Weekly Ratings, Targets, Forecast Changes – 17-02-23

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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 February 13 to Friday February 17, 2023
Total Upgrades: 15
Total Downgrades: 17
Net Ratings Breakdown: Buy 52.02%; Hold 37.51%; Sell 10.47%

For the week ending Friday February 17 there were fifteen upgrades and seventeen downgrades for ASX-listed companies covered by brokers in the FNArena database. 

Most of the valuation and ratings changes stemmed from an increased pace of announced results during the February reporting season.

The largest percentage adjustments in target prices occurred in the Gaming sector, with a 14% increase for SkyCity Entertainment and -31% fall for Star Entertainment.

In the wake of first half results and upgraded FY23 guidance, Outperform-rated Credit Suisse raised its target for SkyCity to $2.90 from $2.80. However, the largest impact on the average target price in the FNArena database came via first time inclusion of research by Ord Minnett (target $3.50).

This broker, which now sources its research from Morningstar instead of JP Morgan, observed the casino operator is back operating at pre-covid levels. 

Macquarie also pointed out SkyCity is more protected than listed peers from regulatory reform and tax changes, with more than 85% of earnings coming from New Zealand.

For Star Entertainment, Macquarie lowered its target to $1.55 from $3.05 last week after the company provided a disappointing earnings update and downgraded earnings guidance for FY23, which fell -24% short of the consensus expectation.

Regulation, competition and potentially higher casino taxes in FY24 remain wildcards, all of which would be exacerbated by a tight balance sheet, cautioned the broker. It’s thought an equity raising may be required.

Buy-rated UBS also slashed its target to $1.95 from $3.75 for Star after a new analyst reviewed forecasts across the sector. The good news for current investors, according to the analyst, is that potential upside is relatively strong, with the group now undervalued following regulatory and compliance issues.

The average target price in the FNArena database for Fletcher Building also fell heavily last week to $4.87 from $6.45.

Morgan Stanley downgraded its rating to Equal-weight from Overweight as Residential and Development earnings came in at less than half of the analysts prior forecast, when management pre-released first half results at the beginning of the week. 

FY23 guidance was also reduced to NZ$800-855m from over NZ$855m due to wet weather in New Zealand over January and February.

After actual first half results later in the week, Credit Suisse significantly lowered its earnings forecasts and reduced its target to $4.10 from $4.80, though pointed to valuation support from an attractive FY24 dividend yield.

Whitehaven Coal was third on the table for percentage fall in broker targets last week and New Hope Corp also appeared in the top ten, after the release of first half and second quarter results, respectively.

The week began with a prescient call from Morgans for Coal sector companies in the February reporting season. While solid dividends were expected, the broker thought they would be lower than what the market was anticipating in light of large cash balances.

On cue, Whitehaven declared a 32cps dividend later in the week when market consensus was for 44cps, despite delivering results generally in line with broker forecasts. Credit Suisse felt the lower dividend was prudent, given a near-term pricing headwind with a mild northern winter and depressed industrial activity weighing on demand.

Citi noted uncertainty from a sharply declining thermal coal price and the domestic thermal coal reservation policy implemented by the NSW government. Six of the seven brokers in the FNArena database retained Buy (or equivalent) ratings.

Despite a -20% miss against consensus forecasts for production and sales in the second quarter, four covering brokers retained Buy (or equivalent) ratings for New Hope. Credit Suisse attributed the weaker quarter to dragline maintenance and mine sequencing to prioritise waste movement, but these issues are expected to materially improve second half performance.

The average target price in the database for Service Stream also fell last week after management identified a further $20m provision was required to complete a challenging utility project in Queensland, having previously announced a $5m contract provision in the last financial year.

Excluding the impact of this provision, the company's first half earnings of $54m were in line with Macquarie's expectations. 

Ord Minnett lowered its target to 87c from $1.14 though noted a contingency buffer is built into the latest provisions and around 60-70% of workflows are already completed.

Service Stream, Star Entertainment and New Hope also appeared in the top four positions in the earnings downgrade table below.

29Metals came fifth on that table after providing a negative production and cost update for the December quarter. Morgan Stanley still sees downside risks to the Golden Grove mine plan and expected grades, and is more dubious than consensus on the prospect for improving costs. The broker’s target was cut to $1.55 from $2.00.

