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

Weekly Reports | Jul 26 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 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%.


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.

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