Weekly Ratings, Targets, Forecast Changes – 02-07-21

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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 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%.

Upgrade

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.

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.

BORAL LIMITED ((BLD)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/3/0

Morgan Stanley commends Boral for its actions on the balance sheet and the sale of assets at attractive prices yet believes these are now reflected in the share price.

Boral has outperformed the ASX200 by 41% since January and the broker's building materials coverage by 18%. Capital management is now factored in, the analysts suggest.

Following the US divestments Boral will be a mature, Australia-focus construction materials operator. From here transformation benefits should boost earnings but outside of this future growth is less obvious to the broker.

Rating is downgraded to Equal-weight from Overweight. Target is $7.60. Industry view is in-line.

COLLINS FOODS LIMITED ((CKF)) Downgrade to Neutral from Buy by UBS and Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0

A strong first half result by Collins Foods beat UBS's profit estimate by 8%, driven by impressive like-for-like sales in KFC Australia. However, the result was considered to not have benefited from as much potential 2H21 operating leverage, given the strong top line.

The broker considers KFC Europe was challenging, however, post the Dutch acquisitions (8 stores), the business is well placed for the recovery over the next 12-24 months.

The analyst continues to like the story though downgrades the rating to Neutral from Buy, given a few concerns including the recent share price rise and the current lockdowns during school holidays. The target price rises to $12.85 from $11.65.

After Collins Foods' FY21 result, Morgans' revenue/earnings forecasts are broadly unchanged, while higher D&A guidance leads to -2-3% EPS downgrades. It's felt FY22 growth for KFC Australia will be more modest after effectively delivering two years of growth in FY21.

The company reported 13% earnings (EBIT) growth and 18% profit growth in FY21, with KFC providing all the uplift, points out the analyst.

The broker highlights softening KFC growth in the result, as the base to cycle becomes elevated, with the opposite in Europe. With the stock now trading within 10% of the target (lowered to $12.82 from $13.38), Morgans lowers its rating to Hold from Add.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/2

The main opportunities are the expansion of Red Lake and Cowal underground and are now incorporated into Morgan Stanley's forecasts, which limits further earnings upside.

The broker expects substantial expansion at Red Lake despite the execution risks, with the project reflecting 34% of DCF value. Cowal is expected to reach its target of 350,000 ounces per annum by FY24 and reflects 42% of DCF value.

Rating is downgraded to Underweight from Equal-weight as Morgan Stanley believes there is better gold exposure elsewhere. Target is $4.30. Industry view: Attractive.

INGHAMS GROUP LIMITED ((ING)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/0

While Inghams Group is a defensive stock Macquarie finds better options are available in times of greater volatility. The broker believes the growth cycle in markets has peaked and downgrades to Neutral from Outperform.

Some uncertainty is created by a major retail contract that is up for renewal in the first half of FY22 and Macquarie suspects the customer could represent 37% of group revenue.

A large proportion of volume is unlikely to be at risk, the broker asserts, but there remains some risk of either volume loss or margin pressure. Target is raised to $4.03 from $3.98.

MAAS GROUP HOLDINGS LIMITED ((MGH)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Following share price strength, Morgans moves to a Hold rating from Add and increases the target to $5.85 from $4.35. It's felt several announced acquisitions/investments will contribute meaningfully to near-term earnings and deliver further medium-to-longer-term value.

The business acquisitions and property investments have a total upfront consideration of $92.2m, comprised of $62.7m in cash and $29.5m in scrip, with deferred consideration and earn-outs totalling $31.5m.

Australian corporate debt facilities have risen to $200m from $160m, and $100m in commercial property finance facilities has been secured. After this strengthening of balance sheet capacity, the analyst feels further M&A will be pursued.

NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/2/1

Following an around 25% appreciation in share price over the last quarter, Credit Suisse lowers  Netwealth Group's rating to Underperform from Neutral, solely on valuation grounds. The target price rises to $16 from $14.40.

The company continues to attract significant flows and grow market share, and the broker expects this to continue.

REECE LIMITED ((REH)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/1/3

Macquarie reviews its investment thesis and downgrades to Underperform from Neutral on valuation grounds.

The broker suggests the stock has had a strong run and while the fundamentals are supportive the valuation more than fully discounts any earnings upside.

The main risk to this view is if the trading environment stays stronger for longer. Macquarie expects the FY21 result will feature strong trading, given positive market commentary from Australian and US peers. Target is steady at $19.40.

RELIANCE WORLDWIDE CORP. LIMITED ((RWC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/3/0

While Macquarie believes the trading environment is supportive the valuation upside is now more limited. Comparables will firm as FY22 progresses so any impetus to growth should be derived from well-executed M&A, in the broker's opinion.

Macquarie considers the current valuation more than adequately balances the risk/reward. Rating is downgraded to Neutral from Outperform. Target is raised to $5.50 from $5.30.

TELSTRA CORPORATION LIMITED ((TLS)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/1/0

With the key catalysts to UBS' Buy rating having played out through rational competition in mobile, the TowerCo sale, and no further dividend cut, the broker has lowered the rating on Telstra Corp to Neutral.

Telstra plans to return half the proceeds to shareholders, invest -$75m in regional connectivity, with the remainder earmarked to pay down debt.

Key upside risks noted by UBS include even more favourable mobile market conditions, 5G use case upside, further corporate activity around Telstra's Infrastructure assets, and more cost initiatives.

The TowerCo sale drives earnings per share upgrades of around 1%, and the price target increases to $3.90 from $3.70.

See also TLS upgrade.

WOOLWORTHS GROUP LIMITED ((WOW)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/2/1

Credit Suisse assesses Woolworths is trading at around a 36% fair value premium to Coles Group ((COL)). Furthermore, the combined market value of Woolworths and Endeavour Group ((EDV)) post demerger is around 4.5% higher than the June 23 closing price.

The broker downgrades Woolworths to Underperform from Neutral on the basis of valuation. Trends in supermarkets/grocery expenditure are yet to normalise and Credit Suisse is forecasting trend growth of 8% in the fourth quarter of FY21 from a 2019 base. Target is unchanged at $32.92.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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