Weekly Reports | Mar 01 2021
Weekly update on stockbroker recommendation, target price, and earnings forecast changes
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 February 22 to Friday February 26, 2021
Total Upgrades: 37
Total Downgrades: 26
Net Ratings Breakdown: Buy 52.08%; Hold 40.26%; Sell 7.66%
For the week ending Friday 19 February, the busiest week by far for corporate earnings reports, there were thirty seven upgrades and twenty six downgrades to ASX-listed companies by brokers in the FNArena database.
Goodman Group received three upgrades to buy from Neutral while Flight Centre had an interesting week with two broker upgrades and four downgrades.
The first half result for Goodman Group exceeded broker forecasts and upgraded net profit guidance was also ahead of what Credit Suisse expected. The company remains a beneficiary of exceptionally strong demand for industrial property.
Commentary pertaining to Flight Centre’s upgrades centred on recent cost savings and an outlook supported by the vaccine rollout, pent-up demand and a leaner business model. The downgrades were triggered mainly by valuation concerns with a recovery already factored into the share price.
Wagners had the largest percentage rise in forecast target price for the week and received two upgrades to Outperform from Neutral. Broker forecasts were significantly exceeded in the first half due to growth in the transport business, greater concrete volumes and a large exposure to the mining sector. Macquarie expects greater demand in FY21 led by improving tender activity in infrastructure.
Costa Group’s second half results exceeded consensus though that didn’t prevent two brokers downgrading the rating on a stretched valuation. Comments were generally favourable on the outlook though Citi cautioned the ability to sustain higher prices will be a key swing factor.
There was a significant percentage rise in target prices for Lovisa Holdings after first half results beat expectations, thanks to gross margin improvements, cost control and higher revenue. Macquarie believes there’s an attractive recovery story as fortunes are not tied to the reopening of borders and the business could benefit from a less competitive rental environment.
After Audinate Group released pre-announced and favourable first half results the brokers generally focused on the outlook. According to UBS, the company continues to extend a lead over competing offerings. There’s also a deepening competitive moat and a chance to replicate the opportunity in video.
As referred to above, despite the 4:2 ratio of downgrades to upgrades for Flight Centre, brokers raised target prices last week.
The a2 Milk Co had the largest percentage fall in forecast target price by brokers for the week. Citi downgraded its FY21, FY22, and FY23 net profit estimates by -25%, -30%, and -30% respectively to largely reflect lower FY21 guidance. On the other hand, Morgans still forecast solid earnings growth from FY22 due to a recovery in the daigou on easing covid restrictions, and growth in China and North America.
Oceanagold Corp was next on the table with Ord Minnett also lowering the company’s rating to Hold from Accumulate after reducing production forecasts for Haile and lifting group costs forecasts.
Appen’s 2020 result and forward guidance disappointed Macquarie and Credit Suisse suspects the historical upgrade pattern and tendency to beat expectations cannot be relied on any more. However, some brokers consider longer-term prospects are still bright.
Next DC led the table for percentage forecast earnings downgrades by brokers. Credit Suisse expects a slower ramp-up over the next couple of years with costs largely unchanged. Macquarie also cautions rising bond yields have a rather large impact on estimates. Ord Minnett, on the other hand, upgraded to Buy from Accumulate on management’s expansion strategy.
Afterpay's appearance on the earnings downgrade list may best be explained by UBS. The broker points out over $2bn in capital raisings since last July “vindicates our view that the market continues to mis-price or ignore how much capital is required to fund the company's growth". However, there were still quite upbeat views on the stock from most brokers.
Production guidance cuts at Western Areas for FY21 weighed on broker earnings forecasts and Credit Suisse cautioned liquidity appears adequate but provides little room for error.
Estia Health suffered from pandemic effects and weaker average occupancy. UBS explained annualised operating earnings per resident are dropping as margins and returns continue to deteriorate. Alternatively, Macquarie sees Estia as having a favourable balance sheet position and valuation appeal relative to listed peers.
There was some caution around forecast earnings for Fineos Corp as FY21 guidance implies to UBS a material slowdown in the second half for organic services revenue. Several brokers found counterbalancing positives including organic subscriber growth of 35% and the signing of a small though strategically significant cloud claims deal in Australasia.
oOh!media was atop the table for earnings upgrades after Credit Suisse assesses 2022 revenue could return to pre-pandemic levels and further growth is possible given the outlook for media expenditure. 2020 results earnings beat on lower costs, mainly through rent relief, according to Macquarie.
