Weekly Reports | Aug 15 2022
Weekly update on stockbroker recommendation, target price, and earnings forecast changes.
By Mark Woodruff
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.
Period: Monday August 8 to Friday August 12, 2022
Total Upgrades: 8
Total Downgrades: 15
Net Ratings Breakdown: Buy 58.43%; Hold 34.21%; Sell 7.37%
For the week ending Friday August 12 there were eight upgrades and fifteen downgrades to ASX-listed companies covered by brokers in the FNArena database.
REA Group featured prominently, picking up three separate broker rating downgrades.
Taking into account a forecast near halving of house lending over the next two years, along with double-digit house price declines, Citi felt consensus growth expectations for FY23 and FY24 were too optimistic and lowered its target to $133.05 from $153.50.
Ord Minnett noted some emerging cost pressures though retained its $140 target, while UBS set a $142.60 target, up from $130, despite lowering earnings forecasts by -5%. Strategists at the broker see potential for house price declines of -10-15% peak to trough by around the second half of 2023, at which point inflation should peak.
OZ Minerals had the largest percentage fall in forecast earnings in the FNArena database last week, as well as the second largest increase in average target price set by brokers.
Morgans agreed with the company’s board that the $25/share takeover bid by BHP Group undervalues the company and is highly opportunistic. OZ Minerals shares had corrected by around -35% from a 12-month high above $29.
In reaction to the bid, Ord Minnett increased its rating to Accumulate from Hold (target to $27,40, up from $16.00) and Credit Suisse upgraded to Neutral from Outperform and nearly doubled its target to $28.00 from $14.50.
Morgans did the reverse and downgraded its rating to Hold from Add after a share price rally following the announcement was adjudged to incorporate most of the potential upside.
Morgans 12-month target price was increased to $25.40 from $23.20 after also allowing for second quarter production that trailed its expectation by -10%, partly due to higher unit costs. The broker also incorporated lower near-term in-house copper forecasts.
The table below misleadingly shows the largest increase in average target price set by brokers last week went to Block. However, the Morgan Stanley and Credit Suisse target prices are set in US dollars, and are not taken up in the AUD average database target price.
Commentary in the database noted Morgan Stanley lowered its price target to US$85 from US$110, due to a more conservative tone by management at second quarter results on outlook and competition. Alternatively, Macquarie raised its Australian dollar target to $130 from $97, on good metrics for the legacy business.
29Metals had the largest percentage rise in forecast earnings by brokers last week after Credit Suisse adjusted both net interest expenses and income tax expenses over the forecast period. An absence of major capital expenditure commitments in the coming two years was noted, as was more balance sheet flexibility than peers, though an Underperform rating was retained.
Next up was Suncorp Group. Following FY22 results, Macquarie lifted EPS forecasts for FY23 and FY24 by 5.3% and 6.6%, respectively, due to higher gross written premiums and bank lending growth.
UBS felt the core general insurance franchise remains in good shape and noted the group appears to have navigated home claims inflation well, with claim severity rising only 1-2% in the second half, while the industry rose closer to 10%.
All seven brokers in the FNArena database reviewed Computershare’s FY22 results and earnings forecast were increased on average. Any short-term concerns for Morgans were trumped by interest rate leverage as suggested by FY23 guidance for over 55% growth. FY23 EPS guidance was estimated to be around 5% above the consensus forecast.
The company’s margins, costs and leverage all impressed Macquarie though corporate activity was considered weak. Credit Suisse was a dissenting voice and downgraded its rating to Neutral from Outperform. The earnings upgrade cycle is thought to be coming to an end, as interest rate cuts from FY24-26 begin to be priced in to fixed income markets.
A data glitch was responsible for the appearance of Alliance Aviation Services in the table for higher broker earnings forecasts, the opposite was true.
A reporting season wouldn’t be complete without deep analysis of the widely held Telstra and its all-important dividend, which rose to 8.5cps in the second half from 8cps in the first half. On average, brokers increased earnings forecasts though commentary was mixed.
On one hand, Morgans felt the company had comfortably turned the corner, Morgan Stanley anticipated shares would outperform in uncertain markets and Ord Minnett recommended shares to investors for the outlook on mobile and the monetisation of InfraCo.
On the other hand, Neutral-rated UBS noted lower FY23 guidance partly implies near-term impacts from rising inflationary pressures, while Macquarie forecast softer NBN margins and increased competition in enterprise fibre, and lowered its target by -7% to $3.80, while its Neutral rating was retained.
Macquarie wasn’t getting too carried away after the increased dividend either, with no further increase anticipated until FY25.
