Weekly Reports | May 09 2022
This story features FORTESCUE METALS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FMG
Weekly update on stockbroker recommendation, target price, and earnings forecast changes.
By Mark Woodruff
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.
Period: Monday May 2 to Friday May 6, 2022
Total Upgrades: 8
Total Downgrades: 12
Net Ratings Breakdown: Buy 59.57%; Hold 34.22%; Sell 6.21%
For the week ending Friday May 6 there were eight upgrades and twelve downgrades to ASX-listed companies covered by brokers in the FNArena database.
Reliance Worldwide received two ratings upgrades from separate brokers following a third quarter trading update. Macquarie noted strong organic revenue in the Americas has now accelerated and upgraded its rating to Outperform from Neutral, given the recent share price retreat.
Morgan Stanley suggested the share price has been unfairly marked down by association with its sector peers and upgraded its rating to Overweight from Equal-weight. The business carries the lowest weighting within the broker's coverage of the sector to new housing construction and the main repair and renovation exposure should prove more resilient.
Following first half results, Eclipx Group topped the table for the largest percentage increase in forecast earnings last week. According to Morgan Stanley, a 32% year-on-year profit increase materially de-risks its FY22 forecast.
Elevated used car prices drove record half year earnings and strong cash generation, and Credit Suisse noted that while prices will inevitably normalise at some point, they should remain stronger for longer. Also, when the pricing normalisation occurs, it’s thought the company will experience a smoother transition due to organic growth and a strong performance for new business.
Coming second on the table was Home Consortium after UBS upgraded its rating to Neutral from Sell after management advised the market it will raise and deploy the $1.2bn from its capital raising over three years to generate an internal rate of return of 17%.
While UBS considers the strategy is plausible, given the company's recent strong execution, the broker would like to see a better cost of capital among listed REITs before upgrading from its Neutral rating.
Next up was Coronado Global Resources, after Credit Suisse’s commodities team raised its coking coal price forecasts by 11-75% through to 2026. Coal prices are expected to remain elevated in the mid-term as geopolitical conflict and trade flow constraints continue to impact on supply. As Europe and other coal consumers look to move away from Russian supply, a scarcity for high grade thermal coal should support healthy premiums on Australian exports.
On the flipside, Corporate Travel Management received the largest percentage downgrade to earnings forecasts, as March quarter results missed the consensus forecast. After a strong run for the share price, Citi downgraded its rating to Neutral from Buy. There’s thought to be less upside risk for earnings over the next 12-18 months and management's earnings guidance is still estimated to be materially short of the consensus forecast.
Despite the major headwind of omicron, Morgan Stanley retained its Overweight rating for the company as the quarterly update demonstrated an earnings recovery into FY23 is on track. Activity in March improved to more than 70% of pre-covid volumes in all regions except Asia, while industry feedback suggests a further recovery is coming.
Regis Resources came second on the earnings downgrade table last week, as March-quarter production and costs disappointed Macquarie, due largely to lower-than-expected grades. While management reiterated production guidance, the analyst thinks the Duketon gold project in Western Australia will have to deliver a strong performance for that to happen.
Nonetheless, the broker upgraded its rating to Outperform from Neutral, to reflect the maintained guidance and management's view that a plant upgrade and underground mines will deliver a much stronger June quarter.
Ramsay Health Care also suffered a fall in forecast earnings by brokers following a third quarter trading update. Credit Suisse was surprised by the extent to which earnings were impacted by covid, while Morgans noted the company still faces numerous headwinds including staff shortages, surgical restrictions, cancellations, inflationary pressures and covid-related costs.
Nonetheless, Macquarie pointed out the rationale for the $88/share bid (by a consortium led by KKR) probably lies with a favourable outlook for Australian hospital volumes over the medium to longer term. In addition, the unrealised value residing within the company's Australian property portfolio is undoubtedly an attraction.
Meanwhile, Citi described BWX’s market update as underwhelming. The company offered weaker than anticipated full year guidance, with the mid-point of revenue and earnings guidance a -17% and -24% miss on the broker's forecasts.
UBS was also disappointed by management’s downgraded guidance though managed to find a positive in that Sukin and Mineral Fusion, which combined represent 56% of FY22 forecast revenues, are performing in-line with expectations.
Finally, at a conference hosted by Macquarie, Inghams Group presented a range of woes in a third quarter trading update including war, pestilence, fires and floods which have combined to keep chook-feed costs elevated.
The analyst at Morgans poses the question: to what extent will price rises and the company's continuous improvement program offset ongoing headwinds? Given the near-term earnings uncertainty, particularly around grain prices, the broker retained its Hold rating.
Total Buy recommendations take up 59.57% of the total, versus 34.22% on Neutral/Hold, while Sell ratings account for the remaining 6.21%.
FORTESCUE METALS GROUP LIMITED ((FMG)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/5/2
Credit Suisse's commodities team expects coal and iron ore prices will remain elevated in the mid-term as geopolitical conflict and trade flow constraints continue to impact on supply. Low output from iron ore majors have driven a global market iron ore deficit, while an energy crisis is emerging in Europe as coal consumers look to move away from Russian supply.
Upgrades to the broker's commodity price deck saw Fortescue Metals' earnings forecasts lift 11% and 66% in FY22 and FY23, with the broker estimated the company's price realisation has improved to 75%, and anticipating further improvement to 80% in FY23.
The rating is upgraded to Neutral from Underperform and the target price increases to $20.00 from $15.00.
HOME CONSORTIUM LIMITED ((HMC)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/2/0
UBS upgrades HMC Capital to Neutral from Sell after management advised the market it will raise and deploy the $1.2bn from its capital raising over three years to generate an internal rate of return of 17%.
Given the company's recent strong execution (a year UBS doubts will be repeated), the broker considers the strategy plausible, but would want to see a better cost of capital among listed REITs before committing to a higher rating.
Target price rises to $6.34 from $5.40.
LOVISA HOLDINGS LIMITED ((LOV)) Buy by Citi .B/H/S: 5/0/0
Lovisa Holdings' latest market update has demonstrated continued strong sales growth despite global supply constraints, although Citi anticipates growth to moderate over the coming months and forecasts sales growth of 45% over the second half.
New store rollout has been slower than expected, with 17 stores to date in the second half. Given the company had guided to a second half rollout in line with the first half, the four stores per month in the second half compared to 7 per month in the first half has disappointed.
The Buy rating is retained and the target price decreases to $20.40 from $21.45.
PTB GROUP LIMITED ((PTB)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Morgans upgrades its rating for PTB Group to Add from Hold as mangement's upgraded FY22 profit guidance implies a 23% improvement in performance over 1H22. An improved performance at PT USA was cited as the primary growth driver.
Relatively speaking the US operations are much larger than those in Australia, and the analyst believes more opportunities will be sought out in the US. The target price rises to $1.51 from $1.23 due to the stronger revenue growth and expectations of more to follow.
REGIS RESOURCES LIMITED ((RRL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/0
Regis Resources's March-quarter production and costs disappointed Macquarie, thanks largely to lower-than-expected grades, and the company reported higher net debt.
Production fell -11% shy of the broker's forecast and management reiterated guidance, but the broker says Duketon will have to deliver a strong performance for that to happen.
EPS forecasts fall -2% and -1% in FY23 and FY24.
Macquarie upgrades to Outperform from Neutral, to reflect maintained guidance and management's view that the plant upgrade and underground mines will deliver a much stronger June quarter. Target price falls -4% to $2.30.
RELIANCE WORLDWIDE CORP. LIMITED ((RWC)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 6/0/1
Reliance Worldwide's March-quarter trading generally pleased Macquarie, as strong organic revenue in the Americas accelerated.
On the downside, earnings (EBITDA) margins eased and EZ_FLO margins fell well below the broker's forecasts.
Management expects costs will continue to slightly erode margins.
EPS forecasts fall -3.9% in FY22; -6.3% in FY23; and -9.5% in FY24.
Target price falls to $4.95 from $5.40. Rating upgraded to Outperform from Neutral given the strong share price retreat.
Morgan Stanley believes the Reliance Worldwide share price has been unfairly marked down by association with peers. It's noted the business carries the lowest weighting within the broker's coverage of the sector to new housing construction.
The company's main repair and renovation exposure should prove much more resilient, in the analyst's opinion, in the face of rising mortgage rates.The broker raises its rating to Overweight from Equal-weight.
The price target rises to $5.40 from $5.30 after Morgan Stanley incorporates earnings forecast upgrades following a 3Q trading update by the company. Industry view: In-Line.
SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/1/0
Super Retail's Q3 update showed ongoing strong sales momentum, points out Ord Minnett. The broker argues the stock deserves a higher multiple given the absence of lockdown tailwinds during the period.
Alas, gross margins are normalising too and this offsets the strong sales performance, in the broker's opinion. Hence, forecasts remain broadly unchanged with minimal adjustments made.
Target price falls to $13.50 from $13.80 but the rating moves to Buy from Accumulate.
BOOKTOPIA GROUP LIMITED ((BKG)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
Morgans assesses a disappointing 3Q trading update from Booktopia Group with an elevated cost base and ongoing margin compression. In addition, co-founder Tony Nash announced he would be standing down as ceo. The rating is lowered to Hold from Add.
Third quarter earnings (EBITDA) fell by -65% on the previous corresponding period to $1.5m. After allowing for the update and guidance, the broker lowers its FY22-FY24 earnings estimates by around -45%. The target falls to $0.95 from $1.85.
CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/1/0
After a strong run for Corporate Travel Management's share price, Citi downgrades its rating to Neutral from Buy due to a more balanced risk/reward profile.
The analyst anticipates less upside risk for the company's earnings over the next 12-18 months. Also, it's estimated that management's earnings guidance is still materially short of the consensus forecast.
Some future headwinds the broker lists include a higher (lower-margin) domestic mix in total transaction value (TTV), and a slow ramp-up in International capacity. The target falls to $25.49 from $28.05.
CROWN RESORTS LIMITED ((CWN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/3/0
Negative news for Crown Resorts in that the Victorian government has proposed an increased tax rate for electronic gaming machines at Crown Resort’s Melbourne casino, to be implemented from 1 July 2023.
In response, Ord Minnett has reduced forecasts by -3-5% from FY24 onwards.
The broker does not believe this will have any impact on the intended acquisition by the KKR-led international consortium.
Target price trimmed to $13.30 from $13.60. Downgrade to Hold from Buy.
FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 0/3/2
Flight Centre Travel's March-quarter loss guidance does not appear to have surprised Ord Minnett, the broker noting Outbound Travel to Aussie consumers has always been where the money has been generated.
The broker sheets the market's disappointment back to over-excitement about the reopening theme.
Meanwhile, Flight Centre hinted revenue margins could be lower for some time due to a reduction in front-end air commissions as airlines revisit low-yielding fares. Ord Minnett considers news of labour shortages problematic given it suggests the company may have to fork out for higher wages, hitting margins.
Rating downgraded to Sell from Lighten. Price target eases to $14.28 from $14.40.
KOGAN.COM LIMITED ((KGN)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/1/1
Credit Suisse downgrades Kogan.com to Underperform from Neutral and sharply cuts the target price to $3.75 from $5.53 after the company published a March-quarter loss.
Sales fell well short of forecasts and market averages, gross sales falling -7.2% year-on-year and Third-Party and Exclusive Brands falling -21.8% and -18.8% respectively.
Credit Suisse believes gross profit will struggle in the short term due to high direct sourcing costs and cautions the company's cost/profit problem could become a cash problem. Costs eased on the previous quarter but remained 16% above 2021, says the broker. Margins (EBITDA) have also tumbled.
MIRVAC GROUP ((MGR)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/2/0
Morgan Stanley reassesses its view of Mirvac Group following a slowdown in the residential cycle, and the recent development investor day, and downgrades its rating to Equal-Weight from Overweight.
The analyst feels the profits associated with the company's $12.9bn pipeline lack the certainty of the FY16-22 period when development profits were secured three years in advance.
The target price falls to $2.60 from $3.30 after the broker applies a more balanced 25/50/25 weighting to its bull/base/bear valuations from 35/50/15. The target is also impacted by less aggressive cap rate and residential assumptions. Industry View: In-Line.
QANTAS AIRWAYS LIMITED ((QAN)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 4/1/1
Ord Minnett comments Qantas Airway's Q3 report showed ongoing acceleration in the domestic recovery, on top of long-held plans for direct flights to London and New York ready to commence in late 2025.
Leisure is leading the travel recovery, the broker observes, while corporate travel is equally recovering earlier-than-expected.
Earnings estimates have been lifted, which pushes up the price target by 7% to $6.40. Rating is downgraded to Accumulate from Buy, on valuation.
RIGHTCROWD LIMITED ((RCW)) Downgrade to Hold from Speculative Buy by Morgans .B/H/S: 0/1/0
Morgans downgrades its rating for RightCrowd to Hold from Speculative Buy after the 3Q was weaker than expected and management lowered FY22 guidance and withdrew its FY23 profit target. The broker's target price tumbles to $0.12 from $0.26.
The broker's house view is underweight the technology sector with a preference for profitable companies in the current macro environment. Nonetheless, there's still considered to be potential for substantial medium-term value creation for RightCrowd.
SILVER LAKE RESOURCES LIMITED ((SLR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0
Silver Lake Resources's March-quarter production fell -7% short of Macquarie's forecasts, a poor performance at Mount Monger more than offsetting a strong performance at Deflector.
Management has withdrawn guidance, citing covid and supply-chain disruption.
The broker cuts FY22 sales forecasts and raises its all-in-sustaining cost estimate.
EPS forecasts fall -25% in FY22, then -17% in FY23, and -1% in FY24 to reflect a downward revision to Mount Monger's prospects.
Target price falls -9% to $2. Rating downgrades to Neutral from Outperform.
TRANSURBAN GROUP LIMITED ((TCL)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 4/2/0
Transurban Group's investor day has left Ord Minnett with a positive impression overall. Nevertheless, the rating has been downgraded to Accumulate from Buy, on valuation.
The price target remains $15.
The broker notes, on the basis of indications provided by management, that underlying network traffic trends are now positive.
VIVA ENERGY GROUP LIMITED ((VEA)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 5/1/0
With regional refining margins doubling since the end of the last quarter, Ord Minnett notes while current margins are likely not sustainable domestic refiners look set to benefit from a turnaround in refining profitability.
Large inventories of low-cost crude, restrictions on exports from China and demand recovery have all supported improved profitability. The broker has updated margin expectations for Viva Energy's Geelong refinery, pushing forecasts well above consensus.
Ord Minnett prefers Ampol ((ALD)) to Viva Energy, noting both offer compelling near- to medium-term outlooks. The rating is downgraded to Accumulate from Buy and the target price increases to $2.95 from $2.75.
WOOLWORTHS GROUP LIMITED ((WOW)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/2/2
While Credit Suisse acknowledges a solid third quarter result from Woolworths Group, the broker expects softer than anticipated inflation and higher than expected costs will likely temper more bullish expectations.
The broker noted shelf prices for Australian Food increased 2.7% in the quarter, compared to an expected 4%, although 4.4% comparable growth for Australia Food sales did exceed expectations.
Credit Suisse expects inflated costs and staff absenteeism to continue to impact in the coming quarter.
The rating is downgraded to Underperform from Neutral and the target price increases to $33.89 from $33.35.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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