Weekly Ratings, Targets, Forecast Changes – 13-05-22

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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 May 9 to Friday May 13, 2022
Total Upgrades: 9
Total Downgrades: 16
Net Ratings Breakdown: Buy 59.34%; Hold 34.32%; Sell 6.34%

For the week ending Friday May 13 there were nine upgrades and sixteen downgrades to ASX-listed companies covered by brokers in the FNArena database.

Morgan Stanley reduced its earnings forecasts for REA Group to reflect cyclical weakness and predicted things will worsen before getting better. By cutting its rating to Equal-weight from Overweight following third quarter results, the broker was at odds with four other brokers who upgraded ratings for REA to Buy or equivalent.

Despite a weaker residential volume outlook in FY23 and current weakness in building approvals figures, UBS was prepared to look through the cycle. Ord Minnett also noted the current 20% relative premium to peer Domain Holdings ((DHG)) should widen again to the traditional 30%. Meanwhile, both Morgans and Credit Suisse also lifted their ratings on valuation grounds.

Broker opinions on Macquarie Group were also divided following the release of FY22 results. Morgans upgraded its rating to Add from Hold and raised its 12-month target price to $215 from $209.60. The result was considered hard to fault, beating the consensus forecast by 7% after strong performances in the Commodities and Global Markets division and within Macquarie Capital.

Citi agreed and described the results as extraordinary though believed they signal the peak of a ten-year upward earnings cycle and downgraded its rating to Neutral from Buy. Credit Suisse also believed earnings have peaked, is concerned by a deteriorating macroeconomic outlook and downgraded to Underperform from Neutral.

Despite a strong first half result by Pendal Group, two brokers downgraded their ratings to Neutral or equivalent from Buy or equivalent. Slowing momentum in retail, a modest range of new strategies and industry-wide pressures concerned Morgan Stanley, while Credit Suisse noted global equity markets have declined further since the result period, and performance fees are likely to be significantly lower in early FY23.

GrainCorp had the largest percentage increase in target price last week after the release of first half results. Trade disruptions continue to support above average grain margins and crop conditions look favourable for the 2022/23 growing season. Nonetheless, UBS maintained the period FY22 to FY23 represents peak super-cycle earnings before normalisation is expected in FY24.

On the flipside, REA Group had the largest percentage fall in target price last week though brokers remained upbeat as evidenced by the rating upgrades detailed above.

Meanwhile, BWX had the largest percentage fall in forecast earnings by brokers following reduced FY22 profit guidance. Lower sales for FY22 will provide a lower base for growth, according to Macquarie, and as the broker’s forecast cost assumptions also increased, FY23 and FY24 EPS estimates were lowered by -24% and -19%, respectively.

Despite decreasing its target price for BWX to $2.40 from $5.00 the broker retained its Outperform rating due to the longer-term margin benefits from a new manufacturing facility and the potential of the company’s brands.

A data glitch was responsible for Xero’s position atop the largest percentage upgrade to forecasts earnings by brokers last week. Also, a carryover from the previous Friday had Eclipse Group in second place, leaving Judo Capital as the de facto leader.

Following an inaugural strategy day, Macquarie considered Judo well positioned to deliver ahead-of-system loan growth over the next three years and upgraded its rating to Outperform from Neutral. Management noted immediate benefits will flow from rising interest rates as 91% of the company’s lending is linked to the bank bill swap rate.

Finally, after oOh!media's good first quarter update appeared to flow into a strong April, Macquarie increased its earnings per share forecasts by 113%, 37% and 35% through to FY24. The broker retained its Outperform rating and raised its target price to $2.30 from $2.00.

Total Buy recommendations take up 59.34% of the total, versus 34.32% on Neutral/Hold, while Sell ratings account for the remaining 6.34%.

Upgrade

JUDO CAPITAL HOLDINGS LIMITED ((JDO)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/0

Judo Capital has held its inaugural strategy day, with Macquarie noting a number of positives look to improve investor prospects.

Macquarie considers the company positioned to deliver ahead of system loan growth over the next three years, and notes Judo Capital appears to be pre-funding this growth with accelerated banker hiring, 12% ahead of expectations.

Given reduced execution risk, the rating is upgraded to Outperform from Neutral and the target price increases to $2.15 from $2.10. Macquarie notes de-rating has shifted risk-reward payoff in favour of investors.

MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/1

Morgans upgrades its rating for Macquarie Group to Add from Hold as FY22 results beat the consensus forecast by 7% after strong performances in the Commodities and Global Markets division and within Macquarie Capital.

After the broker increases its FY23 and FY24 EPS forecasts by 4% and 6%, the target price rises to $215 from $209.60. As this lift in target price suggests greater than 10% upside to the current share price, the rating rises to Add from Hold.

The result was hard to fault, in Morgans view, though the second half dividend of $3.50/share was a slight miss versus the consensus forecast of 3.66/share.

See also MQG downgrade.

REA GROUP LIMITED ((REA)) Upgrade to Add from Hold by Morgans and Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Buy from Accumulate by Ord Minnett and Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

Following a third quarter update, Morgans lowers its target price for REA Group to $145.40 from $156.30. As the amended target price is still more than 10% above the prevailing share price, the broker raises its rating to Add from Hold.

A mix of listings growth and contracted price rises resulted in a resilient performance for the core Australian residential business in the 3Q, in the broker's opinion. Nonetheless, a volatile 4Q is expected on broader macroeconomic impacts and due to the Federal election.

REA Group's March-quarter results disappointed Credit Suisse most likely due to a geographic mix shift and lower Developer revenues.

Management guided to weaker fourth-quarter volumes as listings come off the boil, but expects this will be more than offset by the deferral of March volumes into the fourth quarter, stronger commercial and residential yields and growth in Data and India.

While slightly weaker, the broker still expects EPS growth in the low teens over the forecasts period, and considers the company's multiple to be looking more attractive.

Rating upgraded to Outperform from Neutral. Target price falls to $142.80 from $157.10.

REA Group's March-quarter result missed Ord Minnett's forecast due to listings deferrals from holidays.

The broker notes management was upbeat about the impact of the federal election but doubts this will be enough to drive a fourth-quarter catch-up. Pressure continues on listing volumes and the broker spies positive operating jaws as per guidance.

Ord Minnett prefers REA Group to Domain Holdings ((DHG)), noting the relative premium has decreased to 20% from the traditional 30%.

Rating upgraded to Buy from Accumulate. Target price falls to $153 from $165.

UBS assesses a strong 3Q result for REA Group though lowers its earnings forecasts due to a weaker residential volume outlook in FY23. Also, given weakness in building approvals figures there's expected to be softness in developer revenues.

Nonetheless, should investors be willing to look through the cycle, the analyst sees value emerging and upgrades the rating to Buy from Neutral. At the same time, it's acknowledged the upgrade may be early given the premium valuation and near-term uncertainty.

A fall in target to $130 from $155 reflects the analyst's earnings downgrades and change to the UBS near-term risk-free rate assumption to 3.5% from 2.5%.

See also REA downgrade.

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

On the back of Suncorp Group's March Q update, Ord Minnett has upgraded to Buy from Hold to reflect the company’s leverage to rising interest rates and signs of growth in its banking business.

The broker also notes that while premium increases have not yet come through in personal insurance lines on the back of all the recent events, such increases will likely happen in the future.

Target rises to $14.00 from $13.30.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/4/0

Morgan Stanley expects Westpac's first half result will elicit a positive response, with the bank delivering a 4% pre-provision profit beat to the broker's expectations, up 6% half-on-half, driven by cost improvements and margin stabilisation. 

The bank downgraded its second half expense guidance to $5.03-5.14bn, although Morgan Stanley continues to forecast expenses of $5.13bn.

The rating is upgraded to Overweight from Equal-Weight and the target price increases to $25.70 from $22.50. Industry view: Attractive.

XERO LIMITED ((XRO)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/1/1

Xero'a full year underlying earnings of $213m were 2.6% ahead of Ord Minnett's forecast and an 11% increase on its FY21 result, but a -$9m net loss exceeded the broker's expected -$7m.

Ord Minnett notes the market did not respond positively to the company's continued cash burn in pursuit of growth, but the broker feels Xero has a good case for continued reinvestment given the opportunity set remains sizeable.

Recent share price decline sees Ord Minnett  upgrade its rating to Buy from Accumulate and decrease the target price to $97.00 from $107.00.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/0

In Ord Minnett’s view, the separation of AGL Energy's businesses is in the best interests of existing shareholders, as Accel Energy as a standalone entity will generate substantial cash flow, while AGL Australia is likely to generate corporate interest.

That said, with Mike Cannon-Brookes’ Grok Ventures signalling its intention to vote against the demerger, the process likely depends on the level of retail participation.

A vote against will likely lead to significant instability, hence the broker downgrades to Hold from Accumulate and drops its target to $8.70 from $9.15.

ATTURRA LIMITED ((ATA)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Atturra has upgraded underlying earnings (EBITDA) guidance by around 13%, and announced the acquisition of Perth-based Hayes, an OpenText/ECM specialist for $12m.

Morgans attributes the upgraded guidance to stronger results in March and April and less impact from the Federal election than originally envisaged. A one-off gain from completing a project under budget in the 4Q also contributed.

Following the acquisition, the broker removes a 10cps premium in the target price for future acquistions and after upgrading earnings estimates (offset by downgraded peer multiples), the target falls to $0.72 from $0.78. The rating is downgraded to Hold from Add on valuation.

CENTURIA OFFICE REIT ((COF)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/1/0

Morgan Stanley downgrades Centuria Office REIT to Equal-weight from Overweight and lowers the target price to $2.30 from $2.60, preferring Dexus ((DXS)).

The broker admires Centuria's sector-topping 7.8% FY23 DPS yield but casts a cautious eye to lease expiries in high-vacancy markets and the relatively higher risk of cap rate expansions given the metropolitan office rate spread vs the 10-year bond yield has fallen more than 100 basis points.

Funds from operations forecasts fall -3% and -5% in FY23 and FY24 to reflect a forecast high cost of debt and lower occupancies.

CSR LIMITED ((CSR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/2/0

While CSR missed Macquarie's full year expectations slightly, reported underlying earnings of $291.4m and net profit of $192.6m compared to anticipated $304.3m and $197.6m,  the broker noted improved efficiencies and topline momentum drove a quality result.

Performance from the Building Products segment was a feature, delivering a 160 basis point improvement to earnings margin in the second half and with solid detached activity lined up through FY23, while the company capitalised on market conditions with its Aluminium segment.

Looking ahead, house activity forecasts see Macquarie revise earnings per share forecasts -7%, -5% and -4% through to FY25.

The rating is downgraded to Neutral from Outperform and the target price decreases to $6.05 from $6.80.

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 5/1/0

Corporate Travel Management's market update has flagged a weaker FY22 second-half, management downgrading earnings guidance.

Ord Minnett's sheets the move back to a worsening global economic outlook, growing market-share competition as clients put accounts out to tender post covid, and rising costs (the company is leveraged to rising wages).

While management reports the company's recovery is outpacing consensus and peers, the broker perceives the problem as sectoral, disruption and costs combining to create negative jaws.

EPS forecasts fall -40% in FY22. -8% in FY23 and -6% in FY24. 

Rating downgraded to Accumulate from Buy, the broker expecting numerous opportunities to buy the dips. Target price falls to $25.86 from $28.10.

GRAINCORP LIMITED ((GNC)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/4/0

The first half was slightly ahead of Morgan Stanley's expectations and, with the risks for FY22 reduced, the focus is now on FY23. Risks are weighted to the upside because of high wheat prices and improved seasonal conditions.

The broker raises FY22 EBITDA forecast by 3%, at the top end of management's guidance range. There is potential for another above-average crop in FY23 owing to increased soil moisture levels and elevated grain prices.

Management has also turned to paying fully franked dividends and away from buybacks and the broker raises its forecasts for FY22-23 total dividends to $1 a share.

As a result, now is time to take profits in the broker's opinion and the rating is downgraded to Equal-weight from Overweight. Target is $10.70. Industry View: In-Line.

GPT GROUP ((GPT)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/3/0

Following the RBA's first interest rate increase in 12 years and material moves in long bond yields in 2022, Ord Minnett has made a series of adjustments to valuations and lowered property sector valuations by -6% on average.

GPT Group's target falls to $5.20 from $5.70. Downgrade to Lighten from Hold.

HEALIUS LIMITED ((HLS)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

With Healius yet to invest in a unified lab information system and missing the efficiency benefits one could offer, Credit Suisse notes better longer-term earnings margins exist elsewhere in the segment. 

Anticipating covid disruptions to impact base business, the broker downgrades full year earnings -5% and -30% for FY22 and FY23 respectively.

Noting a preference for Australian Clinical Labs ((ACL)) over Healius, the rating is downgraded to Neutral from Outperform and the target price decreases to $4.65 from $5.50. The broker forecasts Healius' pathology margin to be -150 basis points below Australian Clinical Labs.

HOTEL PROPERTY INVESTMENTS LIMITED ((HPI)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/1/0

Following the RBA's first interest rate increase in 12 years and material moves in long bond yields in 2022, Ord Minnett has made a series of adjustments to valuations and lowered property sector valuations by -6% on average.

