Weekly Ratings, Targets, Forecast Changes – 02-09-22

Weekly Reports | Sep 05 2022

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 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%.

Upgrade

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.


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