The bulls and bears are in a Mexican standoff! The S&P/ASX 200 Index (Index:^AXJO) can’t seem to move much from current levels as investors wait for a circuit breaker.
Optimism about the re-starting of our economy is offset by fears of a second wave of COVID-19 infections.
But there are some ASX stocks that have already started slumping after leading brokers downgraded their recommendations on these shares.
Taking a toll
The first is the Transurban Group (ASX: TCL) share price after UBS cut its rating on the toll road operator to “neutral” from “buy”.
That sent the stock 2.3% into reverse as it fell to $14.45 during lunch time trade.
The downgrade comes even as management issued a positive update recently. Traffic volumes are recovering faster than what many expected and management said it will pay a half year dividend of 16 cents a share. UBS was only expecting an 11 cent a share distribution.
However, dividends over the longer-term may not meet previous expectations.
“Although there is no specific dividend guidance for FY21, there is a repeated intention to only pay out underlying free cashflow excluding capital releases,” said UBS.
“Our forecasts incorporate this as a new dividend policy which dampens longer-term distributions considering the magnitude of forecast WestConnex (WCX) capital releases.”
It also doesn’t help that the Transurban share price is outperforming the broader market, making valuations less attractive.
UBS’ 12-month price target on the stock is $14.85 a share.
Rising costs challenge
Meanwhile, the Qube Holdings Ltd (ASX: QUB) share price got a double hit as not one, but two brokers downgraded their recommendation on the stock.
The move comes even after the logistics group signed Woolworths Group Ltd (ASX: WOW) as a key tenant at its Moorebank intermodal facility.
The customer win is one factor supporting the stock’s outperformance, although that isn’t the only reason why Morgans and Citigroup lowered their rating on Qube.
“QUB has advised of a $60m increase in capex related to upgrading Moorebank Avenue prior to its realignment,” said Morgans.
“In addition to this and the WOW DC capex, QUB says the minimum capex it expects to incur to fund Moorebank will be higher than previous forecast, with an update to be provided at the FY20 result.
“Each $100m unexpected cost increase reduces our valuation by 5 cps.”
Morgans changed its recommendation on Qube to “reduce” from “hold” with a price target of $2.45 a share.
Too much good news in the price
Citi also noted that Qube is funding more of the development and warehouse capex for tenants than originally expected.
“Qube’s share price has risen 34% since its equity raising in early May 2020,” said Citi.
“With the near-term operating outlook still highly uncertain, we lower our recommendation from Buy/High Risk to Neutral with a $3.15 target price.”
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Returns as of 6th October 2020
Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia owns shares of Transurban Group and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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