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

Weekly Reports | May 16 2022

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.


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