SkyCity Entertainment sat atop the list for the largest percentage increase in forecast earnings by brokers in the FNArena database last week.

Macquarie also lifted its earnings outlook for New Zealand-headquartered Ebos Group after reviewing its investment thesis for the provider of healthcare and animal care products and services. 

The company’s revenue stream is classically defensive, and the analyst sees potential upside to longer-term valuation and lifted its 12-month target price by 9% to NZ$47.01.

The acquisition of LifeHealthcare back in late 2021 provided a step-change for the Medical Device division, according to the broker, while the company has also been amassing market share gains in Community Pharmacy, in the face of somewhat impaired competition.

Regarding last week’s material changes to broker earnings forecasts in the tables below for Audinate, News Corp, Domain Holdings, AMP and Aurizon Holdings please check out  https://www.fnarena.com/index.php/reporting_season/ 

Total Buy recommendations comprise 52.02% of the total, versus 37.51% on Neutral/Hold, while Sell ratings account for the remaining 10.47%.

Upgrade

ALUMINA LIMITED ((AWC)) Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 2/0/2

After a recent share price slide for Alumina Ltd, the valuation trigger at Ord Minnett has been reached and the broker's rating rises to Lighten from Sell.

No changes are made to the analyst's forecasts and the $1.20 target is unchanged.

AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/1

In the wake of 1H results, Morgans sees potential share price upside and a reasonable yield for Aurizon Holdings and upgrades its rating to Add from Hold.

This view comes despite a miss versus the broker's forecasts for 1H earnings (EBITDA), cashflow and DPS, as well as a -4% guidance downgrade for earnings in FY23. Earnings for Network, Coal and Bulk were misses of -10%, -8% and -16% respectively.

Management noted the current 75% dividend payout will continue during the capex cycle (ending FY24) for the Bulk division, and the analyst anticipates the payout may lift thereafter.

The target price eases to $3.72 from $4.00.

CENTURIA INDUSTRIAL REIT ((CIP)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/4/0

While raising its rating for Centuria Industrial REIT to Hold from Lighten on valuation, Ord Minnett feels most positives have already been factored into the share price.

The analyst suggests the market is overlooking several factors including a catch-up of supply to demand for industrial property, and the currently low industrial yields in a rising interest rate environment.

The target of $3.00 is unchanged.

COCHLEAR LIMITED ((COH)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/3/1

Cochlear's December-half result outpaced Morgan Stanley by 7%, thanks to a 9.5% beat in revenue. Margins proved a miss as higher operational expenses outpaced a lower tax and interest bill.

Management announced an on-market share buyback over several years, starting with $75m for the first year.

Of particular note was a sharp beat in the company's CI revenue, leading the broker to suspect the company may be stemming market share losses and be back on the market-share growth path.

Rating upgraded to Equal Weight from Underweight, the broker expecting the CI unit growth, and the N8 launch will drive stronger June-half earnings. Target price rises to $214, which compares with the last entry in the FNArena data base on February 7 of $190. Industry view: In-line.

ENDEAVOUR GROUP LIMITED ((EDV)) Upgrade to Add from Hold by Morgans .B/H/S: 2/1/2

Morgans believes risks lay to the upside for Endeavour Group after a 1H result ahead of expectations, which demonstrated cost control despite the inflationary backdrop.

Earnings (EBIT) beat Morgans and consensus forecasts by 7% and 9%, respectively, reflecting a strong rebound in Hotels and a lower-than-expected fall in Retail earnings. The Retail margin performance was considered a key standout.

The broker raises its FY23-25 earnings forecasts by 7%, 6% and 5%, respectively. The target rises to $7.80 from $6.80. As Morgans expects a total shareholder return of 13% in the next 12 months, the rating is raised to Add from Hold.

HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/3/2

After a recent share price slide for Harvey Norman, the valuation trigger at Ord Minnett has been reached and the broker's rating rises to Hold from Lighten.

No changes are made to the analyst's forecasts and the $3.90 target is unchanged.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Buy from Sell by UBS .B/H/S: 1/4/1

UBS spies value emerging in Magellan Financial Group and upgrades its rating to Buy from Sell and the target price to $10 from $8.60.

The broker expects outflows are like to stabilise from here on and that Magellan Financial's funds under management should settle at $40bn.

UBS admires the balance sheets and earnings multiple, and believes investors are getting paid just to wait for a recovery. While the broker suspects further weakness in near-term earnings might be on the cards, it observes the company is trading at a steep discount to net asset value and believes the risk is to the upside.

See also MFG downgrade.

NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/0/1

The analyst at Morgans continues to oscillate between an Add and a Hold call for Nanosonics. This strategy of change, five times in the last five months, has successfully anticipated share price movements over that period.

This time, the rating rises to Add from Hold after a recent share price fall. The target remains at $5.19, with unchanged forecasts.

After a recent share price slide for Nanosonics, the valuation trigger at Ord Minnett has been reached and the broker's rating rises to Hold from Lighten.

No changes are made to the analyst's forecasts and the $4.00 target is unchanged.

See also NAN downgrade.

ORORA LIMITED ((ORA)) Upgrade to Add from Hold by Morgans .B/H/S: 3/4/0

Pricing discipline and ongoing business optimisation were behind an improving North American margin and return on funds employed (ROFE) metric in the 1H, according to Morgans. 

Orora's result beat prior forecasts made by the analyst and consensus, with North American earnings (EBIT) rising by 20% (5% expected by Morgans), while Australasia's earnings fell by -3%.

Management retained FY23 guidance.The broker raises its target to $3.75 from $3.70 and upgrades its rating to Add from Hold.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0

Credit Suisse expects a continued focus on cost and capex control to see which miners have been able to tame costs, after several are now stating that whilst costs remain elevated, broader inflationary pressures have eased in recent months.

Dividends are likely to remain subdued this reporting season, the broker warns, as earnings and free cash flow remain low for some.

Credit Suisse has upgraded Perseus Mining to Outperform from Neutral on valuation. Target unchanged, but not reported.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/1

After being weighed down by the pandemic, Morgans feels Sonic Healthcare has now turned the corner with solid base business growth and effective cost-outs revealed in 1H results. The company's rating is upgraded to Add from Hold.

The analyst also notes some ongoing benefits from covid testing, as well as ample liquidity for capital management/M&A.

Underlying results for the 1H were broadly in line as slowing covid testing weighed upon sales and cash flow, explains the broker, while margins for the base business are back to pre-covid levels and Imaging is also on the improve.

The target rises to $37.04 from $34.77.

TEMPLE & WEBSTER GROUP LIMITED ((TPW)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/0

Temple & Webster's first half revenue was 2% ahead of Macquarie and earnings 11% ahead. Trading for first five weeks of the second half was nevertheless down -7% year on year. Earnings margin guidance of 3-5% is retained, with lower marketing costs expected to continue in the second half.

While Macquarie expects near-term headwinds for furniture retailers given rising interest rates and slowing housing turnover, the broker believes this captured in the current share price following the significant price move after the result.

Upgrade to Neutral from Underperform, target falls to $4.00 from $4.05. Macquarie sees the retailer's strong balance sheet position offering potential for inorganic growth opportunities.

UNIVERSAL STORE HOLDINGS LIMITED ((UNI)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/0

Citi finds current consensus expectations for Universal Store to be bearish, highlighting trading momentum for the key Black Friday and Christmas trading periods was strong.

The broker adds the company will be cycling undemanding comparables moving forward and there is potential for consumer spend to hold up better than expected over the second half. 

The broker also expects growth initiatives including store rollout and the acquisition of Thrills to drive short to medium term earnings growth.

The rating is upgraded to Buy from Neutral and the target price increases to $6.00 from $5.29.

WESFARMERS LIMITED ((WES)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/2/1

Macquarie does not qualify Wesfarmers' result, other than to note Bunnings surprised with resilient consumer demand and a continued pipeline of work for commercial customers, and Kmart did well as sales normalised.

The broker is more focused on the conglomerate's lithium assets, and now incorporates them into its valuation.

Initial production at Mount Holland has been pushed back six months and costs for the project expected to increase 10-20%. But this is considered immaterial compared to the cashflow that the asset is expected to generate at current prices.

The cash generation of the lithium assets at current prices significantly change the cashflow of the group, Macquarie notes. Wesfarmers becomes one of the few defensive consumer stocks with significant earnings and dividend upside over the next few years.

Upgrade to Neutral from Underperform. Target rises to $56.70 from $46.20.

Downgrade

AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/0/2

Ord Minnett now whitelabels Morningstar instead of JPMorgan and Auckland International Airport is included in the coverage, with a recent downgrade to Lighten as the share price has moved through the valuation trigger point. Target is $7.

Auckland International Airport has substantial development opportunity which could bring its capacity up to nearly 26m passenger movements per year by 2026, the broker highlights.

BLACKMORES LIMITED ((BKL)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/0

Citi downgrades Blackmores to Neutral from Buy after the recent sharp run in the company's share price.

The broker remains upbeat about China's reopening prospects but expects this is likely to land late in the June half, and does not expect an optimistic forecast from the company given the global economic uncertainty.

Target price rises to $88.10 from $84.00.

BREVILLE GROUP LIMITED ((BRG)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/1

Breville Group's 1H results revealed a 5% beat on earnings (EBIT) though a -5% miss on sales versus Morgans forecast due primarily to weakness in Europe. Higher gross margins (largely from price rises) were behind the earnings outperformance, explains the analyst.

As the consumer environment is deteriorating in many of Breville's key markets, the broker sees a looming moderation in demand for premium appliances and price rises will become increasingly hard to push through.

In the absence of upcoming positive catalysts, Morgans decides to downgrade the company's rating to Hold from Add. The target falls to $22 from $25 on a more subdued growth outlook.

DETERRA ROYALTIES LIMITED ((DRR)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/3/0

Credit Suisse expects a continued focus on cost and capex control to see which miners have been able to tame costs, after several are now stating that whilst costs remain elevated, broader inflationary pressures have eased in recent months.

Dividends are likely to remain subdued this reporting season, the broker warns, as earnings and free cash flow remain low for some.

Credit Suisse has downgraded Deterra Royalties to Neutral from Outperform on valuation. Target unchanged, but not reported.

Following Deterra Royalties' slightly softer-than-expected 2Q production report (on January 31), Morgan Stanley moves to an Equal-weight rating from Overweight on valuation, after a strong recent share price rally.

The broker sees risk (either upside or downside) to its new rating stance from any prospective bolt-on acquisitions.

The target falls to $5.10 from $5.25. Industry View: Attractive.

FLETCHER BUILDING LIMITED ((FBU)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/2/0

Morgan Stanley's prior Overweight thesis for Fletcher Building was based on cyclical strength providing earnings momentum. Now, the broker feels key A&NZ cycles are past their peaks and an Equal-weight rating is adopted.

A softer 1H result was driven by lower Residential and Development earnings, which came in at less than half the analyst's forecasts.

Management lowered FY23 guidance for earnings (EBIT) to NZ$800-850m (subject to market activity and house sales) from over $850m. January to February trading in New Zealand has been significantly impacted by adverse weather.

The broker lowers its target to $5.00 from $5.90. Industry view is In-Line.

GROWTHPOINT PROPERTIES AUSTRALIA ((GOZ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/0

Growthpoint Properties Australia's 12.5% year on year growth in funds from operations beat Credit Suisse. Finance costs were higher, consistent with an increase in the REIT’s cost of debt and higher average debt balances.

Portfolio occupancy is lower at 94% with a WALE of 6.3 years due to well flagged tenant departures in the Office portfolio, the broker notes. Leasing success at Skyring should help improve occupancy in the near term, with Murray Rose remaining a swing factor over the shorter term.

Growthpoint continues to trade on a discount to net tangible asset valuation while offering a 6.2% yield, but has recently run harder than peers, the broker notes. Downgrade to Neutral from Outperform, target rises to $3.60 from $3.56.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/4/1

Ord Minnett believes the downside risks for Magellan Financial are more than priced into the stock. The -60% drop in interim underlying net profit was largely expected and net losses from Barrenjoey and FinClear appear more cyclical than structural.

The broker also notes good progress has been made on several fronts that should comfort investors. That said, Ord Minnett assesses it will be difficult to restore the company's competitive strengths and downgrades to Hold from Accumulate. Target is $11.50.

See also MFG upgrade.

MINERAL RESOURCES LIMITED ((MIN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/2/0

Credit Suisse believes Mineral Resources' catalysts have largely played out, and execution risks are now rising against high expectations.

The broker downgrades to Neutral from Outperform on valuation grounds, a balanced risk profile over next 12 months, and catalysts for re-rating remaining longer-dated prospects.

Near-term upsides stem from Mt Marion life extension, Wodgina train 3 & 4 news and lithium oxide integration development, but offset by project execution risks against high market expectations, particularly amidst lingering labour & logistics challenges, and a softening macro weighing on end-demand.

Target falls to $84 from $85.

NANOSONICS LIMITED ((NAN)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/0/1

After a recent share price rally for Nanosonics, the valuation trigger at Ord Minnett has been reached and the broker's rating falls to Lighten from Hold.

No changes are made to the analyst's forecasts and the $4.00 target is unchanged.

See also NAN upgrade.

NEWCREST MINING LIMITED ((NCM)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/4/0

Credit Suisse suggests Newcrest Mining posted a "soft" beat on fair value adjustments. A record dividend of US15c ordinary and US20c special surprised against the broker's US8c forecast.

Credit Suisse feels a buyback would provide better value creation for shareholders. Newcrest has for sometime been significantly undervalued versus peers and the broker doesn't believe shareholders own the stock for a 3% yield.

Given few near-term catalysts for re-rating, Credit Suisse is surprised the board rejected Newmont's offer. Downgrade to Neutral from Outperform. Target falls to $24.00 from $24.50.

NRW HOLDINGS LIMITED ((NWH)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Buy by Citi .B/H/S: 1/2/0

Macquarie assesses NRW Holdings met expectations for 1H23 earnings, although the report reflected mixed results; revenue was better than expected and EBIT lower than anticipated.

The dividend came in 42% better than the broker's forecast at 8c per share. Management guidance was unchanged and suggested an improvement in margins is expected in the 2H23.

Macquarie adjusts EPS forecasts by -1% for FY23 and FY24 earnings estimates are unchanged.

Target unchanged at $2.50 and the rating is downgraded to Neutral from Overweight, due to potential macro headwinds from higher inflation, wage growth and margin impacts.

Following 1H results, Citi downgrades its rating for NRW Holdings to Neutral from Buy, in the expectation of near-term headwinds from competitors preferencing revenue over returns.

The result was also weaker than the analyst expected largely due to the Civil division where competitors have been aggressively bidding on contracts.

In the markets that the company can actively pursue, the broker notes ongoing clear visibility for near-term revenue and no shortage of work.

Management reaffirmed FY23 revenue guidance.

The target falls to $2.80 from $2.90. 

NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

After a 1H result beat versus Credit Suisse and consensus forecasts of 7% and 1%, respectively, the broker downgrades its rating for Netwealth Group to Neutral from Outperform.

After the share price has rallied around 15% so far this year, the analyst feels strong growth is already incorporated into the current share price, while there are downside risks for costs and near-term flows are unlikely to exceed expectations.

The 1H beats were largely due to a higher figure for funds under administration (FUA), which is transitory and won't benefit future periods, points out the broker.

The target remains at $13.70.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/2/2

As outflows continue and growth options are muted, Morgan Stanley feels shares of Australian Asset managers have rallied too soon.

Setting aside best-in-class Macquarie Group, under its coverage the broker prefers GQG Partners (given strong inflows) and also Perpetual on diverse growth options and valuation support.

On valuation, the broker downgrades its rating for Platinum Asset Management to Underweight from Equal-weight. It's felt the asset manager is too dear relative to peers given limited growth options and challenged (though stable) flows.

The target rises to $1.85 from $1.70. Industry view: In-Line.

SIMS LIMITED ((SGM)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/3/2

After a strong 1H beat by Sims, Citi raises its target to $14.30 from $12.75 though moves to a Sell rating from Neutral on valuation.

This change in the analyst's rating follows a 20% share price rally since January on higher US steel and scrap prices.

The broker also mentions economic headwinds and near-term uncertainty due to higher interest rates in key economies.

VIVA ENERGY GROUP LIMITED ((VEA)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/3/0

While remaining positive on the company, Ord Minnett downgrades Viva Energy's rating to Hold from Accumulate on grounds of valuation given recent share price strength.

Target price is steady at $3.20.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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