Weekly Ratings, Targets, Forecast Changes – 28-10-22

Weekly Reports | Oct 31 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 October 24 to Friday October 28, 2022
Total Upgrades: 16
Total Downgrades: 16
Net Ratings Breakdown: Buy 55.97%; Hold 36.53%; Sell 7.51%

For the week ending Friday October 28 there were sixteen upgrades and sixteen downgrades to ASX-listed companies covered by brokers in the FNArena database.

While ratings changes were evenly split, there were more material earnings downgrades to broker forecasts than upgrades, and half (five) of the earnings downgrades in the table below relate to the Resources sector.

Three of those five downgrades were gold-related after Ramelius Resources, Newcrest Mining and OZ Minerals issued September quarter results.

While results for Ramelius came in slightly lower than Ord Minnett's expectations, the broker believes six-month upside more than outweighs perceived deliverability risk and upgraded its rating to Buy from Accumulate.

Citi also managed to look through a mixed quarterly for Newcrest and upgraded its rating to Buy from Neutral following a severe share price fall over the course of the general Gold sector de-rating. The US dollar is expected to peak over the next six months and gold is forecast to bounce back to US$1900oz in the second half of next year.

Over at OZ Minerals, gold production exceeded Neutral-rated Credit Suisses forecast, but management downgraded gold guidance for Prominent Hillby -9% due to lower stockpile processing and higher group costs.

Morgan Stanley (Equal-weight) also observed copper production at Prominent Hill is below year to date run rates, and an improvement will be needed in the December quarter if full-year guidance is to be met.

South32 and Iluka Resources were the other two Resource sector stocks appearing in the earnings downgrade table.

While South32s first quarter numbers for coal, alumina and nickel underwhelmed, Morgans still maintained the business remains in robust shape and kept its Add rating, while its target fell to $5.30 from $5.40.

Overweight-rated Morgan Stanley observed sales now need to play catch-up to meet FY23 forecasts though considered this feat achievable.

After a hiatus on coverage of Iluka for 18 months, UBS set a Neutral rating and $10.25 target and its new earnings forecasts lowered the average in the FNArena database.

While rare earths are important for Iluka and command most attention, noted the analyst, 60% of its valuation for the company is linkedto the mineral sands business.

Other brokers noted an agreement with ASX-listed rare earths junior Northern Minerals for the supply of rare earths concentrate.Iluka will invest an initial $20m to support the development of Northern Minerals' Brown Range project through to a definitive feasibility study.

Of all the downgrades to earnings forecasts last week in the database, Appen received the largest in percentage terms after Morgan Stanley became the fourth covering broker and initiated coverage with an Underweight rating and $2.25 target price.

The broker felt competitionhas intensified from a number of global players (including Amazon and Sagemaker), which are creating more sophisticated platforms. The analyst noted the company's software is not built on proprietary technology that would give it a distinctive competitive advantage.

The second largest downgrade to broker earnings forecasts went to Redbubble, which also registered the largest percentage fall in average price target in the FNArena database, following a first quarter update.

UBS downgraded its rating to Neutral from Buy and lowered its target to $0.60 from $1.55. Positive June quarter trends (like margins and improved channel mix) reversed in the September quarter, while the analyst noted free shipping and marketing spend more than offset recent price rises.

Add-rated Morgans was more forgiving around near-term margin headwinds and customer acquisition cost pressures, and noted the company is in an investment-phase with additional brand spend/headcount. The brokers target price was reset to $1.00 from $1.65.

Next on the table was Aussie Broadband after Ord Minnett lowered its target to $3.61 from $4.03, despite an AGM trading update that revealed ongoing market share growth in the September quarter and reiteration of earnings guidance.

The brokers EPS forecasts fell by around -3% to reflect a higher cost of capital, courtesy of rising interest rates.

Later in the week, Morgan Stanley (Underweight) issued its inaugural research on Aussie Broadband and became the fourth broker in the FNArena database covering the stock. In setting a $2.10 target price, the analyst lowered the average database target to $3.14 from $3.66.

This broker noted downside risks to consensus forecasts as upside has already been factored into theoutlook. Intensifying competitive pressure in consumer broadband were also noted, which will potentiallysuppress average revenue per user and kick operating costs higher.

The average target price in the FNArena database for Medibank fell to $3.24 from $3.76 last week on impacts from the recent cyber security breach.

As part of a first quarter update, the company withdrew FY23 policyholder growth guidance in reaction to the event and initially assessed costs in the range of -$25-35m,though Morgans felt significant uncertainty remains for both costs and outcomes.

Ord Minnett felt the greatest immediate risk to earnings would derive from a loss of policyholders due to reputational risk, while regulatory imposts may be added at a later date.

While UBS retains its Sell rating and $0.45 target price forZip Co following a first quarter trading update last week, Ord Minnett lowered its target to $0.70 from $1.10 anddowngraded its rating to Hold from Accumulate, despite apositive trend for bad debts.

Ord Minnetthad hoped management would have sold off the international operations by now though management stated the strategic review of the Rest of the World segment is well advanced.

It was a busy time for Pilbara Minerals with two ratings downgrades by separate brokers and also heading up the table below for the largest percentage increase in target price. These moves followed September quarter results.

While lithium production outpaced peers, operational expenditure came in at the lower end of guidance, and Citi raised its target to $4.60 from $4.30, the brokers rating was downgraded to Sell from Neutral following recent share price strength.

The broker expects a rise in spodumene prices of 40% and 60% across FY23 and FY24.

Ord Minnett marginally increased its target to $4.20 from $4.10, but also struggled to justify the current valuation given a lack of firm growth or margin expansion plans and lowered its rating to Lighten from Hold. Its thought a strong net cash position may lead to a positive capital management update later this quarter.

Returning to broker earnings forecasts, TPG Telecoms position atop the table below for positive change should be ignored due to a data glitch.

Karoon Energy received the only material increase in earnings forecasts last week, following first quarter results.

Management raised the bottom end of its guidance range due to a stronger-than-expected performance at the Baunaoil and gas field in Brazil, post-intervention.

Macquarie feels the company could beat full year guidance if thePatolafield in Brazil comes online, but timing and initial rates will be a determining factor.

Following Patola,Karoon Energy will proceed with up to two wells at the Neon oil discovery in Brazil, which the broker expects could be a material catalyst for a share price re-rate.

Total Buy recommendations comprise 55.97% of the total, versus 36.53% on Neutral/Hold, while Sell ratings account for the remaining 7.51%.

Upgrade

AMPOL LIMITED ((ALD)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/0

Credit Suisse believesAmpol's share price has been unfairly marked-down following 3Q results and upgrades its rating to Outperform from Neutral.

Earnings (EBIT) came in at$266m compared to the analyst's forecast for $338m, due to underperformance in Fuels and Infrastructure on a number of trading-related factors and adverse movements in freight.

The target price falls to $30.49 from $31.93 after the broker downgrades FY22 and FY23 EPS estimates by -6.2% and -7.6%, respectively.

BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

Since August 9, Bendigo & Adelaide Bank has underperformed peers by -17- 29%. While Macquarie continues to expect the bank to be impacted by intense mortgage competition and its community banking revenue-share arrangement, there appears to be light at the end of the tunnel.

Improved saving deposit spreads and rising swap curves should offset margin pressures and rising expenses. Macquarie's margin forecast for FY23 is 15 basis points ahead of consensus.

Target rises to $9.25 from $9.00, upgrade to Outperform from Neutral.

CREDIT CORP GROUP LIMITED ((CCP)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/0/0

Credit Corp has retained its full year earnings guidance and lifted the lower end of its purchased debt ledger guidance range. The update, alongside cash collections holding up,waswell received by the market, particularly given recent industry cash collections.

Ord Minnett upgrades to Buy from Accumulate and the target price decreases to $28.00 from $28.50.

COLES GROUP LIMITED ((COL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/3/0

Ord Minnett now prefersColes Group over Woolworths Group, and accordingly raises its rating to Hold from Lighten and lifts its target to $16.00 from $15.80.

By comparison to Woolworths, the analyst sees better sales momentum, less downside risk to consensus earnings forecasts and a fairer current valuation multiple.

Mind you, the broker is cautious on the overall outlook for the grocery space, despite believing risks are now more reflected in valuations. There's considered to be some downside risk to consensus earnings, following an inflection point reached in the FY22 reporting season.

ESTIA HEALTH LIMITED ((EHE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0

Improved occupancy as covid cases decline should benefitEstia Health according toMacquarie, driving near-term upgrades to the broker's earnings assumptions.

The recently announced $62m acquisition of four residential aged care homes looks tobe accretive.Coupled with expectations of improved occupancy,Macquarie's earnings forecasts lift 5%, 3% and 7% through to FY25.

The rating is upgraded to Outperform from Neutral and the target price increases to $2.50 from $2.15.


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