5 Possible Takeover Targets Plus, Will Banks Cut Dividends?

Monday 30 March 5 possible takeover targets plus, will banks cut dividends?

Do you really have to go to cash? Could you miss the rebound? Are you better off sitting tight and waiting for the market comeback? I go through these questions in my article today. For anyone wanting to hear from my team of experts on what they’re thinking about when this market will bottom and when it might be wise to start buying, check out tonight’s Switzer TV – Investing on YouTube.

How things have changed in the space of five weeks as the Coronavirus became the “black swan”. Back in mid-February, bank dividends looked very secure.

Sincerely,

Peter Switzer

Inside this Issue 02 When is it wise to start buying? When is it wise to start buying? by Peter Switzer 04 How much will bank dividends be cut by? How much will bank dividends be cut by? by Paul Rickard 06 5 potential takeover targets 5 potential takeover target by James Dunn 09 How long will the bears have the upper hand? When is it wise to start How long will the bears have the upper hand? buying? by Percy Allan by Peter Switzer 11 Buy, Hold, Sell – What the Brokers Say 02 42 upgrades, 15 downgrades by Rudi Filapek-Vandyck

Important information: 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. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. When is it wise to start buying? by Peter Switzer

It’s times like these when I have to write a better from Morningstar. story than one I wrote way back in December 2008. Yep, it was the GFC and the Yanks hadn’t gone for broke on their mega rescue plan, Lehman Brothers had failed and negativity was on the rise.

S&P 500

“Missing the single best month during a year drastically reduced returns,” writes Morningstar’s Tom Lauricella. “During years when returns were already negative, the effect of missing the best month Source: macrotrends.net only exaggerated the year’s loss. And in seven of the 49 years shown (1970, 1978, 1984, 1987, 1994, Look at the steep market slump in late 2007 to early 2011, and 2015), missing the best month would have 2009 (i.e. the GFC) and not how aggressively it dragged otherwise positive returns into negative climbed out of that slump. Remember this if you’re territory.” thinking about going to cash and ask yourself these questions: Tom makes the point that “…successful market-timing may improve portfolio performance, it is very difficult Do I really have to go to cash? to time the market consistently,” which I totally agree Could I miss the rebound? with. Am I better off sitting tight and waiting for the market comeback? A big reason I believe we’ll see a stock market rebound is the magnitude of the stimuli packages I showed in Saturday’s Report that over the past around the world — and even here we’re scheduled seven years for US stocks, if you missed the best 10 to see an Mk III stimulus package this week. Ours is days, your overall returns would be halved. And close to 10% of GDP, the Yanks are in the 10% of that’s why not getting in and out and trying to time GDP neighbourhood and could easily go higher, while the market is a risky play. the Germans are throwing 30% of GDP at their problem! Need more convincing? Well, have a look at this chart

Monday 30 March 2020 02 You have to remember that when stock markets saw will celebrate that news with a decent bounce and the penny drop on how bad the Coronavirus could be you don’t have to be me to work that out! on 21 February, the freefall was based not only on the fear of what a world lockdown might mean, there Joye’s team thinks the US will see a flattening of the was also no take on what central banks and curve by late April and Chris says Microsoft’s Bill governments would be prepared to do to help Gates is coming to a similar, albeit cautious, economies. conclusion.These look like the best-case scenarios and you have to hope they’re on the money. S&P/ASX 200 Personally, I don’t know if they’re right but I’m sure hoping and praying that they are.

Anyone wanting to hear from my team of experts on what they’re thinking, check out tonight’s Switzer TV – Investing on YouTube. There I get the latest views from Platinum’s Julian McCormack, AMP Capital’s Shane Oliver, CMC Market’s Michael McCarthy, Julia Lee of Burman Invest and, of course, my colleague Paul Rickard, on when this stock market The low for the S&P/ASX 200 Index was 4546 so the will bottom and when it might be wise to start buying. 8% or so bounceback in the Index represents how the stimulus package pluses are whittling down the Important: This content has been prepared without negatives of the virus infections and deaths data and taking account of the objectives, financial situation or the cost of the containment policies. needs of any particular individual. It does not constitute formal advice. Consider the I’ve said all along that you can forget about appropriateness of the information in regard to your economic data and concentrate on the virus-related circumstances. data. I told you on Saturday that Chris Joye and his research team at Coolabah Capital Investments are dedicating a lot of their time to watching the virus data.

