absent since April (last rating Neutral). They made a come-back by going against the grain, upgrading to Buy on the argument that investor concerns about political intervention risks are by now well and truly priced in, and possibly with too much emphasis on potential downside.
There is one caveat, in that the reintroduction of a carbon price if Labor is re-elected could still materially impact on the valuation of the business. Price target $20.27.
AUSNET SERVICES (AST) was upgraded to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/6/0
First half results were in line with Morgan Stanley’s estimates. The broker believes regulatory risks are factored into the price and this raises the defensive appeal of the stock.
The broker lifts growth estimates for the contracted asset base to around $1.2bn by FY21, 20% above the current level but considered achievable based on the large pipeline of new generation projects.
Rating is upgraded to Equal-weight from Underweight. Target is raised to $1.72 from $1.71. Industry view: Cautious.
See also AST downgrade.
LEND LEASE CORPORATION LIMITED (LLC) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/3/0
Lend Lease has announced an additional cost overrun of around $500m on NorthConnex and some other engineering construction projects. While there is heightened risk in the shares, Credit Suisse believes they are oversold and it may be attractive to buy ahead of the AGM on November 16.
Rating is upgraded to Outperform from Neutral. Target is steady at $16.20. The broker suspects there could be significant upside from a more aggressive focus on costs across the business.
See also LLC downgrade.
ORIGIN ENERGY LIMITED (ORG) was upgraded to Buy from Neutral by Citi .B/H/S: 5/2/0
Citi analysts have upgraded to Buy on the argument that investor concerns about political intervention risks are by now well and truly priced in, and possibly with too much emphasis on potential downside.
There is one caveat, in that the reintroduction of a carbon price if Labor is re-elected could still materially impact on the valuation of the business. Excluding this scenario, Citi thinks there is enough upside potential for an upgrade to Buy from Neutral. Price target $8.52 (was $8.74).
The analysts also point out, were they to use a US$70/bbl long term oil price then the target price would increase to $/9.62shr.
SEVEN WEST MEDIA LIMITED (SWM) was upgraded to Neutral from Sell by UBS .B/H/S: 0/3/2
Seven West has underperformed the market, UBS notes, since rival Nine Entertainment’s (NEC) October update which suggested a weaker metro TV market in which Nine was gaining share. Seven West’s own update confirmed such headwinds but the broker believes this could be a low watermark, given key programming lies ahead such as the cricket and My Kitchen Rules.
Guidance has been left unchanged on the assumption cost controls can offset weak TV, but UBS appears to have a lot of faith in the cricket and MKR and flags a typical election boost next year. The broker thus upgrades to Neutral from Sell while cutting its target to 80c from 85c.
WORLEYPARSONS LIMITED (WOR) was upgraded to Buy from Hold by Deutsche Bank .B/H/S: 5/2/0
Deutsche Bank likes the exposure to the recovery in oil & gas capital expenditure. The share price could be negatively affected by concerns regarding global growth and declines in the oil price, but the company is still expected to find significant opportunities for revenue and margin expansion.
Deutsche Bank forecasts 20% growth in earnings per share between FY18-21. Rating is upgraded to Buy from Hold and the target is raised to $20.15 from $19.10.
In the not-so-good books
AVEO GROUP (AOG) was downgraded to Underperform from Neutral by Macquarie and to Hold from Add by Morgans.B/H/S: 1/1/1
The trading update from the AGM signals to Macquarie that management is backtracking from FY19 guidance, with sales rates below expectations because of a weak residential market.
Given price deflation and lower sales across the retirement sector, the broker suspects conditions will remain tough and pressure margins in FY19.
Macquarie downgrades to Underperform from Neutral and struggles to envisage operating conditions improving. Target is reduced to $1.54 from $2.74.
Morgans downgrades forecasts by -21% and -34% for FY19 and FY20 respectively. The broker downgrades to Hold from Add, until there is further evidence sales rates are holding at current levels. Target is reduced to $2.09 from $3.37.
AUSNET SERVICES (AST) was downgraded to Neutral from Outperform by Macquarie .B/H/S: 1/6/0
The interim result was stronger than Macquarie expected, reflecting a better customer contribution. Macquarie believes the stock has performed well but the potential for growth is now factored in.
While the yield provides a floor, it is considered unlikely to be a catalyst for re-rating. A more coordinated government policy that accelerates growth and renewables is likely to be the driver of a re-rating, in the broker’s opinion. This is unlikely before May 2019.
Rating is downgraded to Neutral from Outperform. Target is lowered to $1.72 from $1.74.
See also AST upgrade.
FACTOR THERAPEUTICS LIMITED (FTT) was downgraded to Reduce from Add by Morgans .B/H/S: 0/0/1
The phase 2 trial for Factor Therapeutics’ treatment for venous leg ulcers failed at all levels. Ongoing development has been halted and the company will now look for ways to reduce costs and preserve cash and intellectual property.
Morgans downgrades to Reduce from Add. Target falls to 0.6c from 0.093c
SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP (SCP) was downgraded to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/3
Since the acquisition of the Vicinity Centres (VCX) in early October Credit Suisse observes the share price is now trading at a 13% premium to the last stated net tangible assets.
While the broker commends management on its ability to execute on its corporate strategy, the hefty premium to valuation is considered a stretch.
Rating is downgraded to Underperform from Neutral. Target is steady at $2.25.
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 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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