Weekly Ratings, Targets, Forecast Changes – 25-06-21

Weekly Reports | Jun 28 2021

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 June 21 to Friday June 25, 2021
Total Upgrades: 8
Total Downgrades: 12
Net Ratings Breakdown: Buy 54.31%; Hold 38.99%; Sell 6.70%

For the week ending Friday 25 June, there were eight upgrades and 12 downgrades to ASX-listed companies by brokers in the FNArena database.

Both Macquarie and Credit Suisse upgraded their ratings for South32 to Outperform from Neutral. The commodities team at Macquarie lifted its 2021-25 aluminium price forecast by 4-5%, driving strong longer-term earnings upgrades for the company. In raising the target price to $3.60 from $3.00, Credit Suisse cited the potential for the global aluminium market to head into protracted deficits from 2022. The broker expects a free cashflow contribution from the company’s aluminium division of 44% in 2022, or 62% if the alumina refineries are included. It’s also felt the ESG-compliance of the company is a big plus.

Adairs suffered a downgrade in rating to Hold from both Morgans and Ord Minnett. Morgans continues to forecast earnings will fall by circa -20% in FY22. This is based on the assumption that like-for-like (LFL) sales growth turns negative, gross margins ease from elevated levels and operating expense deleverage will occur, on the negative LFL sales growth assumption. Ord Minnett feels sales growth has been well above average while operating margins appear unsustainably high, after the company has benefited from elevated demand in the home improvement segment over the past 12 months.

Two separate brokers downgraded the rating for CSL. Citi downgraded to Neutral from Buy, purely on valuation, due to share price outperformance since March. Also, Credit Suisse downgraded to Neutral from Outperform, partly due to valuation but also because the market hasn't factored-in the negative margin impact from lower volumes and higher donor fees. Additionally, the broker sees headwinds for the recovery in FY23, not only from structurally higher donor fees, but also from continued pressure on collections, resulting from the US customs and border protection prohibiting Mexican nationals from donating.

There were no material falls in either target prices or earnings forecasts by brokers in the FNArena database last week.

Meanwhile, New Hope Corporation had both the largest target price rise and the largest percentage upgrade in forecast earnings. This was a result of coal price revisions by both Credit Suisse and Macquarie. The latter raised forecast thermal coal prices by 9% and 7% for 2021 and 2022, respectively, resulting in material upgrades to earnings estimates for those years.  

After adjusting thermal coal prices for the June quarter, Credit Suisse lifted FY21 estimates for New Hope Corporation’s operating earnings by 23%. The broker also increased its Newcastle thermal price assumption to US$100/t for FY22.

The same rationale by both brokers also applied to Whitehaven Coal, which had the next largest percentage rise in earnings forecast. Across the sector, Macquarie continues to prefer the company after a recent upgrade to the long-term metallurgical coal outlook. Despite management guiding to a FY21 production downgrade last week, Credit Suisse considers the damage to be limited, given spot prices remain above US$120/t.

Finally, the Macquarie commodities team remains bullish on the outlook for lithium. This elevated Pilbara Minerals last week into third position on the table for percentage increase in forecast earnings by brokers in the FNArena database.

Total Buy recommendations take up 54.31% of the total, versus 38.99% on Neutral/Hold, while Sell ratings account for the remaining 6.70%.

Upgrade

BORAL LIMITED ((BLD)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/2/0

Boral has sold its North American building products business to Westlake Chemical. The sale price of $2.9bn (US$2.15bn) is $1bn more than Ord Minnett's valuation. Boral is looking at options for capital returns.

Net debt has been reduced to $1.3bn and the broker calculates there could be up to $3.56bn in potential shareholder returns.

The rating is upgraded to Hold from Lighten as the valuation has increased and Ord Minnett assesses Seven Group ((SVW)) could raise its bid for Boral. Target is raised to $6.70 from $5.70.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/5/1

Flight Centre's leisure business is, globally, one the last travel recovery stories, Credit Suisse asserts, because of onerous government restrictions. The long-term earnings potential of this division is also an issue and the broker prefers other operators in the sector.

That said, increased travel complexity could benefit bricks & mortar participants although the store footprint has halved, reducing the scale advantage.

Credit Suisse transfers coverage to another analyst, noting the corporate business is the value driver and new business has been won during the travel shutdown. The broker upgrades to Neutral from Underperform and raises the target to $17.00 from $15.44.

NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0

Adjusting thermal coal prices for the June quarter, Credit Suisse lifts FY21 estimates for New Hope's operating earnings by 23% to $350m. The broker also increases the Newcastle thermal price assumption to US$100/t for FY22.

This drives an expected earnings upgrade of 95% for FY22. The broker upgrades to Outperform from Neutral and raises the target to $1.95 from $1.30.

RESMED INC ((RMD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0

Macquarie envisages market share opportunities for ResMed associated with the recent recall of the Philips DreamStation devices.

In the short term supply chain constraints will limit the company's response and, hence, the broker assumes incremental sales will be driven primarily from existing inventory.

Combined with a balance sheet that provides flexibility for capital management/growth, Macquarie judges the outlook is favourable and upgrades to Outperform from Neutral. Target is raised to $34.85 from $27.50.

SOUTH32 LIMITED ((S32)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/0

After recent upgrades to the iron ore forecast, Macquarie's commodities team has adjusted forecasts for other commodities. The 2022-25 forecasts for copper rise by 13-14% and 2021-25 aluminium lifts by 4-5%. Thermal coal prices rise 9% and 7% for 2021 and 2022.

The most material downgrades are to manganese, which falls -12% in 2022 and by -6 and -9% for 2024 and 2025.

The bullish outlook for aluminium has driven strong longer-term earnings upgrades for South32 and the broker lifts the rating to Outperform from Neutral. The price target lifts to $3.50 from $3.10.

Credit Suisse lifts the rating for South32 to Outperform from Neutral and raises the target price to $3.60 from $3. It's anticipated the global aluminium market will head into protracted deficits from 2022. Its also felt being ESG-compliant is a big plus for the company.

The broker believes aluminium should be in high demand for its role in electricity transmission, solar projects and light-weight. Credit Suisse forecasts the aluminium price to climb to US$1.20/lb next year.

The analyst expects a free cashflow contribution from the company’s aluminium division of 44% in 2022, or 62% if the alumina
refineries are included.

WEST AFRICAN RESOURCES LIMITED ((WAF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

After recent upgrades to the iron ore forecast, Macquarie's commodities team has adjusted forecasts for other commodities. The 2022-25 forecasts for copper rise by 13-14% and 2021-25 aluminium lifts by 4-5%. Thermal coal prices rise 9% and 7% for 2021 and 2022.

The most material downgrades are to manganese, which falls -12% in 2022 and by -6 and -9% for 2024 and 2025.

December year-end producers, such as West African Resources receive material forecast EPS upgrades from the broker in 2021, due to the 2021 gold upgrades aligning with the reporting period.

Macquarie lifts the rating to Outperform from Neutral following recent weakness in the company’s share price. The price target of $1.10 is unchanged.


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