Weekly Ratings, Targets, Forecast Changes – 29-10-21

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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 October 25 to Friday October 29, 2021
Total Upgrades: 17
Total Downgrades: 5
Net Ratings Breakdown: Buy 55.28%; Hold 38.21%; Sell 6.51%

For the week ending Friday October 29, there were seventeen upgrades and five downgrades to ASX-listed companies covered by brokers in the FNArena database.

During the week there were three ratings upgrades for Reece by separate brokers, while there were two upgrades apiece for Reliance Worldwide Corp and SmartGroup Corp.

Morgans (Upgrade to Hold from Reduce) assessed the first quarter performance of Reece’s US business was much better than expected and the A&NZ business was less impacted by lockdowns than estimated. Ord Minnett (upgrade to Buy from Lighten) agreed and assessed robust growth over the past quarter for both A&NZ and the US. Despite a full valuation, Macquarie (Upgrade to Neutral from Underperform) feels the share price has de-rated sufficiently to suggest it should stabilise from here.

Regarding Reliance Worldwide, Macquarie (upgrade to Outperform from Neutral) assessed trading was solid over the first quarter and the acquisition of the EZ-FLO business adds diversity. Meanwhile, recent market checks suggest to UBS (upgrade to Buy from Neutral) renovations in the US will be robust for the next year.

Last week SmartGroup Corp rejected an amended takeover offer. Despite this, Morgans upgraded its rating to Add from Hold to reflect resilient earnings in the face of lockdowns and expected incremental growth in FY22. Credit Suisse also upgraded (to Outperform from Neutral) and expects a good EPS recovery, with a potential boost from the company's uplift program by FY24.

There were no material changes to forecast target prices last week.

In terms of changes to forecast earnings, Coronado Global Resources received the largest percentage upgrade. Morgans says the investment case for the company is best illustrated by an approaching net-cash position, just months after two recapitalisations. This has been achieved with the help of buoyant metallurgical coal prices and the recent sale of the Amonate asset for US$30m, points out Macquarie.

Karoon Energy had the next largest percentage upgrade to earnings, after September quarter production exceeded Macquarie's forecast by 9%. Strong cash flows at current spot prices and outperformance from the Buana oil field in Brazil are thought to position the company well for growth investment in 2022.

Orocobre was next after management upgraded price and volume guidance for the Mount Cattlin mine in WA for 2021. Incorporating updated pricing and guidance means a 7% and 3% lift to Macquarie's FY22 and FY23 forecasts.

Meanwhile, Morgans felt the trading update from Superloop engenders greater confidence in accelerating organic growth. Management will be making a further investment in the consumer side of the recently acquired Exetel business, which Ord Minnett hopes will add momentum to the company’s consumer broadband segment in Australia.

On the flipside, Mineral Resources appeared atop the table for the largest percentage decrease in forecast earnings last week. This came as September-quarter production was weaker than Ord Minnett expected, and the achieved iron-ore price of US$78/t was just 48% of the benchmark. Morgan Stanley also remains concerned about the heavy capital expenditure on low-grade ore projects.

Next on the table was 29Metals. As explained in last week’s article, the September quarter featured weak production at Golden Grove, offsetting a better result at Capricorn Copper. Nonetheless, Credit Suisse rates the company as the best value copper play on the ASX.

Earnings forecasts were also down for Western Areas, as September quarter nickel production came in -5% below Macquarie's forecast and costs were 24% higher. The latter is due to tight labour markets and high shipping rates.

Finally, Afterpay had a material fall in earnings forecasts by brokers after the final report from the RBA on Payments Regulation concluded that it would be in the public interest if the "no surcharge" rules of the BNPL sector are prohibited. 

Given the company’s reliance on high merchant fees to fund its economics, UBS believes this is a large negative development. Moreover, completion risk may now surround the proposed acquisition by Square.

Total Buy recommendations take up 55.28 % of the total, versus 38.21% on Neutral/Hold, while Sell ratings account for the remaining 6.51%.

Upgrade

A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/2/1

Credit Suisse upgrades the a2 Milk Company to Neutral from Underperform to reflect rising English Label sales and more ambitious market-share targets for China.

Still the total market is declining, risk remains with the company's ambitions in China (from a reduction in newborns and government regulation), and the company has a long road to hoe, although much of this is priced in, says the broker.

EPS forecasts fall roughly -3% in FY22 and rise 3% and 12% in FY23 and FY24.

Target price rises to $5.75 from $5.50.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ((ANZ)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/4/0

Citi upgrades its rating for ANZ Bank to Neutral from Sell and raises its target to $29.25 from $28 following FY21 results. The analyst likes the improved revenue outlook and sees strong leverage to a steepening yield curve. Institutional volume growth has also resumed.

The analyst upgrades cash earnings forecasts by circa 15%. Half of this is attributable to lower bad debts and the balance from improved core earnings.

