Weekly Reports | Apr 26 2021
This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ
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 April 19 to Friday April 23, 2021
Total Upgrades: 5
Total Downgrades: 10
Net Ratings Breakdown: Buy 54.70%; Hold 38.16%; Sell 7.14%
For the week ending Friday 23 April, there were five upgrades and ten downgrades to ASX-listed companies by brokers in the FNArena database.
There were no material changes to forecast target prices for the week.
Despite retaining a Sell on Unibail Rodamco-Westfield, stockbroker Citi expects a rebound in 2022 earnings. This was enough to ensure the company headed the list last week for the largest percentage gain in earnings forecasts by brokers in the FNArena database. However, after assuming a capital raise during 2023-25, the broker calculates earnings will decline by an average -5% over the period.
Sims was next after FY21 earnings guidance was approximately 65% above the top of the range of consensus expectations, according to Credit Suisse. The latest trading update showed Morgan Stanley improved intake volumes in the third quarter. There was also an improvement in gross margin owing to higher scrap prices and margin management.
Audinate also hit the high notes by setting a new quarterly revenue record, driven by continued strength of chips, cards and modules. Looking forward, Morgan Stanley expects corporate to drive results and a demand rebound in higher education.
Earnings expectations were also on the up last week for Megaport. Management confirmed 80m in FY21 revenue, which implies to Morgans a meaningful re-acceleration in fourth quarter sales. The broker feels this should awaken investor interest. Less sanguine views emanated from both UBS and Ord Minnett after reflecting upon third quarter results that were in-line and softer than expected, respectively, compared to in-house forecasts.
The five brokers on the FNArena database that updated research on Eagers Automotive last week were impressed by the first quarter trading result. Ord Minnett explains the company is benefiting from industry tailwinds with constrained original equipment manufacturer supply driving gross margins higher. It's now expected this dynamic will continue for much of 2021.
Coronado Global Resources was the worst performer in terms of percentage adjustments to earnings forecasts by brokers last week. Talk from Morgans of the need to extend debt covenant waivers does not inspire confidence. However, Macquarie remains positive on the outlook for metallurgical coal. This view is informed by buoyant steel demand and the fact seaborne prices are converging towards Chinese import prices.
Frustration ruled at Morgans due to ongoing faulting issues at Whitehaven Coal’s Narrabri mine. The broker feels the company should be fully leveraging the current spike in high calorific value coal prices. Consequently, the analyst’s FY21 earnings (EBITDA) forecasts were lowered by -30% on lower revenue and higher costs.
Senex Energy’s March quarter production was a little weaker than Macquarie expected while the Atlas project reached nameplate in February. The potential for government intervention in the east coast gas market and the coal seam gas (CSG) well performance are considered key risks to the outlook. The broker lowered operating earnings estimates by -13-14% across FY21-23 to reflect a slower ramp up in CSG production compared with prior forecasts.
Finally, after six brokers reviewed March quarter production for Western Areas, the average earnings estimates of all all seven brokers on the FNArena database fell around -30%.
Total Buy recommendations take up 54.7% of the total, versus 38.6% on Neutral/Hold, while Sell ratings account for the remaining 7.14%.
Upgrade
BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 5/1/0
Bank Of Queensland is improving the performance of its mortgage franchise without sacrificing margins, observes Morgan Stanley.
The first half result showed an earlier-than-expected return to growth in the bank's core blue housing loans. This gives the broker confidence that Bank Of Queensland can grow at circa 1.5x in FY21. FY21-22 earnings forecasts have been upgraded by circa 2-3%.
The broker thinks the proposed acquisition of ME Bank provides scale benefits and geographic diversification but is not convinced it materially improves growth prospects.
Morgan Stanley upgrades to Overweight from Equal-Weight with the target rising to $10 from $9.60. Industry view: In-line.
DEXUS ((DXS)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 4/1/1
Morgan Stanley believes fears around the future of office have been overplayed and thinks net absorption and rent trajectory may be nearing a trough. It's considered this may lead to a re-rating of Dexus. The rating is upgraded to Overweight from Equal-weight.
The analyst's target rises to $11.70 from $8.25, driven by forecast incentives in the terminal year declining to 20%-25% from 30%
previously. Additional factors were the recent $120m buyback and a long-term occupancy assumption of 95% versus 90% previously.
Industry View: In-line.
GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/2/1
Galaxy Resources and Orocobre have agreed to merge and create a $4bn lithium producer that will be positioned to produce around 10% of global lithium production. Orocobre shareholders would end up owning 54.2% of the merged company and Galaxy Resources' the remainder.
Credit Suisse finds the tie-up entirely logical although there are limited financial synergies on offer because of the different operating locations and modest corporate overheads. The transaction is all about growth and scale.
Rating is upgraded to Neutral from Underperform and the target is raised to $3.75 from $2.10.
HUB24 LIMITED ((HUB)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/0/0
The March quarter update was slightly better than Ord Minnett expected, amid continued strength in platform flows. As organic growth is better than peers, the broker upgrades to Accumulate from Hold.
While most of the attention has been on the three recent acquisitions, Ord Minnett envisages new appeal in the core business. Target is raised to $26 from $24.
WESTERN AREAS NL ((WSA)) Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0
Morgans lifts the rating to Add from Hold and the target to $2.61 from $2.57 as the Cosmos development is on track and fully funded after a capital raising during the third quarter. It's considered Cosmos will drive value for the next decade.
The broker also welcomes an improving grade at Spotted Quoll and the normalising of production at Forrestania. Management reaffirmed the production guidance range of 16-17kt of nickel in concentrate at a unit cash cost of $3.75/lb to $4.25/lb.
Morgans believes production volumes and costs will improve to achieve the bottom end of production guidance at near the top end of the cost range for the full year.
Downgrade
ARDENT LEISURE GROUP ((ALG)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 1/0/1
Main Event is now reporting strong comparable numbers and Ord Minnett suspects its fears when the company announced a deal with RedBird Capital for a 51% stake in this business are likely materialising.
At the time of the deal, in the depths of the pandemic, the broker asserted, while this was positive for short-term cash flow, it could cap shareholder exposure to the upside in a potential recovery.
Despite valuing Main Event at $912m on a 100% basis, the broker estimates RedBird will be able to acquire its controlling stake for just $234m. Rating is downgraded to Sell from Hold and the target rises to $0.75 from $0.60.
AMCOR LIMITED ((AMC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/3/0
Amcor's nine-month result is expected on May 5.
Going by last year's nine-month numbers, Macquarie expects US$785m in net profit for the nine months, up 9%.
While the June quarter is Amcor's largest quarter in terms of contribution to the company's profit, this year Macquarie expects the contribution to be slightly lower due to higher raw material costs.
Macquarie reduces its rating to Neutral from Outperform with the target dropping to $16.09 from $17.19.
AUSTRALIAN PHARMACEUTICAL INDUSTRIES ((API)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/0
Citi lowers the rating to Neutral from Buy and the target price to $1.35 from $1.50 as FY21-23 EPS forecasts fall by -12% to -15%, to reflect a lower-than-expected first half result. Management guided to FY21 earnings (EBIT) of $75m, implying 2H earnings of $43m.
The broker explains the result was negatively impacted by the lockdowns and closures of Priceline stores (without a pharmacy) and ClearSkin clinics across Australia. The Consumer Brands division was impacted by the drop in demand for cold and flu products.
ALUMINA LIMITED ((AWC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 4/1/1
Macquarie notes Alumina Ltd's first-quarter result was weak with in-line production offset by cost increases. The broker expects cost headwinds to continue throughout 2021.
