Weekly Ratings, Targets, Forecast Changes – 08-07-22

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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 July 4 to Friday July 8, 2022
Total Upgrades: 8
Total Downgrades: 2
Net Ratings Breakdown: Buy 59.03%; Hold 33.98%; Sell 7.00%

For the week ending Friday July 8 there were eight upgrades and two downgrades to ASX-listed companies covered by brokers in the FNArena database.

Austal headed up the table for the largest percentage increase in target price after announcing a contract worth up to US$3.3bn for detailed design and construction of up to eleven offshore patrol cutters for the US Coast Guard.

Macquarie felt the contract de-risked the company’s outlook and raised its rating to Outperform from Neutral and its 12-month target price to $2.65 from $1.91. The contract will cover shipyard overheads, which will allow more room to bid on future projects, according to Citi.

Citi also highlighted the Mobile division is more sophisticated and diversified than a few years ago and raised its target to $2.91 from $2.35. Hold-rated Ord Minnett was more cautious and noted the valuation impact of the contract win is difficult to assess given uncertainty around the expected margin.

On the flipside, Newcrest Mining received the largest percentage fall in target price. Across Ord Minnett’s commodities coverage, average net present values were reduced by -15% and its rating for Newcrest was lowered to Hold from Buy, while its target was slashed to $23 from $29.

From the same starting point of $29, Citi also reduced its target to $22 due to rising cost concerns and a lower consensus copper price expectation. The target was also impacted by a marking-to-market of commodity prices, partially offset by a lower Australian dollar. Lower commodity price forecasts at UBS also resulted in a $22.40 target, down from $26.20.

The only commodities exempt from lower price revisions by UBS were thermal coal, the broader Energy sector and lithium. The broker highlighted a constructive outlook for lithium prices and exceptional cashflows are expected to fund transformational growth for Allkem (and IGO and Mineral Resources), even as prices fall by up to two-thirds by the end of 2023.

This positive view was responsible for Allkems's position atop the table for largest percentage increase in forecast earnings last week. On the other hand, Star Entertainment received the largest percentage decrease. Morgans downgraded its rating to Hold from Add while the findings of the Bell Review (due August 31) are awaited.

The broker lowered its FY22 earnings forecast (to align with consensus) by -28% to take account of higher operating costs and expressed a preference for gaming stocks like Jumbo Interactive and Lottery Corp, which are exposed to higher potential earnings growth from lotteries.

Judo Capital was next on the forecast earnings downgrade list. While an Outperform rating was retained, Macquarie is concerned about loan impairments as rates rise, a position not helped by the company’s sub-scale operation. Also, the loan book is skewed to SME’s and Judo Capital is thought to have easier underwriting standards than peers in that segment.

However, following an update on loan growth by management, Macquarie conceded prospectus targets continue to be met. Ord Minnett also noted ongoing market share gains in the SME lending market and retained its Buy rating.

Last week, Ord Minnett initiated coverage on Lottery Corp with an Accumulate rating, which increased the number of covering brokers in the FNArena database to five, though had the effect of lowering the company’s average forecast earnings within the database.

The broker noted Lottery Corp’s capacity to generate profits and deliver hefty returns to shareholders, though highlighted the consensus margin expansion forecast from digital penetration may be overdone. More positively, the broker noted a capital-light business model and defensive earnings that may come in handy should the economic backdrop worsen.

Total Buy recommendations take up 59.03% of the total, versus 33.98% on Neutral/Hold, while Sell ratings account for the remaining 7.00%.

Upgrade

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

Ord Minnett conducts its quarterly currency revisions for healthcare companies and finds a very modest benefit to companies reporting in Australian dollars.

Ansell is upgraded to Buy from Accumulate on valuation grounds. Target price is steady at $33.

AUSTAL LIMITED ((ASB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/0

Austal has been awarded a contract worth up to US$3.3bn for detailed design & construction of up to 11 Offshore Patrol Cutters for the US Coast Guard and Macquarie comments this contract de-risks the company's outlook.

There will be more tender opportunities for the company over the year ahead and Macquarie upgrades to Outperform from Buy.

Earnings estimates have received a boost, putting a rocket underneath the price target; to $2.65 from $1.91 prior.

DACIAN GOLD LIMITED ((DCN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/0

Macquarie upgrades its rating for Dacian Gold to Neutral from Underperform following an all-scrip takeover offer by Genesis Minerals ((GMD)) that values the company at $0.12.

The broker's target price rises to $0.10 from $0.09 to reflect the takeover and a $12.6m placement to Genesis Minerals, which will
enable exploration drilling and stockpile processing to continue.

MCMILLAN SHAKESPEARE LIMITED ((MMS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/0

Minister for Climate and Energy Chris Bowen confirmed at a National Press Club address the government could cut the 5% tariff on electric vehices and abolish fringe benefits tax on affordable electric vehicles (EVs) priced up to $77,565 from July 22.

Macquarie says the policy offers a tax advantage for Novated Leases and expects it should boost the salary-package market share and conversion, compared with other distribution channels.

Macquarie considers the near-term earnings impact to be immaterial but considers the potential upside to medium-term earnings from the fringe-benefits tax policy should support the company's multiple.

The  broker notes that the lifetime cost of an EV is up to -50% less than an internal combustion vehicle and running costs are also cheaper.

Rating is upgraded to Outperform from Neutral. Target price falls to $11.20 from $12.59 to reflect the de-rating in Small Industrials price-earnings ratios.

OZ MINERALS LIMITED ((OZL)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/0

As a direction for value investors, Morgans upgrades its rating for OZ Minerals to Add from Hold. Traders are cautioned to delay investment until there's more clarity around the Carrapateena mine and the direction of the copper price.

This advice follows the recent 2022 management guidance downgrades, combined with weaker copper prices and higher assumed 2022-24 cost assumptions.

The broker lowers its 2022-23 earnings (EBITDA) forecasts by -8-13% and the target price falls to $23.12 from $26.65.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/3/2

Credit Suisse downgrades it EPS forecasts for asset managers by -16% on average for FY23, after allowing for market movements in the second quarter just finished.

The broker upgrades its rating for Platinum Asset Management to Neutral from Underperform on valuation and in the belief earnings will improve after a period of improved fund performance. The target falls to $1.80 from $1.90.

WOODSIDE ENERGY GROUP LIMITED ((WDS)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

With supply availability continuing to tighten the global oil market UBS has lifted its Brent oil forecast to US$104 a barrel in FY22, up from US$95 a barrel, and to US$95, US$85 and US$80 a barrel through to FY25, driving earnings per share increases across the sector ranging 8-25% to FY24.

While the broker sees better value with Santos ((STO)), it does note Woodside Energy should benefit from higher spot LNG prices, with UBS lifting its forecast for North Asian spot LNG by an average 40% through to 2026.

The Woodside Energy rating is upgraded to Buy from Neutral and the target price increases to $34.25 from $32.00.

WOOLWORTHS GROUP LIMITED ((WOW)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/4/1

UBS is generally more positive on the grocery sector, with survey results obtained by the broker suggesting food inflation has gained momentum faster than anticipated, with the sector achieving multiple price rises in the last year. 

With cost of living pressures expected to drive a resurgence of private label goods, and the broker expects Woolworths Group and Aldi to make market gains, while Coles Group and IGA ((MTS)) lose share.

Coupled with a strong trading result for Woolworths Group in April and May, the broker increases its earnings per share forecasts 6% and 9% through to FY23. 

The rating is upgraded to Neutral from Sell and the target price increases to $37.00 from $36.00.

Downgrade

NEWCREST MINING LIMITED ((NCM)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/3/0

With commodity markets taking a hit in recent weeks as the market becomes increasingly focused on a potential economic recession, Ord Minnett's average net present value has declined -15% across its commodities coverage, but does expect macro economic conditions to improve in the second half of the year.

The broker notes it now prefers BlueScope Steel ((BSL)) and South32 ((S32)) to Newcrest Mining.

The rating is downgraded to Hold from Buy and the target price decreases to $23.00 from $29.00.

STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0

As part of a preview of FY22 results for five gaming stocks under coverage that report in August, Morgans expects the best earnings growth from those primarily exposed to lotteries. These are represented by Jumbo Interactive and Lottery Corp.

For Star Entertainment, the broker lowers its FY22 earnings (EBITDA) forecast (to align with consensus) by -28% to $220m to take account of higher operating costs. The rating falls to Hold from Add while the findings of the Bell Review (due August 31) are awaited.

The target price falls to $3.10 from $4.00.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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