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

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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 18 to Friday July 22, 2022
Total Upgrades: 9
Total Downgrades: 7
Net Ratings Breakdown: Buy 59.53%; Hold 33.57%; Sell 6.90%

For the week ending Friday July 22 there were nine upgrades and seven downgrades to ASX-listed companies covered by brokers in the FNArena database.

A technical glitch was responsible for Zip Co appearing atop the table for the largest percentage increase in average target price set by brokers last week. That position belonged to Whitehaven Coal following unaudited FY22 earnings that were a 16% beat versus the consensus forecast. 

Morgans noted far higher than expected pricing offset volume and cost headwinds, and referred to “staggering” cash accumulation, with $1.4bn generated in the June quarter. The broker raised its target price to $6.70 from $5.25. 

Citi raised its thermal coal price estimates for FY22 and FY23 by 60% and 100%, respectively, to US$350/t and US$210/t, and FY22 and FY23 earnings forecasts for Whitehaven Coal by 50% and 350%, respectively. As a result, the broker upgraded its rating to Buy from Neutral and increased its target to $7.85 from $4.90. 

On the flipside, Charter Hall Group had the largest percentage fall in average target price after both Citi and Macquarie undertook REIT sector reviews last week.

Citi lowered its target to $12.60 from $24.80, and its rating to Neutral from Buy. Rising interest rates are expected to result in higher debt costs across all of Charter Hall Group’s funds, and increased acquisition costs could reduce the number of potential acquisitions.

While Outperform-rated Macquarie also lowered its target to $15.33 from $16.33, it was more upbeat than Citi. It’s thought the addition of a fund manager like Charter Hall would supplement more defensive REIT holdings, should bond yields show signs of stabilising.

Auckland International Airport received the largest percentage fall in forecast earnings last week, after Morgan Stanley lowered its FY22-24 EPS estimates to reflect June 2022 traffic data, and cost pressures resulting from inflation and disrupted supply chains.

The broker predicted an international passenger recovery to 60% of 2019 levels by the end of 2022, and the resumption of a dividend in the second half of FY23.

Last week Citi downgraded its metals deck to account for weaker demand, and sharply downgraded its earnings forecasts for 29Metals, expecting cash burn to emerge in the second half. At the same time, the company’s June-quarter production report outpaced the broker’s forecasts and management retained 2022 guidance.

Underperform-rated Credit Suisse also lowered FY22 earnings forecasts for 29Metals on weaker June and September quarter revenues.

As part of its general review of REITs prior to the reporting season, Macquarie lowered earnings forecasts for Outperform-rated HealthCo Healthcare & Wellness REIT. Increased market scrutiny over capital management was noted, given the dividend is unlikely to be covered until FY25.

Earnings forecasts for Alumina Ltd were also revised lower by brokers following June quarter results for the AWAC joint venture with Alcoa. Morgan Stanley revised its estimate for Alumina Ltd’s 40% share of AWAC’s first half dividend to US$4.1cps compared to the US$5.7cps previously expected.

Incorporating the AWAC result and lower forecasts for the San Ciprian refinery triggered a -16% cut to Macquarie’s earnings forecasts. Credit Suisse noted the refinery accounts for around 12% of AWAC production, and according to Alcoa is losing circa -US$75m per quarter at current gas and power prices in Spain. Gas prices have increased five-fold from 2021 levels.

Best to substitute Iluka Resources for Tabcorp at the head of the table below for positive earnings changes, as broker forecasts for Tabcorp continue to be distorted by the demerger of it’s Lotteries and Keno business.

Iluka’s June quarter production of both zircon and synthetic rutile came in above consensus forecasts, according to Credit Suisse, and a sell-off in inventories for zircon, rutile and synthetic rutile resulted in a 20% beat for sales versus consensus.

Outperform-rated Macquarie noted the company is set to benefit from rising zircon, rutile and rare earth prices in the short and medium term, while Buy-rated Citi pointed to strong US demand due to supply chain constraints on paints, coating and plastics, and raised 2022 earnings forecasts by 38%

Reasons are advanced above for target price changes for Whitehaven Coal and Charter Hall Group. While both also appeared on the list for a material uplift in earnings forecasts by brokers, Charter Hall's position should be disregarded due to technical issues.

Ampol also received higher earnings forecasts from brokers. Macquarie returned from a period of research restriction on the company with an Outperform rating, noting the Z Energy acquisition is more than 20% accretive and should accelerate debt reduction. 

Second quarter refining margins confirmed Buy-rated UBS's suspicions that the Lytton refinery will continue to benefit from strong margins, given 97% of its fuel is transport related. Meanwhile, Morgan Stanley noted recent share price weakness and sniffed a buying opportunity.

Total Buy recommendations take up 59.53% of the total, versus 33.57% on Neutral/Hold, while Sell ratings account for the remaining 6.90%.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/2/0

Ord Minnett has used a general sector update to upgrade AGL Energy's rating to Buy from Hold. The broker's price target has lifted to $10.60 from $9.15.

ANSELL LIMITED ((ANN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/1/1

Macquarie notes Ansell's near term earnings continue to be impacted by the unwinding of covid demand from FY20/21.

But the broker sees this factor as discounted in forecasts and consensus earnings for the company.

Macquarie downgrades earnings by -8% and -9% for FY22 & FY23, respectively, reflecting revised assumptions for operations and FX forecasts.

Ansell is trading at 12.7x 12-month forward consensus forecast earnings, a -29% discount to the ASX200 industrials, with a strong balance sheet, leverage to a lower AUD and defensive healthcare earnings, notes the broker.

The price target raises to $27.85 from $27.65 and the rating is upgraded to Outperform from Neutral.

COOPER ENERGY LIMITED ((COE)) Upgrade to Buy from Accumulate by Ord Minnett and Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/3/0

Ord Minnett has used a general sector update to upgrade its rating for Cooper Energy to Buy from Accumulate with a fresh price target of 34c, up from 33c previously.

As Cooper Energy's share price continues to underperform, Morgan Stanley's rating is lifted to Equal-weight from Underweight. It's felt the Orbost Gas Processing Plant transaction last month puts the company in control of its own destiny.

Morgan Stanley feels Sole is showing signs of improvement after a disappointing couple of years. In a 4Q update, the company reported higher annual production, sales volume and revenue for FY22.

The analyst estimates the removal of the Orbost Gas Processing Plant tariff will save the company around $50m per year, partly offset by a -$25m increase in opex related to the plant.

The target price rises to $0.25 from $0.23. Industry view: Attractive.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/4/0

Evolution Mining's June quarter numbers proved broadly in-line with Ord Minnett pointing out management at the gold producer had already lowered expectations in late June, so no flowers this time around (we made up the latter).

Now that expectations have been re-based, and so has the share price, Ord Minnett sees an opportunity to jump on board of a lower cost producer with a quality management team at an attractive price.

Hence, the rating has been upgraded to Accumulate from Hold. Target price has lost another -10c to $2.90.

JB HI-FI LIMITED ((JBH)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/1

Citi assesses a strong 4Q trading update by JB Hi-Fi with 2H earnings (EBIT) a 29% beat versus the broker's forecast. The rating is upgraded to Buy from Neutral.

Margins expanded in the 2H for JB Hi-Fi Australia and The Good Guys on better gross margins and operating leverage, explains the analyst.

As previously tipped by the broker, households remain well placed to weather increasing cost-of-living headwinds in FY23. While the FY23 earnings forecast is increased by 9.6%, the target falls to $47 from $52 on a de-rating of multiples for the market and peers.

RIO TINTO LIMITED ((RIO)) Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0

Morgans upgrades its rating for Rio Tinto to Add from Hold after recent share price weakness. By late 2022 and heading into 2023, a better outlook for metals is expected as Chinese growth starts to recover.

The broker makes minor changes to assumptions following last week's 2Q result and the target price falls to $113 from $114.

SIMS LIMITED ((SGM)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/3/0

Citi cuts FY22 earnings forecasts for Sims -1% and FY23 forecasts -6% to account for lower Turkish scrap price assumptions.

The broker notes scrap prices have fallen -38% since March and Turkish scrap now looks oversold.

Add to that the recent -35% share-price retreat and Citi spies value, not to mention the strong net cash position and balance sheet.

Rating upgraded to Buy from Neutral. Target price slips to $17 from $20.40 to reflect the broader market de-rating.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Buy from Neutral by Citi .B/H/S: 6/0/0

Whitehaven Coal's June quarter & FY22 coal production proved in-line with guidance, observes Citi.

The broker highlights the link between rising thermal coal prices and the switch by European countries to bring back more coal plants due to the Russian gas restrictions and gas supply outages (Freemont).

Citi expects the global seaborne coal market to remain tight with an EU ban on Russian coal expected in mid-August.

Accordingly, the broker has upgraded thermal coal estimates for FY22/23 by 60/100%, respectively to US$350/$210t and earnings forecasts by 50% and 350%, for FY22/FY23, respectively.

If the coal price forecasts are correct, Citi believes there is more upside scope for the shares on valuations of circa 0.6x DCF, despite the 100% increase in the last 6 months.

Target price rises to $7.85 from $4.90. Rating is upgraded to Buy from Neutral.

Downgrade

ATLAS ARTERIA ((ALX)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/3/0

Morgan Stanley lifts its target price for Atlas Arteria to $8.08 from $6.88 to incorporate the growth outlook and potential corporate activity. IFM Global Infrastructure Fund obtained a 15% shareholding in the company at $8.10/share in early June.

The broker also lowers its rating to Equal-weight from Overweight on valuation. Industry view: Cautious. 

APPR 2Q traffic and revenue were lower than expected and the analyst now has less hope for a French traffic recovery for the rest of the year, due to weather, petrol prices and economic uncertainty.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 5/1/1

For Ord Minnett's early response, see yesterday's Report. Today, upon further reflection, the broker has downgraded Beach Energy to Accumulate from Buy – we can blame the share price performance for that.

Ord Minnett believes the company released a "reasonable quarterly activities report" which hereby gets rewarded with minor upgrades to forecasts.

In response, the price target has climbed to $2 from $1.95.

CHARTER HALL GROUP ((CHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/2/0

Citi reviews the Australian Real Estate sector and forecasts a -6% to -10% fall in asset values by 2024 in response to rising bond yields but expects a hard landing will be avoided.

Add to that the near-term and medium-term earnings hit from higher rates, Citi favours asset classes with better demand supply dynamics such as industrial, or short-term leases such as Storage.

Income favourably exposed to high inflation such as convenience and certain weighted asset lease expiries are also preferred.

Citi expects rising interest rates will hit Charter Hall hard, resulting in higher debt costs across all funds, as well as increase acquisition costs, potentially reducing the number of forecast acquisitions.

While valuation is starting to appeal, the broker spies no upside catalysts.

Rating downgraded to Neutral from Buy. Target price slumps to $12.60 from $24.50.

CHARTER HALL LONG WALE REIT ((CLW)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/0

Citi reviews the Australian Real Estate sector and forecasts a -6% to -10% fall in asset values by 2024 in response to rising bond yields but expects a hard landing will be avoided.

Add to that the near-term and medium-term earnings hit from higher rates, Citi favours asset classes with better demand supply dynamics such as industrial, or short-term leases such as Storage.

Income favourably exposed to high inflation such as convenience and certain weighted asset lease expiries are also preferred.

Citi expects Charter Hall Long WALE REIT's low hedging and high gearing will result in a hit to near-term and medium-term earnings.

While 46% of the REIT's income is linked to the CPI, Citi expects the REIT's long weighted average lease expiries on the other 54% will work against it in a rising rate environment.

Rating downgraded to Neutral from Buy and Citi issues a downside catalyst watch, expecting FY23 guidance will miss consensus.

Target price falls to $4.70 from $5.71.

SUNCORP GROUP LIMITED ((SUN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/1/1

Ord Minnett is not overly enthusiastic about the move to sell the banking operations to ANZ Bank ((ANZ)); and that's putting it mildly.

The broker highlights the lack of large takeover premium, significant transaction costs, uncertainty on regulatory approval, on top of a number of dis-synergies.

In addition, and separate to the deal, Ord Minnett harbours concerns around reinsurance and perils costs in FY23 delaying a return to 10–12% margins for the insurance business.

Downgrade to Hold from Buy. Target price drops to $13.25 from $14.

TABCORP HOLDINGS LIMITED ((TAH)) Neutral by UBS .B/H/S: 2/4/0

Following a period of restriction on Tabcorp Holdings research, UBS reinstates coverage with a Neutral rating and $1.00 target price, down from $4.70 following the demerger of the Lotteries and Keno business. Despite a lack of growth options, it's felt there's little downside risk.

For the remaining Wagering business, the analyst feels the company will need to improve its product and value perception to stabilise market share.

While structural reform of key licences will be the most significant value driver, the broker cautions that such reform is uncertain and the timing difficult to forecast.

WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/1/1

WiseTech Global has upgraded earnings margin guidance to above consensus expectations for the fourth consecutive period. But having seen earnings margins expand from 30% in FY20 to 50% in FY22, Macquarie sees limited upside from further large expansion.

The operational outlook remains positive, Macquarie suggests, but the catalysts to drive further outperformance are either becoming less material or have unclear timing. Going forward, slowing revenue growth coupled with weaker margin expansion may cause further downward pressure on valuation.

Downgrade to Underperform from Neutral. Target falls to $42 from $44 on a higher risk-free rate.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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