Weekly Ratings, Targets, Forecast Changes – 14-10-22

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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 October 10 to Friday October 14, 2022
Total Upgrades: 6
Total Downgrades: 7
Net Ratings Breakdown: Buy 56.01%; Hold 36.50%; Sell 7.49%

For the week ending Friday October 14 there were six upgrades and seven downgrades to ASX-listed companies covered by brokers in the FNArena database.

Following a first quarter trading update, Qantas Airways received an upgrade in rating to Neutral from Sell by Citi, and had the largest percentage upgrade to the average earnings forecasts of brokers in the database.

Strong demand coupled with capacity constraints supported higher ticket pricing, noted Credit Suisse, with management suggesting current demand is twice that of pre-covid. Moreover, guidance for profit before tax of $1.2-1.3bn was more than double the broker’s previous assumption.

Next on the table for earnings upgrades is Tyro Payments. Morgans liked the tone set by new CEO Jon Davey, following a first quarter update that detailed a new cost-out plan. FY23 earnings guidance was also raised by around 19%.

Morgan Stanley kept its Equal-weight rating and $1.40 target price given some M&A premium remains in the Tyro share price, after the recently rejected bid from private equity. Industry consolidation remains an integral part of the broker’s investment thesis and $2.50 bull case target price.

Morgans increased its earnings forecast for Karoon Energy last week, upon learning the national petroleum regulator in Brazil had offered a discount on royalties for the company’s Bauna project. The broker raised its target to $3.95 from $3.60.

Macquarie agreed with Morgans the discount shows strong ongoing support for the energy industry in Brazil and increased its target to $3.00 from $2.90.

Superloop also received increased earnings forecasts from brokers last week after revealing 14,637 net new subscribers in the consumer business in the first quarter, not far off the 17,621 subscribers added through the whole of FY22.

New FY23 earnings guidance also beat the consensus forecast by 19%. Morgans partly attributed these strong outcomes to organic NBN subscriber growth and the Acurus and VostroNet acquisitions. A network partnership deal with Uniti Group, announced a day earlier, will also be immediately earnings accretive, explained the analyst.

On the flipside, Sandfire Resources received the largest percentage reduction in forecast earnings last week. This was partly due to an updated macroeconomic view from Citi anticipating short-term headwinds for metals demand from a sluggish China and higher interest rates from the Federal Reserve in the US.

The broker maintained its High-risk Buy rating for Sandfire though lowered its target to $5.50 from $6.00. More positively, the broker still expects a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

While Morgans also lowered its earnings forecasts for Sandfire and reduced its target to $5.20 from $7.50, several catalysts were noted that should support a positive share price re-rating for assertive investors.

The broker pointed to a de-risking of the Motheo project over time and incremental improvements at the MATSA operations in Spain. A potential tailwind for the Sandfire share price may also arise from recycled funds seeking copper exposure, should BHP Group be successful in acquiring OZ Minerals.

Next up was Cooper Energy, after Credit Suisse refreshed its research following a hiatus. The new $0.24 target price, down from $0.26, incorporated a capital raise, the Orbost gas processing plant acquisition and recent disclosures.

The Neutral-rated broker prefers Beach Energy in the sector given balance sheet risks for Cooper Energy. It was also noted exploration catalysts for the key Otway Phase 3 Development Project (OP3D) may be as far off as FY26.

Earnings forecasts also fell for Baby Bunting last week. Citi was surprised by the extent of the -230 basis point gross margin contraction in the first quarter, and downgraded its rating to Neutral from Buy.

Ord Minnett attributed the margin decline to loyalty program investment, unrecovered cost increases and heightened price competition.

Morgan Stanley adopted a more positive view and noted gross margins declined by -1% in FY18 only to rebound to record highs in FY19. The broker felt subsequent price rises will render pressures on the gross margin transitory.

Baby Bunting was also atop the table for the largest percentage fall in target price last week. Four of the five covering brokers in the FNArena database updated research last week and the average target price fell to $4.52 from $5.70.

Like Sandfire Resources, Nickel Industries was caught up in Citi’s more bearish metals outlook. The broker’s target fell to $0.90 from $1.60 and its rating was downgraded to High-risk Neutral from High-risk Buy.

Not only is Citi concerned about a lower nickel price but also the company’s costs are expected to rise on a bullish outlook for coal.

Total Buy recommendations comprise 56.01% of the total, versus 36.50% on Neutral/Hold, while Sell ratings account for the remaining 7.49%.

Upgrade

ALUMINA LIMITED ((AWC)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/0/1

Citi sees short-term headwinds for metals demand as China will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker trims its near-term price forecasts for iron ore, aluminium, copper and nickel, and raises its forecast for coal. Lithium prices are expected to be resilient. Citi is now relatively more bearish on copper and relatively more bullish on met coal.

The analysts expect a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

For Alumina Ltd, Citi raises its rating to Buy from Neutral on valuation after an around -34% share price fall in the last six months and leaves its $1.60 target price unchanged.

DETERRA ROYALTIES LIMITED ((DRR)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

Citi sees short-term headwinds for metals demand as China will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker trims its near-term price forecasts for iron ore, aluminium, copper and nickel, and raises its forecast for coal. Lithium prices are expected to be resilient. Citi is now relatively more bearish on copper and relatively more bullish on met coal.

The analysts expect a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

For Deterra Royalties, Citi upgrades its rating to Buy from Neutral on valuation as the share price has retraced around -29% in the past six months. The $4.80 target price is unchanged.

MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/1

UBS reviews the banking sector after recent interest rate hikes and ahead of the maturation of $500bn in fixed rate mortgages (25% of the system residential total) by December 2024.

While the broker believes consumers are fairly resilient to rate rises (rates are at their highest since 2013), based on the latest UBS Mortgages Survey, a keen eye will need to be kept to the SME sector.

The maturation of mortgages is another matter, the broker expecting a pricing war as 25% of the market comes up for grabs.

On the upside, deposit pricing has been lagging, which in the short term should improve net interest margins, says the broker.

UBS upgrades Macquarie Group to Buy from Neutral, believing Macquarie Bank is better positioned to attract mortgages given it has (along with Westpac ((WBC)) the most competitive refinancing SVR rate among the top seven banks.

Target price falls to to $185.00 from $200.00.

QANTAS AIRWAYS LIMITED ((QAN)) Upgrade to Neutral from Sell by Citi .B/H/S: 5/1/0

It was only a month ago, Citi analysts point out, Qantas guided to a profit before tax result of $1.3bn for FY23. Yesterday, the expectation shifted in that this number will be achieved over the first six months of the financial year.

Citi assumes yields were the driver of the circa 100% upgrade in guidance. Clearly, concludes the broker, travelers had no qualms with picking up the bill.

Citi has lifted core EBIT forecasts by 89%/16% for FY23/24 respectively and raised its target price to $5.78 from $4.72. Upgrade to Neutral from Sell.

SOUTH32 LIMITED ((S32)) Upgrade to Buy from Neutral by Citi .B/H/S: 7/0/0

Citi sees short-term headwinds for metals demand as China will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker trims its near-term price forecasts for iron ore, aluminium, copper and nickel, and raises its forecast for coal. Lithium prices are expected to be resilient. Citi is now relatively more bearish on copper and relatively more bullish on met coal.

The analysts expect a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

For South32, Citi upgrades its rating to Buy from Neutral on valuation as the share price has retraced around -23% in the past six months. The target rises to $4.60 from $4.50.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/4/0

UBS reviews the banking sector after recent interest rate hikes and ahead of the maturation of $500bn in fixed rate mortgages (25% of the system residential total) by December 2024.

While the broker believes consumers are fairly resilient to rate rises (rates are at their highest since 2013), based on the latest UBS Mortgages Survey, a keen eye will need to be kept to the SME sector.

The maturation of mortgages is another matter, the broker expecting a pricing war as 25% of the market comes up for grabs.

On the upside, deposit pricing has been lagging, which in the short term should improve net interest margins, says the broker.

UBS says the Financial Rate Monitor shows Westpac is well placed to win market share due to its competitive loan pricing, and especially deposit rates.

Westpace is upgraded to Buy from Neutral. Target price rises to $27 from $26.

Downgrade

29METALS LIMITED ((29M)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/2/1

Citi sees short-term headwinds for metals demand as China will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker trims its near-term price forecasts for iron ore, aluminium, copper and nickel, and raises its forecast for coal. Lithium prices are expected to be resilient. Citi is now relatively more bearish on copper and relatively more bullish on met coal.

The analysts expect a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

For 29Metals, Citi lowers its rating to Neutral from Buy and cuts its target to $2.50 from $2.60.

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/1/0

Citi was surprised by the extent of Baby Bunting's -230 basis point gross margin contraction in the first quarter, and has downgraded its rating on the stock given concern over ongoing earnings downside risk.

The broker anticipates margins will moderate over the remainder of the fiscal year from loyalty program optimisation. While the retailer did report 8% like-for-like sales growth in the first fourteen weeks of the year, Citi notes this implies a slowing to 2% growth in the latter half of this period. 

The rating is downgraded to Neutral from Buy and the target price decreases to $3.32 from $5.62.

FORTESCUE METALS GROUP LIMITED ((FMG)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/3/4

Morgans increases unit cost assumptions across iron ore and aluminium exposed miners and lowers forecast prices to allow for a rising US dollar and fears of a US/global recession.

However, the broker feels share prices have largely factored-in these variables and sees good buying opportunities for some stocks under its Mining sector coverage.

BHP Group and South32 are Morgans top two picks among diversified miners.

The broker expects greater volatility ahead for iron ore than for base metals and sees a vastly diminished long-term free cash profile for Fortescue Metals due to the capital intensive nature of its decarbonisation push.

The rating is lowered to Reduce from Hold and the target falls to $15.00 from $17.30.

NICKEL INDUSTRIES LIMITED ((NIC)) Downgrade to High-risk Neutral from High-risk Buy by Citi .B/H/S: 1/2/0

Citi sees short-term headwinds for metals demand as China will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker trims its near-term price forecasts for iron ore, aluminium, copper and nickel, and raises its forecast for coal. Lithium prices are expected to be resilient. Citi is now relatively more bearish on copper and relatively more bullish on met coal.

The analysts expect a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

For Nickel Industries, Citi downgrades its rating to High-risk Neutral from High-risk Buy on the broker's bearish outlook for nickel and after allowing for increased costs via its bullish outlook on coal. The target falls to $0.90 from $1.60.

REGIS RESOURCES LIMITED ((RRL)) Initiation of coverage with Neutral by UBS .B/H/S: 2/2/2

UBS initiates coverage of Regis Resources with a Neutral rating and provides commentary on the West Australian-based projects Duketon and Tropicana. A 12-month target price of $1.80 is set.

The broker' current valuation of Tropicana suggests a slight overpayment for the company's -$903m purchase (30% interest), though it remains a quality cornerstone asset. It's thought mine life extension, most likely from the underground operations, will provide upside.

Also, underground extensions will help Duketon maintain rates of 350kozpa for longer and 500kozpa for the company, forecasts the broker.

WOODSIDE ENERGY GROUP LIMITED ((WDS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/0

While oil prices remain elevated and Ord Minnett remains broadly positive on the sector, the broker has downgraded Woodside Energy given the proximity of the stock price to its net present value estimate.

Accounting for the broker's latest Brent price forecasts, Ord Minnett made modest upgrades to 2022 net profit forecasts. 

The rating is downgraded to Hold from Accumulate and the target price of $37.00 is retained.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Sell from Neutral by Citi .B/H/S: 5/0/1

Citi sees short-term headwinds for metals demand as China will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker trims its near-term price forecasts for iron ore, aluminium, copper and nickel, and raises its forecast for coal. Lithium prices are expected to be resilient. Citi is now relatively more bearish on copper and relatively more bullish on met coal.

The analysts expect a rebound for metal prices during the second half of 2023 from an easing in China and a pivot in Fed policy from the second quarter of 2023. 

For Whitehaven Coal, Citi downgrades its rating to Sell from Neutral on valuation following a 154% share price rally in the last six months, despite the risk of higher-for-longer coal prices. The target rises to $8.30 from $7.40.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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