Weekly Ratings, Targets, Forecast Changes – 12-05-23

This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ

By Mark Woodruff

Guide:

The FNArena database tabulates the views of eight major Australian and international stockbrokers: Citi, Bell Potter, Macquarie, Morgan Stanley, Morgans, Ord Minnett, Shaw and Partners 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 May 8 to Friday May 12, 2023
Total Upgrades: 4
Total Downgrades: 10
Net Ratings Breakdown: Buy 57.82%; Hold 33.35%; Sell 8.82%

For the week ending Friday May 12 there were four upgrades and ten downgrades to ASX-listed companies by brokers in the FNArena database.

Fisher & Paykel Healthcare received the largest percentage increase in 12-month target price for the week after Morgan Stanley refreshed research following evidence of easing supply constraints within ResMed’s third quarter result in early-May. ResMed also revealed strong device sales and revenue growth from covid-related business with China.

The broker suggested as much as ten years of product demand was pulled forward for Fisher & Paykel during the pandemic, and the expanded installed base should yield material benefits.

Covid drove rapid acceptance of devices that provide Nasal High Flow (NHF) therapy, which Morgan Stanley forecasted will drive higher sales of Hospital Consumables.

The Equal-weight-rated broker adjusted its EPS forecasts for FY23-25 by 17.5%, -1.3% and 6.4%, respectively, and increased its target to $25.20 from $21.00.

On the flipside, Appen’s average target price in the database fell by nearly -20% to $1.81 from $2.25, while the company also featured atop the table for the largest percentage fall in forecast earnings by brokers.

Appen issued a soft trading update for the four months to April, which reflected weaker macroeconomic conditions and reduced annotation expenditure from one major client. 

Underlying earnings (excluding currency) were -US$12.4m versus US$7.9m in the previous corresponding period.

In response, management will implement a -US$46m cost-out program to be largely executed throughout the second half of this year.

Macquarie downgraded its rating for Appen to Underperform from Neutral, noting that while the company has no debt, the cash balance is limited and there’s a modest risk of a capital raise. After also allowing for a new valuation methodology, the broker's target price was reduced to $1.18 from $2.50.

Both Bell Potter and Morgan Stanley lowered their price targets by around -10%, with the latter expressing a preference for WiseTech Global and Altium in the Technology sector, which both offer proven high profits and free cash flow, as well as opportunity to scale.

NextDC was second on the table for lower forecast earnings after announcing a $618m equity raising at $10.80 per share for new data centre developments in Kuala Lumpur and Auckland, together with the accelerated data hall fit out in the third Sydney centre. Management is also evaluating Singapore and Tokyo as potential markets.

Following the announcement, three brokers in the database updated research and remained very supportive of the company with Buy (or equivalent) ratings.

While the international expansion does open a new growth avenue, it also increases risk, cautioned Citi. However, Sydney and Melbourne are expected to be the key drivers over the next three to five years. Morgans was unsurprised by the well thought out expansion plan which leverages the company's competitive advantage.

Until confirmation of deal completion, UBS will refrain from incorporating the 1:8 non-renounceable accelerated entitlement offer into its forecasts.

The table below listing the largest percentage earnings upgrades has Origin Energy at its top. The company also featured in the prior week's table, after upgrading its FY23 Energy Markets earnings outlook by over 60%, with stronger earnings from Octopus Energy a key driver.

Additionally, the company is a beneficiary of the $125/t coal price cap imposed by the NSW government which will lead to government compensation for coal bought at prices above the cap from December 23 last year.

This week, Ord Minnett reacted by increasing its FY23 earnings estimate by 48%. Earnings are rebounding faster than the analyst expected as the LNG export business and the utility business perform strongly.

GrainCorp was next on the table after management upgraded earnings guidance to $500-560m from $470-530m while delivering first half results. Around $14m of the upgrade reflected the revaluation of its 8.5% holding in United Malt and the remainder related to strong exports and good global demand, explained Macquarie.

First half results exceeded brokers’ forecasts with a boost provided by a third consecutive bumper crop and strong demand across key end markets. Underlying profit of $200.3m far exceeded the $145.3m forecast by Bell Potter.

UBS increased its earnings estimates by 10-18% over FY23-26 and noted the stock should be assessed on its mid-term cash flows and scope for capital returns. It’s felt there will be a step-down in earnings from FY24 as La Nina ends.

Morgans retained its Hold rating in the expectation of an earnings decline over FY23-25, though still managed to lift its target target to $8.65 from $8.60.

The average target price in the FNArena database increased to $8.68 from $8.55, which suggests just over 5% upside to GrainCorp's latest share price. Three brokers have a Buy (or equivalent) rating and a further two have Hold recommendations.

Total Buy recommendations in the database comprise 57.82% of the total, versus 33.35% on Neutral/Hold, while Sell ratings account for the remaining 8.82%.

Upgrade

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 1/2/3

As the share price of Bank of Queensland has moved through the trigger level Ord Minnett upgrades to Buy from Accumulate. Target is $8.50.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/4/0

Following a recent update by Iluka Resources on its near-term production outlook, which highlighted stable output volumes for 2023-2025, Macquarie upgrades its rating to Outperform from Neutral.

The broker's target rises by 3% to $12.30 due to the production forecast and changes to its zircon price forecasts. Movements in zircon, rare earths and rutile prices present the most significant risks to the analyst's earnings forecasts and valuation.

LYNAS RARE EARTHS LIMITED ((LYC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/1

Lynas Rare Earths has secured an important six-month extension to its operating licence in Malaysia. This should enable full production to be maintained while the plant in Kalgoorlie is ramped up, Macquarie observes.

