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

Weekly Reports | Jul 12 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 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%.


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.

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