Weekly Ratings, Targets, Forecast Changes – 18-12-20

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By Mark Woodruff

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 December 14 to Friday December 18, 2020
Total Upgrades: 14
Total Downgrades: 9
Net Ratings Breakdown: Buy 51.71%; Hold 38.48%; Sell 9.81%

By Mark Woodruff

For the week ending Friday December 18 there were fourteen upgrades and nine downgrades by brokers for ASX-listed stocks in the FNArena database. On a valuation basis Northern Star Resources, Perseus Mining and Regis Resources were upgraded after Citi reviewed the gold sector.  In a moderation of prior forecasts, the broker simultaneously lowered earnings forecasts and target prices for the companies.

The broker expects "peak gold" in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth. It’s considered prices will push above US$1975/oz in the next six-nine months. Citi observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices.

As a result of Citi’s review, all three gold stocks appeared near the top of the table for the largest percentage decline in forecast earnings by brokers for the week. Coming third on the table was Nickel Mines after Credit Suisse initiated coverage with an Outperform rating and target price of $1.35. Nothing inherently negative here, other than earnings forecasts were set below other existing brokers in the FNArena database, thereby reducing the average.

Appen suffered significant forecast earnings declines by brokers with Citi raising concerns over earnings visibility. Perhaps this resulted in UBS’s surprise at the magnitude and timing of the earnings downgrade by management. The company also headed the table for the largest percentage fall in target price for the week. Runner up was the previously-explained Regis Resources.

On the sunny side, Seven West Media led the way for positive changes to target prices for the week and UBS upgraded the rating for the company to Buy from Neutral. This flowed from an upgrade to ad market forecasts based on SMI data showing a return to positive ad market growth for the first time in two years, along with trading updates from listed corporates.

As part of its relief measures for the refining sector, the federal government will be bringing forward its interim refinery production payment, from which Viva Energy Group will benefit. After three brokers upgraded earnings forecasts, the group had the largest rise for the week in percentage terms.

Next was oOh!Media, after the company issued a trading update. Ord Minnett noted emerging signs of a regional recovery and promising digital penetration, amid the company's delivery of cost savings. Also posting a better-than-expected trading update was Michael Hill International. Citi observed this was driven by favourable retail conditions and self-help strategies and consequently increased FY21-23 earnings forecasts by 4-6%.

Trading updates were in vogue during the week, as Eagers Automotive showcased the powerful margin tailwind that comes when inventory conditions are tight. Morgans considered the second half had also benefited from the structural cost-out executed during the second quarter FY20. In an additional announcement, the company will divest the Daimler truck business and related property. Morgan Stanley envisages no shortage of structural growth opportunities for the company and expects proceeds will be reinvested.

Finally, Western Areas received forecast earnings upgrades from Ord Minnett. The broker has marked-to-market its forward-curve-based commodity forecasts with the result that prices of some key commodities have been pegged 10-20% higher than the broker's previous estimates.

Going into 2021, the broker is positive on the mining sector in the post-covid era.

Total Neutral/Hold recommendations take up 51.71% of the total, versus 38.48% on Neutral/Hold, while Sell ratings account for the remaining 9.81%.

Upgrade

AUSTRALIAN PHARMACEUTICAL INDUSTRIES ((API)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/2/0

Morgan Stanley prefers stocks in the healthcare sector that have positive industry momentum as well as legacies from the pandemic.

The broker upgrades Australian Pharmaceutical to Equal-weight from Underweight on a better valuation and more funding certainty.

Target is raised to $1.25 from $1.04. Industry view is In-Line.

EBOS GROUP LIMITED ((EBO)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/0

Credit Suisse likes EBOS Group's modest organic growth outlook and execution track record.

Stronger first half trading versus the broker's initial expectations for FY21, coupled with moving to a lower weighted average cost of capital, leads to a rating upgrade to Outperform from Neutral.

The broker sees further upside from bolt-on acquisitions, a potential covid-19 vaccine distribution and the return of daigou for consumer products.

Top-line growth was supported by the first full year from the Chemist Warehouse wholesale contract. Credit Suisse increases the target to NZ$29.20 from NZ$22.47.

HASTINGS TECHNOLOGY METALS LTD ((HAS)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/0/0

Ord Minnett upgrades its rating to Speculative Buy from Hold with the target rising to $0.30 from $0.16.

With permanent magnet raw materials prices rising 50% year to date, the rare earth thematic is firing, asserts the broker. Furthermore, project economics of the company has improved with further upside expected in operating costs and ore sorting.

HT&E LIMITED ((HT1)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/1/1

UBS has upgraded its ad market forecasts based on SMI data showing a return to positive ad market growth for the first time in two years, along with trading updates from listed corporates.

