Weekly Reports | Nov 28 2022
This story features LOVISA HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: LOV
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 21 to Friday November 25, 2022
Total Upgrades: 5
Total Downgrades: 10
Net Ratings Breakdown: Buy 55.69%; Hold 36.77%; Sell 7.54%
For the week ending Friday November 25 there were five upgrades and ten downgrades to ASX-listed companies covered by brokers in the FNArena database.
It was a busy week for Nanosonics, which received two ratings upgrades and one downgrade.
Morgans was originally ahead of the game by upgrading its forecasts for the company prior to a four-month trading update on November 18, which revealed a 42% increase in revenue, along with an increase in the installed base.
In reaction to the positive share price response to that AGM update, the broker began last week by downgrading its rating to Hold from Add. Then, as the share price swooned by around -20% in subsequent days (to sit around -23% below the broker's $4.91 target price), the rating was upgraded to Add from Hold.
Ord Minnett also upgraded its rating to Hold from Lighten in the belief Nanosonics is on track to beat its FY23 sales growth guidance. The analyst’s target was also increased to $4.00 from $3.60 given an increased valuation, potential for a rise in FY23 guidance and prospects for the company’s second product, Coris, once it is launched.
On the other hand, Sandfire Resources received two ratings downgrades from separate brokers last week, after management announced an entitlement offer to raise $200m at $4.30 per share for “balance sheet flexibility”.
Citi pointed to potential for substantial downside in base metals prices over the next three-to-six months. While copper is now pricing a major near-term recovery in demand growth, this is considered unlikely to materialise before the June quarter next year.
This broker lowered its rating to Neutral from Buy and marginally lowered its target price, while Ord Minnett downgraded to Sell from Hold, following a 43% share price rally from October lows.
Ord Minnett liked the rationale for the equity raising, given Sandfire’s indebted financial structure and raised its target to $3.60 from $3.30.
In line with consensus expectations, Monadelphous guided to -10-15% lower first half sales compared to the previous corresponding period. However, brokers recognised the impact of timing issues on past contract wins and raised the average target price in the FNArena database to $14.31 from $12.91 in the expectation of contract wins going forward.
As a result, the group had the only material (and positive) target price change in the database last week, despite ranking second on the table below for the largest average percentage decline in earnings forecasts by brokers.
Coming first on that table was Serko. While the company's first half results were ahead of consensus forecasts and FY23 guidance was reaffirmed, management was cautious on the economic outlook.
Macquarie downgraded its rating to Neutral from Outperform and felt a lack of momentum in key growth projects may take six-to-twelve months to rectify. The average target price in the FNArena database fell materially (not picked up in the table below due to a data glitch) after Macquarie and Citi lowered their targets by -64% to NZ$2.67 and by -28% to $3.65, respectively.
Citi lowered its FY24 and FY25 forecasts to reflect the impact of the current macroeconomic backdrop on the core Managed Travel business and adopted more conservative assumptions for the Booking for Business segment.
This broker maintained its Buy rating given the company’s ample balance sheet capacity to reach its free cashflow break-even target. Growth is also anticipated from US expansion and the Booking for Business division.
QBE Insurance also received lower earnings forecasts last week following a third quarter trading update though all seven brokers in the FNArena database remained Buy-rated, or equivalent, and the average target rose to $16.03 from $15.65.
Management noted premium volumes and rates remain buoyant but warned catastrophe costs, inflation and running yields will weigh on FY22 results. While UBS acknowledged the catastrophe budget will need to be raised, a bumper FY23 is still anticipated.
On the flipside, Brickworks received the largest percentage increase in forecast earnings last week after two brokers refreshed research following first quarter results. However, Macquarie noted its FY23 forecasts were inflated by an accounting adjustment.
The Neutral-rated broker felt the outlook is becoming increasingly uncertain though acknowledged firm first quarter US and Australian trading for the Building Products division. UBS (Buy) also pointed to proactive price increases within this key division to offset inflationary pressures, even though labour and trade availability constraints have eased somewhat.
Iluka Resources also received higher forecasts earnings last week, particularly from UBS (Neutral), which raised its 2023 and 2024 forecasts by 18% and 62%, respectively. While September-quarter sales fell a touch shy of the broker’s forecasts, price expectations remain high, and a boost is expected via China’s reopening.
Citi, which is also Neutral-rated, suggested the greatest risk to near-term earnings for Iluka is a faster-than-anticipated fall in rutile and synthetic rutile prices.
The positive trend for Qantas Airways continued with increased earnings forecasts by brokers following upgraded profit guidance for the second time in two months. Five of the potential six brokers in the FNArena database issued updated research and the average target price rose to $7.58 from $7.19.
As a result of an ongoing windfall from increased travel demand, Ord Minnett suggested capital management is possible, as the balance sheet has deleveraged faster than expected.
