Weekly Ratings, Targets, Forecast Changes – 03-02-23

This story features BORAL LIMITED, and other companies. For more info SHARE ANALYSIS: BLD

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 30 to Friday February 3, 2023
Total Upgrades: 10
Total Downgrades: 14
Net Ratings Breakdown: Buy 53.46%; Hold 36.43%; Sell 10.11%

For the week ending Friday February 3 there were a relatively even number of ratings upgrades and downgrades (ten: fourteen) for ASX-listed companies covered by brokers in the FNArena database.

The total number of ratings changes for the week were boosted by Ord Minnett's transition to new whitelabeled research by Morningstar (from JP Morgan). For five companies, a fresh view by a Morningstar analyst resulted in a change of recommendation.

The even number of ratings changes was partly attributable to four sets of upgrades and downgrades by different brokers for the same companies, namely Pinnacle Investment Management, Virgin Money Uk, Coles Group, and Beach Energy. 

Morgans upgraded Pinnacle to Add from Hold as medium-term earnings (FY25) are expected to step-up, while UBS (Sell from Neutral) focused on the shorter-term, predicting the company’s second half results are likely to disappoint on higher costs, weaker fund flows and a softer outlook.

After a solid first quarter report by Virgin Money UK, Ord Minnett now expects lower operating costs and more business customers in the greater London market. Ord Minnett upgraded to Accumulate from Hold, while Macquarie downgraded to Neutral from Outperform on valuation.

Credit Suisse upgraded Coles to Outperform from Neutral due to robust industry growth, margin benefits from food inflation and an absence of covid-related costs, while Ord Minnett downgraded to Sell from Hold as a result of the new whitelabeled research.

A further four ratings changes last week resulted from a review of the Australian Building Materials sector by Credit Suisse. 

On the one hand extraordinary rainfall is now normalising and spot energy costs have peaked, according to the broker. On the other hand approvals/prices are falling for housing, along with additions and alterations (A&A), and further deterioration is expected.

Taking these factors into account, Credit Suisse analysts now prefer stocks involved in the areas of infrastructure and non-residential over exposures to residential, new construction and the repair and remodel (R&R) space.

Boral benefited most from these new preferences relative to other stocks in the sector, and Credit Suisse upgraded its rating to Outperform from Neutral. 

On the flipside, the ratings for Adbri and GWA Group were lowered to Underperform from Neutral, while the broker also reduced Fletcher Building’s recommendation to Neutral from Outperform. In all cases no changes were made to forecasts or 12-month target prices.

APM Human Services International received the only material adjustment to target price by brokers in the FNArena database last week. The average target fell by -13% to $3.41 simply because two new brokers with targets below the existing average ($3.92) were entered into the database. 

Morgan Stanley initiated coverage on the global human services business with an Overweight rating and $3.00 target, while new white labeled research adopted by Ord Minnett was an effective ‘initiation of coverage’ at Hold and $2.80.

In term of earnings forecasts by brokers, Audinate Group received the greatest percentage decrease last week. While Macquarie retained its Outperform rating, cost forecasts also rose due to increasing logistics costs, headcount and higher travel expenses. 

However, it should be noted the percentage decrease was exaggerated by the relatively small earnings forecast numbers (still in the negative too). The target fell to $10 from $11.

Beach Energy was equally in the picture. As noted previously, the company received a downgrade and an upgrade last week, in reaction to second quarter production results. 

Macquarie downgraded Beach to Underperform from Neutral on news of disappointing drilling at Waitsia, rising capital expenditure and a delay caused by the need to reselect a contractor when currently attractive LNG prices may not persist.

Morgans (Add from Hold) was far more forgiving. It was felt lower reserves at Waitsia won't impact delivery of commitments to customers over the next five years. Also, the analyst attributed lower production at Otway and Kupe to plant outages and lower customer demand, rather than poor operational performance.

Tyro Payments assumed the top position on the earnings upgrade table below (after a data glitch rendered GQG Partners’ top position ineligible). 

The company’s pre-reported first half profit met Macquarie’s forecast and FY23 guidance was upgraded to reflect strong turnover, banking yields and other income, offset partly by higher expenses. The Neutral rating was retained due to the uncertain economic backdrop.

