Weekly Reports | Feb 15 2021
Weekly update on stockbroker recommendation, target price, and earnings forecast changes
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 February 8 to Friday February 12, 2021
Total Upgrades: 15
Total Downgrades: 10
Net Ratings Breakdown: Buy 50.98%; Hold 40.62%; Sell 8.40%
By Mark Woodruff
For the week ending Friday 12 February, there were fifteen upgrades and ten downgrades to ASX-listed companies by brokers in the FNArena database.
ASX received three upgrades to Neutral from Sell by separate brokers and Transurban Group received two upgrades to Neutral from Sell.
There was some consensus amongst brokers regarding a turnaround for ASX. Ord Minnett considers the company has reached the bottom of its earnings cycle and is expected to see some rebound in FY22, while Citi believes all of the main negatives are now known.
Citi upgraded Transurban Group after a -20% share price underperformance over the past three months. Meanwhile, Credit Suisse raised FY21 distribution estimates with higher numbers expected in FY22 and FY23, due to lower financing costs after Chesapeake proceeds are received.
Pilbara Minerals had the largest percentage rise in target price for the week, despite Credit Suisse lowering its rating to Neutral from Outperform after a recent share price rally. Ord Minnett also rewarded Harvey Norman with the second largest percentage target price rise and simultaneously lowered its rating to Hold from Accumulate on valuation grounds.
For Pilbara Minerals, Credit Suisse doubts we are going back to a period of extreme oversupply and price depression and the stock continues to be the broker’s preferred pick. Meanwhile, Ord Minnett anticipates Harvey Norman’s underlying pre-tax profit for the first half will be up 91% at $545.7m. The company’s earning result is due on March 1.
In terms of percentage downgrades to target prices for the week, all four of the brokers that cover Cimic Group in the FNArena database were disappointed by the FY20 results.
The ‘miss’ seemed to largely stem from pandemic effects on the awarding of new projects and on construction activity. Operating cash flow conversion was also weak, impacted by the unwinding of Leighton Asia projects and a reduction in debtor factoring.
Next in terms of negative revision to broker target prices was Origin Energy. As mentioned last week, the company lowered guidance for FY21 and headwinds facing the electricity sector do not appear to be weakening anytime soon.
An adjustment in data due to no recent updates by broker Ord Minnett had Pushpay Holding atop the table for downgrades to price targets.
The largest percentage fall in earnings forecasts by brokers in the FNArena database went to Transurban Group.
Cimic Group, Origin Energy and Pilbara Minerals have already received dishonourable mentions above in regard to falling target prices. They were also placed in the top three for percentage declines in forecast earnings by brokers.
Next was Crown Resorts which has been deemed unsuitable for the Crown Sydney licence and Macquarie assesses the pathway to obtaining approval is onerous and may take two years.
In the case of positive revisions to earnings forecasts for the week, Insurance Australia Group was the standout. Six of a possible seven brokers updated estimates and Citi upgraded the rating to Buy from Neutral.
It seemed to be a case of relief after first half results were impacted by a -$1.2bn provision loss, booked due to Business Interruption claims. Macquarie feels the result was strong under the circumstances and Citi can see momentum starting to build in the business.
There were surprises all around for the four brokers that updated earnings forecasts for News Corp after second half results. They were by driven by cost-out and operating leverage and the trends from both the Move and Dow Jones businesses were seen as indicative of structural growth.
GrainCorp appeared high on the table for largest percentage earnings upgrades after higher-than-expected grain receivals and grain exports. This comes after the largest east coast winter grain crops on record.
Nickel Mines was next after Macquarie noted a remarkable surge in electric vehicles in the fourth quarter, which has has propelled nickel sulphate prices higher. The company is the broker’s preferred nickel exposure, featuring strong forecast free cash flow yields, which increase further in a spot price scenario.
Finally, Oil Search and fellow Papua LNG partners (Total and ExxonMobil) have finally signed an agreement with the PNG government. This is considered an important milestone for the project.
Total Buy recommendations take up 50.98% of the total, versus 40.62% on Neutral/Hold, while Sell ratings account for the remaining 8.4%.
AMP LIMITED ((AMP)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/6/0
Having initially retained an Underperform rating after a first glance at AMP's result yesterday, Macquaire has now decided to upgrade to Neutral.
The result was overshadowed by the back-down of Ares Management from any takeover intentions, which led to the big share price fall.
Macquarie sees it differently, suggesting the focus can now return to that within mangement's control. That includes an unchanged cost-out target. AMP managed to get close to its FY20 cost-out target even with additional unforeseen covid costs.
No dividend was declared but the board is committed to reinstating capital management, and a breakdown of divisional earnings has provided more clarity, and led the broker to upgrade forecasts. Target rises to $1.45 from $1.30.
ASX LIMITED ((ASX)) Upgrade to Neutral from Sell by Citi and Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/6/1
Citi upgrades its rating to Neutral from Sell.
ASX has increased guidance for both capex and costs, a development that had already been anticipated by Citi. Costs grew 8% in the first half but Citi still expects cost growth to moderate from here while expecting higher revenue.
Issuer services revenue grew strongly by 44% in the first half, notes the broker, mainly reflecting the strong growth in retail broking accounts and activity. Citi expects momentum to soften from here.
With all the main negatives now known, the broker upgrades its earnings forecasts for FY21-23.
Target price rises to $70 from $68.
Credit Suisse upgrades its rating to Neutral from Underperform with a target price of $71.
ASX's first-half net profit was 3% above Credit Suisse's forecast. ASX's latest result demonstrates the resilience of its business, suggests the broker, with earnings down only -3% versus last year.
Going ahead, the broker believes ASX's earnings will contract by -5-10% in FY21 and a further -0-5% in FY22 led by softening of certain revenue lines like capital raisings supporting issuer services and elevated cash equities activity.
Ord Minnett looks at some key issues investors should look for in the interim result. In the broker's view, ASX has reached the bottom of its earnings and the broker expects to see some rebound in FY22.
Rating is upgraded to Hold from Lighten with the target price reducing to $73.78 from $77.28.
CHALLENGER LIMITED ((CGF)) Upgrade to Add from Hold by Morgans .B/H/S: 3/4/0
The normalised profit (NPAT) for Challenger was -2-3% below Morgans expectations, due to a -50 basis point decline in the life cash operating earnings (COE) margin.
The broker notes this margin is expected to be assisted in the second half when excess liquids are further invested. Morgans sees FY21 as the bottoming out of earnings and moves to an Add rating from Hold. The target is decreased to $6.72 from $6.80.
The analyst lowers FY21 and FY22 EPS forecasts by -4% and -7%, respectively, mainly reflecting higher net book growth assumptions, offset by reduced COE margin forecasts.
See also CGF downgrade.
CHAMPION IRON LIMITED ((CIA)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/1/0
Citi raises benchmark iron ore forecasts to US$140 and US$110 per tonne for 2020 and 2021, respectively. The broker believes the higher-for-longer iron ore prices will benefit Champion Iron and upgrades to Neutral from Sell.
On Citi's modelling the share price is implying a long-term benchmark iron ore price of US$65/t versus its forecast of US$60/t.
COCHLEAR LIMITED ((COH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/3/2
After an encouraging first-half update and positive feedback from the US, Ord Minnett is confident Cochlear will a report a strong earnings recovery led by market share gains and flat operating costs. No guidance is expected.
Earnings estimates have been increased by 8% in FY21 and 7% in FY22.
Cochlear will report its first-half FY21 result on February 19.
Rating is upgraded to Hold from Lighten with the target rising to $200 from $175.
DETERRA ROYALTIES LIMITED ((DRR)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/1/0
Citi upgrades its rating to Neutral from Sell with a target of $4.50.
Citi highlights Iron ore prices rose 80% in 2020 to nine-year high levels of US$177/t before moving back to US$150/t. The broker expects prices to rise to US$165/t over the next 3 months before falling to US$140 in 2021.
Deterra Royalties will report on a fiscal year basis and report first half results on 24 Feb. Citi expects earnings of $26m but notes this will be a tricky result since the first half will have a different incorporation date (15 June 2020) and implementation date (2 Nov 2020).
Citi forecasts a first half interim dividend of $0.02 with full-year dividend expected to peak at $0.22 in FY23.