While macro-optimism has pushed up share prices over the first three weeks of the new calendar year, investors in Australia might be heartened by the observation that stockbroking analysts locally are equally supporting the upward move in share prices by issuing more recommendation upgrades than downgrades for individual ASX-listed stocks.
For the week ending Friday 18 January 2019, FNArena registered 16 upgrades versus nine downgrades. Alas, due to technical problems this week’s Report contains no insights on valuations and consensus earnings estimates but anecdotal observations suggest both are trending south ahead of the February reporting season. Most upgrades are inspired by weak valuations with both Michael Hill and News Corp receiving two upgrades during the week. That’s two times up to Neutral/Hold for the former, and two times up to Buy for the latter. All but two downgrades have moved to Neutral/Hold; the two “unlucky” ones, so to speak, to receive fresh Sell ratings are Platinum Asset Management (covered in last Thursday’s Switzer Report) and Sydney Airport.
In the good books
ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Equal-weight from Underweight by Morgan Stanley, B/H/S: 1/4/1
Morgan Stanley observes Adelaide Brighton has de-rated meaningfully and is now below its five-year average. The broker believes, at this level and still trading at a premium to peers, the stock is more attractive from a relative valuation perspective. Given the changes to management and timeline for any updates to strategy, the broker does not envisage any urgency in owning the stock. Rating is upgraded to Equal-weight from Underweight. Target is steady at $4.75. Industry view: Cautious.
BEACH ENERGY LIMITED (BPT) was upgraded to Outperform from Neutral by Credit Suisse, B/H/S: 3/2/0
Credit Suisse believes Beach Energy is uniquely situated as a domestic gas player, with the potential to capture east coast gas trading and consolidation. Potential acquisition candidates include Cooper Energy (COE) and Bass Strait interests. Credit Suisse is also comfortable with Seven Group (SVW) increasing its stake in Beach Energy. The broker upgrades to Outperform from Neutral, and expects price support over the next 18 months from continued cost reductions as well as modest production growth in the Cooper Basin. Target is raised to $1.75 from $1.25.
CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was upgraded to Buy from Neutral by UBS, B/H/S: 4/1/0
The stock has fallen -31% since its peak in September and UBS remains convinced of the growth opportunity. The broker asserts nothing is being priced in for future acquisitions. Upside risk to earnings is considered likely, given the company’s acquisition history, and the broker upgrades to Buy from Neutral. Target is reduced to $31.20 from $32.20.
MICHAEL HILL INTERNATIONAL LIMITED (MHJ) was upgraded to Hold from Reduce by Morgans, B/H/S: 2/2/0
Morgans is now more confident, given the return to positive sales growth over the crucial Christmas period, although retains some concerns about the outlook for gross margin going forward. Rating is upgraded to Hold from Reduce and the target raised to $0.62 from $0.60. The company did not provide its usual regional growth metrics but a strong performance is still envisaged for Canada. Nine Entertainment’s rating is upgraded to Buy from Neutral, entirely because of valuation, with the drop in the share price considered excessive. Target is reduced to $1.60 from $1.85.
NEWS CORPORATION (NWS) was upgraded to Buy from Neutral by UBS, B/H/S: 3/1/1
UBS has data which shows that price was the main reason why consumers either left Foxtel or never subscribed. However, with around 70% of households taking at least one pay-TV/SPAD product, consumers appear willing to pay for reasonably-priced content. Kayo Sports has a lower price point and the broker believes it can significantly grow Foxtel’s household penetration. The risk of cannibalisation exists but may be less than feared. Following the recent underperformance of the share price, UBS upgrades to Buy from Neutral and raises the target to $20.75 from $20.50, to allow for the upside potential.
In the not-so-good books
AGL ENERGY LIMITED (AGL) was downgraded to Hold from Accumulate by Ord Minnett, B/H/S: 2/3/3
The share price appears to have caught up with higher wholesale forward prices and, while Ord Minnett does not believe AGL will risk upgrading full year guidance at the interim result, higher electricity prices should be positive for earnings. The broker suspects an upgrade to full year guidance would risk even greater scrutiny from federal politicians. Energy and electricity prices are expected to be the main focus for both political parties leading up to the may 2019 election and the broker believes it will be difficult for the share price to outperform throughout that period. Rating is downgraded to Hold from Accumulate and the target is reduced to $23.20 from $23.40.
AUB GROUP LIMITED (AUB) was downgraded to Neutral from Outperform by Credit Suisse, B/H/S: 1/1/0
As a result of the uncertainty generated by the Hayne Royal Commission and the Australian Securities & Investments Commission submission, Credit Suisse lowers the target to $13.45 from $14.50. Rating is downgraded to Neutral from Outperform. While the issues are in relation to certain retail products, the debate in recent months highlights one of the broker’s biggest concerns: that a ban on conflicted remuneration could be extended to general insurance products.
STEADFAST GROUP LIMITED (SDF) was downgraded to Neutral from Outperform by Credit Suisse, B/H/S: 1/2/0
The ASIC submission to the Hayne Royal Commission has indicated the regulator believes a ban on conflicted remuneration should be extended to general insurance products. While the response was in relation to retail products, Credit Suisse believes this will create uncertainty and it could take some time before there is clarity on the issue. Rating is downgraded to Neutral from Outperform and target reduced to $3.00 from $3.15.
SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was downgraded to Sell from Buy by Citi, B/H/S: 3/3/2
Citi has a weaker organic growth outlook, resulting in reductions of -7% and -12% for distributions in 2019 and 2020, respectively. The broker also believes regulatory uncertainty is likely to drive underperformance. The broker downgrades to Sell from Buy, believing headwinds are gathering pace. The broker prefers property and utility companies which have more appealing distribution growth rates and lower leverage. Target is reduced to $6.00 from $7.74.
WHITEHAVEN COAL LIMITED (WHC) was downgraded to Neutral from Outperform by Macquarie, B/H/S: 7/1/0
December quarter operations were strong, with record production at Maules Creek. The company has guided to cost increases and this results in large reductions to Macquarie’s estimates for earnings per share. As a result the broker cuts the target to $4.70 from $5.60 and downgrades to Neutral from Outperform. The saving grace is that the company could pay an above-average dividend but Macquarie suspects the surprise increase to costs will outweigh this.
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.
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.