Hotel Property Investments' target falls to $3.90 from $4.00. Downgrade to Hold from Buy.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/1

Macquarie Group's FY21 result's guidance disappointed the broker, and Credit Suisse downgrades the company to Underperform from Neutral, believing earnings have peaked.

The broker notes the bank has been a big beneficiary from a low-interest rate environment and that is all about to change. 

Credit Suisse notes guidance was conservative, the macroeconomic outlook is deteriorating (raising the prospect of stagflation), which in turn threatens investment values upon realisation.

On the upside, Credit Suisse appreciates the group's stronger commodities trading income; M&A-driven rises in fee and commission income; strong loan growth and an improvement in loan balances.

FY23-FY24 earnings forecasts fall -14% to -16%. Target price falls to $150.00 from $210.00

Citi has described Macquarie Group's full year results as "extraordinary", with the company delivering 56% year-on-year cash earnings growth to a record $4,706m, with commodities volatility and record merger and acquisition activity supporting the strong result.

Despite this, the broker has downgraded the rating and target price for Macquarie Group, anticipating a lower trajectory in coming years will see cash earnings drop to $3,800m by FY25 as commodities revenue normalises. The broker expects FY22 results will be the peak of a ten-year upward earnings cycle.

The rating is downgraded to Neutral from Buy and the target price decreases to $187.00 from $226.00.

See also MQG upgrade.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/5/0

Following 1H results for National Australia Bank, UBS slightly upgrades cash EPS forecasts due to stronger forecast revenue growth and lower credit impairment charges. Despite this, the broker's rating falls to Neutral from Buy, after a strong recent share price rally.

The analyst sees strong operational and financial momentum in the business. This momentum is supported by above-system business lending growth and inorganic opportunities for retail banking. The target price rises to $35 from $33.

PENDAL GROUP LIMITED ((PDL)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/3/0

Despite a strong first half result from Pendal Group, Credit Suisse sees pressures ahead in the coming 6-12 months. The broker notes global equity markets have declined since March, while performance fees look to be significantly lower in early FY23.

Pendal Group's first half underlying profit beat Credit Suisse's expectations by 20%, with the result driven by higher management fee margins and lower costs, as well as a one-off contribution to non-operating income.

While the strong first half result drove a 12% increase to the broker's FY22 earnings forecast, expected headwinds see forecasts decrease up to -2% for FY23 and FY24.

The rating is downgraded to Neutral from Outperform and the target price decreases to $5.35 from $5.40.

Following a strong 1H result and subsequent 8% rally for Pendal Group shares, Morgan Stanley believes it will be difficult for the shares to head higher in the near-term and lowers its rating to Equal-weight from Overweight.

The analyst points to negatives including soft momentum in retail, a modest range of new strategies and industry-wide pressures. While the broker's FY22 EPS estimates rise on lower costs, FY23-24 forecasts fall by -3% and -4%, reducing the target to $5.90 from $6.70.

The 1H dividend of 21cps was in-line with Morgan Stanley's forecast though 11% ahead of the consensus estimate. Industry view is Attractive.

REA GROUP LIMITED ((REA)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 5/2/0

REA Group's March-quarter result broadly met consensus' and Morgan Stanley's forecasts.

But the broker believes the company is cycling into a period where pricing power will combine with new products to become the key drivers of revenue as listing volumes fall in the June quarter, potentially weakening again in FY23.

Interest rates and election uncertainty remain a risk to near-term consensus forecasts, opines the broker, while admiring the company's medium-term growth outlook.

EPS forecasts fall -5% to -10% across FY23 and FY24 to reflect cyclical weakness. The broker sits -10% to -15% below consensus and expects things will worsen before getting better, possibly offering a reasonable entry point.

Rating falls to Equal-weight from Overweight. Target price falls to $130 from $178. Industry view: Attractive.

See also REA upgrade.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/3/0

Ord Minnett downgrades Sonic Healthcare to Accumulate from Buy as covid pressure recedes. 

While the broker flags a -50% fall in FY23 earnings, Ord Minnett notes that testing has held up reasonably well and appreciates the company's defensive profile, expecting its core diagnostic imaging business will recover and be supplemented by M&A (the broker spies an underutilised balance sheet).

Cost pressure and pricing remain key areas to watch.

Rating downgraded to Accumulate from Buy in line with recent share price strength. Target price rises to $39 from $37.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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