Weekly Ratings, Targets, Forecast Changes – 12-08-22

This story features AIR NEW ZEALAND LIMITED, and other companies. For more info SHARE ANALYSIS: AIZ

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 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%.

Upgrade

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.

REECE LIMITED ((REH)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/2/2

With Reece due to report on its full year before the end of the month, Macquarie notes volumes should continue to be supported by an elongated pipeline but sees risk of affordability constraints impacting in the detached housing segment in Australia. 

In the US, the broker notes earnings have benefited from the current US dollar strength, but anticipates the segment to be operationally weaker in FY24. Earnings per share forecasts updated 0%, -8% and -12% through to FY24.

The rating is upgraded to Neutral from Underperform and the target price decreases to $15.80 from $18.50.

Downgrade

AUSTRALIAN CLINICAL LABS LIMITED ((ACL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/1/1

While Australian Clinical Labs closed out the year with net profit of $184.5m, Credit Suisse notes year-on-year growth of 108% missed consensus forecasts by -4% as slow base business dragged on the second half.

With covid revenue down -45% in the half, the broker notes Australian Clinical Labs' base business is yet to show signs of improvement as fewer GP visits, higher cancellation rates and staffing shortages continue to take a toll. Credit Suisse does not expect deficit recovery in the short-term. 

Credit Suisse lifted its FY23 earnings per share forecast 8%, predicting covid revenue to improve to $92m in the first half. The rating is downgraded to Neutral from Outperform and the target price decreases to $5.35 from $6.00.

ARENA REIT ((ARF)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/0

Arena REIT's FY22 earnings were in line with Macquarie's forecast. FY23 dividend guidance is nevertheless -3% below expectations,
mainly driven by lower development completions and returns.

Arena maintains superior growth relative to peers driven by its development pipeline in early learning centres, Macquarie notes. but with development returns moderating and interest expense headwinds impacting growth, the broker has become more cautious on the outlook.

Given an elevated valuation and forecast 3.5% dividend yield, Macquarie downgrades to Neutral from Outperform. Target falls to $4.74 from $4.92.

ASX LIMITED ((ASX)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/3

Ord Minnett reduces its rating for the ASX to Lighten from Hold on valuation and concerns over July volumes which showed pressures that may be ongoing for a few months. The target also falls to $82.50 from $84.86.

These pressures are from expenses related to the CHESS replacement, explains the analyst. There's also concerns around a new management team and the regulator's own concerns about the IT rollouts.

The broker estimates any benefits from the block chain technology will be small and have been pushed further out.

BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/3/1

Macquarie notes Bendigo & Adelaide Bank continues to lead the banking sector in 2022, outperforming peers 12-35% year-to-date with strong lending growth driving the result. 

The bank has also benefited from its relatively higher exposure to rising rates, but the broker warns as deposit pricing benefits normalise, and with Bendigo & Adelaide Bank not demonstrating margin upside like peers National Bank ((NAB)) and Suncorp Group ((SUN)), valuation is increasingly stretched.

The broker finds cost ambitions unrealistic, and presenting a key risk to its recommendation. The rating is downgraded to Underperform from Neutral and the target price of $10.00 is retained.

BORAL LIMITED ((BLD)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/3

With Boral due to report on its full year before the end of the month, Macquarie believes strong underlying demand remains for the cement and aggregate market despite weather impacts.

The broker does remain cautious, with expected further high rainfall between September and November for the eastern states presenting risk, but sees favourable infrastructure developments. Energy costs also remain a risk, and could drive downside if costs worsen.

The rating is downgraded to Neutral from Outperform and the target price decreases to $3.20 from $4.05.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/1

Ahead of FY22 results due on Monday August 15 for Beach Energy, Morgans lowers its rating to Hold from Add, partly due to valuation.

The broker also fears FY23 production guidance may not be as strong as hoped for, and prices aren't likely to lift materially until FY24, partially due to an expected increase in Origin Energy's ((ORG)) GSA pricing.

The target price falls to $1.91 from $1.95.

CITY CHIC COLLECTIVE LIMITED ((CCX)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/0

Website analysis by Citi reveals weaker-than-expected website visits (one driver of online sales) for City Chic Collective and the broker downgrades its rating to Neutral from Buy, after trimming FY23 and FY24 EPS forecasts by -3%.

The eanings downgrades also reflect a challenging FY23 outlook, explains the analyst. The target falls by -17% to $2.47 due to the earnings changes, lower market multiples and a lower price/earnings premium.

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 6/1/0

Benefiting from rising interest rates, Credit Suisse notes Computershare has been in an earnings upgrade cycle over the last year, but anticipates the cycle is coming to an end as interest rate cuts from FY24-26 begin to be priced in to fixed income markets. 

The company delivered a 2% beat to its earnings per share guidance, and is guiding to 55% growth in FY23, but Credit Suisse is predicting earnings growth will decline to just 13% in FY24 and no growth will occur in FY25 and FY26. Earnings per share forecasts are downgraded -13-15% through to FY24.

The rating is downgraded to Neutral from Outperform and the target price decreases to $25.00 from $27.00.

See also CPU upgrade.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0

Citi downgrades its rating for Domain Holdings Australia to Neutral from Buy as consensus growth expectations for FY23 and FY24 are likely too optimistic. This view takes into account a near halving of house lending over the next two years and double-digit house price declines.

Despite this, the broker upgrades its FY22 earnings (EBITDA) forecast by 3% for stronger 4Q new listing volumes and expects positive momentum into the 1Q of FY23.

As Sydney and Canberra were in lockdowns in the first quarter of FY22, Citi expects Domain to provide a strong upcoming trading update. 

The target falls by -30% to $4.10. REA Group is preferred in the space.

GWA GROUP LIMITED ((GWA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/0

With GWA Group due to report on its full year before the end of the month, Macquarie is flagging risks to the company's pipeline as affordability pressures mount, particularly highlighting exposure to residential as home buyers look to cut costs on fixtures and fittings.

The broker notes a more significant downturn in the housing market remains a key risk to GWA Group, while a weaker Australian dollar could place pressure on margins. Earnings per share forecasts updated 0%, -6% and -14% through to FY24.

The rating is downgraded to Neutral from Outperform and the target price decreases to $2.15 from $3.30.

LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/1/0

UBS lifts its target price for Lovisa Holdings to $18.50 from $16.00 on greater forecast US store growth and a greater valuation from an increased trading multiple. As shares have rallied strongly, the rating is pulled back to Neutral from Buy.

The broker expects scale and price optimisation (promotions etc) will outweigh near-term headwinds from labour and supply chain costs.

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

Morgans agrees with the board of OZ Minerals in finding the $25/share takeover bid by BHP group undervalues the company and is highly opportunistic. OZ Minerals shares have corrected by around -35% from a 12-month high above $29.

The analyst feels odds favour a higher offer in time, given the solid logic for BHP Group and the potential synergies. 

The broker downgrades its rating to Hold from Add after a share price rally in reaction to the anouncement already incorporates most of the potential upside.

Apart from factoring-in the bid, Morgans makes allowances for 2Q production that was -10% below the broker's expectation, and higher unit costs, as well as lower near-term copper forecasts. The target rises to $25.40 from $23.12.

See also OZL upgrade.

REA GROUP LIMITED ((REA)) Downgrade to Accumulate from Buy by Ord Minnett and Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Buy by UBS .B/H/S: 3/3/1

Post REA Group's FY22 release, Ord Minnett has pulled back its rating to Accumulate from Buy. Target price remains unchanged at $140.

REA's underlying net profit missed the broker's forecast, but it's predominantly the uncertain outlook that keeps Ord Minnett on the cautious side.

In addition, the broker did spot some cost pressures emerging.

Citi downgrades its rating for REA Group to Neutral from Buy as consensus growth expectations for FY23 and FY24 are likely too optimistic. This view takes into account a near halving of house lending over the next two years and double-digit house price declines.

Despite this, the broker upgrades its FY22 earnings (EBITDA) forecast by 2% for stronger 4Q new listing volumes and expects positive momentum into the 1Q of FY23.

The target falls to $133.05 from $153.50.

REA Group 2H22 results beat UBS earnings forecasts by 4% with revenues of $579m, which came in line with expectations.

UBS is forecasting 10% yield growth for FY23 to FY27 which is at the lower end of REA Group's guidance as highlighted at the Investor Day, with declines in listings in major cities Sydney and Melbourne and slower rentals acting as a drag on yield.

The UBS macro outlook is -10-15% house price declines through the cycle and peaking in the 2H23, accordingly the analyst lowers the FY23 forecast volume growth to -6% from -4% in line with previous downturns in the housing cycle.

The broker's earnings forecasts are lowered by -5% and the stock is considered as reasonably valued.

The recommendation is downgraded to Neutral from Buy and the price target is raised to $142.60 from $130.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms