Weekly Reports | Mar 14 2022
This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL
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 March 7 to Friday March 11, 2022
Total Upgrades: 3
Total Downgrades: 5
Net Ratings Breakdown: Buy 59.25%; Hold 34.77%; Sell 5.98%
For the week ending Friday March 11 there were three upgrades and five downgrades to ASX-listed companies covered by brokers in the FNArena database.
Media reports of China-based Tsingshan being caught on the wrong side of a short squeeze in nickel prices resulted in broker downgrades for Nickel Mines. The company is a junior partner co-invested in several Indonesian nickel projects with Tsingshan.
Ord Minnett felt negative sentiment will weigh on Nickel Mines’ near-term share price and downgraded its rating to Hold from Accumulate. Moreover, according to Credit Suisse (Neutral from Outperform) the company’s large cost base exposure to price rises in nickel ore and coal were already placing pressure on margins.
Brokers in the FNArena database made no material percentage changes to price targets last week.
Meanwhile, the only material changes made by brokers to forecast earnings were positive. Mineral Resources received the largest percentage upgrade after Citi’s commodity team raised near-term commodity price forecasts in the belief the Russia/Ukraine will prolong the pandemic-recovery boom.
Thermal coal, oil, nickel, aluminium and iron ore received the biggest upgrades as Russia/Ukraine combined is a key exporter.
The broker upgraded its rating for Mineral Resources to Buy from Neutral not only because of high leverage to forecast iron ore price increases but also exposure to increased lithium price forecasts. The $58 target price was maintained.
Next was Auckland International Airport, after Credit Suisse raised its rating to Outperform from Neutral in expectation of strong post-pandemic travel and the potential for higher pricing.
This comes as the NZ government removes the 10-day self-isolation period for NZ citizens and highly skilled workers. Also, the broker is anticipating a full opening of borders to Australia (July) and the rest of the world in October.
Regarding higher prices, the analyst feels the Commerce Commission may judge airports as higher risk than pre-covid and allow the company to set higher aeronautical pricing in the next regulatory period.
New Hope Corp was next on the list of companies that received the largest percentage increase in forecast earnings. This was partly attributable to the increased coal price forecasts made by Citi’s commodity team last week.
In addition, Morgans previewed the company’s pre-released 1H results due on March 22, and now sees upside for the FY22 dividend. The broker estimates 36cps and raises its target price to $3.05 from $2.61 on stronger recent prices for coal.
While the broker maintained its Add rating, there's some concern that spot coal prices may have peaked, which may result in a cheaper entry point for shares.
Before last week, just two brokers in the FNArena database were covering Gold Road Resources and had ventured earnings forecasts. The average earnings forecast rose when UBS initiated coverage with a Buy rating and $1.94 price target.
The 50%-owned Gruyere gold mine offers exposure to a long-life producing gold asset with its best years ahead, according to the broker. Increased production with almost no additional capex is expected, and the increased production rates should keep downward pressure on unit costs.
The company has a 9.4% five-year gold production compound annual growth rate (CAGR), which the broker finds compelling in a sector struggling for growth
Total Buy recommendations take up 59.25%of the total, versus 34.77% on Neutral/Hold, while Sell ratings account for the remaining 5.98%.
Upgrade
INCITEC PIVOT LIMITED ((IPL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/0
Continuing supply tightness and volatility looks to benefit nitrogen and phosphate prices, and therefore companies with exposure. Credit Suisse upgrades its June quarter fertiliser forecasts given elevated spot pricing, and Incitec Pivot stands to gain.
The recommendation from Russia that producers halt fertiliser exports should add to an already tight market, but largely fixed input costs should see Incitec Pivot benefit from an extended run in fertiliser prices, suggests Credit Suisse.
The broker acknowledges investor negativity around recurring problems at the company's WALA plant, including a -US$110m earning impact from a leak in the first half, but finds the current price environment compelling.
The rating is upgraded to Outperform from Neutral and the target price increases to $3.85 from $3.58.
MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/1
Citi’s commodity team has raised near-term commodity price forecasts materially, as the Russia/Ukraine crisis looks to be prolonging the pandemic recovery boom.
Thermal coal, oil, nickel, aluminium and iron ore benefit the most as Russia/Ukraine is considered a key exporter, explains the analyst.
The broker upgrades its rating for Mineral Resources to Buy from Neutral. As a higher cost iron ore producer, the company has high earnings leverage to iron ore price increases.
In addition, the analyst considers the company to be a lithium (price forecasts up) play in the short run.The $58 target price is maintained.
SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/4/0
Ord Minnett upgrades its rating for Sonic Healthcare to Buy from Hold after a -30% decline in share price in 2022. While earnings from covid testing are expected to contract sharply, the core diagnostic business is anticipated to recover.
Moreover, the broker suggests a new $500m share buyback will be supportive and potential exists for M&A activity given strong balance sheet capacity. The target slips to $37.30 from $38.70.
Downgrade
BEACH ENERGY LIMITED ((BPT)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 5/1/1
Despite limited exposure to spot pricing Beach Energy's share price rose 11% since the start of March, driving Macquarie to downgrade. By comparison Woodside Petroleum ((WPL)) rose 16%, Santos ((STO)) rose 8% and Karoon Energy ((KAR)) rose 13%.
The broker finds the share price rally excessive given peers offer better exposure, noting if spot prices of US$127 per barrel of oil are maintained through to the end of FY22 Beach Energy could generate as much as an additional $79m in free cash flow.
Accounting for oil pricing earnings forecasts are updated 6% and -2% for FY22 and FY23.
The rating is downgraded to Underperform from Neutral and the target price increases to $1.55 from $1.50.
NICKEL MINES LIMITED ((NIC)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0
Ord Minnett expects negative sentiment will weigh on Nickel Mines' near-term stock price given ties to joint venture partner Tsingshan Holding, following allegations that Tsingshan spiked a nickel price rally as it attempted to address a shortfall.
Nickel prices more than doubled on Monday, reaching more than US$100 per kilogram from US$45 per kilogram, before the London Metal Exchange suspended trading, with limited spot inventory driving the rally.
With reports suggesting the company was short 100,000 tonnes of nickel at the beginning of the year, Ord Minnett predicts losses of -US$2.0-10.0bn, but adds the Chinese state has likely already moved to bail out Tsingshan.
The rating is downgraded to Hold from Accumulate and the target price of $1.60 is retained.
Tsingshan Holdings allegedly secured credit agreement to cover the cost margin requirements that saw the company drive up nickel prices earlier in the week, but Credit Suisse notes Nickel Mines' market perception impact will likely linger given its relationship with Tsinghshan.
Despite this, large cost base exposure to price rises in nickel ore and coal were already placing pressure on Nickel Mines' margins. Credit Suisse attributes earnings per share forecast changes to higher unit costs.
The rating is downgraded to Neutral from Outperform and the target price decreases to $1.35 from $1.74.
PARADIGM BIOPHARMACEUTICALS LIMITED ((PAR)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/0/1
Morgans believes Paradigm Biopharmaceuticals' chance of achieving a major de-risking event (partial exit via a partnership) for its major asset has decreased.
This comes as the US Patent Office has issued a final rejection notice for the company's key osteoarthritis patent application.
The broker lowers its rating to Reduce from Hold and reduces its target to $0.79 from $1.29 due to decreased confidence on existing IP claims, leadership direction and the cost outlook.
RIO TINTO LIMITED ((RIO)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/1
Citi’s commodity team has raised near-term commodity price forecasts materially, as the Russia/Ukraine crisis looks to be prolonging the pandemic recovery boom.
Thermal coal, oil, nickel, aluminium and iron ore benefit the most as Russia/Ukraine is considered a key exporter, explains the analyst.
While noting Rio Tinto is not expensive by any means, the broker downgrades its rating to Neutral from Buy, as the share price has appreciated 33% over the last three months. The target rises to $120 from $115.
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED
For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED
For more info SHARE ANALYSIS: KAR - KAROON ENERGY LIMITED
For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED
For more info SHARE ANALYSIS: NIC - NICKEL INDUSTRIES LIMITED
For more info SHARE ANALYSIS: PAR - PARADIGM BIOPHARMACEUTICALS LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: STO - SANTOS LIMITED