Weekly Ratings, Targets, Forecast Changes – 09-12-22

This story features G.U.D. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: GUD

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 December 5 to Friday December 9, 2022
Total Upgrades: 2
Total Downgrades: 10
Net Ratings Breakdown: Buy 54.80%; Hold 37.46%; Sell 7.75%

For the week ending Friday December 9 there were two upgrades and ten downgrades to ASX-listed companies covered by brokers in the FNArena database.

There were two downgrades to Beach Energy by separate brokers last week. 

Clough, the company’s contractor for the Waitsa project, is experiencing financial difficulties and Hancock Energy has increased its bid for Warrego Energy to 28cps, ahead of the 20cps pitched by Beach nearly a month ago.

After Morgans allowed for these two events, as well as recent share price strength, the broker’s rating was downgraded to Hold from Add. 

Ord Minnett also lowered its rating to Hold from Accumulate on valuation concerns after shares had rallied and on the increased competition for Warrego Energy from both Hancock Energy and Strike Energy. Further, threats over government intervention to lower gas prices have been growing in recent weeks.

Downer EDI also suffered two ratings downgrades, the largest percentage downgrade to target price by brokers, as well as the second largest percentage downgrade to forecast earnings.

Not only was guidance lowered by -15% due to wet weather and labour shortages but also, more worryingly, management announced accounting irregularities relating to a single contract in the Utilities business.

UBS downgraded its rating to Neutral from Buy and noted the overstatement of historical earnings highlights an internal control weakness, and while the amount is immaterial, investors will be seeking reassurances the incident is not indicative of a more widespread issue. 

The broker also pointed out the company’s renewed infrastructure services and maintenance operating model has proven susceptible to challenging weather and post-covid related operating conditions, which has resulted in ongoing earnings volatility and project write-downs.

For broadly similar reasons, Macquarie also downgraded its rating to Neutral from Outperform and reduced its target price to 4.05 from $5.61, while the average target price of four covering brokers in the FNArena database also fell to $4.39 from $5.85.

Given a dearth of recent research by Ord Minnett on Serko, FNArena had wrongly assumed coverage had ceased, and re-inclusion of the company into the database causes a distortion to the table below for (the largest) positive change to average target price, which should be ignored.

The broker actually lowered its target to $5.19 from $6.03, following first half results in late-November, which showed higher-than-expected staff costs and general inflationary impacts. As a result, Serko appeared atop the table for the largest percentage forecast earnings downgrade last week.

The analyst maintained confidence in positive execution of the Bookings.com deal, and management reiterated guidance for a doubling of revenue in FY23 and a cashflow positive outcome in FY25.

On the flipside, 29Metals received the largest percentage increase in forecast earnings, after Morgan Stanley updated across its materials coverage to account for spot commodity prices and currency rates. Valuations were also adjusted for new base, bear and bull case scenarios.

The broker downgraded its rating for 29Metals to Underweight from Equal-weight on account of valuation and the potential for higher costs in 2023, though the target increased to $2.00 from $1.85 on a more positive bull and bear case. 

Alumina and Regis Resources also appear on the table below for a positive change in earnings forecast following Morgan Stanley’s updated commodity and currency forecasts. The 12-month target price for Alumina fell to $1.70 from $1.80, while the Regis target increased to $1.80 from $1.70.

Upgrade

G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

Citi reviews the Australian auto parts and equipment sector (small caps) and notes the rebound in the original-equipment-manufacturing sector continues, new car sales rising 18% in November.

The broker expects this augurs well for GUD Holdings but suspects a full supply chain recovery might dovetail with a recession.

The broker trims the company's earnings forecasts and notes it prefers ARB Corporation ((ARB)) and Bapcor ((BAP)).

But Citi upgrade's the company's rating to Buy from Neutral to reflect the company's low price-earnings multiple. Target price rises 14% to $10.

ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/0

Consistent with the indicative bid price from Brookfield/EIG, Credit Suisse raises its target price for Origin Energy to $9.00 from $6.20 and upgrades is rating to Outperform from Neutral. It's felt the bid will ultimately be successful.

The broker increases its FY23 and FY24 earnings (EBITDA) forecasts for both Energy Markets and Integrated Gas, which factors in the massive $350-550m guidance range (on October 31) for a LNG trading gain.

After conducting a scenario analysis, Credit Suisse estimates AGL Energy ((AGL)) would be less impacted by government imposed price caps than Origin Energy ((ORG)) 

This is because AGL has less net output exposed to high price NSW/SA after Aluminium smelter contracts and the Liddell closure.

Downgrade

29METALS LIMITED ((29M)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/1/2

Morgan Stanley lowers its rating for 29Metals to Underweight from Equal-weight on valuation and the potential for higher costs in 2023.

The broker increases its 2022-24 gold price forecasts. The 2022-23 copper price estimates also increase and then slightly decrease in 2024.

