Weekly Ratings, Targets, Forecast Changes – 27-05-22

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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 23 to Friday May 27, 2022
Total Upgrades: 7
Total Downgrades: 8
Net Ratings Breakdown: Buy 60.07%; Hold 33.41%; Sell 6.52%

For the week ending Friday May 27 there were seven upgrades and eight downgrades to ASX-listed companies covered by brokers in the FNArena database.

Following the demerger of The Lottery Corp, brokers last week were busy removing forecasts for the Lotteries & Keno spin-off from financial models for Tabcorp. Thus it was not surprising to see the company atop the tables for the largest percentage reduction in target price, and the largest percentage fall in forecast earnings by brokers last week.

Tabcorp is now a wagering, media and gaming business, and while the stock price is initially trading below expectations Credit Suisse maintained its Outperform rating and has faith in a potential transformation.

On the other hand, Macquarie was less sanguine and downgraded its rating to Neutral from Outperform in the belief investors will be cautious around structural challenges. It’s thought additional capital may be required for license renewals and the WA TAB tender.

Nonetheless, the broker is hopeful a covid recovery will drive near-term growth and earnings will stabilised in FY23 prior to attaining 2% long-term annual growth.

Following the release of FY22 results in the prior week, brokers continued to update forecasts for Webjet, and the company topped the list for the largest percentage increase in forecast earnings last week. Morgan Stanley’s FY24 estimates are above 2019 levels and incorporate market share gains that management has referenced.

Citi pointed out in last week’s article the key metric for Webjet in the current environment is revenue, which was slightly ahead of the consensus expectation. Meanwhile, UBS noted all the company’s businesses were profitable in April, and May profitability is expected to be significantly higher versus April.

Next on the earnings table was Superloop, following a trading update which showed strong organic sales momentum in the core business, according to Morgans. In addition, earnings accretion is expected in FY23 from the acquisition of Melbourne-based white label platform and managed service company Acurus.

While FY22 results were in-line with prior guidance, ALS had the third largest percentage increase in forecast earnings, ousting Serko from that position on the table below, following a data glitch.

Despite few surprises in the result, Morgans believed shares were looking cheap and upgraded its rating to Buy from Hold. Organic revenue growth in Life Sciences and a strong outlook for volumes were considered highlights of the result.

Morgan Stanley assessed inflationary pressures are being handled well and management continues to target margin expansion via increased pricing (especially in Commodities) and procurement savings.

After a halving of share price in the last nine months, Nanosonics received forecast earnings upgrades from Morgans. As part of a trading update, management now expects the consensus estimate for FY22 revenue will be met.

The transition to a direct sales model with GE is on-track, according to the Add-rated broker. The company has expanded its sales and clinical applications team to meet an end-of-June transition-completion date.

Total Buy recommendations take up 60.07% of the total, versus 33.41% on Neutral/Hold, while Sell ratings account for the remaining 6.52%.

Upgrade

ABACUS PROPERTY GROUP ((ABP)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/2/0

Ord Minnett sees emerging value in the REIT sector due to a stabilisation of long-term bond yields and moderating market cash rate assumptions over the past few weeks.

The broker upgrades its rating for Abacus Property to Hold from Lighten on relative valuation grounds after outperformance in 2022. The $3.20 price target is unchanged.

ALS LIMITED ((ALQ)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/0

Morgans believes ALS looks cheap on recent share price weakness and upgrades its rating to Add from Hold following a FY22 result which contained few surprises. Underlying profit met the upper end of the guidance range and was in-line with the consensus estimate.

A highlight for the analyst was 13.4% organic revenue growth in Life Sciences and a strong outlook for volumes.

Overall, while inflation pressures were offset by price rises and strong volume leverage via additional capacity, the broker expects margin contraction in FY23. Target rises to $14.38 from $13.57.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/5/2

UBS retains its US$1,500/oz long-term gold price forecast and expects supply chain pressures and opex/capex inflation to persist, along with the shortage of skilled labour.

For the producers, the broker retains a preference for new(er) mines benefiting from new infrastructure, highest grades and limited or brownfield capex.

While Evolution Mining is not the broker's preferred play at current prices, much risk is already priced-in and the rating is upgraded to Neutral from Sell. The target price slips to $4.05 from $4.13.

IGO LIMITED ((IGO)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/0/1

IGO has announced consistent first production of battery-grade lithium hydroxide at its Kwinana Lithium Hydroxide factory.

UBS says this is a key de-risking event for the TLEA joint venture.

The broker updates realised spodumene price forecasts (-1.7% in FY22 and -11.3% in FY23) and remains structurally bullish on lithium and nickel in the medium and long term.

Upgrade to Buy from Neutral given the recent share-price retreat. Target price dips to $12.15 from $12.40.

MIRVAC GROUP ((MGR)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/1/0

Ord Minnett sees emerging value in the REIT sector due to a stabilisation of long-term bond yields and moderating market cash rate assumptions over the past few weeks.

In looking at large cap relativities, the broker now prefers Mirvac Group (upgraded to Accumulate from Hold) over Dexus ((DXS), which is downgraded to Hold from Buy.

The target price for Mirvac Group slips to $2.50 from $2.60.

MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/2/1

Following recent results for the major banks, Ord Minnett revises its interest rate forecasts and increases its EPS estimates, despite higher cost inflation and the potential for normalisation of impairments over FY23 and FY24.

Net interest margins (NIM) stabilised in the 2Q, lending more confidence to guided 2H increases for NIMs, explains the analyst. Of the four majors, CommBank ((CBA) is estimated to have the greatest interest rate leverage.

Outside of the majors, Ord Minnett upgrades its rating for Macquarie Group to Buy from Accumulate on valuation grounds, and retains its $218 price target.

WESFARMERS LIMITED ((WES)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/3/1

UBS upgrades its rating for Wesfarmers in recognition that non-retail divisions were the source of upside in the 1H, and are becoming a larger share of earnings.

The broker estimates the Chemicals Energy & Fertilisers (WesCEF) business along with an exposure to lithium upside can counter the mixed outlook for retail. The target price rises to $56 from $54.

Downgrade

CHALLENGER LIMITED ((CGF)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/4/1

Challenger left its profit guidance unchanged at its investor day though suggested a return on equity (ROE) enhancement
from yields may be delayed and pointed to a weaker capital position.

The analyst explains the capital position has gone from being strong to just at the target range over the past five months.

Following a 53% rise in share price over the last year, Ord Minnett lowers its rating to Lighten from Hold and reduces its target price to $6.90 from $7.00.

CROMWELL PROPERTY GROUP ((CMW)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/2/0

Ord Minnett sees emerging value in the REIT sector due to a stabilisation of long-term bond yields and moderating market cash rate assumptions over the past few weeks.

Nonetheless, the broker downgrades its rating for Cromwell Property to Hold from Buy on relative valuation grounds after recent underperformance, and reduces the target to $0.85 from $0.95.

DEXUS INDUSTRIA REIT ((DXI)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Dexus Industria REIT has divested of a Sydney property at 17% above book value, with proceeds to be used to fund the development pipeline. Macquarie estimates the divestment is -0.6% dilutive to FY23 earnings.

The broker has nevertheless taken the opportunity to update its model for rising rates and low hedging. FY23-24 forecast earnings fall by -9%-plus.

Despite being attracted to the REIT’s development pipeline, Macquarie warns higher construction and interest costs could impact returns. Downgrade to Neutral from Outperform. Target falls to $3.25 from $3.59.

DEXUS ((DXS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/2/0

Ord Minnett sees emerging value in the REIT sector due to a stabilisation of long-term bond yields and moderating market cash rate assumptions over the past few weeks.

In looking at large cap relativities, the broker downgrades its rating for Dexus to Hold from Buy and now prefers Mirvac Group ((MGR), which is upgraded to Accumulate from Hold.

The target price for Dexus also falls to $12.00 from $12.50.

INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0

Medicare benefits data highlighted weaker trends for Jan-Feb 2022 with modest recovery in March, Macquarie notes. For the March quarter, combined benefits in key states for Integral Diagnostics fell -9% quarter on quarter and -6% year on year.

Commentary from peers has highlighted operational challenges and elevated costs associated with covid in early 2022, and in addition, the broker sees supply chain constraints as presenting potential upside risk for consumables/equipment expenses in the near-term.

Downgrade to Neutral from Outperform, target falls to $4.15 from $4.30.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/2/0

First half earnings (EBIT) were in-line with Morgan Stanley's estimate but -8% below the consensus forecast. An increased Henry Hub gas price forecast is the main reason for a -5% cut to the broker's FY22 earnings forecast.

The broker downgrades its rating to Equal-weight from Overweight and sees a more challenging backdrop for short-
term performance. While fertiliser prices appear to have peaked they are expected to remain supportive.

Orica ((ORI)) is preferred in the sector. The target price falls to $4.05 from $4.70. Industry view: In-Line.

The analyst expects a period of share price range-trading while demerger discussion rages following the decision to separately list the Fertilisers and Dyno Nobel businesses. It's considered a moot point whether strategic benefits outweigh one-off and ongoing costs.

SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP RE LIMITED ((SCP)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/3/0

Ord Minnett sees emerging value in the REIT sector due to a stabilisation of long-term bond yields and moderating market cash rate assumptions over the past few weeks.

Nonetheless, the broker downgrades it rating for Shopping Centres Australasia Property to Lighten from Hold on relative valuation grounds after recent underperformance. The $3.00 target price is unchanged.

TABCORP HOLDINGS LIMITED ((TAH)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0

Following the demerger of Lottery Corp ((TLC), Tabcorp has closed its first day of trading with a market capitalisation of $2.4bn. Macquarie expects investors to take a cautious view of Tabcorp given structural challenges to be overcome. 

The broker noted additional capital may be required for license renewals and the WA TAB tender. Macquarie expects covid recovery to drive near-term growth, and hopes the company can stabilise earnings in FY23 before achieving long-term annual growth of 2%. 

Notably, with Tabcorp closing out its first day of trading at a price of $1.06 per share and Lottery Corp at $4.70 per share, the combined value implies the creation of more than $900m compared to the previous price.

The rating is downgraded to Neutral from Outperform and the target price decreases to $1.00 from $6.00.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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