In the good books
- Asaleo Care (AHY) was upgraded to Outperform from Neutral by Credit Suisse
Pulp prices are falling and Credit Suisse now expects a -30% reduction in pulp costs for Asaleo in 2020, with 2019 supply already hedged. Now that local tissue business has been divested, the broker sees more stable revenue and margins ahead. Forecast cost relief leads to a forecast earnings increase of 18% in 2020. Target rises to $1.25 from 95 cents. Upgrade to Outperform from Neutral, noting a 5% yield.
- G.U.D. Holdings (GUD) was upgraded to Accumulate from Hold by Ord Minnett
While some dynamics will remain structural, such as weak first half cash flow, Ord Minnett believes the medium-term growth prospects for the business remain intact. The share price has de-rated and the broker upgrades to Accumulate from Hold. Ord Minnett believes the company can consistently generate more than 6% growth in organic earnings over the medium term. Market concerns about customer concentration in the automotive division are considered to be overstated. Target is raised to $12.70 from $12.00. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- HT&E (HT1) was upgraded to Outperform from Neutral by Credit Suisse
While reducing earnings estimates to reflect lower audience share in the second half of 2018, Credit Suisse believes the stock has fallen too far, given the underlying radio market is growing. The stock is considered to be offering value at current levels. Rating is upgraded to Outperform from Neutral and the target reduced to $1.95 from $2.23.
- Insurance Australia Group (IAG) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett notes a strong outlook for domestic commercial insurance rates, leading to an upgrade to Accumulate from Hold for Insurance Australia Group. The broker finds a favourable insurance cycle, little risk from the Royal Commission and stronger reinsurance protections are underpinning the stock. Target is raised to $8.00 from $7.10. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- Novonix (NVX) was upgraded to Add from Hold by Morgans
The company has exercised its option to increase its stake in PUREgraphite JV. Novonix now hold 75% of the joint venture and has rights to 100% of synthetic graphite above 1000tpa. Morgans considers this a positive step for the company to maximise super potential value of its synthetic graphite intellectual property. The broker reduces its risk factor on the JV in line with the milestones identified and upgrades to Add from Hold. Target is raised to $0.54 from $0.40. While more positive on the stock than previously, the broker cautions investors that the company still has a long way to go to build a profitable battery anode business at scale.
In the not-so-good books
- Australian Finance Group (AFG) was downgraded to Neutral from Outperform by Macquarie
Macquarie has downgraded Australian Finance Group to Neutral from Outperform in the wake of the Hayne Report, which recommends banning trailing commissions and switching to a borrower pays model for mortgage brokers. The downgrade reflects caution ahead of more clarity on regulation along with the weakening housing market. The broker has applied a -40% risk discount to valuation given uncertainty. Target falls to $1.17 from $1.95.
- ClearView Wealth (CVW) was downgraded to Neutral from Outperform by Macquarie
Macquarie has downgraded Clearview to Neutral from Outperform in the wake of the Hayne Report, the recommendations of which may add to the operational cost of the Life/Wealth Management/Advice model. Life remuneration faces more years of uncertainty, the broker suggests, while Wealth and Advice may be impacted by annual fee arrangement renewals. The broker has applied a -20% risk discount to valuation, given uncertainty. Target falls to 91 cents from $1.14.
- CSL (CSL) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse observes US immunoglobulin growth is starting to soften. This likely reflects supply constraints rather than a slowing in demand. The broker does not expect guidance to be raised at the results on February 13, given a weaker northern hemisphere flu season, which could affect volume returns in the second half. Rating is downgraded to Neutral from Outperform and the target lowered to $210 from $230 as the broker believes the stock is fairly valued.
- Evolution Mining (EVN) was downgraded to Underweight from Equal-weight by Morgan Stanley
After strong price appreciation and some disappointments in the second quarter, amid lower gold grades, Morgan Stanley downgrades to Underweight from Equal-weight. The broker acknowledges Evolution Mining is a quality gold company, with diversified production, but the sharp increase in the share price since September has meant it is overvalued. Target is raised to $2.90 from $2.80. Industry view is Attractive.
- Fortescue Metals Group (FMG) was downgraded to Equal-weight from Overweight by Morgan Stanley
Rapidly improving price realisations have driven Morgan Stanley to take profits and downgrade to Equal-weight from Overweight. The broker calculates the stock is implying an iron ore price of US$66/t and is increasingly now a headline play in the sector. Target is raised to $6.30 from $5.05. Industry view is Attractive.
- OceanaGold (OGC) was downgraded to Neutral from Outperform by Macquarie
2019 production and cost guidance are weaker than Macquarie expected. The focus in 2019 is on exploration, with a US$40-50m program scheduled for multiple prospects. Macquarie is maintaining an eye on the Didipio underground and ramp up at Haile. The broker downgrades to Neutral from Outperform. Target is $5.00.
- Rio Tinto (RIO) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett notes iron ore prices have rallied in response to supply uncertainty as a result of the tailings dam failure at the Vale mine in Brazil. The broker concludes supply disruption from the tragedy is likely to be modest. Still, the better iron ore price improves the outlook for Australian iron ore miners, although the recent rally in share prices has accounted for this. The broker downgrades Rio Tinto to Hold from Accumulate, although maintains a preference for RIO over BHP ((BHP)) based on cheaper metrics. Target is raised to $92 from $90. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- Smartgroup (SIQ) was downgraded to Hold from Add by Morgans
While the company has a strong track record, Morgans takes a slightly more cautious stance heading into the results on February 18. No formal earnings guidance has been provided. The broker believes an acquisition is a realistic proposition in 2019, which represents the primary upside risk to forecasts. However, the stock is trading at a fair multiple, with the prospect of softer organic growth in the near term, and the broker downgrades to Hold from Add. Target is reduced to $11.20 from $11.65.
- Sydney Airport (SYD) was downgraded to Underperform from Neutral by Credit Suisse
In anticipation of lower air travel demand in 2019, international airlines are cutting their capacity plans, Credit Suisse notes. To that end, the broker lowers its international passenger growth forecast to 0% from 5% previously and domestic to 0% from 2%. The broker’s dividend forecasts fall -4% in 2019 and -9% in 2020. Target falls to $6.40 from $6.80. Downgrade to Underperform from Neutral.
- TechnologyOne (TNE) was downgraded to Hold from Buy by Ord Minnett
The share price has increased over 65% since Ord Minnett initiated coverage in July 2018. The broker believes growth has now been captured in the valuation and downgrades to Hold from Buy. While there is potential for earnings upgrades over the medium term, the broker would like to have a more evidence of accelerating back book cloud adoption before upgrading forecasts. Target is raised to $6.10 from $6.00.
- Transurban Group (TCL) was downgraded to Hold from Add by Morgans
Morgans expects the first half earnings growth will be principally driven by acquisitions. The broker expects around 13% growth in operating earnings (EBITDA) with a relatively flat margin. No change is expected to FY19 distribution guidance of $0.59 per security. The company will report its first half result on February 12. Morgans downgrades to Hold from Add, given recent strength in the share price. Target is raised to $12.29 from $12.03.
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.