Weekly Ratings, Targets, Forecast Changes – 09-07-21

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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 July 5 to Friday July 9, 2021
Total Upgrades: 8
Total Downgrades: 11
Net Ratings Breakdown: Buy 53.80%; Hold 39.20%; Sell 6.99%

For the week ending Friday 9 July, there were eight upgrades and eleven downgrades to ASX-listed companies by brokers in the FNArena database.

Woolworths received the largest percentage decrease in forecast target price by brokers to account for the Endeavour demerger. Morgan Stanley lowered its rating to Equal-Weight from Overweight, after shares rallied 7% in the three months leading into the demerger, and a further 4% in the week prior to the broker’s rating decision.

Sitting atop the table for the largest percentage increase in forecast target price last week was IGO. As mentioned in last week's article, Credit Suisse lifted near-term lithium pricing forecasts, incorporating exponential lithium demand for EV batteries. An increase by the broker in forecast EPS also reflected the Tropicana divestment, accounting adjustments and changes to the assumed capital structure.

Coming second on the table was Coronado Global Resources, which also featured at the top of the list for percentage increase in forecast earnings by brokers in the FNArena database. Morgans estimates that dilution from a recent capital raise will be offset by leverage to sharply higher coking coal prices.

Next up was Orocobre, which also had a material lift in earnings forecasts by brokers last week. Apart from the new lithium price forecast from Credit Suisse referred to above, the company benefited from the agreed merger with Galaxy Resources, from which the broker sees ample value upside.

Crown Resorts had the largest negative percentage change in forecast earnings by brokers in the FNArena database last week. The broker expects revenue from the company’s domestic business in Melbourne and Perth to be trading above pre-covid levels by FY23. However, it’s believed there will be a lag in underlying earnings, driven by higher costs and reduced VIP volumes.

While Sydney Airport came second on the table for percentage earnings downgrades, broker commentary centred on an indicative and non-binding $8.25 bid from a consortium of infrastructure investors. Morgans feels a higher bid may emerge, given the significant dry powder sitting in infrastructure funds globally that is looking for investment opportunities. Citi concurs and believes such a unique asset is likely to appeal to a range of infrastructure bidders.

Next was Western Areas, which posted a mixed June quarter production report, with nickel production 7% higher than Macquarie forecast though shipments were -5% lower. Given Flying Fox continues to underperform expectations, the ability to deliver a replacement source is now considered a key catalyst going forward. Based on the trend evident from the June quarter, the broker cuts earnings forecasts, and now expects the miner to report a small loss at its FY21 result release.

As mentioned last week, Morgans lowered FY21 earnings forecasts for Nanosonics to reflect an exchange rate adjustment to consumables. Despite this, the broker feels the investment in R&D is delivering, after the launch of a new digital platform, AuditPro. However, the analyst had already allowed for a second instrument-disinfection product in FY23 forecasts, so makes no adjustments in that period.

Finally, two additional brokers updated forecasts for Lendlease last week, after a trading update on July 1 revealed estimates for FY21 profit will be -13%-20% below consensus estimates. This was largely due to project delays and profit write-backs in London. 

Morgan Stanley believes a review of the company’s profit recognition strategy is the first part of the new CEO's reset. While volatility may result from re-prioritising 23 urbanisation projects and announcing plans to divest more non-core businesses, the broker feels a successful cost reduction program could be the remedy. Meanwhile, Macquarie suggests value is emerging though negative earnings momentum needs to be dealt with and visibility needs to improve. The broker suspects there could be more negative news before the market can focus on the medium-term growth outlook.

Total Buy recommendations take up 53.8% of the total, versus 39.2% on Neutral/Hold, while Sell ratings account for the remaining 6.99%.

Upgrade

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/0

Morgan Stanley upgrades the rating for BlueScope Steel to Overweight from Equal-weight, as key steel spreads remain supportive. The spreads are considered likely to drive significant consensus upgrades and facilitate meaningful capital management.

The broker lifts forecasts to reflect the much-improved price and spread environment in the US, an earlier start to the Northstar expansion and to align with revised Morgan Stanley commodity price forecasts.

The analyst lifts EPS estimates for FY22 and FY23 by 11% and 67%, and raises the target price to $27 from $24.50. Industry view: In-line.

CORONADO GLOBAL RESOURCES INC ((CRN)) Upgrade to Add from Hold by Morgans .B/H/S: 3/1/0

After updating views post the company's capital structure re-set, Morgans' valuation rises to $1.06 from $1. Coronado Global Resources' leverage to sharply higher coking coal prices is estimated to offset equity dilution.

The company refinanced debt and raised capital for balance sheet repair. The analyst notes global coking coal prices have move sharply and unexpectedly upward.

The broker upgrades the rating to Add from Hold, noting the company suits sophisticated investors with a high risk tolerance.

CARNARVON PETROLEUM LIMITED ((CVN)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/1/0

Ord Minnett believes M&A could be the catalyst for equity performance and remains positive on most stocks in the Energy and Utilities sector. It's felt compelling valuations could prompt corporate activity across the sector, with a number of assets up for sale. 

All energy stocks the broker covers are trading below estimated valuation. The rating for Carnarvon Petroleum is raised to Buy from Hold based on valuation and the target price lifts to $0.35 from $0.33.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/0

Fertiliser prices remain strong, supporting the outlook for Incitec Pivot. The steepening cost curve in Europe is also beneficial, the broker suggests, given the company's US gas cost base for ammonia and fixed gas and sulphur cost base for phosphates in Australia.

The broker expects tightness to remain for the remainder of 2021 and makes earnings upgrades that are split evenly between phosphates and ammonia.

There are also increasing signs that fertiliser prices have reached a level where demand is being reduced so there are limited opportunities for further increases even on material volume.

Credit Suisse upgrades to Outperform from Neutral and raises the target to $3.02 from $2.51.

OIL SEARCH LIMITED ((OSH)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/1

It's surprising to Morgans that Oil and Gas equities have materially underperformed, given the improvement in supply-demand fundamentals, and the steady rise of oil prices. One explanation is considered to be the surge in ESG concerns.

Additionally, the broker notes market pessimism on oil prices holding current levels, and company specific factors as several have looming major capex or recent operational issues.

After upgrading short and medium term oil price forecasts, Morgans upgrades the rating to Add from Hold for Oil Search after recent share price weakness. It's considered the most sensitive of the large-caps to changes in the oil price. Target $4.70.

SEVEN GROUP HOLDINGS LIMITED ((SVW)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/0/0

Ord Minnett lifts the rating for Seven Group Holdings to Buy from Accumulate, after identifying significant potential upside to the unchanged $26.50 target price. Applying the average peer multiple for WesTrac and Coates Hire implies a $27.50 share price, estimates the analyst.

The broker also sees significant value creation from Seven Group’s listed investments. The Buy rating is maintained.

SYDNEY AIRPORT ((SYD)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/5/0

Sydney Airport has received a non-binding indicative cash bid of $8.25 per share from a consortium that comprises IFM Investors, Conyers, QSuper and Global Infrastructure Management. 

The offer implies an equity value of $22.3bn and an enterprise value of $30.6bn, and is at a 42% premium to Sydney Airport's closing price on Friday. Credit Suisse notes a 67% probability of a successful deal at the current indicative offer. 

Among a number of conditions attached to the offer, the offer is conditional on UniSuper joining the consortium with its current 15% stake. Credit Suisse also notes that given Australian airport cross holding limits, IFM will be unable to hold more than 15% of the equity. 

The rating is upgraded to Neutral and the target price increases to $7.70 from $5.30.

See also SYD downgrade.

TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Add from Hold by Morgans .B/H/S: 3/1/0

The company has announced an intention to demerge its Lotteries & Keno business. The demerger will create two ASX-listed companies in Lotteries & KenoCo and Wagering & GamingCo. The latter will comprise Wagering & Media and Gaming Services business units.

Morgans believes the demerger has the potential to unlock the value inherent in the high quality Lotteries and Keno business and upgrades to an Add rating from Hold. The target price is also lifted to $5.66 from $5.11.

The analyst notes proposals received for Wagering and Media and Gaming Services should continue to provide near-term valuation support for Wagering & GamingCo.

Downgrade

ABACUS PROPERTY GROUP ((ABP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/0

Abacus Property has acquired a $160m portfolio of self-storage assets in Sydney's northern suburbs. Ord Minnett assumes the initial yield on the transaction is very tight, at around 3-3.5%, reflecting the premium locations.

The acquisition is included in modelling and has meant Abacus Property has fully utilised its December capital raising.

Ord Minnett downgrades to Hold from Accumulate, given the recent run up in the share price. Target is $3.20.

AMA GROUP LIMITED ((AMA)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/1/0

While the long-term opportunity remains appealing, UBS believes there are a number of near-term uncertainties including the potential impact of current lockdowns and the ability and time required to successfully renegotiate pricing increases.

Additionally, there are labour and parts inflation pressures as well as recent staff turnover within senior management, explains the broker. The rating is downgraded to Neutral from Buy and the target price falls to $0.56 from $0.70. 

The analyst considers the risk-return balance has shifted, at least until there's more visibility on the above-mentioned concerns.

ASX LIMITED ((ASX)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/5/2

ASX’s volumes for both cash equities and futures fell markedly in second half FY21 by -21% and -14% respectively versus the previous period.

With the stock looking expensive again, Citi moves to Sell and increases the target price to $71.10 from $70.10.

While Citi expects some commentary on medium term growth prospects at ASX’s FY21 results, the broker suspects it will be insufficient to materially alter forecasts.

At the upcoming result Citi expects updates on DLT, commodity futures, Sympli and Datasphere.

BORAL LIMITED ((BLD)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/0

Seven Group ((SVW)) has increased the bid for Boral to $7.40 a share having taken its stake beyond 34.5%. The offer remains open until July 15 and Macquarie suggests any alteration to the bid now is unlikely.

The broker downgrades to Neutral from Outperform, believing the upside is more limited at the current valuation. The fly ash review is due in coming weeks which presents some risk to a more cautious stance although Macquarie suggests it could go either way. Target remains $7.80.

CENTURIA OFFICE REIT ((COF)) Downgrade to Hold from Add by Morgans .B/H/S: 0/3/1

There were upward revaluations as at June 2021 14 of 22 properties, due to a mix of leasing outcomes and cap rate compression, explains Morgans.The portfolio is now valued at $2bn, with a weighted average cap rate of 5.81%.

The REIT announced $405m in debt refinancing, increasing the weighted average debt expiry to 4.3 years.

Given recent share price strength, the broker moves to a Hold rating from Add, with a revised price target of $2.49 from $2.33. The REIT is considered to offer an attractive distribution yield for income focused investors.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/0

Macquarie refines its outlook ahead of the FY21 result, noting incremental positive updates have had limited benefit on the share price.

The broker suggests this is a quality cyclical business with a positive trajectory from 9Now, Stan and FTA business but headwinds are likely to loom in the short term from the Olympics.

Valuation support is moderating so Macquarie strategists have shifted to a defensive portfolio position. As a result, the rating is downgraded to Neutral from Outperform. The target is reduced to $3.00 from $3.60.

SENEX ENERGY LIMITED ((SXY)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/2/0

Senex Energy's share price has risen 123% since May 2020. Macquarie continues to see coal seam gas production expansion ahead but delivery will take time, so suggests for now investors may find better returns available elsewhere.

The broker will contiue to monitor valuation upside but on the re-rating has pulled back to Neutral from Outperform. Target unchanged at $3.85.

SYDNEY AIRPORT ((SYD)) Downgrade to Hold from Add by Morgans .B/H/S: 1/5/0

Morgans feels there is a strong likelihood the takeover bid from a consortium of unlisted infrastructure funds will proceed. The rating is lowered to Hold from Add and the target price is raised to the bid price of $8.25 from $7.03.

In predicting whether another bidder could emerge, the broker notes significant dry powder sitting in infrastructure funds globally looking for investment opportunities.

The analyst feels the bid price is sufficiently attractive to entice investors, when compared to an uncertain wait for the distribution to recommence and international traffic to recover.

See also SYD upgrade.

WOOLWORTHS GROUP LIMITED ((WOW)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/3/1

Morgan Stanley downgrades the rating for Woolworths Group to Equal-weight from Overweight, after shares rallied 7% in the three months leading into the Endeavour Group ((EDV)) demerger. Since then, the shares have rallied a further 4% in the past week.

With the removal of Endeavour Group from forecasts, the broker's price target declines to $36.50 from $44. Industry view: Attractive. The analyst anticipates an off-market buyback after management has flagged capital management totaling $1.6-2bn.

Given the anticipated balance sheet position, Morgan Stanley expects capital management to come in towards the top end of the range.

WESTERN AREAS LIMITED ((WSA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/5/0

Western Areas posted a mixed June quarter production report, with nickel production 7% higher than Maquarie forecast but shipments -5% lower. Given Flying Fox continues to underform expactations, the ability to deliver a replacement source is now a key catalyst.

The broker has cut forecasts on the June quarter trend and now expects the miner to report a small loss at its FY21 result release. Target falls to $2.60 from $2.70, downgrade to Neutral from Outperform.

WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/0

Factoring in the latest container volumes statistics, Macquarie lowers the FY21-23 EPS forecasts by -6%,-1% and -3%, respectively. With limited visibility on catalysts in the coming six months Macquarie downgrades to Neutral from Outperform, ahead of the company’s results. 

The broker lowers the target price to $33 from $34, adjusting for the weaker-than-expected container volumes. Longer-term drivers such as a rebound in roll-out global customer growth and Cargowise Neo are considered to remain intact.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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