Weekly Reports | Feb 27 2023
By Mark Woodruff
Guide:
The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.
Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.
Summary
Period: Monday 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 Outperform 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.
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