Weekly Reports | Jun 21 2021
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 June 14 to Friday June 18, 2021
Total Upgrades: 6
Total Downgrades: 15
Net Ratings Breakdown: Buy 54.79%; Hold 38.42%; Sell 6.78%
For the week ending Friday 18 June, there were six upgrades and fifteen downgrades to ASX-listed companies by brokers in the FNArena database.
There were two downgrades to ratings by separate brokers for both Coles Group and Suncorp Group during the week.
Credit Suisse lowered its rating for Coles to Neutral from Outperform after a strong share price rally leading into a strategy update. Overall, the update was considered positive, despite the increase in depreciation guidance, which led to a reduction in the broker’s FY22/23 earnings forecasts. Citi downgraded earnings forecasts for the group by around -4% in FY22 and -8% in FY23, to account for the higher D&A and a step up in supply chain implementation opex in FY23. The rating was lowered to Neutral from Buy.
Macquarie took the opposing view by raising the rating for Coles to Outperform from Neutral. However, this was partly attributable to a timing issue, given the broker moved in anticipation of the strategy briefing. Nonetheless, the rating was held at Outperform after the briefing, partly due to the support from normalising consumer behaviour.
Following the Victorian storms and flooding, Suncorp will likely come in between $50m-$100m above its original FY21 natural hazard allowance. Morgans left forecasts unchanged, having already factored-in adverse events. However, the broker lowered the group’s rating to Hold from Add to reflect a strong share price rise over the last month. The share price also prompted Credit Suisse to downgrade to Neutral from Outperform.
There were no material changes to price targets by brokers in the FNArena database during the week.
Tyro Payments had the largest percentage upgrade in earnings forecasts by brokers in the FNArena database last week. Morgan Stanley assesses the company is fighting back after its terminal outages caused havoc in January-February. The company is now considered better equipped than its competitors to deal with any future outage and this message appears to be resonating with small-medium enterprise merchants. The broker also sees potential from the deal with Bendigo & Adelaide Bank ((BEN)), with the rollout of hardware and software to the bank's customers having just commenced.
Sims was next as earnings forecasts were upgraded after the company provided a strong FY21 earnings guidance update to $360-380m from $260-310m. As post-covid normalisation continues, Macquarie expects improvement should continue, given a better backdrop for scrap. Morgan Stanley cautions on how much of the trading upgrade is driven by inventory yet still raised FY21 earnings (EBIT) forecasts by around 20%. Meanwhile, Ord Minnett upgraded to Buy from Hold, believing scrap and zorba markets will remain strong in the short term.
Insurance Australia Group had the only material downgrade to earnings after six brokers in the FNArena database updated forecasts last week. Morgans lowered the FY21 EPS forecast by around -9% following the Victorian storms and flooding, as the group will likely come in between $50m-$100m above its original FY21 natural hazard allowance. Additionally, ongoing market share contraction in the group’s most profitable products leads Macquarie to believe the company may turn to M&A to fill the gap.
Total Buy recommendations take up 54.79% of the total, versus 38.42% on Neutral/Hold, while Sell ratings account for the remaining 6.78%.
COLES GROUP LIMITED ((COL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/4/0
Macquarie reviews its outlook for Coles Group ahead of the strategy briefing on June 17. The broker envisages upside from normalising consumer behaviour with comparable sales narrowing.
The stock screens attractively on valuation and the broker switches its preference to staples, upgrading to Outperform from Neutral.
Coles is expected to be a beneficiary from the unwinding of the "local shopping" trend. Coles supermarkets are over-indexed to shopping centres and the CBD, areas most affected by the pandemic. Target is raised to $18.20 from $17.30.
See also COL downgrade.
ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/1
Strong demand and ongoing supply issues are driving zircon prices higher, Macquarie notes, hence the broker has upgraded forecasts.
The broker had forecast Sierra Rutile to post negative earnings over the next two years, thus concurs with the decision to suspend operations, which should provide a modestly positive impact on rutile prices.
With price momentum for both zircon and titanium turning positive, the broker upgrades to Outperfom from Neutral. Target rises to $8.60 from $7.30.
NICKEL MINES LIMITED ((NIC)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/0
Nickel Mines Ltd has underperformed the London Metal Exchange nickel price by around 10% in the past six months.
Citi highlights that expansion of nickel pig iron production in Indonesia has seen the company's realised pricing average around 83% of the London Metal Exchange pricing over the last year. The broker reduces assumed realisation versus London Metal Exchange by 6% accordingly, reducing FY22 sales forecast by around 6%.
Nickel Mines has also signed a memorandum of understanding with Shanghai Decent Investment to modify two RKEF lines to produce matte. Citi notes this is an imminent market challenge.
The rating is upgraded to Buy and the target price decreases to $1.30 from $1.50.
REGIS HEALTHCARE LIMITED ((REG)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/0
With reference to M&A generally and multiples relating to the Japara Healthcare ((JHC)) takeover offer in particular, Morgans lifts the rating for Regis Healthcare to Add from Hold. The target price increases to $2.23 from $2.03.
The broker believes the increased level of M&A activity in the sector is likely to increase further, and a successful conclusion to the Japara Healthcare bid will likely attract more investor attention.
SEEK LIMITED ((SEK)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0
Macquarie estimates the removal of the recruiter discount results in a 9% yield tailwind in total for Seek and the broker's recruiter survey suggests a 24% uplift in yield is achievable before volumes are impacted.
The broker's economists are forecasting a fall to the low 4s for the unemployment rate during 2023, and ad volumes and the labour market are strongly correlated. The recent sale of Zhaopin has reduced financial leverage and lowered capital outlay requirements.
Macquarie sees Seek as "quality" stock, and upgrades to Outperform from Neutral. Target rises to $40.00 from $31.60.