Weekly Reports | May 23 2022
This story features ARISTOCRAT LEISURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALL
Weekly update on stockbroker recommendation, target price, and earnings forecast changes
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 May 16 to Friday May 20, 2022
Total Upgrades: 5
Total Downgrades: 4
Net Ratings Breakdown: Buy 59.90%; Hold 33.53%; Sell 6.58%
For the week ending Friday May 20 there were five upgrades and four downgrades to ASX-listed companies covered by brokers in the FNArena database.
As Boral had two ratings downgrades by separate brokers last week, it was unsurprising to see the company heading up the table for the largest percentage decrease in target price set by brokers, as well as the largest percentage downgrade to forecast earnings.
Following management’s-$45m downgrade to full year earnings guidance (excluding Property), Credit Suisse decreased its target price to $2.60 from $3.80 and lowered its rating to Underperform from Neutral.
The broker attributed two thirds of the downgrade to the impact from eastern states rainfall, while the balance resulted from elevated energy costs. It’s estimated gross energy costs could increase a further $70m in FY23 and realised prices are unlikely to provide a full offset.
In a similar vein, Morgan Stanley noted cost issues may persist for some time and was disappointed by the lack of price offset. Management also flagged transformation program benefits would be lower than prior FY22 guidance by -$15-25m, though the $200m benefit target is unchanged. The broker cut its rating to Underweight from Equal-weight and reduced its target to $2.80 from $3.20.
Coming second on the table for the largest percentage decrease in earnings forecasts was United Malt Group, after the release of first half results.
First half profit of $10m was bang on Macquarie's estimate though a miss versus the consensus forecast of $13m, and the broker reduced its FY22 EPS forecast by around -7% to incorporate a higher than expected tax rate. Nonetheless, Management reiterated FY22 earnings guidance and remains confident in the outlook after FY22.
Morgans also downgraded it profit estimates due to the higher than expected rate of taxation, and was troubled by a lack of catalysts on the horizon. A Hold rating was maintained due to above-target gearing and near-term earnings risk.
On the flipside, Xero received the largest percentage increase in forecast earnings iafter brokers further reviewed FY22 results released in the week prior.
Despite lower than anticipated subscriber growth in the second half, 29% full year revenue growth beat UBS's expectations. Even so, a lack of cash flow is thought to be a challenge and the broker retained its Sell rating and decreased its target price to $70.00 from $88.00.
Cit correlated lower than expected UK subscriber growth to increased investment by competitor Sage, yet still expects Xero can continue to deliver strong growth in the region. The broker retained its Buy rating and $108 target price.
Following the release of FY22 results. Webjet was next on the list for the largest percentage increase in forecast earnings.
Macquarie noted travel activity continues to recover though revenue and profit margins face headwinds from lagging international travel and travel mix, which is likely to persist in the first half of FY23. Nonetheless, it’s thought the company remains well placed in the medium term, underpinned by strong market share gains and a structurally lower cost base.
Citi pointed out the key metric for Webjet in the current environment is revenue, which was slightly ahead of the consensus expectation, while UBS noted all the company’s businesses were profitable in April, and May profitability is expected to be significantly higher versus April.
Viva Energy Group received forecasts earnings upgrades from Credit Suisse as Australian fuel retailers stand to benefit from exposure to elevated refinery earnings. Demand from Europe and export restrictions from China are expected to support strong refining margins through 2022.
Finally, earnings forecasts were lifted for James Hardie last week. While FY22 profit of US$621m was at the low end of the US$620-630m guidance range, 42% year on year underlying profit growth in the fourth quarter came in ahead of Ord Minnett's forecast.
In raising its rating to Buy from Accumulate, the broker acknowledged rising interest rates will pressure the company’s PE multiple though low expectations are already factored into the share price. Price rises are also expected to counter some of the rising costs.
Morgan Stanley agreed housing market weakness has been priced-in after a recent share price de-rating, especially given the company's skew towards the repair and remodel (R&R) markets. The broker upgraded its rating to Overweight from Equal-weight, while the target price was reduced to $51 from $57.
Total Buy recommendations take up 59.90% of the total, versus 33.53% on Neutral/Hold, while Sell ratings account for the remaining 6.58%.
Upgrade
ARISTOCRAT LEISURE LIMITED ((ALL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 6/0/0
A solid result across the board from Aristocrat Leisure in its first half has reflected the resilience of the gaming sector according to Ord Minnett, delivering a significant beat to the broker's underlying net profit forecast with a reported $530.7m compared to an anticipated $386.0m.
The broker highlighted the land-based segment was a major driver with strong year-on-year volume and fee growth, but continuing robust performance from the digital segment should quiet concerns around digital weakness.
The rating is upgraded to Buy from Accumulate and the target price decreases to $46.00 from $49.00.
JAMES HARDIE INDUSTRIES PLC ((JHX)) Upgrade to Overweight from Equal-weight by Morgan Stanley and Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/1/0
James Hardie Industries' FY22 adjusted profit was broadly in-line with Morgan Stanley's estimate and the consensus forecast. While margins were a beat for the North America Fibre Cement division, they were softer than anticipated for the APAC region.
Management reiterated FY23 profit guidance. The broker feels housing market weakness has been priced-in after a recent share price de-rating, especially given the company's skew towards the repair and remodel (R&R) markets.
While the target price slips to $51 from from $57, Morgan Stanley upgrades its rating to Overweight from Equal-weight. Industry view is In-Line.
James Hardie's 42% year on year underlying profit growth in its fourth quarter came in ahead of Ord Minnett's forecast. Full-year profit of US$621m is at the low end of the US$620-630m guidance range.
The 30c final dividend declared meant 70c for the full year, which is in line with FY21 but well below market assumptions.
FY23 will see a volatile path for margins, the broker warns, with costs the main headwind, although the company has shown its willingness to push through price rises. Rising rates will drag on James Hardie's PE multiple, although low expectations are already factored in.
The broker nevertheless sees longer term value, and double-digit earnings growth over the next two years. Upgrade to Buy from Accumulate on share price weakness. Target rises to $53.10 from $52.70.
OZ MINERALS LIMITED ((OZL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/5/0
OZ Minerals continues to pursue growth, looking to enter into a definitive option agreement with Havilah Resources ((HAV)) on its Kalkaroo copper-gold project.
Credit Suisse expects OZ Minerals will spend up to $76m on the project during the 18-month option, but as much as $346m if the project is pursued.
The broker highlights Kalkaroo presents a material increase to the already significant growth capital spend OZ Minerals is committed to over the next three years.
Pre-feasibility studies suggest the project offers 30,000 tonnes of copper and 72,000 ounces of gold annually over 13 years.
Given recent share price performance, the rating is upgraded to Neutral from Underperform and the target price of $21.00 is retained.
PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0
Citi retains a positive view on the Retail sector despite depressed expectations due to increased fuel prices and the interest rate outlook.
The broker upgrades its rating for Premier Investments to Buy from Neutral, while the target price eases to $29.00 from $30.80. It is felt Smiggle and the fashion brands will be reopening beneficiaries, while Peter Alexander is expected to hold up well.
Downgrade
BORAL LIMITED ((BLD)) Downgrade to Underweight from Equal-weight by Morgan Stanley and Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/3/2
Morgan Stanley lowers its rating for Boral to Underweight from Equal-weight following another (-$45m) FY22 guidance downgrade, driven by wet weather across Eastern Australia (-$30m) and inflationary impacts.
The broker estimates the cost issues may persist for some time and a lack of price offset is disappointing. Management also flagged transformation program benefits would be lower than prior FY22 guidance by -$15-25m, though the $200m benefit target is unchanged.
The target price falls to $2.80 from $3.20. Industry view: In-Line. The analyst sees better value in the sector via Fletcher Building ((FBU)).
Credit Suisse notes the -$45m downgrade to Boral's full year earnings guidance, excluding Property, is reflective of poor pricing power in the current inflationary environment, with -$30m being attributed to Eastern states rainfall and -$15m to elevated energy costs.
Further, the broker anticipates energy costs will continue to impact in the coming financial year, estimating gross energy costs could increase a further $70m in FY23, while realised prices are unlikely to be able to fully offset.
The rating is downgraded to Underperform from Neutral and the target price decreases to $2.60 from $3.80.
NUFARM LIMITED ((NUF)) Downgrade to Hold from Add by Morgans .B/H/S: 3/4/0
Despite first half results for Nufarm coming in at the mid-point of prior guidance, Morgans lowers its rating to Hold from Add. FY23 earnings are thought likely to fall when compared to the exceptional FY22.
As the analyst's FY23 forecasts are now more reflective of normal operating conditions and price, the target price falls to $6.65 from $7.20. In-line with the company's growth strategy, solid growth is expected to resume in FY24-26.
The broker suggests there will be material share price upside if Nufarm delivers on its FY26 aspirational targets.
WESFARMERS LIMITED ((WES)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/4/1
Citi has revisited Australia's retail sector to account for fuel-price and interest-rate changes and broadly expects retail to prove resilient in FY2023 before hitting more resistance in FY24, at which point in the down-cycle stock clearances and margin erosion emerge.
Citi acknowledges risks to retail from rate rises and the resumption of travel, but expects normalisation of trade will more than compensate for this.
On the rate front, Citi notes 40% of mortgages are fixed, further ameliorating the impact, and notes consumers have ample room to cut savings compared with historical levels. The affect of petrol prices is difficult to ascertain at this stage, says the broker.
Wesfarmers is downgraded to Sell from Neutral. Target price falls to $42 from $50.00.
| Total Recommendations |
Recommendation Changes |
|
Broker Recommendation Breakup |
|
Broker Rating |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Target Price |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Positive Change Covered by > 2 Brokers
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negative Change Covered by > 2 Brokers
|
Earning Forecast |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Positive Change Covered by > 2 Brokers
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negative Change Covered by > 2 Brokers
|
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
Click to view our Glossary of Financial Terms
CHARTS
For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: BLD - BORAL LIMITED
For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED
For more info SHARE ANALYSIS: HAV - HAVILAH RESOURCES LIMITED
For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC
For more info SHARE ANALYSIS: NUF - NUFARM LIMITED
For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED
For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED