Weekly Reports | Nov 07 2022
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Weekly update on stockbroker recommendation, target price, and earnings forecast changes.
By Mark Woodruff
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.
Period: Monday October 31 to Friday November 4, 2022
Total Upgrades: 10
Total Downgrades: 6
Net Ratings Breakdown: Buy 56.28%; Hold 36.38%; Sell 7.35%
For the week ending Friday November 4 there were ten upgrades and six downgrades to ASX-listed companies covered by brokers in the FNArena database.
Despite first quarter results showing a downward trend for traffic and lead volumes, Carsales received an upgraded rating from UBS and Ord Minnett due to recent share price weakness.
Before becoming more upbeat than a Hold rating (up from Lighten) Ord Minnett would like to see improving indicators for both consumer confidence and dealership trends.
More positively, UBS noted the least cyclical of the online classifieds categories is automotive and Carsales’ current trading conditions indicate momentum across its businesses. The broker raised its rating to Buy from Neutral.
On the flipside, UBS and Credit Suisse downgraded IGO to Neutral from Buy on valuation. However, after six covering brokers in the FNArena database adjusted forecasts following September quarter results for IGO, the new average target price of $15.05 was barely changed.
While Citi noted Greenbushes (lithium) more than doubled underlying earnings from the June quarter, a larger than forecast capital expenditure bill at Cosmos (nickel) disappointed brokers.
Coronado Global Resources had the largest percentage fall in target price last week, after third quarter production and sales missed consensus forecasts.
Full year coal production guidance was downgraded to 16.9-17.1m tonnes from 18.0-19.0m, while cost guidance lifted to US$81-83/tonne from US$79-81 on weather and inflationary impacts.
Despite these near-term negatives, brokers generally remained positive and increased earnings forecasts. An out-of-season special dividend of US13.4cps was declared and Credit Suisse expects the dividend bonanza to continue.
Domino’s Pizza Enterprises had the second-largest percentage fall in target price and the second-largest percentage fall in earnings forecasts last week.
While first quarter results disappointed, both Ord Minnett and Morgans agreed October signalled an inflection point for Domino’s sales. Citi also noted the company's scale should see it outperform smaller competitors in what remains a challenging operational environment.
Citi is further enthused that Domino's remains one of the best long-duration growth companies under its research coverage though still downgraded its rating to Neutral from Buy.
The largest percentage fall in broker forecast earnings went to Boral after AGM commentary indicated price rises and operational leverage may be unable to deliver the margin expansion perviously anticipated, amid ongoing and significant inflation.
Credit Suisse pointed out management had previously flagged new initiatives would more than offset inflationary impacts. As a result, the broker lowered its earnings and profit expectations and felt consensus forecasts were also too optimistic.
Earnings forecasts also fell for Lendlease after a downgrade to FY23 profit guidance. All targets for return on invested capital (ROIC) and margin were pushed to the lower-end of ranges provided in August, driven by a combination of the macro environment and asset-specific delays, according to Macquarie.
In addition, the payout ratio for dividends will be lowered to 30-50% from 40-60%, which confirmed Morgan Stanley’s previous commentary regarding a tight balance sheet position. More positively, it’s thought FY24 is on-track to meet return targets for each of the three company segments.
AUB Group featured atop the table for the largest percentage increase in forecast earnings last week.
The group lifted its net profit guidance to $90-92.0m from $86.5-91m, or $107.5-115m if one includes initial guidance for the Tysers acquisition. Ord Minnett raised its forecasts to allow for higher interest rates and the earlier close of that acquisition.
Regarding Tysers, Credit Suisse noted a well thought out cost synergy plan and felt the majority of savings will derive from removing back-office and rental cost duplication, which can be realised in less than two years.
Nanosonics was next on the table after Morgans increased its FY23 revenue forecast to allow for a lower Australian dollar. After also taking into account recent share price weakness, the rating was raised to Add from Hold.
The broker’s channel checks suggest much of the operating environment in the hospital networks is returning to pre-covid levels
While Coronado Global Resources received the largest percentage fall in target price last week for the reasons explained above, brokers remained positive.
Morgans even raised its target after lifting 2022 and 2023 hard coking coal price assumptions. It’s felt shares are too cheap on current valuation multiples and the Add rating was retained.
Credit Suisse also maintained its Outperform rating for Coranado with potential upside from an ongoing met coal price recovery, a strong balance sheet and a strong US domestic contract in 2023.
Judo Capital also received earnings upgrades by brokers last week after first quarter profit of $23m came in ahead of Credit Suisse's $17m estimate. Management guidance for FY23 also beat consensus forecasts, particularly around the underlying net interest margin.
According to Ord Minnett, the loan book is currently showing few signs of stress in the current macroeconomic environment and the businesses is on a sound financial footing.
Total Buy recommendations comprise 56.28% of the total, versus 36.38% on Neutral/Hold, while Sell ratings account for the remaining 7.35%.
CARSALES.COM LIMITED ((CAR)) Upgrade to Buy from Neutral by UBS and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 4/2/0
UBS believes two key concerns have weighed on Carsales's recent share price performance, being macroeconomic concerns and execution risks associated with the Trader Interactive acquisition.
Yet current trading conditions indicate positive momentum across the company's businesses, and the broker notes Automotive is typically the least cyclical of the online classifieds categories.
UBS does acknowledge execution risk for Trader Interactive but on share price weakness upgrades to Buy from Neutral. Target unchanged at $24.60.
A 1Q trading update by Carsales confirmed a downward trend for traffic and lead volumes and Ord Minnett notes the environment for dealers is likely to become more challenging.
The broker increases its rating to Hold from Lighten following a share price fall since August results. To become more constructive the analyst would like to see positive indicators for both consumer confidence and dealership trends. The $20 target is maintained.
Management retains FY23 guidance and expects good growth in adjusted revenue and adjusted operating earnings.
DOWNER EDI LIMITED ((DOW)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/0/0
Downer EDI reiterated FY23 guidance for 10-20% growth in net profit at its AGM with “strategies to realise value for shareholders”
also to be articulated in 2023. Ord Minnett notes a 2H outlook will be provided at February's interim results.
On valuation grounds, the broker upgrades its rating to Buy from Accumulate and trims its target to $5.90 from $6.10 after reducing its FY23 profit growth forecast to 15% from 23% year-on-year. The latter change results from softer assumptions for Transport and Utilities.
Ord Minnett remains positive on Downer’s longer-term prospects.
EBOS GROUP LIMITED ((EBO)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/0
Morgans raises its rating to Add from Hold after a 1Q trading update by Ebos Group which revealed strong performances for both the Healthcare and Animal Care segments.
The group continues to achieve double-digit revenue growth on FY22 and the broker now has confidence in the short-term outlook.
The analyst increases revenue forecasts by 2.4% across the forecast period though slightly lowers margins in a cautious stance to allow recent acquistions to be fully integrated. The target rises to $36.84 from $36.81.
ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0
Iluka Resources' September quarter was largely in line with Credit Suisse's expectations, with production 11% higher than the broker had estimated. Despite the strong quarter, rutile production year to date is only 60% of full year guidance, and the broker raised concerns around the company's ability to meet its target.
The broker lifts its zircon pricing over the coming six months to US$2000 per tonne, from US$1730 per tonne, but does maintain expectations of a downturn ahead.
Given a busy catalyst schedule, the rating is upgraded to Outperform from Neutral and the target price of $10.00 is retained.
See also ILU downgrade.
NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/1
After increasing its FY23 revenue forecast to allow for a lower Australian dollar, Morgans lifts its rating for Nanosonics to Add from Hold after also taking into account recent share price weakness. The target is increased to $4.91 from $4.87.
The broker's channel checks suggest much of the operating environment in the hospital networks is returning to pre-covid levels.
ORICA LIMITED ((ORI)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/4/0
UBS believes Orica's upcoming FY22 result has been de-risked by a previous trading update. The broker upgrades its rating to Buy from Neutral on valuation and after raising FY23 and FY24 EPS forecasts by 4% and 11%, respectively.
The analyst points out global ammonium nitrate prices have increased significantly over the past 12 months and looks forward to evidence of increasing contract prices during the company's upcoming earnings update.
The target rises to $18.00 from $17.00.
QUBE HOLDINGS LIMITED ((QUB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0
Qube Holdings' trading update suggested high volume and margin improvement across most parts of the business. Credit Suisse likes the advantage offered by Qube Holdings' integrated logistics offering, and that new customer wins and expansion of services offers growth potential.
Previous guidance was confirmed, and Credit Suisse retains its forecasts. The rating is upgraded to Outperform from Neutral and the target price increases to $2.90 from $2.80.
UNITED MALT GROUP LIMITED ((UMG)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/0
UBS has upgraded United Malt to Buy from Neutral ahead of its FY22 results, expecting an in line result, unchanged FY23 guidance, and no further 'bad news' to be a positive catalyst for the share price.
The stock has been under pressure since the guidance downgrade in August. But data points suggest to the broker supply-side/cost headwinds should be easing into year-end and beer demand appears to be largely holding up.
Uncertainties still remain over FY23-24, UBS acknowledges, but also opportunities. Target unchanged at $3.50.
WOOLWORTHS GROUP LIMITED ((WOW)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/4/0
Woolworths Group delivered below-market sales growth in the first quarter, with Credit Suisse acknowledging the market was too optimistic on market share retention.
The broker notes Woolworths Group appears to have ceded the 60 basis point share gain from the first quarter lockdown of FY22 as market share normalised.
The broker also found profit guidance for New Zealand operations of NZ$100-130m to be lower than anticipated, and expects the profit reset to have some permanence.
A less demanding share price to valuation sees the broker increase its rating to Neutral from Underperform and the target price increases to $33.01 from $32.84.
BRAVURA SOLUTIONS LIMITED ((BVS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0
Bravura Solutions issued FY23 guidance significantly below Macquarie's expectations due mostly to far higher costs. The broker's revised forecasts for cost inflation materially reduce outer year earnings.
Client inactivity has been an issue since covid and given the economic outlook, the risk is the issue continues, Macquarie suggests. The balance sheet is not at risk at this point, but the broker will monitor.
Switching to a price/earnings valuation from discounted cash flow, target falls to 66c from $2.00. Downgrade to Neutral from Outperform.
DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/0
Ahead of the AGM, Citi had already warned Domino's Pizza's European operations are likely to be weighed down by cost pressures. Next thing, the company confirmed the operational challenges in front of shareholders.
The broker has, in response, lowered its forecasts while anticipating consensus forecasts might have to reset in double digit percentage.
Citi continues to be of the view Domino's Pizza Enterprises remains one of the best long duration growth companies in its coverage and the company's scale should see it outperform smaller competitors in what remains a challenging operational environment.
While acknowledging it looks rather like a late move, Citi has nevertheless downgraded to Neutral from Buy. Target price drops by -21% to $66.60.
IGO LIMITED ((IGO)) Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/1
IGO's September-quarter update met UBS forecasts, strong pricing for quality spodumene and low costs offsetting lower mining rates. Nickel production was in line. The dividend disappointed as did a heftier than forecast capital expenditure bill at Cosmos.
Management reiterated guidance.
UBS observes the company's share price is approaching the broker's target price, and the broker believes spodumene prices may have peaked.
Rating downgraded to Neutral from Buy. Target price moves to $15.70 from the last entry in the FNArena database on October 5 of $16.15.
IGO's Sep Q highlight was Greenbushes more than doubling underlying earnings from the June Q, Citi suggests. Net debt reduced by -$137m to $396m.
The broker expects nickel prices to move lower and lithium to track more or less sideways in the near-term.
Target rises to $15.20 from $14.00. With IGO now trading on an FY24 enterprise multiple of 6x, Citi downgrades to Neutral from Buy.
ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0
Citi expects September zircon, rutile and synthetic rutile pricing to be a peak for the current cycle, anticipating demand for both zircon and pigments to decline ahead with the Chinese ceramic market and real estate markets softening.
The broker expects this demand and pricing drag to keep investors on the sideline, but continues to see value in the stock. Having already assumed a price peak, earnings per share forecasts changes are modest.
The rating is downgraded to Neutral from Buy and the target price decreases to $9.50 from $12.20.
See also ILU upgrade.
RESMED INC ((RMD)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0
While supply chain impacts improve and the competitive dynamic remains in ResMed's favour, Citi anticipates a more gradual gross margin recovery and has updated its forecasts accordingly.
A decision between competitor Philips and the US Department of Justice could either see Philips return to the market and negatively impact ResMed's earnings, or remain out of the market and allow ResMed to continue to benefit from a quiet competitive environment.
The rating is downgraded to Neutral from Buy and the target price decreases to $37.50 from $38.50.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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For more info SHARE ANALYSIS: BVS - BRAVURA SOLUTIONS LIMITED
For more info SHARE ANALYSIS: CAR - CAR GROUP LIMITED
For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED
For more info SHARE ANALYSIS: DOW - DOWNER EDI LIMITED
For more info SHARE ANALYSIS: EBO - EBOS GROUP LIMITED
For more info SHARE ANALYSIS: IGO - IGO LIMITED
For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED
For more info SHARE ANALYSIS: NAN - NANOSONICS LIMITED
For more info SHARE ANALYSIS: ORI - ORICA LIMITED
For more info SHARE ANALYSIS: QUB - QUBE HOLDINGS LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: UMG - UNITED MALT GROUP LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED