Weekly Ratings, Targets, Forecast Changes – 24-02-23

This story features AUSTRALIAN CLINICAL LABS LIMITED, and other companies. For more info SHARE ANALYSIS: ACL

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 20 to Friday February 24, 2023
Total Upgrades: 38
Total Downgrades: 26
Net Ratings Breakdown: Buy 52.24%; Hold 37.48%; Sell 10.27%

For the week ending Friday February 24 there were thirty-eight upgrades and twenty-six downgrades for ASX-listed companies as brokers in the FNArena database digested results from the third week of the February reporting season.

In the Healthcare sector there were two ratings upgrades apiece for Integral Diagnostics and Australian Clinical Labs, following positive signs from first half results by Sonic Healthcare in the prior week.

Citi was impressed by business-as-usual margins for Australian Clinical Labs and raised its rating to Buy from Neutral, while Credit Suisse noted solid cost control despite an -83% decline in covid-related revenue and lifted its rating to Outperform from Neutral.

Credit Suisse also upgraded its rating for Integral Diagnostics to Neutral from Underperform on a longer-term view though remained uncomfortable with near-term earnings prospects, despite an improved operating performance.

Macquarie (Outperform from Neutral) observed improving activity trends in the second half of the financial year should positively impact on margins and the balance sheet.

Staying in the health domain, nib Holding received ratings upgrades to Buy from Citi and UBS, while Ord Minnett raised its recommendation to Hold from Lighten. The latter noted mixed first half results, with a strong rebound in travel and international insurance partially offset by weaker-than-expected Australian private health insurance.

Both Citi and UBS observed policy growth in Australian resident insurance remains buoyant and nib continues to gain market share. UBS felt the stock price decline was overdone and presented a unique buying opportunity for investors.

First half results for Domino’s Pizza Enterprises disappointed all brokers with higher prices weighing on customer spend. The share price fall in reaction to results enticed Ord Minnett and Macquarie to upgrade respective ratings to Accumulate and Neutral.

UBS noted management is looking to raise prices again. It’s felt initiatives aimed at turning around performance will take time to implement, and this broker downgraded to Neutral from Buy.

The average target price of the seven covering brokers for Domino’s fell -16.75% to $62.92.

The only larger percentage fall in target last week was for Link Administration Holdings (-17.4%) which will report its first half results later in February. The average target was dragged down by Morgan Stanley (Equal-weight) after its forecasts were updated for the PEXA Group sell-down and distribution, and its target was reduced to $2.00 from $3.40.

Neutral-rated Citi also has a $2.00 target and last week alluded to the company’s talks with Dublin-based Waystone Group regarding the sale of its UK-based Funds Solutions business. Should a broadly net zero outcome be negotiated, it’s felt the stock price would react positively.

The average target price for Iress also fell by around -13% after in-line full-year results just scraped into the low end of downgraded September guidance.

Morgans (Hold) noted that while valuation multiples are currently full, there is significant longer-term upside, and Neutral-rated Macquarie observed the core Australian business remains strong and an attractive dividend is on offer.

On the flipside, oOh!media received the largest percentage increase in target price. FY22 results outpaced consensus forecasts thanks to stronger-than-expected road segment revenue.

Macquarie noted a strong contract pipeline and less interest expense than expected, and raised its target to $2.49 from $1.86. Morgan Stanley observed a continuation of momentum from structural tailwinds, though pointed out higher operating leverage than peers makes the company a riskier exposure.

29Metals received the largest percentage downgrade to earnings forecasts, despite returning overall in-line FY22 results and maintaining FY23 guidance. As expected, no dividend was declared.

Macquarie lowered its forecasts by -15% due to a higher depreciation estimate and highlights earnings remain vulnerable to changes in copper and zinc prices. Net debt also blew-out by 33% over the period, compared to the analyst's forecast. 

There are three Sell (or equivalent ratings) in the FNArena database and two Holds.

Next on the earnings downgrade table below is Superloop. Following broadly in line first half results, management's earnings guidance implies a large second half skew, according to Morgan Stanley, after the first half disappointed on costs.

While Morgans identified both strong business momentum and operating cash flow conversion, a doubling of underlying earnings in the second half to attain guidance looks a stretch.

Alumina Ltd also disappointed brokers’ expectations after FY22 underlying profit for Alcoa World Alumina and Chemicals (AWAC) was a miss. As expected, no dividend was declared.

Ord Minnett noted a second half loss was mainly due to weaker margins, with a 16% rise in the average alumina price more than offset by a near -30% negative impact from an increase in production costs. The company is considered to be in strong financial shape and well-placed to ride out a downturn.

On the positive side of the ledger, QBE Insurance received the largest percentage earnings upgrade last week after seven brokers in the FNArena database reviewed FY22 results and FY23 guidance for mid-to-high single digit gross written premium growth.

Ord Minnett upgraded its rating to Hold from Lighten after the underwriting result more than doubled, supported by a 9% increase in premiums and a drop in expense and commission ratios. Overweight-rated Morgan Stanley now expects the stock price can further re-rate in FY23.

Service Stream was next on the earnings upgrade table below followed by Seek after the release of first half results.

Citi felt the result represented an inflection point for Service Stream and upgraded its rating to Buy from Neutral on a near-to-medium term outlook. This broker cited several factors in forming this view including less impact from weather and underlying organic revenue growth of 7%.

Management has guided to a stronger second half, which Ord Minnett found achievable given seasonal patterns of the past.

For Seek, UBS felt A&NZ listing yield growth of 9% in the first half suggested dynamic pricing to date has delivered a step-change in pricing. This outcome is expected to support growth, especially when listings begin to normalise faster in the second half.

Morgan Stanley noted significant potential for the Asian operations, following a good performance in the first half and now that planned significant reinvestment is 50% complete.

After Macquarie last week upgraded its rating for Seek to Neutral from Outperform there are now two Hold (or equivalent) ratings in the database and four Buys (or equivalent).

Regarding last week’s material changes to broker earnings forecasts in the tables below for Costa Group, Ramelius Resources, South32, Gold Road Resources, Viva Energy, Spark New Zealand and Santos please check out  https://www.fnarena.com/index.php/reporting_season/ 

Total Buy recommendations comprise 52.24% of the total, versus 37.48% on Neutral/Hold, while Sell ratings account for the remaining 10.27%.

Upgrade

AUSTRALIAN CLINICAL LABS LIMITED ((ACL)) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/0/0

Having last week reassured investors that margins would be in line with pre-covid levels, in its first half result Australian Clinical Labs has suggested business as usual margins look to be at or above 11% in the second half and beyond, in what Citi found to be a highlight of the result. 

The update has given Citi more confidence in Australian Clinical Labs' ability to reach targeted low teens earnings margins moving forward. 

The rating is upgraded to Buy from Neutral and the target price increases to $4.10 from $3.30. 

Australian Clinical Labs' underlying earnings, excluding one-offs, came in slightly below Credit Suisse' forecast. Margins were nevertheless maintained on solid cost control despite an -83% decline in covid-releated revenue.

Australian Clinical Labs has outperformed Healius ((HLS)) on all metrics, the broker notes, achieving a stronger earnings performance
due to its Unified Laboratory Network, where uniform equipment and systems across all high-volume central laboratories has enabled greater agility in managing its labour cost base over varying demand.

Seeing no immediate change in this trend, Credit Suisse upgrades to Outperform from Neutral. Target rises to $3.80 from $3.45.

AMP LIMITED ((AMP)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/1/1

As the share price has moved through the trigger point, Ord Minnett upgrades AMP to Accumulate from Hold. Target is $1.35.

ALUMINA LIMITED ((AWC)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/1/1

With Alumina Ltd delivering an 11% 'beat' to Citi's full year profit expectations at US$109m, the broker has lifted its 2023 forecast modestly, albeit off a low base.

The broker has described operations as a double-edged sword, with lower Alcoa World Alumina and Chemicals (AWAC) production likely to support a higher alumina price, and with AWAC production down -6% for 2023, the broker has accordingly raised its alumina price 4% for the year to US$360 per tonne.

The rating is upgraded to Neutral from Sell and the target price increases to $1.55 from $1.50. While the result beat Citi, it was some -8% below market consensus.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/3/0

A falling share price has pulled Morningstar/Ord Minnett back to the drawing board to upgrade the rating for Costa Group to Accumulate from Hold.

Fair value remains at $3.10.

One interesting observation is that Morningstar believes Costa Group's concentrated customer base prevents it from building an economic moat because, and here's the quote: "the balance of bargaining power lies with its powerful customers".

See also CGC downgrade.

CHARTER HALL GROUP ((CHC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/1/0

As the share price has moved through the trigger point, Ord Minnett upgrades Charter Hall to Accumulate from Hold. Target is $15.85.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/4/0

Domino's Pizza Enterprises' December-half result fell well short of Ord Minnett's forecast, volumes slumping in December and failing to recover.

The broker sheets this back to price rises for pizzas and deliveries to compensate franchisees for cost inflation, but adds the company appears to have overestimated the product's price elasticity.

Add to that continued cost inflation, adverse foreign exchange movements and falling market share (particularly to burgers and dining-in and drive-throughs), and the broker suspects management has some thinking to do

First step will most likely be to address the pricing structure, and the broker suspects inflation may start to ease, providing some relief for franchisees.

EPS forecasts fall -10% in FY23; and -10% in FY24.

Upgrade to Accumulate from Hold following the recent share price retreat. Target price is $68.

This is Ord Minnett's first report since transitioning to Morningstar Research. Previously it held a Buy rating and $80 target price.

Domino's Pizza Enterprises disappointed Macquarie with its first half results, given a capital raising occurred in December. Europe drove the miss to estimates, with EBITDA down -31%.

Management pointed out higher prices  negatively affected volumes. Meanwhile, Australasia appears to be holding up.

Weakening franchisee sentiment results in a cautious outlook, yet Macquarie notes the stock has fallen -25% on the back of the result and upgrades to Neutral from Underperform. Target is reduced to $55 from $60.

See also DMP downgrade.

GOODMAN GROUP ((GMG)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 5/1/0

Ord Minnett increases estimates in the wake of the first half result. Goodman Group shares still appear slightly overvalued but the rating is now upgraded to Hold from Lighten.

Management has indicated it will not increase distributions, preferring to retain capital amid profitable development opportunities.

The broker commends the business on its positioning as it takes advantage of favourable conditions in industrial property without exposing shareholders to too much risk.

Earnings growth is expected to offset the headwind of rising interest rates. Target is raised to $18.60 from $18.00.

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

Ord Minnett found little to be concerned about in the 2022 results, with net profit and EBITDA in line with estimates. 2023 guidance is unchanged and the broker expects earnings and cash flow will improve.

Unlike its peers, Gold Road Resources has generated positive earnings and cash flow in 2022 which the broker attributes to greater consistency at Gruyere as well as the scale and maturity of a tier 1 asset protecting it from inflationary pressures.

Rating is upgraded to Buy from Accumulate and the target edges up to $1.85 from $1.80.

HEALTHCO HEALTHCARE & WELLNESS REIT ((HCW)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/0

First half results were weaker than Macquarie expected. HealthCo Healthcare & Wellness REIT has revised up its yield on cost assumptions for future developments to 6-7 "over 5%" amid rental growth.

Not only is there a positive earnings benefit in a higher interest-rate environment but Macquarie points out this results in development margins of 30%.

Meanwhile, the broker suggests the downside risks, such as the outlook for GenesisCare, which represents 8% of the portfolio and has been reported as having liquidity concerns, are factored into the share price.

Macquarie upgrades to Outperform from Neutral and raises the target to $1.80 from $1.76.

HMC CAPITAL LIMITED ((HMC)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0

HMC Capital reported a 12% beat on Macquarie's forecast earnings in the 1H23 and 16% above consensus with the boost provided by recognising unrealised gains in the value of the private equity fund.

Adjusting for tax changes. margin expansion and gains in the Capital Partners Fund, Macquarie lifts EPS forecasts by 16% for FY23 and 30% for FY24.

In the medium term, management offered strategies to achieving FUM of at least $10bn (versus $6bn currently) by 2024 with potential 20% ROE (versus 7% currently). 

Upside potential to FY25 EPS would be 46c compared to the broker's 29.9c forecast. The rating is upgraded to Outperform from Neutral and the target raised to $5.20 from $5.

Despite a first half result from HMC Capital that disappointed on Credit Suisse's expectations, made without the backdrop of company guidance, the broker remains confident in HMC Capital's ability to deliver on its funds under management growth strategy. 

The broker expects HMC Capital to be more reliant on acquisitions and investment opportunities to grow funds under management than some peers, although the company does also retain a modest development pipeline.

The rating is upgraded to Outperform from Neutral and the target price decreases to $4.90 from $5.82.

INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/3/0

First half results from Integral Diagnostics were below expectations, although Macquarie observes improved activity in the second half is underpinnning earnings growth, margin improvement and a better balance sheet.

While the balance sheet is stretched it remains within covenants. The broker upgrades to Outperform from Neutral and raises the target to $3.30 from $3.05.

Integral Diagnostics reported better than expected revenues but profit was a clear miss. While operating cashflow conversion was very strong, it was partially aided by an unsustainably high accounts payable figure, Credit Suisse warns.

Management's expectation is for the second half to be "materially stronger" than the first, with volumes and margin both improving.

Despite an improving operating performance it is difficult to be comfortable with near-term earnings prospects, Credit Suisse suggests. On balance the broker believes investors have some time before they need to take a position to benefit from improved outer year earnings.

An upgrade to Neutral from Underperform reflects a longer term view. target rises to $2.70 from $2.63.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/5/0

2022 results were in line with expectations and on further analysis Citi upgrades to Neutral from Sell.

The broker finds the stock somewhat of a conundrum as a new mining approach could make mineral sands deposits viable that were previously uneconomic, while the Eneabba refinery earnings are still some time away from being realised.

Hence, earnings multiples appear high. Still, the broker considers Iluka Resources is a "good news" rare earths story and the risk will come with refinery commissioning. Target is raised to $11.50 from $10.40.

INGHAMS GROUP LIMITED ((ING)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0

Macquarie observes Inghams Group has successfully transitioned from the operating disruptions experienced in FY22. First half earnings and net profit were ahead of expectations and the strong result increases the broker's confidence in an earnings recovery.

As a result, the rating is upgraded to Outperform from Neutral and the target raised to $2.97 from $2.62. Multiples also appear more attractive, with the stock trading on 13.3x and 11.0x FY23 and FY24 PE, respectively, a -15% and -25% discount to peers.

Inghams Group's 1H result was a material beat versus Morgans forecast and management expects the positive momentum to continue in the 2H.

The company also noted inflationary cost pressures remain for grain, labour fuel, freight packaging, utilities and ingredients.

The broker raises its forecasts and expects earnings will normalise through FY24/25 due to price rises and improvements in operations. The rating is upgraded to Add from Hold and the target rises to $3.15 from $2.97.

KAROON ENERGY LIMITED ((KAR)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/0/0

According to Morgan Stanley, first half results for Karoon Energy demonstrate the leverage within the business. There's favourable free cash flow leverage to Brent with lower policy risk compared to peers in the broker's Australian Energy coverage.

An increase in earnings (EBITDA) and profit of 97% and 275%, respectively, resulted from a 33% increase in production, on the previous corresponding period

Profit for the half was -25% lower than the analyst expected owing to a ramp-up in operations and development costs.

The target rises to $2.88 from $2.32 and the rating is increased to Overweight from Equal-weight. It's felt the inflection in Karoon's exploration and production profile is under-appreciated by investors. Industry view: Attractive.

LINDSAY AUSTRALIA LIMITED ((LAU)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Morgans upgrades its rating for Lindsay Australia to Add from Hold and raises its target to 86c from 50c after 1H results materially beat expectations.

The broker feels outlook commentary was positive, with the company aiming to expand its Rail capacity and grow its Rural business.

Management reiterated FY23 guidance, with strong operating conditions and improved utilisation in Transport expected to drive 2H growth.

CEO Kim Lindsay will retire after 20 years in the role on June 30.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 4/3/0

As the share price for Mineral Resources has moved through the trigger point, Ord Minnett upgrades to Hold from Lighten. Target is $75.

NIB HOLDINGS LIMITED ((NHF)) Upgrade to Buy from Neutral by Citi and Upgrade to Hold from Lighten by Ord Minnett and Upgrade to Buy from Neutral by UBS .B/H/S: 3/4/0

A disappointing first half result from nib Holdings, according to Citi, with the broker noting much of the 'miss' stemmed from pre-flagged losses from Midnight Health. 

Further investment in Midnight Health looks to be a feature of the next three to four halves, with Citi not anticipating a breakeven until FY25. 

Despite arhi margins declining markedly in the period, the broker points out this segment continues to grow ahead of system and the company expects growth of 3-4% over the year. Both iihi and travel are demonstrating quick recovery, suggests the broker.

The rating is upgraded to Buy from Neutral and the target price increases to $7.85 from $7.60.

First half results were mixed, with a strong rebound in travel and international insurance partially offset by weaker-than-expected Australian private health insurance.

In adddition to deferral of premium price increases, nib Holdings' bottom line was affected by higher acquisition costs and additional investment expenditure.

Ord Minnett increases FY23 profit estimates by around 5% following the result. Rating is upgraded to Hold from Lighten while the target of $7 is unchanged.

First half results were below consensus expectations yet UBS considers these were optimistic. The broker assesses the decline in the nib Holdings stock price is overdone and there is now a unique entry point.

As a result, the rating is upgraded to Buy from Neutral and the target raised to $8.00 from $7.80.

The broker observes policy growth in Australian resident insurance remains buoyant and the brand continues to gain market share. Policy growth is expected to exceed the 3-4% guidance range in FY23.

OBJECTIVE CORPORATION LIMITED ((OCL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Morgans notes a mixed 1H result as Objective Corp continues to phase out Perpetual Right To Use (PRTU) licensing and returns opex to normalised post-covid levels.

While this transition should weigh on near-term revenue recognition for the rest of FY23, the analyst feels costs were re-based in the 1H, and the stage is now set for margin improvement well into FY24.

The broker raises its rating to Add from Hold after becoming more comfortable with visibility for revenue and margins. While earnings forecasts are slightly lowered, the target rises to $15.70 from $15.20 on a roll forward of the financial model.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/0

First half net profit was stronger than Macquarie expected although the dividend was below forecasts. Perseus Mining will review the dividend with the full year result with the potential for a bonus on top of the base payout.

Second half guidance has been maintained for 230-260,000 ounces at a cost of US$1000-1100/oz. Following recent movements in the share price and the strong cash generation, Macquarie upgrades to Outperform from Neutral. Target is steady at $2.50.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 6/1/0

2022 results were much stronger than Ord Minnett expected. The underwriting result more than doubled to US$2.2bn, supported by a 9% increase in premiums and a drop in expense and commission ratios.

The broker makes minor changes to estimates but is now more positive on operating costs. Given a higher cash rate environment, Ord Minnett expects QBE Insurance to generate stronger returns on its policyholder and shareholder funds in 2023.

Rating is upgraded to Hold from Lighten and the target lifted 8% to $13.

See also QBE downgrade.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/5/0

Ramsay Health Care's 1H revenue beat forecasts by consensus and Morgan Stanley by 3% and 2%, respectively, largely due to a sharp turnaround in the 2Q for Ramsay Sante.

By region, France and Nordics were a positive surprise for the analyst, offsetting weakness in Australia and the UK.

The broker detects no change in tone on guidance with management expecting "a gradual recovery through FY23 and more normalised conditions in FY24”.

Morgan Stanley raises its target to $67.10 from $62.10 and increases its rating to Equal-weight from Underweight. Industry view: In-Line.

RAMELIUS RESOURCES LIMITED ((RMS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/0

Ramelius Resources's December-half result outpaced Macquarie's net debt and net-profit-after-tax forecasts, and management reiterated guidance.

Strong revenue, a beat on production costs, and lower depreciation and amortisation boosted the top line, although a slight miss on corporate costs and exploration expenditure weighed on earnings (EBITDA).

The company finished the half with net cash, including leases, of $101m (up $14.1m), thanks to a lower lease balance, advises the broker.

EPS forecasts rise four-fold in FY23; and 2% to 4% thereafter to reflect an improved lease balance.

Rating upgraded to Outperform from Neutral. Target price is steady at $1.20.

SCENTRE GROUP ((SCG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/5/0

Scentre Group's FY22 full-year result met Macquarie's forecasts, and FY23 guidance outpaced by 2%. The broker observes the company's leasing spreads continue to trend upwards.

Macquarie estimates the company will deploy -$0.6bn (net) in FY23, which should raise the company's leverage to 40% from 39%.

Given Scentre Group's strong retail performance, the broker expects the company may have an opportunity to sell retail assets and reduce leverage, without impacting earnings.

Macquarie also observes the company has an opportunity to cut its interest costs via a lower-margin subordinated notes (the company holds a 2026 call option on $2.1bn notes) or refinance at lower rates (pending market movements), and that every 1% change in the margin translates to a 2% rise in funds from operations.

Rating is upgraded to Neutral from Underperform. The broker tinkers with EPS forecasts. Target price rises 13% to $2.89 from $2.55 to reflect a better-than-expected expansion in the company's cap rate.

SEEK LIMITED ((SEK)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 4/2/0

Seek's December-half result met consensus estimates and outpaced Macquarie's forecasts by 6%.

Management narrowed guidance to the low end of its range in response to weaker turnover in Australian and New Zealand, and the bringing forward of unification costs into operational expenditure.

On the upside, Asia posted a strong yield, the segment growing at 22% year on year (A&NZ yields improved slightly). EPS forecasts rise 23% in FY23; 43% in FY24; and 51% in FY25 to reflect the Asia beat.

Rating upgraded to Neutral from Underperform. Target price rises to $23.50 from $19.50.

STOCKLAND ((SGP)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

A softer outlook for residential settlements has caused Ord Minnett to slightly reduce estimates for earnings, or FFO, to 33.3c per security. The first half results signalled the business is on track to meet FY23 guidance.

The broker considers the securities undervalued, as Stockland has one of the strongest balance sheets in the sector, with gearing at 22.1%.

Target is raised to $4.35 from $4.30 and the rating is upgraded to Accumulate from Hold.

While the long-term outlook for the residential business, with strong population growth exceeding new housing supply, is becoming more certain the broker does not assume boom conditions will return.

SPARK NEW ZEALAND LIMITED ((SPK)) Upgrade to Hold by Ord Minnett .B/H/S: 1/3/0

Spark New Zealand's December-half results missed Ord Minnett's forecasts but the broker remains positive.

The miss was struck on a fall in lower-quality earnings and inflation, says Ord Minnett, and the broker adds that the metric to watch is the higher-quality mobile earnings which account for 48% of gross profit – this segment posted strong growth.

As a result, Ord Minnett's long-term forecasts remain intact and the broker appreciates the company's strong balance sheet, dividend security and defensive profile.

The broker expects a strong June half. 

Rating upgraded to Hold. Target price is $4.30. Ord Minnett is now white-labelling Morningstar research.

SERVICE STREAM LIMITED ((SSM)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/0

While Citi acknowledges the risk associated with adequacy of Service Stream's -$20m provision taken for the Queensland water project, the broker believes there appears to be a clearer runway for growth.

This is substantiated by underlying organic revenue growth of 7.2%, delivery of $17m synergies 6-9 months ahead of schedule and
a progressively dissipating impact from weather.

The broker sees the underlying result as an inflection point and a base from which Service Stream can build. The overhang from the problematic project is likely to persist until completion, but Citi is more positive on the company’s near-to-medium term outlook.

Upgrade to Buy from Neutral. Target rises to 80c from 75c.

LOTTERY CORPORATION LIMITED ((TLC)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 4/2/0

Interim results were better than Ord Minnett expected. There was a continued strong performance in Lottery Corp's core lotteries business and a sharp rebound in Keno earnings after restrictions hurt venues during the pandemic.

Along with an interim dividend of 8c a special dividend of 1c was declared. The business is now targeting a dividend payout ratio of 80-100% of underlying net profit after tax. Ord Minnett had considered the prior range to be conservative, given the low capital intensity and defensive earnings.

Rating is upgraded to Hold from Lighten and the target lifted to $4.70 from $4.40.

REJECT SHOP LIMITED ((TRS)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0

The Reject Shop’s H1 report proved in line with the trading update released in January. Ord Minnett observes no dividend has been declared.

The broker upgrades to Accumulate from Hold while observing management at the retailer is now focused on driving sales and comparable store sales growth, having spent years on lowering costs across the business and store network.

Price target moves to $4.85 from $4.30. As part of higher forecasts, the broker is now penciling in the return of dividends, starting with the FY23 release in August (5c).

Morgans raises its rating for the Reject Shop to Add from Hold, largely due to higher peer multiples and lifts its target to $4.60 from $4.45 following 1H results. Sales and earnings (EBIT) were in line with the trading update on February 1.

The broker raises FY23 earnings (EBIT) forecast by 16% to better reflect operating margins, boosted by the inclusion of $1.6m in insurance proceeds. Only minor changes are made to the FY24 forecast.

The analyst feels the company may benefit from a trade-down by consumers in a tougher consumer environment and dividends are expected to resume in August.

VIVA ENERGY GROUP LIMITED ((VEA)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

Ord Minnett upgrades Viva Energy to Accumulate from Hold on valuation. Target price is $3.35.

EPS forecasts are steady.

Downgrade

A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/1/3

a2 Milk made strong gains in Chinese infant formula market share in the first half on excellent marketing and execution, Credit Suisse declares. Brand awareness continues to improve in China.

Upside risk is nonetheless difficult because the Chinese infant formula demand rate of decline appears to have quickened. The broker's modelling now suggests a further -10% decline in demand in 2023.

Credit Suisse is concerned the China re-registration process could cause market disorder. Downgrade to Underperform from Neutral on valuation. Target falls to $5.10 from $5.30.

AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/1/2

First half results were ahead of estimates. Morgan Stanley notes the market reacted positively to the upgrade to guidance. Auckland Innternational Airport envisages a recovery in passengers to 2019 levels by December 2024.

The broker lauds the quallity of the infrastructure business, which has been underscored by resilience during covid as well as a quick return to activity post the recent flooding.

Rating is downngraded to Equal-weight from Overweight on valuation while the target is raised to NZ$8.88 from NZ$7.67. Industry view: Cautious.

AMPOL LIMITED ((ALD)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/3/0

Ord Minnett finds no longer-term implications from a very strong 2022 cash result, which was well ahead of  expectations. The main surprise was Ampol rewarding shareholders with a special dividend of $0.50 on top of the underlying full year dividend of $1.75.

The results reflected the Z Energy acquisition although the main feature in profit growth was extraordinarily strong refiner margins. The rating is reduced to Hold from Buy and the target remains at $34.50, with the shares now considered only marginally undervalued.

ALTIUM ((ALU)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/2/1

Altium missed UBS on softer subscriptions and new licence sales, despite earnings being in line. The broker is cautious on the medium term outlook as we are yet to see true impact of 10-15% price hikes in December on new seat sales and subscription renewal rates.

Octopart is likely to see further normalisation in clicks and CPC growth and there is limited scope for operating leverage in the medium term as Altium transitions to SaaS and invests in Enterprise/Nexus, the broker notes.

Altium is trading at an average 40% premium to high-growth SaaS and Australian tech peers despite delivering below-peer margins and free cash flow, points out UBS. Downgrade to Sell from Neutral. Target falls to $37.30 from $37.70.

AUB GROUP LIMITED ((AUB)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/1/0

First half net profit was up 52%, as anticipated, and revenue increased 42%. AUB Group has backed up a strong result with bullish medium-term targets, Ord Minnett highlights, upgrading margin assumptions that were already ahead of estimates.

The broker had been wary that reinvestment in the offering would limit some of the margin expansion over the medium term. Net profit forecasts remain at the top end of guidance, incorporating higher commissions.

Rating is downgraded to Hold from Accumulate with a target of $29.

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/0

Ord Minnett found the first half results "poor", with EBIT down -47% and gross profit margins declining to 37.2% and suspects it will be difficult for Baby Bunting to meet profit guidance over the short term.

Nevertheless, the broker acknowledges there is significant long-term growth potential. Rating is downgraded to Hold from Buy and the target is lowered to $2.45 from $3.30.

BLACKMORES LIMITED ((BKL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/5/0

A return to trend sales for Blackmores in Indonesia, following covid-related demand in 2021, was sharper than it had anticipated, and one driver of a missed first half result according to Credit Suisse. 

Coupled with an expected sales burst from China, Blackmores had accumulated $15m in inventory that did not convert to sales in the period. 

Further, price increases of 5-6% failed to materialise into gross margins. The broker expects the sharp contraction in the high-margin Indonesian market dragged on group margins. 

The rating is downgraded to Neutral from Outperform and the target price decreases to $81.00 from $90.00.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/1/1

BlueScope Steel's first half result was in line with guidance but second half guidance is below expectation. 

In 2021, Credit Suisse concluded there was no evidence Australian Steel Products was outperforming spreads over five years, while NorthStar had underperformed.

Strong realised pricing  and market share growth in Colorbond and other products in the interim led the broker to a rethink.

But on the first half result and second half guidance, Credit Suisse now suggests this may have been cyclical, not structural.

Target falls to $14.40 from $19.90, downgrade to Underperform from Neutral.

CAPITOL HEALTH LIMITED ((CAJ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/1/0

Credit Suisse is warning Capitol Health's recovery is likely not going to emerge as quickly as initially thought. 

The broker expects limited free cash flow and margin improvements pose a significant hurdle to the stock demanding a much higher valuation, despite an aging population providing a fairly sound backdrop. 

In the first half the company reported revenue of $98.1m, equating to 49% of the broker's full year revenue forecast, and earnings of $19.7m, equating to 45% of forecast.

The rating is downgraded to Neutral from Outperform and the target price decreases to $0.28 from $0.42.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Hold from Add by Morgans .B/H/S: 2/3/0

Costa Group has announced it will postpone blueberry acreage expansion in 2023, and Credit Suisse downgrades its rating to Neutral from Outperform. The company closed the year with net debt ex leases of -$350m. 

The broker expects the impact on earnings will land in 2024. 

Elsewhere, the broker is forecasting a strong citrus recovery as wet weather subsides, and that the company should benefit from new citrus acreage purchases. 

The broker believes this, combined with the resumption of China acreage purchase by 2025, could trigger a 2025 earnings upgrade. Target $2.50.

Weather and inflationary cost pressures weighed on FY22 results for Costa Group with all metrics missing expectations though China operations were a highlight, according to Morgans.

Costs pressures are expected to moderate and management noted a positive start to FY23 with an improved weather outlook.

The broker leaves its earnings forecasts largely unchanged and downgrades its rating to Hold from Add on valuation. The target price rises to $3.00 from $2.90. There's considered potential for a takeover as private equity has returned to the share register.

Management anticipates significant earnings growth in FY23 with further growth over FY24 and FY25 as numerous growth projects scale up.

See also CGC upgrade.

CSR LIMITED ((CSR)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 3/2/1

Macquarie assesses conditions are weakening for CSR and the risks are growing. While the available work has been robust and builders are generally expected to be busy over 2023, a tightening of affordability and price pressures could result in increased cancellation rates.

While the company is likely to perform strongly over FY23, the broker assesses the earnings risk beyond that is distinct. Rating is downgraded to Underperform from Neutral and the target is lowered to $4.55 from $5.05.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/0

On further analysis UBS downgrades Domino's Pizza Enterprises to Neutral from Buy and reduces the target to $60 from $78. First half results were below estimates and considered "poor".

To support franchisee profitability, the company absorbed higher food prices and reduced margins, particularly in Europe. The business is looking to raise food prices again and UBS is confident that poor execution is not entrenched, yet initiatives will take time to implement.

See also DMP upgrade.

DETERRA ROYALTIES LIMITED ((DRR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/0

First half results were in line with expectations. Deterra Royalties has the benefit of the ramp-up of South Flank that has offset the easing of iron ore prices, Macquarie points out. South Flank remains a key catalyst and should lift to nameplate capacity over the next two years.

The broker expects spot prices to remain above 7% from FY23. Incorporating the results makes little difference to forecasts and the target is unchanged at $5. Macquarie downgrades to Neutral from Outperform amid recent strength in the share price.

G8 EDUCATION LIMITED ((GEM)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/2/0

G8 Education posted a solid improvement in occupancy half on half, ending the year at 71%, UBS highlights, and major business improvements are largely done.

The demand outlook is improving and the upcoming increase in government rebates should help further stimulate participation. However labour shortages remain the key constraint to further occupancy uplifts and industry supply may again become a headwind.

Wage increases could help drive a meaningful step-up in labour availability but government reviews of the industry create another layer of uncertainty, UBS warns.

Given the recent share price run the broker downgrades to Neutral from Buy. Target rises to $1.30 from $1.25.

GRAINCORP LIMITED ((GNC)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/1/0

As the share price for GrainCorp has moved through the trigger point, Ord Minnett downgrades to Lighten from Hold. Target is $6.70.

LATITUDE GROUP HOLDINGS LIMITED ((LFS)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/2/1

Results from Latitude Group, at the pre-provision level, were largely in line with forecasts, affected by continued elevated repayment levels and margin pressures. Macquarie envisages re-pricing initiatives and rising rates will broadly offset each other over 2023.

As the macro uncertainties are driving soft margin trends and there are persistent material items, the broker finds better value elsewhere in the sector and downgrades to Underperform from Neutral. Target is reduced to $1.20 from $1.30.

MONADELPHOUS GROUP LIMITED ((MND)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/1

Monadelphous Group's December-half result nosed out Macquarie's forecasts, thanks to a strong beat in earnings (EBITDA) margins and a buoyant resources sector.

Macquarie says the margin beat reflects the company's earnings quality and targeted bidding.

The construction division disappointed due to contract delays and losses (the Rio Tinto Western Range contract) and iron-ore capital expenditure, and the broker observes contract delays are continuing but considers selective tendering is better in the long-term given it allows the company to put its constrained labour forces and resources into higher yielding projects.

Management guides to increased revenue in the June half and FY24, and advises the contract pipeline remains at $2bn.

Macquarie downgrades its rating to Neutral from Outperform. Target price eases to $13.60 from $13.70.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Lighten from Buy by Ord Minnett .B/H/S: 6/1/0

Ord Minnett expects higher interest rates will provide a benefit for QBE Insurance in the medium term although the competitive landscape means some of the upside will be eroded through competition via premium rates.

The broker now whitelabels Morningstar instead of JPMorgan and the rating is downgraded to Lighten as the share price has moved through the trigger level. Target is $12.

See also QBE upgrade.

QUBE HOLDINGS LIMITED ((QUB)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0

Qube Holdings' underlying H1 performance proved well ahead of Credit Suisse's forecasts, as well as 27% above market consensus. The 3.8c in dividend was equally a positive surprise.

Strong growth is now expected for FY23 and that, the broker explains, implies an upgrade in guidance.

Target price has lifted to $3.30 from $2.90 but rating is downgraded to Neutral from Outperform on valuation.

REECE LIMITED ((REH)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/2/3

Reece's December-half result appears to have met Macquarie's forecasts, higher tax and interest largely offsetting an operationally strong result and rising gross profit.

But the broker is cautious, observing volumes are slowing, particularly in the US (floating rate USD-denominate debt is an added problem), and a deteriorating macro environment. Macquarie also believes exit rates suggest downside risk.

No specific guidance was provided but the broker says a subsidence in inflation would reduce some of the risk. In the meantime, the broker cuts margin forecasts, raises interest-cost assumptions and pegs a higher tax rate.

EPS forecasts fall -5% in FY23; -19% in FY24; and -13% in FY25. Rating downgraded to Underperform from Neutral. Target price falls to $14.10 from $15.10.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/2

Given recent 2Q reporting by Regis Resources, Morgans wasn't surprised by a soft 1H due to cost pressures.

Management retained FY23 production guidance of 450-500koz, with all-in sustaining costs (AISC) expected to be at the upper end of the $1,525-$1,625/oz guidance range.

While the analyst expects this guidance will be met, the rating falls to Hold from Add as it's felt management needs to demonstrate a better handle on AISC and execute on delivery to build market confidence.

The target falls to $1.91 from $2.02.

SHAVER SHOP GROUP LIMITED ((SSG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/1/0

First half results were largely in line and no FY23 guidance was provided. Ord Minnett observes Shaver Shop has a strong market position and generates high returns on capital. The Australian network has been largely built out but there is scope for expansion in New Zealand.

Still, with declining sales in successive quarters and the prospect of more difficult trading ahead, the broker has become more cautious and downgrades to Hold from Accumulate. Target is reduced to $1.25 from $1.30.

SUPER RETAIL GROUP LIMITED ((SUL)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 3/2/1

As the Super Retail share price has moved through the trigger point, Ord Minnett downgrades to Sell from Lighten. Target is $9.50.

UNIVERSAL STORE HOLDINGS LIMITED ((UNI)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

Like-for-like sales growth for Universal Store in the first seven weeks of the second half was 9%. Citi upgrades estimates for net profit in FY23-25 by 2-5% to reflect a faster store roll-out and a better-than-expected trading update.

Yet, the broker factors in a gradual slowdown as a tough consumer environment looms. Rating is downgraded to Neutral from Buy and the target lowered to $5.75 from $6.00.

While early signs from the Thrills acquisition are positive, Citi remains concerned about increased brand concentration risk.

WORLEY LIMITED ((WOR)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 4/0/1

Worley's December-half result missed Ord Minnett's forecasts due to lower-than-expected margins. Management reiterated guidance for strong growth but advised June-half margins were likely to match the first half.

FY23 EPS forecasts are cut -30% accordingly, and while considering the shares to be overvalued, the broker retains its long-term view.

The broker observes about 67% of contract wins in the December-half related to sustainability, taking total sustainability work to roughly 40% (keeping in mind the company's target to achieve 75% of total contracts by 2025).

Ord Minnett now surmises the market may be overly-optimistic about the company's sustainability credentials. Rating downgraded to Lighten from Hold. Target price eases to $12 from $13.

Ord Minnett is now white-labelling Morningstar research.

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