Let me recap on what I wrote on Saturday: “Assuming, for example, that Australia and the US are only half as good as South Korea at containing the virus, we should be able to observe a decline in new infection numbers by the second half of April. This could be an important inflexion point for markets insofar as they’ll be able to see across to the other side of the fiscal and monetary policy “bridge” that has been belatedly built by governments.”

On Sunday, this is what his update said: “Australia’s peak new infection numbers are realised between April 4 and April 11, assuming it is 50% as effective at containment as South Korea and 75% as effective as Italy.”

If we can be cheering a flattening to falling infection curve by the dates Joye cites above, the stock market

Monday 30 March 2020 03 How much will bank dividends be cut by? by Paul Rickard

Back in mid-February, bank dividends looked very Stanley between 10% and 18%. Target prices and secure. The Commonwealth Bank had emphatically dividend forecasts have also been reduced. confirmed that not only was it going to maintain its interim dividend of $2 per share, but it was prepared There are probably more downgrades to come, and to maintain a dividend payout ratio above its target. decisions in other jurisdictions are adding to the CEO Matt Comyn said, when announcing the Bank’s pressure on dividends. Last Thursday, the European half year profit, that “We are targeting a gradual Central Bank asked Eurozone banks not to pay return to our full year payout ratio range of 70% to dividends or conduct share buybacks during the 80%”. I wrote at the time words to the effect that “the COVID-19 pandemic. It said: “to boost banks’ biggest take to come out of the result is that CBA is capacity to absorb losses and support lending to going to do everything it can to maintain its full year households, small businesses and corporates during dividend of $4.31 per share”. the Coronavirus pandemic, they should not pay dividends for the financial years 2019 and 2020 until Of the major banks, the only anticipated cut then was at least 1 October 2020”. by Westpac, which would reduce its full year dividend to around $1.60 per share, in line with the ANZ and Australian banks are much better capitalized and NAB. considerably stronger than their European colleagues, so a similar directive is not expected from How things have changed in the space of five weeks APRA. Among large listed commercial banks, CBA as the Coronavirus became the “black swan”. has the highest capital ratio on an internationally comparable basis, ANZ comes in third, Westpac in It will impact bank earnings (and the ability to pay fifth and NAB is eleventh. dividends in) three areas. Firstly, lower net interest margins following the Reserve Bank’s cut to the cash The table below shows the latest dividend forecasts rate and lower lending rates to businesses. Secondly, from the brokers (source FN Arena): the cost of customer support packages, which include the waiving of fees and other assistance measures. Forecast Dividends – Broker Consensus And thirdly, the big one and the hardest to estimate – Estimates an increase in bad debts as businesses (and households) struggle in the new environment. Offsetting these will be market share gains from the minor banks (although possibly no net volume increase), the Reserve Bank’s very accommodating 3 year fixed rate borrowing facility and higher treasury markets income. ANZ, NAB and Westpac are due to announce their March half year results in early May, and their interim Most brokers have cut their earnings forecasts for the dividends to be paid in June and July. This period will major banks. Macquarie has downgraded FY20 only have a couple months’ worth of “Coronavirus earnings by between 2% and 10%, Citi between 0% impact”, and it will be way too early to see any and 7%, Credit Suisse by around 10% and Morgan noticeable pick up in bad debts.

Monday 30 March 2020 04 While bank boards traditionally aim to pay sustainable * As CBA FY20 interim already paid, 25% cut only dividends (which also means minimizing changes applied to implied FY20 final from one period to the next), they will probably be conservative and go to the bottom (if not below the On paper at least, these implied yields look attractive bottom) of their target payout ratios. These are shown and income seekers who have sufficient cash should in the table below. consider. The unknown question of course is the severity of the recession and its impact on bank bad Bank Dividend Payout Targets debts.

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 Putting a number on this is almost impossible – but appropriateness of the information in regard to your my hunch is that the interim dividends will more likely circumstances. be in the sixties rather than the seventies that the brokers are currently forecasting.

Yields

Let’s assume that the current broker consensus forecasts for dividends are the best guide (Scenario 1). Let’s take a second scenario and factor a further cut of 25% to the broker estimates for FY20 and FY21. The tables below show the forecast yields and the grossed up equivalents, which take into account the benefit of franking credits.(Note: ANZ is only 70% franked). The share prices are as per the close on Friday.

Scenario 1 – Implied Yields based on Current

Broker Forecasts

Scenario 2 – Implied Yields based on further 25% cut to Broker Forecasts

Monday 30 March 2020 05 5 potential takeover targets by James Dunn

It is a truism of the stock market that once a business potential impact of the disease on demand for its wine is listed on the exchange, it is up for sale, all day, in China – it is the biggest-selling winemaker in every day. And with the stock market down by 30%, China, which is the company’s most profitable all of the listed businesses are effectively in a bargain market – was reason enough for the shares to be sale, priced to clear. sold-off.

The caveat, of course, is whether the individual The internal review was canvassing whether to companies have a business that will still exist on the separate the prestige brands such as Penfolds, other side of the Covid-19 crash, and can rebuild Wynns and Seppelt from the lower-priced commercial revenue and earnings. If so, there are bargains not brands, such as Lindemans and Blossom Hill. The only for individual investors, but for companies and basic problem was that the two arms of the business private-equity funds that have the cash to take had become incompatible: Bank of America told advantage of opportunities they might have liked for Treasury earlier this year that the value of the flagship some time, but which are now suddenly significantly Penfolds business alone was well above the share cheaper. price at the time – and that Treasury could be worth about $20 per share if the company were to be Here are 5 potential takeover candidates in the broken up. The higher-end brands earn a return on carnage of the Covid-19 crash. investment between two and four times more than the commercial portfolio. 1. Treasury Wine Estates (TWE, $9.42) OK – so you might not get $20 now. But tell me that Market capitalisation: 6.8 Billion value extraction isn’t still attractive, especially if the North American wine glut is going to be around for a Global wine group Treasury Wine Estates was couple of years? If Treasury doesn’t want to do this, already considered by many market watchers to be a someone else might think the value of the prestige takeover target, having underwhelmed in its half-year brands worth extracting in the current environment, result and lowered its full-year guidance even before given that they are getting access to those brands at the coronavirus hit – and then downgrading for the bargain share-price levels. second time in a month, this time incorporating the impact of the outbreak. From $16.24 at the start of 2. Afterpay (APT, $18.47) the year, TWE has subsided to $9.46, a drop of 42%. Market capitalisation: $5 Billion Treasury has been hurt by a wine glut in North America, in the wake of a larger-than-expected Everybody has an opinion on the “buy now, pay Californian grape harvest in 2019, cheap private-label later” fintech leader Afterpay, which has almost wine subsequently flooding the market, and the become a verb in that space – in the same way that effects of the trade war with China. The company has people (particularly young people) will “Uber” estimated that the over-supply will take about two somewhere, they will “Afterpay” for stuff, in four years to clear. Treasury Wine was known to be instalments. It’s actually more a “buy now, receive reviewing its business before the coronavirus hit; the now, pay later” model, with the credit assessed and

Monday 30 March 2020 06 funded by Afterpay. Market capitalisation: $3.4 Billion

The company has always been highly polarising in Electronic printed circuit board (PCB) design software the investment community, and that is especially so in company Altium is one of the ASX’s genuine global the current environment: some say that because it technology stars, but that has not stopped the does not conduct credit checks on its customers and Covid-19 Crash from slicing 37% off its value, to $3.4 has never had to try to recover debts, Afterpay will billion. Any company looking for leading companies in face problems from low-income customers losing an expanding global market that are still growing their their jobs. Others believe that the service is used by market share would have to have circled and higher-income repeat customers as a budgeting tool, underlined Altium on their list. that it helps retailers, and is not a debt trap, given that a single overdue payment sees a user locked out. Despite its valuation haircut, Altium could actually be well-placed to weather the coronavirus storm, The company does not yet make a profit, but this has because its electronic design work is not linked to not greatly concerned Afterpay fans, who have manufacturing volumes. And Altium’s products are focused on the huge opportunity in the US market, deeply embedded in the profound technological shifts and progress in that expansion. Afterpay launched in we are experiencing, in the rise of forces such as the US in 2018, and its customer base in the market cloud computing, big data, artificial intelligence (AI) has already exceeded its base of 3.1 million and 5G – structural shifts that should not be derailed customers in Australia. If Afterpay can replicate the by Covid-19. The PCB is at the heart of the trust, loyalty and repeat business that it appears to burgeoning use of “smart” connected devices in have built with its Australian consumers in the US – everyday life – Altium says it is “committed to and its other main expansion targets, the UK and achieve market leadership to the point of being the Canada – it can reasonably expect increased volume dominant provider of PCB design software by 2025.” and eventual profitability. Covid-19 has put a spanner Like most businesses, earnings are susceptible in the in the works, as it has with most businesses, at least short term, but Altium has the buffer of a net cash temporarily, but Afterpay is confident that its model position on the balance sheet. could even be “enhanced with changing market conditions.” 4. Webjet Limited (WEB, $3.76)

Starting the year at $29.28, APT soared to $40.50 by Market capitalisation: $510 Million 19 February, only to be dragged back to $8.90 by the Covid-19 Correction – a gut-wrenching fall of 78%. It has been an awful quarter for online travel agent Since then, Afterpay has rebounded to $19.10, a rise Webjet: the shares started the year at $13.02, and of 107%. But the stock is still down 37% for 2020 to cruised to $14.44 within three weeks – but the world date. is a different place now. Webjet went into a trading halt on 18 March and has been trying to raise $250 One thing is for certain, other companies in the million of capital at a reported $1.80, to shore-up its payments area would have noticed that Afterpay is a near-term future, given that cashflow has collapsed in lot cheaper now. Think Mastercard, or Pay Pal, or the face of a virtual shutdown of the domestic and possibly even Swedish payments solution provider global tourism industries. Klarna. Webjet has been smashed, and it looks like it has Klarna, which has a banking licence in Europe, has come down to super-cheap levels – priced at 6.9 partnered with Commonwealth Bank of Australia. It times expected FY21 earnings. But the big ‘IF,’ of has installed the Klarna product in its banking course, is IF those earnings expectations are application and has also invested $US300 million achievable; which would require a recovery of ($500 million) in Klarna. aviation and tourism. Like many companies in the tourism/airline business, Webjet would be a 3. Altium (ALU, $27.00) screaming buy if we knew whether this was the

Monday 30 March 2020 07 bottom, or whether things could get worse. their own financial issues, but at least Singapore Airlines has cashed itself up, raising $US10.5 billion Webjet’s problem is not over-indebtedness in tough ($17.5 billion), backed by Singapore government times: it had borrowings of $191.7 million at funds. Of all Virgin’s shareholders, Singapore December 31, while net debt accounted for only 0.35 Airlines is considered to have the most to gain from a times its EBITDA (earnings before interest, tax, takeover of the Australian airline, and that is about all depreciation and amortisation). that is keeping the minority shareholders in the stock. The downside? Investment bank Credit Suisse has a With its proposed equity issue to raise money target price on VAH of 1 cent. apparently not going to fly (pun intended), Webjet – which is still in trading halt – is reported to be Important: This content has been prepared without considering a convertible funding arrangement with taking account of the objectives, financial situation or private equity group KKR, or a similar fund. If it is needs of any particular individual. It does not KKR, that is the group that was reported to be poised constitute formal advice. Consider the to make a takeover bid for Webjet before the appropriateness of the information in regard to your coronavirus hit. Might KKR be even more interested circumstances. at a price suddenly 70% cheaper?

5. Virgin Australia (VAH, 7.8 cents)

Market capitalisation: $658 Million

At these share-price levels, Virgin Australia doesn’t really have shareholders in the normal sense – it has punters betting on the struggling airline being taken out by one of its big shareholders. After seven straight years of losses, Virgin Australia does not have the cash reserves to survive a prolonged air-travel slump; but the paradox is that the Australian government needs it to keep flying, and to be able to resume its schedule once Covid-19 permits. The government cannot afford a repetition of the Ansett collapse in 2001. As Australian Competition and Consumer Commission (ACCC) chairman Rod Sims put it earlier this month: “we went into this crisis with two full-service airlines and we need to come out of this crisis with two full-service airlines.”

Virgin Australia has suspended all international flights until mid-June and cut domestic capacity by about 50%.

The Australian government is not going to nationalise Virgin Australia, so all eyes turn to its share register, which is 90%-owned by the government-controlled Singapore Airlines and Etihad Airways, Chinese groups Hainan Airlines (HNA) and Nanshan, and Richard Branson’s Virgin Group. All of these have

Monday 30 March 2020 08 How long will the bears have the upper hand? by Percy Allan

The key indicator presently driving the share market is the number of new infections especially in America, which dominates global share exchanges. Until this plague wanes, the bears have the upper hand. In Asian countries that applied a lockdown early, the total number of infections seemed to plateau 45 to 60 days after the first 100 cases were identified.

Western Countries are only 17 days (Australia) to 30 days (Italy) into this crisis so may not see a respite before May.

America is only 20 days into this crisis, with New York Australia’s Long-Term Position – bearish, with the State the epicentre. It lacks a national strategy since 7 week trend line below the 70 week trend line and each state runs its own health service and President long term momentum falling, but still not in positive Trump has not convened a national cabinet of State territory. Governors to coordinate their efforts. Instead he prefers daily TV briefings on what he thinks might happen (e.g. resurrection of the country by Easter) rather than let experts hold court. Hence America’s virus turnaround could take longer than in countries acting factually, decisively and cooperatively.

Here are the charts on where the market ended this Friday.

Australia’s Short-Term Position – bearish with the two week trend line still below the 6 week trend line and negative on two week momentum, notwithstanding a slight uptick in the All Ords last week. Australian Sector Position – using 9-monthly price momentum Gold bullion (GOLD) is in still in front and rising while Property (SLF), Finance (OZF) and Resources (QRE) are in negative territory though their fall slowed last week. Cash (AAA) remains stable.

Monday 30 March 2020 09 World Sector Position – using 9-monthly price momentum gold bullion (GOLD) is still in front and rising while the USA stock market (IVV), Other Developed Markets (IVE) and Emerging Markets (IEM) are in negative territory though showed some rebound last week. Cash (IAA) remains stable.

As always, this is a technical analysis of the market’s present trends and momenta, not a forecast of its future direction nor advice on trading or investing. I wish you and your family good health and economic security during this global pandemic.

Monday 30 March 2020 10 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

The script from the weeks prior continued in the week simply enormous, led by cyclical, highly leveraged ending Friday 27 March 2020. While equities companies such as Sims Metal Management, Karoon continued to be exposed to wild gyrations, with a bias Energy, Air New Zealand, Nufarm, Qantas, and Oil to the downside, securities analysts kept on frantically Search. updating and responding to profit warnings and removals of guidance by individual companies. And It is most likely the above trends will continue in the the scrapping of dividends, which no doubt will be week(s) ahead. hitting hard on large cohorts of the Australian investor community. In the good books

Total Buy (and equivalent) ratings for the seven BENDIGO AND ADELAIDE BANK LIMITED (BEN) stockbrokerages monitored daily by FNArena is now was upgraded to Neutral from Underperform by well and truly the largest group of recommendations, Macquarie B/H/S: 1/3/2 but still only two out of these seven are carrying more Buy ratings than Neutral/Holds; Citi and Macquarie. Macquarie has downgraded forecast earnings across the major banks by -2-10% to account for the RBA Total Buy recommendations for individual stocks cut, repricing initiatives, virus support packages and have now risen above 47% with 42.2% on rising impairments due to economic weakness. The Neutral/Hold and the remaining 10.5% on Sell. impact on regionals is less severe as they benefit from the majors’ repricing initiatives. Exposure to As far as upgrades and downgrades are concerned, SME impairments lead to material downgrades for the week saw 42 upgrades and 15 downgrades, and Virgin Money UK. Bendigo & Adelaide Bank target the overwhelming majority of upgrades moved to Buy falls to $6.00 from $7.50, upgrade to Neutral from (32 new Buys out of 42). Stocks that received multiple Underperform. upgrades (not necessarily all to Buy) include Bendigo and Adelaide Bank, Magellan Financial, REA Group, Star Entertainment, and Westpac.

As expected, only two of the 15 downgrades shifted to a fresh Sell recommendation with Air New Zealand and G8 Education the receivers.

There are still companies receiving upgrades to earnings forecasts, and they include Virgin Money UK, Sigma Healthcare, Fortescue Metals, Medibank Private and numerous others. But, no surprise here, for the real fireworks we need to cast our eye over the table showing negative adjustments.

Downward adjustments to earnings forecasts are

Monday 30 March 2020 11 operating risk profile given the locations of its mines and the revenue mix. The broker reduces the target to $5.90 from $6.30.

JAPARA HEALTHCARE LIMITED (JHC) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/4/0

Ord Minnett is now a little more confident that residential aged care facilities have the procedures to manage infection control throughout the current coronavirus outbreak without undue risk. The broker has also become more constructive on the outlook for occupancy, as the sector should benefit from efforts to clear hospitals ahead of the influx of coronavirus patients. Despite the company’s decision to step away from guidance, the broker lifts forecast slightly and upgrades to Hold from Lighten. Target is reduced to $0.65 from $0.80.

MACQUARIE GROUP LIMITED (MQG) was CROWN RESORTS LIMITED (CWN) was upgraded upgraded to Outperform from Neutral by Credit to Buy from Neutral by Citi B/H/S: 3/3/0 Suisse B/H/S: 3/2/1 Citi envisages earnings risks for the near term and Credit Suisse envisages further risk to FY21, given downgrades estimates by -48%. However, the broker annuity businesses are likely to start from a lower remains confident in the FY22 earnings outlook and base and performance fees are likely to fall, given considers the stock undervalued. Rating is upgraded asset price deflation. Increased impairments could be to Buy from Neutral and the target reduced to $8.20 recognised in FY20 and FY21. The broker reduces from $12.10. FY20 forecasts by -12% and FY21 forecasts by -20%. Given the volatile market, the broker suspects DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) Macquarie Group may not provide any guidance was upgraded to Neutral from Sell by UBS B/H/S: statement for FY21 at the FY20 result. The share 3/2/2 price has fallen -40% since mid-February and the broker upgrades to Outperform from Neutral. Target UBS upgrades to Neutral from Sell, noting the is reduced to $110 for $135. balance sheet is solid and the company will benefit in the longer term from an accelerating shift to OZ MINERALS LIMITED (OZL) was upgraded to deliveries. The broker believes earnings risk from the Buy from Neutral by Citi B/H/S: 4/2/1 coronavirus crisis is manageable and transitory. The stock appears to be trading broadly in line with peers Citi upgrades to Buy/High Risk from Neutral. The and is seen as representing fair value. Target is stock has de-rated substantially and, while the broker reduced to $51.00 from $52.50. is cautious on the ramp up of Carrapateena, the risk is considered priced in. Target is reduced to $10.70 IGO LIMITED (IGO) was upgraded to Buy from from $11.00. Neutral by Citi B/H/S: 3/2/1 REA GROUP LIMITED (REA) was upgraded to Citi upgrades to Buy from Neutral. At current levels Accumulate from Lighten by Ord Minnett B/H/S: the broker assesses the valuation is attractive. Across 5/1/0 base metals coverage, the stock carries the lowest

Monday 30 March 2020 12 Ord Minnett upgrades to Accumulate from Lighten, could take a couple of years. The company has assessing the current valuation is attractive as an ample liquidity even in the case of more extensive entry point. The broker points to the strong network shutdowns to casinos. Finance industry indications and unique real estate advertising structure in are that Australian banks are likely to resist calling in Australia underpinning the stock. The stock is now debt. The stock is presenting deep value and the down -33% in 2020 to date. The broker reduces the broker upgrades to Outperform from Neutral, target to $88 from $99. Revised estimates take into although the growth profile is partially compromised account a -50% decline year-on-year in new listings by the opening of Crown ((CWN)) Sydney. Target is over the next six months. reduced to $3.90 from $4.20.

STEADFAST GROUP LIMITED (SDF) was SIGMA HEALTHCARE LIMITED (SIG) was upgraded to Outperform from Neutral by Credit upgraded to Neutral from Underperform by Credit Suisse B/H/S: 4/0/0 Suisse B/H/S: 0/2/2

Credit Suisse decreases FY20 net profit estimates by FY20 underlying operating earnings were ahead of -4%. A very severe economic downturn with a large Credit Suisse estimates. No final dividend was number of small businesses collapsing could put announced. While the balance sheet appears additional pressure on income. While not ruling out stretched, Credit Suisse notes the company is the downside risk in such a scenario, the broker pursuing a sale & lease-back of its distribution suspects this would be less severe compared with the centres. The broker believes FY20 was a trough in broader sector. Therefore, the rating is upgraded to earnings and in the short term the company can Outperform from Neutral. Target is lowered to $3.50 benefit from the increased demand for from $4.00. pharmaceuticals. Rating is upgraded to Neutral from Underperform. Target is raised to $0.64 from $0.53. SANDFIRE RESOURCES NL (SFR) was upgraded to Buy from Neutral by Citi B/H/S: 4/3/0 SUNCORP GROUP LIMITED (SUN) was upgraded to Neutral from Underperform by Credit Suisse Citi upgrades to Buy/High Risk from Neutral/High B/H/S: 1/5/1 Risk. Target is reduced to $5.00 from $6.20. The sole producing asset, Monty, is generating cash and the Credit Suisse makes changes to key assumptions, main overhang continues to be the timing of new lowering FY20 net profit forecasts by -25%. FY21 projects to ensure production continuity when estimates are lowered by -8-10% on a lower DeGrussa reserves deplete during FY22. underlying investment yield on insurance and higher bad debts and the bank. The share price is tracking THE STAR ENTERTAINMENT GROUP LIMITED around -20% below that of Insurance Australia Group (SGR) was upgraded to Buy from Sell by Citi and (IAG), which the broker assumes is because of the Upgrade to Outperform from Neutral by Credit banking exposure. Credit Suisse is becoming more Suisse B/H/S: 5/2/0 comfortable with the reinsurance renewal risk and upgrades to Neutral from Underperform. Target is Citi envisages earnings risks for the near term and reduced to $9.15 from $12.00. downgrades estimates by -48%. However, the broker remains confident in the FY22 earnings outlook and TRANSURBAN GROUP (TCL) was upgraded to considers the stock undervalued. The broker Neutral from Underperform by Credit Suisse upgrades to Buy from Sell and reduces the target to B/H/S: 2/4/1 $2.40 from $4.10. Traffic levels are likely to be severely impacted by Credit Suisse downgrades FY20 estimates for travel bans, lock-downs and other measures to slow earnings per share by -38% and FY21 estimates by the spread of coronavirus. Credit Suisse expects a -20%. FY22 estimates are downgraded by -8% as the reduction in the dividend of -23% in FY21 because of broker considers it plausible that economic recovery lower free cash flow. A $0.62 dividend is forecast for

Monday 30 March 2020 13 FY20, in line with guidance, although the broker coronavirus. The distribution is being reduced to acknowledges there is downside risk depending on protect the balance sheet, although Macquarie notes how the crisis develops in the next few weeks. Rating absolute gearing levels are high versus peers. is upgraded to Neutral from Underperform as the Exposure to discretionary retail tenants is the main valuation appears more reasonable. Target is risk, in the broker’s opinion. Rating is downgraded to lowered to $10.65 from $13.00. Neutral from Outperform and the target lowered to $2.43 from $3.45. VIVA ENERGY REIT (VVR) was upgraded to Add from Hold by Morgans B/H/S: 1/1/1 CIMIC GROUP LIMITED (CIM) was downgraded to Neutral from Outperform by Macquarie B/H/S: Viva Energy REIT is well placed in the current 2/2/0 environment, Morgans suggests, with balance sheet, leases structures and long lease expiries all in its Hochtief has been coming to support Cimic Group, favour. Importantly, petrol stations are an essential increasing its stake by 2.2% to 74.9% in the last two service. The broker upgrades to Add from Hold. weeks, Macquarie notes. Under law, Hochtief can buy Target falls to $2.71 from $2.77. 3% every six months. The announced buyback will also go ahead, in contrast to just about everyone In the not-so-good books else. All well and good but the sector is clearly now challenged, which is not in contrast to everyone else. AFTERPAY LIMITED (APT) was downgraded to The broker downgrades to Neutral from Outperform Equal-weight from Overweight by Morgan Stanley as the share price is approaching an unchanged B/H/S: 4/2/0 $25.73 target.

Morgan Stanley believes this recession is unique and ECLIPX GROUP LIMITED (ECX) was downgraded will test Afterpay’s business model. The broker to Neutral from Outperform by Macquarie B/H/S: suspects the company faces a trade-off between 3/2/0 maintaining revenue growth and containing credit risk. Retailers, faced with the lock-down of physical Increased asset, credit risk and strain on working stores, will seek to accelerate the shift to online. capital has caused Macquarie to apply a -75% Afterpay is well-placed to capitalise on this for the discount to the fundamental valuation. Rating is short term. Yet, Morgan Stanley suspects this will be downgraded to Neutral from Outperform and the a temporary tailwind. Rating is downgraded to target reduced to $0.49 from $1.93. The company Equal-weight from Overweight. Target is reduced has recently reiterated the sale of Right2Drive and to$19.00 from $46.50. Industry view is In-Line. CarLoans is still expected in FY20. Macquarie also notes that all asset exposures are secured and are income-generating business assets. Still, working capital in the current environment is highly uncertain.