Next up was Newcrest. Following a second quarter production result with a solid performance by Cadia in particular, Morgans’ lower capex forecasts and higher gold price assumptions resulted in higher earnings forecasts and a new $25.70 target, up from $20.60, along with a increase in rating to Add from Hold.

The analyst sees an emerging value proposition for Newcrest thanks to the company’s diversification, solid margins and long-life reserves. All this happened before news got out that a merger with prior US parent Newmont may yet again be on the cards.

Suncorp Group was fourth on the table below for the largest percentage upgrade in forecast earnings by brokers in the FNArena database last week.

At the underlying level, UBS is anticipating an improved first half result on February 8, driven by tight claims control and positive underwriting jaws. 

Meanwhile, Overweight-rated Morgan Stanley expressed the view Suncorp will outperform Insurance Australia Group (Equal-weight) over the next two years, on cost savings, CAT costs and retentions.

In addition, Suncorp has renewed its reinsurance and its quota share agreement on more favourable terms.

Total Buy recommendations comprise 53.46% of the total, versus 36.43% on Neutral/Hold, while Sell ratings account for the remaining 10.11%.

Upgrade

BORAL LIMITED ((BLD)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 1/3/2

In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. 

The broker expect Boral will benefit from this new outlook for the above two factors (having suffered from them in 2022). 

The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration.

Boral benefits most, relative to other stocks in the sector, from these Credit Suisse preferences and the rating is upgraded to Outperform from Neutral. There are no changes to forecasts and the $2.50 target is unchanged.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Add from Hold by Morgans .B/H/S: 5/0/2

Morgans upgrades its rating to Add from Hold despite second quarter production missing the consensus forecast by -5% and Beach Energy downgrading reserves at Waitsia. The target falls to $1.81 from $1.91.

Production fell for Bass Gas, Otway and Kupe, though the analyst notes the latter two were afflicted by plant outages and lower customer demand, rather than poor operational performance.

Also, the lower reserves at Waitsia won't impact delivery of commitments to customers over the next five years, explains the broker.

Morgans' FY24 and FY25 dividend forecasts are raised by 30% and 55%, respectively, as the company will likely move to a free cash flow metric.

See also BPT downgrade.

CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/2/1

Ord Minnett is not anticipating much in terms of negative surprises from A-REITs in the upcoming February reporting season, though the broker does believe market pressure is mounting for more capital management from the sector.

The reason for the latter, the broker explains, is due to the strong disconnect between listed and unlisted assets currently.

Ord Minnett's top picks for the season are Charter Hall Long WALE, RAM Essential Services Property and Waypoint REIT.

Target price for Charter Hall Long WALE REIT has fallen to $4.87 from $4.93. Upgrade to Buy from Accumulate.

COLES GROUP LIMITED ((COL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/2

Credit Suisse expects food inflation of 10% for December largely carried across to similar rates of supermarket industry inflation, and retains a preference for supermarkets over non-food retail in the first half. 

Credit Suisse expects Coles Group can deliver 16% year-on-year earnings growth, supported by robust industry growth, margin benefits derived from food inflation, and an absence of covid-related costs. 

The rating is upgraded to Outperform from Neutral and the target price increases to $19.31 from $18.02.

See also COL downgrade.

LIBERTY FINANCIAL GROUP LIMITED ((LFG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/0

Macquarie's investment thesis is based on Liberty Financial’s ability to deliver a more defensive result in the elevated rate environment, with structurally lower credit growth aspirations.

With a lower churn rate, the broker sees Liberty as well placed to manage margins, and with a lower exposure to the non-prime mortgage segment, sees Liberty as a lower risk exposure and higher quality book than Pepper Money.

With a more defensive bent than Pepper Money in the non-bank lender segment, Liberty is Macquarie's preferred exposure in the sector, given stronger defensive quality and stability in pricing strategy, which should engender improved customer loyalty in the longer term.

Upgrade to Outperform. Target unchanged at $4.25.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Add from Hold by Morgans .B/H/S: 4/3/0

In the wake of Newcrest Mining’s 2Q production report last week, Morgans reduces long-term sustaining capex assumptions at Cadia.

When these changed capex forecasts are combined with upgraded gold price assumptions, the broker’s target is increased to $25.70 from $20.60 and the rating upgraded to Add from Hold.

The analyst sees an emerging value proposition for Newcrest thanks to the company’s diversification, solid margins, and long-life reserves.

Highlights for the 2Q included a solid performance from Cadia, a 25% rise in gold production year-on-year and all-in sustaining costs (AISC) of US$32/oz (after by-product credits).

PINNACLE INVESTMENT MANAGEMENT GROUP LIMITED ((PNI)) Upgrade to Add from Hold by Morgans .B/H/S: 2/1/1

Second quarter net flows for Pinnacle Investment Management showed some improvement on the first quarter. While flows remain uncertain, upcoming leverage is expected after investment by several affiliates in longer-term initiatives.

The broker upgrades its rating to Add from Hold, while the target slips to $10.75 from $10.95. Medium-term earnings (FY25) are expected to step-up on improving flows and performance fees, as well as operating leverage on improved funds under management (FUM).

The investment management firm reported profit for the 2Q of $30.5m, missing the $32.9m expected by the analyst. While group funds FUM closed flat over six months, it's thought the composition improved.

See also PNI downgrade.

TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/3/0

Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously.

This has resulted in an upgrade for Tabcorp Holdings to Hold from Lighten and a target price increase to $1.00 from 90c.

VIRGIN MONEY UK PLC ((VUK)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/1/0

Ord Minnett assesses a solid 1Q (September year end) and believes management at Virgin Money UK will reduce operating costs and add business customers in the greater London market.

The broker's rating is increased to Accumulate from Hold, while the target falls by -2.5% to $3.80.

The 1Q revealed a 3bps improvement to 1.89% in net interest margin (NIM) thanks to the higher interest rate environment and the analyst expects 1.90% will be achieved for FY23. Management is guiding to a range of 1.85-1.90%.

See also VUK downgrade.

WOOLWORTHS GROUP LIMITED ((WOW)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/1

Credit Suisse expects food inflation of 10% for December largely carried across to similar rates of supermarket industry inflation, and retains a preference for supermarkets over non-food retail in the first half. 

Credit Suisse expects Coles Group can deliver 22% year-on-year earnings growth, supported by robust industry growth, margin benefits derived from food inflation, and an absence of covid-related costs. 

The rating is upgraded to Outperform from Neutral and the target price increases to $36.51 from $33.01.

Downgrade

ADBRI LIMITED ((ABC)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/5/1

In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. 

The broker expects Boral and Adbri will benefit from this new outlook for the above two factors (having suffered from them in 2022).

The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration.

Adbri (downgraded to Underperform from Neutral) should benefit to a lesser degree than Boral (upgraded to Outperform) from the improved weather and the stated sub sector preferences above, explains Credit Suisse.

There are no changes to earnings forecasts or target price.

ARDENT LEISURE GROUP LIMITED ((ALG)) Downgrade to Lighten by Ord Minnett .B/H/S: 0/0/0

Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously.

While it had appeared Ord Minnett had ceased coverage of Ardent, the switch has resulted in a "cut" (downgrade) to Lighten as the share price has moved through the broker's trigger level. Fair value 55c.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 5/0/2

Beach Energy's December-quarter result disappointed Macquarie, Waitsia drilling results disappointing (reserves cut by -15% – another downgrade); capital expenditure rising given a tight labour skills market; and news of a contractor reselection (the company is sensitive to schedule delays given LNG prices are unlikely to stay this high forever).

EPS forecasts fall -16% in FY23; and -15% in FY24. Rating is downgraded to Underperform from Neutral. Target price falls to $1.45 from $1.70.

See also BPT upgrade.

COLES GROUP LIMITED ((COL)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 4/1/2

Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously.

This has led to a downgrade to Sell from Hold for Coles Group, and a fair value set at $13.60 (previous target $15.80).

See also COL upgrade.

FLETCHER BUILDING LIMITED ((FBU)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/1/0

In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. 

Fletcher Building benefited in 2022 from passing through costs associated with the above two factors. Relatively speaking Boral and Adbri will now benefit more with the new outlook and the broker's rating for Fletcher Building falls to Neutral from Outperform.

The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration.

No changes to Fletcher Building's forecasts or $7.00 target price are made.

FORTESCUE METALS GROUP LIMITED ((FMG)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/0/6

Credit Suisse assesses another strong quarter (2Q) for Fortescue Metals, with beats for iron ore production and price realisation of 4% and 2%, respectively, while unit costs were also around -2% lower than expected.

The broker's rating falls to Underperform from Neutral on a 50% share price rally since last November. It's suggested investors take profits and reallocate funds to sector peers with more favourable valuations.

The target rises to $17.20 from $15.30.

GOLD ROAD RESOURCES LIMITED ((GOR)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/1/0

Ord Minnett has been disappointed by 2023 cost guidance from Gold Road Resources being 12% ahead of its expectations, with the company suffering the impacts of inflationary inputs and sustained higher spend. The broker lowers its earnings forecasts -14% and -4% in FY23 and FY24. 

Guidance followed a fourth quarter where production declined -11% quarter-on-quarter, and costs were higher than expected on larger mining and capital expenditure. Ord Minnett describes the latest result as a "slight step back" after Gold Road Resources outperformed peers over the last six months.

The rating is downgraded to Accumulate from Buy and the target price decreases to $1.80 from $2.00.

GWA GROUP LIMITED ((GWA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/1/1

In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. 

The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration.

Boral (upgraded to Outperform) benefits most from these preferred exposures by Credit Suisse, while in relative terms GWA Group benefits less. The rating falls to Underperform from Neutral. There are no changes to earnings forecasts or the $2.30 target price.

LIFESTYLE COMMUNITIES LIMITED ((LIC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/1/0

Ord Minnett expects settlements for both Ingenia and Lifestyle Communities to record a greater second half skew compared with the average 40/60 split recorded over the past three years.

The broker points out demand remains strong and construction bottlenecks are showing tentative signs of easing.

While the broker continues to believe Lifestyle Communities is underpinned by strong underlying long-term fundamentals and a high-calibre management team, it is viewed as being fully valued on a 12-month basis.

Downgrade to Hold from Accumulate, target falls to $18.25 from $18.31.

MYER HOLDINGS LIMITED ((MYR)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/0/0

Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously.

This results in a downgrade for Myer to Lighten from Hold on a fair value of 75c.

NIB HOLDINGS LIMITED ((NHF)) Downgrade to Lighten from Accumulate by Ord Minnett .B/H/S: 1/5/0

Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously.

This has resulted in downgrade to Lighten from Accumulate and a target cut to $7.00 from $7.50.

PINNACLE INVESTMENT MANAGEMENT GROUP LIMITED ((PNI)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/1/1

UBS had already expressed its lack of enthusiasm for Pinnacle Investment Management, but today's February reporting season preview for diversified financials has gone one step further.

The broker has downgraded to Sell from Neutral while reducing the price target by -3% to $8.50.

Pinnacle Investment Management has been nominated as one of the companies likely to disappoint in February on higher costs, weaker fund flows and a weaker outlook for performance fees.

See also PNI upgrade.

PEPPER MONEY LIMITED ((PPM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0

After listing in 2021, Pepper Money has delivered better than expected cash earnings, driven by higher margins and accelerating credit growth in a low-rate environment. However, Macquarie sees increasing headwinds in the medium term as rates rise.

Pepper Money is unable to offset this through deposit margins on current accounts, and now unable to compete with major banks as they utilise deposit margin benefits to compete aggressively in the prime mortgage segment, the broker notes.

Downgrade to Neutral from Outperform. Target unchanged at $1.70.

VIRGIN MONEY UK PLC ((VUK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Virgin Money UK's underlying performance improved in the Dec quarter, Macquarie notes, underpinned by stable margins and improved growth in key segments.

Virgin Money remains fundamentally cheap relative to the theoretical valuation, the broker suggests, but with a challenging economic backdrop its multiple is no longer materially different to larger UK peers.

Following a 30% share price rally, the stock no longer looks overly cheap versus peers. Downgrade to Neutral from Outperform, target falls to $3.60 from $4.20.

See also VUK upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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