Weekly Reports | Sep 19 2022
This story features ARISTOCRAT LEISURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALL
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 12 to Friday September 16, 2022
Total Upgrades: 5
Total Downgrades: 5
Net Ratings Breakdown: Buy 55.70%; Hold 36.66%; Sell 7.64%
For the week ending Friday September 16 there were five upgrades and five downgrades to ASX-listed companies covered by brokers in the FNArena database.
After a general review of Australian banks, Citi upgraded its ratings for both National Australia Bank and Bendigo & Adelaide Bank to Buy from Neutral after recent share price falls.
The broker noted banks are now sitting on an excess liquidity build the size of which has not been seen in history, with central banks set to embark on their quickest and largest tightening seen in over 30 years.
The build in liquidity is expected to generate a material initial return on that abundant liquidity, sending FY23 net interest margins (NIMs) sharply higher by around 30bps. These margins will retract in FY25 as the excess liquidity evaporates.
The excess liquidity stems from deposit growth and the direct Term Funding Facility (TFF). The facility was provided by the Reserve Bank in covid times to support the economy via low cost three-year funding against high quality collateral.
There were no material changes to target prices set by brokers last week. While target prices appear to have stabilised after reporting season revisions, changes to earnings forecasts continued.
As can be seen within the two tables below, forecast earnings changes by brokers are more material for downgrades compared to upgrades, and mining companies are largely bearing the brunt of the downgrades.
It interesting to note some bifurcation of forecasts occurring within the Mining sector, depending on respective commodity exposures.
The earnings forecast tables show positive broker earnings upgrades for Allkem (lithium), Whitehaven Coal (largely thermal coal), IGO (lithium, nickel, copper) and mineral sands company Iluka Resources.
On the flipside, five of the top six broker earnings downgrades related to 29Metals (copper and precious metals), Nickel Industries, Sandfire Resources (copper/gold), Alumina Ltd and Coronado Global Resources, which mines metallurgical coal.
Increased mining costs are generally weighing across the sector, and in some cases are not being countered by increased commodity price forecasts. Using 29Metals as an example, Morgan Stanley not only decreased its price forecasts for gold and copper, but also raised cost forecasts.
As a result of these twin impacts, 29Metals headed up the table for the largest percentage fall in forecast earnings.
Despite cost headwinds, Morgan Stanley last week generally raised target prices across its Australian Mining coverage, with the sector generally undervalued and set to benefit from inflation.
Appen came third on the table for the largest percentage fall in forecast earnings in ongoing reaction to a weak August trading update. Macquarie recently rated the company as its least-preferred pick in its coverage of the Technology sector.
More positively, Citi last week drew some comfort from signs of optimism contained within August website traffic. As part of this, Appen China continues to see strong web traffic, climbing by 76% year-on-year in August to reach an all-time monthly high.
Total Buy recommendations comprise 55.70% of the total, versus 36.66% on Neutral/Hold, while Sell ratings account for the remaining 7.64%.
Upgrade
ARISTOCRAT LEISURE LIMITED ((ALL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 7/0/0
New analysts at Morgan Stanley "assume coverage" of Aristocrat Leisure and begin with an Overweight rating and set a $45 target. While prior coverage is not referenced, this is effectively an upgrade from an Equal-weight rating. The target has risen from $43.
The broker expects a re-rating of Aristocrat Leisure shares based on potential to become a meaningful player in i-Gaming in the US and to navigate a weaker consumer backdrop in that country. Past digital growth is also considered to be sustainable.
Apart from an attractive valuation, the analysts also see potential upside from the pursuit of M&A opportunities or capital management initiatives.
Industry View: In-Line.
BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/0
Citi is anticipating a shift in the tide for the banking sector in the coming year, with banks holding historic levels of excess liquidity ahead of the quickest and largest tightening in more than thirty years.
The broker notes this should generate strong return on liquidity over the next year, and drive a 30 basis point net interest margin increase, before liquidity diminishes in 2024-25.
Given its recent sell off, Citi upgrades Bendigo & Adelaide Bank to Buy from Neutral and the target price decreases to $9.75 from $10.40.
CLOVER CORPORATION LIMITED ((CLV)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/0/0
Clover's second half sales surprisingly beat the top end of guidance, driven by improved China infant formula market conditions and new customers, UBS notes.
At its first half result, Clover indicated solid early second half trading may have benefited from order pull-forward, though this does not appear to have been the case
The broker sees two medium term opportunities — new customers in China and new products and omega-3 expansion beyond infant formula. An increased cost of capital takes the broker's target down to $1.35 from $1.40 but rating upgraded to Buy from Neutral.
NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/5/0
Citi is anticipating a shift in the tide for the banking sector in the coming year, with banks holding historic levels of excess liquidity ahead of the quickest and largest tightening in more than thirty years.
The broker notes this should generate strong return on liquidity over the next year, and drive a 30 basis point net interest margin increase, before liquidity diminishes in 2024-25.
Given its recent pull back, Citi upgrades National Australia Bank to Buy from Neutral and the target price increases to $32.75 from $32.25.
WOODSIDE ENERGY GROUP LIMITED ((WDS)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/3/0
The Citi global commodity team significantly upgrades its global gas price forecasts, while short-term Australian east coast wholesale prices have been trimmed. It's felt east coast gas supplies will be a priority as industry and government work together.
Atfter mark-to-marking gas prices, the broker estimates Woodside Energy is best-placed to benefit via LNG sales on the spot market. The rating is raised to Buy from Neutral and the target is increased to $36.50 from $33.30.
Downgrade
ALS LIMITED ((ALQ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0
ALS has laid out a pathway to its five year aspirations of 50% revenue growth to $3.3bn and 55% earnings growth to $600m by FY27. Credit Suisse notes the company intends to deliver margins above 19% and cash conversion above 90%.
The broker noted the company highlighted its major divisions remain favourably exposed to operating trends. Credit Suisse is cautious on potential moderating activity from junior miners in the near-term, but on a five year view sees strong investment opportunity in ALS.
The rating is downgraded to Neutral from Outperform and the target price of $12.60 is retained.
MINERAL RESOURCES LIMITED ((MIN)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/1/0
Morgan Stanley generally raises target prices across its Australian Mining coverage, with the sector generally undervalued and set to benefit from inflation.
The broker lowers its rating for Mineral Resources to Equal-weight from Overweight after a 47% share price rally since March, though raises its target to $78.90 from $64.80.
The valuation benefits from higher forecasts for long-term iron ore and lithium prices. Industry view: Attractive.
PENDAL GROUP LIMITED ((PDL)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/3/0
Ord Minnett reviews Pendal Group's valuation following the Perpetual (PPT) takeover offer.
The broker says the offer implies proceeds of $5.44, although that is something of a moot point for many shareholders given there is no shareholder vote.
Rating downgrade to Accumulate from Buy on valuation. Target price rises to $5.35 from $4.20 to reflect the likely completion offer – about 5.2% below the Perpetual offer.
SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Buy by Citi .B/H/S: 6/1/0
Following an around 10% outperformance versus the ASX300 Mining Index in the last month (despite lower copper and aluminium prices), Citi downgrades its rating for South32 to Neutral from Buy.
While robust valuation support exists, there's thought to be significant downside risk to near-term earnings, based upon spot commodity prices compared to the broker's base case.
The target price falls to $4.50 from $4.65 after downward revisions to the analyst's FY23 and FY24 earnings forecasts.
TYRO PAYMENTS LIMITED ((TYR)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/2/0
The bid by the Potentia Capital Management-led consortium has been rejected by the board of Tyro Payments. Ord Minnett feels further bids may eventuate, given shares are trading -77% below highs attained prior to the bid.
The rating is lowered to Accumulate from Buy and the $1.40 target is unchanged.
Separately, Jon Davey, who has been with the business since May 2021, has been appointed as the new ceo.
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Recommendation Changes |
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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Earning Forecast |
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: ALQ - ALS LIMITED
For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED
For more info SHARE ANALYSIS: CLV - CLOVER CORPORATION LIMITED
For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: PDL - PENDAL GROUP LIMITED
For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED
For more info SHARE ANALYSIS: TYR - TYRO PAYMENTS LIMITED
For more info SHARE ANALYSIS: WDS - WOODSIDE ENERGY GROUP LIMITED