Earnings have been revised for HT&E for FY20-23 to the tune of 30-55%.

UBS upgrades its rating to Buy from Neutral with the target rising to $2 from $1.40.

JB HI-FI LIMITED ((JBH)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/6/0

Credit Suisse believes the market is too bearish regarding expenditure on the household goods sector. A permanent shift to working from home should provide a step change, in the broker's view.

On the basis of 30% of the Australian workforce working from home two days a week, the broker calculates a 4ppts direct and 3ppts indirect increase in furniture and electrical goods consumption.

As JB Hi-Fi has a near debt-free balance sheet amid surplus franking credits, capital management is considered likely in FY21. Credit Suisse upgrades to Outperform from Neutral and raises the target to $53.02 from $50.62.

MINERAL RESOURCES LIMITED ((MIN)) Initiation of coverage with Buy by UBS .B/H/S: 2/1/1

UBS initiates coverage on Mineral Resources with a Buy rating and a target price of $41.90.

Mineral Resources offers exposure to a growing mining services business along with exposure to iron ore and lithium, assesses UBS. 

The broker sees the company at an inflection point in terms of growth opportunities for the commodities business. Over the last 12 months, the company has expanded Koolyanobbing and Iron Valley.

Iron ore prices are expected to remain elevated over the next 12-18 months which will likely see strong free cash flows, helping Mineral Resources fund its development pipeline.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/1

Citi has downgraded its outlook for gold, anticipating "peak gold" in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth.

Gold prices are expected to make a push above US$1975/oz in the next 6-9 months. The broker observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices.

This drives a ratings upgrade to Northern Star, to Buy from Neutral, and the target price is lowered to $13.90 from $15.90.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/0

Citi has downgraded its outlook for gold, anticipating "peak gold" in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth.

Gold prices are expected to make a push above US$1975/oz in the next 6-9 months. The broker observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices.

Citi revises forecasts for Perseus Mining down post 2021 and reduces the target to $1.55 from $1.60. Based on valuation, the rating is upgraded to Buy/High Risk from Neutral/High Risk.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 4/3/0

The board has approved the development of a new underground mine below Garden Well pit. Macquarie incorporates the new resource into estimates, noting this is a continuation of the strategy to unlock higher-grade underground projects.

The recent weakness in the stock price means the broker upgrades to Neutral from Underperform. Macquarie highlights approval and subsequent development of McPhillamys remain key to the outlook. Target is $3.90.

SARACEN MINERAL HOLDINGS LIMITED ((SAR)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/0

Citi has downgraded its outlook for gold, anticipating "peak gold" in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth.

Gold prices are expected to make a push above US$1975/oz in the next 6-9 months. The broker observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices.

Citi upgrades Saracen Mineral Holdings to Buy from Neutral and reduces the target to $5.30 from $6.20 after a pullback in the stock.

Saracen remains the broker's preference heading into its potential merger deal with Northern Star ((NST)).

SIGMA HEALTHCARE LIMITED ((SIG)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/3/0

Morgan Stanley prefers stocks in the healthcare sector that have positive industry momentum as well as legacies from the pandemic.

The broker upgrades Sigma Healthcare to Equal-weight from Underweight because of better valuation and more funding certainty. In-Line industry view. Target is $0.60.

SEVEN WEST MEDIA LIMITED ((SWM)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/0/0

UBS has upgraded its ad market forecasts based on SMI data showing a return to positive ad market growth for the first time in two years, along with trading updates from listed corporates.

Earnings have been revised for Seven West Media for FY20-23 to the tune of 60-80% along with a material change to the company's equity value.

UBS upgrades its rating to Buy from Neutral with the target rising to $0.40 from $0.14.

VIRTUS HEALTH LIMITED ((VRT)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/1

Morgans upgrades the rating to Add from Hold as industry participants have noted a swift recovery for the first quarter FY21. Positive momentum is considered to be building within the company and industry.

The broker finds Medicare data supports this conclusion and growth is now expected to continue, before a more normal activity period in the second half.

Following modelling adjustments to reflect more normal conditions in FY22, Morgans increases the valuation and price to $5.82 from $5.31. There are no changes to underlying forecasts.

See also VRT downgrade.

ZIP CO LIMITED ((Z1P)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/2/1

Zip Co has announced a capital raising of up to $150m. Proceeds will be used for the US and UK expansion. UBS believes the company is now well situated for growth strategies in new markets and new products.

