Weekly Reports | Mar 08 2021
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Weekly update on stockbroker recommendation, target price, and earnings forecast changes
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 March 1 to Friday March 5, 2021
Total Upgrades: 7
Total Downgrades: 6
Net Ratings Breakdown: Buy 52.49%; Hold 39.78%; Sell 7.73%
For the week ending Friday 5 March, there were seven upgrades and six downgrades to ASX-listed companies by brokers in the FNArena database.
Orica received three downgrades from separate brokers. A litany of woes included China’s ban on Australian thermal coal imports, FX headwinds, lack of visibility on earnings as well as a CEO transition.
Wagners had the largest percentage rise in forecast target price for the week. As mentioned last week broker forecasts were significantly exceeded in the first half and volume growth helped in lifting margins, particularly in construction materials and services.
Reece was next after first half earnings exceeded forecasts while good cost control led to earnings margin expansion. Ord Minnett upgraded its rating to Hold from Lighten and felt housing activity in both ANZ and the US looks supportive for earnings growth for the remainder of the calendar year.
Given their intertwined businesses, it was not surprising Synlait Milk and a2 Milk had the two largest percentage falls in forecast target prices for the week. The latter also headed the same table last week after brokers aggressively downgraded earnings to largely reflect lower FY21 guidance.
This week Morgans downgraded its rating for Synlait Milk to Reduce from Hold after assessing significant uncertainty and volatility is impacting the business. A slide in infant formula sales volumes is expected to reduce overhead recovery and increase production of lower-margin ingredient products.
On the podium for leading forecast earnings downgrades last week were the two leading BNPL stocks in Afterpay and Zip Co.
Citi expects Afterpay’s growth will be negatively impacted by slowing e-commerce and sees competition as a risk to medium-term margins. In the prior week, UBS pointed 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".
Regarding Zip Co, Macquarie warned the market may only be focussing on customer growth and pointed out the risk of elevated sector multiples. While largely positive on the stock, Citi alluded to risks from competition and lack of scale internationally.
Another high PE stock in NextDC was wedged between the BNPL players on the table for the biggest percentage downgrades to earnings. As mentioned last week, Credit Suisse expects a slower ramp-up over the next couple of years with costs largely unchanged, while Macquarie cautions on the impact of rising bond yields. On the other hand, Citi enthuses that near-term earnings are already contracted and customer expansion underpins the broker’s medium-term forecasts.
There was 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, as mentioned last week, found counterbalancing positives including organic subscriber growth of 35% and the signing of a small though strategically significant cloud claims deal in Australasia.
Qantas and Flight Centre also appeared on the list for significant percentage downgrades to earnings for the week by brokers on the FNArena database. While Qantas is doing a good job managing costs, Ord Minnett notes the balance sheet is feeling the impact of a huge hit to revenue with net debt rising to $6.1bn and above target.
Last week Flight Centre suffered some broker downgrades triggered mainly by valuation concerns with a recovery seemingly already factored into the share price.
Finally, Orica also had material forecast earnings downgrades, which dovetails with the earlier explanations for ratings downgrades.
Karoon Energy was atop the table for percentage earnings upgrades by brokers last week. The reasons put forward by Macquarie last week were solid production and cash metrics which are expected to continue in FY21.
Coronado Global Resources was next on the table. Morgans believes the around -15% discount to fair value looks overdone and upgraded its rating to Add from Hold. Meanwhile, UBS forecasts positive free cash flow in 2021.
Galaxy Resources received a boost to forecast earnings after UBS forecasted 10-50% higher lithium prices in 2021 and Citi expects a return to positive gross margins in 2021 driven by higher prices and lower unit costs.
Material forecast earnings upgrades were also received by road warriors Transurban Group and Atlas Arteria last week. For the former Macquarie highlighted a rebound in Australian traffic and registration growth, while management of Atlas Arteria cited French traffic resilience and recovery potential this year.
The recently updated 2020 financial performance for Nickel Mines showed Macquarie better-than-expected metrics and the Angel Nickel acquisition is expected to underpin a doubling of nickel production by 2023.
Finally, Wagners forecast earnings upgrades are consistent with commentary above relating to the big uptick in estimated price target for the company.
