Weekly Reports | Mar 06 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 27 to Friday March 3, 2023
Total Upgrades: 15
Total Downgrades: 10
Net Ratings Breakdown: Buy 52.21%; Hold 37.61%; Sell 10.18%
For the week ending Friday March 3 there were fifteen upgrades and ten downgrades for ASX-listed companies as brokers in the FNArena database reviewed results from the final week of the February reporting season.
As can be seen below, earnings downgrades remained material (more so than upgrades) even towards the bottom of the top-ten table.
While first half results for Bega Cheese were a miss against expectations, two brokers upgraded ratings for the company.
Morgans (Add from Hold) felt the worst of recent headwinds is over following a first half that was materially impacted by higher farmgate milk prices and other inflationary costs, as well as the lag impact for retail prices after implementing price rises.
The target was raised to $4.05 from $3.71 after the broker adjusted for higher peer multiples and a lower net debt forecast due to asset sales.
Ord Minnett noted recent falls in global dairy commodity prices suggest a peak for farmgate prices and upgraded its rating to Hold from Lighten.
While first half results for Platinum Asset Management also missed consensus forecasts, Ord Minnett upgraded to Accumulate from Hold on valuation after a share price fall, and Credit Suisse moved to Outperform from Neutral in the expectation of an improved fund performance.
It was a busy week for regenerative (skin restoration) medicine company Avita Medical. Ord Minnett downgraded its rating to Accumulate from Buy after raising its forecasts for sales and marketing by 29%, prior to the July launch in the US of Recell (spray-on skin), which is targeting the acute burns market.
Morgans also initiated coverage and noted further approvals are pending mid-2023 in the areas of soft tissue repair and vitiligo (loss of skin colour in patches). The analysts observed recent revenue guidance for both the the first quarter and the whole of 2023 by CEO Jim Corbett has propelled the share price higher.
In the tables below, Ventia Services and Liberty Financial received the largest percentage target price upgrade and downgrade, respectively, but these movements should be ignored.
Ord Minnett’s target for Ventia was distorted by a transition to whiltelabeled research from Morningstar instead of JP Morgan, while a data glitch in the FNArena database was largely responsible for the lower Liberty target.
NextDC received the largest percentage decrease to forecast earnings last week, despite the release of in-line first half results and after revenue guidance was raised to the top end of the prior range.
There is certainly no reason to panic, as five covering brokers in the FNArena database have a Buy (or equivalent) rating and two are on Hold.
While elevated energy prices will result in near-term margin compression, Macquarie feels this should be offset by CPI clauses. This broker expects a strong margin recovery in 2024 when energy prices in NSW and Victoria are forecast to ease.
UBS backs NextDC's track record and awaits “hyperscaler” contract announcements in the second half, which should again de-risk future earnings and provide potential for a re-rating.
Block was second on the earnings downgrade table though brokers were generally positive following in-line fourth quarter/FY22results.
Macquarie noted adjusted gross profit margins increased amid an increased contribution from the higher-margin Afterpay and Cash App businesses, while Credit Suisse approved of cost discipline commentary by management.
Ord Minnett points out the company has struggled to convert revenue growth (experienced in the fourth quarter) into better profitability. It’s thought guidance for 2023 indicates this will remain the case.
Earnings forecasts for Sandfire Resources were also lowered last week despite in-line first half results. While Morgan Stanley (Buy) lowered its valuation for MATSA after the company apparently previously misunderstood Spanish tax rules, brokers were otherwise impressed by the Motheo operations, where first concentrate production is due in April.
On the flipside, Tyro Payments received the largest percentage increase in forecasts earnings by brokers after releasing first half results. Back in January, the company pre-released results that were a beat against Morgan Stanley’s forecasts.
Last week, with the benefit of additional detail, the broker discerned a high-quality beat and management also noted strongly positive second-half trading. Ord Minnett also noted profits arrived earlier than expected and derived from genuine growth drivers, rather than cost cuts.
Average earnings forecasts for Liontown Resources also rose last week after Morgans' forecasts were included in the FNArena database when the broker initiated coverage with a Speculative Buy rating.
While spot lithium prices have recently softened, Morgans suggested tight supply will continue as new projects are taking longer to complete. Also, increased demand is expected out of China.
The analyst cautioned the early-stage developer won't generate free cash from its Kathleen Valley project until FY25, following completion of commissioning and first sales of product. The company is considered a higher-risk opportunity when compared to its established peers on the ASX.
Regarding last week’s material changes to broker earnings forecasts in the tables below for 29Metals, Link Administration, Appen, Brambles, Woodside Energy, Cooper Energy and Wagners please check out https://www.fnarena.com/index.php/reporting_season/
Total Buy recommendations comprise 52.21% of the total, versus 37.61% on Neutral/Hold, while Sell ratings account for the remaining 10.18%.
Upgrade
ARDENT LEISURE GROUP LIMITED ((ALG)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/1/0
Ord Minnett upgrades its rating for Ardent Leisure to Hold from Lighten on valuation after the share price has fallen in recent days.
The 60c target price is retained.
ASX LIMITED ((ASX)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/6/0
UBS observes ASX is back at fair value and upgrades the rating to Neutral from Sell. Volumes appear to be at cyclical lows in all key markets and most of the catalysts underpinning the former recommendation have now played out.
While primary and secondary raisings in listings remain weak the broker expects these will inevitably recover. The broker expects second half revenue to fall by -3% before rising 6% in FY24. Target is raised to $70 from $68.
BEGA CHEESE LIMITED ((BGA)) Upgrade to Add from Hold by Morgans and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/2/0
Following 1H results, Morgans feels Bega Cheese is over the worst of recent headwinds and upgrades its rating to Add from Hold.
The half was materially impacted by higher milk and other inflationary costs, as well as the lag impact of implementing price rises, explains the analyst.
Management reduced FY23 earnings (EBITDA) guidance to the lower-end of prior guidance. Rising interest rates are expected to further impact profits and the broker makes large cuts to its FY23 forecast.
The target rises to $4.05 from $3.71 after Morgans applies higher multiples after recent peer outperformance and the net debt forecast falls on asset sales.
First half results were below expectations, with Bega Cheese's EBITDA down -30% and a commensurate reduction in the interim dividend. A significant increase in farmgate milk prices required substantial increases to retail, yet retail prices lagged input costs resulting in lower margins.
Recent falls in global dairy prices suggest milk prices may have peaked. Ord Minnett observes there has been no demand destruction but this remains a risk.
Rating is upgraded to Hold from Lighten and the target is reduced to $3.50 from $3.75.
BRAMBLES LIMITED ((BXB)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/4/0
First half results were mixed with EBIT ahead of Morgan Stanley's estimates and revenue slightly below. Sales guidance in FY23 has been raised to 12-14% and EBIT guidance to 15-18%, the latter up 7% at the mid point.
Brambles is witnessing a recovery in pallet return rates in the US and UK and is positioned to manage progressive destocking in the second half. An improvement is not expected in Australia until the fourth quarter.
Morgan Stanley assesses the business has managed well in difficult markets and may be nearing the sweet spot where robust earnings are coupled with improved cash generation.
As a result the rating is upgraded to Equal-weight from Underweight and the target raised to $13.20 from $11.80. Industry view: In-Line.
See also BXB downgrade.
FINEOS CORPORATION HOLDINGS PLC ((FCL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/0/0
Ord Minnett upgrades Fineos Corp to Buy from Accumulate as the share price is moved through the trigger level. Target is $3.75.
INVOCARE LIMITED ((IVC)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/4/0
2022 results were weaker than Ord Minnett expected. While funeral volumes and prices have rebounded, the inflationary effects on the cost base are dampening near-term profitability.
The broker suspects InvoCare lost volume share in Australian funerals in 2022 but expects growth to resume in 2023.
Ord Minnett estimates much of the spike in funeral demand the past year was taken by smaller firms that have latent capacity and can ramp up the labour force. Rating is upgraded to Buy and the target is $14.50.
LIBERTY FINANCIAL GROUP LIMITED ((LFG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0
Liberty Financial delivered a first half result in line with Credit Suisse' forecasts, with profit lower year on year given expected macro headwinds affecting areas like funding costs and credit growth.
The broker expects some of the residual impacts of these pressures to further impact the second half and into early FY24, before a return to earnings growth.
Credit Suisse believes the market will likely require evidence of a peak in interest rates before a meaningful re-rate will occur, but trading at a 6x forward PE and with a dividend yield in excess of 10%, on a 12-month view the broker sees valuation as compelling.
Upgrade to Outperform from Neutral, target unchanged at $4.55.
MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/3/1
Ord Minnett has now changed its view as the Magellan Financial share price has moved through the trigger, taking the rating back up to Accumulate from Hold. Target is $11.50.
NANOSONICS LIMITED ((NAN)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/1/1
Ord Minnett upgrades to Hold from Lighten as the share price has moved through the trigger point. Target is $4.
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