Our market looks like it will close the week on a strong footing. This is more than what we can say for the Telstra Corporation Ltd (ASX: TLS) share price and two other ASX stocks that got slugged with a broker downgrade.
The S&P/ASX 200 Index (Index:^AXJO) gained 0.3% in late morning trade and if it closes at this level, it would have advanced by a decent 1.7% pace for the week.
That’s not a bad effort given we are nearing the half-year point for what has been described as the worst reporting season in recent history.
But the August cheer isn’t universally shared. Just ask shareholders in Telstra Corporation Ltd (ASX: TLS) with the stock slumping again today on a broker downgrade.
Morgans cut its rating on the stock to “hold” from “add” after Telstra posted its full year results yesterday.
The broker questions whether the stock is as dependable an income stock as investors like to believe as management’s outlook was more downbeat than expected.
Telstra’s 25% dividend cut risk
“TLS also reduced their FY23 return on capital target from 10% to now being greater than 7%,” said Morgans. “This has implications for EPS and DPS sustainability.”
That assessment will strike fear in shareholders as dividend sustainability is the key (if not only) reason to be holding the stock.
Morgans believes Telstra will need to cut its dividend by a quarter to 12 cents a share from this financial year onwards. Its price target drops to $3.21 from $3.73 a share.
Shares in our largest telco fell 1.8% to $3.06 at the time of writing and is likely to shed around 10% of its value over the week.
Good news baked in
Another stock licking its wounds this week is the Breville Group Ltd (ASX: BRG) share price. Bell Potter lowered its recommendation on the small kitchen appliance maker to “hold” from “buy” even though its results proved to be resilient to COVID-19.
Breville’s underlying earnings before interest and tax (EBIT) jumped 14.3% to $111.1 million in FY20 over last year due to strong sales in key markets. But the good news is arguably reflected in the current share price.
“We have a positive view on BRG on several fronts: growth prospects in several large markets, flexible cost structure and strong balance sheet,” said Bell Potter.
“However, given the strong share price run, and mindful of near-term uncertainties, we believe BRG is now fair-value.”
The broker’s price target on Breville is $26 a share.
It’s uncertainties from COVID-19 that also prompted Citigroup to downgrade its call on the Flight Centre Travel Group Ltd (ASX: FLT) share price.
The travel agent released a trading update that forecasted a pre-tax loss of $474 million to $525 million for FY20. This is significantly below Citi’s estimate of a $145 million loss.
Management tried to off-set the bad news by pointing to its strong liquidity position. Flight Centre can go for 18 months with the $800 million in its tank.
That should give plenty of time for the world to recover from the COVID-19 shutdown.
Second capital raising?
“We acknowledge the potential upside on a three-year view, albeit with very limited visibility,” said Citi.
“The risk of a second capital raising also exists within twelve months given the lack of leisure and corporate travel expected over the near term.”
The broker cut its recommendation on the stock to “hold” from “buy” with a price target of $13.50 a share.
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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Flight Centre Travel Group 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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