Broker downgrades are clouding over these two ASX shares even as the broader market rallies.
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The market is gaining ground this morning but broker downgrades are holding back these two ASX shares.
But the news isn’t quite as rosy for the Woolworths Group Ltd (ASX: WOW) share price, which dipped 0.1% to $37.57. This is after Morgan Stanley downgraded the supermarket to “equal-weight” from “overweight”.
ASX shares getting downgraded post demerger
The broker also slashed its 12-month price target on the Woolworths share price to $36.50 from $44 a share post-demerger with the Endeavour Group Ltd (ASX: EDV) share price.
Coincidentally, the Endeavour Group share price is also underperforming today.
“With operational momentum and an impending demerger, WOW traded up 7% over the 3 months leading into the Endeavour demerger,” said Morgan Stanley.
“Since then, WOW+EDV has rallied a further 4% over the last week.”
Trading at a premium
This makes the Woolworths share price look fully valued at around 31.3 times earnings. Woolies is trading at a 6% premium to the ASX 200 and a 35% premium to the Coles Group Ltd (ASX: COL) share price).
However, Morgan Stanley’s valuation doesn’t include any potential capital return. Woolworths indicated it could have up to $2 billion in excess cash that could be used for capital management.
This is likely to take the form of an off-market share buy-back. Assuming an average discount of 14%, the program could be 1.7% accretive to the Woolworths share price, noted the broker.
Downgrade dents sentiment for this ASX share
Another that’s struggling to gain traction today is the AMA Group Ltd (ASX: AMA) share price. The panel beating group dipped 0.9% to 56 cents at the time of writing.
The underperformance coincides with UBS downgrading the ASX shares to “neutral” from “buy”.
“While the long-term opportunity remains appealing, in our view there are a number of uncertainties that cloud the near-term outlook,” said UBS.
Four risk factors
There are four specific areas of concern highlighted by the broker. The first is the potential impact of rolling lockdowns.
Looking at Apple vehicle mobility, the seven-day rolling average is down around 13% in AMA’s regions for the week starting 24 June when compared to pre-COVID-19.
Next is the labour and parts inflation pressures, followed by the group’s ability to pass on these higher costs.
Finally, the recent turnover of senior management is also dragging on the AMA share price. This is perhaps the most worrying risk factor, in my view.
Short-term risks trumps longer-term outlook
“We still see AMA as a beneficiary of industry consolidation and higher volumes post-COVID,” added UBS.
“But consider the risk-return balance to have shifted until we have better visibility on the above mentioned concerns.”
UBS cut its 12-month price target on the AMA share price to 56 cents from 70 cents a share.
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