Weekly Ratings, Targets, Forecast Changes – 11-02-22

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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 February 7 to Friday February 11, 2022
Total Upgrades: 8
Total Downgrades: 8
Net Ratings Breakdown: Buy 58.39%; Hold 34.88%; Sell 6.73%

For the week ending Friday February 11, there were eight upgrades and eight downgrades to ASX-listed companies covered by brokers in the FNArena database.

GrainCorp had the largest percentage gain in target price after the guidance range for FY22 earnings and profit were beats of 28-44% and 40-67%, respectively, versus the UBS forecast ranges. The company is experiencing increasing demand and prices for Australian grain during a period of supply challenges in the Northern Hemisphere.

However, Morgans (downgrade to Hold from Add) is wary of near perfect trading conditions across both grain Marketing and Processing. UBS agrees and suggests the current time probably represents peak-cycle earnings and retains its Neutral rating. Macquarie is more positive and keeps an Outperform rating and lifts it target price by 18% to $9.48.

Meanwhile Cimic Group had the largest percentage fall in target price last week. The group’s FY21 profit result was less than Macquarie's forecast and was at the bottom end of prior guidance by management.

The broker keeps a Neutral rating while awaiting increased earnings and the delivery of improved cash conversion, with Leighton Asia the key in that regard. Credit Suisse (Neutral) believes recent contract wins ensure a robust pipeline of work.

Macquarie was responsible for the next biggest percentage fall in target price, after slashing Nearmap’s 12-month target to $1.30 from $2.20 and lowering its rating to Underperform from Neutral.

The analyst sees competition building from peer Aerometix in the A&NZ aerial mapping market, of which Nearmap has an 80% share. For the more fragmented North American market, the broker is concerned about the expenditure (and litigation risk) required to build upon a 3% share.

Nearmap also featured fifth on the list of companies experiencing the largest percentage fall in forecast earnings last week. Leading that unfortunate list was Star Entertainment Group after Macquarie cut its FY22 earnings forecast by -15% in response to a pre-release of first half results.

As indicated by Macquarie’s Outperform rating, there appears no cause for alarm as the market is expected to look through FY22 covid disruptions. UBS (Buy) and Ord Minnett (Accumulate) seem to agree and retain their respective ratings and target prices.

Next up was Megaport, after the release of second quarter results. While most of the five brokers in the FNArena database are buoyant about the company’s prospects, the spectre of rising interest rates weighs upon Morgans' view.

Additionally, Ord Minnett voices concerns around an investment for growth, which management expects to bear fruit in the current half though the broker feels FY23 may be more likely.

Mineral Resources reported first half earnings -50% below Morgan Stanley’s forecast, which was already -16% below the consensus estimate. The miss was due to higher costs and lower revenues for iron ore, and higher costs at Mt Marion (lithium). In addition, management guided to increased capital expenditure across all assets.

Forecast earnings by brokers for Alliance Aviation Services also suffered, following a weaker than expected first half result and guidance for FY22. Morgans investment thesis, predicated on strong FY23 earnings growth, is still expected. Credit Suisse agrees on the timing for the earnings uplift which should flow from an expanded fleet.

Due to a data glitch, it’s best to ignore the position of oOh!media atop the table for the largest percentage increase in forecast earnings.

GrainCorp was the “true” leader for the same reasons put forward above to explain the company's largest percentage gain in target price set by brokers in the FNArena database last week.

Forecast earnings for St. Barbara also benefited last week, after Credit Suisse amended its calculations pertaining to the company's hedge book. As a result, FY22 forecast profits rose to $46m from -$24m, and to $62m from $17m in FY23. The broker warns not to expect an interim dividend as the company will likely conserve capital ahead of an increased capital spend.

Finally, six brokers in the FNArena database adjudicated on James Hardie’s third quarter, and generally agreed results were in-line with expectations. While Morgan Stanley nods approvingly to increased FY22 guidance (and favourable FY23 guidance), the old chestnut of a rising interest rate environment, and its impact on housing activity, is uppermost in thoughts. The broker retains its Equal-weight rating.

Total Buy recommendations take up 58.39% of the total, versus 34.88% on Neutral/Hold, while Sell ratings account for the remaining 6.73%.

Upgrade

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ((ANZ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/0

ANZ Bank has issued its first quarter trading update, showing a net interest margin compression to 1.57% from 1.65% at the end of FY21 and prompting Credit Suisse to reduce its expected net interest margin for the year down three basis points to 1.56%. 

While the bank's update did not include earnings, Credit Suisse issued a -4% decrease to earnings, earnings per share and dividends per share forecasts in FY22, and a -1% decrease to each in FY23. The expenses forecast increases $50m in FY22 given investment.

The broker finds ANZ Bank to be better positioned at this point in the cycle, although challenges remain, and notes the company trades at a -16% discount to the sector.

The rating is upgraded to Outperform from Neutral and the target price of $28.50 is retained.

BAPCOR LIMITED ((BAP)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 6/1/0

Bapcorp's December-half result broadly met Ord Minnett's forecasts, having suffered store closures, higher costs, supply-chain disruptions and investment in a new head office and Victorian distribution centre. The dividend outpaced the broker's estimate at 10c.

Ord Minnett expects first-half headwinds should dissipate in the June half and spies potential for growth in Trade Auto Parts and Bapcor's A&NZ store network. The broker also forecasts an uptick in operating margins and leverage through higher own-brand sales and long-term growth prospects in Asia.

Now the worst is out of the way, Ord Minnett upgrades to Buy from Hold and raises the target price to $8.60 from $7.20.

CENTURIA OFFICE REIT ((COF)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/1

Centuria Office REIT reported fist half funds from operations of 9.8c which, Morgans notes, included surrender lease payments that would otherwise have contributed to the second half.

The result nonetheless highlighted stable metrics, the broker suggests, and FY22 guidance is reiterated. Investor demand remains strong for a pure-play office REIT despite omicron, so at a -10% discount to net tangible asset value the broker upgrades to Add from Hold.

Target unchanged at $2.50.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/3/1

UBS has again downgraded earnings for Domino Pizza Enterprises, cutting the target price -20% to $120 from $150.

But it upgrades to Buy from Neutral to reflect the strident retreat in the share price from nearly $165 in September.

The share price slumped after AGM commentary guided to weaker-than-expected Japanese earnings (courtesy covid), and rising inflation.

UBS maintains Domino's growth prospects remain attractive despite headwinds, citing developed markets; same-store-sales growth; margin expansion; and new store growth. It also believes Domino's experience in home delivery positions it well for structural ESG trends and believes the company is better positioned than many to manage rising inflation challenges.

FY22 EPS forecasts fall -8% and FY23 forecasts fall -11%.

LENDLEASE GROUP ((LLC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/0/1

While Ord Minnett acknowledges a poor short-term outlook for Lendlease Group (and lowers its target price to $12.50 from $13, there's considered to be potential for significant medium-term upside. Thus, the rating rises to Accumulate from Hold.

The potential upside derives from a $114bn development pipeline and $40bn of funds under management (FUM), explains the analyst. The stock is expected to rerate as a more predictable earnings stream (in two or three years) is being delivered.

The broker feels the upcoming 1H result will be the low point for the company.

MIRVAC GROUP ((MGR)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0

Mirvac Group's first half result was in line with Citi. FY22 guidance is unchanged given omicron disruptions, as the broker expected, although the market may have been disappointed.

Operationally, the development business is performing well, Citi notes, offsetting near term covid impacts on the investment portfolio. New forecasts reflect higher development profits and lower net operating income.

Target rises to $3.13 from $2.95 on higher property values. On recent share price weakness the broker upgrades to Buy from Neutral.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

In a review of the Retail sector, Ord Minnett points out retailers are entering the reporting season with low sales and margin expectations for the first time during the pandemic. Solid results, cautious outlook statements and volatility are expected.

The broker upgrades its rating for Super Retail Group to Accumulate from Hold following a share price fall leading into results. The target rises to $14.50 from $14.20.

A strong online offering, and the trend towards driving and camping holidays are a few factors that should provide upside potential for earnings, explains the analyst.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0

Suncorp's first half profit was down -21% year on year but 22% above consensus forecasts. The dividend of 23c beat a consensus 17c.

Morgans sees this as a solid result, highlighted by improving top line momentum and a positive trajectory being seen in the key
underlying insurance margin.

Morgans upgrades its FY22 earnings forecast and raises its target to $13.19 from $12.25. Solid business momentum and cost-outs into FY23 lead to an upgrade to Add from Hold.

Downgrade

APA GROUP ((APA)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/0

After APA Group's share price has climbed towards Morgans' $9.98 target price, the broker's rating is now lowered to Hold from Add.

No changes are made to the analyst's forecasts. First half results are released on 23 February.

DOWNER EDI LIMITED ((DOW)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/0

Downer EDI reported earnings of $181.6m in the first half, a miss on Credit Suisse's forecast $204m, and notably the company retracted previous guidance as covid disruptions to operating conditions continue, making outlook forecasts difficult to determine. 

The broker downgrades earnings per share estimates -15-20% for FY22-FY24. While covid impacts are transient, Credit Suisse does not find the stock's current pricing low enough to reap value once normalisation occurs.

The rating is downgraded to Neutral from Outperform and the target price decreases to $5.40 from $6.50.

GRAINCORP LIMITED ((GNC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/0

Morgans is wary of near perfect trading conditions across both grain Marketing and Processing and lowers its rating for GrainCorp to Hold from Add on valuation. This comes despite FY22 earnings guidance which was materially higher than the consensus estimate.

The broker upgrades its FY22-24 earnings (EBITDA) forecasts by 33.3%,15.8% and 3.9%, respectively, on the upgraded guidance, and because high carry-over grain will assist future earnings. The target price rises to $8.06 from $7.90.

JANUS HENDERSON GROUP PLC ((JHG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/0

Macquarie downgrades its rating for Janus Henderson to Neutral from Outperform after a recent outperformance relative to peers and with the prospect of a weaker equity performance accelerating outflows.

This comes as the December quarter operating result beat the broker's forecast though non comp expense guidance was a material miss versus the flat growth forecast. The target price falls to $52 from $64.

NANOSONICS LIMITED ((NAN)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/0/1

Ord Minnett has tempered its growth expectations for both Nanosonics’ current business and the yet-to-be-launched Coris device.

The broker cuts its profit forecast to breakeven, largely from lost sales to GE Healthcare, after the announced changes to distributor arrangements. These changes are thought to offer both greater opportunity and risk, as the company takes greater control over its destiny.

EPS estimates are also lowered by -30% to reflect slower sales penetration assumptions and higher costs, explains the analyst.

The Lighten rating is unchanged and the target falls to $4.05 from $6.40.

NEARMAP LIMITED ((NEA)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/0/1

Macquarie forecasts the aerial imagery market to see 13-14% growth over both A&NZ as well as North America over the coming
few years. Major industries already using aerial mapping include government, insurance, engineering, and solar companies amongst other users.

Nearmap enjoys some 80% of the A&NZ market, but the broker sees competition building from Aerometrex ((AMX)). In the 15x larger but more fragmented North American market, the broker sees opportunity for Nearmap to increase its current 3% share.

But this will require greater operating expenditure, and litigation risk remains. The broker thus downgrades Nearmap to Underperform from Neutral, target falls to $1.30 from $2.20.

VULCAN STEEL LIMITED ((VSL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/1/0

A good first half result from Vulcan Steel, with earnings 2% above consensus forecasts, was coupled with a second upgrade to full year guidance. The company now expects earnings of NZ194-204m, up from NZ$174-184m, and profit of NZ$107-114m, up from NZ$93-100m. 

First half cash flow was weak as the company undertook inventory build to safeguard service levels amid supply chain constraint. The broker notes supply chain constraint and rising prices could persist for 6-12 month, and it is wary of where margins will normalise. 

The rating is downgraded to Neutral from Outperform and the target price increases to $9.80 from $9.60.

WESFARMERS LIMITED ((WES)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/5/1

In a review of the Retail sector, Ord Minnett points out retailers are entering the reporting season with low sales and margin expectations for the first time during the pandemic. Solid results, cautious outlook statements and volatility are expected.

The broker lowers its rating for Wesfarmers to Hold from Accumulate largely due to market and peer deratings. Exposure to housing will be a likely headwind in a rising interest rate environment, notes the analyst.

The target price falls to $57 from $60.60.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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