Total Buy recommendations take up 52.49% of the total, versus 39.78% on Neutral/Hold, while Sell ratings account for the remaining 7.73%
Upgrade
ARB CORPORATION LIMITED ((ARB)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/0
Ord Minnett expects ARB Corp to benefit from an improvement in new vehicle sales along with strong demand in the Australian aftermarket sales and growth from the export markets. Also, favourable currency movements have led to better gross profit margins.
The broker believes these factors will drive above-average growth in the medium term.
Looking at the recent pull-back in the share price, Ord Minnett upgrades its rating to Accumulate from Hold with the target rising to $36.50 from $35.
AUSTAL LIMITED ((ASB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0
Austal's first-half revenue was below Credit Suisse's expectations although the result beat the broker's operating income forecast ($70m versus Credit Suisse's estimated $62m). The beat was primarily driven by stronger-than-expected margin expansion in the US business.
Management has downgraded FY21 revenue guidance to $1.65bn from $1.8bn while leaving the operating income guidance unchanged at $125m, hinting at better productivity levels and cost control, in the broker's view.
The broker has reduced its FY21 revenue estimate by -11% to $1.69bn on fx headwinds and lower sustained throughput due to the US Navy’s decision to cease LCS dockings.
Rating is upgraded to Outperform from Neutral with the target rising to $2.75 from $2.70.
CORONADO GLOBAL RESOURCES ((CRN)) Upgrade to Add from Hold by Morgans .B/H/S: 4/0/0
Morgans believes the around -15% discount to fair value looks overdone and upgrades the rating to Add from Hold. The target decreases to $1.27 from $1.35.
The 2020 result was well flagged by quarterly reports. The broker describes guidance as mixed with higher-than-expected costs driving a downgrade to forecasts.
The analyst says the company will benefit in the second half from fleet sale-and-leaseback and the potential for both property sales and the sale of Greenbriar.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/3/1
Citi believes nominal gold prices have peaked this cycle and downgrades gold price forecasts by -5% in 2021 to US$1,800/oz while the long term gold price remains unchanged at US$1,400/oz.
With the Fed tightening being priced-in, Citi thinks the opportunity cost of holding gold will increase. The broker's key picks are stocks positioned to generate cash through the cycle and expect upcoming news flow.
Evolution Mining is upgraded to Buy from Neutral with a target price of $4.80.
ORICA LIMITED ((ORI)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/5/0
Credit Suisse thinks Orica's earnings downgrade stems from a mix of external factors likely to normalise in time plus some fundamental factors.
The broker highlights the progression of downgrades over the years indicates rising cost pressures, surplus industry capacity and operational delays with key assets.
On the bright side, the broker finds the market structure attractive and expects technology to drive further consolidation. In the broker's view, the reduction in Orica's share price is an opportunity for investors to get exposure to the leader in a market likely to remain attractive.
Credit Suisse upgrades to Outperform from Neutral with the target dropping to $16.84 from $16.99.
See also ORI downgrade.
PANORAMIC RESOURCES LIMITED ((PAN)) Upgrade to Add from Hold by Morgans .B/H/S: 1/1/0
In the wake of half year results, Morgans increases the rating to Add from Hold after updating commodity and FX assumptions and taking into account sale proceeds from the Panton PGM project. The target price is increased to $0.16 from $0.15
Based on strong commodity prices, the broker believes the board will approve a production re-start mid-year. There’s also considered upside from more efficient, lower cost mining and processing than previously estimated.
REECE LIMITED ((REH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/1/2
Ord Minnett upgrades to Hold from Lighten and raises the target price to $16 from $13.50 after first half earnings (EBITDA) exceeded forecasts by 2.4%, while earnings margins increased 41 basis pointss to 11.4%.
Financing costs of -$66.6m were significantly higher than the broker's -$44 forecast due to a foreign currency loss on derivative instruments.
The broker feels housing activity in both ANZ and the US looks supportive for earnings growth for the remainder of the calendar year. It's considered there will be a rebound in capital expenditure, particularly in the US, where further opportunities for expansion exist.
Downgrade
DAMSTRA HOLDINGS LIMITED ((DTC)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/1/0
While Damstra Holdings' revenue at $12m missed Morgan Stanley's forecast by -10%, the operating income beat the broker's estimated $1.3m. Also, the broker expected a net loss of -$1.5m but the company surprised with a net profit of $0.9m.
The broker finds the strategic vision of Damstra platform play to be compelling. Even then, there is a near-term lack of visibility that makes the broker think the earnings will be skewed to the downside versus Damstra's August guidance.
Morgan Stanley lowers its revenue forecasts by -8% in FY21 and -11% in FY22.
The rating is downgraded to Equal-weight from Overweight with the target dropping to $1.25 from $2. Industry view: In-line.
ORICA LIMITED ((ORI)) Downgrade to Neutral from Buy by UBS and Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/5/0
UBS is disappointed with the trading update, noting there are several factors that drove a reduction to the first half earnings outlook. Orica has indicated a 180,000t reduction in global ammonium nitrate volumes is likely in the first half, given the slump in thermal coal demand.
UBS reduces FY21-23 estimates sharply. Rating is downgraded to Neutral from Buy.
The broker still believes Orica will provide leverage to a global recovery and the normalisation of mine production, but increasing coal trade dislocation, increased investor concerns and the risk of a re-set under the new CEO will weigh on the short-term performance, the broker predicts.
Target is reduced to $13.50 from $19.40.
Orica’s first half update was materially weaker than Morgans had expected due to covid impacts and China’s ban on Australian thermal coal imports. Also, FX headwinds and issues with transitioning to a new SAP system were considered to play a part in the weak result.
Though operating conditions have improved, the broker believes some first half issues will continue to impact the second half. Thus, Morgans downgrades FY21-23 profit (NPAT) forecasts by -33.9%, -16.8% and -16.4%, respectively.
The rating is moved to Hold from Add and the target falls to $13.97 from $18.95. Morgans forecasts growth will resume in FY22 reflecting a recovery from covid and the implementation of five strategic growth initiatives.
Macquarie downgrades to Neutral from Outperform, given the lack of visibility on earnings as well as the CEO transition and tighter balance sheet metrics.
The company has made a significant downgrade in its update, with first half earnings affected to the tune of -$105-125m and only partially affected by the pandemic. Macquarie highlights the impact of lower mining demand, while FX and Burrup costs also contribute.
The broker's first half estimate for operating earnings (EBITDA) is reduced by -22%. Target is reduced to $13.65 from $18.46.
See also ORI upgrade.
SYNLAIT MILK LIMITED ((SM1)) Downgrade to Reduce from Hold by Morgans .B/H/S: 2/1/1
In the wake of the recent downgrade from The A2 Milk Co ((A2M)), Synlait Milk has flagged significant uncertainty and volatility is impacting its business. The company has now withdrawn FY21 guidance.
Morgans makes material forecast downgrades, lowers the rating to Reduce from Hold and the target price is decreased to $2.78 from $4.18. Balance sheet risk is considered to be heightened and an equity raising not ruled out.
The broker highlights a slide in infant formula sales volumes will reduce overhead recovery and increase production of lower-margin ingredient products.
VICTORY OFFICES ((VOL)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0
Victory Offices reported a net loss of -$14.2m on the back of weaker than expected revenue of $6.6m (Ord Minnett expected $7.2m). This along with an impairment of receivables led to the first half cash burn exceeding guidance, notes the broker, implying a limited funding runway.
In the long term, Ord Minnett believes covid will offer positive tailwinds as the industry demands a high level of workplace flexibility. For now, the broker expects the negative impacts to prevail.
Ord Minnett downgrades to Hold from Buy with the target dropping to $0.33 from $0.71.
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CHARTS
For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED
For more info SHARE ANALYSIS: ASB - AUSTAL LIMITED
For more info SHARE ANALYSIS: CRN - CORONADO GLOBAL RESOURCES INC
For more info SHARE ANALYSIS: DTC - DAMSTRA HOLDINGS LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: ORI - ORICA LIMITED
For more info SHARE ANALYSIS: PAN - PANORAMIC RESOURCES LIMITED
For more info SHARE ANALYSIS: REH - REECE LIMITED
For more info SHARE ANALYSIS: SM1 - SYNLAIT MILK LIMITED
For more info SHARE ANALYSIS: VOL - VICTORY OFFICES LIMITED