Weekly Ratings, Targets, Forecast Changes – 18-11-22

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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 November 14 to Friday November 18, 2022
Total Upgrades: 8
Total Downgrades: 13
Net Ratings Breakdown: Buy 55.93%; Hold 36.53%; Sell 7.53%

For the week ending Friday November 18 there were eight upgrades and thirteen downgrades to ASX-listed companies covered by brokers in the FNArena database.

United Malt Group and Aristocrat Leisure received the only material percentage increase in forecast earnings by brokers last week, while GrainCorp and Incitec Pivot featured in the top four for percentage earnings downgrades.

These four companies reported full-year results last week and their earnings “upgrades” and “downgrades” should not be taken at face value as overall earnings forecasts were impacted when FY22 forecasts rolled-off broker financial models. 

As a result, the changes made to broker forecasts may reflect more than recent actual results or revised outlooks.

For a more accurate summary of broker forecasts and views for Aristocrat Leisure, please refer to https://www.fnarena.com/index.php/2022/11/09/eclipx-group-cutting-costs-looking-for-catalysts/.

In the case of United Malt Group, the average of target prices set by three brokers in the FNArena database rose to $3.92 from $3.78.

According to Morgans, FY22 earnings [post software-as-a-service (SaaS) costs] were in line with guidance, while management’s FY23 guidance was revised marginally lower for higher SaaS costs. 

Higher net interest and tax forecasts led the broker to make material profit forecast downgrades, and its target fell to $3.67 from $3.84.

On the other hand, UBS raised its target to $3.70 from $3.50 and felt the company performed to the broker’s recently upgraded expectations, which were underpinned by easing supply-side headwinds and ongoing beer demand.

Risks around high-end craft beer demand and the potential for an equity raise to deleverage the business faster were mentioned by UBS, though Macquarie felt gearing will naturally revert to the company's target range by FY23 and envisaged a credible path to an earnings recovery in FY23 and beyond.

Due to a few one-off items, GrainCorp’s overall result came in slightly weaker than Morgans' forecast and at the bottom-end of the guidance range.

The broker observed financial years don’t get much better than FY22 for this company and FY23 earnings are unlikely to exceed FY22, especially with wet weather creating some uncertainty. A smaller crop and lower marketing margins and crush margins are also set to weigh.

UBS agreed with Morgans that FY22 likely represents an earnings peak. However, strong visibility into FY24 and upside risk potential from favourable weather and macro conditions prompted this broker to raise its rating to Buy from Neutral.

Outperform-rated Macquarie noted commentary from the Agricultural Bureau suggests a third consecutive above-average crop is anticipated in 2022-2023, though management pointed out flooding has delayed the harvest and impacted yield and quality. 

The average target price in the FNArena database for GrainCorp fell to $9.59 from $9.71.

The average target price for Incitec Pivot moved in the other direction and increased to $4.34 from $4.18, despite appearing in the table below for broker forecast downgrades due to the FY22 forecast rollover effect mentioned above.

FY22 results revealed earnings beat the consensus forecast and Morgan Stanley noted the focus will now likely be on the decision to delay the demerger of Pivot Fertilisers and Dyno Nobel, and to pursue a “strategic review” of the US ammonia manufacturing business.

A fully franked final dividend of 17cps was declared and a $400m buyback (5.2% of issued capital) boosted Morgans FY23-25 EPS forecasts.

Brokers’ earnings forecasts for Flight Centre Travel declined last week after a trading update for the first four months of FY23 came in -20% adrift of consensus forecasts. Ord Minnett downgraded its rating to Lighten from Hold following weaker-than-expected first half guidance. 

Despite the increasing demand for bricks and mortar travel advice, the company’s network is now around -50% smaller than pre-pandemic.

More positively, Neutral-rated Citi pointed to an improving underlying operational performance, with volumes back to pre-covid levels and revenue at 95%.

Two brokers in the FNArena database refreshed research for Pact Group last week following a disappointing first quarter trading update. First half guidance was softer than either Ord Minnett or Macquarie had expected.

The analyst at Ord Minnett was skeptical of management’s “slight EBIT growth” for FY23 and pointed out that for FY23 guidance to be achieved the group requires a half year earnings result only experienced in three of the past ten half yearly periods.

The average target price in the database fell to $2.23 from $2.76.

Total Buy recommendations comprise 55.93% of the total, versus 36.53% on Neutral/Hold, while Sell ratings account for the remaining 7.53%.

Upgrade

ABACUS PROPERTY GROUP ((ABP)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/0

Ord Minnett has lifted its cost of capital used for valuation models for the third time in 2022, taking the risk-free rate up by a further 25 basis points to 3.75% after starting the calendar year at 3.0%.

The broker has also increased capitalisation rate, floating debt cost and inflation assumptions. This results in a -5% average cut to property sector price targets, or -15% total in 2022. The sector is now trading at a -10% discount to revised targets.

Abacus Property upgraded to Accumulate from Hold. Target falls to $3.10 from $3.30.

ALLKEM LIMITED ((AKE)) Upgrade to Add from Hold by Morgans .B/H/S: 5/1/1

Morgans disagrees with recent market views of pending oversupply of lithium and expects demand will remain strong for the next 12 months. The broker's forecasts for realised lithium prices in FY23 -24 have increased, given the continued strength of the spot market.

As a result, Morgans lifts its rating for Allkem to Add from Hold and raises its target to $15.70 from $15.00. At the same time, a note of caution is added regarding highly volatile share prices in the sector.

ALS LIMITED ((ALQ)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/0

First half underlying net profit for ALS Ltd came in at $164m, exceeding management's guidance range set in August for $157-$162m on strong demand for the Commodities segment. A 20.3c interim dividend beat the 16.7c forecast by Ord Minnett.

The analyst notes contract repricing was utilsed to combat inflation, and repricing is likely to continue, while 2H labour availability should also improve.

Management guidance is for FY23 underlying profit to lift by 17% year-on-year to between $300m-320m, which the broker sees as achievable. The rating is upgraded to Accumulate from Hold, while the target is increased to $13.20 from $13.00.

GRAINCORP LIMITED ((GNC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/0

GrainCorp delivered, as expected, a strong full year result according to UBS, supported by a bumper crop and high supply chain margins.

The broker warns FY22 likely represents an earnings peak, but likes the strong visibility into FY24 and upside risk potential from favourable weather and macro conditions. 

Recent flooding has delayed winter harvests, and could impact on final crop size, but UBS suggests this is more likely to limit potential upside rather than create downside. 

The rating is upgraded to Buy from Neutral and the target price increases to $8.65 from $8.60.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/2/0

Ord Minnett upgrades its rating for Newcrest Mining to Accumulate from Hold and raises its target to $22 from $19 after marking-to-market gold and silver prices. Also, no major project capex increases are anticipated until next year.

Based on a recent bid for a Canadian precious metals producer, the analyst feels M&A activity may provide a general gold sector re-rate.

It's also believed the market was awaiting a lower inflation signal (before becoming more positive), as occurred via US CPI data in November. 

NUFARM LIMITED ((NUF)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/2/0

Nufarm's result met forecasts, with North America a highlight and Asia-Pacific solid, Ord Minnett notes. Europe was more muted.

FY23 outlook commentary for “modest underlying EBITDA growth” on a constant-currency basis was positive, the broker suggests, underpinned by favourable conditions and a strong outlook for soft commodity prices.

European regulatory headwinds seem to be abating, but management otherwise believes it can offset through organic growth and new products.

Upgrade to Accumulate from Hold, target rises to $6.40 from $6.10.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/2/1

Ord Minnett sees upside for Ramsay Health Care from a domestic recovery and upgrades its rating to Buy from Accumulate, while the $71.00 target is unchanged.

First quarter commentary was upbeat around supportive rates from the health funds and a lessening of workforce shortages in Australia, though offshore results provide a note of caution for the analyst. This is especially the case in France, with reduced government support.

While the broker believes media reports of a fourth covid wave is a threat, it's felt the company can now manage this new normal.

See also RHC downgrade.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/3/1

While further approvals are still outstanding (and a final feasability study) for Regis Resources' McPhillamys project, Citi recognises the importance of a DPE approval by raising its rating to Neutral from Sell.

DPE stands for the NSW Department of Planning & Environment.

The target is increased to $1.85 from $1.50 after the analyst reduces the risk weighting on the project.

Downgrade

ALUMINA LIMITED ((AWC)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/1/1

Alumina shares have rallied around 30% when the index has managed 7%, Ord Minnett notes, despite alumina prices remaining flat. The key driver have been lower gas prices in Spain, which have settled at half the price of that in February.

Spanish gas prices have been the main drag on earnings this year, Ord Minnett points out, along with lower alumina prices, leading the San Ciprian refinery to generate significant cash losses.

The next catalyst would need to be improved alumina prices, and the broker does not see that happening near term. Downgrade to Hold from Buy, target unchanged at $1.50.

BWP TRUST ((BWP)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/1/2

Ord Minnett has lifted its cost of capital used for valuation models for the third time in 2022, taking the risk-free rate up by a further 25 basis points to 3.75% after starting the calendar year at 3.0%.

The broker has also increased capitalisation rate, floating debt cost and inflation assumptions. This results in a -5% average cut to property sector price targets, or -15% total in 2022. The sector is now trading at a -10% discount to revised targets.

BWP Trust downgraded to Lighten from Hold. Target falls to $4.00 from $4.20.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/4/3

In reaction to 1Q results, Credit Suisse adjusts its FY23-25 EPS forecasts by 1%, -5% and -7%, respectively. A higher net interest margin (NIM) was offset by inflationary pressures on costs and higher bad debt assumptions.

Net interest income (NII) grew by 16% on volume growth and higher margins, partially offset by lower non-interest income. 

The broker's target price falls to $97.50 from $102.80 . The rating is downgraded to Underperform from Neutral on valuation and as the benefits from rate rises are already factored into the share price.

CORE LITHIUM LIMITED ((CXO)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Core Lithium has announced the resignation of its CFO, and the company is undergoing the search for a replacement. This follows the exit of the Managing Director and CEO in October and of the COO in early 2022, making for high executive turnover in recent months. 

Couple with weather impacts, senior management changes increase risk of project delays at Finniss, according to Macquarie. While the company continues to anticipate first spodumene production in the second half of FY23, Macquarie now assumes first production in FY24. 

The rating is downgraded to Neutral from Outperform and the target price decreases to $1.80 from $1.90.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/4/1

Ord Minnett materially downgrades FY23 EPS forecasts for Flight Centre Travel as 1H earnings (EBITDA) guidance of $70-90m was well below expectations. FY24 estimates are also downgraded though FY25 forecasts are left unchanged.

The broker downgrades its rating to Lighten from Hold and lowers its target to $13.71 from $14.26.

The analyst had felt a downgrade to guidance was on the cards and points out that despite the increasing demand for bricks and mortar travel advice, the Flight Centre Travel network is now around -50% smaller than pre-pandemic.

HOME CONSORTIUM LIMITED ((HMC)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/5/0

Ord Minnett has lifted its cost of capital used for valuation models for the third time in 2022, taking the risk-free rate up by a further 25 basis points to 3.75% after starting the calendar year at 3.0%.

The broker has also increased capitalisation rate, floating debt cost and inflation assumptions. This results in a -5% average cut to property sector price targets, or -15% total in 2022. The sector is now trading at a -10% discount to revised targets.

Home Consortium downgraded to Hold from Buy. Target falls to $5.60 from $6.60.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

While Credit Suisse upgrades FY23-25 earnings following Incitec Pivot's FY22 results and the target rises to $3.92 from $3.90, the rating falls to Neutral from Outperform as current opportunities are already considered in the share price.

These opportunities include the potential divestment of the US ammonia manufacturing business (WALA) and an improvement in earnings from the Americas. A $400m buyback is considered supportive.

Management will conduct a strategic review of WALA, having received a number of unsolicited buy offers.

The analyst expects fertiliser prices will provide less of a tailwind in FY23 and wet weather poses downside risk for Australian fertiliser sales volume in the 1H of FY23.

LYNAS RARE EARTHS LIMITED ((LYC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/1

Having revised the demand and supply outlook for rare earths and adjusting its commodity pricing outlook, Macquarie has lowered its earnings forecast for Lynas Rare Earths. The broker expects rare earths to trade below US$100 per tonne over the next six months, and peak at US$130 per tonne in late 2024. 

Macquarie downgrades its earnings forecasts by -27%, -11%, -7% and -4% through to FY26. The rating is downgraded to Neutral from Outperform and the target price decreases to $9.10 from $9.50.

NATIONAL STORAGE REIT ((NSR)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/2/2

Ord Minnett has lifted its cost of capital used for valuation models for the third time in 2022, taking the risk-free rate up by a further 25 basis points to 3.75% after starting the calendar year at 3.0%.

The broker has also increased capitalisation rate, floating debt cost and inflation assumptions. This results in a -5% average cut to property sector price targets, or -15% total in 2022. The sector is now trading at a -10% discount to revised targets.

National Storage REIT downgraded to Hold from Buy. Target falls to $2.60 from $2.70.

PERPETUAL LIMITED ((PPT)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/0

Credit Suisse expects the Perpetual and Pendal Group ((PDL)) merger is likely to complete following a ruling from the New South Wales Supreme Court that Perpetual could be liable for further remedies beyond the -$23m break fee if the company does not proceed, making it difficult to pursue alternatives.

Updated merger financials will see the deal close for $1.65 cash and one Perpetual share for every seven Pendal Group shares, increased scrip 5%. The reduced target price reflects the broker's sum of the parts valuation for the merged entity. 

The rating is downgraded to Neutral from Outperform and the target price decreases to $27.50 from $29.00.

RAMSAY HEALTH CARE LIMITED ((RHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/1

Ramsay Health Care's latest trading update has given Citi increased confidence that post-covid recovery is underway in Australia. Despite this, Citi flags that performance in Europe and the UK remains challenged. 

The broker highlights labour shortages had a significant impact on first quarter performance in the UK. While the company guided to a gradual recovery through FY23, ahead of more normalised conditions in FY24, Citi lowered earnings per share forecasts -15%, -5% and -2% through to FY25 on a weaker quarter. 

The rating is downgraded to Neutral from Buy and the target price decreases to $62.00 from $73.00.

See also RHC upgrade.

RAMELIUS RESOURCES LIMITED ((RMS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/1/0

Ramelius Resources updated its three-year outlook guidance and Macquarie saw nothing untoward or different from its own projections; "broadly in line", but with FY25 much stronger than forecast.

The broker highlights Penny will be key for improved production and all-in sustainable cost (AISC) over the period.

Also: new ore sources will be required to maintain production rates beyond FY25. Downgrade to Neutral from Outperform as the price target lifts by 13% to 90c.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 5/2/0

South32 has been downgraded by Macquarie to Neutral from Outperform with unchanged price target of $4.40. The broker is anticipating emerging headwinds for the miner's earnings.

Illawarra Coal is expected to slow down over the near term due to soft coking coal prices and weak output. The broker thinks alumina and aluminium operations are facing rising costs and subdued prices.

It is noted the shares have performed strongly recently.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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