Total Buy recommendations take up 58.43% of the total, versus 34.21% on Neutral/Hold, while Sell ratings account for the remaining 7.37%.
AIR NEW ZEALAND LIMITED ((AIZ)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/0
Macquarie reviews Air New Zealand's capacity for FY23 and finds first-half capacity should land at 67% of pre-covid levels before rising to 84% in the second half.
Strong demand is allowing ticket prices to recoup fuel costs for now, notes the broker, but remains cautious given the likelihood of a spending slowdown.
Rating is upgraded to Neutral from Underperform. Targe price is NZ65c.
COMPUTERSHARE LIMITED ((CPU)) Upgrade to Buy from Neutral by Citi .B/H/S: 6/1/0
Even though Computershare flagged the significance of margin income, Citi concludes from the FY22 results that the company is even more heavily reliant on the movement in interest rates, both up and down.
The margin income was a significant earnings driver in FY22 and in excess of operational earnings.
Looking to FY23, Citi views the company will benefit from a further notable increase in margin income with the peak expected to be down the track.
The company's balance sheet revealed a strong improvement post the CCT acquisition with net debt to EBITDA at 1.64x and within the target range.
The broker's earnings forecasts are raised by 4% and 3% for FY23 and FY24, respectively and changes from the Canadian transfer pricing mean there will be zero franking in the near future.
The price target is adjusted for the earnings forecasts and valuation to $28.20 from $26.90 and the rating is upgraded to Buy from Neutral.
See also CPU downgrade.
GRAINCORP LIMITED ((GNC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/0
With GrainCorp upgrading its FY22 guidance and providing increased visibility as to earnings through to FY24, Credit Suisse has upgraded its own full year FY22 earnings forecast 7.5% and FY24 earnings forecast 185%.
The broker highlights the guidance upgrade for FY22 is a product of the company's strong export program execution, supported by a positive trading environment that the broker anticipates will continue into FY23. Credit Suisse also notes the company expects an above average winter crop, driving the broker to lift its production forecast to 26m tonnes from 21m tonnes.
The rating is upgraded to Outperform from Neutral and the target price increases to $9.14 from $8.79.
INCITEC PIVOT LIMITED ((IPL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/0
Morgan Stanley expects ongoing upside for ammonia prices, after a recent positive move. It's felt Incitec Pivot is ideally positioned to leverage the dislocation in global gas markets and subsequent favourable pricing across the nitrogen complex.
The analyst estimates that for every US$10/t rise for the ammonia price Incitec Pivot's earnings (EBIT) rise by around $7.7m.
The broker upgrades its rating to Overweight from Equal-weight and raises its target to $4.75 from $4.05. Industry view: In-Line.
OZ MINERALS LIMITED ((OZL)) Upgrade to Accumulate from Lighten by Ord Minnett and Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/3/0
In an initial review of the $25/share takeover bid by BHP Group, Ord Minnett raises its rating for OZ Minerals to Accumulate from Lighten. It's thought the sale process could yield a higher price and the broker raises its target above the bid price to $27.40 from $16.00.
In light of the recent copper price correction, the broker feels the bid is opportunistic, and notes the OZ Minerals board has rejected the offer.
The analyst sees large synergies in a combined entity due to BHP's Olympic Dam and Oak Dam assets in South Australia. By 2027 it's estimated OZ Minerals could add an additional 14% in earnings (EBITDA) for BHP.
OZ Minerals has been offered a $25 per share takeover bid by BHP Group ((BHP)), an offer that Credit Suisse notes represents 12x 2023 expected earnings and values OZ Minerals at a level far superior to any copper peers.
With both of OZ Minerals' copper mines at growth stages, the broker expects BHP would require key personnel to be retained to oversee integration of copper assets to avoid a sizeable cost increase.
The rating is upgraded to Neutral from Underperform and the target price increases to $28.00 from $14.50.
See also OZL downgrade.
REDBUBBLE LIMITED ((RBL)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/1/0
UBS sees limited near-term downside risk for Redbubble ahead of the company delivering its full year result, and anticipates a result that meets or exceeds expectations would likely be a positive catalyst for the stock.
The broker points to signs that sales and margin trends could exceed what the market appears to be pricing in, including a 10% base price rise from May and reports from US peers that digital marketing costs have not significantly worsened.
Given what the broker describes as an "extreme level of investor disinterest" and a valuation implying further downgrades, it sees an attractive risk-reward balance. The rating is upgraded to Buy from Neutral and the target price increases to $1.60 from $1.45.