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

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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 September 5 to Friday September 9, 2022
Total Upgrades: 10
Total Downgrades: 5
Net Ratings Breakdown: Buy 55.51%; Hold 36.86%; Sell 7.63%

For the week ending Friday September 9 there were ten upgrades and five downgrades to ASX-listed companies covered by brokers in the FNArena database.

After an avalanche of analysis during the August reporting season, broker research was in short supply last week.

In looking at the upgrades and downgrades, the Banks featured heavily due to a review of the sector by Macquarie. Upside is expected in the next six months, driven by benefits from rising rates and lagging term-deposit pricing, but the benefits aren’t likely to last.

The broker's earnings forecasts remain well below consensus expectations for FY24 and beyond, given potential credit quality concerns, demanding pre-provision valuations, and elevated multiples relative to global peers.

Macquarie prefers ANZ Bank to Neutral-rated Westpac Bank within the value category and upgraded its rating to Outperform from Neutral following ongoing share-price weakness.

While CommBank is expensive at current levels, there is no obvious catalyst for underperformance and likely near-term upside risk to earnings, and the broker upgraded its rating to Neutral from Underperform, while the rating for National Australia Bank was lowered to Neutral from Outperform on valuation.

For regional banks, Macquarie noted Bendigo & Adelaide is set to benefit from highly accretive term deposit spreads in the near term, and upgraded to Neutral from Underperform. The rating for Bank Of Queensland was downgraded to Neutral from Outperform on lower-than-peer margin benefits due to a high exposure to the intensely competitive mortgage market and lower interest rate sensitivity.

There were no material changes to target prices set by brokers during the week.

NextDC received the largest percentage fall in forecast earnings after a review by Morgan Stanley into the energy-intensive undertaking of running data centres.

Despite lowering its target price to $14 from $15, the broker concluded costs are manageable, as around 80-90% of the forecast energy cost increase for FY23 (a 100% rise from FY22) can be passed through to customers.

Should energy prices rise a further 100% in FY23 and FY24, the risk to NextDC's earnings is around -2-3%, and the impact to Morgan Stanley's valuation is around -15cps.

Tyro Payments also received reduced forecast earnings by brokers, after several announcements. Only a minor change in forecasts led to a material percentage change, given only small forecast numbers were involved.

The week began with a trading update, which revealed transaction value of $3.5bn, up 69% on the same period last year. According to Ord Minnett, the update was in line with the $40-42bn guidance range provided at FY22 results.

In generally positive commentary, the analyst noted statistics from downloads and engagement with Tyro’s mobile app, showed ongoing merchant acquisition and retention.

Towards the end of the week the board of Tyro Payments announced and rejected a conditional bid of $1.27/share by a private equity consortium led by Potentia. This announcement validated recent Morgan Stanley research highlighting the global trend of consolidation in the merchant acquiring space.

The broker retained its Equal-weight rating and 12-month target price of $1.40.

Buy-rated UBS kept its $1.80 target unchanged and noted 12.5% shareholder Grok Ventures is willing to accept the takeover bid or vote in favour of a scheme of arrangement proposed by Potentia at the offer price, subject to certain conditions.

The broker further explained Grok can't take action under a competing proposal unless the proposal is valued 25c higher than the most recent Potentia bid. It's noted Grok has an option to remain a private investor under private equity and the current proposal.

Total Buy recommendations take up 55.51% of the total, versus 36.86% on Neutral/Hold, while Sell ratings account for the remaining 7.63%.

Upgrade

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ((ANZ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/2/0

Macquarie sees upside in the next six months for the banks, driven by benefits from rising rates and lagging term-deposit pricing, but the benefits aren’t likely to last.

On the one hand, the broker sees further upside risk to bank earnings in 1H23 but on the other, Macquarie's earnings forecasts remain well below consensus for FY24 and beyond given potential credit-quality concerns, demanding pre-provision valuations, and elevated multiples relative to global peers.

Macquarie prefers ANZ Bank to Westpac within the value category and upgrades to Outperform from Neutral following ongoing
share-price weakness. Target rises to $24.00 from $23.50.

ASX LIMITED ((ASX)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/5/1

According to ASX's monthly trading update, derivatives volumes are finally starting to pick up, exclaims Ord Minnett, but then market value traded and capital raisings were weak versus the same period last year.

Post a negative share price response, coupled with the fact that infrastructure-alike type of earnings (the broker's choice of words) will be sought after if/when rough times announce themselves, Ord Minnett has decided to upgrade to Hold from Lighten.

Long-term, the broker does not denounce the strong outlook for the ASX, but short-term there are challenges, also because of the cycling of tough comparables.

Target $80. Only minimal adjustments have been made to forecasts.

BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/0

Macquarie sees upside in the next six months for the banks, driven by benefits from rising rates and lagging term-deposit pricing, but the benefits aren’t likely to last.

On the one hand, the broker sees further upside risk to bank earnings in 1H23 but on the other, Macquarie's earnings forecasts remain well below consensus for FY24 and beyond given potential credit-quality concerns, demanding pre-provision valuations, and elevated multiples relative to global peers.

The broker prefers prefer Bendigo & Adelaide Bank to Bank of Queensland within the regionals, and upgrades to Neutral from Underperform. Target falls to $9.00 from $9.25.

CARSALES.COM LIMITED ((CAR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

In the wake of the result season, Macquarie notes the macro backdrop remains challenging, and the automotive market is no exception.

The broker continues to highlight Carsales remains resilient in a softer automotive market as dealers would need to increase listings and depth takeup to increase turnover.

Macquarie's forecasts capture only limited success from new product offerings, but it sees them as a key source of potential earnings upside in the term.

With valuation undemanding, the broker upgrades to Outperform form Neutral. Target unchanged at $24.40.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 1/3/3

Macquarie sees upside in the next six months for the banks, driven by benefits from rising rates and lagging term-deposit pricing, but the benefits aren’t likely to last.

On the one hand, the broker sees further upside risk to bank earnings in 1H23 but on the other, Macquarie's earnings forecasts remain well below consensus for FY24 and beyond given potential credit-quality concerns, demanding pre-provision valuations, and elevated multiples relative to global peers.

CommBank remains expensive at current levels, the broker suggests, but with no obvious catalyst for underperformance and likely near-term upside risk to earnings, rating is upgraded to Neutral from Underperform. Target rises to $90.50 from $81.00.

GPT GROUP ((GPT)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/1

After an investment thesis review of GPT Group, following the August reporting season, Macquarie upgrades its rating to Outperform from Neutral. It's felt headwinds from interest rates are factored into the share price and conditions are in place for some upside.

These conditions include a recovery in retail and development execution in the near term, explains the broker, and upside via M&A and management in the longer term.

As revealed at 1H results, the group is now 71% hedged over the next 2.5 years at an average rate of 2.8%, which largely alleviated concerns the analyst had around debt costs.

No changes are made to Macquarie's earnings forecasts and the $4.68 target price is unchanged.

In a separate update, it is noted AMP Capital Retail Trust (ACRT) has transferred management of the trust from AMP ((AMP))/ Dexus ((DXS)) to GPT Group, including management of Pacific fair.

At first glance, Macquarie expects the mandate could deliver GPT $9.5m in revenue or $7.2m of earnings (EBIT) on a margin of 75%, which should translate to $5m in profit after tax and 0.8% accretion to funds from operations.

UniSuper, co-owner of ACRT transferred a separate $2.8bn mandate from AMP Capital (which has a 7.7% stake in ACRT) to GPT earlier in 2022, and Macquarie is uncertain of whether GPT will buy the co-investment (which would be 0.3% accretive by the broker's estimates).

METCASH LIMITED ((MTS)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/2/0

Following an AGM trading update by Metcash, Ord Minnett raises its rating to Buy from Accumulate and lifts its target to $5.00 from $4.80, after the last ten weeks have shown ongoing sales momentum.

In general, independent supermarkets are proving resilient, according to the analyst.

In addition, Mitre 10 has seen a further sales growth acceleration via strong demand in the trade channel and general inflationary gains, while Total Tools is also benefiting from store rollouts, explains the broker.

Ord Minnett increases its FY23-25 EPS forecasts by 1-2%.

PILBARA MINERALS LIMITED ((PLS)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/1/2

Ord Minnett has reviewed the lithium sector and lowers demand forecasts for electric vehicle sales due to supply-chain challenges and a likely recession.

But the broker notes penetration rates are rising thanks to government incentives and has slightly increased its total lithium demand (lithium carbonate equivalent) forecast to 3.1Mt from 2.9Mt.

On the plus side, the broker doubts China lepidolite supply will flood the market in the near future.

Ord Minnett upgrades Pilbara Minerals' rating to Buy from Hold, the broker preferring producers over developers, but notes Allkem ((AKE)) is its top pick and that it is on research restriction for Mineral Resources ((MIN)).

Target price rises to $4.10 from $3.50.

SANDFIRE RESOURCES LIMITED ((SFR)) Upgrade to Hold from Sell by Ord Minnett .B/H/S: 5/1/1

Thus far this year, Sandfire Resources' shares have been wallopped on investor concerns about ever-rising energy costs in Spain. Ord Minnett, post another research update, shares those concerns.

However, at the present share price the broker also believes the risk has now been priced in.

Upgrade to Hold from Sell. Target price unchanged at $3.80.

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

Reflecting on WiseTech Global's existing CargoWise One business and upcoming CargoWise Neo platform, Macquarie forecasts the company achieving a 21% revenue compound annual growth rate over the next three years. 

The broker notes launch of CargoWise Neo could be as soon as six months, but that the platform remains 1-2 years from delivering revenue. Macquarie estimates CargoWise Neo, as a standalone, to contribute $12.90 per share to the company's valution. 

The rating is upgraded to Neutral from Underperform and the target price increases to $55.00 from $46.00.

Downgrade

ALLKEM LIMITED ((AKE)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/1

Morgans lowers its rating to Hold from Add following a 26% share price rally in the last month (8% yesterday) which leaves the price just shy of the broker's 12-month target price of $15.40.

The likelihood of substantial contract price increases for carbonate is becoming less likely (though possible) and the analyst expects prices to moderate over the next one to two years.

Morgans still rates Allkem as one of the best lithium pure plays on the market.

ALUMINA LIMITED ((AWC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 3/1/1

Due to market surpluses, Macquarie downgrades its 2022-24 alumina price forecasts by -9-12% and its aluminium price forecasts by -12-24%.

This drives cuts in 2022-25 earnings forecasts for Alumina Ltd of -42-54% and a target price cut to $1.10 from $1.40.

Downgrade to Underperform from Neutral.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 5/2/0

Macquarie sees upside in the next six months for the banks, driven by benefits from rising rates and lagging term-deposit pricing, but the benefits aren’t likely to last.

On the one hand, the broker sees further upside risk to bank earnings in 1H23 but on the other, Macquarie's earnings forecasts remain well below consensus for FY24 and beyond given potential credit-quality concerns, demanding pre-provision valuations, and elevated multiples relative to global peers.

The broker prefers prefer Bendigo & Adelaide Bank to Bank of Queensland within the regionals, and downgrades to Neutral from Outperform. Target falls to $7.00 from $8.00.

BREVILLE GROUP LIMITED ((BRG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/2/0

Macquarie reviews 2Q results for the kitchen appliance exposed segment of peer Williams Sonoma to attain a read-through for Breville Group.

Management of Williams Sonoma acknlowledged an uncertain economic backdrop for its customers with unknown outcomes for spending trends, as well as pointing to ongoing supply chain pressures.

As a result, the broker cuts its FY23-25 EPS forecasts by -2-3% on lower revenue forecasts to reflect the macroeconomic uncertainty, and lowers its target to $23.10 from $23.35. The rating is also lowered to Neutral from Outperform for the same reasons.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/6/0

Macquarie sees upside in the next six months for the banks, driven by benefits from rising rates and lagging term-deposit pricing, but the benefits aren’t likely to last.

On the one hand, the broker sees further upside risk to bank earnings in 1H23 but on the other, Macquarie's earnings forecasts remain well below consensus for FY24 and beyond given potential credit-quality concerns, demanding pre-provision valuations, and elevated multiples relative to global peers.

National Australia Bank’s expectations already incorporate much of the upside, despite the potential risk of more pressure on
deposit funding given a historically weaker deposit base. Given the full multiple, the broker downgrades to Neutral from Outperform.

Target rises to $30.25 from $29.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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