Morgan Stanley noted an acceleration in revenue inflow and a delay in capex will result in around -$900m lower net debt for Qantas than prior management guidance.
Total Buy recommendations comprise 55.69% of the total, versus 36.77% on Neutral/Hold, while Sell ratings account for the remaining 7.54%.
Upgrade
LOVISA HOLDINGS LIMITED ((LOV)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/0/0
UBS does an about-face on Lovisa Holdings after the AGM trading date, believing its August downgrading was premature after like for like sales grew 60% in the first 19 weeks of FY23.
Store network growth is outpacing global peers, the company is set to enter three new markets, and the broker expects strong revenue, earnings and margins growth accordingly.
EPS forecasts rise 24% in FY23 and 35% in FY24, and the broker now sits sharply above consensus forecasts.
Rating upgraded to Buy from Neutral. Target price rises to $29 from $20.
NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/1/1
As previously noted, Morgans was ahead of the game by upgrading forecasts for Nanosonics prior to a four month trading update at the company's AGM on November 18. The update revealed a 42% increase in revenue, along with an increase in the installed base.
In reaction to the AGM update, the broker then downgraded its rating to Hold from Add.
Now, as the share price has swooned by around -20% since the AGM, to be around -23% below the broker's $4.91 target price, the analyst decides to upgrade to Add from Hold.
Nothing left to say, other than to suggest promoting the analyst to a trading role.
Ord Minnett believes Nanosonics is on-track to beat its FY23 sales growth guidance, having last week reported a 42% lift in sales for the first four months of FY23. As a result of this view, the broker's rating is upgraded to Hold from Lighten.
The target also rises to $4.00 from $3.60 given the analyst's increased valuation, potential for a rise in FY23 guidance and prospects for the second product, Coris, once it is launched.
See also NAN downgrade.
NIB HOLDINGS LIMITED ((NHF)) Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 2/5/0
nib Holdings trading update for the first four months of FY23 at the AGM revealed a well received lift in underlying profits, according to Ord Minnett.
Although the analyst notes the low level of claims from the impact of covid, management do not see there are reasons for concern from any potential pullback in profits from the comparative covid period.
Earnings forecasts are adjusted by 6% for FY23 with higher margins being sustained before reverting to more normal levels.
Ord Minnett upgrades the rating to Accumulate from Lighten due to the share price pull-back with a $7.50 target.
SMARTGROUP CORPORATION LIMITED ((SIQ)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/0
Morgans downgrades FY22 and FY23 profit (NPATA) estimates by -8.3% and -11.9%, respectively, and reduces its target for Smartgroup Corp to $5.65 from $7.40.
The broker’s lower forecasts were in reaction to new FY22 profit guidance that missed the consensus estimate by -8%. Guidance implied 2H profit would fall by -10-13% half-on-half due to lower settlement volume from ongoing vehicle supply constraints.
Morgans decides to upgrade its rating to Add from Hold given the company’s strong balance sheet, solid forward revenue pipeline, contract opportunities and potential for high electric vehicle lease demand.
See also SIQ downgrade.
Downgrade
ADORE BEAUTY GROUP LIMITED ((ABY)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/2/0
Adore Beauty has appointed Tamlin Morton as new CEO, starting January 9.
While the broker appreciates the less discretionary qualities of the beauty category, it spies little upside from here given September-quarter results met the broker's forecasts but earnings (EBITDA) margin guidance proved a miss.
UBS observes the company is targeting margins of 8% to 10% in FY27, a figure the broker considers overly ambitious.
Rating downgraded to Neutral from Buy. Target price falls to $1.95 from $2.
HEALIUS LIMITED ((HLS)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/3/0
Post the Sonic Healthcare ((SHL)) trading update, Ord Minnett has taken a knife to Healius earnings forecasts due to the challenging macro environment from declining covid testing, rising costs and a slower turnaround in the base business.
EPS forecasts are lowered by -37% for FY23 and -28% for FY24.
The rating is downgraded to Lighten from Hold and the rating declines to $2.95 from $3.90.
MONADELPHOUS GROUP LIMITED ((MND)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/2/0
Monadelphous Group has guided to first half revenue being -10-15% lower than the previous comparable period given contract timing in the engineering construction segment.
The company does anticipate strong growth across key end markets in FY24 which should drive a revenue and earnings rebound.
Following the update from Monadelphous, Ord Minnett has lowered its FY23 revenue estimate -5.4%, but increased FY24 and FY25 estimates 7.2% and 9.7%.
The broker found the update largely positive, with improved contract terms and end market opportunity underpinning the growth outlook.
The rating is downgraded to Hold from Accumulate and the target price increases to $13.70 from $12.80.
NANOSONICS LIMITED ((NAN)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/1
Morgans was ahead of the game by recently upgrading forecasts for Nanosonics, as shown by a four month trading update at the company's AGM, which revealed a 42% increase in revenue, along with an increase in the installed base.
As a result of this foresight, the broker makes no changes to its forecasts (preferring to wait for 1H results), maintains its $4.91 target price and lowers its rating to Hold from Add after a recent share price rally.
The analyst remains cautious on the (limited) launch timing for CORIS, the flexible endoscope cleaning device, scheduled for 2023.
See also NAN upgrade.
PRO MEDICUS LIMITED ((PME)) Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0
Morgans suggests investors trim overweight positions in Pro Medicus after a recent share price rally and reduces its rating to Hold from Add. The $58.18 target price is unchanged.
The company provided no guidance at its AGM, as expected by the analyst, though noted the business was running ahead of internal budgets.
An overhanging risk, in the broker's view, is the assumption that all major contracts will renew. While there is no reason to think otherwise, some contracts are overdue for renewal, explains the analyst.
SANDFIRE RESOURCES LIMITED ((SFR)) Downgrade to Neutral from Buy by Citi and Downgrade to Sell from Hold by Ord Minnett .B/H/S: 3/2/1
Sandfire Resources' announcement of a $200m equity raise is somewhat unexpected and Citi thinks the reaction may be mixed. Sandfire assured a raise wasn’t required for debt covenants but for “balance sheet flexibility”.
There is a new CEO coming, costs at MATSA have edged higher, and ASX copper peers are becoming scarcer (in reference to the OZ Minerals takeover) but the copper price is also 7% higher, Citi notes, and China reopening headlines have helped lift the share price 24%.
Citi's near-term base case is for substantial downside in base metals prices over the next 3-6 months. Copper is now pricing a major near-term recovery in demand growth, which is unlikely to materialise before the June quarter next year in the broker's view.
Downgrade to Neutral from Buy, target falls to $5.40 from $5.50.
Ord Minnett view the $200m entitlement offer at $4.30 per share as a positive, boosting the price target by 9% to $3.60 and at pitched a $1 premium to the analyst's net present value.
Of note the deleveraging of the balance sheet is viewed as significant due to the indebted financial structure of the company.
Nevertheless the broker considers the valuation as excessive with the stock rallying some 43% from the lows in October.
The target is revised to $3.60 from $3.30 and the rating downgraded to Sell from Hold.
STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0
Macquarie downgrades its rating for Star Entertainment to Neutral from Outperform. Recent trading has been softer than expected and anticipated regulatory change may be more disruptive than first thought.
The analyst notes ongoing remediation costs are now around -$20m annually, up from -$12m and, additionally, there is
uncertainty on the level of monetary penalties. The target falls to $3.05 from $3.50.
The broker now forecasts $425m in FY23 earnings (EBITDA) compared to $459m previously, which factors-in a more severe impact at Star Sydney and higher remediation costs.
SMARTGROUP CORPORATION LIMITED ((SIQ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0
Smartgroup Corp has downgraded guidance (-6% to -8% short of consensus and Macquarie's forecasts) as supply-chain constraints on new-vehicle deliveries continue to hamper growth, despite signs of growing demand for novated leases.
On the upside, the company has renewed its salary packaging and novated lease contract with NSW Health, in a deal that runs until 2028.
EPS forecasts fall -8% in FY22; -16.5% in FY23; and -16.6% in FY24. Rating downgraded to Neutral from Outperform. Target price falls to $4.75 from $7.10.
See also SIQ upgrade.
TECHNOLOGY ONE LIMITED ((TNE)) Downgrade to Hold from Add by Morgans .B/H/S: 0/3/0
FY22 results were slightly better than expected and did nothing to alter Morgans view TechnologyOne is one of the highest quality stocks on the ASX.
A lower tax rate (post the Scentia acquisition) helped profit and EPS to exceed forecasts by 22%, explains the analyst. Should the SaaS/ARR growth trend persist, $500m of ARR target will be achieved 12 months prior to the FY26 target date.
The broker's target rises to $13.50 from $11.53, while the rating is downgraded to Hold from Add on valuation grounds following a 18% share price rally in the last six months.
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CHARTS
For more info SHARE ANALYSIS: ABY - ADORE BEAUTY GROUP LIMITED
For more info SHARE ANALYSIS: HLS - HEALIUS LIMITED
For more info SHARE ANALYSIS: LOV - LOVISA HOLDINGS LIMITED
For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED
For more info SHARE ANALYSIS: NAN - NANOSONICS LIMITED
For more info SHARE ANALYSIS: NHF - NIB HOLDINGS LIMITED
For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED
For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED
For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SIQ - SMARTGROUP CORPORATION LIMITED
For more info SHARE ANALYSIS: TNE - TECHNOLOGY ONE LIMITED