FIRSTWAVE CLOUD TECHNOLOGY LIMITED (FCT) was downgraded to Hold from Add by Morgans B/H/S: 0/1/0

Firstwave Cloud Technology continues to make all the right moves, Morgans suggests, is leveraged to a AVENTUS GROUP (AVN) was downgraded to large and growing market and has created an Neutral from Outperform by Macquarie B/H/S: innovative cyber-security solution for SMEs. However 1/2/0 the business is not yet self-funding and relies on ongoing access to equity markets. Clearly that is a Guidance has been withdrawn. The company has challenge right now. The broker has changed neither indicated trading was solid up until the outbreak of the earnings forecasts nor valuation but has applied a

Monday 30 March 2020 14 valuation discount under the current circumstances. The pandemic has created strong demand for Target falls to 11c from 24c, downgrade to Hold from ventilators globally and the company has committed Speculative Buy. to increasing its manufacturing capacity although it will take time to source parts. These are typically G8 EDUCATION LIMITED (GEM) was downgraded higher margin items. Still, with sleep laboratories to Underperform from Neutral by Macquarie closing as part of government mandated lock-downs, B/H/S: 0/4/1 Credit Suisse expects a sharp decline in new sleep apnoea treatment. The broker estimates 90% of sleep The implications of the lock-downs and a recession apnoea device sales are new patient set-ups. Rating from rising unemployment magnifies the risks to the is downgraded to Neutral from Outperform and the balance sheet and equity, Macquarie asserts. With a target lowered to $25.10 from $27.00. recession as a base case, the broker believes child-care demand after the coronavirus crisis could SOMNOMED LIMITED (SOM) was downgraded to be in difficulty amid high unemployment. Rating is Hold from Add by Morgans .B/H/S: 0/1/0 downgraded to Underperform from Neutral. Target is reduced to $0.50 from $1.77. The effects of the crisis on the company’s operations are considered significant for the short term as dental NORTHERN STAR RESOURCES LTD (NST) was and medical societies are recommended to refrain downgraded to Hold from Buy by Ord Minnett from the company’s treatments until coronavirus B/H/S: 1/3/2 rates are under control. Morgans assumes the next two quarters of revenue are negligible amid a gradual Northern Star has downgraded March quarter return to previous expectations by FY22. The production guidance by -10-15% and withdrawn FY20 company has announced an accelerated entitlement guidance, deferring the interim dividend. Ord Minnett offer to raise $15.5m to fund the business through the reduces estimates by -23% in FY20 and -11% in period of uncertainty. Rating is downgraded to Hold FY21. Disruptions are largely because of restrictions from Add and the target lowered to $1.33 from $3.75. being imposed on the movement of workers and suppliers in Western Australia and Alaska. The broker Earnings forecast lowers the target to $12.00 from $13.50 and downgrades to Hold from Buy. Listed below are the companies that have had their forecast current year earnings raised or lowered by PREMIER INVESTMENTS LIMITED (PMV) was the brokers last week. The qualification is that the downgraded to Neutral from Outperform by Credit stock must be covered by at least two brokers. The Suisse B/H/S: 2/3/0 table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage The company has temporarily closed most of its change. stores to protect cash flow. Employees are being stood down and the company does not intend to pay rent during the period of closure. Credit Suisse reduces earnings estimates for FY20 to reflect two months of full closure and trading at around 70% of the normal level of June and July. No adjustments are yet made to FY21. Given the uncertainty in the low likelihood of outperformance in recession, Credit Suisse reduces the rating to Neutral from Outperform. Target is raised to $10.17 from $9.94.

RESMED INC (RMD) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/5/1 The above was compiled from reports on FNArena.

Monday 30 March 2020 15 The FNArena database tabulates the views of seven major Australian and international stockbrokers: Citi, Credit Suisse, 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.

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