Weekly Reports | Mar 28 2022
This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP
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 21 to Friday March 25, 2022
Total Upgrades: 5
Total Downgrades: 6
Net Ratings Breakdown: Buy 58.86%; Hold 35.16%; Sell 5.98%
For the week ending Friday March 25 there were five upgrades and six downgrades to ASX-listed companies covered by brokers in the FNArena database.
Atlas Arteria received two ratings downgrades from two separate brokers. In lowering its rating to Neutral from Outperform, Macquarie considered rising French fuel prices (car trips are partly discretionary on its French toll road), soft traffic data so far this year and an unfavourable exchange rate.
Morgans also lowered its rating to Hold from Add due to concerns around exchange rate impacts as well as rising sovereign bond yields. The broker found it hard to reconcile these movements with the recent strength in the company’s share price.
Brokers made no material percentage changes to price targets last week.
Meanwhile, Beach Energy had the largest percentage increase in forecast earningsafter Citi’s commodities team adjusted its forecasts for the sector.
The Brent oil price forecast lifted by US$20 a barrel to average US$91 a barrel in 2022, while the broker's gas price forecast increased US$10 per million thermal units to an average of US$22pmtu. Beach Energy remains the broker’s top pick and its only Buy-rated stock in the sector.
While first half results for New Hope Corp were largely pre-announced, brokers upgraded earnings forecasts. The combined 17cps ordinary dividend and surprise 13cps special dividend were largely due to higher-than-expected first half cash flows and a very strong second half cashflow outlook, according to Morgans.
Credit Suisse also noted continuing tightness in the coal industry, which may see New Hope command a premium price above US$200 per tonne for several years and increased its pricing forecast for the company to US$230 per tonne in the second half.
Brickworks also released first half results last week and brokers generally raised earnings forecasts. Ord Minnett raised its rating to Buy from Accumulate on potential within the Property division for further development opportunities and rental income growth.
Meanwhile, UBS retained its Neutral rating in the belief that Property division upside is adequately reflected in the current share price, and noted uncertainties surrounding the new operating land trust, and for US property.
Following a FY22 guidance downgrade, Boral received the largest percentage downgrade to earnings forecasts by brokers last week. Management cited not only recent rain and flood disruptions, but also negative coal and fuel impacts.
The broker also noted diesel hedging expires in April 2022 and coal costs are unhedged, which implies ongoing risks should prices remain high.
Finally, Webjet received the second largest earnings forecast downgrade though Ord Minnett advocates investors buy into weakness, given ongoing volatility. While the upcoming FY22 result (March year-end) will be weaker than initially expected, strong demand for 2023 Northern Hemisphere summer holiday travel is forecast. Additionally, the analyst estimates the business-to-business and business-to-consumer divisions should win material market share.
Total Buy recommendations take up 58.86% of the total, versus 35.16% on Neutral/Hold, while Sell ratings account for the remaining 5.98%.
Upgrade
BHP GROUP LIMITED ((BHP)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/0
While Morgans expects growth in iron ore pricing growth to slow the broker anticipates supply tightness will continue to support continuing strong earnings in the sector, maintaining the market remains strong with benchmark pricing of US$140-150 per tonne.
While pressure is likely to be felt from surging fuel costs and labour and supply constraints, the broker doubts these will have significant impact on pricing.
BHP Group remains Morgans' top sector pick given superior diversification and ability to mitigate cost and labour pressures. Key to the company's outlook, according to the broker, is growth in China and internationally.
The rating is upgraded to Add from Hold and the target price increases to $51.80 from $48.70.
BRICKWORKS LIMITED ((BKW)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/3/0
Ord Minnett raises its rating for Brickworks to Buy from Accumulate following 1H results that indicated further upside potential from the Property division. It's estimated upside will derive from further development opportunities and rental income growth.
First half profit of $330m exceeded the broker's $258m forecast, while the 22cps dividend was in-line.
Along with upside from Property operations, the analyst notes a strong pipeline of work from housing activity in Australia and improving
non-residential construction in the US. The target price is lowered to $26 from $26.20.
RED 5 LIMITED ((RED)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0
Morgans believes the pathway to gold production in the next quarter at Red 5's King of the Hills project has been derisked and raises its rating to Add from Hold. The target also rises to $0.48 from $0.34.
Energisation and commissioning of the SAG mill remains the final major activity to be completed, explains the analyst. It's felt the share price will continue to re-rate in coming months as investors also adjust their risk discounts.
SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0
With Sonic Healthcare's shares underperforming the ASX200 by -22% year-to-date, Credit Suisse believes the market is underestimating the opportunity that remains for the company in covid testing.
With the shift to rapid antigen tests, the broker believes PCR testing levels have stabilised at 80,000 per day and expects this will normalise to 50,000 tests per day, forecasting a $890m second half revenue benefit compared to the $1.3bn achieved in the first half.
Combined with pent-up demand driving strong base business performance, Credit Suisse increases earnings per share estimates 6% and 3% in FY22 and FY23 respectively.
The rating is upgraded to Outperform from Neutral and the target price of $40.00 is retained.
VITA GROUP LIMITED ((VTG)) Upgrade to Speculative Buy from Hold by Ord Minnett .B/H/S: 1/0/0
Ord Minnett had previously taken a bearish view on Vita Group post the sale of its ICT business to Telstra ((TLS)), but today's update marks a reversal of that view.
With the company now wholly focused on the Artisan skin care and wellness business, Ord Minnett anticipates conditions to improve, which means the long term outlook is considered "positive" with organic, greenfield and acquisitions all seen as future contributions.
Shareholders already received 39c in the form of a special dividend from the ICT sale back in November and the broker anticipates a further 3c-6c (fully franked) is still forthcoming before June 30.
The rating has been upgraded to Speculative Buy from Hold, with a revised price target of 36c (down from 93c decided upon last year).
Updated forecasts now imply the company will remain loss-making for years to come (one assumes that is now the new 'organic' profile).
Downgrade
ATLAS ARTERIA ((ALX)) Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0
Morgans has been surprised by the recent strength of Atlas Arteria's share price given momentum in sovereign bond yields and surges in exchange rates.
The broker notes strength in the Australian dollar, and the Australian to US dollar exchange rate, has impacted negatively on distributions received by Macquarie Fund Advisors, driving dividend per share forecast downgrades from the broker of -5% in FY22 and -8-9% in FY23 and FY24.
The rating is downgraded to Hold from Add and the target price decreases to $6.41 from $6.69.
Macquarie downgrades its rating for Atlas Arteria to Neutral from Outperform and its target price falls to $6.66 from $7.09 after an unfavourable exchange rate is taken into account.
In addition, with French fuel prices having risen by 60% from 2019 levels, the analyst points out car trips are partly discretionary and expects trips to be cut by -6-7%. Traffic data so far in 2022 has been soft, notes Macquarie.
AUSTAL LIMITED ((ASB)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0
Due to lower visibility of the medium-term outlook for Austal, Macquarie downgrades its rating to Neutral from Outperform. This comes as the company was notified it will not be awarded the contract to construct offshore patrol vessels for the Philippines Navy.
The broker notes the company will now focus on winning orders for commercial ferries for its Philippines shipyard. For FY23 and FY24, EPS forecasts are downgraded by -10% and -21% and the target price is lowered by -24% to $1.91.
MYDEAL.COM.AU LIMITED ((MYD)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
Following a review of late February's 1H results for MyDeal.com.au, Morgans increases its earnings (EBITDA) loss forecasts. As a result the target price falls to $0.60 from $0.90 and the rating is lowered to Hold from Add.
The broker feels there may be a lack of catalysts from future sales updates, given management has set a gross sales target of $500m by FY25. This is the same year management expects earnings profitability, a year later than the analyst had predicted.
RESMED INC ((RMD)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 5/1/0
Based on commentary from management, Ord Minnett notes ResMed has not been able to meaningfully increase device supply in the March quarter as constrained availability of chips continues, but reiterates an anticipated supply boost in the June quarter.
The broker expects this will be insufficient to meet the company's US$300-350m incremental revenue guidance, but notes the miss is largely a timing issue. Further, Ord Minnett notes supply issues are consistent with other providers.
The rating is downgraded to Accumulate from Buy and the target price decreases to $37.00 from $38.00.
SEEK LIMITED ((SEK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/3/0
Macquarie lowers its rating for Seek to Neutral from Outperform on downside risk for earnings and limited valuation support. The target price of $32 is unchanged.
As the labour market normalises, the broker anticipates formerly strong depth revenue growth will subside. Depth is not considered to be the structural growth driver that the market is assuming.
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Target Price |
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: ALX - ATLAS ARTERIA
For more info SHARE ANALYSIS: ASB - AUSTAL LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: BKW - BRICKWORKS LIMITED
For more info SHARE ANALYSIS: RED - RED 5 LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: SEK - SEEK LIMITED
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED
For more info SHARE ANALYSIS: VTG - VITA GROUP LIMITED