Weekly Reports | Mar 14 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 March 6 to Friday March 10, 2023
Total Upgrades: 4
Total Downgrades: 14
Net Ratings Breakdown: Buy 51.96%; Hold 37.75%; Sell 10.29%
For the week ending Friday March 10 there were four upgrades and fourteen downgrades for ASX-listed companies as brokers in the FNArena reduced their research output following the conclusion of the February reporting season.
Of those fourteen downgrades, eight were reactions to perceived overvaluation by Ord Minnett following recent share price rallies. No changes were made to the broker’s forecasts for those companies. Ord Minnett (Morningstar) follows a model of automatic ratings changes triggered by relative movements in share price to target price.
Citi agreed with Ord Minnett that New Hope Corp was overvalued and downgraded its rating to Neutral from Buy, but also slashed its FY24 earnings forecast by -47% on lower forecast coal prices and lowered its target to $4.90 from $6.15.
The analysts pointed out Newcastle thermal coal price has retraced by -58% from the peak attained last September, and with Asian utility coal restocking expected in June, Whitehaven Coal remains the preferred exposure.
Compared to New Hope shares, the Whitehaven share price has underperformed by -20% over the last three months.
Ord Minnett’s downgrade of InvoCare to Accumulate from Buy on valuation was matched by Morgans downgrade to Hold from Add for the same reason.
Having previously accumulated a near 18% interest in InvoCare, TPG Global has launched an indicative bid to acquire the remainder of the company for $12.65/share, a 41% premium to the previous closing price.
Morgans raised its target to $12.19 from $11.10 in response, and noted the offer price is well above InvoCare's peer median FY23 enterprise value multiple of 11.1x.
The offer is at pitched at 15.2x, which is above the company's average over the past ten years of 13.9x and shy of the highest point of 16.6x in December 2017.
The analyst assigned a 70% probability the transaction will be successful.
There were no material target price changes nor any significantly negative forecast earnings downgrades made by brokers in the FNArena database last week.
There were, however, some sizeable upgrades to forecast earnings with Xero heading up the table below. The company’s shares rallied hard toward the end of the week, prompting Ord Minnett to downgrade its rating to Sell from Lighten on valuation.
Shares rallied in response to the new aim by incoming CEO Sukhinder Singh Cassidy to target profitable growth, which according to Morgans, should result in higher free cashflow and profits in FY24 and beyond.
The company announced an intention to reduce its workforce by -15%, or around 700-800 roles, in an attempt to balance growth and productivity ahead of uncertain macroeconomic conditions.
UBS raised its earnings forecasts by an average of 17% through to FY25, after also incorporating a redesign of the company's technology function, which is expected to result in improved efficiencies.
Liontown Resources was next on the table though very small forecast numbers rendered exaggerated percentage changes irrelevant. Across the lithium sector, Citi downgraded the ratings of a number of companies under its coverage, as lithium prices are likely to remain under near-term pressure.
Also, several of these companies had experienced a significant share price rally prior to the broker’s report, including Liontown (Neutral from Buy), whose shares had risen by around 30% in a week after presenting at the BMO Capital Markets conference in the US. The $1.80 target price was unchanged.
Other lithium stocks downgraded by Citi were Mineral Resources (Neutral from Buy) and Core Lithium to Sell from Neutral. The analysts are hoping to achieve lower entry prices, especially as lithium prices may gain once restocking occurs along the battery supply chain over March to April.
Citi's preferred exposure in the sector is Pilbara Minerals given it has the simplest operational model.
The average earnings forecast in the FNArena database also rose for Nickel Industries after Macquarie reacted to revised terms for the the Dawn high-pressure acid leach (HPAL) project in Indonesia, which includes higher nameplate production capacity and lower capital expenditure.
An agreement was also reached to convert two of the four lines at the Angel Nickel project, also in Indonesia, from nickel pig iron (NPI), used for stainless steel, to higher-margin nickel matte, which is used in batteries.
The broker forecasts 76% of 2023 nickel production will be delivered in the form of NPI, and with realisation rates below 60%, is awaiting an improvement before changing its recommendation from Neutral. The $1.05 target was retained.
Total Buy recommendations comprise 51.96% of the total, versus 37.75% on Neutral/Hold, while Sell ratings account for the remaining 10.29%.
Upgrade
PRO MEDICUS LIMITED ((PME)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/2/1
Citi views Pro Medicus' business model as attractive, given a real competitive advantage in the Picture Archiving & Communication Systems space, but a valuation of some 70x PE on FY25 forecasts is keeping the broker on the sideline.
Citi does not yet explicitly forecast any contribution from Cardiology or AI, awaiting more details on the new products, nor any significant revenue contribution from Europe. These could be sources of upside over the medium to longer term, but difficult to quantify at this stage, the broker notes.
But following an -8% share price decline post-result, the broker upgrades to Neutral from Sell. Target unchanged at $61.
REGION GROUP ((RGN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/5/0
Highlighting that Region Group has underperformed the ASX200 A-REIT index by -6% since releasing its first half result, Macquarie notes it remains cautious on the company's earnings trajectory, particularly heading into FY24.
The broker does remain positive on the company's defensive topline, with Region Group's tenant base performing strongly in the first half and leasing spreads improving to 4.4% from 3.3% partially as a result of the company delaying lease negotiations during covid-impacted periods.
The rating is upgraded to Neutral from Underperform and the target price of $2.52 is retained.
SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/1
Citi has upgraded its earnings forecasts for Sonic Healthcare after adjusting for the AUDUSD, and rolled forward its valuation. The result is a target increase to $36.00 from $34.50 and an upgrade to Buy from Neutral.
The broker notes ample balance sheet capacity for acquisitions/new contracts or share buybacks and further upgrades its FY23-25 forecasts on higher margin expectations.
WISETECH GLOBAL LIMITED ((WTC)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/2/0
While wary of WiseTech Global's high valuation, Citi decides to upgrade its rating to Neutral from Sell on growth potential, new business opportunities and a strong balance sheet/profitability.
In the face of declining freight volumes, the analysts admire the company's impressive growth and see new growth emerging from global customs and landside logistics.
A highlight from 1H results, according to the broker, was the global customs roll-out with Kuehne & Nagel the largest global third party logistics (3PL) company with a reputation for developing its own software.
The target rises to $64.10 from $53.65.
Downgrade
INGHAMS GROUP LIMITED ((ING)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/0
Ord Minnett downgrades its rating for Inghams Group to Hold from Accumulate after a recent share price rally.
Forecasts are unchanged and the $3.50 target retained.
INVOCARE LIMITED ((IVC)) Downgrade to Hold from Add by Morgans and Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/3/0
Having previously accumulated a near 18% interest in InvoCare, TPG global has launched an indicative bid to acquire the remainder of the company for $12.65/share, a 41% premium to the previous closing price.
Morgans notes the offer price is well above InvoCare's peer median FY23 EV/EBITDA multiple of 11.1x. The offer is at 15.2x, which is above the company's average over the past ten years of 13.9x and shy of the highest point of 16.6x in December 2017.
The analyst assigns a 70% probability the transaction proceeds.
The broker raises its target to $12.19 from $11.10 and lowers its rating to Hold from Add on valuation.
Ord Minnett lowers its rating for InvoCare to Accumulate from Buy on valuation after a recent share price rally.
The $14.50 target is unchanged.
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