Weekly Reports | Apr 04 2022
This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG
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 28 to Friday April 1, 2022
Total Upgrades: 7
Total Downgrades: 5
Net Ratings Breakdown: Buy 58.97%; Hold 35.15%; Sell 5.88%
For the week ending Friday April 1 there were seven upgrades and six downgrades to ASX-listed companies covered by brokers in the FNArena database.
Brokers made no material percentage changes to price targets last week.
Gold Road Resources had the largest percentage increase in forecast earnings by brokers after releasing FY21 results. Macquarie raised its rating to Neutral from Underperform as expectations were exceeded for both profit and dividend and due to recent share price weakness.
UBS noted production growth of around 60% by 2024 for the Gruyere mine places the company at a relative advantage to peers in a time when the industry is facing ongoing covid and cost pressures (e.g labour and oil).
As a result of these rising input costs, the strategists at Morgan Stanley expect longer-term commodity price estimates will need to be raised across the sector. This is especially the case for commodities like aluminium, alumina and zinc, which have high input costs.
While the broker maintained its Underweight rating for Western Areas, the earnings forecast was raised and the target price increased to $3.40 from $2.95.
The same commodity review by Morgan Stanley resulted in the broker’s rating for Mineral Resources being upgraded to Overweight from Equal-weight. While the company’s lithium production is ramping up and high prices are being achieved, the analyst also pointed out higher iron ore prices are benefiting the company's high-cost operations.
Meanwhile, Macquarie also raised its earnings forecast for Mineral Resources after noting upside risk to the gas resource estimate for Lockyer Deep from testing results and a strong flow rate. Lockyer Deep, situated in the Perth basin, is a joint venture with ASX-listed Northwest Energy. Gas from the joint venture is not expected for two years.
Next, in terms of the largest increase in forecast earnings by brokers in the FNArena database last week, was 29Metals. Again, the Morgan Stanley commodity review resulted in a target price rise to $3.40 from $3.10 due to higher EPS estimates and a higher forecast long-term copper price.
Morgan Stanley’s review also impacted upon earnings forecasts for both IGO Ltd and Whitehaven Coal. The former’s target price was raised to $11.35 from $10.05, while the latter’s increased to $5.45 from $3.75.
For Whitehaven Coal, the broker expects thermal coal to trade higher for longer and sees 31% upside for the share price. It's felt longer term value should derive from project approvals and development, particularly at the Vickery project. The company is Morgan Stanley’s second most preferred pick across its mining sector coverage, behind South32.
Total Buy recommendations take up 58.97% of the total, versus 35.15% on Neutral/Hold, while Sell ratings account for the remaining 5.88%.
Upgrade
FORTESCUE METALS GROUP LIMITED ((FMG)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/4/3
After allowing for the Ukraine/Russia conflict, the UBS commodities team sees higher commodity prices for longer on the assumption the global economy avoids a material downturn.
The broker's price revisions are highest for thermal and metallurgical coal, nickel, aluminium, zinc, the platinum group metals, iron ore and gold. It's believed demand headwinds will be offset by commodity supply disruptions/trade re-alignment for the next 12-18 months.
For Fortescue Metals, UBS raises its rating to Neutral from Sell after upgrading its iron ore price forecasts for 2022 and 2023 by 23% and 24% to $135/dmt and $105/dmt [62% Fines cost and freight (CFR) China] with minor changes to forecasts from 2024.
The target price rises to $17.10 from $16.30.
GOLD ROAD RESOURCES LIMITED ((GOR)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/1/0
As a result of recent share price weakness and the release of FY21 results, Macquarie upgrades its rating for Gold Road Resources to Neutral from Underperform, while retaining its $1.70 target price.
Profit was a $7.6m beat versus the broker's estimate mainly due to a positive move in inventory. The final fully-franked dividend of 0.5cps was also higher than Macquarie expected.
MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/0/1
Morgan Stanley points to near-term earnings support for the mining sector from inflation expectations, rising input costs (particularly energy) and supply impacts from the Ukraine/Russia conflict.
Should inflation persist and demand destruction is avoided, longer-term commodity price estimates will need to be raised across the sector, suggests the broker. This is especially the case for commodities like aluminium, alumina and zinc, which have high input costs.
Morgan Stanley lifts its rating for Mineral Resources to Overweight from Equal-weight and raises its target to $56 from $45.70.
While lithium production is ramping-up and high prices are being achieved, higher iron ore prices are also benefiting the company's high cost operations, explains the analyst. Industry view: Attractive.
RIO TINTO LIMITED ((RIO)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/4/0
UBS upgrades Rio Tinto to Neutral from Sell and raises its target price to $104 from $90 on an improving risk reward ratio for the iron ore price over the next 12 months.
Apart from the boost via the Ukraine/Russia conflict, the analyst notes stronger-than-expected data from China in January and February and believes there is a prospect of further easing to achieve the country's growth targets.
The broker upgrades its 2022 iron ore price forecast to US$135/t from $110/t and its 2023 forecast to US$105/t from $85/t.
WASHINGTON H. SOUL PATTINSON AND CO. LIMITED ((SOL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Following solid 1H results, Morgans raises its rating for WH Soul Pattinson to Add from Hold given more than 10% upside for total shareholder returns to the new 12-month target of $30.60, reduced from $36.78.
Underlying group profit was $344m, up by 281% on the previous corresponding period.
The new target arises after allowing for the 1H result and further improvements to the broker's near-term yield assumptions post the recent results of core portfolio holdings.
TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0
Tabcorp's Demerger Scheme Booklet disclosed better than anticipated operational expenditure and net debt allocation according to Credit Suisse. The broker's target price now incorporates $4.95 per share for The Lottery Corp and $1.25 per share for the new Tabcorp.
The Scheme booklet also warned of potential litigation risk, but the broker expects this offers opportunity to harmonise wagering industry fee structures. The broker assumes a -7 cents per share impact from litigation settlement.
The broker also noted a 10% lottery revenue increase in the March quarter, driving a target price increase and a suggested return of more than 15% in the next year.
The rating is upgraded to Outperform from Neutral and the target price increases to $6.20 from $5.70.
UNITI GROUP LIMITED ((UWL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/1/0
Uniti Group has received a revised takeover offer from the Morrison & Co and Brookfield Infrastructure consortium of $5 per share, up from a previous bid of $4.50 per share. Ord Minnett notes Uniti Group is exclusively engaging with the offer, and has not engaged with a competing offer from the Connect consortium.
The broker finds Uniti Group's assets, including private fibre assets, a more than 290,000 premise pipeline and high margin network revenues, demand a multiple at the mid to high end of the 15.5-28.0x multiple range achieved by recent telco infrastructure purchases.
The rating is upgraded to Accumulate from Hold and the target price increases to $5.00 from $4.05.
Downgrade
BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 5/1/0
Macquarie downgrades its rating for Bank of Queensland to Neutral from Outperform due to increased competition and because lower deposit pricing has resulted in very slow deposit growth. It's also felt the bank has relatively lower leverage to higher rates.
The target price falls to $9 from $9.25 as the broker sees increasing risk of mortgage margin impacts and a deposit cost blowout as the bank's funding gap widens.
For the overall sector, Macquarie expects the Bank sector to consolidate at current levels given near-term results are likely to disappoint due to weaker margins. While volume growth remains solid, it is slowing, and competitive pressures are expected to remain intense.
Mortgage competition has shifted to variable rates due to higher rates, explains the analyst. Also, higher term deposit costs and
switching are expected to limit the upside from those higher rates.
EVOLUTION MINING LIMITED ((EVN)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/2/3
After allowing for the Ukraine/Russia conflict, the UBS commodities team sees higher commodity prices for longer on the assumption the global economy avoids a material downturn.
The broker's price revisions are highest for thermal and metallurgical coal, nickel, aluminium, zinc, the platinum group metals, iron ore and gold. It's believed demand headwinds will be offset by commodity supply disruptions/trade re-alignment for the next 12-18 months.
Evolution Mining is one of the broker's least preferred exposures in its coverage of the mining sector. The broker downgrades its rating to Sell from Neutral, while the target price rises to $4.23 from $3.65.
NEWCREST MINING LIMITED ((NCM)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/2/0
After allowing for the Ukraine/Russia conflict, the UBS commodities team sees higher commodity prices for longer on the assumption the global economy avoids a material downturn.
The broker's price revisions are highest for thermal and metallurgical coal, nickel, aluminium, zinc, the platinum group metals, iron ore and gold. It is believed demand headwinds will be offset by commodity supply disruptions/trade re-alignment for the next 12-18 months.
For Newcrest Mining, UBS lowers its rating to Neutral from Buy and raises its target to $27.10 from $26.50.
SIMS LIMITED ((SGM)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/3/0
Sims has outlined opportunities to diversify from traditional metals recycling into a broader ESG strategy, but UBS notes pursuing this will take time and capital expenditure, and in the near-term scrap pricing and volumes will continue to drive earnings.
Given a settling of scrap metal pricing at higher levels the broker anticipates pricing declines from the first half of FY23. On company guidance, UBS notes volumes look unlikely to offset lower pricing.
Based on the limited opportunity for organic growth seen by the broker, the rating is downgraded to Neutral from Buy and the target price increases to $22.00 from $20.30.
WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/3/0
UBS raises its 2022 Brent oil forecast to US$95/bbl from US$81/bbl. For 2023, the estimate climbs to US$85/bbl from US$80/bbl and then to US$80/bbl from US$75/bbl for 2024, while US$75/bbl is unchanged for 2025.
All changes are mainly driven by impacts from the Russia/Ukraine conflict, explains the analyst, and the long term (from 2026) Brent forecast also rises to US$75/bbl from US$70/bbl. UBS also increases its JKM LNG forecast by 14-108% between 2022-24.
Nonetheless, the broker downgrades its rating for Woodside Petroleum to Neutral from Buy as shares are approaching full valuation. The price target rises to $34.60 from $29.
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: FMG - FORTESCUE LIMITED
For more info SHARE ANALYSIS: GOR - GOLD ROAD RESOURCES LIMITED
For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: SGM - SIMS LIMITED
For more info SHARE ANALYSIS: SOL - WASHINGTON H. SOUL PATTINSON AND CO. LIMITED
For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED