Monday 24 August 2020 4 stocks and how I intend to play them

My article today is a tale of four stocks that reported last week and how I intend to play them. All four would not be out of place in any quality portfolio. Tonight on my TV show, I ask three CEOs and one CFO of these four companies this question: what’s the case for believing your company is heading in the right direction? Today in my article, I’m giving you my views on these stocks.

When Paul (Rickard) wrote about a2 Milk in October last year, it was $12.23. On Friday, it closed at $18.37. His article today sets out why he continues to like a2M and why growth investors should consider the post-result mark down as an opportunity to invest.

Sincerely,

Peter Switzer

Inside this Issue 02 Why I like BHP, Coles, Domino’s and Tyro BHP, COL, DMP & TYR by Peter Switzer 05 Is a2 Milk still a buy? A2M by Paul Rickard 08 Reporting season, not horror season! Not as bad as feared by James Dunn Why I like BHP, Coles, 11 Buy, Hold, Sell – What the Brokers Say 24 downgrades, 22 upgrades Domino’s and Tyro by Rudi Filapek-Vandyck by Peter Switzer 17 “HOT” stocks 02 MP1, not CCL by Maureen Jordan

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. Why I like BHP, Coles, Domino’s and Tyro by Peter Switzer

This is a tale of four stocks that reported last week could affect the iron ore price. This would then affect and how I intend to play them. All four would not be the share price. But if it fell to the low $30s, I’d be a out of place in any quality portfolio. Tonight on my TV buyer because I think the company will benefit from show, I asked three CEOs and one CFO of these four the eventual post-virus global recovery. companies this question: what’s the case for believing your company is heading in the right The analysts surveyed by FNArena think a $39.49 direction? I asked this question because these target is on the cards. This means it would be 3% leaders won’t comment on their share price but higher from its current level of $38.36. So if you saw a that’s what I want to know. price of $35 or lower and you didn’t hold BHP, I’d call it a buy because a $5 gain on a $35 buy-in price By this time next year (post August reporting season is a return of 14%, before a grossed up franked 2021), I think the share prices of all four companies dividend of about 5%. At $35, this quality stock is a will be higher. Each of these four stories has a bargain. different subplot and (depending on whether you hold these stocks or would like to) the critical difference is Peter Beaven’s take on the company also adds to the timing of any purchase any investor might want to the case to being programmed to be a dip-buyer of make. BHP.

The four stocks in question reported last week and on BHP 2015-2020 this week’s Switzer TV Investing show you can see my interviews, which you should take in if you hold the stocks in question or intend to for sensible investing and wealth-building reasons.

The stocks I’m referring to can be classified as two blue chips and two stocks for the new age. And yep, because of that, they have potential. I hold two of these stocks but will pounce on the other two if a buying opportunity arises.

1. BHP – the big Australian 2. COLES – the new home of great value! The first stock is BHP, of which I have a biggish holding. Paul (Rickard) and I told you that Coles around $11 or $12 was a decent buy. Now it’s an $18 stock but The Coronavirus crash was a perfect buy-in after listening to my interview with the CEO of this opportunity when its share price fell to around $28. supermarket giant, I suspect it falls into the same Since March 23 there’s been around a 35% gain! My class as BHP — great to buy on a dip, if one shows interview with CFO Peter Beaven indicates he thinks up. But you could buy this company now and maybe Brazil will eventually start adding to supply, which still see a nice gain over the next 12 months. Here’s

Monday 24 August 2020 02 the chart that shows how the Coronavirus, the Domino’s is another share I don’t hold (and I’m lockdowns, home-cooking and the escalation of kicking myself because I’ve always admired its CEO buying online has turbo-charged Coles’ share price. Don Meij). I’ve always noted that Domino’s is a company that the market falls in love with, then finds Coles (COL) 1-year chart reasons to fall out of love with it. The Coronavirus has given the company and the share price a boost but the uptrend was there before the virus and home-working helped online takeaway food businesses.

Domino’s (DMP) 5-year chart

The pandemic has given Coles a 40% boost, which I thought would have to be pared back when we get back to normal (whenever that may be). But what CEO Steve Cain has in store for his stores makes me think that these guys could go higher on the likelihood that, for most of the reporting season (which ends at the end of December), businesses like Coles will See how in August 2016 the market gave up on remain in the box seat. Big office block businesses Domino’s, then forgave it partially in 2018, and aren’t in any hurry to go back to the CBDs and rejected it again during Donald Trump’s trade war workers from home (who have helped Coles) will still period when stocks fell. But when the bounce-back be home-based, especially in Victoria! started in early 2019, DMP was slow to be loved. However by mid-2019, the market started to rethink Steve Cain also has a number of innovations in place, DMP’s problems and the Coronavirus hardly hit the including something called Ocado, which is a company at all and has grown because of it. UK-based centralized fulfilment solution company. Back in October last year, the AFR reported on the But it’s not just a ‘workers at home pigging out on deal between Coles and Ocado. “Mr Cain said he pizza’ story. Have a look at my interview with Don expected the partnership, which includes a new and you’ll see reasons to believe that these guys are website and two automated centralised fulfilment definitely a buy-on-the-dip play. One intriguing aspect centres, would boost online sales by about $1 billion, of the market’s set against DMP was a belief that the double its home-delivery capacity, reduce likes of Uber and Deliveroo were going to eat cost-to-serve and lead to improved profit margins for Domino’s ‘lunch’, as they were the leaders in online Coles Online,” wrote the AFR’s Sue Mitchell. ordering and delivery.

And this was before the damn virus increased Cain’s That hasn’t been the case. The parallels with the online and hone delivery customers. market that expected Amazon was going to kill JB Hi-Fi and were vastly exaggerated. Coles is a definite buy on a dip but given the DMP has surged despite their rivals and Don explains innovation plans, it could be a decent investment why. This is definitely a ‘buy on the dip’ stock but now. I don’t hold Coles these days but with a decent note the analysts think a 19.2% is needed before it’s pullback, I’d be happy to be a shareholder again. a buy.

3. DOMINO’s – zero contact pick-up and delivery! 4. TYRO – new kid on the block

Monday 24 August 2020 03 My final stock is a buy anytime company and analysts needs of any particular individual. It does not see Tyro going 11.3% higher. Yep, I hold this one and constitute formal advice. Consider the it’s a part of my ZEET tech stocks collection — Zip, appropriateness of the information in regard to your ELMO Software, EML Payments and Tyro. And my circumstances. interview with the CEO Robbie Cook made me remain a believer in this company and its potential.

The key points CEO Robbie Cook made were:

The company has 10% share of the SMEs in the health, hospitality and retail sectors. Cook thinks 20% is a realisable target. Victoria is 23% of its total business. After lockdown, there should be a business spike. The whole COVID-19 experience will reduce the use of cash and escalate the use of cards, which is good for Tyro. Cook thinks Tyro’s investment in the hospitality food ordering and payments app menu, which means people at pubs can basically sit at their table and order via their app, will be another favoured activity in a COVID-19 affected world.

My interview with Cook in this week’s Switzer TV Investing show is worth a look.

By the way, in case you’re wondering what the analysts think of the other ZEETs, here are the latest ‘guesses’ from the experts:

ELO – +54.1%. EML – no guesses but Julia Lee and Shaw Partner’s Adam Dawes like it a lot. Z1P (a competitor of ) – 5.9% but has had a nice run, as the chart below shows:

Important: This content has been prepared without taking account of the objectives, financial situation or

Monday 24 August 2020 04 Is a2 Milk still a buy? by Paul Rickard

I wrote about a2 Milk (ASX: A2M) last October (see mothers and primary age children. https://switzersuperreport.com.au/the-land-of-a2-milk- and-money/). It was $12.23 at the time. On Friday, it In infant nutrition, a2 Milk employs a “one brand, two closed at $18.37. labels approach” to distribution and sales. A premium English label brand (Platinum) that is available to This isn’t one of those “how smart I am stories” but Australian retailers and resellers, and on cross border rather, I want to set out why I continue to like a2M. e-commerce sites such JD Global. The latter Further, why growth investors should consider the achieved sales of NZ$341 million in FY20 (up 40.3%), post result mark-down an opportunity to invest. while Australian retailers and re-sellers delivered sales of NZ$745, up 14.1%. Some of the Australian The chart below summarises why I like the company: sales are purchases by retail daigou (Chinese travellers and students) who take the products back to China to use/on-sell.

The other infant nutrition label is a Chinese label which a2M describes as “super premium”. This is available in “mother and baby stores” (MBS) in China. Sales in FY20 rose by a very impressive 101% to NZ$338m as a2M invested heavily in marketing and expanded its distribution reach to 19,100 MBS stores in China. But first, some background on the company, and then why I think it can continue its impressive performance.

The history of a2 Milk

Founded in in 2000, the a2 Milk company produces liquid milk and infant nutrition (powder and toddler milk drink) from cows that only contain the A2 beta- protein. Most regular cows’ milk also contains the A1 protein, which according to the a2 Milk company, can lead to digestive discomfort for approximately 25% of the population.

Liquid milk accounts for 13% of sales, with the bulk in and New Zealand and a developing market in the USA (3% in total). Infant nutrition is the main And that’s the point about a2M, it is largely a sales category, responsible for 82% of revenue. marketing and distribution company. Interestingly, a2 There are also fortified milk nutrition products for Milk says its market share of the MBS market for

Monday 24 August 2020 05 infant nutrition products in China is 2%, up from 1.3% the back of what it saw as “attractive growth in June 19. prospects and strong valuation support”, it raised its target price to NZ$22.55 (A$20.50). On overall sales growth of 32.8% to NZ$1.73 billion, a2 Milk delivered EBITDA of NZ$550 million, up While the result was broadly in line (some brokers 32.9%. Profit after tax rose by 34.1% to NZ$386 had it below their forecast, others had it above), million. These were largely in line with forecast, as several noted the increasing competition in the was the EBITDA margin (earnings as a proportion of Chinese infant formula market. However, they also revenue) of 31.7%. noted the company’s “strong revenue growth” forecast, strong balance sheet and upside from new Covid-19 was considered to have had a “modest products and markets. positive impact in FY20 on both revenue and EBITDA”, as pantry stocking of infant nutrition across For the major brokers, there are 2 buy online and resellers brought forward sales in Q3. recommendations, 2 neutral recommendations and 2 Offsetting this was a softening of retail daigou, due to sell recommendations (source: FNArena). The reduced tourism from China and international student consensus target price of the major brokers is $19.14, numbers. approximately 4% higher than Friday’s close of $18.37. Individual recommendations are set out in the At 30 June, a2 Milk had NZ$854 million cash on table below. hand, up NZ$389 million at the end of FY19. This strong balance sheet position provides scope for a2 Milk to fund future growth and potential participation in manufacturing. On Friday, a2M announced that it had entered into due diligence to acquire a 75.1% interest in Matura Valley Milk for NZ$270 million. Matura’s main manufacturing facility is in Southland, New Zealand. The other 24.9% is owned by a The brokers have forecast EPS (earnings per share) Chinese subsidiary of the China National Agricultural growth of 16.5% in FY21 and another 16.4% in FY22 Development Group. (this compares to a growth rate of 33.5% in FY20). On multiples, this puts a2 Milk on a multiple of 33.2 Looking ahead, a2M said that, notwithstanding the times FY21 forecast earnings and 28.5 times forecast Covid-19 uncertainties (which could impact consumer FY22 earnings. behaviour in its core markets and the supply chain in China), it “anticipates strong revenue growth Here’s my view supported by our continued investment in marketing and organisational capability”. It didn’t provide A multiple of 33 times doesn’t seem to be too guidance, but did say that it expects the EBITDA demanding for a company that historically has been margin to be in the order of 30% to 31%. growing earnings well in excess of 30% pa and is forecast to grow at 16.5% next year. Particularly in What do the brokers say? the current market where many growth stocks have yet to deliver any earnings. Following the result, Citi “double-downgraded” a2M from a “buy” to a “sell”. It thought that “the best I put a lot of weight on ‘track record” – increasing days are behind the company” and is worried about a revenue each year, increasing earnings each year, resurgence of Chinese brands and increasing increasing earnings per share each year – and in that geopolitical risk. respect, A2M has delivered in spades.

On the other hand, Credit Suisse upgraded from My interpretation of the sell-off post the result is that “neutral” to “outperform”. It thought that the result A2M has run pretty hard this year and that was “solid and broadly on expected lines”, and on profit-taking was always going to happen at some

Monday 24 August 2020 06 level. The share price chart for 2020 (see below) shows that is has been virtually a one way ride this year, notwithstanding the Covid-19 crash of February/March.

a2 Milk in 2020

There is no doubt that the “China risk” has increased a notch for a2 Milk. If tensions continue between China and Australia, the obvious question is “what’s next after wine?” However, most commentators think it very unlikely that a ban would be extended to dairy and infant nutrition. Further, a2M argues that it is a New Zealand company, not Australian.

The ban on inbound international travel and international students could certainly have some impact on sales if these continue well into FY21. a2M says that corporate daigou are replacing retail daigou and the MBS (mother and baby store) channel is becoming more important. There are also expansion opportunities into other Asian markets, in particular, South Korea.

For growth investors, a2M is a buy.

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.

Monday 24 August 2020 07 Reporting season, not horror season! by James Dunn

Shane Oliver, head of investment strategy at AMP December. Capital, says the season is 70% complete by companies (S&P/ASX 200) and 80% complete by In April, cut its interim market capitalisation. So far, says Oliver, only 28% of (first-half) dividend by more than 60%, while ANZ and results have exceeded expectations, compared to a deferred theirs until further notice. Because ‘norm’ of about 44%; but ‘misses’ (that is, results it reports on a June 30 balance date – while its “big falling short of analysts’ consensus expectations) are four” peers end their financial years on September 30 running at almost the same proportion, at 27%. – CBA had already paid an interim dividend, which it kept at $2 a share (as it related to pre-COVID times, Only 33% of results have seen earnings rise from a of the six months to December 2019). However, its year earlier (compared to a norm of 66%) and 55% COVID-affected final dividend, at 98 cents, was down have cut dividends (compared to a norm of just 16%). by 57% on the $2.31 paid last year – bringing the full-year fully franked dividend to $2.98, one-third Even with dividend cuts dominating, the extent of the (31%) lower than last year’s $4.31 a share. cuts has not been as heavy as expected, helped by a number of special dividends announced by While that is disappointing to income-oriented companies finding themselves with excess cash. This shareholders, the total payout and final were still has been caused by special situations, for example, better than the market had expected – and that is the , following the sale of Coles; Northern point when assessing all profits and dividends in this Star Resources, on the back of a booming gold price environment. (especially in A$ terms); and even the embattled AMP, which was able to pay a special dividend During this reporting season, NAB, Westpac and ANZ following the $3 billion sale of its life insurance all issued third-quarter trading updates, with the latter business. two delivering very different news on their interim dividends: Westpac confirmed that it would not pay AGL Energy, despite tough conditions, said it expects an interim dividend, while ANZ declared a first-half to pay special dividends over the next two years of up payment of 25 cents a share, almost 70% lower than to 25 per cent of profit, on top of the 75% payout ratio last year. ANZ chief executive Shayne Elliott already in place. specifically referred to the needs of retiree shareholders as influencing the decision to pay a Investors were particularly concerned about bank “prudent and modest” dividend amid the prevailing dividends, and there, the news wasn’t great. economic uncertainty. Investors knew that the prudential regulator, the Australian Prudential Regulation Authority (APRA), Other companies that have delivered had “requested” in April that banks and insurers better-than-expected dividend news include , consider deferring dividend decisions until the impact , GPT, Newcrest and QBE. of COVID impact was clearer. In July, APRA relaxed this requirement, but its revised guidelines asked On the flipside, – while holding its fully franked companies under its ambit to retain at least half of full-year dividend steady at 16 cents – reported a set their earnings, when deciding dividends, until of numbers that had analysts concluding that it will

Monday 24 August 2020 08 not be able to do so in the current financial year, have been buttressing overall market earnings in unless the business performs at its absolute optimum. recent years) with –14.4%. FNArena’s collation of analysts’ consensus estimates arrives at an expectation of 14.7 cents a Oliver says most companies appear quite resilient, share for FY21, slipping further to 14.2 cents in FY22. and this in turn has enabled a majority (or 59%) of Thomson Reuters’ collation does see 16 cents in companies’ share prices to outperform the market on FY21, declining to 15.4 cents in FY22. the day they reported, and for the market as a whole to rise so far through August. A unique factor affecting the current earnings season is the impact of government stimulus: we have seen But the cloudiness of the outlook is having a big the strange sight of the Federal Government’s impact on the mood of corporate Australia, with JobKeeper scheme showing up in company figures. Deloitte’s biannual CFO (chief financial officer) For example, vehicle parts retailer ARB Corporation Sentiment Survey showing plunging optimism, with and homeware retailers Nick Scali and Adairs 75% of Australia’s CFOs expecting the pandemic to reported numbers that showed consumers hit revenues in the second half of 2020, and more channelling some of their COVID support payments than half foreseeing further declines in 2021. into purchases. Nick Scali and Adairs were actually able to lift dividends on the back of this effect – Reports still to come drawing criticism from some quarters. After all, these payments were meant primarily to sandbag the Tuesday wages of their workforce. Bingo Industries (BIN) Travel centre chain reported in its result that it is receiving $10 million a month from The waste management company could be a JobKeeper. is expecting to receive about potential star of the season: analysts’ consensus $400 million by the end of September. Retail giant expects earnings per share (EPS) to more than Premier Investments (owner of brands including Peter double, from 3.9 cents last year to 8.1 cents in FY20, Alexander, Just Jeans and Smiggle) admitted that but with a slight fall in the fully franked dividend, from JobKeeper payments would be one of the factors 3.7 cents to 3.6 cents. Analysts’ consensus target helping to push it to a forecast record profit for FY20, price of $2.438, versus current share price of $2.10. as well as rent waivers and strong online sales. (BKL) The shift to online is benefiting many retailers, but while that was a trend that was in place before Analysts’ consensus expects sharp EPS contraction, COVID, government subsidies were not – and down 64% to 110.1 cents in FY20, and no dividend analysts and investors have to factor-in what ensues (BKL paid $2.20 a share in FY19). Analysts’ when the cash injection tails off later in the year, due consensus target price of $72.467, versus current to the criteria for receiving it being tightened. share price of $75.16.

The general uncertainty brought about by COVID is Seven West Media (SWM) making looking forward into FY21 more difficult than usual. At the outset of reporting season, analysts Analysts’ consensus expects EPS of 5.2 cents, a expected earnings across the market for FY21 to be major recovery from a loss of 29.5 cents a share in down 21%: that fall is now seen as –22.3%, Oliver FY19; but no dividend (the last dividend was in says, which is on track to be the biggest slump in FY18). Analysts’ consensus target price of 21 cents, company earnings since the early 1990s recession. versus current share price of 14 cents. Financials are being hit the hardest, with the consensus expecting a –29% slump in earnings – led (ANN) by insurers and the banks – followed by industrials with a –17.7% fall in earnings and resources (which A COVID beneficiary. Analysts’ consensus expects

Monday 24 August 2020 09 EPS of 116.9 US cents, up 4.9%, and a dividend of than US$70 million in July, representing a 30% 51.3 US cents, compared to 46.8 US cents a year increase on the June quarter average and a 600%+ ago. Analysts’ consensus target price of $33.69, increase year-on-year. The business added 133,000 versus current share price of $39.57. customers in July and surpassed the 2 million customer milestone in August. But analysts’ Wednesday consensus target price, at $6.20, is well below the current share price of $7.14. Reece (REH) (RHC) Analysts’ consensus expects EPS of 28.8 cents, down 19.9%, and a fully franked dividend of 6 cents, Analysts’ consensus expects EPS of 186 cents, down 70%. Analysts’ consensus target price of down 30%, and a fully franked dividend of 64.1 cents, $8.92, versus current share price of $11.06 down 58%. Analysts’ consensus target price, at $68.45, sits higher than the current share price of Thursday $65.82.

Woolworths (WOW) Important: This content has been prepared without taking account of the objectives, financial situation or Analysts’ consensus expects EPS of 131.7 cents, needs of any particular individual. It does not down 36.1%, and a fully franked dividend of 94.9 constitute formal advice. Consider the cents, down 7%. Analysts’ consensus target price of appropriateness of the information in regard to your $38.53, versus current share price of $39.76 circumstances.

Afterpay (APT)

Could be another star, after flagging last week that EBITDA (earnings before interest, tax, depreciation and amortisation) for the full-year would be almost double the forecast made in July: $44 million compared to the flagged $20 million–$25 million, plus the important core measure of profitability, the net transaction margin, was coming in at 2.25%, or 0.25% higher than expected. However, analysts’ consensus target price is $67.92, significantly below the current share price of $81.97.

Nine Entertainment Company (NEC)

Analysts’ consensus expects EPS of 8.4 cents, down 44%, and a fully franked dividend of 6.2 cents, down 38%. But analysts’ consensus target price, at $1.90, offers upside on the current share price of $1.65

Zip Co (Z1P)

Afterpay’s buy-now, pay-later (BNPL) rival Zip Co now has access to the US’s online retail market (15x bigger than the Australian market) thanks to its acquisition of QuadPay. The QuadPay business struck record monthly transaction volume of more

Monday 24 August 2020 10 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

Receiving two upgrades to ratings by different Credit Suisse notes a2 Milk’s FY20 result was solid brokers were The thanks to and broadly on expected lines. The company expects impressive cost management, Coca-Cola Amatil for strong revenue growth to continue in FY21 along with improving sales volumes and Monadelphous Group some capex into milk processing and IT. The as a result of better-than-expected margins, cashflow, company clarified it will continue to prioritise growth and dividend. Additionally, Monadelphous was over return to shareholders. Driven by attractive assessed as having strong prospects for FY21, growth prospects and strong valuation support, Credit despite a pending lawsuit from . Suisse upgrades its rating to Outperform from Neutral with the target price increasing to The only company receiving two downgrades to NZ$22.55 from NZ$17.65. ratings was Domain Holdings and both were largely due to valuation concerns, after a doubling of the See downgrade below. share price since March 2020 lows. Surrounding commentary by both analysts was quite upbeat and was further reflected by another broker upgrading the company’s rating due to its leverage to an improved listing environment.

The table for negative updates to earnings estimates reveals significant adjustments for both Qantas Airways and Flight Centre, due to delays in near-term domestic and long-term international travel.

On a more positive note, the largest lift in percentage terms for earnings was , on the strength in the development workbook and hopes for a resolution to the sale of its engineering division. A similar potential divestment story is in play at for its stake in South Africa Energy Coal. Along with brokers being generally positive on FY21 guidance by management, this saw the company third on the table for earnings upgrades, just below Sims Limited, with a better-than-expected FY20 result.

In the good books

THE A2 MILK COMPANY LIMITED (A2M) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/1/2

Monday 24 August 2020 11 COCA-COLA AMATIL LIMITED (CCL) was listing environment. The target price is increased to upgraded to Outperform from Neutral by Credit $3.37 from $2.25. Suisse and Upgrade to Add from Hold by Morgans B/H/S: 3/4/0 See downgrade below.

The impact of the pandemic on first half earnings was PROPERTY GROUP (DXS) was upgraded less than Credit Suisse anticipated. The broker was to Accumulate from Hold by Ord Minnett B/H/S: surprised that Indonesian EBIT broke even despite a 4/2/0 -19% drop in volumes and applauds the company’s efforts. The broker no longer projects losses for Dexus Property Group’s FY20 underlying funds from Indonesia and factors in $70m for the company’s operations were slightly below Ord Minnett’s new cost savings program. NZ volumes and price forecast. A dividend of 23c (20% franked) was assumptions are also upgraded. Rating is upgraded declared, taking the full-year payout to 50.3c. No to Outperform from Neutral and the target is raised to dividend guidance has been given for FY21 due to $11.25 from $9.00. uncertainty on rent collections. Even so, the broker expects dividends to stabilise at 50-52c in FY22. Coca-Cola Amatil’s result was materially stronger Taking a contrarian view of the group following its than Morgans expected due to a stronger volume FY20 results, Ord Minnett upgrades its rating to recovery in June, quicker than expected realisation of Accumulate from Hold with the target price increasing cost savings and cashflow was strong (and the to $9.65 from $9.10. highlight for the broker). Morgans highlights overall company volumes have improved sequentially since HT&E LIMITED (HT1) was upgraded to Outperform April, while volume trends in developing countries are from Neutral by Credit Suisse B/H/S: 1/2/1 improving. The balance sheet remains in a solid position, according to the analyst, and enabled the First half results were ahead of estimates driven by declaration of an unfranked interim dividend of 9cps. better cost management at Cody Outdoor and very Following the result and encouraging volume trends, strong growth at Soprano Design. The broker Morgans upgrades earnings (EBIT) forecasts by recognises the Australian Radio Network faces 18.2%, 10.5% and 4% for FY20. FY21 and FY22. The challenges but believes these are well understood. A rating is upgraded to Add from Hold. The target price re-valuation of Soprano drives an upgrade to the is increased to $10.39 from $8.93. broker’s rating, to Outperform from Neutral. Target is raised to $1.60 from $1.25. DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) was upgraded to Hold from Reduce by Morgans MCMILLAN SHAKESPEARE LIMITED (MMS) was B/H/S: 3/3/0 upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/2/0 Morgans relates Domain Holdings Australia has reported very similar online revenue trends to FY20 results were in line, with the exception of a lack competitor REA Group (REA), with the core digital of final dividend, although Credit Suisse is not business seeing revenue declines of -6.4% in the surprised. The broker considers the decision to year. However, print revenues were decimated in the withhold a dividend prudent rather than related to any second half, according to the broker. The company is specific cash flow concerns. While the recovery may aiming to move the audience reach conversation from be lumpy, July novated lease volumes are considered quantity to quality of leads and ability to match buyers encouraging and tracking ahead of the prior and seller, according to the analyst. Additionally, the corresponding period. Credit Suisse expects growth aim is to move from a classifieds business to an in FY21 and upgrades to Outperform from Neutral. agent and consumer enabler, participating in the Target is raised to $10.60 from $10.10. lifecycle of the property transaction. The rating is upgraded to a Hold from Reduce and Morgans is NORTHERN STAR RESOURCES LTD (NST) was cognisant of the company’s leverage to an improved upgraded to Outperform from Neutral by Credit

Monday 24 August 2020 12 Suisse B/H/S: 1/2/2 signs of improvement, but visibility is poor. Deleveraging plans, the fact that Star is better FY20 results missed forecasts but reserve and mine positioned to deal with domestic capacity and supply life growth are positive, Credit Suisse notes. FY21-22 than competitors and the loyalty plan are likely to production forecasts are softer than the broker favour margin expansion, says the broker. The broker expected along with modestly higher costs which expects an earnings fall in FY21 but upgrades the drives a downgrade to estimates. That said, while company to Accumulate from Hold and raises the production growth is likely to come at higher average target price to $3.25 from $2.70. cost, it will be accretive and reflects a superior growth profile versus peers, in the broker’s view. Credit LIMITED (TAH) was Suisse upgrades to Outperform from Neutral. Target upgraded to Outperform from Neutral by Credit is lowered to $15.65 from $16.00. Suisse B/H/S: 2/4/0

PRO MEDICUS LIMITED (PME) was upgraded to Tabcorp Holdings announced a lower payout to 75% Buy from Neutral by UBS B/H/S: 2/0/0 of net profit while also stating dividends will resume “when appropriate”. Credit Suisse assumes lottery Pro Medicus’ FY21 result outpaced UBS forecasts will increase revenue by 1% in FY21 for and the broker upgrades to Buy, expecting positive Tabcorp versus -3% assumed previously. The broker catalysts during FY21 and noting the recent pullback. notes the first half will be cycling a period of A sharper than expected rise in second-half exam exceptionally strong jackpots and the business might volumes triggers a 5% increase in FY21 EPS grow. Earnings growth forecasts for FY21-22 have forecasts. FY22-23 EPS earnings are downgraded been revised upwards. Credit Suisse upgrades its -3% to -5% on expectations that expansion will rating to Outperform from Neutral with the target price moderate. The pipeline continued to build through increasing to $4.30 from $3.65. COVID and the company has plenty of tendering opportunities. Cash flow was strong, yielding a net In the not-so-good books cash position of $43m. Target price is steady at $29.65. THE A2 MILK COMPANY LIMITED (A2M) was downgraded to Sell from Buy by Citi B/H/S: 3/1/2 THE STAR ENTERTAINMENT GROUP LIMITED (SGR) was upgraded to Outperform from Neutral Citi believes the best days are behind the company by Credit Suisse and to Accumulate from Hold by and downgrades to Sell from Buy. A substantial path Ord Minnett B/H/S: 6/1/0 for growth continues but the outlook is considered increasingly risky amid a resurgence of Chinese Credit Suisse notes excellent cost control and good brands and increasing geopolitical risks. The broker customer management in the current trying times and acknowledges use of the cash balance for upgrades FY21 estimates. The broker assesses, by acquisitions and/or capital management remains the FY22, Star Entertainment is likely to have retired biggest risk to the view. Citi reduces FY21 and FY22 substantial debt. Management has identified $300m net profit estimates by -3% to reflect the lower sales in assets that can be divested to fund FY21 and earnings outlook for China along with pressure investments. The broker now models FY23 revenue on Australasian earnings from FY22 amid structural at 80% of FY19. Rating is upgraded to Outperform decline in the daigou channel. Target is reduced to from Neutral and the target is raised to $3.60 from $17.20 from $21.50. $3.40. See upgrade above. Star Entertainment Group’s FY20 result outpaced consensus and Ord Minnett forecasts, thanks to impressive cost management, although earnings disappointed. Star has removed the dividend until leverage normalises. Domestic visits show some

Monday 24 August 2020 13 from Buy and reduces the target to $320 from $334.

CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was downgraded to Hold from Add by Morgans B/H/S: 3/3/0

The FY20 result of Corporate Travel Management beat Morgans forecasts on most key metrics, particularly cashflow and balance sheet strength. The fourth quarter was materially stronger, according to the broker, with Europe and the US the strongest contributors to group revenue. The broker expects earnings may not return to FY19 levels until FY23. .COM LIMITED (CAR) was The rating is downgraded to Hold from Add, as the downgraded to Hold from Add by Morgans B/H/S: stock has rallied 64% since being upgraded to an Add 1/5/0 in early August. The target price is increased to $14.20 from $12.85. Morgans describes the Carsales.com FY20 result as good in challenging times and FY21 should show DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) continued growth on a normalised basis. A strong end was downgraded to Buy from Neutral by UBS and of year and July trading confirms to the analyst to Hold from Accumulate by Ord Minnett B/H/S: used car conditions are buoyant. The broker 3/3/0 highlights international businesses now represent 24% of ‘look through’ revenue for the company, with Domain Holdings Australia’s FY20 was a “solid these businesses being the dominant portals in their beat” versus UBS forecast, somewhat driven by geographies. The rating is lowered to Hold from Add. JobKeeper subsidies and a better than expected print The target price is increased to $19.17 from $14.58. result. UBS has upgraded its FY21 earnings forecast by circa 25% and assumes a quicker return of CHARTER HALL GROUP (CHC) was downgraded subscription /agent services revenues back to to Neutral from Buy by UBS B/H/S: 5/1/0 pre-pandemic levels. The stock is trading at UBS’ target price and the broker downgrades to Neutral UBS is of the view Charter Hall Group delivered from Buy rating with the target price increasing to “extraordinary growth” in a year marked by $3.60 from $3.55. unprecedented volatility. The broker considers the guidance, -4% below UBS forecast, to be Domain Holdings revenue was down -9.1% on FY20. conservative and expects upgrades in the year Ord Minnett notes Project Nash appears to support ahead. UBS downgrades its rating to Neutral from the company quite favourably despite the lockdowns Buy on valuation grounds with the target price revised and restrictions. With the company prioritising cost upwards to $12.25 from $9.80. control in FY21, the broker expects better margins and has increased operating earnings forecasts for CSL LIMITED (CSL) was downgraded to Neutral FY21. Domain is trading at an elevated premium to its from Buy by Citi B/H/S: 2/5/0 peers, notes the broker, downgrading its recommendation to Hold from Accumulate with a FY20 net profit was in line with Citi’s estimates. The target price of $3.50. broker considers the FY21 net profit forecasts ($2.1-2.27bn) are achievable only of plasma See upgrade above. collections improve over the course of the year. Still, the broker remains positive about the control of the GROWTHPOINT PROPERTIES AUSTRALIA (GOZ) pandemic globally and sets its net profit estimates was downgraded to Hold from Accumulate by Ord near the top of the range. Citi downgrades to Neutral Minnett B/H/S: 1/2/0

Monday 24 August 2020 14 Growthpoint Properties’ FY20 funds from operation assumes gathering restrictions will affect the business (FFO) was 4% ahead of Ord Minnett’s and the multiple will re-rate higher as social forecast. Portfolio occupancy decreased to 93% as distancing measures are eased and there is clarity on Botanicca, a newly completed project in the new senior management strategy. First half net Melbourne, was vacant on completion. No earnings profit was -17% below forecasts and there is no 2020 guidance was provided for FY21, but the dividend guidance. However, the 5.5c interim dividend was was guided to 20c, down -8% versus FY20. Driven by unexpected. Rating is downgraded to Neutral from valuation, Ord Minnett downgrades its Buy. Target is lowered to $11.00 from $12.75. recommendation to Hold from Accumulate with the target price rising to $3.40 from $3.30. LIMITED (ORG) was downgraded to Neutral from Outperform by IDP EDUCATION LIMITED (IEL) was downgraded Macquarie B/H/S: 4/3/0 to Hold from Add by Morgans B/H/S: 4/1/0 FY20 results were in line with Macquarie’s estimates. IDP Education’s FY20 result was materially ahead of Weaker pricing has weighed on guidance, with Morgans expectations. This was largely due to a underlying profit forecast to fall to $300m in FY21. quicker-than-expected recovery of its IELTS division Operating earnings guidance (EBITDA) and signs of strong student demand for its placement is $1.15-1.3bn. Macquarie notes the upside relies on operations. The company ended the period with a rally in oil and/or gas prices amid the company’s $205m of net cash (assisted by the $225m capital ability to shorten its exposure to falling power prices. raising in April) and declared it will pay its deferred Rating is downgraded to Neutral from Outperform and 19.5cps interim dividend in September. Morgans the target reduced to $6.01 from $6.62. does not expect the recovery to be linear for the company and due to the recent strong share price, QANTAS AIRWAYS LIMITED (QAN) was the rating is reduced to Hold from Add. The target downgraded Neutral from Buy by Citi B/H/S: 3/2/1 price is increased to $19.31 from $15.07. Qantas’s FY20 result was a shocker as expected, IRESS LIMITED (IRE) was downgraded to Hold and the broker downgrades FY22 and FY23 revisions from Add by Morgans B/H/S: 1/2/1 -6% and -10% respectively, finding little joy in the outlook. Citi expects a domestic recovery in the Iress reported headline profit (NPAT) of $26.3m, second half of FY21, led by Jetstar Domestic, but the which was broadly in-line with Morgans forecasts. An earliest recovery for the international operations is interim dividend of 16cps was declared. The company FY22. On the upside, Qantas is addressing its cost did not reinstate previous guidance, given continued base and the broker expects FY21 first-half earnings potential disruptions (primarily related to project will represent the nadir. Neutral (High Risk) rating implementations) from COVID-19. Morgans retained. Target falls to $4.40 from $4.60. concludes the company has a strong recurring earnings base and pipeline of opportunities, but LIMITED (SHL) was investment for growth remains high and the broker is downgraded to Neutral from Buy by Citi B/H/S: looking for a clearer point at which operating leverage 2/4/1 will materialise. The rating is downgraded to Hold from Add. The target price is decreased to $12.05 Sonic Healthcare has delivered an FY20 result above from $13.74. June guidance, consensus and Citi forecasts, courtesy an uptick in COVID testing. While pathology INVOCARE LIMITED (IVC) was downgraded to rose, radiology took a -10% hit as volumes dried up. Neutral from Buy by Citi B/H/S: 1/4/1 Cash generation was strong and the business base largely recovered from its March-May slump by Citi reduces 2020-22 operating earnings forecasts to year-end. Revenue growth in July and August was account for the lower volume in case averages that is extremely strong, again thanks to COVID. No expected over the foreseeable future. The broker also guidance was forthcoming. FY21 forecasts rise but

Monday 24 August 2020 15 Citi expects a return to normal in FY22, although The above was compiled from reports on FNArena. FY22 EPS forecasts fall -7% to reflect currency and The FNArena database tabulates the views of seven interest rate movements. Broker downgrades to major Australian and international stockbrokers: Citi, Neutral from Buy. Target is raised to $35.50 from Credit Suisse, Macquarie, Morgan Stanley, Morgans, $34.00. Ord Minnett and UBS. Important: This content has been prepared without taking account of the SMARTGROUP CORPORATION LTD (SIQ) was objectives, financial situation or needs of any downgraded to Hold from Add by Morgans B/H/S: particular individual. It does not constitute formal 2/3/0 advice. Consider the appropriateness of the information in regard to your circumstances. First half profit (NPATA) of $32.1m was in-line with recent guidance with the balance sheet net debt figure of around $12m a key positive, notes Morgans. Novated lease volumes showed further recovery into June/July, but not to the same extent as competitors, according to the broker. Morgans expects a relatively low organic growth profile and capital will likely need to be deployed (acquisitions) for growth. The rating is lowered to Hold from Add. The target price is decreased to $6.75 from $7.20.

WISETECH GLOBAL LIMITED (WTC) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/2/1 The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven Wisetech Global’s FY20 result was slightly ahead of major Australian and international stockbrokers: Citi, Credit Suisse’s forecast and at the lower end of Credit Suisse, Macquarie, Morgan Stanley, Morgans, company management’s guidance. The company’s Ord Minnett and UBS. Important: This content has FY21 guidance points towards operating income of been prepared without taking account of the $155-$180m supported by an increased focus on objectives, financial situation or needs of any costs. The broker believes the foundation is set for particular individual. It does not constitute formal attractive long-term growth, amplified at profit given advice. Consider the appropriateness of the the scalability of the software and operating model. information in regard to your circumstances. Long-term investors are expected to be in for surprises to the upside. Overall, the broker struggles to bridge the strong share price performance with the news in the FY20 result and downgrades its rating to Neutral from Outperform. The target price increases to $28 from $23.6

Earnings forecast

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.

Monday 24 August 2020 16 “HOT” stocks by Maureen Jordan

WHAT I LIKE – Megaport (MP1)

Megaport is a provider of elasticity connectivity and network services, operating under a Network as a Service (NaaS) business model and it’s a stock that Michael Wayne from Medallion Financial has on his list of likes. “In recent weeks, we have revisited a business we first raised with clients in one of our Source: Google monthly reports three years ago,” said Michael. WHAT I DON’T LIKE – Coca-Cola Amatil (CCL) “The company prides for offering the world’s first elastic SDN-based interconnection fabric, which CCL is the authorised bottler and distributor of The accelerates connection between customers and data Coca-Cola Company’s beverages in Australia and 5 centres,” he added. other Asia Pacific regions. Coca-Cola Amatil also prepares and distributes beverages outside of the Megaport allows businesses (like Amazon Web Coca-Cola family, taking its portfolio of non-alcoholic Services, Google Cloud Platform, IBM Cloud, Oracle beverage brands to a total of 30. “The business has Cloud, Salesforce and SAP) to swiftly access multiple been experiencing soft volume growth, declining cloud databases through a single platform. “This is margins and falling revenues. extremely important in an environment where many multinational corporations have several business “We feel the structural trend of consumers shifting operations across several countries and use several away from unhealthy fizzy drinks will remain a cloud databases depending on the location and headwind for some time to come, with increases business. Megaport effectively streamlines the across water, dairy and energy drinks only partially communication by allowing data stored in different offsetting declines in carbonated and sugary drinks. cloud servers and countries to be accessed universally on a single platform. “Competitor pricing pressure and intense competition across the grocery industry have the potential to Megaport’s share price was on the move early last further compress margins,” said Michael. week, after the network-as-a-service provider announced the upcoming release of Megaport Virtual Edge. “This product innovation will allow customers to tap into Megaport’s platform to deploy and extend network functions in real time, without deploying hardware.

“The global cloud database market estimated to grow to $24.8 billion USD by 2025 which places MP1 in an Source: Google enviable position to capitalise, should management continue to deliver,” Michael concluded. Important: This content has been prepared without

Monday 24 August 2020 17 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.

Monday 24 August 2020 18

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