Weekly Reports | 10:00 AM
By Mark Woodruff
Guide:
The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.
Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.
Summary
Period: Monday July 6 to Friday July 10, 2020
Total Upgrades: 7
Total Downgrades: 27
Net Ratings Breakdown: Buy 48.71%; Hold 40.84%; Sell 10.44%
The weeks overall review of downgrades revealed seven of 27 moving to a fresh sell. The only discernible sectoral trend appeared to be in gold, with sixdowngrades . A number of stockbrokers have been signalling they find value is becoming increasingly hard to find after gold shares have rallied in response to an increasing gold price.
Gold miner Saracen Mineral Holdings received three downgrades of which only one moved to a Sell. Both Treasury Wine Estates and Adbri received two downgrades (incorporating one move to a Sell apiece). Adbris downgrade appeared more structural with the loss of a major contract with Alcoa.
Compared to prior months, target price changes were relatively mild, with the two largest downward revisions reserved for Adbri and Scentre Group, while Hub24 and Breville Group had upward revisions.
The majority of material adjustments to earnings estimates were to the downside. Four of the top five movers were mid-cap resource stocks. The largest positive change was reserved for Webjet after strengthening its balance sheet with a EUR100m convertible note offering.
Total Buy ratings for the seven brokers monitored daily remains high at 48.71% of total ratings, versus 40.84% on Neutral/Hold, and 10.44% with a Sell rating.
Upgrade
AFTERPAY LIMITED ((APT)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/1
Afterpay is demonstrating better than expected credit quality control, points out Morgan Stanley. The companys sales growth is accelerating and the broker notes the company is diversifying away from the fashion category via eBay.
Afterpay is expected to deliver almost 60% in revenue CAGR (compounded annual growth rate) over FY20-22 while maintaining about 2% net transaction margin.
The company is starting operations in Canada in the first quarter of FY21 along with a US in-store rollout. This is to solidifyits early mover advantage by moving to an omni-channel platform, comments the broker.
Morgan Stanley thinksAfterpaymay use its $800m capital raising to look for M&A options so as to enter new geographies.
Revenue forecasts for FY21-22 upgraded by circa 15%. The broker is of the opinion that Afterpay is under-owned by Australian institutional investors.
Morgan Stanley upgrades to Overweight from Equal-weight with the target price increasing to $101 from $36. Industry view: In-line.
See also APT downgrade.
CML GROUP LIMITED ((CGR)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
CML Group provided a trading update and FY20 earnings guidance.
In June, new clients and higher volumes lifted the Invoice Financing division, while client attrition and risk metrics are consistent with the pre-covid-19 era. Managementexpects volumes to keep growing and be assisted by reduced Government assistance for SME funding.
Uncertain SME business conditions leavesthe Equipment Finance book below historical levels.
While future FY20 guidance may be impacted by provisioning, management is confident of no material future credit losses.
Morgans believes the company is well positioned to return to sustainable growth, with the key opportunity in Factoring, and the potential for acquisitions as smaller operators lack access to funding.
The rating is increased to Add from Hold. The target price is $0.40.
THE STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/1
Citi believes the outlook for domestic casinos is robust as they re-open on schedule with limited restrictions.
The broker forecasts JobKeeper will boost first half margins as wages are subsidised during the early stages of the re-opening.
Citi upgrades Star Entertainment to Buy from Neutral, envisaging more share price upside in the near term. Target is raised to $3.50 from $3.10.
THE REJECT SHOP LIMITED ((TRS)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 2/0/0
Morgan Stanley assesses The Reject Shop is a leader in a fragmented market, a niche that has proved to be large and profitable in other global markets.
Still the business has been under-earning and the broker suspects a simplified strategy and new management will be the positive catalyst.
Morgan Stanley acknowledges measuring earnings growth is problematic as the starting point is either negative or very small. Hence, it is the long-term potential that is evaluated.
The broker upgrades to Overweight from Equal-weight. Target is raised to $10.00 from $2.60.Industry view: In Line.
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/6/0
Macquarie observes the company has experienced an unprecedented second half, with wine volumes affected by the bushfires, oversupply in the US and the impact of the virus in China.
Private-label pressures are expected to continue in the short term as oversupply builds in America. However, Macquarie assesses some confidence around consumption levels is starting to return in China. The broker downgrades estimates for FY20-22.
Rating is upgraded to Neutral from Underperform and the target lifted to $11.50 from $9.30.
See also TWE downgrade.
VOCUS GROUP LIMITED ((VOC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/3/0
The share price has underperformed and UBS upgrades to Buy from Neutral on valuation grounds. The broker expects valuation will become more compelling once FY20-21 expenditure is cycled.
However, estimates for earnings per share are lowered by -9% to reflect higher interest costs post the recent re-financing and more difficult execution against growth targets. Target is reduced to $3.60 from $3.85.
WEST AFRICAN RESOURCES LIMITED ((WAF)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/0
Operating performance was in line in the June quarter while the cash position was better than Macquarie expected.
Commercial production at Sanbrado was declared and the broker expectsprogressive production growth over the next year.
Given the stronger net debt position and the rolling forward of valuation, Macquarie upgrades to Neutral from Underperform. Target is raised to $1 from $0.90.
Downgrade
ADBRI LIMITED ((ABC)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Sell from Buy by UBS .B/H/S: 1/3/3
Alcoa will not be renewing its lime supply contract with Adbri, set to expireon June 30, 2021.
Ord Minnett notes the loss from this will be -70min revenue or about 40% of the lime business. Earnings forecasts have been lowered by -19% by FY22.
The broker sees risk of more volume loss, price resets and import threats and has reduced its rating to Hold from Accumulate with the target price reducing to $2.70 from $3.
UBS downgrades to Sell from Buy and lowers the target to $2.00 from $2.82
The broker had expected that the lime division would be stable but the loss of the Alcoa contract has now affected this view.
The broker is concerned about the company’s inability to renegotiate the contract and price & quality are likely to have played a part.
However, UBS points out Adbri has a dominant position in lime and this may have been a contributing factor to Alcoa seeking a new source.
AGL ENERGY LIMITED ((AGL)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/4/3
Macquarie assesses power pricing is a challenge for AGL Energy as falling fuel costs and weak demand have led to a drop in earnings.
There is also the issue of the Alcoa contract which is nearing expiry. The broker suggests any renewal is likely to reflect the soft forward market.
Rating is downgraded to Underperform from Neutral, as the broker says the decay in electricity pricing as well as expiry of historical gas contracts cannot be ignored. Target is raised to $15.91 from $15.87.
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