Coming second on the table was Viva Energy as UBS assessed a strong retail division performance and Credit Suisse expects fuel margins to be the major driver in 2021. Confidence also appears to be building around a long-term government support package for refining, according to Morgan Stanley.
Three oil companies in Oil search, Karoon energy and Woodside Petroleum featured strongly for forecast earnings upgrades.
A final dividend for Oil Search surprised Macquarie given marginal profitability in 2020 and was taken to imply a rising confidence in the outlook. Ord Minnett remains positive on the stock given its leverage to rising oil prices, top-tier assets and potential for corporate appeal. Meanwhile, production and cash metrics were solid at Karoon Energy and Macquarie expects this to continue in FY21.
Seven out of a potential seven brokers on the FNArena database updated for Woodside Petroleum after the 2020 result. Ord Minnett felt the recovery in Brent and LNG suggests earnings will materially improve from now. Morgans also believes in a rapid turnaround for earnings in 2021 as spot LNG and oil-linked prices are both improving.
Given the positive foreign exchange environment, Macquarie upgraded QBE Insurance Group to Neutral from Underperform. The broker also upgraded EPS forecasts by 68% for FY21 and 56% for FY22 to reflect strong gross written premiums and a new expense ratio target. Citi also noted premium rates are expanding a lot faster than claims inflation.
Since the start of 2021, UBS noted spot spodumene prices have increased to US$510/t, suggesting Galaxy Resources' average realised price could be US$500/t throughout the year, or even higher. As a result, the broker raised earnings estimates and the target price to $3.60 from $3.30.
Total Buy recommendations take up 52.08% of the total, versus 40.26% on Neutral/Hold, while Sell ratings account for the remaining 7.66%.
THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/2/1
Ahead of the first half results on February 25 Ord Minnett upgrades to Hold from Lighten and raises the target to $10.30 from $9.90. The broker expects operating earnings of NZ$182.6m, down -30.6%.
The company faces challenges such as a recovery in daigou amid excess inventory, and the timing of a resolution is unclear. Following recent share price weakness, some valuation support is emerging, the broker argues, and this makes the risk/reward argument more balanced, in the broker's view.
See also A2M downgrade.
ADORE BEAUTY GROUP LIMITED ((ABY)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/0/0
UBS upgrades to Buy from Neutral after a strong maiden first half result. Gross margin expanded 130 basis points, driven by improved supplier terms and increasing customer retention.
While aware of the uncertainty regarding online retail once the pandemic subsides, the broker considers Adore Beauty a good business with attractive growth opportunities. Target is $6.20.
ATLAS ARTERIA ((ALX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/0
Atlas Arteria's toll road earnings were in line with Morgan Stanley's forecast. APRR's operating income of EUR1,550m was down -20% over last year but higher than the broker's estimate.
Operating income for Dulles Greenway was higher than Morgan Stanley expected and in line for Warnow Tunnel. The company has guided to a second-half distribution of 13c citing French traffic resilience and recovery potential this year.
Morgan Stanley upgrades its rating to Overweight from Equal-weight with the target falling to $6.33 from $6.82. Industry view: Cautious.
APA GROUP ((APA)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 5/2/0
APA Group's first-half net profit of $162m was below Ord Minnett’s forecast of $166m with operating earnings within -1% of the broker's estimate. An interim dividend of 24c was announced.
Management has reaffirmed the full-year guidance which implies the second half operating income will be between $822-$842m. The broker believes the recent share price weakness was driven by an increase in benchmark interest rates.
While macro drivers could represent a near term headwind, Ord Minnett finds the stock attractive at current price levels and given the group's stable, predictable earnings.
Ord Minnett upgrades to Buy from Hold with the target rising to $11.30 from $11.09.
EAGERS AUTOMOTIVE LIMITED ((APE)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0
2020 results were in line with guidance provided in late January. The outlook has not changed, Ord Minnett observes, and the current record margins are expected to be sustained for some time given high demand and disrupted global supply chains.
The broker believes Eagers Automotive is ideally positioned to expand its leadership position over the medium term and widen the gap between scale networks and smaller operators. The broker upgrades to Accumulate from Hold and raises the target to $14.00 from $13.50.
Macquarie lifts the rating for Eagers Automotive to Outperform from Neutral as supply-demand dynamics appear likely to remain
supportive of margins until at least the second half of 2021, which should drive further earnings upgrades.
Management suggested there has likely been a structural shift in total global supply, caused by the permanent reduction of excess capacity and the closure of uneconomic factories.
The company reported FY20 results, with underlying operating profit (PBT) of $209.4m, in-line with recently updated guidance. The target price is increased to $14.50 from $14.30.
The broker highlights the company has exceeded its annualised synergy targets and achieved -$78m of permanent cost reductions during the initial response to covid, which will result in higher earnings (EBITDA margins) when pricing normalises.
APPEN LIMITED ((APX)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/2/1
2020 results were broadly in line with expectations. The company experienced a slowdown in Relevance work over the second half as major customers deferred and redirected expenditure.
Ord Minnett envisages an opportunity for Appen to continue its growth path and leverage the global trend of investment in artificial intelligence.
The broker considers the stock trading on undemanding multiple and upgrades to Buy from Accumulate. Target is reduced to $24.75 from $30.00.
AUSTAL LIMITED ((ASB)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/2/0
Ord Minnett envisages significant risk to earnings expectations as the LCS program winds down in FY23. This risk appears heightened by management changes and ongoing US regulatory investigations. The president of the US operations has resigned.
The earnings outlook for the business from FY24 remains unclear and the broker envisages meaningful downside risk. Still, the share price has fallen to a level where some of this appears priced in.
Austal maintains some strategically located assets and remains a large employer in the US, which should underpin future work. Rating is upgraded to Hold from Lighten and the target is reduced to $2.30 from $3.00.
BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/0
Bank Of Queensland will acquire 100% of Members Equity Bank Limited for cash consideration of $1.325bn. The acquisition will be funded by an underwritten capital raising of $1.35bn at a price of $7.35.
Morgans expects the acquisition to be around 10% cash EPS accretive once $80m per annum of pre-tax cost synergies are realised.
In a trading update, the company expects first half cash earnings of $163-166m. The bottom end of this range is 26% better than the broker’s expectation and circa 29% better than consensus.
The return on tangible equity (ROTE) outlook has improved with and without the acquisition, and this leads to an improved dividend outlook, forecasts the analyst. Upgrade to Add from Hold and the target is increased to $10 from $8.
EVENT HOSPITALITY AND ENTERTAINMENT LTD ((EVT)) Upgrade to Buy from Sell by Citi .B/H/S: 2/0/0
Citi has upgraded Event Hospitality to Buy from Sell in the wake of the first half results. The broker's price target has lifted to $12.25 from $9.20.
Citi's upgrade is based upon the premise that core operations will start recovering from here onwards, from a low base, plus value shall be unlocked through the -$250m property divestment program.
As no buyer was found for the German cinemas, Citi was forced to include these operations back into estimates, which has depressed forward numbers as these operations remain loss-making.
Dividends have been scrapped for both FY21 and FY22.
FLIGHT CENTRE LIMITED ((FLT)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/4/2
It is unsurprising that Flight Centre saw total transaction value drop -88% in the first half and revenue -90%. What matters is the flight path from here. Management expects both Leisure and Corporate to breakeven in 2021, and TTV to recover to pre-covid levels in FY24.
Macquarie forecasts an 80-85% recovery by FY24. The outlook is supported by pent-up demand and a leaner business model, and with the vaccine rollout the broker is prepared to suggest travel has seen its last delay. Cash reserves are adequate through to late 2022.
Target rises to $20.00 from $15.30. Upgrade to Outperform from Neutral.
The interim result impressed Ord Minnett with the amount of cost savings procured over the last 12 months. This should assist the business to emerge with a leaner, more productive operation once the pandemic is over.
Ord Minnett has little doubt the market was excited by the "passionate/optimistic" commentary provided by management but remains cautious.
Flight Centre faces hurdles, given the retail store network is now reduced by -50% and there are likely to be headwinds in terms of online competitors and airline overriders.
Ord Minnett upgrades to Hold from Lighten and raises the target to $16.35 from $15.35.
See also FLT downgrade.