Weekly Ratings, Targets, Forecast Changes – 10-12-21

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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 December 6 to Friday December 10, 2021
Total Upgrades: 11
Total Downgrades: 4
Net Ratings Breakdown: Buy 56.81%; Hold 36.49%; Sell 6.70%

For the week ending Friday December 10, there were eleven upgrades and four downgrades to ASX-listed companies covered by brokers in the FNArena database.

Rio Tinto featured in the tables for both an upgrade and a downgrade to its rating last week. 

Morgan Stanley (upgrade to Overweight from Equal-weight) feels most negative news has been factored into a share price that has underperformed rival BHP Group and the ASX200 Materials Index. Risks are also skewed to the upside, considering the broker’s positive view for aluminium and an improving economic and housing outlook in China.

By contrast, Ord Minnett downgraded its rating for Rio Tinto to Hold from Buy, following material reductions to its China steel production assumptions. This resulted in a lowering of iron ore price forecasts by -12% to US$92/t in 2022 and by -10% to US$90/t in FY23. The broker feels continuing operational challenges may prompt marginal investors to prefer other stocks in the sector.

By initiating coverage on Redbubble with a $3.45 target price last week, UBS lowered the consensus database forecast target price to $4.93 (now based upon three brokers) for the company. The new forecast target price suggests 48% upside to the company’s latest share price.

UBS explains its forecasts are more conservative than consensus estimates, as reinvestment is needed to drive double digit top-line growth. Furthermore, surging covid-related sales are expected to normalise. The broker commenced its coverage with a Neutral rating. This was the only material change to a forecast target price in the FNArena database last week. 

A glitch in data had Star Entertainment atop the list for the largest percentage decline in forecast earnings by brokers last week, so best to ignore. 

That ‘honour’ fell to Cooper Energy after management downgraded FY22 earnings and production guidance. According to Morgans, this was due to added costs from a spike in domestic spot gas prices when the company had to source additional third party volumes.

Management also highlighted a two month delay in planned Phase 2B works at Orbost. As bad as all this sounds, the analyst is unconcerned over the temporary nature of current setbacks and maintained its Add rating.

Finally, Redbubble was next on the list for the largest percentage reduction in forecast earnings by brokers last week. The above-mentioned explanation for the fall in forecast target price for the company equally applies.

Total Buy recommendations take up 56.81% of the total, versus 36.49% on Neutral/Hold, while Sell ratings account for the remaining 6.70%.

Upgrade

EBOS GROUP LIMITED ((EBO)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/0

In a transaction that will substantially accelerate strategy and scale, according to Credit Suisse, Ebos Group has announced the acquisition of LifeHealthcare for -$1.2bn. The broker upgrades its rating to Outperform from Neutral and hikes its target price to $41 from $31.

LifeHealthcare is one of the largest independent distributors of third party medical devices, consumables and capital equipment in Australia and New Zealand, explains the analyst. The company also manufactures allograft material.

There will be a $642m share placement, a $100m retail offer and the balance will be raised by new term loan debt facilities. Credit Suisse estimates the acquisition will be 11% EPS accretive in FY23/24.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/5/0

UBS resumes coverage on Evolution Mining. Having bought out Glencore Australia for $1bn, Evolution Mining now owns 100% of the Ernest Henry project, increasing copper to 25% of group revenue and adding 380,000 ounces of gold equivalent per annum to production. 

The broker expects weaker near-term cash flow as the company enters reinvestment, committing $600m capital expenditure to developing Cowal over three years. This follows a two-year cash burn from Red Lake production despite the attractive 11m ounce resource.

Coverage resumes with an upgraded Neutral rating. Target price increases to $3.95 from $3.90.

IGO LIMITED ((IGO)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/1

Cit has published its annual commodities 2022 Outlook and says that, after five solid quarters of outperformance, it expects the sector to take a breather, setting up a "more diversified sector for 2022 and 2023". Citi expects energy and bulk commodities will underperform the market and that base metals will outperform.

Iron ore is expected to stage a U-shaped price move next year as China eases credit sales and property bounces back. Citi expects iron ore prices to average US$88/t in the June half and $105 in the second half, before retreating in the longer term to $60/t-$80/t as the seaborne market declines.

Citi also forecasts higher lithium prices but spies cost headwinds as energy inflation, higher feedstock prices, wages and logistics costs kick in. 

Citi upgrades IGO to Buy from Neutral and increases the target price rises to $12.40 from $10.80 to reflect a stronger earnings profile, Citi believing the company's move into lithium was well timed.

FY22 earnings forecasts fall 9% but Citi says the discounted cash flow valuation is still strong at $11.30 a share; and admires the balance sheet at $888m net cash.

METCASH LIMITED ((MTS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

Metcash reported a solid first half result, Macquarie suggests, with hardware the standout performer driven by strength in Trade and the Total Tools acquisition. IGA posted sales growth well ahead of pre-pandemic levels.

Strong momentum has been sustained into the second half to date, despite state reopenings, with hardware up 20%. The company has accelerated its investment in online, the broker notes, but has also warned of supply disruptions and higher costs.

The broker upgrades to Outperform from Neutral. Target rises to $4.70 from $4.10.

NORTHERN STAR RESOURCES LIMITED ((NST)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/1/0

UBS reinstates coverage of Northern Star Resources with a new analyst and a Buy rating, up from Neutral. The broker sees management's forecast 25% production growth as conservative and sees more potential at the Super Pit.

The analyst feels the mid-2022 expansion study release will be a key catalyst though cautions the company is more exposed to the tight
WA labour market than peers. UBS sets a $11.20 target price down from $14.40 prior to the hiatus in coverage.

PERPETUAL LIMITED ((PPT)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/3/0

Citi sees a potential opportunity after the recent slide in Perpetual's share price and upgrades its rating to Buy from Neutral and retains its $40.40 target. Among other positives, the broker highlights the company's strong ESG tilt and new growth opportunities for Corporate Trust.

Management is confident in achieving growth (and has an ongoing interest in acquisitions) and cites positive momentum in all its businesses.

RIO TINTO LIMITED ((RIO)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/1

Morgan Stanley feels most negative news has been factored into the current Rio Tinto share price and upgrades its rating to Overweight from Equal-weight and raises its target price to $110.50 from $101.00. In-Line industry view.

The broker feels risks are skewed to the upside with a positive view for aluminium and an improving economic and housing outlook in China. In addition, Morgan Stanley notes shares have underperformed both rival BHP Group ((BHP)) and the ASX200 Materials Index.

See also RIO downgrade.

RESMED INC ((RMD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Although semiconductor shortages are creating near-term pressure on device supply for ResMed and peers, Macquarie notes industry commentary suggests a backlog of new patient diagnoses will be addressed by 2026. 

Macquarie expects an increase in industry device volume growth from 2023 leading to potential share gains for ResMed. The broker is forecasting earnings per share 18% and 12% ahead of consensus for FY23 and FY24. 

The rating is upgraded to Outperform from Neutral and the target price increases to $39.00 from $38.00.

SOUTH32 LIMITED ((S32)) Upgrade to Add from Hold by Morgans .B/H/S: 7/0/0

As Sierra Gorda in Chile nears completion, Morgans incorporates the recently acquired copper operations into forecasts, triggering a rating upgrade to Add from Hold. Moreover, shares offer an attractive dividend yield and there's potential for new growth.

The Sierra Gorda acquisition is immediately earnings accretive for FY23 notes the analyst, who also cites the company's superior diversification compared to ASX mining peers. The target price rises to $4.10 from $3.77.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Buy from Neutral by Citi .B/H/S: 6/0/0

Cit has published its annual commodities 2022 Outlook and says that, after five solid quarters of outperformance, it expects the sector to take a breather, setting up a "more diversified sector for 2022 and 2023". Citi expects energy and bulk commodities will underperform the market and that base metals will outperform.

