Weekly Ratings, Targets, Forecast Changes – 23-07-21

This story features CREDIT CORP GROUP LIMITED, and other companies.
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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 19 to Friday July 23, 2021
Total Upgrades: 11
Total Downgrades: 11
Net Ratings Breakdown: Buy 53.92%; Hold 38.91%; Sell 7.17%

For the week ending Friday 23 July, there were eleven upgrades and eleven downgrades to ASX-listed companies by brokers in the FNArena database.

Interestingly, Evolution Mining received two rating upgrades from separate brokers and one rating downgrade from another. Credit Suisse upgraded the company to Outperform from Neutral believing the market has fully digested a disappointing multi-year outlook, and the company is set to successfully execute on its Red Lake/Cowal growth projects in a positive gold price environment. The broker was commenting after the acquisition of Northern Star's Kundana assets for $400m, which was considered an attractive price, given the immediate synergies that will accrue.

Meanwhile, on the back of management’s fresh three-year production guidance, Citi lowered its FY21-22 earnings forecasts, yet increased forecasts for FY23-24, and then raised its rating to Neutral from Sell. Macquarie begged to differ, and lowered its rating to Underperform from Neutral, citing a materially more negative three-year outlook, with costs and capital expenditure higher than expected.

Hub24 also received ratings downgrades from two separate brokers in the FNArena database last week. With trading volumes now normalising, uncertainty around costs and the stock trading near Macquarie’s new target price of $25.75, the analyst downgraded the rating to Neutral from Outperform. 

Morgans also lowered its rating to Hold from Add, on the potential for short term volatility after August 24 results, which may create a better entry point. Longer-term, the broker believes there will be scale efficiencies, a material market share increase and benefits from industry consolidation.

There were no material changes to target prices by brokers during the week.

While takeover talks remains the main talking point, Sydney Airport had the largest percentage fall in earnings forecast by brokers in the FNArena database last week. Morgans downgraded after June passenger data was weaker than expected, impacted by recent lockdowns. Ord Minnett expects a broad-based recovery in domestic passenger numbers in 2022, by which time the majority of the population is expected to be vaccinated, while a recovery in international passengers is likely to be more prolonged.

Next up was Zip Co, after opinions varied across four different brokers following a fourth quarter trading update last week. Morgans homed in on slightly-reduced sequential revenue growth in A&NZ, as the introduction of ‘Tap and Zip’ resulted in a mix change. While increases in volume were strong, they were accompanied by declining average transaction values. Also, Ord Minnett increased cost estimates in the US, despite being generally happy with the performance of QuadPay.

As mentioned in last week’s article, a consortium has made a takeover approach for Spark Infrastructure Group. Ord Minnett feels management may come under pressure to engage though it doesn't recommend investors buy the stock in anticipation of a higher bid price. The broker estimates there's potentially around -14% downside to the consensus valuation and the offer price appears fair.

The table for the largest percentage rise in earnings forecast by brokers in the FNArena database was headed by OceanaGold. (It’s best to ignore Unibail-Rodamco-Westfield's leading position on the table, due to an incorrect entry).

OceanaGold's preliminary June quarter production and costs were in-line with Macquarie’s expectation. However, the broker now incorporates into its forecasts a one-off revenue boost of US$57m for the sale of copper concentrate, held at Didipio since 2019.

Regarding Galaxy Resources, Macquarie believes the merger with Orocobre, expected to complete on 25 August, presents a key catalyst for the company. Ord Minnett agrees, and sees a solid growth pipeline, optimisation options and a strong lithium market outlook for the merged entity. Separately, Morgan Stanley noted strong June quarter production with spodumene production 23% above estimates.

In the wake of June quarter results, Macquarie explained a rally in coal prices has driven earnings upside momentum for Coranado Global Resources, with earnings forecasts more than doubling in a spot price scenario. The broker lifted its rating to Outperform from Neutral. Credit Suisse also remains positive, and suggests potential further upside from US domestic contract prices (US$87/t for calendar year 2021). The next round of negotiations will start in the September quarter.

Finally, all seven brokers in the FNArena database had an opinion on Insurance Australia Group last week, which lifted forecast earnings. This came after the sale announcement of the group’s 49% stake in the Malaysian joint venture AmGeneral Holdings. A sale would take the group one step closer to exiting Asia, noted Macquarie, however, brokers generally agreed the sale price was a tad underwhelming. Despite this, Credit Suisse welcomes the additional capital, and believes some of it may find its way to shareholders via either a special dividend in FY22 or an on-market buyback.

Total Buy recommendations take up 53.92% of the total, versus 38.91% on Neutral/Hold, while Sell ratings account for the remaining 7.17%.

Upgrade

CREDIT CORP GROUP LIMITED ((CCP)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0

In a review of FY21 results due on August 3, Morgans expects FY21 profit to be at the top-end of the guidance of $85-90m. Purchased debt ledger supply is considered to remain subdued in both Australia and the US though improvement is expected through FY22. 

Along with this positive, the broker expects the group to capitalise on the market share opportunity in the US and expects a rebound in consumer lending. As a result, Morgans lifts its rating to Add from Hold on a medium-term view, and maintains the $33.45 target price.

In the short term, the analyst suspects guidance may underwhelm, and extended lockdowns may see heightened share price volatility.

CIMIC GROUP LIMITED ((CIM)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0

First half results were below Credit Suisse forecasts at the revenue line while underlying net profit was in keeping with estimates. Improved trading conditions characterised the half-year with new work accelerating to above pre-pandemic levels.

Project momentum appears to be building and the broker suspects this will continue into the second half. Yet, in NSW, while the state government committed to recommence construction activities from July 31, a two-week extension of the ban could further affect net profit by -$15-20m, the broker estimates.

Credit Suisse upgrades to Outperform from Neutral and raises the target to $23.60 from $21.90.

COMPUTERSHARE LIMITED ((CPU)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Credit Suisse anticipates the Computershare share price could double in the next 3-5 years and upgrades to Outperform from Neutral.

Earnings are expected to increase on the back of the CTS acquisition and associated synergies, as well as from higher margin income as cash rates are increased.

Cost reductions are also expected amid modest organic growth. Higher interest rates are a major part of the broker's investment view and yet, even without these, Credit Suisse finds a case for 10% growth in earnings per share per annum. Target is raised to $23.20 from $13.90.

See also CPU downgrade.

CORONADO GLOBAL RESOURCES INC ((CRN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/0

Macquarie upgrades its rating to Outperform from Neutral and raises its target price to $1.20 from $0.80, after higher realised prices drove stronger second quarter revenue.

The broker explains a rally in coal prices has driven earnings upside momentum, with earnings forecasts more than doubling in a spot price scenario. 

Metallurgical coal realised pricing of US$105/t was above the analyst's expectations, as the Chinese premium paid for American coal continued and seaborne met coal prices from Australia recovered.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Neutral from Sell by Citi .B/H/S: 1/3/3

Evolution Mining has agreed to acquire Northern Star's ((NST)) Kundana assets for $400m and cites proximity to the company's existing Mungari mill as the primary rationale for the transaction.

Credit Suisse observes that the $400m transaction price implies $166/oz of Resource or $691/oz of Reserve.

The broker notes once the immediate synergies are considered, it becomes clear that $400m is an attractive price
from Evolution's perspective.

With the disappointing multi-year outlook now fully digested by the market, Credit Suisse moves back to an Outperform rating from Neutral.

The broker believes Evolution will successfully execute on its Red Lake/Cowal growth projects, and that this, overlaid with a positive gold price outlook, should drive positive returns to investors.

The broker's earnings per share estimates increase 10-13% following the acquisition.

Target price increases to $4.70 from $4.45.

Evolution Mining's June quarter production missed previously tightened guidance due to underperformance at Mungari and lower grades at Red Lake, with hopes of increased Lake Cowal production stymied by an unplanned mill outage.

On the back of fresh three-year production guidance, Citi has lowered FY21-22 earnings forecasts but increased FY23-24. Target falls to $4.70 from $4.80 but the broker upgrades to Neutral from Sell.

See also EVN downgrade.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/0

Morgans updates its Insurance/Diversified Financials sector earnings forecasts on a mark-to-market basis, and after a broad review of earnings assumptions.

The broker upgrades its rating for Link Administration Holdings to Add from Hold. The business, ex PEXA Group ((PXA)), is considered trading on low multiples, as the balance sheet has meaningfully de-geared post receiving the PEXA Group IPO proceeds.

The analyst suggests earnings are well positioned to benefit from a global recovery, and expects management to reaffirm earnings have bottomed in FY21. Only minor changes are made to earnings forecasts. The broker’s price target falls to $5.53 from $5.57.

OIL SEARCH LIMITED ((OSH)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/4/0

The Santos disclosure of a proposal to acquire Oil Search has meant merger prospects have eventuated. Credit Suisse observes the market is now pricing in a 4% premium to the offer.

The broker envisages logic to the merger because of cost synergies, the alignment in PNG and a more diversified portfolio run by better regarded Santos management.

The main risks, in the broker's view, are that the board of Oil Search may not engage seriously, particularly if it has high value expectations and Santos may be reluctant to materially increase the offer.

Credit Suisse upgrades to Neutral from Underperform on valuation grounds and as the M&A potential is now more tangible. Target is raised to $3.86 from $3.61.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/3/0

Following a period of research restriction, Ord Minnett moves to a Buy recommendation from Accumulate, with a target price of $72.50, down from $73.50 previously. The broker cuts the FY22 EPS forecast by -7% to allow for the Australian lockdowns.

Ord Minnett feels the company is unlikely to have given up on its Spire Healthcare offer, given its typically patient approach.

As vaccination rates in the UK and France are close to world-leading, the analyst is hopeful for a period of elevated activity in the months ahead.

SANTOS LIMITED ((STO)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/2/0

While the market's focus will likely be on Santos' approach to acquire Oil Search ((OSH)), Ord Minnett assesses a strong June-quarter production report, with all key metrics above expectations. Attributable production of 22.5mmboe was -9% below the previous quarter.

Management increased both production and sales volume guidance for the full year to the top-end of its previous range. The broker raises its rating to Buy from Accumulate and lifts its target price to $8.15 from $8.10.

The broker estimates Santos could pay up to 0.69x for Oil Search, albeit an acquisition is likely to be EPS-dilutive, given Oil Search’s assets are longer-dated.

WESTERN AREAS LIMITED ((WSA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/4/0

The Macquarie commodities team expects the nickel market to move into deficit, as a result of strong stainless steel demand, combined with a weaker supply response. 

Upgrades of 3-12% to quarterly nickel price forecasts by the broker over the next 18 months, translates to 4% and 8% upgrades to Macquarie’s 2021 and 2022 nickel price forecasts.

Macquarie lifts the rating for Western Areas to Outperform from Neutral and increases its target price to $2.70 from $2.60, after lifting FY22 and FY23 by 69% and 20%. 

Downgrade

ABACUS PROPERTY GROUP ((ABP)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/0

Abacus Property remains exposed to self storage/office although it is adding value opportunities, Macquarie observes. As a result of recent transactions the broker estimates the business now has a 45% exposure to self storage and 11% exposure to retail.

While there is potential upside the broker also notes increased risk, and with limited valuation support downgrades to Neutral from Outperform. Target is raised to $3.35 from $3.05.

ARENA REIT ((ARF)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/0

Macquarie reviews its investment thesis following the strong share price performance and downgrades to Neutral from Outperform on valuation grounds.

The broker calculates the stock is trading at a 48.8% premium to its December 2020 pro forma net tangible assets per share and this factors in too much additional valuation upside.

The broker notes capacity on the balance sheet continues, assessing around $160m of deployment capacity before reaching the bottom of the target gearing range of 35-40%. Target is raised to $3.73 from $3.25.

BORAL LIMITED ((BLD)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/1

Ord Minnett has downgraded Boral to Lighten from Hold. The broker believes there is risk for a share price correction once the current deadline for the $7.40 per share offer beckons on 29 July.

Ord Minnett still is not a great believer in management's transformation program. More selling could follow if/when the stock loses more of its index weighting, seen as another potential risk.

Target price unchanged at $6.70.

COCHLEAR LIMITED ((COH)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/4/2

After a strong performance over the year to date, Morgan Stanley downgrades Cochlear to Equal-weight from Overweight.

The broker suspects it is better to own stocks with more reasonable valuations along with near-term business momentum. Target is raised to $230 from $227. Industry view: In-Line.

Morgan Stanley notes ASX200 healthcare valuations are at record highs and over the last five years have traded at an average 61% premium to the ASX200 ex financials, while the current premium is 99%.

This reflects the lack of growth in the largest contributor, CSL ((CSL)) in FY22, with investors backing a strong FY23 rebound.

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/1

Morgans updates its Insurance/Diversified Financials sector earnings forecasts on a mark-to-market basis, and after a broad review of earnings assumptions.

The broker lowers its rating for Computershare to Hold from Add after a share price rally of over 20% since March.

EPS forecasts are downgraded for FY22 and FY23 by -2% and -4%, on more conservative earnings (EBITDA) margin assumptions. The broker’s price target rises to $17.42 from $17.10 on a valuation roll-forward.

See also CPU upgrade.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/3/2

Domino's Pizza's long term growth story is intact, Macquarie suggests, but market expectations of FY21 success being sustained for longer are now under pressure. Apart from cycling FY21 comparables, Domino's enters FY22 facing a number of headwinds.

These include higher input costs, wage inflation, unfavourable exchange rates and an uplift in investment spending. Covid has pushed the stock's FY22 PE up to 46x, making it very sensitive to earnings disappointment, the broker warns.

Downgrade to Underperform from Neutral. Target falls to $103.50 from $108.50.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/3/3

Quarterly production results were weaker than Macquarie expected in terms of both volume and costs, and missed revised guidance albeit met original guidance.

The three-year outlook is materially more negative, the broker asserts, with costs and capital expenditure higher than expected. This has a large impact on cash flow expectations.

The rating is downgraded to Underperform from Neutral and the target is lowered to $4.00 from $4.90.

Credit Suisse lowers its rating for Evolution Mining to Neutral from Outperform and its target price to $4.45 from $5.05, after the three-year group production/cost/capital outlook fell short of expectations.

At a group level, the analyst explains the production outlook came in broadly lower than the market expected, and details on individual operations' outlooks will be supplied at the full year results.

Credit Suisse suggests that there are better value opportunities in the sector over a short to medium-term view.

See also EVN upgrade.

HUB24 LIMITED ((HUB)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0

Hub24 has reported a very strong June quarter, comments Macquarie, with funds under administration rising $7.2bn to $56.8bn. However, any earnings forecast increases Macquarie may have made as a result are offset by the company's commitment to invest in scale and innovation.

Trading volumes are also now normalising, and there remains uncertainty around costs. With the stock now trading near its new target price of $25.75, up from $25.50, Macquarie downgrades to Neutral from Outperform. 

Morgans lowers its rating to Hold from Add, on the potential for short term volatility after August 24 results, which may create a better entry point. Long-term, it's believed there will be a material market share increase, scale efficiencies and benefits from industry consolidation.

The company ended the fourth quarter with funds under administaration (FUA) of $58.6bn, up 14% for the quarter. FUA comprised $41.5bn for Platform and $17.2bn for Portfolio, Administration and Reporting Services (PARS), up 16% and 9%, respectively, quarter-on-quarter.

The analyst downgrades FY21-23 earnings (EBITDA) forecasts by -7.8%, -2.9% and -6.3%, respectively. Morgans increases its target price to $28.05 from $25.10.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Hold from Add by Morgans .B/H/S: 2/5/0

Morgans updates its Insurance/Diversified Financials sector earnings forecasts on a mark-to-market basis, and after a broad review of earnings assumptions.

Within the sector, the broker considers the health insurers are the best upside earnings risk candidates. However, Medibank Private has already declared it will return $105m of covid benefits to customers via premium relief by September 2021.

The broker lowers its rating to Hold from Add after a share price rally of over 20% since March. The broker’s $3.34 target price is unchanged, after lifting FY21 and FY22 EPS forecasts by 1%-2% on slightly more favourable claims assumptions. 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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