CAMPLIFY HOLDINGS LIMITED ((CHL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Morgans raises its target price to $5 from $4.20 and upgrades its rating to Add from Hold for Camplify Holdings after after an agreement was struck to buy Mighway and SHAREaCAMPER for -$7.4m, in an all-scrip transaction from Tourism Holdings.

The analyst notes the transaction sets up the company to be the dominant peer-to-peer (P2P) RV platform in A&NZ. A strategic relationship with Tourism Holdings is also thought to confer additional marketing and revenue benefits.

DELOREAN CORPORATION LIMITED ((DEL)) Upgrade to Speculative Buy from Hold by Morgans .B/H/S: 1/0/0

Morgans thinks Delorean Corp may be well positioned to capture a slice of the potentially large market for biomethane in Australia, following an announcement with Brickworks ((BKW)). The rating is lifted to Speculative Buy from Hold.

A memorandum of understanding has been entered into, in an attempt to alleviate Brickworks gas consumption and carbon footprint. The broker feels this presents a sizeable growth opportunity and raises its target price to $0.275 from $0.20. 

JB HI-FI LIMITED ((JBH)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/2/1

The JB Hi-Fi business and The Good Guys business were hit by 55% of stores closed over the September quarter but improving sales trends have been evident since the Ausgust update, Macquarie notes. The NZ business remains weak.

But lockdowns have simply held up demand so the broker expects a big surge into Christmas, albeit with a caveat of possible supply chain issues. Looking further out, uncertainty hangs over electronics demand in a vaccinated world.

Macquarie nevertheless upgrades to Outperform from Hold. Target unchanged at $52.50.

MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/3/0

Citi upgrades to Neutral from Sell and raises the target to $200 from $153. The broker has also upgraded earnings forecasts by 8-10% out to FY24, to reflect a combination of lower FX assumptions and higher commodity revenue.

The broker expects the continued volatility in energy markets will benefit the commodities division. First half results are due on October 29.

ORICA LIMITED ((ORI)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/3/0

Morgan Stanley upgrades Orica to Overweight from Equal Weight, anticipating the new managing director's strategy has what it takes to drive a period of outperformance.

The broker also spies a recovery in demand, allowing the company to capitalise on a "favourable industry structure" and expects the company will introduce a cost-reduction program at its November results and will soon introduce new technology.

Equal-weight rating is retained and the target price is lowered to $12.60 from $13.20. Industry view: In-Line.

REECE LIMITED ((REH)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Buy from Lighten by Ord Minnett and Upgrade to Hold from Reduce by Morgans .B/H/S: 1/2/2

A trading update at the Reece AGM revealed revenue growth was stronger than expected but investment in the US network, inflation and supply side issues are be weighing on margins, Macquarie notes. These issues lead management to warn of assuming another solid quarter.

But the share price has de-rated sufficiently for the broker to suggest it should stabilise from here, while still fully valued. Upgrade to Neutral from Underperform, target falls to $18.40 from $18.80.

Following Reece's stronger-than-expected 1Q trading update, Ord Minnett lifts its rating to Buy from Lighten and raises its price target to $21.50 from $18. Robust growth was assessed for both A&NZ and the US.

In the US, sales growth increased 18.6% (in USD), more than double the analyst's forecast, while revenue in A&NZ came in at 9% compared to the 5% forecast by Ord Minnett.

Management has flagged a step-change in both operating expenditure and capital expenditure, in search of market share growth across the sunbelt states of America.

Morgans was pleasantly surprised in a number of ways from Reece's 1Q trading update, as group revenue rose 13% versus the broker's expectation for -4% for the 1H. The rating is upgraded to Hold from Reduce and the target price climbs to $18.83 from $14.30.

The performance of the US business was much better than expected by the analyst, and the A&NZ business was less impacted by lockdowns than estimated.The broker lifts FY22-24 earnings (EBITDA) forecasts by between 9-14%.

RELIANCE WORLDWIDE CORP. LIMITED ((RWC)) Upgrade to Buy from Neutral by UBS and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

UBS observes Reliance Worldwide is benefiting from a strong environment, with recent market checks suggesting renovations in the US will be robust for the next year.

UBS assumes the trend continues into FY23 which will also benefit from the acquisition of EZ-FLO and result in synergies. The broker believes this is a logical expansion into adjacencies for the company.

Rating is upgraded to Buy from Neutral, given the recent underperformance in the share price, and the target is raised to $6.20 from $5.90.

The broker assesses trading is solid and the acquisition of EZ-FLO is strategically sensible as it adds diversity to the business. There is only a 10% overlap with the company's products which provides the opportunity for cost and revenue synergies.

The accompanying trading update was below expectations as a reconfiguration of inventory in American retail resulted in first quarter revenue growth of just 4%. Macquarie upgrades to Outperform from Neutral and raises the target to $5.95 from $5.70.

SG FLEET GROUP LIMITED ((SGF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0

Despite the lockdowns, Macquarie notes sales activity is strong and the company continues to win accounts. The NSW government contract has been retained with increased share. The order pipeline in New Zealand is also at record levels.

The company highlights the LeasePlan integration is progressing well. There are supply chain constraints and this is evident because the order pipeline is growing as a majority of deliveries get directed to back orders.

On the back of valuation support and underlying momentum, Macquarie upgrades to Outperform from Neutral. Target is unchanged at $2.98.

SIMS LIMITED ((SGM)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/0

As a result of elevated volumes and a recovery in ferrous scrap prices UBS expects SIMS' earnings will rise in the first half and upgrades EBIT estimates by 4%, to $340m.

UBS upgrades to Buy from Neutral to reflect the earnings changes and weakness in the share price since the FY21 result. Target is raised to $17.80 from $17.30.

The broker highlights management has been proactive in positioning the business as a high-grade processor of scrap which should benefit from a further tightening in quality requirements.

SMARTGROUP CORPORATION LIMITED ((SIQ)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0

The consortium comprising TPG Global and Potentia Capital has announced it will not proceed with its $10.35 bid to acquire SmartGroup Corp, though it did propose $9.25/share. The SmartGroup Corp board has decided not to proceed. The target falls to $8.90 from $10.35.

Separately, management said it's on track for 2021 results to be in-line with consensus expectations. Credit Suisse upgrades its rating to Outperform from Neutral and continues to expect a good EPS recovery, with a potential boost from the company's uplift program by FY24.

The private equity consortium conditionally offering $10.35ps to takeover SmartGroup had cut its offer to $9.25, which the board rejected, hence the consortium has walked away. Morgans has cut its target to $8.80 from the initial $10.35 bid.

But returning to fundamentals, the broker upgrades to Add from Hold to reflect resilient earnings in the face of lockdowns and expected incremental growth in FY22. Upside is on offer, the broker suggests, if the company can execute on its Smart Future strategy.

WEST AFRICAN RESOURCES LIMITED ((WAF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

West African Resources will buy the 6.8m ounces Kiaka project for US$100m and raise $126m to support the transaction. Macquarie envisages an 11.5-year mine life for Kiaka, producing 254,000 ounces per annum at an all-in sustainable cost of US$1213/oz.

Significantly, previous work done on the project reveals a conventional cyanide leach plant will be sufficient for about 90% recovery.

This has potential to be a meaningful asset, the broker asserts, and upgrades to Outperform from Neutral. Target is raised to $1.60 from $1.50. 

Downgrade

COOPER ENERGY LIMITED ((COE)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/2/1

Ord Minnett found Cooper Energy's September-quarter update but a "mixed" affair as both production and realised pricing missed the mark.

On the positive side, the troubled Orbost operation is finally showing improvement in operations. The broker has made only minor amendments.

Target price remains 33c but as the share price has moved higher, the recommendation shifts to Accumulate from Buy.

CASHREWARDS LIMITED ((CRW)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/0/0

Ord Minnett believes the takeover offer by ANZ Bank's ((ANZ)) innovation and investment arm, 1835i, for Cashrewards is likely to proceed. This is because the existing 19% shareholder (1835i) is the natural acquirer, and it has recently extended a $15m loan to Cashrewards.

On a reduced likelihood of a superior offer, the broker reduces its rating to Accumulate from Buy and lowers its target price to $1.30 from $2.

POINTSBET HOLDINGS LIMITED ((PBH)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/1/0

Following a trading update by Pointsbet Holdings, Ord Minnett points to only a -1% miss on US customer numbers though average turnover per active customer was only $2,019. Management feels increasing competition is to blame for a loss of market share.

Due to that risk of competition, the broker lowers its rating to Hold from Buy and slices its target price to $8.80 from $13.10.

New Jersey market share fell to 3.9% in the quarter from 7.8% in the June quarter. More positively, the Australian business was 10%
ahead of the analyst's expectation at the net win line.

SILK LASER AUSTRALIA LIMITED ((SLA)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/0/0

Ord Minnett lowers its rating for Silk Laser Australia to Accumulate from Buy, after a strong recent run in the share price. The target price rises to $5.15 from $4.85, after the September quarter was 5% ahead of the broker's expectations.

The analyst notes the company continues to self-fund growth towards its 150-clinic target from 118. 

WOOLWORTHS GROUP LIMITED ((WOW)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/2

UBS has downgraded Woolworth's Group to Sell from Buy (double downgrade) as the latest market update revealed more signs of a broad slowing for food retailing in Australia.

Woolworths' main competitor, Coles ((COL)), was already rated Sell.

UBS sees margin pressure on the horizon, and a share price at elevated level. The sector as a whole is facing de-rating, predicts the broker. Target drops to $37 from $40.

Only minor changes have been made to forecasts.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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