Although this is a relatively early-stage investment that is still making a loss, amid significant capital requirements, the broker is confident in management's strategy. Rating is upgraded to Neutral from Sell, given the recent underperformance of the share price. Target is $5.70.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/2/4

UBS downgrades AGL Energy to Sell from Neutral with the target falling to $12.25 from $15.60.

The downgrade is driven by margin pressure materially reducing the broker's wholesale electricity price forecast.

The push towards renewables coupled with the fact that about 90% of AGL Energy's electricity generation comes from coal, the broker believes AGL's earnings will decline by -12% CAGR over FY21-24.

APPEN LIMITED ((APX)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/2/0

Appen has guided to second-half operating income of $57-60m, -23-27% below UBS's estimates of $78m. While expecting higher risks to Appen's FY20 guidance, the magnitude and timing of the downgrade surprised the broker.

The company indicated a "reprioritisation" of resources away from mature projects and towards new product areas. USB believes this is primarily driven by covid and a return to normal will see the volume of work to mature projects resume.

Even so, the broker adopts a cautious stance and downgrades its rating to Neutral from Buy with the target falling to $27.50 from $44.

ALUMINA LIMITED ((AWC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/1/1

Ord Minnett has marked to market its forward-curve-based commodity forecasts with the result that prices of some key commodities like copper, iron ore and aluminium have been pegged 10-20% higher than the broker's previous estimates.

Going into 2021, the broker is positive on the mining sector in the post-covid era.

Despite this, the recent rally in the share price of Alumina Ltd prompts Ord Minnett to downgrade its recommendation to Hold from Accumulate. A target of $2 is retained.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/1

APRA announced that it will no longer hold banks to a minimum level of earnings retention from the start of 2021, replacing its recommendation in July this year for banks to retain at least half of their earnings.

Morgans interprets the announcement to mean that APRA is now more comfortable with the asset quality outlook of the banks.

However, the broker highlights APRA has said that a high degree of uncertainty remains in the outlook for the operating environment, and that the onus remains on boards to moderate dividend payout ratios to ensure they are sustainable.

The analyst expects the major banks to be able to sustainably operate with dividend payout ratios in the range of 56-83%. If credit growth remains in the current range of 0-3% per annum, then it's considered dividend payout ratios in the range of 78-100% are possible.

Morgans forecasts Bank Of Queensland will have a dividend payout ratio of 50% over the forecast period and forecasts a lower return on tangible equity (ROTE) than the major banks.

The rating is downgraded to Hold from Add and the target price is increased to $8 from $7.20

ESTIA HEALTH LIMITED ((EHE)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/1/1

Negative earnings revisions have led to a reduction in the valuation of Estia Health across Morgan Stanley's various scenarios.

The broker suspects earnings will be challenged while the outcome of the Royal Commission is still uncertain.

Rating is downgraded to Underweight from Equal-weight and the target is lowered to $1.50 from $1.60. In-Line industry view.

NEARMAP LTD ((NEA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/1/0

Reviewing Nearmap's opportunity in the US, Macquarie considers scale to be the key consideration. The inability to scale fast enough poses the greatest risk to the broker's investment thesis.

Macquarie remains attracted to Nearmap’s technology, growing market opportunity and the ability to leverage efficiencies from an enhanced capture program.

Having said that the broker also notes a continued rotation to value/cyclicals could restrict near-term outperformance.

Macquarie downgrades its rating to Neutral from Outperform with the target price falling to $2.40 from $3.20.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/1/1

UBS notes while QBE Insurance has upside leverage to a strong premium rate environment, the group is also exposed to elevated claims currently.

Even with positive headline premium rates, the earnings benefit is less clear to the broker with the gross written premium likely to lag premium rate increases in the near-term. 

On January 1, 2021, QBE Insurance has a major reinsurance renewal which could lead to a sizeable margin headwind.

UBS downgrades its rating to Neutral from Buy. Target falls to $10.50 from $12.

SERVICE STREAM LIMITED ((SSM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Unify Services is expected to generate circa $70m revenue for Service Stream in its first year (FY22), lower than FY20's circa $330m and $280m in FY19, on account of lower activations.

Also, Service Stream has lost New South Wales and Victoria to BSA ((BSA)), with its market share declining to 25% from 40-45%.

Macquarie downgrades its rating to Neutral from Outperform with the target declining to $2.01 from $2.72.

VIRTUS HEALTH LIMITED ((VRT)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/0/1

Versus Health is trading ahead of Morgan Stanley's target which leads to a downgrade to Underweight from Equal-weight.

The broker remains cautious about the longer-term shift to lower-priced IVF services within the business.

Target is raised to $4.90 from $4.00. Industry view is In-Line.

See also VRT upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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