Weekly Reports | May 24 2021
This story features AMPOL LIMITED, and other companies. For more info SHARE ANALYSIS: ALD
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 May 17 to Friday May 21, 2021
Total Upgrades: 11
Total Downgrades: 9
Net Ratings Breakdown: Buy 54.91%; Hold 38.37%; Sell 6.73%
For the week ending Friday 21 May, there were eleven upgrades and nine downgrades to ASX-listed companies by brokers in the FNArena database.
The recent fall in the Suncorp Group share price enticed both Citi and Morgans to upgrade the company rating last week. As part of a general insurance forum, the bankinsurer confirmed that momentum in the banking franchise broadly continued as expected in the third quarter. Citi sees attractive medium-term upside potential as long as the group can deliver on at least some of its FY23 targets, about which the market remains sceptical.
After another production downgrade, Ord Minnett feels it may take some time to regain confidence in St Barbara and the potential growth story. The broker lowered the company rating to Hold from Buy and reduced earnings estimates by -40% in FY21 and -30% in FY22. While Macquarie downgraded to Underperform from Neutral, the broker highlighted a number of meaningful upcoming catalysts that could be key to re-setting the production profile.
Nearmap experienced the only material change made to broker forecast target prices last week, and headed up the table for the highest percentage fall in the FNArena database. Citi downgraded the company to Neutral from Buy due to patent infringement legal proceedings, which will likely have a negative impact on demand in the US.
The largest percentage decline in forecast earnings by brokers in the FNArena database went to Xero, after the company lowered expectations for earnings margins in the previous week. This initially resulted in a hefty share price decline, which was largely recovered by the end of last week. Maybe investors began to agree with Morgan Stanley that continual reinvestment in product is necessary to sustain a leadership position. The broker remains Overweight.
Next was Coronado Global Resources. As mentioned last week, Credit Suisse downgraded met coal forecast for the June quarter and December half, which had the effect of reducing the broker’s net profit forecast by circa -67%.
Conversely, Webjet had the largest percentage rise in forecast earnings by brokers last week though many were pushing a recovery out to FY23 and beyond. The company posted a roughly in-line earnings result on stronger revenues offset by higher costs. The signs are looking more positive, UBS suggests, given potential re-openings for the northern summer, and pent-up demand shown by improving bookings.
There is a new niggle on the horizon, however, with Qantas sharply reducing commissions for travel agents.
Next up was James Hardie Industries as March-quarter profit exceeded the consensus forecast by 7%, with a stronger APAC/Europe offsetting a weaker North America. The latter doesn’t concern Credit Suisse as reported growth has so far been in the high teens this quarter. Macquarie also notes the slightly softer-than-expected North American trading was partially explained by the shutting down of two Texas plants.
A stronger volume recovery than anticipated in March drove United Malt Group’s first half earnings higher. Crucially for Morgans, the second half outlook comments were more upbeat. Additionally, all four broker updates on the FNArena database referenced the better–than-expected benefits flowing from the group’s Business Transformation Program of $30m by FY24.
As mentioned last week, GrainCorp reported strong first half results and materially upgraded FY21 guidance. The initial outlook for the 2021/22 east coast winter crop is considered encouraging by Morgans. UBS went further and believes significant upside remains if FY22 produces a bumper crop and feels the solid balance sheet offers M&A or capital return potential.
Via a strong first half result, Nufarm elicited a material average upgrade to forecast earnings by six of a potential seven broker updates within the FNArena database. Better seasonal conditions, lower costs and improved execution were considered keys to the result, according to Morgan Stanley, who downgraded the company’s rating on valuation concerns.
Ord Minnett’s increased forecasts also imply a recovery in earnings in the years ahead. Similarly to United Malt Group above, it was considered equally important that progress is being made toward the Performance Improvement Program target of $35–40m by FY22, on a run-rate basis.
Finally, Aristocrat Leisure enjoyed a lift in earnings estimations by brokers last week. The company is recovering much faster than Citi expected, fuelled by a reopening and stimulated US economy. A profit update was released last week just ahead of first half results due out today.
Total Buy recommendations take up 54.98% of the total, versus 38.3% on Neutral/Hold, while Sell ratings account for the remaining 6.73%.
AMPOL ((ALD)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/0
Morgan Stanley moves to Overweight from Equal-weight, due to government financial assistance enabling Australia's two last refineries to stay open until at least 2027. The target price is increased to $31.70 from $30. Industry view is Attractive.
The broker increases earnings estimates as the refining package will give the investment community more confidence that consensus forecasts can be attained. For the next leg of upside, it's considered global refinery margins need to improve.
While it is still possible to lose money, the significant bear case of refineries losing a lot of money has been reduced, explains the analyst.
AFTERPAY LIMITED ((APT)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/1
After conducting a Buy Now Pay Later (BNPL) survey in the US, Macquarie observes there is limited brand loyalty among BNPL's. It's estimated around 70% of users would prefer to sign up with a different BNPL rather than switch stores.
The broker believes this increases the importance of having a large two-sided network of merchants/users of which Afterpay ranks the highest amongst peers. The broker upgrades to Outperform from Neutral and retains the $120 target price.
In-terms of brand perception, among the brands surveyed, PayPal, Affirm and Afterpay ranked in the top three, in that order.
CARSALES.COM LIMITED ((CAR)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0
Morgans upgrades to Add from Hold and lifts the target price to $20.82 from $19.45. The broker is supportive of the recent acquisition of Trader Interactive, which will likely reinvigorate topline growth.
The analyst sees Carsales.Com as providing the best growth/valuation trade-off amongst the domestic classifieds players at present. With strong domestic new car sales and Korea travelling well despite covid, conditions are considered to remain supportive into FY22.
CREDIT CORP GROUP LIMITED ((CCP)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/1/0
Ord Minnett upgrades the rating for Credit Corp Group to Buy from Hold, after the share price has underperformed the Small Ordinaries index by -20% since mid-March. This is considered due to a slower-than-expected recovery in Purchased Debt Ledger (PDL) supply in both Australia and the US.
The broker sees evidence that some larger financial participants could re-enter the purchased debt ledger sale market over the next 12–18 months. Also, a number of forbearance measures are set to expire in the US, including rent and mortgages in June.
The analyst suspects collections in the US and arrears rates in the consumer lending business have performed better than previous assumptions. The target price is unchanged at $31.50.
The $31.50 target price maintained.
COMPUTERSHARE LIMITED ((CPU)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/3/1
Ord Minnett thinks Computershare offers very strong leverage to earnings from higher American interest rates following its acquisition of Wells Fargo's Corporate Trust Services business in the US.
The broker believes this is a sentiment dynamic that could even override its concerns about actual near-term earnings from the company. To reflect some potential upside from rates, Ord Minnett has raised its terminal growth assumptions.
As a result, Ord Minnett upgrades its rating to Hold from Lighten. The target price rises to $14.60 from $12.
OROCOBRE LIMITED ((ORE)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/3/0
Ord Minnett feels the proposed merger between Orocobre and Galaxy Resources ((GXY)) will result in a unique, pure lithium producer. The merged company is considered to have a diversified, low-carbon, strategic and growing production base.
The rating is upgraded to Accumulate from Hold. Assuming timely deal completion, and including Olaroz Stage 3 in the valuation, the broker increases the target price to $7.15 from $5.50.
The combined entity will grow to the fifth largest lithium company globally, based on forecast 2030 production.
SUNCORP GROUP LIMITED ((SUN)) Upgrade to Add from Hold by Morgans and Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0
After a recent retracement in share price, Morgans moves to an Add rating from Hold for Suncorp Group, and lifts the target price to $11.53 from $11.39.
As part of a recent general insurance forum, Suncorp Group confirmed that momentum in the banking franchise broadly continued as expected in the third quarter.
Management also disclosed that achieving its bank cost-to-income ratio target of around 50% will come 1/3rd from revenue growth and 2/3rds from cost improvements. The broker expresses some caution on this, given past difficulties in improving banking efficiency.
Citi sees attractive medium-term upside potential in Suncorp Group if the group can deliver on at least some of its FY23 targets about which the market remains skeptical.
Even so, noting any meaningful improvement in either bank or general insurer looks unlikely until at least 2H22, Citi continues to believe much of the potential for share price upside may be more medium-term than short-term.
Led by the recent share price fall, Citi upgrades to Buy from Neutral with an $11.80 target price.
TPG TELECOM LIMITED ((TPG)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 5/1/0
Ord Minnett believes market concerns about TPG Telecom's management change and the impact of covid on subscribers have been the key drivers of TPG Telecom's underperformance.
While concerned over the mobile business with covid headwinds not expected to ease until mid-2022, the broker does expect strong earnings growth driven partly by cost synergies from the merger.
Ord Minnett upgrades to Buy from Hold with the target price lowered to $6.45 from $7.40 led by lower post-paid revenue and fixed average revenue per user (ARPU).
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Add from Hold by Morgans .B/H/S: 1/5/1
Morgans lifts the rating to Add from Hold and raises the target price to $13 from $11.10, after developing greater confidence in Treasury wine Estate's growth profile. The FY21-23 profit forecasts were increased by 4.4%, 9.0% and 4.8%, respectively.
The FY21 trading update was better than the broker expected, despite covid-impacts on some of the higher-margin channels and no China sales in the second half.
To maximise the benefits of a separate focus across brand portfolios, rather than regions, management has created new divisions (Penfolds, Treasury Americas and Treasury Premium Brands).
The analyst believes this will allow the market to properly value the Penfolds brand, and prove that the sum-of-the-parts is worth more than the whole.
VICINITY CENTRES ((VCX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/2
Macquarie reviews the outlook for Vicinity Centres, noting the current share price implies a decline in asset values of -33% compared with pre-pandemic levels.
Yet the broker points to some key assets and believes the pricing is not recognising the performance of convenience-based assets or the strength of the balance sheet.
Macquarie assesses current pricing provides an opportunity and upgrades to Outperform from Neutral. The main risk in the short term is a reduction in the pay-out ratio. Target edges down to $1.64 from $1.65.
APA GROUP ((APA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/0
Macquarie feels emissions policies are driving a structural decline in gas usage and, hence, growth for APA Group over a 30-year horizon. The broker lowers the rating to Neutral from Outperform. The target price falls to $10.09 from $10.40.
The analyst believes renewables are still an avenue for growth though the space remains competitive.
While the government release of the RIS Gas pipeline review has minimal impact on the group, increased information disclosure may cause pricing pressure, cautions the broker.
ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/3/1
The company has indicated its Sierra Rutile operations will be suspended in six months if it is unable to make the project more profitable or attract a new investor.
The announcement has come as no surprise to Ord Minnett with the broker noting this has been a troubled asset for quite a while. Iluka has better growth options available closer to home, states the analyst.
As forecast earnings have been reduced by -14%, the broker's price target has retreated to $8 from $8.20. The Buy recommendation has been downgraded one notch to Accumulate.
NEARMAP LTD ((NEA)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/2/0
Nearmap remains confident about successfully defending itself against Eagleview’s allegations of patent infringement. In Citi's view, Nearmap can still be successful in the US even if it were to lose the lawsuit.
Even so, Citi downgrades to Neutral from Buy as the broker expects legal proceedings to have a negative impact on demand in the US, in turn weighing on the share price.
The target drops to $2 from $3.15.
NUFARM LIMITED ((NUF)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/3/0
Despite a much improved first half result, Morgan Stanley lowers the rating for Nufarm to Equal-weight from Overweight due to valuation concerns. Better seasonal conditions, lower costs and improved execution were considered keys to the result.
Group earnings (EBITDA) margins of 14% exceeded the broker's forecasts. Strong margins in Europe were considered due to an
improved mix, delivery of cost-out and raw material prices easing. The analyst increases the FY21 earnings (EBITDA) forecast by 5%.
Target price falls to $5.30 from $5.60. Industry view: In-Line.
PLEXURE GROUP LTD ((PX1)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0
Plexure Group's fully audited FY21 release is labelled "a reasonable set of revenue and EBITDA numbers" by Ord Minnett. The numbers were largely in-line with the unaudited guidance provided earlier.
Cash flow generated surprised on the upside. However, downward pressure on the gross profit margin is seen as a concern by the broker. Main customer McDonald's is making the company pay for a higher rate of communications and infrastructure costs as app usage increases.
Ord Minnett has reduced its forecasts, while acknowledging risks have risen, but also that a re-negotiation of the contract is probably overdue, without putting too much faith in this actually happening.
Lower forecasts have pulled back Ord Minnett's price target to $0.80 from $1.36. Given higher short-term execution risks, the rating has been downgraded to Hold from Buy.
SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/3/0
South32 will be divesting the South Africa Energy Coal business with completion expected on 1 June 2021. The company confirmed the exit is conditional and a loss on sale of -US$125-175m will be booked.
The exit was a key catalyst for the stock, in Macquarie's view and the broker sees limited near-term positive catalysts with only the pre-feasibility study for Taylor due in the next few months.
Further, declines in some of the miner's key commodities have eroded the near-term earnings upgrade momentum and Macquarie downgrades to Neutral from Outperform. The target falls to $3.10 from $3.20.
ST BARBARA LIMITED ((SBM)) Downgrade to Hold from Buy by Ord Minnett and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 3/1/1
Ord Minnett lowers the rating to Hold from Buy and reduces the target price to $2 from $2.80, after St Barbara issued another production downgrade. It's felt the market may take some time to regain confidence in the company and the potential growth story.
“Negative grade reconciliation” in both stope ore and stockpiles affected production at Leonora. Production from the Simberi operation in PNG was downgraded -10%, due to ore variability on lower mining rates and lower recoveries.
The broker cuts the FY21 production forecast to 320,000oz at AISC of $1,712/oz, and reduces earnings estimates by -40% in FY21 and -30% in FY22.
St Barbara has cut FY21 guidance to 330-360,000 ounces amid grade issues and the contractor change at Gwalia as well as low mining rates at Simberi.
Macquarie had expected a downgrade to guidance but this update was materially weaker than anticipated. Tonnage will be delayed into FY22 although grade reconciliation issues are considered short term.
Macquarie downgrades to Underperform from Neutral, noting a number of meaningful catalysts are ahead that could be key to re-setting the production profile. Target is reduced to $1.80 from $1.90.
UNITED MALT GROUP LIMITED ((UMG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0
United Malt Group's first half result was solidly ahead of guidance, observes Credit Suisse. The result was driven by a stronger volume recovery than anticipated in March. The result also absorbed -$7m in non-recurring costs.
The broker is positive with respect to market recovery and opportunities for further expansion and sees low risk to demand recovery in North America and the United Kingdom. Lockdowns in Asia may impact exports ex Australia, adds Credit Suisse.
Even with the strong result, Credit Suisse reduces its rating to Neutral from Outperform led by a strong rise in the group's share price since the March lows. The target price rises to $4.58 from $4.21.
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: ALD - AMPOL LIMITED
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For more info SHARE ANALYSIS: PX1 - PLEXURE GROUP LIMITED
For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED
For more info SHARE ANALYSIS: SBM - ST. BARBARA LIMITED
For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED
For more info SHARE ANALYSIS: TPG - TPG TELECOM LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: UMG - UNITED MALT GROUP LIMITED
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