Weekly Reports | Dec 14 2020
By Mark Woodruff
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.
Period: Monday December 7 to Friday December 11, 2020
Total Upgrades: 14
Total Downgrades: 20
Net Ratings Breakdown: Buy 51.14%; Hold 38.96%; Sell 9.90%
For the week ending Friday December 11 there were fourteen upgrades and twenty downgrades to ASX-listed stocks in the FNArena database. Two of the broker upgrades were for Evolution Mining, while Fortescue Metals Group and Lynas Rare Earths received two downgrades apiece.
While Morgan Stanley expects gold to be in a holding pattern in 2021, the broker likes the expansion potential for Evolution Mining and that the share price has recently retraced. Macquarie concurs on the latter point and upgrades the stock to Neutral from Underperform. The mirror-opposite was true for Fortescue Metals, with two brokers downgrading the rating after a 40% rally in the share price in the last six months.
This seems insignificant when compared to the 115% rally of the Lynas share price since July, which prompted two broker downgrades on valuation grounds. This is despite the company’s exposure to electric vehicles and strategic position as one of only two non-China rare earth producers.
While there were no material negative percentage changes to target prices for the week, there were several material positive changes made by brokers. Metcash was second on the table for largest percentage rise in target price. Six brokers had their say on first half results and concluded operating income, net profit and dividends were all significantly above expectations. Hardware is now considered the medium-term driver of growth given the robust expectations for the recent Total Tools acquisition.
The mining sector accounted for the remainder of companies with a positive material percentage change to target price. For the second week in a row the biggest change related to Syrah Resources, despite Morgan Stanley downgrading the rating. Positivity has been building with expectations for a tightening of the graphite market and the positive implications for a restart at the Balama facility. However, with significant capital expenditure needed for the 40ktpa AAM facility at Vidalia, the broker expects funding could become a key issue. UBS counters by highlighting the raising of $124m via a three-tier funding package.
Other mining companies included Fortescue Metals, BHP Group and Western Areas. Last week broking houses were overhauling forecasting models to account for the ongoing rise in the iron ore price and revisions for other metals and oil. Perhaps expectations by Macquarie for earnings upgrades over the next three years of around 60% for BHP Group summarises the prevailing mood.
An improved earnings outlook for base metals and, in particular, better leverage to an improving nickel price resulted in Macquarie upgrading Western Areas to Outperform from Neutral.
Given all the above, it comes as no surprise that both Fortescue Metals and Western Areas also appeared in the top four percentage rises in forecast earnings for the week. Michael Hill International had the largest gain after revealing an over 200 basis point gross margin improvement. After a period of defending market share, Credit Suisse believes this now reflects a good balance between margin and sales growth.
As mentioned last week, 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.
Metcash also had strong forecast earnings upgrades on top of the lift in average price target for the week explained above.
Finally, Alliance Aviation Services was a key beneficiary of the changes in the Western Australian and Queensland aviation services market. Consequently, Ord Minnett upgraded earnings after a positive trading update that revealed first half pre-tax profit guidance 20% ahead of the broker’s expectations.
On the flipside, Qantas Airways had the largest percentage fall in forecast earnings by brokers for the week. Concerns arose as Virgin is expected to gain a higher share of the profit under Bain's ownership, and a third entrant (the regional airline Regional Express) is planning to enter the intercity market in March 2021.
Next in order of percentage move was Cooper Energy. As detailed last week, there are now five brokers researching the company in the FNArena database. This is 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 earnings of the five.
Finally, Coronado Global Resources has benefitted as Macquarie increased earnings multiples for FY21 and FY22 to capture the recovery in metallurgical coal. The broker notes a current premium being paid for Western coal, resulting from the perceived Chinese import ban on Australian coal. The analyst notes a 10% change in metallurgical coal prices is considered to drive a circa 50% change in earnings.
Total Neutral/Hold recommendations take up 51.14% of the total, versus 38.96% on Neutral/Hold, while Sell ratings account for the remaining 9.9%.
AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/1
Ainsworth Game appears likely to return to profitability in FY22 and Macquarie notes material operating leverage from improved volumes.
The broker believes slot products suppliers should be through the worst of the pandemic now, as most casinos around the world have reopened. The broker now forecasts a -$22m pre-tax loss in FY21.
Ainsworth should gain from opportunities in North America, with Kentucky Historical Horse Racing turnover at 30% above pre-pandemic levels.
The MTD Gaming acquisition should also deliver incremental sales, supported by an exclusive year deal with Golden Gaming in Montana. Macquarie upgrades to Outperform from Neutral and raises the target to $0.65 from $0.45.
APPEN LIMITED ((APX)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/1/0
Appen's trading update highlights a weaker than expected pipeline of project work over the third and fourth quarters of 2020.
The company has cut its 2020 operating earnings guidance by -15-16% to $106–109m, citing pandemic disruption to its key customers and currency moves affecting Appen’s large mature projects.
Ord Minnett believes there is some uncertainty in the short term with respect to the sales pipeline although the industry backdrop remains favourable. The broker expects growth momentum to bounce back over FY21-22.
Led by the change in its earnings forecasts, Ord Minnett reduces the target for Appen to $30 from $35 while upgrading its recommendation to Accumulate from Hold.
ESTIA HEALTH LIMITED ((EHE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0
Macquarie acknowledges the short-term outlook for the residential aged care sector is uncertain, yet increased government funding represents potential upside while corporate action is also a possibility.
The broker assesses Estia Health has lower relative earnings risk and a favourable balance sheet. Hence, the rating is upgraded to Outperform from Neutral. Target is raised to $1.95 from $1.70.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Equal-weight from Underweight by Morgan Stanley and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/2
Morgan Stanley expects a global v-shaped recovery, bolstered by the recent covid vaccine discoveries. The broker expects inflation to return in late 2021, leading to a weaker USD and in turn supporting commodities.
The broker expects gold to be in a holding pattern in 2021 with global growth offset by a weaker US dollar and inflation.
Driven by its recent pull-back which has brought the stock closer to its valuation and noting further expansion potential, Morgan Stanley upgrades its rating to Equal-weight from Underweight. Target falls to $4.60 from $4.90. Industry view: Attractive.
The spot price for gold presents some upside to Macquarie's FY21 earnings forecasts, primarily a function of currency.
The broker's gold price forecasts calls for a -21% and -22% drop in gold prices in Australian dollar terms in 2021 and 2022, respectively.
Rating is upgraded to Neutral from Underperform on valuation. Target is steady at $5.30.
IGO LIMITED ((IGO)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/0
IGO will acquire a 25% interest in Greenbushes lithium and a 49% interest in downstream Kwinana lithium hydroxide, for US$1.4bn. Funding will be via debt and equity.
The deal is expected to be accretive from FY23 and cash flow accretive from FY24. Credit Suisse welcomes the deal, as the transaction is at the bottom of the cycle from a forced seller in a sector where the structural growth theme prevails.
It also addresses the mine life deficiency in the company's portfolio. Rating is upgraded to Outperform from Neutral and the target raised to $6.00 from $4.90.
INCITEC PIVOT LIMITED ((IPL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/1/0
Strong US demand and higher fertiliser prices over the last month have underpinned Incitec Pivot, which has also been able to capture some of the premium in US diammonium phosphate prices via US exports.
Macquarie expects this will continue over the short term before supply moves to the key Australian season.
The share price is still at a discount to traditional fertiliser price correlation and book value, hence Macquarie upgrades to Outperform from Neutral. Target is raised to $2.67 from $2.30.