Weekly Reports | May 03 2021
This story features APPEN LIMITED, and other companies. For more info SHARE ANALYSIS: APX
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 April 26 to Friday April 30, 2021
Total Upgrades: 11
Total Downgrades: 6
Net Ratings Breakdown: Buy 55.01%; Hold 37.98%; Sell 7.01%
For the week ending Friday 30 April, there were eleven upgrades and six downgrades to ASX-listed companies by brokers in the FNArena database.
Coles Group and Resolute Mining both received two upgrades to ratings from separate brokers.
In the wake of third quarter results there were signs of normalisation of consumer behaviour at Coles Group, despite weaker-than-expected sales. Citi believes there’s been an inflection point around market share and sales differentials, with the worst of the underperformance behind the retailer. Credit Suisse calculates the valuation is undemanding and notes e-commerce has accelerated in the March quarter.
Citi upgrades its rating for Resolute Mining to Buy from Neutral following life of mine guidance for Syama and Mako. This is believed to have reset expectations. Macquarie agrees and upgrades to Outperform from Neutral in the belief operational momentum at Syama sulphides has been regained.
On the flipside, BlueScope Steel received downgrades to Neutral from Outperform from two brokers, despite a material upgrade to earnings guidance by management. Macquarie finds it hard to imagine the environment will become better from here, while Credit Suisse feels earnings are nearing a peak in relation to what can be achieved from the current asset base.
There were no material changes to forecast target prices for the week.
Megaport received the highest percentage upgrade to forecast earnings by brokers in the FNArena database. As mentioned in last week’s article, management confirmed guidance for 80m in FY21 revenue, which implies to Morgans a meaningful re-acceleration in fourth quarter sales. The broker feels this should awaken investor interest. Both UBS and Ord Minnett were less hopeful after reflecting upon third quarter results that were in-line and softer than expected, respectively, compared to in-house forecasts.
Karoon Energy was next after Morgans assessed a strong third quarter underlying field performance from the Bauna project, which could outperform expectations over the next 12 months. Morgan Stanley considers the company’s free cash flow yields from 2023 onwards are attractive. In the broker's view, the company offers the most leverage to a rising oil price with circa 100% upside at almost US$65/bbl long-term Brent.
Audinate set a new quarterly revenue record, as mentioned last week, driven by the continued strength of chips, cards and modules. Looking forward, Morgan Stanley expects corporate to drive results and higher education to rebound.
All seven brokers in the FNArena database updated views on nib Holdings last week after the release of third quarter results. Policyholder growth is running ahead of expectations and the company guided to underlying operating profit 20% above consensus forecasts. However, a few brokers highlighted the one-off nature of the less than expected “catch-up” in treatment deferrals after the worst of covid-19 has passed.
March quarter metrics were positive for Sandfire Resources signaling the top end of FY21 guidance for copper production is within reach. Cost performance was also ahead of budget while gold production was 80% of the full year guidance.
St Barbara received the unenviable highest percentage downgrade to forecast earnings by brokers in the FNArena database. March quarter production was less than broker forecasts while costs were higher. Several brokers highlighted a very strong fourth quarter will be required to meet full year guidance that is looking increasingly stretched. Citi was the only upbeat broker and upgraded to Buy from Neutral on the basis of the recent share price fall.
Finally, Nickel Mines followed behind St Barbara in terms of earnings downgrades as first quarter results generally disappointed. The impact on cash margins was amplified by a decline in the realised nickel price. However, the company's structural low-cost position should sustain margins and cash flow under a range of Credit Suisse’s nickel price scenarios.
Total Buy recommendations take up 55.01% of the total, versus 37.98% on Neutral/Hold, while Sell ratings account for the remaining 7.01%.
APPEN LIMITED ((APX)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/0
The share price has declined -33% in the last three months, Macquarie notes. While the broker has previously highlighted the risk of increased price competition, recent investor feedback suggests the market is aware of the risk.
Hence, Macquarie suspects this is now being reflected in the share price.
While the broker will monitor market activity closely, given the sensitivity to prices from price competition that could lead to larger-than-expected earnings downgrades, the rating is upgraded to Neutral from Underperform. Target is $16.
CHORUS LIMITED ((CNU)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/2/0
UBS notes Chorus underperformed the NZX50 by circa -15% in the last three months, leading the broker to update its model to take account of increasing wireless competition and movement in risk-free rates.
The broker expects a reduction in long term dividends but even then upgrades to Neutral from Sell. The target falls to $6.30 from $7.
COLES GROUP LIMITED ((COL)) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/0
According to Citi, Coles Group has reached an inflection point around market share and sales differentials with the worst of the underperformance behind the retailer.
While like-for-like sales growth should continue to be volatile due to covid, the broker believes a faster than expected fall in covid costs will act as a hedge to operating deleverage.
Citi upgrades to Buy from Neutral with the target dropping to $18 from $19.
Credit Suisse observes early signs of sales stabilising and some normalisation of consumer shopping behaviour. This means greater frequency, increased Sunday shopping and a better performance at shopping centre stores.
E-commerce also accelerated in the March quarter. The broker maintains a two-year cumulative growth rate of 8% for supermarkets, noting that inflation has now normalised to a two-year cumulative rate of around 1%.
Valuation is undemanding and the broker upgrades to Outperform from Neutral. Target is reduced to $18.19 from $19.04
JB HI-FI LIMITED ((JBH)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/5/1
The March quarter was surprisingly strong and Credit Suisse notes the CEO transition will be as smooth as could be expected as Richard Murray moves to Premier Investments ((PMV)) and is replaced by Terry Smart.
The broker believes the market is underestimating the momentum that still exists in the household goods market. Risks are now sufficiently to the upside that the rating is upgraded to Outperform from Neutral.
Credit Suisse upgrades FY21 estimates on the basis of a stronger March quarter sales result and also marginally increases fourth quarter sales forecasts. Target is raised to $57.39 from $57.03.
ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/3/0
Macquarie suggests Origin Energy must address leverage in order to maintain an investment grade credit rating, noting the company's second earnings downgrade has meant S&P has placed a negative watch over its BBB rating.
Earnings have structurally declined and leverage is stretched. The broker believes the negatives are entrenched in the share price and therefore upgrades to Outperform from Neutral. Target is raised to $4.70 from $4.68.
At a minimum Macquarie believes the dividend policy needs to be reviewed in order to retain cash and some debt reduction will be necessary.
OIL SEARCH LIMITED ((OSH)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/4/1
First quarter production was in line with UBS estimates. Revenue was marginally lower than expected because of reduced volumes from PNG LNG. Realised LNG prices outperformed peers in the quarter, the broker notes.
2021 guidance has been revised, with capital expenditure reduced by -28% as expenditure on the biomass project and seismic analysis in PNG are deferred. Yet operating cost guidance has been revised up 35% because of higher hedging costs.
UBS upgrades to Buy from Neutral, assessing the outlook for oil demand is improving and Oil Search has the highest leverage to a forecast oil price recovery. Target is reduced to $4.50 from $4.60.
RESOLUTE MINING LIMITED ((RSG)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0
Resolute Mining's March quarter production was -11% below the broker's forecast and costs 8% higher. FY guidance has nonetheless been retained.
Importantly for the broker, Resolute seems to have regained operational momentum at Syama sulphides, posting the highest production since 2016. The oxide operation is also expected to improve in the June quarter with an extension of the Tabakoroni pit.
Target unchanged at 60c, rating upgraded to Outperform from Underperform on valuation.
Resolute Mining’s Gold output for the quarter was 85.7koz @ AISC US$1239/oz, a less productive period than the December 2020 (90koz @ US$1002/oz) but within 5% of Citi’s estimates on gold and costs.
Resolute has reaffirmed CY21 guidance of 350-375koz @ US$1200-1275/oz. While only one quarter in, Citi expects 361koz @ US$1215/oz.
Citi believes the valuation disconnect on Resolute Mining’s is due in part to Syama’s inconsistent operational performance, plus the company’s disputed US$70m Malian tax balance and now uncertainty over whether Bibiani can be divested.
Following life of mine (LOM) guidance for Syama and Mako, which Citi believes has reset expectations (i.e Sulphide recoveries of 80%) the broker moves back to Buy from Neutral, but has trimmed the price target $0.70 from $0.75.
RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Upgrade to Add from Hold by Morgans .B/H/S: 4/2/0
Morgans lifts the rating to Add from Hold after a third quarter sales trading update that was ahead of expectations. Constant currency sales growth was strong across all regions (EMEA 13%, APAC 11%), with Americas (39%) boosted by the Texas freeze event.
The broker increases underlying earnings (EBITDA) estimates for FY21-23 by 6%,1% and 2%, respectively, and raises the target price to $5.50 from $4.65. Management advised that April sales to date are substantially ahead of the covid-impacted pcp.
The company is continuing to implement price rises for products that have been impacted by higher input costs, particularly brass products which have experienced higher copper and zinc costs.
ST BARBARA LIMITED ((SBM)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0
Citi upgrades St Barbara to Buy from Neutral with the target rising to $2.40 from $2.30.
St Barbara's March quarter gold production at 82.3koz missed Citi's expectations by -19% while costs were 17% higher than expected. Gwalia mine's production remained steady but was still -10% below Citi's forecast led by lower milled grades.
Impacted by covid, Simberi mine's production fell to a 5 year low and costs increased considerably while Atlantic mine also delivered below expectations.
On a risk-reward basis, Citi finds St Barbara more attractive following the recent -8% selloff and views the outlook for Gwalia, Australia’s deepest trucking mine, to be improving.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Downgrade to Neutral from Buy by Citi .B/H/S: 6/1/0
In a first half results preview, Citi strategists believe the sharp improvement in the Australian economy, particularly the employment
market, is set to make the major banks' covid-crisis loan loss provisions redundant.
FY21 consensus earnings could be an average circa 12% higher if just 60% of these provisions are released back during FY21, calculates the broker. For ANZ Bank's interim, the analyst forecasts cash NPAT of $3,215m, basic cash EPS of 113.1c and a dividend of 65c.
While the analyst upgrades forecasts by around 8-11% across 2H21-FY22 to reflect further loan provision write-backs, the rating is downgraded to Neutral from Buy after a strong run in the share price. The target rises to $30.25 from $26.50.
ACCENT GROUP LIMITED ((AX1)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/0
Citi highlights the Glue acquisition as yet another example of Accent Group's ongoing pursuit of growth. The acquisition price at $13m is small in Citi's view, meaning the downside is limited.
While Glue provides Accent Group with a growth avenue, Citi notes the group is already in the middle of many other growth opportunities that could lead to competition for management time and company resources.
Citi downgrades its rating to Neutral from Buy noting the share price is up almost 25% over the last month with the target price rising to $3.10 from $2.85.
BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/5/0
Second half earnings guidance (EBIT) has increased to $1-1.08bn from $750-830m. This is a substantial upgrade, Credit Suisse observes, and driven by North Star in the US and Australian Steel Products. The broker increases EBIT estimates for FY21 by 10%.
Nevertheless, earnings are nearing a peak for what can be achieved from the current asset base and the broker envisages diminishing share price returns from earnings upgrades. Rating is downgraded to Neutral from Outperform. Target is steady at $22.50.
BlueScope Steel has raised second half EBIT guidance to $1-1.08bn, well ahead of expectations. The company has highlighted a US$250/t increase in North American steel prices as the main driver of the upgrade.
Macquarie notes earnings momentum is strong and more upgrades to estimates are likely to ensue. Still, the broker finds it difficult to imagine the environment will become better from here and downgrades to Neutral from Outperform. Target is raised to $23.90 from $23.05.
PANORAMIC RESOURCES LIMITED ((PAN)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0
Morgans downgrades to Hold from Add. However, the target price is increased to $0.18 from $0.16, partly due to positive metal prices.
Management announced the restart of the Savannah Nickel Mine with forecast costs of $6.36/lb payable nickel, compared to spot pricing over $10/lb. A US$45m loan facility with offtake partner Trafigura fills the funding gap without shareholder dilution, explains the broker.
The analyst sees the use of contractors for mining (and the new equipment they bring) as a big positive for production.
SEALINK TRAVEL GROUP LIMITED ((SLK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0
Macquarie downgrades to Neutral from Outperform, reducing the target to $9.30 from $10.30. The broker assesses current levels in the stock are ascribing value to growth options in which it has little confidence.
M&A in New Zealand remains the most attractive option while the performance of the bus operations in Sydney remains robust.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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For more info SHARE ANALYSIS: ANZ - AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
For more info SHARE ANALYSIS: APX - APPEN LIMITED
For more info SHARE ANALYSIS: AX1 - ACCENT GROUP LIMITED
For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED
For more info SHARE ANALYSIS: CNU - CHORUS LIMITED
For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED
For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED
For more info SHARE ANALYSIS: PAN - PANORAMIC RESOURCES LIMITED
For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED
For more info SHARE ANALYSIS: RSG - RESOLUTE MINING LIMITED
For more info SHARE ANALYSIS: RWC - RELIANCE WORLDWIDE CORP. LIMITED
For more info SHARE ANALYSIS: SBM - ST. BARBARA LIMITED
For more info SHARE ANALYSIS: SLK - SEALINK TRAVEL GROUP LIMITED