Timing of the Alcoa of Australia (AoA) tax shield receipts, now expected in the second quarter, has impacted first quarter distributions, notes Macquarie. Added to this are cost pressures that have depressed Alumina Ltd's near-term dividend yield outlook.
Macquarie downgrades to Underperform from Neutral with the target falling to $1.5 from $1.8.
CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/5/0
Challenger reported its strongest quarter of annuity book growth in the 10-year time series, comments Credit Suisse. This was supported by $1bn in low margin/discounted institutional term annuities without which there would have been no growth.
The benefit of a stronger book was overshadowed by an FY21 downgrade and guidance is now for the lower end of the $390-440m pre-tax profit range.
Credit Suisse downgrades to Neutral from Outperform, assessing the recovery story is delayed. Target is reduced to $6.05 from $6.65.
EVOLUTION MINING LIMITED ((EVN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/1
Evolution mining posted a weak March quarter, with production down -9% on Macquarie's forecast and costs up 18%. Red Lake continued to perform above expectation but Mt Rawdon was impacted by heavy rain.
Guidance for FY21 implies a strong end to the year, with higher copper credits driving a reduction in overall cost guidance. Studies at Cowal and Red Lake could provide upside but the broker's expectation of a lower gold price could weigh.
Recent share price outperformance leads to a downgrade to Neutral from Outperform. Target unchanged at $4.80.
MAYNE PHARMA GROUP LIMITED ((MYX)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/3/1
The US FDA has approved Mayne Pharma Group's Nextstellis, a combined oral contraceptive. Macquarie expects a commercial launch by June end noting the group has a 20-year supply and license agreement with Mithra for the commercialisation.
In the near term, the broker continues to see subdued business trends as subdued.
Mayne Pharma Group is downgraded to Underperform from Neutral with the target price rising to 38c from 32c.
PILBARA MINERALS LIMITED ((PLS)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/1/2
Citi lowers the rating to Sell from Neutral after the share price has rallied 25% since mid-February. The price is now calculated to be trading ahead of underlying valuation. The $1.10 target price is maintained.
March quarter lithium concentrate shipments missed expectations, due largely to a fire on an inbound cargo vessel at berth that pushed 11.5kt of shipment into April. Costs were also higher quarter-on-quarter, thanks to a stronger Australian dollar and higher freight charges.
REDBUBBLE LIMITED ((RBL)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
Morgans lowers the rating to Hold from Add and the target price is decreased to $4.88 from $6.64, after forecasting near-term earnings downgrades and longer-term margin reduction. The business model and long-term growth profile are still considered appealing.
The broker explains near-term investment is occurring just when there's cycling of tough comparisons to periods with covid tailwinds and unlikely-to-be-repeated mask sales. It's believed there's a large opportunity to increase customer loyalty and repeat prior purchase rates.
Management disclosed 2024 aspirational targets that imply a 20-30% revenue compound annual growth rate (CAGR), which is well above rates factored into the analyst's estimates.
SCENTRE GROUP ((SCG)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/3/2
Morgan Stanley lowers the rating to Equal-weight from Overweight. The share price has increased around 60% since April 2020 and it's considered the reopening trade has largely played out with foot-traffic now back at 90% across Scentre Group assets (ex CBD).
The broker continues to like the revised distribution guidance of 14cps, which implies a sustainable circa 70% payout ratio.
Whilst sales and foot-traffic will continue to recover in 2021, leasing spreads are almost certain to remain negative and online market share will remain an overhanging issue, explains the analyst. Target is decreased to $2.98 from $3.15. Industry view: In-line.
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: AWC - ALUMINA LIMITED
For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED
For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED
For more info SHARE ANALYSIS: DXS - DEXUS
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: HUB - HUB24 LIMITED
For more info SHARE ANALYSIS: MYX - MAYNE PHARMA GROUP LIMITED
For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED
For more info SHARE ANALYSIS: RBL - REDBUBBLE LIMITED
For more info SHARE ANALYSIS: SCG - SCENTRE GROUP