Despite a fall in earnings forecasts for the analyst's base case, the valuation technique also incorporates a more positive bear and bull case, resulting in a $2.00 target, up from $1.85.

ALLKEM LIMITED ((AKE)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 5/0/2

Morgan Stanley makes updates across its materials coverage to account for spot commodity prices and currency changes. 

Lithium demand headwinds causes the broker to downgrade its rating for Allkem to Underweight from Equal-weight and the target falls to $12.40 from $15.85.

BHP GROUP LIMITED ((BHP)) Downgrade to Hold from Add by Morgans .B/H/S: 1/5/0

Despite stable fundamentals in the iron ore market, Morgans sees reduced value upside for the major Australian miners as the market appears to have prematurely priced in a China growth recovery.

Market sentiment towards China has been rising over the last month on signals for an easing in covid restrictions and stimulus measures for the property market, explains the analyst.

The broker also increases its risk free rate to 3.6% from 3.0% for the iron ore miners under its coverage.

As a result of these changes, Morgans rating for BHP Group is downgraded to Hold from Add and its target falls to $44.80 from $47.00.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Hold from Add by Morgans and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/1

Taking into account recent share price strength, increasing competition for the Warrego Energy ((WGO)) acquisition, and the financial troubles for Clough, the Waitsia project's contractor, Morgans downgrades its Beach Energy rating to Hold from Add.

Hancock Energy has increased its competing bid for Warrego to 28cps, ahead of the 20cps pitched by Beach nearly a month ago.

The broker allows an additional 10% increase on its forecast capital expenditure to go on the Waitsia infrastructure in 2023. The target falls to $1.91 from $1.97.

Ord Minnett suggests Beach Energy offers good exposure to tightening East Coast gas markets, but also highlights a number of potential downside risks, including a recent history of operational issues and the ongoing threat of government intervention.

There is also the issue of Beach competing with Strike Energy ((STX)) and Gina Rinehart’s Hancock Energy for Warrego Energy ((WGO)).

As the stock has recently outperformed sector peers significantly, the broker pulls back to Hold from Accumulate. Target unchanged at $1.90.

DOWNER EDI LIMITED ((DOW)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/0

While Macquarie had anticipated wet weather may jeapordise FY23 guidance for Downer EDI, the extent was greater than expected. Higher costs also weighed. News of accounting irregularities was considered of greater concern.

The irregularities occurred in a maintenance contract at the Australian utilities business and resulted in a historical overstatement of pre-tax earnings of around $30-40m. Investigations are ongoing and the analyst notes the risk they may uncover similar issues.

Guidance for FY23 was downgraded to $210-230m profit (NPATA) compared to the broker's $249m forecast.

The rating is downgraded to Neutral from Outperform and the broker sets a $4.05 target, down from $5.61.

Downer EDI's renewed infrastructure services and maintenance operating model has proven susceptible to challenging weather and post-covid related operating conditions that have resulted in ongoing earnings volatility and project write-downs, UBS notes.

The weather had led to a -15% guidance downgrade. The overstatement of historical earnings highlights internal control weaknesses, UBS suggests.

While the amount is immaterial, investors will be seeking reassurances that this control deficiency is not indicative of a more widespread issue. Downgrade to Neutral from Buy. Target falls to $4.00 from $6.15.

ELDERS LIMITED ((ELD)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/2/0

UBS downgrades Elders to Neutral from Buy, expecting softer earnings growth and citing management uncertainty after the resignation of its CEO and CFO.

Challenges are building, says the broker, including reduced earnings from the Elders' Agency business as cattle prices stabilise; the one-off nature of some price benefits; and lower Real Estate returns in response to rising interest rates. 

The broker says the business remains attractive as a capital light high return proposition (having returned an earnings (EBIT) compound annual growth rate of 24% over the past 10 years) but the broker requires stronger evidence of earnings momentum before returning to Buy.

EPS forecasts fall 18% for FY23; and 19% for FY24. Price target falls to $11.30 from $15.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Add by Morgans .B/H/S: 2/5/0

Despite stable fundamentals in the iron ore market, Morgans sees reduced value upside for the major Australian miners as the market appears to have prematurely priced in a China growth recovery.

Market sentiment towards China has been rising over the last month on signals for an easing in covid restrictions and stimulus measures for the property market, explains the analyst.

The broker also increases its risk free rate to 3.6% from 3.0% for the iron ore miners under its coverage.

As a result of these changes, Morgans rating for Rio Tinto is downgraded to Hold from Add and the target falls to $107 from $108.

TREASURY WINE ESTATES LIMITED ((TWE)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/3/0

As Treasury Wine Estates share price has rallied in recent months, alongside other China-exposed stocks, and is currently above Credit Suisse's $13.80 target, the broker's rating is downgraded to Neutral from Outperform.

Separately, the broker notes feels the benefit from a falling Australian dollar is likely muted considering the company's hedging policy and the prospect of additional cost inflation.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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