Weekly Reports | Jan 30 2023
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 January 23 to Friday January 27, 2023
Total Upgrades: 9
Total Downgrades: 25
Net Ratings Breakdown: Buy 53.14%; Hold 37.29%; Sell 9.57%
For the week ending Friday January 27 there were nine upgrades and twenty-five downgrades to ASX-listed companies in the FNArena database.
While the overwhelming majority of ratings changes were downgrades, amendments to brokers' price targets and earnings forecasts in the tables below show a greater upside bias, in line with early-year market optimism.
Not only is it the time of year for individuals to implement new year’s resolutions, but also the time for brokers to initiate sector-wide reviews.
Hence, the number of ratings downgrades were increased by a UBS sector report on the Australian Real Estate sector (four downgrades), a Banking sector review by Macquarie (three downgrades) and both Morgan Stanley and Morgans looked at the Retail sector, resulting in a few more downgrades.
For real estate-exposed stocks, UBS expects ongoing volatility for bond yields but feels the range of outcomes for interest rates has diminished, and on average, raises its price targets by 6% across the sector.
The analysts forecast a peak of 3.35% for the cash rate (market expects 3.8%) on normalising unemployment and inflation, and expect rate cuts in the second half of 2023 will close valuation discounts in the Real Estate sector,
The sub-sector of Logistics is preferred given traditionally high rent growth and record low vacancy levels, while structural factors favour Residential.
UBS also moved to underweight from overweight for retail-exposed stocks in the Real Estate sector on a weaker consumer, while caution was retained for office, and it was considered too early to overweight the Funds Management sub-sector due to subdued transaction volumes.
As a result of this changed outlook, the broker downgraded its rating for BWP Trust, Charter Hall Long Wale REIT and Vicinity Centres to Sell from Neutral, and the rating for Mirvac Group to Neutral from Buy. The rating for Goodman Group was raised to Buy from Neutral on the preference for the Logistics sub sector.
After reviewing the Australian banking sector, Macquarie concluded it is peaking, with only one last upgrade left in it (if that), and the broker now has underweight exposure.
The broker considers the sector's longer-term leverage to high interest rates is overstated and doesn’t consider the banks to be a great inflation hedge. Nonetheless, the banks are set for their last hurrah and should deliver their strongest pre-provision profit and growth in more than a decade in FY23, courtesy of strong margins in response to rising interest rates.
However, the analysts believe stubborn inflation and higher interest rates are eventually likely to impact asset quality and raise impairments.
Macquarie downgraded its rating for Commonwealth Bank, Westpac and Bank of Queensland to Underperform from Neutral, while ANZ Bank was upgraded to Outperform from Neutral given its relative undervaluation.
Morgans take on Discretionary Retail revealed an expectation for generally positive first half results for many retailers, especially as comparisons will be made against a previous corresponding period which included lockdowns.
The analysts also noted retail sales continue to rise faster than market expectations due to low rates of unemployment and elevated household savings ratios. As a result, it’s felt the market has overestimated the impact of interest rate rises on the consumer.
For stocks under the broker's coverage, key picks include Add-rated Beacon Lighting, JB Hi-Fi and Universal Store.
Morgan Stanley prefers retailers with potential for global expansion, levers to adjust margins and a track record of beating market expectations. A high level of insider ownership and a strong balance sheet is also viewed positively.
This broker upgraded its rating for Premier Investments to Overweight from Equal-weight and lowered its ratings for KMD Brands and Accent Group to Equal-weight from Overweight.
As part of its retail review, Morgans also lowered its rating for Accent Group to Hold from Add on a 50% share rally since last October, while Morgan Stanley (Equal-weight from Overweight) cited concerns around an increasing apparel exposure and margin headwinds, along with the tough economic backdrop.
Following a better-than-expected first half trading update by Accent Group, the average target price in the FNArena database rose to $2.14 from $1.90, the only material positive change in the table below. Broker earnings forecasts also rose, placing the company third on the earnings upgrade table.
Ramelius Resources is first on that table. Despite a second quarter earnings miss, longer term guidance and new hedging combined to drive upward revisions to Ord Minnett’s earnings outlook (FY24 up by 9%, FY25 by 30%). The target and Buy rating were left unchanged.
Serko was next after earnings upgrades by both Citi and Ord Minnett. The latter reiterated how important the Booking.com arrangement is to the broker’s Buy rating thesis and was pleased this was a key driver of upgraded FY23 guidance by management.
Should this arrangement prove to be successful over time, the broker pointed out Serko’s share price will be worth multiples of where it is currently trading.
While Magellan Financial appeared on the earnings upgrade table and Ord Minnett raised its rating to Accumulate from Lighten, long-suffering shareholders should not become too optimistic. Ord Minnett sees little in the wings for a return to former glories, while Magellan is Morgans (Hold) least preferred among its coverage of ASX-listed fund managers, behind GQG Partners and Pinnacle Investment Management.
Sandfire Resources also received upgraded earnings forecasts from brokers last week following a miss on second quarter production, which was more than compensated for by a beat on costs. According to UBS, the company's outlook has improved materially since the appointment of a new CEO, a completed rights issue and a rally in copper and zinc prices courtesy of the China reopening. A scarcity of copper exposure on the ASX, also prompted Citi to lift its target to $6.40 from $5.60.
Material broker earnings downgrades last week related mainly to the Resources sector, with 29Metals receiving a nearly -300% downgrade (from a small base) while South32, Perseus Mining, Cooper Energy and Alumina copped average broker downgrades in the range of -17% to -10%. Target prices for the latter grouping barely changed.
Following a second quarter production report, Macquarie noted Underperform-rated 29Metals had operational issues at both Golden Grove and Capricorn Copper, while fresh cost guidance was also significantly higher than forecast. Citi (Neutral) was also concerned about the rate of cash burn. The company headed up the table for the largest percentage fall (-18%) in target price last week.
While Ord Minnett lowered its rating to Hold from Accumulate and its target to $1.95 from $2.10, the analyst reminded investors of upside risk from high leverage to the copper price.
In among the Resource sector earnings downgrades, Austal received a 15% downgrade when Citi (one of three brokers covering the stock in the FNArena database) updated research for the shipbuilder and reduced its target by -45%. As a result, the company came a close second on the target price downgrade table for the week, as the average target fell to $2.47 from $2.93 (nearly -16%).
In the prior week, management reduced earnings guidance to $58m from $100m as a result of an increased provision for its towing salvage and rescue (T-ATS) contract, which was secured in 2021 with the US Navy.
According to Citi, “The T-ATS-related downgrade is disappointing, and a reminder of the risks involved when a new vessel build commences. The implications on Austal’s prospects to win the more complicated ocean surveillance ships (T-AGOS) construction contract (which has been delayed to 2023) remain unclear.”
The broker retained its Buy rating on the strength of Austal's balance sheet and the order book, along with the potential to secure new contracts.
Total Buy recommendations comprise 53.11% of the total, versus 37.33% on Neutral/Hold, while Sell ratings account for the remaining 9.56%.
Upgrade
ANZ GROUP HOLDINGS LIMITED ((ANZ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/2/0
Macquarie reviews the Australian banking sector and concludes it is peaking, with only one last upgrade left in it (if that).
The broker considers the sector's longer-term leverage to high interest rates to be overstated; and does not consider the banks to be a great inflation hedge.
But the banks are set for their last hurrah concludes the broker, expecting they will deliver their strongest pre-provision profit and growth in more than a decade in FY23, courtesy strong margins in response to rising interest rates.
Beyond the March half, however, stubborn inflation and higher interest rates are eventually likely to impact asset quality and raise impairments.
Macquarie is now underweight the banking sector.
ANZ Bank is considered the exception, given its discounted, and in the broker's view, unjustified valuation (the bank is trading at a -45% discount to the All Industrials and about -40% to some peers), the broker spying upside from market income and an uptick in margins from its institutional business.
Rating upgraded to Outperform from Neutral. Target price is steady at $26.
ALUMINA LIMITED ((AWC)) Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 2/0/2
Alumina Ltd's sole asset Alcoa World Alumina and Chemicals reported higher-than-forecast December-quarter operating costs.
Alumina's EPS forecasts fall -30% for 2022 accordingly, and -50% for 2023, the broker believing costs will remain elevated longer than forecast. DPS forecasts fall -20% and -35%.
But the broker advises that modest changes to costs are having a larger impact on earnings at the moment, given the earnings cycle is at a low ebb, and remains positive for mid-cycle earnings, which it believes will be underpinned by higher energy costs, carbon capture subsidies, light-weighting vehicle trends and a robust battery market.
Ord Minnett upgrades Alumina's rating to Lighten from Sell, after cutting the target price last week to $1.20 from $1.50 (the $1.20 figure still stands).
GOODMAN GROUP ((GMG)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/1/0
In a review of the Australian Real Estate sector, UBS expects ongoing volatility on bond yield moves but feels the range of outcomes for interest rates has diminished. On average price targets are raised by 6% across the sector.
The broker forecasts a peak of 3.35% for the cash rate (market expects 3.8%) on normalising unemployment and inflation.
Rate cuts in the 2H will close valuation discounts in the Real Estate sector, according to the analysts, and the sub-sector of Logistics is preferred given traditionally high rent growth and record low vacancy levels.
While structural factors favour Residential, UBS moves to underweight from overweight for the Retail sector on a weaker consumer. Caution is retained on Office, while it's considered too early to overweight Funds Management due to subdued transaction volumes.
The rating for Goodman Group rises to Buy from Neutral and the target jumps to $23.00 from $20.60.
MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 1/3/2
Ord Minnett raises Magellan Financial's rating to Accumulate from Lighten but cuts its fair value estimate -43% to $11.50 from $20, as covid and management disruptions continue to take their toll.
The broker is bucking the trend with the ratings upgrade, due to a change of coverage to Morningstar away from JP Morgan, but sees little in the wings to return the company to its former glory.
MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/1/0
UBS expects lithium markets will remain in deficit over the near and medium term, before a structural deficit develops in the longer term. Price estimates are upgraded by 50% across the forecast period.
As a result of these new forecasts, the broker raise its rating for Mineral Resources to Buy from Neutral.
No target price update is revealed by UBS. On December 23, a target of $83.30 was set.
MEGAPORT LIMITED ((MP1)) Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0
Megaport reports 2Q results on January 31 followed by 1H results on February 9. Morgans changes its forecasts to US dollars as both results will change from being reported in Australian dollars.
After considering an improving macroeconomic backdrop, more reasonable FY23 earnings expectations and the likelihood of a better 2Q compared to the weak 1Q, the broker upgrades to Add from Hold.
The analyst feels fundamentals will return to the fore after a brutal 2022 for technology and growth stocks on the ASX and notes technology valuations are now back to 20-year long-run averages.
The $9.00 target is unchanged.
PILBARA MINERALS LIMITED ((PLS)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/2/1
UBS expects lithium markets will remain in deficit over the near and medium term, before a structural deficit develops in the longer term. Price estimates are upgraded by 50% across the forecast period.
As a result of these new forecasts, the broker raise its rating for Pilbara Minerals to Neutral from Sell.
No target price update is revealed by UBS. On January 23, a target of $3.40 was set.
PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/1/1
Morgan Stanley prefers retailers with potential for global expansion, levers to adjust margins and a track record of beating market expectations. A high level of insider ownership and a strong balance sheet are also viewed positively.
Premier Investments fulfills many of the broker's requirements including the expansion opportunity for Smiggle and a strong management track record.
The company is considered best positioned among stocks under Morgan Stanley's coverage to deal with the tough economic backdrop.
The rating is upgraded to Overweight from Equal-weight, while the target rises to $30.50 from $23.25. Industry view: In-Line.
TELSTRA GROUP LIMITED ((TLS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0
Macquarie upgrades Telstra to Outperform from Neutral prior to the December-half result and raises the target price to $4.50 from $4.
The upgrade reflects the broker's expectation of a recovery in roaming revenue and stronger-than-forecast subscriber growth after customers fled Optus after the September/October data breach.
Macquarie also expects a 4.6% uptick in ARPU half on half.
EPS forecasts fall -2% in FY23; -4% in FY24; and -3% in FY25 to reflect the impact of inflation on operational expenditure.
Downgrade
29METALS LIMITED ((29M)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/2/3
While 2Q results for 29Metals were a slight beat versus Ord Minnett's forecasts, the broker is concerned by lower potential cash generation in 2023 from operational woes and weak cost control.
Golden Grove's development remains behind schedule, points out the analyst, and Capricorn Copper's upcoming tailings lift will hold back 3Q milling capacity.
Management's 2023 outlook was broadly in line with its December update.
The rating falls to Hold from Accumulate and the target falls to $1.95 from $2.10, yet the analyst reminds investors of upside risk from high leverage to the copper price.
ANSELL LIMITED ((ANN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0
Macquarie has downgraded its rating on Ansell given a moderation of global manufacturing performance in recent months. December marked the fourth consecutive month that performance of manufacturing index data tracked below 50, suggesting contractionary activity.
While Ansell's November trading update did indicate positive growth year-to-date for industrial divisions, Macquarie has moderated growth assumptions for these divisions based on what it sees as a reasonable indicator for industrial activity.
The broker continues to see a favourable outlook for Ansell over the medium to long-term. The rating is downgraded to Neutral from Outperform and the target price increases to $29.20 from $28.85.
ARB CORPORATION LIMITED ((ARB)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/2/0
Morgan Stanley identifies some areas of uncertainty for ARB Corp and moves to an Equal-weight stance from Overweight.
The broker sees deceleration risk in recent data and from company peers, as well as risk from elevated industry inventory as supply constraints ease. US distribution uncertainty alluded to at the AGM is considered another reason for caution.
The $31 target is unchanged. Industry view: In-Line.
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