A longer-term extension to the full operating license in Malaysia presents upside risks to the broker's base case.

Following the receipt of the licence extension Macquarie removes the production hiatus from numbers, which translates to a 45% lift in FY24 production forecasts. Rating is upgraded to Outperform from Neutral and the target raised to $8.60 from $6.50.

MONADELPHOUS GROUP LIMITED ((MND)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/4/0

Citi believes Monadelphous Group is well served by its disciplined approach to pricing, reputation and capacity in E&C which should be reflected in the awarding of work as momentum in the industry returns.

There are $2-2.5bn in E&C projects to be awarded before the end of FY23 on the broker's estimate, primarily in lithium and rare earths.

If the company secures some of the opportunities, this should mean a revenue recovery in FY24. Citi upgrades to Neutral from Sell and raises the target to $12.80 from $12.25.

Downgrade

ALLKEM LIMITED ((AKE)) Downgrade to Hold from Add by Morgans .B/H/S: 3/1/0

A share price rally for Allkem after the announced merger with US-based Livent prompts Morgans to downgrade its rating to Hold from Add on valuation. Due to softer recent spodumene pricing the target price falls to $14.40 from $14.70.

The main appeal of the merger for the analyst are the synergies on offer as both companies have brine operations in Argentina (where Livent uses more advanced brine processing techniques) and spodumene operations in Quebec. 

Prior to a more detailed analysis, the broker assesses value in the transaction for Allkem shareholders.

ANZ GROUP HOLDINGS LIMITED ((ANZ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/3/0

Following 1H results, and after shares have outperformed peers by 5-12% so far this year, Macquarie downgrades its rating for ANZ Bank to Neutral from Outperform. An elevated exposure to a deteriorating New Zealand economy was another factor in the downgrade.

The analyst suggests consensus margin forecasts in the 2H and for FY24 are circa 10bps too high, as higher deposit costs will likely weigh.

It appears to the broker that group margins fell by around -3-4bps in the 2Q, which implies margins are likely to decline from here. The target falls to $24 from $26.

APPEN LIMITED ((APX)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/0/4

Appen's trading update for April reveals revenue down -21% in the year to date. The company is responding with a -US$46m cost reduction program.

Moreover, 2023 is expected to be loss-making and Macquarie notes a continued risk to revenue in 2024/25 that will affect cash flow and the balance sheet.

The company has no debt but the cash balance is limited and the broker envisages a capital raising is a "modest risk". Rating is downgraded to Underperform from Neutral and the target lowered, amid a change in methodology, to $1.18 from $2.50.

COGSTATE LIMITED ((CGS)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/1/0

A one-off restructuring charge will be incurred in the June quarter as Cogstate moves to reduce its full time workforce by -13%, explains Bell Potter.  As a result, management has downgraded FY23 guidance for revenue, earnings and profit.

The broker downgrades its rating to Hold from Buy and lowers its target to $1.70 from $1.80, driven by conservative downgrades to clinical trial contract execution during the remainder of FY23 and FY24.

The analyst also notes the current macroeconomic backdrop is weighing on pipeline strength due to the limited availability of capital across the biotechnology/drug development sector.

CSR LIMITED ((CSR)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/1

CSR's FY23 results beat Citi's estimates and momentum is expected to continue into the first half of FY24 as price rises continued for gyprock while there is a backlog of work yet to be completed.

Yet the broker believes the addition of the aluminium overhang will be too much for investors. Cost volatility and the unpredictability of energy and raw materials makes this segment challenging, in the broker's view.

Moreover, the new loss range of -$5-15m is likely to disappoint and, in the current environment, may not be wide enough, Citi adds.

Rating is downgraded to Neutral from Buy and the target lowered to $5.45 from $5.80.

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

As the share price of Integral Diagnostics has moved through the trigger level Ord Minnett downgrades to Hold from Accumulate. Target is $3.60.

MADER GROUP LIMITED ((MAD)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 1/1/0

While Bell Potter downgrades its rating for Mader Group to Hold from Buy (on valuation alone), overall commentary by the broker is very buoyant.

In the group's key market of North America, feedback from several heavy mobile equipment OEMs and dealers suggests equipment orders/backlogs remain at or near-record levels.

It's thought Mader's 96% valuation premium against Mining Services sector peers justifies the analyst's high-growth earnings outlook. The $5.10 target is unchanged.

NIB HOLDINGS LIMITED ((NHF)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/2/0

As the share price of nib Holdings has moved through the trigger level, Ord Minnett downgrades to Lighten from Hold. Target is $7.

NEXTED GROUP LIMITED ((NXD)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 1/1/0

After NextEd Group provided a lead indicator and campus expansion update, Bell Potter increases its revenue forecasts for FY23-25 by 4%, 9% and 3%, respectively.

Management announced another record number of actively studying English students, at a level more than three times peak pre-covid.

The broker highlights this ongoing strength in English language student numbers and recent pricing increases, along with an expected ramp-up in international Vocational revenue in FY24.

As the analyst's new target of $1.90 (up from $1.70) is set at less than a 15% premium to the current share price, the rating is downgraded to Hold from Buy.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0

Upon further consideration, Citi analysts believe the outlook, and attraction, for Westpac shares is for now closely correlated with how management can tame the increase in costs.

This is the real reason, the analysts speculate, why the FY24 target has been abandoned. Citi is not taking a positive view.

Costs will be THE problem for Westpac going forward, Citi believes. Earnings estimates have been reduced by -10%, with the broker adding this removes the one key point of differentiation with Australian peers.

It also removes the one key reason as to why investors should own the stock, the broker believes. Downgrade to Neutral from Buy.

Target price drops to $22.50 from $26.25.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms