Weekly Reports | May 31 2021
This story features COSTA GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: CGC
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 24 to Friday May 28, 2021
Total Upgrades: 9
Total Downgrades: 8
Net Ratings Breakdown: Buy 54.81%; Hold 38.67%; Sell 6.52%
For the week ending Friday 28 May, there were nine upgrades and eight downgrades to ASX-listed companies by brokers in the FNArena database.
After ALS Ltd posted an underlying FY21 profit 4.5% ahead of consensus last week, two brokers in the FNArena database downgraded the company rating due to a strong recent share price. Morgans attributed the result to astute management of costs and capacity, while Morgan Stanley was impressed by momentum in the Commodities segment, but notes the risk with cost inflation.
The final dividend of 14.6 cents was well ahead of expectations, underpinned by strong cash conversion and debt reduction.
ALS also achieved the weekly double by appearing atop the tables for the largest positive percentage change to broker’s forecast target prices and earnings.
This was the only material adjustment to forecast target prices though there were several material upgrades to forecast earnings, including the second-placed Insurance Australia Group.
Following the release of APRA’s quarterly general insurance performance statistics for March, Macquarie estimated industry price rises remain strong. However, the broker also concluded covid-19 benefits, particularly in Home and Commercial lines, are dissipating for IAG.
Next up was Nufarm, after Citi assessed the earnings trajectory looks positive through to FY23. The company offers leverage to strong agricultural fundamentals across key markets on top of continued execution on cost-out initiatives, explains the broker. In the short term, the one negative is a higher tax rate outlook in the second half, which had the analyst lowering the FY21 profit forecast by -9%.
Finally, Costa Group Holdings was next in terms of earnings downgrades last week. The more limited visibility for the earnings potential of the domestic Produce business, and uncertainty remaining over the extent of the second half earnings recovery, prompted Morgans to lower the rating to Hold from Add. Conversely, Credit Suisse upgraded to Outperform from Neutral while lowering the target price dropping to $4.15 from $4.70.
While management guidance was below market expectations it resulted from factors the broker considers are seasonal and not structural. Meanwhile, the company expects the June half performance to be marginally ahead of the last year.
Total Buy recommendations take up 54.81% of the total, versus 38.67% on Neutral/Hold, while Sell ratings account for the remaining 6.52%.
COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/3/0
Credit Suisse upgrades to Outperform from Neutral with the target price dropping to $4.15 from $4.70.
Costa Group Holdings expects the June half performance to be marginally ahead of the last year. This guidance was below market expectations and a result of factors that Credit Suisse considers seasonal and not structural.
The broker finds it difficult to ascertain a normal margin for the group's domestic product since in a 12-month period, the group's peak margins have been about 14%-15% while in a bad year, margins have been as low as 5%-6%.
The 2021 operating income forecast has been reduced by -7.5%.
See also CGC downgrade.
CHAMPION IRON LIMITED ((CIA)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/1/0
Citi upgrades to Neutral from Sell with the target price rising to $7.10 from $6.40.
Champion Iron delivered a record quarterly revenue, observes Citi, with strong price momentum in iron ore. Net profit for FY21 was slightly below Citi's forecast at $477m but more than doubled over FY20.
In the broker's view, the company is well-positioned to capitalise on a global de-carbonisation theme and expansion upside via Phase II delivery and potential Phase III expansion post Kami acquisition.
CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/0/0
There are signs of a strong FY22 domestic recovery in North America and Australasia and Macquarie notes these regions now comprise more than 70% of group revenue. The broker points to recent updates from Qantas ((QAN)), Serko ((SKO)) and corporate activity data.
Macquarie upgrades to Outperform from Neutral, noting the main risk is that the pandemic restrictions persist and delay recovery of domestic and international travel. Target is raised to $20.75 from $20.05.
DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/4/1
Citi upgrades Domino’s Pizza Enterprises to Neutral from Sell with the target rising to $104.2 from $72.40.
Citi sees potential for Domino’s Pizza Enterprises to enter a number of new countries in Europe like Italy, Spain and Poland. The broker estimates these markets could represent a network opportunity of 2,506 stores, potentially contributing an operating income of $263m.
81 net new stores were opened in Europe to date, suggesting the company needs to roll out at least 53 stores if it plans to rollout 2,850 stores by 2028-33. Citi highlights rollouts have been skewed towards the second and fourth quarters.
Looking at the opportunities to expand into new countries, the scope for store acquisitions in existing markets and the improving rollout pace in Europe, Citi remains optimistic.
MIRVAC GROUP ((MGR)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/0
Morgan Stanley notes Australian dwelling prices have been pacing at 2-3% per month for most of 2021 and believes housing affordability will become a key issue in the physical as well as the equities market.
After completing a deep dive into the affordability of 72 residential projects by Mirvac Group and Stockland Corp ((SGP)), Morgan Stanley concludes the group's land product is more affordable than Stockland's core products.
Analysing Mirvac Group's 31 active projects, the broker suggests 79% of the lots look affordable. The broker is positive on the group's prospects and has increased its FY22 residential forecast to 2.6k from 2.3k while modelling in more apartment settlements in FY23-25.
Morgan Stanley upgrades to Overweight from Equal Weight rating with the target price rising to $3.15 from $2.60. Industry view is In-Line.
NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/0
Citi updates coal prices to allow for marking-to-market adjustments and the recent rally in thermal coal. This results in material earnings upgrades for New Hope and the rating is upgraded to Buy from Neutral.
The broker notes risk appetite is low but argues the stock is now trading on 3x enterprise value/EBITDA for FY22 and the balance sheet is moving to a net cash position in FY23. Target is raised to $1.75 from $1.55.
See also NHC downgrade.
OZ MINERALS LIMITED ((OZL)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/1
Copper has eased back from highs of US10,700/t to US$9900/t, yet Citi expects this to be a temporary pullback before prices rebound. The broker envisages another 20% upside to spot prices over the next six months and forecasts copper will hit US$12,200/t.
The broker understands investors are hesitant about buying a stock that has rallied around 50% in the past six months but still expects it will trade higher and upgrades to Buy from Neutral. Target is $27.
RESMED INC ((RMD)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/0
Ord Minnett reviews forecasts and takes a more optimistic view of the potential boost from the launch of the AirSense 11 flow generator platform.
The new device is also expected to support gross margins as manufacturing volumes ramp up. In the interim, sales are expected to stagnate as customers await the new device, which may exacerbate already tough comparables.
Ord Minnett upgrades to Accumulate from Hold, envisaging potential upside to consensus numbers. Target is raised to $28.50 from $26.50.
SYNLAIT MILK LIMITED ((SM1)) Upgrade to Hold from Reduce by Morgans .B/H/S: 1/2/0
Despite FY21 guidance being lowered to a loss of -NZ$20-30m from March’s breakeven expectation, Morgans believes issues will be largely confined to FY21. The rating rises to Hold from Reduce and the target price falls to $2.55 from $2.58.
The broker explains lower guidance was due to ongoing shipping delays and lower-than-expected ingredient sales prices due to sales phasing impacts and volume pressure. Also, there's a more conservative approach to year-end inventory volumes and valuations.
The analyst feels investors could start to look through existing issues if the company can start to rebuild confidence in a FY22 earnings recovery at the FY21 result. The broker continues to believe gearing is too high though management states a raising is not in prospect.
ARISTOCRAT LEISURE LIMITED ((ALL)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 5/2/0
Aristocrat Leisure added 886 machines to the North American installed base during the first half, ahead of Morgan Stanley's expected 600.
The broker notes the company continues to reinvest ahead of peers, with design and development spend up 2% versus the NYSE listed International Game Technology PLC's -23%. In the broker's view, this leaves it well placed to add machines and gain market share.
IDFA changes were implemented in late April and the impact on Aristocrat Leisure has been limited so far, highlights the broker while warning it is too early to tell.
Morgan Stanley believes the results support the thesis that the company will emerge from covid in a better position with considerable balance sheet optionality.
Noting the company outperformed the ASX200 by almost 30% and looks fairly valued, Morgan Stanley downgrades to Equal-Weight from Overweight with the price target lifting to $41 from $38. There is no industry rating.
ALS LTD ((ALQ)) Downgrade to Hold from Add by Morgans and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/4/0
Morgans downgrades the rating for ALS to Hold from Add after a strong share price rise. It’s considered astute management of costs and capacity drove underlying FY21 profit 4.5% ahead of consensus.
The broker lifts FY22-24 EPS forecasts by 4-11% due mainly to a lift in assumed Commodities margins close to 30%, to reflect the sector outlook. The target rises to $11.56 from $10.35.
ALS Ltd provided a strong FY21 result, in Morgan Stanley's view. Commodities momentum impressed amid higher volumes which lead to higher earnings margins. Still, cost inflation is a risk. In life sciences there was modest margin compression, the broker notes.
Morgan Stanley upgrades estimates by 8% and 3% for FY22 and FY23, respectively, noting that the stock has performed well and while there may be further upside the magnitude is likely to be lower.
Morgan Stanley downgrades to Equal-weight from Overweight. Target is raised to $12.90 from $10.70. Industry view: In-line.
COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/0
Morgans downgrades Costa Group to Hold from Add, after first half guidance was for marginal growth. Also, from the guidance, there was considered implicit contraction in Produce segment that is materially weaker than expected.
The broker lowers FY21-23 underlying earnings (EBITDA-S) forecasts by -10%, -5% and -5%, respectively. Also, increased D&A guidance and operating deleverage has seen material downgrades at the profit (NPAT-S) level.
Overal, the more limited visibility on the earnings potential of the domestic Produce business and uncertainty remaining over the extent of the second half earnings recovery, prompts the analyst to lower the rating. The target price falls to $3.54 from $5.03.
See also CGC upgrade.
FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/1/2
Credit Suisse downgrades Fisher & Paykel Healthcare Corp to Neutral from Outperform with the target dropping to $30 from $34.
Post the FY21 result, Credit Suisse has lowered its earnings estimates for FY22-23. Earnings uncertainty is expected to persist over the next six months and the broker does not see a short-term catalyst for the stock to outperform.
Management conceded there is too much uncertainty in the monthly and quarterly earnings to provide any guidance or be confident that the current trends will continue.
The broker notes demand is tracking covid-related hospitalisations and in countries where hospitalisations have fallen, there has not been evidence of sustained strong utilisation of the installed base outside of covid patients.
NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0
Total coal sales for the March quarter were softer than Credit Suisse had expected, as were the Bengalla realised prices. The company rating is lowered to Neutral from Outperform after a recent rally in the share price. The price target of $1.30 is unchanged.
With earnings continuing to concentrate to Bengalla, the broker believes the company will likely need the successful approval and execution of the Acland extension to trigger a re-rate.
See also NHC upgrade.
UNITI GROUP LIMITED ((UWL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/1/0
Ord Minnett reviews the outlook for Uniti Group in light of a strong housing backdrop and stability in the wholesale broadband price.
The March quarter dwelling numbers highlight another quarter of above-trend growth, observes the broker, supported by positive sales and pricing from greenfield property developers in 2021.
The broker expects FY21 operating income of $84.4m and operating cash flow of $71m after-tax but prior to re-investment in new fibre construction. Ord Minnett also highlights lower integration risks with the recent OptiComm acquisition.
Ord Minnett downgrades to a Hold recommendation from Accumulate with the target rising to $2.90 from $2.23.
XERO LIMITED ((XRO)) Neutral by Citi .B/H/S: 2/2/1
While noting there isn’t a lot to read-through for Xero from Intuit’s third quarter, Citi sees Intuit’s commentary on the use of online accounting and associated services as positive for Xero.
In the broker's view, the results from both companies point to home markets outperforming the International markets although going by Intuit’s comments, it looks to the broker Xero could be outperforming Quickbooks in the UK.
Neutral rating with a target price of $136.
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: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: ALQ - ALS LIMITED
For more info SHARE ANALYSIS: CGC - COSTA GROUP HOLDINGS LIMITED
For more info SHARE ANALYSIS: CIA - CHAMPION IRON LIMITED
For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED
For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED
For more info SHARE ANALYSIS: FPH - FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED
For more info SHARE ANALYSIS: MGR - MIRVAC GROUP
For more info SHARE ANALYSIS: NHC - NEW HOPE CORPORATION LIMITED
For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED
For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: SGP - STOCKLAND
For more info SHARE ANALYSIS: SKO - SERKO LIMITED
For more info SHARE ANALYSIS: SM1 - SYNLAIT MILK LIMITED
For more info SHARE ANALYSIS: UWL - UNITI GROUP LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED