Weekly Reports | Nov 14 2022
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 November 7 to Friday November 11, 2022
Total Upgrades: 14
Total Downgrades: 12
Net Ratings Breakdown: Buy 56.09%; Hold 36.51%; Sell 7.40%
For the week ending Friday November 11 there were fourteen upgrades and twelve downgrades to ASX-listed companies covered by brokers in the FNArena database.
Westpac, National Australia Bank and Orica appear among the top four in the table below for largest percentage increase in forecast earnings last week.
These three companies reported full-year results last week and their earnings “upgrades” should not be taken at face value as earnings received a boost when lower FY22 forecasts rolled-off broker financial models.
This boost occurred even if existing (sunnier) forecasts for FY23 and beyond were downgraded due to changed reporting season results/outlooks.
To demonstrate the point, the average Westpac target price set by brokers in the FNArena database fell to $25.87 from $26.00, despite the bank being atop the earnings upgrade table.
Morgans assessed the bank’s result met or exceeded expectations and the 64cps fully franked second half dividend was a beat by 3cps. However, management’s cost target increased to $8.6bn from $8bn due to higher inflation, a later timing of business exits and longer phasing of regulatory costs.
This broker lowered its FY23-25 cash EPS forecasts by around -2-8%, while dividend forecasts suffered larger percentage falls on a lower assumed payout ratio due to the economic backdrop.
NAB received a rating downgrade to Neutral by two separate brokers. Macquarie felt there is limited scope for a further re-rating for both the sector and NAB, while Citi noted FY22 results delivered few surprises.
Accumulate-rated Ord Minnett noted NAB’s net interest margin result failed to deliver upside, while FY22 margins for Westpac and ANZ Bank exceeded expectations.
For Orica, Citi noted FY22 results exceeded the consensus forecast by 6%.
Given the macroeconomic conditions, the broker considered management's FY23 outlook commentary was surprisingly constructive, with FY23 earnings expected to be ahead of FY22 on growth in global commodities demand.
Management stated inflation pressures, particularly from energy, are an ongoing challenge and cost-reduction initiatives will be introduced. The average target price for Orica in the database only increased to $16.18 from $15.96, following the full year results.
Block came second behind Westpac on the earnings upgrade table after September-quarter results outpaced Credit Suisse's gross profit forecasts and demonstrated improved compound annual growth rate trends.
Macquarie noted cash app deposits experienced a record September quarter and Square is seeing some success in the large seller cohort, although Afterpay remains uncertain.
As Block’s shares had previously de-rated and operating leverage is beginning to flow through, this broker upgrades its rating to Outperform from Neutral.
It was also a positive week for broker earnings forecasts for Pilbara Minerals after Ord Minnett raised spodumene forecasts to US$6,500/t for 2023 and US$5,700/t for 2024, increases of 44% and 66%, respectively. As a result, the broker’s rating was upgraded to Hold from Lighten and the target increased to $5.10 from $4.20.
Also, Macquarie made material upgrades to its earnings forecasts for lithium miners and developers under its coverage, despite near-term headwinds from economic slowdowns and covid lockdowns in China.
The broker maintained an Outperform rating and increased it target price to $7.50 from $5.60 for Pilbara Minerals, the preferred Lithium sector exposure (along with IGO) on the ASX.
Pilbara Minerals and Block also came second and third on the table for the largest percentage increase in average target price, while Origin Energy received the largest increase.
Ord Minnett increased its target for Origin Energy to $9.00 from $6.00 and upgraded its rating to Buy from Hold following a $9.00/share non-binding takeover bid from a consortium. It's felt the full bid price will likely rule out bids by other players.
Regulatory issues may hinder the bid as the Federal government may not desire privatisation in light of ongoing scrutiny around elevated energy prices, suggested the broker. On the flipside, a $20bn commitment by the consortium to expand the company's renewable power generation may appeal to the government.
Baby Bunting received the only materially negative adjustment to average target price last week following first quarter results. Citi (unchanged $3.32 target) noted margin headwinds are likely to continue into the second quarter due to pressures from its loyalty program and increased input costs (diesel prices and currency).
This margin pressure prompted Macquarie to lower its rating to Neutral from Outperform and slash its target to $2.80 from $4.95. Also, the Playgear category is considered a key concern, being high margin discretionary. Sales expectations were nevertheless unchanged, and the analyst remained positive on revenue growth execution.
In terms of earnings, Appen received the highest percentage downgrade after Macquarie waited a month to react to latest guidance by management, which showed global services revenue is being impacted by large market-share loss from its major customers.
Appen’s de-rating may have now largely played out, according to the broker, but a material recovery is not forecast until 2025 at the earliest. On limited further downside, the rating was upgraded to Neutral from Underperform, while the target fell to $2.70 from $3.30.
Pendal Group was next on the table for earnings downgrades after releasing FY22 results, though as explained above, the roll-off of FY22 forecasts from broker financial models has the capacity to distort.
While the results outpaced consensus estimates by 3%, Credit Suisse pointed to ongoing flows pressure for the group, partly exacerbated by a disappointing performance from the International Select strategy, while inflation also weighed on costs. Pendal’s average target price in the database fell to $4.79 from $5.01.
Morgans observed the short-term outlook depends upon the outcome of the merger with Perpetual and management expects shareholder support for the union. Should the merger fail, the share price is expected to initially fall by around -12-28%.
Brokers’ earnings forecasts for Zero were lowered after September-half earnings fell -12% short of consensus. While subscriber growth was slower than Morgans forecast, pricing power was evident, and a weaker New Zealand dollar assisted. Revenue grew by 30% year-on-year in constant currency terms.
Morgan Stanley (Overweight) lowered its target to $95 from $130, though felt the company has a meaningful opportunity to create value should it pivot to profitability by reducing its expense base and/or capex levels.
The distorting impact from the roll-off of forecasts from broker financial models after FY22 results was shown by the appearance of Eclipx Group on the earnings downgrade table. For a more accurate summary of broker forecasts and views for Eclipx please refer to https://www.fnarena.com/index.php/2022/11/09/eclipx-group-cutting-costs-looking-for-catalysts/
Total Buy recommendations comprise 56.09% of the total, versus 36.51% on Neutral/Hold, while Sell ratings account for the remaining 7.40%.
APPEN LIMITED ((APX)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/3
Macquarie has lowered FY22-24 underlying earnings estimates for Appen by -56-61%, adjusting for the latest company guidance.
Guidance is being driven by weakness in the company’s global services revenue, in the broker's view, which in turn is being
impacted by large market-share loss from its major customers.
Appen’s de-rating may have largely now played out, but a material recovery is not forecast until 2025 the earliest. On limited further downside, Macquarie upgrades to Neutral from Underperform. Target falls to $2.70 from $3.30.
CITY CHIC COLLECTIVE LIMITED ((CCX)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0
While acknowledging the current consumer environment is likely to challenge City Chic Collective's top line and margin results, Citi remains positive on the company's long-term international growth prospects.
According to the broker, City Chic Collective has "significant room to expand" in the global plus size women's clothing market, which it estimates to have a worth of US$180bn.
The rating is upgraded to Buy from Neutral and the target price decreases to $1.74 from $2.09.
COMPUTERSHARE LIMITED ((CPU)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 7/0/0
Credit Suisse raises its forecasts for Computershare as trends in aggregate for cash rates, FX movements and activity will be positive for US dollar earnings, and even more so for Australian dollar earnings.
The analyst feels the current share price neglects the up to $6/share of excess capital available courtesy of future debt headroom and proceeds from the potential exit from mortgage servicing in the US and UK. It's thought funds may be used for buybacks/M&A.
The rating is upgraded to Outperform from Neutral and the broker's target rises to $29 from $25.
CHARTER HALL RETAIL REIT ((CQR)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/1
Upgrading on Charter Hall Retail REIT, Citi has indicated a preference for defensive convenience retail exposures over discretionary retail at this stage in the consumer cycle.
The broker remains relatively constructive on underlying demand for consumption, but expects rising rates will start to play a larger role in consumer spending. Citi found commentary from Charter Hall Retail REIT to present a relatively stable outlook.
The rating is upgraded to Buy from Neutral and the target price of $4.30 is retained.