Weekly Reports | Dec 07 2020
This story features BREVILLE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BRG
Guide:
The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.
Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.
Summary
Period: Monday November 30 to Friday December 4, 2020
Total Upgrades: 9
Total Downgrades: 9
Net Ratings Breakdown: Buy 51.46%; Hold 38.60%; Sell 9.94%
By Mark Woodruff
For the week ending Friday December 4 there were nine upgrades and nine downgrades for ASX-listed stocks on the FNArena database. Of the nine upgrades, four were made by separate brokers for Domino’s Pizza Enterprises.
The majority of the seven brokers in the database were effusive in praise for Domino’s. It’s considered the company is set for multi-year earnings growth led by store expansion, growth in same-store-sales and operating earnings margin expansion.
Three of the downgrades (and one upgrade) pertained to Treasury Wine Estates following the China-imposed 169% provisional anti-dumping measure rate. This outcome was worse than expected and reallocation plans are expected to take time. Credit Suisse took a counter-cyclical approach and upgraded the rating to Outperform from Neutral on the basis news is unlikely to get worse.
While there were no material negative percentage changes to target prices for the week, there were several material positive changes made by brokers. The top three by percentage involved raw material providers to the battery industry. These were Syrah Resources (graphite) and the lithium producers Galaxy Resources and Orocobre.
After Morgan Stanley performed various projections for revenue derived from the Balama project and costs for Vidalia, earnings forecasts were increased for Syrah Resources. This is despite reservations over whether the net of these two and cash on hand was sufficient to fund Vidalia.
Positive forecasts for the lithium price played a role in upgraded earnings forecasts for both Orocobre and Galaxy Resources. Earnings adjustments for the latter company were complicated by a capital raise to fund Stage 1 of the Sal de Vida project.
Worley was next for percentage increase in target price for the week, after the company outlined plans to leverage green competencies by focusing more on sustainability projects.
It was a big news week for Freedom Foods Group, which resulted in the largest percentage earnings upgrade for the week. Around -$590m has been written off or re-stated, largely related to fixed assets, goodwill, brands and new product costs. However, Citi can see some positives emerging and plans to simplify the business and board turnover should be well received. Also feeding into earnings forecasts is the mooted capital raising of up to $280 million, via a listed secured subordinated convertible note.
Karoon Energy shares are on an earnings upgrade roll since the recent Bauna acquisition. Macquarie also envisages "forgotten" upside in the Neon & Goia oil fields. The broker assesses the company is turning its attention to a broader Santos Basin strategy in order to boost oil production.
A higher nickel price assumption led to higher forecast earnings by Credit Suisse for Western Areas. Finally, Senex Energy had a material percentage earnings upgrade following the divestment of the company’s Cooper Basin business and upgraded Surat CSG growth targets.
It comes as little surprise that Treasury Wine Estates had the largest percentage fall in earnings forecasts by brokers for the week. The tale of woe is adequately covered above.
In the wake of an investor day, some analysts downgraded earnings forecasts for Santos. Ongoing capital costs for the base business are substantially higher than the prior broker estimates, and the company is experiencing some delays to growth projects.
Now there are five brokers researching Cooper Energy in the FNArena database, after Morgan Stanley initiated coverage last week with an Equal-Weight rating and a target price of $0.40. The new broker’s earnings projection had the effect of lowering the overall average of the five.
Total Neutral/Hold recommendations take up 51.46% of the total, versus 38.6% on Neutral/Hold, while Sell ratings account for the remaining 9.94%.
Upgrade
BREVILLE GROUP LIMITED ((BRG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0
Macquarie notes revenue trends remain strong into the holiday season and are likely to stay elevated while households redirect spending.
For Breville Group, the broker expects strong consumer demand to continue, expected to push the re-stocking benefit into 2021 in some markets.
Rating is upgraded to Outperform from Neutral with the target rising to $27 from $26.
DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Neutral from Sell by UBS and Upgrade to Add from Hold by Morgans and Upgrade to Buy from Hold by Ord Minnett and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/2
UBS upgrades its rating on Domino's Pizza Enterprises to Neutral from Sell.
UBS found the company's 2020 investor day to be positive with takeaways operating leverage expected to improve and most of the second half covid costs unlikely to repeat in FY21.
Also, the broker highlights strong franchisee profit across the board with Germany scaling up and Japan expected to continue to grow.
Target is unchanged at $72.
Following recent share price falls and positive momentum across the company, Morgans upgrades the rating to Add from Hold.
It was clear to Morgans after an investor briefing that Japan and Germany are exhibiting strong top-line growth and margin expansion.
The broker highlights management comments that Germany would likely become the company’s strongest growth market for the short-term and ultimately become the largest market.
The target price is increased to $82.96 from $81.29.
Looking at Domino’s Pizza Enterprises' recent share price underperformance, Ord Minnett upgrades its rating to Buy from Hold.
The broker expects the company to enjoy multi-year earnings growth led by store expansion, growth in same-store-sales (SSS) and operating earnings margin expansion.
The target price remains unchanged at $85.
Domino's Pizza Enterprises expects the shift in customers to digital delivery from restaurants and takeaway to continue post-covid. Growth drivers include store rollouts, marketing and technology.
Despite strong double-digit earnings growth, Macquarie finds the valuation support to be modest. The broker believes absent any M&A activity, further expansion may be difficult.
With the stock trading around Macquarie's target price of $72.10, the broker upgrades to Neutral from Underperform.
IGO LIMITED ((IGO)) Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 1/3/0
Ord Minnett remains cautiously optimistic that recent board changes could translate to much-needed change.
The broker continues to question a Trop sale although acknowledges, with the review ongoing, IGO Ltd could still realise a reasonable return on the back of spot gold prices as well as re-rate if converted into a nickel mine.
Despite some "generous assumptions" the broker finds the valuation heavy going, upgrading to Lighten from Sell. Target is raised to $4.30 from $3.40.
KOGAN.COM LTD ((KGN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/1/0
In the opinion of Credit Suisse, the acquisition of New Zealand based online retailer Mighty Ape represents a material step-change in the Kogan.com business.
The broker considers Mighty Ape is a quality business and management is being retained. They are considered to have strong incentives to deliver financial objectives.
There is opportunity to grow the acquired company's private label offer and leverage the marketplace of Kogan.com, in the analyst's view. Also, there is considered a number of potential synergies across the merged group.
The target price is increased to $20.60 from $19.49. The rating is increased to Outperform from Neutral.
SANDFIRE RESOURCES NL ((SFR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/3/0
Sandfire Resources has approved the development of its T3 Motheo copper-silver project in Botswana, which is expected to deliver around 30ktpa of copper for 10 years.
After incorporating the expanded production scenario, Macquarie's FY21 earnings forecast rise by 1%. Earnings forecasts for FY25-28 rise by 7-28% and by 100% for FY29.
Rating is upgraded to Outperform from Neutral with the target rising to $5.40 from $4.20.
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/1
Credit Suisse assesses the news is unlikely to get worse now that China has announced import tariffs of 169% as provisional measures on the company's wines.
The broker assesses the best case scenario is for the tariffs to be removed in four months time should the anti-dumping investigation warrant their removal.
The broker models lost volumes in China and discounting in Australia and the UK, particularly in commercial and premium categories as around 11.5m cases of Australian wine exported to China will need to be re-directed.
Rating is upgraded to Outperform from Neutral, with the main risk that the tariffs persist for longer than expected. Target is raised to $11.00 from $8.50.
See also TWE downgrade.
Downgrade
GPT GROUP ((GPT)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/1
Given GPT Group's relatively high exposure to Victoria, Credit Suisse suspects part of its recent rally could be on the back of the re-opening.
No 2020 guidance has been provided although Credit Suisse expects 2021 earnings will be meaningfully stronger without new government-mandated restrictions. Earnings headwinds remain in the retail and CBD office segments for the sector as a whole.
GPT is seeking to raise its weighting to the logistics sector while lowering its exposure to office.
The broker downgrades to Neutral from Outperform in the wake of the rally and raises the target to $4.83 from $4.29.
HELLOWORLD TRAVEL LIMITED ((HLO)) Downgrade to Lighten from Buy by Ord Minnett .B/H/S: 1/0/0
Ord Minnett finds valuation stretched in the travel & tourism sector as stocks have rallied on the back of progress with the coronavirus vaccines and domestic border re-opening.
Nevertheless, the broker suspects a meaningful recovery is at least 12-18 months away.
In such circumstances the focus needs to be on stocks that have strong fundamentals while investors need to be nimble and watch for anomalies in valuation at any point in time, in Ord Minnett's view.
Helloworld Travel's rating is downgraded to Lighten from Buy and the target raised to $2.65 from $2.13.
SANTOS LIMITED ((STO)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/0
Santos provided positive production and operating expenditure guidance at its investor briefing. New investments have experienced strong 20-60% margins. The company's 26-30% carbon emission reduction target by 2030 appears plausible to the broker.
While the view on fundamentals has not changed and Santos remains the preferred pick for oil, having a number of catalysts over the next 18 months, the equity has rallied ahead of industry sentiment.
Hence, Credit Suisse would need to witness price assumptions increase beyond the macro view to justify further upside. Rating is downgraded to Neutral from Outperform and the target is raised to $6.40 from $6.33.
TEMPLE & WEBSTER GROUP ((TPW)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0
Macquarie notes revenue trends remain strong into the holiday season and are likely to stay elevated while households redirect spending.
The broker believes Temple & Webster Group will continue to grow with online sales penetration remaining a prominent feature. The broker is waiting for the market to find the balance between a slowing revenue growth rate with continued share gains and increasing profitability.
Macquarie downgrades its rating to Neutral from Outperform with the target rising to $10.60 from $10.50.
TREASURY WINE ESTATES LIMITED ((TWE)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Sell from Buy by Citi and Downgrade to Neutral from Buy by UBS .B/H/S: 2/3/1
In response to the 169.3% provisional anti-dumping measure rate imposed by China, Treasury Wine Estates has decided to grow its global priority markets via reallocation. The company has also decided to change its operating model and reduce costs.
With the outcome worse than expected, Ord Minnett finds the risk posed by China's recent measures difficult to price.
Also. with access to the high-growth China market limited and reallocation plans expected to take time, the broker has reduced its rating on Treasury Wine to Lighten from Hold with the target price falling to $8 from $9.
China has imposed anti-dumping tariffs of 169% on Treasury Wine wines. Citi believes this will impact the company's earnings significantly in the near-term on account of an oversupply of Australian wine (given China has effectively closed its door).
According to the broker's estimate, China generates about $164-$190m in operating income for Treasury Wine. In FY21, the operating income is expected to fall to $421m but the real challenge for the company, suggests Citi, is a circa 11% overhang of supply.
The broker believes it will be difficult for the company to maintain any presence in China and going ahead, expects the key share price driver to be the Americas.
Citi downgrades its rating to Sell from Buy with the target trimmed to $8.20 from $10.40.
UBS downgrades its rating on Treasury Wine Estates to Neutral from Buy.
Although the broker sees value in the stock ex-China, UBS also concedes there is uncertainty with respect to ex-China operating income (on account of increased supply).
Following the circa 169% provisional tariffs on China exports, the broker sees pricing risk in the short term, as about $1bn of wine exports are re-allocated both offshore and domestically.
With almost $1.5bn in liquidity and circa $226m of near-term maturities, UBS considers the risk to the balance sheet manageable.
The target price is increased to $9.20 from $8.80.
See also TWE upgrade.
WEBJET LIMITED ((WEB)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/0
Ord Minnett finds valuation stretched in the travel & tourism sector as stocks have rallied on the back of progress with the coronavirus vaccines and domestic border re-opening.
Nevertheless, the broker suspects a meaningful recovery is at least 12-18 months away.
In such circumstances the focus needs to be on stocks that have strong fundamentals while investors need to be nimble and watch for anomalies in valuation at any point in time, in Ord Minnett's view.
The broker downgrades Webjet to Hold from Buy and the target is raised to $5.52 from $4.58.
WORLEY LIMITED ((WOR)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 4/1/0
Worley is well-placed to capitalise on growth in environmentally sustainable projects, Ord Minnett observes. These projects represent a small portion of current revenue and may not be a major contributor for some time, the broker points out.
Moreover, the outlook is challenging as projects are still being deferred. The stock appears expensive and consensus forecasts optimistic and Ord Minnett downgrades to Lighten from Hold.
The broker has become more cautious on the stock since the onset of the pandemic on the basis of reduced global capital expenditure. Target is raised to $11.50 from $11.00.
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CHARTS
For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED
For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED
For more info SHARE ANALYSIS: GPT - GPT GROUP
For more info SHARE ANALYSIS: HLO - HELLOWORLD TRAVEL LIMITED
For more info SHARE ANALYSIS: IGO - IGO LIMITED
For more info SHARE ANALYSIS: KGN - KOGAN.COM LIMITED
For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED
For more info SHARE ANALYSIS: STO - SANTOS LIMITED
For more info SHARE ANALYSIS: TPW - TEMPLE & WEBSTER GROUP LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: WEB - WEBJET LIMITED
For more info SHARE ANALYSIS: WOR - WORLEY LIMITED