Weekly Reports | Sep 05 2022
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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 29 to Friday September 2, 2022
Total Upgrades: 9
Total Downgrades: 14
Net Ratings Breakdown: Buy 55.43%; Hold 36.67%; Sell 7.90%
For the week ending Friday September 2 there were nine upgrades and fourteen downgrades to ASX-listed companies covered by brokers in the FNArena database.
Three brokers decided to downgrade their ratings for Woodside Energy — two to Hold or equivalent and Ord Minnett to Accumulate from Buy — on valuation grounds following first half results that either met or beat expectations.
Ord Minnett noted additional capital management does not appear to be imminent, with management taking a more conservative view of the balance sheet. Morgans also felt the dividend payout ratio could be cut in the near term due to higher planned capex in the second half.
UBS supported Woodside’s focus on balancing sustainable returns with investment in growth and energy transition capex, but also noted investors will have to moderate former capital management expectations.
While FY22 results for Tyro Payments generally beat expectations, the company received the largest percentage decrease in target price set by brokers in the FNArena database.
This anomaly may be explained by the actions of Morgan Stanley, which had a $4.70 target in place prior to results, more than double that set by each of the other four covering brokers in the database.
Following the results, the broker slashed its target to $1.40, acknowledged its prior Overweight rating was the wrong call, and downgraded to Equal-weight. The speed and magnitude of the de-rating of payments stocks in general came as a surprise.
With the advent of a new financial year, overall earnings forecasts for some companies like Mineral Resources and IGO have received a material boost as FY22 forecasts rolled off broker financial models. These boosts can still occur even if existing (sunnier) forecasts for FY23 and beyond are kept constant or are downgraded because of reporting season results/outlooks.
Mineral Resources was atop the table for the largest percentage upgrade to forecast earnings last week. Macquarie found FY22 results were mixed but generally in line with forecasts. While underlying net profit missed the UBS forecast by -11-12%, a better-than-expected 100cps final dividend provided an offset.
The big news was the approval of the Onslow Iron project from the Red Hill Iron ((RHI)) joint venture partners. Mineral Resources plans to increase its stake to 60.3% from 40% and will build, fund, own and operate all infrastructure.
Next on the table was IGO. FY22 results were in line with underweight-rated Morgan Stanley’s expectations though the dividend was lower than anticipated. The broker had expected a higher payout given strong cash generation into FY23.
Ord Minnett maintained its Lighten rating (target $8.40) for IGO on concerns around project execution at both Kwinana and Cosmos, while Buy-rated UBS kept the company as its top battery-raw-materials pick and increased its target to $16.00 from $15.85.
Best to ignore the position of Dalyrimple Bay Infrastructure on the table below for forecast earnings upgrades due to a data glitch.
While FY22 results for NextDC were in line with broker forecasts, average forecast earnings for the first year of the forecast period almost doubled (on small numbers), once FY22 broker forecasts rolled off financial models. The same near doubling also occurred for Ramsay Health Care, despite a miss versus broker expectations for FY22 results.
UBS (Buy) noted while demand remains strong for NextDC, constraints for switches and servers appear to be pushing new megawatt contracts into the new financial year, highlighting that any megawatts contracted today could take twelve months to commence activation.
FY23 margin guidance was also weaker than Outperform-rated Macquarie expected, driven by higher electricity costs as well as an increase in SaaS expenses. Apart from that, the broker still approved of the company’s high earnings visibility and operational resilience.
For Ramsay Health Care, Morgans maintained a takeover premium in its valuation and upgraded its rating to Add from Hold. The broker lowered FY23-24 underlying earnings forecasts on a challenging operating environment, though management expects a “gradual recovery” through FY23 and more “normalised” conditions from FY24 onwards.
Citi believes there is a greater than 50% chance of a formal bid still occurring and upgraded its rating to Buy from Neutral after the KKR-led consortium withdrew its indicative proposal of $88 a share and made an alternative offer that was rejected by the board.
Despite in-line FY22 results at the underlying level, Ramelius Resource received the largest percentage downgrade to forecast earnings last week. Results were impacted by impairments and higher D&A costs, and Hold-rated Ord Minnett now awaits September quarter results to re-examine cost expectations and the ramp-up of the key Penny gold mining operation in Western Australia.
Macquarie also noted higher-than-expected closing lease balances which resulted in a softer-than-expected cash balance. The broker retained its Outperform rating though lowered its target to $1.05 from $1.20.
Sandfire Resources also garnered lower earnings forecasts from brokers following full year results that missed most expectations. Underlying profit of $111m for FY22 came in well below the $171m forecast by Ord Minnett, largely due to higher depreciation charges, while the FY22 dividend of 3 cents (no final dividend) was adrift of the anticipated 8 cents.
Management indicated the final dividend had been canceled because of the financing requirements for the Motheo copper project in Botswana and the repayment of debt facilities related to the MATSA copper operations in Spain.
At the end of the week, to add insult to injury, Macquarie commodity strategists lowered zinc price forecasts by -11-15% for the next 18 months and lowered copper price forecasts by -5-15% over 2022-2024 on a softening demand outlook.
As a result, the broker reduced its target price to $5.20 from $5.70 for Sandfire Resources on the copper forecast price changes, and then to $5.00 after allowing for the lower zinc price forecast.
While FY22 results for Healius were in line with consensus forecasts thanks to strong demand for covid testing, Citi lowered its FY24 earnings forecasts by -21% to reflect lower base business revenue forecasts, after management said it expects a period of catch-up before trade normalises.
The broker downgraded its rating to Neutral from Buy and suggested all pathology companies will find it difficult to outpace expectations given earnings are forecast to more than halve in the next one to two years, unless a more severe covid variant appears.
More positively, Outperform-rated Macquarie noted 45% of the company's Sustainable Improvement Program (SIP) phase 2 were achieved in FY22, with costs tracking below initial forecast. Ongoing delivery of SIP targets are expected to provide a degree of insulation to any near-term volatility in the operating environment and complement any base business recovery.
After in-line FY22 results in the prior week, average earnings forecasts for Boral fell last week when Morgan Stanley lowered its forecasts by -16% in FY23 and -14% in FY24 on increasing doubts higher prices will offset rising costs.
It’s felt management guidance for a rebound in profitability revolves around an unprecedented round of price increases which are unlikely to be sustained, if history is any guide.
Total Buy recommendations take up 55.43% of the total, versus 36.67% on Neutral/Hold, while Sell ratings account for the remaining 7.90%.
AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Upgrade to Neutral from Sell by UBS and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0
Ainsworth Game Technology's result outpaced UBS forecasts and profits rose sharply half on half, thanks to a strong performance from the North Americas, which are recovering faster than other divisions.
UBS expects other divisions will start to catch up over FY23 further boosting earnings this financial year.
No guidance was provided but the broker expects better revenue will still translate to flat margins given supply-chain challenges.
The company has finalised the restructuring of its balance sheet and has completely paid down its debt, exiting the year with $50m in net cash. UBS says this positions the company well for investing in product – the No-1 priority in the broker's mind.
Earnings rise 5% to 7% acrosse FY23 to FY25.
Neutral rating and $1 target price retained.
Ainsworth Game Technology posted a $27m FY22 profit, which was a turnaround of $44m from FY21 and ahead of Macquarie. Ainsworth has returned to sustainable profitability, the broker notes, and is also increasing investment in products through R&D which could see upside to forecasts.
With improved earnings quality, Macquarie is starting to gain better visibility on the trajectory with more than 35% of revenues now coming through gaming operations and digital.
The stock is cheap, the broker notes, based on historical PE. Upgrade to Outperform from Neutral. Target rises to $1.25 from $1.20.
INVOCARE LIMITED ((IVC)) Upgrade to Add from Hold by Morgans .B/H/S: 1/4/1
Morgans notes higher funeral case volumes and a higher case average, as well as double digit growth in burials and cremations saw InvoCare deliver first half earnings of $68.5m and net profit of $27.9m.
The broker notes earnings were a slight miss to Morgans' expectations, but net profits were stronger than anticipated. The company has suggested momentum has carried into the second half, and excess mortality rates in Australia, New Zealand and Singapore supports the outlook.
The rating is upgraded to Add from Hold and the target price decreases to $12.80 from $13.60.
JOHNS LYNG GROUP LIMITED ((JLG)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 1/0/0
FY22 underlying operating earnings were in line with guidance while revenue was ahead of expectations. FY23 guidance is slightly below current market forecasts although Ord Minnett envisages potential upside from catastrophe-related contract awards during the year.
Johns Lyng is considered well able to deliver strong revenue and earnings growth amid industry tailwinds as there is low capital intensity and exposure to inflation. Ord Minnett upgrades to Buy from Accumulate and raises the target to $8.50 from $8.40.
NRW HOLDINGS LIMITED ((NWH)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0
Macquarie has adjusted its valuation methodology for mining services companies to come into line with metrics reported by the industry.
This results in the broker's earnings forecasts for NRW Holdings to be increased 9% for the medium term to reflect higher margins, given commentary of margin recovery and sustained contracting strength.
Target rises to $2.50 from $2.10, upgrade to Outperform from Neutral.
RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Buy from Neutral by Citi and Upgrade to Add from Hold by Morgans .B/H/S: 4/0/1
Citi lowers FY23-25 estimates for earnings per share as the negative impact of the pandemic continues to delay an earnings recovery. Ramsay Health Care provided no guidance but signalled a gradual recovery is expected throughout FY23, with more normal conditions from FY24.
Following the FY22 result the KKR-led consortium has withdrawn its indicative proposal of $88 a share and made an alternative offer that was rejected by the board, as it valued that at $85.
Citi believes there is a greater than 50% chance of a formal bid still occurring and upgrades to Buy from Neutral. Target is reduced to $85 from $88.
Morgans maintains a takeover premium in its valuation for Ramsay Health Care and upgrades its rating to Add from Hold after rolling forward its financial model after FY22 results.
The broker lowers FY23-24 underlying earnings forecasts by -6.4% and -7.5% on a challenging operating environment. No FY23 guidance was provided though management expects a “gradual recovery” through FY23 and more “normalised” conditions from FY24 onwards.
The $80 target price is unchanged.
ST. BARBARA LIMITED ((SBM)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/0
St. Barbara reported a much larger loss than Macquarie expected driven by an impairment at Atlantic, primarily driven by past permitting delays. Underlying earnings were nevertheless stronger on lower operating expense.
Macquarie continues to view a potential sale of Simberi as a key near-term positive catalyst, given the prospect of reducing group
capital requirements and providing proceeds that can be diverted to other growth projects.
On recent share price weakness, the broker upgrades to Outperform from Neutral. Target unchanged at $1.10.
WEBJET LIMITED ((WEB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0
Guidance provided at Webjet's AGM suggests FY24 earnings will exceed those of pre-covid FY19.
Profitability ahead of expectations increases Macquarie's confidence Webjet will deliver and sustain a structurally lower cost base.
Despite some macro risks on the horizon, the medium-term growth outlook is favourable and underpinned by market share gains, ongoing tech investment, and a full recovery in travel markets, the broker notes.
Upgrade to Outperform from Neutral, target rises to $6.15 from $5.50.
A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/2
Citi downgrades to Sell from Neutral in the wake of the FY22 results. While the fundamental valuation is largely unchanged, the broker assesses the opportunity to obtain US market access, and a primary reason for upgrading to Neutral back in May, appears to have narrowed.
Moreover, over the next six months there are Chinese regulatory events where the risk is largely to the downside. a2 Milk Co's recent performance in China has improved but then the broker points out this has come at the cost of margin. Target is reduced to $4.58 from $4.64.
ADORE BEAUTY GROUP LIMITED ((ABY)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/1/0
Morgan Stanley acknowledges an incorrect Oveweight call (now Equal-weight) for Adore Beauty, partly due to overestimating a higher covid benefit for sales and underestimating competition. Near-term concerns now include leadership transition and low earnings visibility.
While FY22 results were ahead of expectations, Morgan Stanley was surprised by the magnitude (-28%) of sales declines in the first seven weeks of FY23. Margin guidance downgrades for FY23 from inflation and higher investment also surprised.
As a result, the broker reduces FY23 sales and EBITDA forecasts by -13% and -59%, respectively, which suggests margins of 1.4%, compared to prior guidance of 2-4%.
The target falls to $1.70 from $1.90. Industry View: In-Line.
DELOREAN CORPORATION LIMITED ((DEL)) Downgrade to Hold from Speculative Buy by Morgans .B/H/S: 0/1/0
Morgans expects share price weakness will continue for Delorean Corp and downgrades its rating to Hold from Speculative Buy and reduces its target to $0.095 from $0.215.
Losses continued in the 2H from the engineering, procurement and construction (EPC) businesses, notes the analyst, and FY22 results revealed a net loss after tax of -$10.9m.
Management pointed to one-off impacts including timing and covid impacts to the Ecogas project and BLM project.
The broker's lower target price results from a number of factors including the introduction of a 25% risk weighting on the EPC business, given troublesome project execution since the company listed.
HEALIUS LIMITED ((HLS)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/0
Healius's FY22 result was in line with consensus and Citi's forecasts, thanks to strong demand for covid testing.
No guidance was provided and the limited disclosure for pathology fell short of peers, says the broker.
EPS forecasts rise 12% in FY23 as covid testing continues apace; and falls -21% in FY24, to reflect lower base business revenue forecasts, after the company said it expects a period of catch-up before trade normalises.
Citi says it will be hard for any pathology companies to outpace given earnings are forecast to more than halve in the next 1-2 years, a more severe covid variant being the only obvious wildcard.
Rating downgraded to Neutral from Buy. Target price falls to $4 from $4.30.
HARMONEY CORP LIMITED ((HMY)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/0/0
Ord Minnett saw Harmoney Corp releasing FY22 financials largely in line. Cash flow milestones have been reached during H2 and the broker is banking on further cash flow improvements.
Also, now that the loan book has reached a greater point of scale in Australia, Ord Minnett is forecasting operating costs as a share of revenues to fall to circa 20%, adding: this should support adjusted profit growth.
As investors are anticipating further rate rises, multiples for the sector are de-rating, with the broker pulling back its target for Harmoney to $1.02 from $2.19 (not a typo).
The stock has been downgraded to Accumulate from Buy. Note: the broker publishes "normalised EPS" forecasts which are better-looking than the reported financials.
LYNAS RARE EARTHS LIMITED ((LYC)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 0/1/1
While 2H results for Lynas Rare Earths were broadly in line with recent quarterly results and consensus expectations, Ord Minnett is concerned about project execution risk. Capex guidance is for -$1.2bn over FY23 and FY24 versus the broker's -$754m forecast.
In addition, the broker notes commodity price pressure and lowers its rating to Sell from Lighten, while decreasing its target price to $4.85 from $5.35.
Despite a -30% year-on-year worsening in unit costs, margins hit what the analyst describes as a "whopping" 65%.
NICKEL INDUSTRIES LIMITED ((NIC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0
Nickel Industries' first half profit was -6% below Macquarie and earnings missed slightly. Nickel price realisation rates have been falling this year, down to 70% currently from 85% in 2021, the broker notes. The dividend was in line.
Softening stainless steel demand in China has been a headwind to price realisation rates so far in 2022. Further weakness in the stainless steel market could further impact earnings, Macquarie warns.
This has led to a cut in earnings forecasts, a cut in target to $1.00 from $1.40, and a downgrade to Neutral from Outperform.
OZ MINERALS LIMITED ((OZL)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/0
OZ Minerals' result was a little short of UBS but immaterial given the offer on the table from BHP Group ((BHP)).
Otherwise OZ Minerals retained its guidance, outlined operational improvements and confidence around cave breakthrough at Carrapateena, confirmed West Musgrave final investment timing and highlighted the scarcity of its assets, low geographical risk and its growth pipeline.
At $26.50, UBS estimates the market is pricing in a US$3.77/lb copper price. Triangulating between higher commodity price assumptions, and valuing the unmodelled growth pipeline and any synergies, could justify a higher bid in the broker's view.
Target rises to $26.50 from $22.60, downgrade to Neutral from Buy.
TYRO PAYMENTS LIMITED ((TYR)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/2/0
The FY22 result and outlook were a little better than Morgan Stanley expected. Going forward, the broker envisages the likely upside will come from industry consolidation, but this is a bull case proposition.
Morgan Stanley acknowledges its prior Overweight rating on Tyro Payments was the wrong call and, while the business largely met FY22 financial metrics, the speed and magnitude of the de-rating of payments stocks came as a surprise.
Morgan Stanley points out capital markets have changed permanently and it is not enough that companies grow topline revenue, they need to focus on being meaningfully profitable. Rating moves to Equal-weight from Overweight and the target is lowered to $1.40 from $4.70. Industry view: Attractive.
WOODSIDE ENERGY GROUP LIMITED ((WDS)) Downgrade to Accumulate from Buy by Ord Minnett and Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/0
Woodside Energy's June first-half result outpaced Ord Minnett by 9%, and the dividend sharply outpaced, the payout ratio setting a new record.
Once paid, the company's gearing will move into the 13% target range, and management advises share buyback and/or special dividends may be on the cards – but not in the near term.
Ord Minnett says management appears to be taking a more conservative balance-sheet stance than the broker had forecast, heading into a growth period, which might disappoint investors.
While this was a key input into the broker's forecasts, Ord Minnett still believes the company offers good value, growth, and leverage to spot LNG prices.
Rating is downgraded to Accumulate from Buy. Target price slips to $37 from $37.50.
Now that the share price has reached the $34.90 target price (down from $35.40) set by Morgans, the rating for Woodside Energy is downgraded to Hold from Add. This change follows 1H results that were in-line with the broker and above consensus forecasts.
The broker makes minor changes to forecasts. Management's 2022 capex guidance suggest a major 2H skew and negative free cash flow, and the analyst feels the dividend payout ratio could be cut in the short term.
A record US109c ordinary dividend was declared for the half.
Woodside Energy delivered first half net profit of $1,819m and announced an interim dividend of 109 cents per share, in line with UBS's expectations.
The company reiterated its significant capital expenditure commitments over the coming 2-3 years, guiding to a $9bn spend on the Pluto-Scarborough and Sangomar projects by December 2024.
A higher average spot LNG estimate drives the broker's earnings per share forecast up 32% for FY22. The broker notes Woodside Energy offers attractive exposure to the tight global LNG market, but finds the stock to be trading above fair value.
The rating is downgraded to Neutral from Buy and the target price increases to $34.00 from $33.65.
WESTGOLD RESOURCES LIMITED ((WGX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0
Westgold Resources' FY22 result fell sharply short of Macquarie's forecasts due to higher than expected depreciation and amortisation and pre-announced non-cash impairments of $186m.
Management guides to lower production and rising all-in-sustaining costs, also short of the broker's forecasts.
The broker raises its cost assumptions over the next seven years.
EPS forecasts fall -62% in FY23; -90% in FY24; and -60% in FY25.
Rating downgraded to Neutral from Outperform. Target price is halved to $1 from $2.
WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/0/2
Citi retains the view WiseTech Global remains destined for strong earnings growth over the next few years, on the back of ongoing customer wins and global roll-outs.
Moreover, as a core Enterprise software solution the broker considers WiseTech might just be the most defensive software name in its Australian coverage.
Forecasts have been upgraded. Though this only pushes up the valuation/price target by 3% to $52.70. Not enough to justify the share price, hence Citi downgrades to Sell from Neutral.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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