Weekly Reports | Jul 05 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 28 to Friday July 2, 2021
Total Upgrades: 3
Total Downgrades: 13
Net Ratings Breakdown: Buy 54.08%; Hold 38.92%; Sell 7.00%
For the week ending Friday 2 July, there were three upgrades and thirteen downgrades to ASX-listed companies by brokers in the FNArena database.
Two separate brokers downgraded the rating for Collins Foods. UBS continues to like the story though downgraded the rating to Neutral from Buy, given a few concerns including the recent share price rise and the current lockdowns during school holidays.
With the share price trading within 10% of Morgans’ newly-lowered target price, (to $12.82 from $13.38), the broker also decided to lower the rating to Hold from Add. Contributing to the downgrade was management’s guidance for a higher D&A expense. Additionally, the broker feels FY22 growth for KFC Australia will be more modest, after effectively delivering two years of growth in FY21.
In a big week of news for AGL Energy, the company had the largest percentage decrease in forecast target price by brokers in the FNArena database last week. Management provided an update on the separation of its assets and also indicated FY21 earnings will be at the lower end of the guidance range.
Morgan Stanley assesses the "new AGL", the proposed energy retailer, has attractive re-rating potential on financial grounds with exposure to renewables growth. On the other hand, the other part, named Accel, may be excluded from many institutional mandates in view of its carbon intensity. Uncertainty reigns and, as with many demergers, the upside for investors is difficult to quantify, the broker asserts.
Meanwhile, IGO earned the largest percentage increase in forecast target price by brokers. This came as Credit Suisse lifted near-term lithium pricing forecasts, incorporating exponential lithium demand for EV batteries. An increase by the broker in forecast earnings also reflected the Tropicana divestment, accounting adjustments and changes to the assumed capital structure.
The increase in lithium price forecasts by Credit Suisse also resulted in both Pilbara Minerals and Orocobre sitting atop the table for largest percentage increase in broker forecast earnings estimates in the FNArena database last week.
The broker notes lithium prices have risen sharply since February and doesn't believe this is temporary. Pilbara Minerals remains Credit Suisse's top pick in the sector for many reasons including management's track record and a simpler hard rock resource.
Apart from the new lithium price forecast from Credit Suisse, Orocobre benefited from the agreed merger with Galaxy Resources, from which the broker sees ample value upside.
Nanosonics had the largest percentage fall in forecast earnings. Mind you, only one broker in Morgans updated research, and even then sounded slightly upbeat. The broker feels the company’s investment in R&D is delivering, after the launch a new digital platform, AuditPro. The analyst had already allowed for a second instrument-disinfection product in FY23 forecasts, so makes no adjustments. However, FY21 forecasts were lowered to reflect an exchange rate adjustment to consumables.
Finally, Lendlease was next in terms of a percentage fall in earnings by broker in the FNArena database. Long-suffering shareholders were told by management that estimates for FY21 profit will be -13%-20% below consensus estimates, due to project delays and profit write-backs in London.
Morgan Stanley describes near-term profitability as appearing to be murky, and suspects current consensus estimates will have to come down materially, to reflect the uncertain earnings in the near term. Credit Suisse is more sanguine. While still awaiting more detail, the broker doesn't feel the company’s Construction and Investment segments are going to be materially worse than expected.
Total Buy recommendations take up 54.08% of the total, versus 38.92% on Neutral/Hold, while Sell ratings account for the remaining 7%.
AMCOR PLC ((AMC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/2/0
Macquarie is forecasting a solid FY21 result for Amcor, with the company guiding to a 14-15% earnings per share increase.
The broker believes the growth cycle has peaked, meaning the company will be facing more volatility and lower equity returns in a slowing cycle. Despite this, Macquarie notes Amcor has generally performed well in a volatile market and continues to guide to a solid FY22 result.
Macquarie has also highlighted Amcor has improved raw materials management, and attributes this to the company being more proactive regarding emerging markets.
The rating is upgraded to Outperform and the target price increases to $16.56 from $16.42.
PENDAL GROUP LIMITED ((PDL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/0
As a sector, Credit Suisse estimates asset managers are trading at a -20% discount (near all-time lows) to the market and upgrades earnings by 1-2% on average. Sector flows have improved and are now less negative, but the price earnings discount has persisted.
The broker upgrades Pendal Group to Outperform from Neutral, given it is trading at a P/E discount to three prominent peers, yet its flows are tracking better than all three.
There's considered scope for both a P/E re-rate and upside risk to earnings should flows further accelerate from this point, explains the analyst. The target price is raised to $8.90 from $7.90, and the stock is now Credit Suisse's most preferred in the sector.
TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/0
Telstra surprised Morgans with the early divestment of a 49% stake in its InfraCo towers business. Bids were due by December 2021 but the deal will be consummated in 1H22. It's considered a good deal for shareholders as Telstra keeps control and a high price was attained.
It also shows management is serious about taking steps to continue releasing value, points out the broker. The rating is upgraded to Add from Hold and the target price rises to $4.19 from $3.33.
The company will use roughly 50% of the proceeds to pay down debt. The balance (around 11cps) will be returned to shareholders.The analyst has consistently said shares are worth circa $4.50 per share if the sum of the parts is able to be realised.
See also TLS downgrade.
AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/3/1
In light of the Auckland International Airport's enterprise value having recovered to pre COVID-19 levels, and the unlikely return to unrestricted international travel before FY24, 12 months longer than market expectations, UBS has lowered the company's rating to Sell from Neutral.
The broker has pushed back the start of NZ border re-opening by 3 months to mid-2022, reflecting a slower-than-expected vaccine rollout.
To reflect a slower-than-expected recovery in international passengers, UBS has lowered net profit forecasts by -54%, and -17% in FY23 and FY24, well below market consensus.
UBS has incorporated an extended period of retail rental abatements, deferral of aeronautical PSE4 reset until FY24, and a substantial reduction in capital expenditure from pushing back the new domestic terminal and second runway.
Price target is lowered to NZ$6.65 from NZ$7.30.
AUTOSPORTS GROUP LIMITED ((ASG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0
The company has produced strong operating margins over FY21 as demand continues to outstrip supply. Despite some production limitations supply has performed in line with expectations.
Autosports has also acquired and 80% interest in John Newell Mazda, Alexandria. The purchase price is $12m in goodwill and $4m for the net asset interest, to be funded by existing cash.
Macquarie expects operating margins will remain elevated for the majority of FY22 but following the recent share price performance downgrades to Neutral from Outperform. Target is raised to $2.50 from $2.15.