Weekly Ratings, Targets, Forecast Changes – 10-06-22

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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 June 6 to Friday June 10, 2022
Total Upgrades: 7
Total Downgrades: 9
Net Ratings Breakdown: Buy 59.81%; Hold 33.67%; Sell 6.52%

For the week ending Friday June 10 there were seven upgrades and nine downgrades to ASX-listed companies covered by brokers in the FNArena database.

For another week Tabcorp headed the tables for the largest percentage reduction in target price and the largest percentage fall in forecast earnings, as brokers continued to amend financial models to allow for the demerger of the company’s Lotteries & Keno business.

As mentioned in last week’s article, Morgans cautioned investors around impending licence renewals and the amount of competition weighing on the remaining Wagering & Media and Gaming Services businesses. The broker downgraded its rating to Hold from Add and reduced its target price to $0.95 from $6.12 (adjusting for the demerger).

The Equal-weighted Morgan Stanley also ‘initiated’ coverage on the ’new’ Tabcorp in the prior week and arrived at the same target price of $0.95. While the retail wagering licences in Australia are a monopoly, the analyst cautioned investors over online competition from corporate bookmakers, who have a lower cost structure, and in some cases, global scale.

Coming second on the table for the largest percentage reduction in target price last week was Universal Store, after Macquarie lowered its target to $4.40 from $9.40 and decreased its rating to Neutral from Outperform. Discretionary retailers are expected to suffer as consumer confidence wanes in the face of increasing macroeconomic uncertainty.

Despite a strong balance sheet and an easing in pandemic impacts, the broker is also cautious around a relative lack of liquidity in Universal Store shares trading on the ASX.

Following Tabcorp, Healius was second on the table for the largest percentage reduction in forecast earnings. This followed an update by management showing a sharp fall in activity and higher costs, due largely to greater staff absences and unpredictable demand for the company’s core pathology and imaging services. Lower PCR testing volumes and margins also weighed.

As a result, Ord Minnett, Morgans and Credit Suisse all reduced EPS forecasts on the expectation covid and flu disruptions for domestic health services will continue for the time being. Nonetheless, Citi raised its rating to Buy from Neutral, despite the possibility of further weakness around FY22 results as the market comes to grips with permanently lower PCR testing. Looking further out, the broker expects FY24 to be a more normal earnings year.

Total Buy recommendations take up 59.81% of the total, versus 33.67% on Neutral/Hold, while Sell ratings account for the remaining 6.52%.

Upgrade

ARENA REIT ((ARF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/0

Arena REIT is upgraded to Outperform from Neutral, as Macquarie considers the stock defensive from an income and cost perspective amid solid fundamentals.

The tenant base continues to benefit from buoyant operating conditions and additional support is now expected for the early learning sub-sector via the Labor Government policy to lift the maximum child care subsidy rate to 90% for families for the first child in care. Target is reduced to $4.61 from $4.90.

COOPER ENERGY LIMITED ((COE)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/1

Increased output at the Orbost gas plant  has meant Cooper Energy has exceeded contract nominations with up to 20 terajoules a day now sold into the spot market at elevated prices.

Ord Minnett believes the business is well-placed with its exposure to east coast gas markets amid growth options for a number of assets in various stages of development. Rating is upgraded to Accumulate from Hold  and the target is lifted to $0.33 from $0.32.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/2/0

Domino's Pizza Enterprises has outlined a continuation of its strategy for Asia with a target for net store growth of 9-12% per annum. No trading update was provided.

Delivery times in Japan have improved with greater store density. While inflationary pressures are significant, the company has managed to keep prices below peers.

Advertising in Japan is considerably higher and management does not expect this to fall to Australian levels. Nevertheless, as scale builds, margin should expand as a proportion of network sales.

Given the recent de-rating of the stock, Ord Minnett upgrades to Buy from Accumulate. Target is steady at $99.

HEALIUS LIMITED ((HLS)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/0

Citi lowers its target price for Healius to $4.30 from $4.70 following a trading update to the end of May that revealed a covid-induced slowing for core pathology and imaging.

Following recent share price weakness, the broker raises its rating to Buy from Neutral. This move comes despite the possibility of further weakness around FY22 results, the analyst explains, as the market comes to grips with permanently-lower PCR testing.

Citi expects expect FY24 to be a more normal earnings year.

NATIONAL STORAGE REIT ((NSR)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/0

Macquarie reviews the investment outlook, assessing the storage fundamentals remain solid. Downside risks include cost inflation in construction, which may affect returns from developments and refurbishments. Also interest expenses are increasing.

Given the current valuation, Macquarie considers the risks are balanced and upgrades to Neutral from Underperform. Target is reduced to $2.39 from $2.47.

SCENTRE GROUP ((SCG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/2/1

Macquarie remains cautious about the balance sheet as gearing is 39% and there is an interest cost headwind over FY22-FY24. Still, with the stock trading on 14x FFO and at a -21% discount to NTA value seems to be emerging.

The broker also observes retail is relatively more defensive as an asset class in cyclical downturns and as a result upgrades to Neutral from Underperform.

Retail sales continue to surprise to the upside, supported by strong employment and elevated savings. Target is reduced to $2.79 from $2.85.

VICINITY CENTRES ((VCX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/1

Macquarie remains attracted to the defensive cash flows of Vicinity Centres. Moreover, retail shopping centres perform well on a relative basis during a cyclical downturn.

The broker reviews the investment assessment and upgrades to Outperform from Neutral.

The balance sheet and hedging profile screen positively against peers, with Macquarie noting gearing is a conservative 26% and hedging 82%, and thus the group is relatively protected from higher rates. Target is raised to $2.01 from $1.87.

Downgrade

APPEN LIMITED ((APX)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/2/1

While the bid by Canadian telco giant Telus International was revoked, Citi sees validation for Appen's market position and the demand for labelled AI training data. The company is still considered to be an attractive takeover target.

Nonetheless, the broker lowers its rating to Neutral from Buy on earnings risk due to a weaker than expected start to the year and a material 2H earnings skew. The target price falls to $6.60 from $9.15.

BEST & LESS GROUP HOLDINGS LIMITED ((BST)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Macquarie assesses increased macro uncertainty and the impact on the consumer apparel segment, noting Best & Less is exposed in a positive way to low prices and repeat purchasing in childrenswear yet has limited trading liquidity and a vulnerability to low income earners.

 All up, the broker chooses to move to Neutral from Outperform and lowers the target to $2.40 from $4.10. Risks to the rating include a change in the macro outlook, sales and/or margins that lag or exceed expectations.

CHARTER HALL LONG WALE REIT ((CLW)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/1/0

Charter Hall Long WALE REIT has outperformed the sector 2022 to date by 17%, Macquarie observes. The proportion of the leases with CPI-linked escalators has increased to 46% and while this appears resilient the offset is an expected increase in interest costs, the broker adds.

Macquarie expects asset values to increase as of June 2022 as book valuations catch up with transactions in late 2021 and early 2022. Beyond this, caution prevails on the outlook for asset values.

The end result is a downgrade to Neutral from Outperform with the target reduced to $5.11 from $5.23.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Cleanaway Waste Management intends to build EfW (energy from waste) facilities in Melbourne and Brisbane with 300-500,000t per annum capacity. Credit Suisse expects most of the investment will be incurred in FY25 and FY26 with commissioning and commencement of operations in FY27.

The company considers the construction and demolition market an attractive growth opportunity, with the investment expected to double its tangible asset base.

While management retains segment EBITDA margin targets, the broker believes this is a poor metric for a business with a high diversity of capital intensity and return on invested capital or EBIT margin targets would be better. Credit Suisse downgrades to Underperform from Neutral and reduces the target to $2.60 from $2.80.

GPT GROUP ((GPT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/0

Macquarie remains attracted to the diversity and defensive nature of GPT Group, anticipating a retail recovery and strong industrial rental growth. Yet the sources of upside are primarily offset by the hedging profile and the rating is downgraded to Neutral from Outperform.

Given potential interest expense headwinds the broker considers the overall outlook has become more challenging on a fundamental basis. Target is reduced to $4.89 from $5.47.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/3/0

First half net profit at $384m was sharply ahead of the prior corresponding half's $36m. This highlighted strong leverage to a rising commodity environment, Ord Minnett suggests.

The share price may have lagged commodity prices in the current cycle because of the operating issues at Waggaman, yet the broker considers earnings momentum has peaked given the recent trajectory of fertiliser prices.

Ord Minnett also suspects uncertainty created by a plan to spin off the explosives segment may weigh on the share price. Rating is downgraded to Hold from Accumulate and the target raised to $3.90 from $3.50.

TRANSURBAN GROUP LIMITED ((TCL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

Toll roads may be considered inflation hedges yet Credit Suisse believes Transurban Group has had a strong run and investors should consider taking profits.

While rates have been hedged and the average cost of the company's Australian debt is 4%, when debt is refinanced the cost of debt is likely to increase, the broker also observes.

Target is lowered to $13.60 from $14.60 and the rating is downgraded to Neutral from Outperform.

UNIVERSAL STORE HOLDINGS LIMITED ((UNI)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/1/0

Macquarie downgrades its rating on Universal Store to Neutral from Outperform and lowers the target to $4.40 from $9.40. The broker attempts to capture increasing macro uncertainty and the potential impact of this on consumer apparel.

Macquarie updates its view and preferences, believing there is scope for some contraction in consumer confidence with the resulting pressure on discretionary retailers.

While the business should benefit from the relaxation of pandemic constraints, and there is a strong balance sheet, a relative lack of trading liquidity leads the broker to be more cautious.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/5/0

UBS remains confident its forecasts for the banks as rising interest rates provide a shock absorber for earnings. Yet the broker is cautious about the potential for further sector outperformance.

During periods of low growth and high inflation banks have historically underperformed relative to the market. That said, based on the broker's analysis, there would need to be a substantial disruption in credit provisions to derail the earnings story.

UBS downgrades Westpac to Neutral from Buy and reduces the target to $26 from $27.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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