Weekly Ratings, Targets, Forecast Changes – 24-06-22

Weekly Reports | Jun 27 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 June 20 to Friday June 24, 2022
Total Upgrades: 11
Total Downgrades: 9
Net Ratings Breakdown: Buy 59.26%; Hold 33.95%; Sell 6.79%

For the week ending Friday June 24 there were eleven upgrades and nine downgrades to ASX-listed companies covered by brokers in the FNArena database.

Due to challenging macroeconomic conditions both Morgan Stanley and UBS undertook reviews of consumer-exposed stocks and decided to lower FY23 earnings estimates for stocks under coverage by an average-37% and -23%, respectively.

UBS downgraded its rating for City Chic Collective to Neutral from Buy and slashed its target price to $2.00 from $4.50 after reducing the companys sales forecasts across the Americas, EMEA and Australasia. While Morgan Stanley retained its Overweight rating, its target price fell to $3.00 from $4.40.

As a result, City Chic Collective received the largest percentage reduction in average target price set by brokers last week. The second largest reduction belonged to footwear retailer Accent Group after UBS lowered its target to $1.25 from $2.50 as gross margin forecasts were reduced on the expectation for increased discounting and a mix-shift back to lower-margin third-party brands. The brokers rating was also downgraded to Neutral from Buy.

Also as part of its review, UBS lowered it target price for Harvey Norman to $3.35 from $6.50 and its rating to Sell from Buy. The companys sales mix is skewed to large items for which the purchasing decision can be delayed, and the broker feels market share and franchisee health are being prioritised over shareholder interests in the short term.

A decline in time spent listening to AM/FM radio, particularly by the youth audience, was cited by Morgan Stanley as just one example of structural (and cyclical) problems besetting the media and entertainment business HT&E.

Exposure to these problems has only increased, suggests the analyst, after the company acquired regional radio business Grant Broadcasters last January. The Underweight rating was retained while the target price was reduced to $1.00 from $1.55.

The target price set for Centuria Capital was also materially reduced by UBS last week to $2.00 from $3.14. This was part of a wider REIT sector review due to a worsening macroeconomic backdropthat resulted in price targets falling by -15% on average across the brokers REIT coverage.

The analyst estimates FY23 asset under management (AUM) for Centuria Capital will be flat with negative revaluations offset by some organic AUM growth. While greater growth is expected in FY24, forecasts for performance/transaction fees are significantly reduced and the market multiple applied to these fees is much lower.

The average target price set by brokers for Metcash also fell last week as estimates were made for FY22 results due out today. The main focus will be on leverage to grocery inflation and the demand environment, suggests Ord Minnett, as well as the outlook for trade hardware, givena slowing housing market. Based on industry feedback, Citi expects the outlook for the second half of FY22 and FY23 will be positive for supermarkets.

The commodities teams at Macquarie and Morgan Stanley last week generally reduced commodity price forecasts.

While a lower gold price forecast by Macquarie had some impact on the brokers decision to downgrade its rating for St Barbara to Neutral from Outperform other factors were also at play. These included a delay in the Final Investment Decision for the Simberi project in Papua New Guinea, along with a delay in pit development timelines at the Atlantic operations in Canada.

After Citi also pointed to ongoing operational issues at Gwalia, St Barbara appeared atop the list for the largest percentage downgrade to forecast earnings by brokers in the FNArena database last week.

The next two list positions were filled by Regis Resources and Alumina Ltd as a result of the aforementioned commodity price downgrades by Macquarie and Morgan Stanley. The latter downgraded its rating for Regis Resources to Underweight from Equal-weight on recent production issues and sees the least upside forthe company among its gold coverage.

Meanwhile, Macquarie lowered its target price for Alumina Ltd by -11% to $1.60 on forecast cost increases though noted alumina prices are a key risk to its forecasts. Morgan Stanley retained its Overweight rating and likes the attractive 2022 dividend yield. The broker's target fell to $1.85 from $2.20 onnegative impacts from updates to the broker's alumina and aluminium price forecasts for 2022.

As displayed in the tables below, earnings forecasts (and target prices) continue in a firm downtrend. The rare industry exception was provided by Ampol and Viva Energy after Morgan Stanley suggested both companies could generate around $500-600m of extra cash flow from refining over the next 18 months.

The broker estimated there will be$850m of debt capacity for Ampol to fund an off-market buybackby the end of 2022. Meanwhile, the performance of Viva Energy is expected to depend on whether refining margins keep rising and how the Geelong Energy hub develops. An Overweight rating is retained for both companies and Viva Energys target price was raised to $3.30 from $2.70.

Total Buy recommendations take up 59.26% of the total, versus 33.95% on Neutral/Hold, while Sell ratings account for the remaining 6.79%.

Upgrade

APPEN LIMITED ((APX)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/0

Macquarie considers Appen's strategy to diversify its customer base is sound but will take time. Growth will be driven by China and the Appin Ontology Studio.

Consensus expectations still need to be achieved in order to regain market confidence, the broker observes, asthe stock is trading below its historical average on earnings multiples.

Macquarie upgrades to Neutral from Underperform and retains a $5.70 target.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 5/1/1

A recent decline in Beach Energy's share price, down -16% over the last fortnight, has seenMacquarie lift its rating on the company given an improved risk-reward outlook.Further, the broker has lifted its base case oil price deck, further supportingBeach Energy's valuation.

Looking ahead,Macquarie highlights the company is investing in a sizable growth program to lift production. The company is targeting 28m barrels equivalent with its investment program, which the broker finds achievable.

The rating is upgraded to Neutral from Underperform and the target price increases to $1.65 from $1.51.

BWP TRUST ((BWP)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/2/2

UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts pricetargets down by -15% on average to reflect valuations that show a"normalised" higher growth/rate environment as well as a DCF-based scenario.

Most sector valuation metrics screen as "cheap" versus the past 10 years, yet the broker notes the earnings yield spread to bonds is lower. The low gearing and strong transaction market remains supportive of BWP Trust but UBS believes this is balanced by risks to upcoming lease expiries along with benign growth.

While upgrading to Neutral from Sell, the broker prefers Centuria Industrial REIT ((CIP)) as it offers a more defensive exposure. Target is reduced to $3.59 from $3.86.

CHARTER HALL GROUP ((CHC)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/0

UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts pricetargets down by -15% on average, to reflect valuations that show a"normalised" higher growth/rate environment as well as a DCF-based scenario.

Most sector valuation metrics screen as "cheap" versus the past 10 years, yet the broker notes the earnings yield spread to bonds is lower. The broker prefers names with low leverage and high cash flow security andbelieves CharterHall is still in a position to grow its assets under management through a period of dislocation, with support from key investors.

Charter Hall is upgraded to Buy from Neutral, with the target lowered to $13.90 from $20.00.

CENTURIA INDUSTRIAL REIT ((CIP)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/0

UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts pricetargets down by -15% on average to reflect valuations that show a"normalised" higher growth/rate environment as well as a DCF-based scenario.

Most sector valuation metrics screen as "cheap" versus the past 10 years, yet the broker notes the earnings yield spread to bonds is lower.

UBS considers Centuria Industrial REITthe leading pure logistics A-REIT, noting the strong demand for space from logistics tenants which supports asset valuations. The longer-term outlook for rental growth should mean industrial segments remain the preferred sub- sector for some years to come.

The broker upgrades to Buy from Neutral and reduces the target to $3.12 from $4.00.


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