Iron ore is expected to stage a U-shaped price move next year as China eases credit sales and property bounces back. Citi expects iron ore prices to average US$88/t in the June half and $105 in the second half, before retreating in the longer term to $60/t-$80/t as the seaborne market declines.

Citi also forecasts higher lithium prices but spies cost headwinds as energy inflation, higher feedstock prices, wages and logistics costs kick in. 

Citi upgrades Whitehaven Coal to Buy from Neutral after the recent strong retreat in the share price. Target price eases to $3.20 from $3.50 to reflect a weaker earnings outlook, the broker forecasting lower thermal coal prices ($110/t from $120/t in CY22; and CY23 unchanged at $75/t).

FY22 earnings forecasts fall -9% but Citi says the discounted cash flow valuation is still strong at $4.40 a share; expects the balance sheet to be net cash; and notes the company is offering a dividend yield of 6.3%.

ZIP CO LIMITED ((Z1P)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/2/1

Recent share price weakness has improved Zip Co's risk-reward profile says UBS, despite first-half total transaction value tracking below the broker's expectations. 

Previously above consensus, the broker reduces first-half total transaction value forecasts to $4.49bn from $4.81bn on market updates. UBS says US growth may be slowing but it is still expected to surpass Australia and New Zealand as the company's largest market. 

UBS upgrades to Neutral from Sell. Target price decreases to $5.20 from $5.50.

Downgrade

FORTESCUE METALS GROUP LIMITED ((FMG)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/2

Ord Minnett has made material reductions to its China steel production assumptions. As a result, the strategists have lowered iron ore price forecasts by -12% to US$92/t in 2022 and by -10% to US$90/t in FY23.

The broker lowers its target price for Fortescue Metals Group to $20 from $22 and downgrades to Hold from Buy given the company is trading near the broker's net-present-value estimate.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 5/1/1

Morgan Stanley downgrades IAG to non-consensus Underweight and cuts the target price to $3.75 from $4.80, listing 10 contributing factors that should increase the company's capital costs and hurt the company's ESG prospects.

The broker cites IAG's skew to CAT-prone short-tail lines, NZ reform risks, higher catastrophe-cost volatility; higher reinsurance pricing and tighter access; quota share reinsurance renewal risks; regulatory risk on personal reinsurance pricing; capital regulatory risk; consumer data right concerns; CDR regulation; reserving risk; and a remuneration report strike.

But wait, there's more.

Morgan Stanley casts a nervous eye to margin headwinds and market share losses; and expects an extended $1.8bn capital buffer may be required to offset reduced capital flexibility – although the release of business interruption combined with the liberation of tax assets could be another option.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/2/1

Ord Minnett has made material reductions to its China steel production assumptions. As a result, the strategists have lowered iron ore price forecasts by -12% to US$92/t in 2022 and by -10% to US$90/t in FY23.

The broker lowers its target price for Rio Tinto to $102 from $113.

Ord Minnett downgrades the rating to Hold from Buy, expecting continuing operational challenges may prompt marginal investors to prefer other stocks in the sector.

See also RIO upgrade.

SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/4/0

Impacts of the ERP system rollout have driven Sigma Healthcare to issue a downgrade to full-year profit, now guiding to a -10% year-on-year underlying earnings decline. Credit Suisse highlights implementing rollout during covid restrictions impacted customer experience.

The broker notes updated guidance implies a -27% year-on-year underlying earnings decline in the second half, and has accordingly updated its underling earnings forecast -15% in FY22 to $74.2m, or a -10.8% year-on-year decline, and earnings per share -29%.

The rating is downgraded to Neutral from Outperform and the target price decreases to $0.53 from $0.70. 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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