Weekly Ratings, Targets, Forecast Changes – 21-10-22

This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies. For more info SHARE ANALYSIS: BEN

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 October 17 to Friday October 21, 2022
Total Upgrades: 14
Total Downgrades: 6
Net Ratings Breakdown: Buy 56.32%; Hold 36.49%; Sell 7.18%

For the week ending Friday October 21 there were fourteen upgrades and six downgrades to ASX-listed companies covered by brokers in the FNArena database.

While several brokers covering Megaport were surprised by the extent of the negative share price reaction to a first quarter trading update, the company still experienced the largest percentage fall in average target price last week.

The average 12-month target set by the six covering brokers fell to $10.27 from $10.93.

Free cash flow was a solid miss compared to Credit Suisse’s expectations due to a blowout in capital expenditure, and management guided to a further increase in capital expenditure in FY23 to -$38m from -$30m. 

Citi felt part of the market’s concerns centred around the capital-intensive nature of Megaport’s business and the balance sheet, though UBS noted sufficient funding up until break-even is achieved in the second half of FY24. The company also has access to a $25m credit facility, noted the analyst.

As may be seen in the table below, St Barbara received the largest percentage decrease in forecast earnings last week, after September quarter production missed consensus forecasts by -10%.

Production declined by -26% quarter-on-quarter, while logistical problems with the Gwalia mine in Western Australia led Citi to downgrade guidance for the mine to 950,00 tonnes from 1.1m tonnes. 

Management downgraded full year production guidance and raised all-in sustaining costs estimates.

Ord Minnett noted potential for more near-term downside from cost inflation, labour shortages, delays at the Atlantic operations in Canada and headwinds at the Simberi project in Papua New Guinea.

Sandfire Resources also received lower earnings forecasts from brokers last week following first quarter results. Credit Suisse pointed to higher costs and lower copper production and remained cautious over funding requirements and balance sheet exposure to lower commodity prices.

Outperform-rated Macquarie noted mixed first quarter results with solid copper production from both DeGrussa in Western Australia and Matsa in Spain, but at higher cash costs than expected. 

More positively, management retained FY23 guidance and UBS (Buy) noted the current share price is simply too cheap. Buy-rated Citi also observed Sandfire Resources shares are trading at almost half the value of what was paid for the purchase of Matsa.

Following first quarter results for Redbubble that missed consensus expectations, Morgan Stanley noted revenues continue to decline and the path back to earnings profitability looks increasingly uncertain. 

The broker is concerned about the viability of the company’s business model, given consecutive quarters of low to declining revenue growth, coupled with escalating costs. The broker's price target was reduced to $0.55 from $1.00 while the Equal-weight rating was maintained.

Earnings forecasts also fell for Costa Group last week following a weaker than expected trading update.

Management lowered FY22 earnings guidance as wet weather and colder temperatures impacted on the quality of citrus products, even though volumes remained in line with budget.

While UBS lowered its target to $2.20 from $2.80, the longer-term growth outlook is considered positive for the Australian, Moroccan and Chinese markets. Credit Suisse agreed on the outlook and felt the 2022 disease and quality issues will abate in 2023 and fruit production should rise against a backdrop of strong demand.

Alumina Ltd also experienced a material downgrade to broker earnings forecasts last week. A September quarter market update showed the AWAC joint venture with Alcoa experienced ongoing cost pressures from higher gas and caustic soda prices. Lower alumina prices also contributed.

Overweight-rated Morgan Stanley assured investors significant upside remains, but there are presently no catalysts on the horizon. Fortunately, negative news regarding cost inflation is considered to be already priced in. 

Citi (Buy) also noted the company’s strong balance sheet should support the share price through the current alumina price challenge.

On the flipside, there was only one material increase in earnings forecasts last week in the FNArena database. 

Despite a dip in September-quarter production at Whitehaven Coal due to wet weather, realised coal prices rose to a record US$581/t compared to US$514/t in the June quarter.

Sales weakened by less than production, thanks to a stock drawdown at the Maules Creek operations, noted Morgan Stanley, while an improved coal mix more than offset the production loss.

Total Buy recommendations comprise 56.32% of the total, versus 36.49% on Neutral/Hold, while Sell ratings account for the remaining 7.18%.

Upgrade

BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/0

Morgan Stanley has used a deep dive into the Australian market for mortgages to upgrade Bendigo & Adelaide Bank to Overweight from Equal-weight.

All in all, Morgan Stanley expects the banks to enjoy margin increases that are "materially" higher than consensus forecasts in the September and December quarters, but at the same time multiples should remain subdued on the back of macro uncertainty.

On average, EPS forecasts have lifted by 3-4% across the board for FY23 and FY24. Target lifts to $9.50 from $9.40.

The broker's major bank order of preference is now ANZ Bank on top, followed by Westpac, National Australia Bank, then CommBank. Industry view is In-Line.

BRICKWORKS LIMITED ((BKW)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/0

UBS reviews the impact of housing construction trends and property valuations upon the Australian Building Materials sector.

The broker holds a baseline scenario of a 165,000 minimum dwelling consents in 2023, citing policy support, and expects some stimulus; a recovery in immigration; and cash-rate cuts in the 2023 December half (about 50 basis points) to also prove supportive. This compares with 175,000 in 2022, and the broker forecasts a recovery to 205,000 in 2024.

At its nadir, UBS forecasts a -13% to -15% fall in property prices (a real fall post CPI of -20%) from their peak and a -25% drop in housing sales.

UBS raises its property valuation for Brickworks and EPS forecasts rise 30.8% in FY23 and 117.5% in FY24. Rating rises to Buy from Neutral. Target price rises to $25.30 from $23.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Buy from Neutral by Citi and Upgrade to Add from Hold by Morgans .B/H/S: 5/1/1

Citi has upgraded Beach Energy to Buy from Neutral. Target price lifts to $2.10 from $1.88.

Beach Energy's production declined in the quarter across all basins bar Perth, due to either wet weather or natural field declines, Morgans notes. Sales revenue was -13% lower.

The broker expects declines to continue through this quarter and possibly the next until new well connections are made, having been held up by the weather.

The outlook for FY24 remains bright with spot LNG exposure and production increases but those are still some time away.

Upgrade to Add from Hold on valuation, target falls to $1.69 from $1.74.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/5/2

A reassessment of Morgans' bank valuations under a new analyst, ahead of the upcoming reporting season, sees an upgrade to Hold from Reduce for CommBank and a target price increase to $94.57 from $77.00.

Morgans sees CommBank as the highest quality, with the strongest return of equity, but all priced in, and is forecasting a 0% total shareholder return over 12 months, inclusive of a 6% yield and franking.

Note CBA provides only a quarterly update in the season.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0

Credit Suisse upgrades Costa Group to Outperform from Neutral, expecting a recovery in citrus crops; and the target price falls to $2.50 from $2.90.

The disease and quality issues that have dogged the 2022 season's crops (resulting in a cut to guidance – EPS forecasts fall -33%), are expected to abate in 2023 and fruit production to rise against a backdrop of strong demand.

Meanwhile, the company's investor tour of its biggest mushroom farm appears to have pleased Credit Suisse, the farm proving a low-cost operation requiring one-third the labour, and the broker expects mushroom growth to continue to be a feature of the company going forward. 

CSR LIMITED ((CSR)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/3/0

UBS reviews the impact of housing construction trends and property valuations upon the Australian Building Materials sector.

The broker holds a baseline scenario of a 165,000 minimum dwelling consents in 2023, citing policy support, and expects some stimulus; a recovery in immigration; and cash-rate cuts in the 2023 December half (about 50 basis points) to also prove supportive. This compares with 175,000 in 2022, and the broker forecasts a recovery to 205,000 in 2024.

At its nadir, UBS forecasts a -13% to -15% fall in property prices (a real fall post CPI of -20%) from their peak and a -25% drop in housing sales.

CSR is the broker's favoured sector pick, given it is most exposed to the detached housing market, and also raises its property valuation for the company. EPS forecasts fall -1.7% in FY23 and -7% in FY24 but rising property valuations win the day.

CSR's rating is upgraded Buy from Neutral. Target price rises to $6.50 from $6.40.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/4/0

After assessing Bank of Queensland's result, Macquarie upgrades the major banks' FY23 earnings by 5%-10% as a rising cash rate improves deposit pricing, just six weeks after a 3%-5% upgrade.

The broker retains its belief that margin growth will be limited in the long term as competition for deposits returns. 

All up, Macquarie expects short-term windfalls will be reinvested and that banks will also seek to tighten their front-to-back book gaps through retention pricing.

National Australia Bank is the broker's top pick and is upgraded to Outperform from Neutral. Target price rises to $32.25  from $30.25.

NIB HOLDINGS LIMITED ((NHF)) Upgrade to Add from Hold by Morgans .B/H/S: 1/5/0

nib Holdings has raised $135m, with a $15m SPP to follow, to fund its move into the NDIS space. The metrics on its first acquisition — Maple Plan — are encouraging, Morgans suggests.

There is nevertheless execution risk on entering a new growth vertical, and regulatory risk. The trading update was slightly better than expectation at the operating profit level, Morgans notes, although the quarter did see negative mark-to-market investment experience impacting.

Offering a total shareholder return in excess of 10%, nib is upgraded to Add from Hold. Target falls to $8.27 from $8.36.

SANDFIRE RESOURCES LIMITED ((SFR)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 5/2/0

Credit Suisse has marked to market the SepQ and revalued for its commodities team’s recent revisions, and lowered its near-term AUD assumptions.

The broker now expects the base metals (copper, nickel, zinc) to perform better in the second half but sees pressure on alumina, met coal and iron ore.

Sandfire Resources upgraded to Neutral from Underperform, target rises to $3.75 from $3.55.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 5/0/1

Ord Minnett has adjusted earnings forecasts for Suncorp to incorporate the business interruption provision release, mark-to-market, weather and flood costs, interest rates, and premium rates. This results in 5% earnings upgrades in FY24.

The broker upgrades to Buy from Hold on valuation grounds, having downgraded Insurance Australia Group to Hold from Buy for the same reason.

Target unchanged at $13.25.

TRANSURBAN GROUP LIMITED ((TCL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/4/0

Transurban's September quarter traffic report showed traffic grew strongly year-on-year, Ord Minnett notes. Incremental traffic has continued to improve month-on-month, as trends noted at its recent FY22 result persist.

Inflation and interest rates are likely to remain elevated, resulting in the broker's risk-free rate lifting from 3.0% to 3.5%, but 70% of assets having embedded CPI-indexed escalations.

 On a valuation basis, Ord Minnett upgrades to Buy from Accumulate. Target falls to $15.00 from $15.80 on the higher risk-free rate.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Add from Hold by Morgans .B/H/S: 4/3/0

A reassessment of Morgans' bank valuations under a new analyst ahead of the upcoming reporting season sees an upgrade to Add from  Hold for Westpac and a target price increase to $26.71 from $24.00.

Morgans sees Westpac as the greatest value on a medium term view, forecasting a 12 month total shareholder return of 22%, inclusive of a 9% yield with franking.

XERO LIMITED ((XRO)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 4/1/1

Macquarie reviews Xero, and spies light at the end of the tunnel in second half.

The broker doubts that the November introduction of Making Tax Digital will greatly benefit Xero, expecting smaller operators are likely to adopt one of the 24 free compliant MTD solutions on the market.

So, while Macquarie expects weaker subs growth will continue in the June half, it also expects current price rises and a weaker $NZ should offset this somewhat. 

EPS forecasts rise 25% in FY23, 9% in FY24 and 6% in FY24.

Rating is upgraded to Neutral from Underperform. Target price rises to $74 from $70.

Downgrade

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ((ANZ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 5/2/0

After assessing Bank of Queensland's ((BOQ)) result, Macquarie upgrades the major banks' FY23 earnings by 5%-10% as a rising cash rate improves deposit pricing, just six weeks after a 3%-5% upgrade.

The broker retains its belief that margin growth will be limited in the long term as competition for deposits returns. 

All up, Macquarie expects short-term windfalls will be reinvested and that banks will also seek to tighten their front-to-back book gaps through retention pricing.

National Australia Bank is the broker's top pick.

ANZ Bank is downgraded to Neutral from Outperform. Target price rises to $25.50 from $24.

BAPCOR LIMITED ((BAP)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/3/0

Bapcor's AGM trading update reveals revenue is growing at a double-digit pace, and profit in the mid-single digits, and management guided to a solid FY23 result.

But Credit Suisse spies areas of concern (primarily higher costs in a bid to deliver on strategy) and lowers EPS forecasts -4.8% in FY23 and -5.9% in FY24.

The broker says investors are likely to want to see proof of strategic success to justify rising costs over the next year and the feeling is that may be slow in coming – although strong revenues remove some pressure.

Rating is downgraded to Neutral from Outperform. Target price falls to $6.60 from $7.50.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Neutral from Buy by UBS and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/4/0

UBS reviews the FY22 earnings result for Bank of Queensland and assesses the report as in line with expectations.

The bank benefited from higher than anticipated net interest margins (NIM) and a strong second half with management re-stating the ongoing digital investment program to create more "sustainable profitability".

UBS adjusts earnings forecasts by -1% and -6% for FY23 and FY24, reflecting higher cost assumptions, despite the upgrade in NIM forecasts.

Bank of Queensland is downgraded to Neutral from Buy. UBS views the stock as fairly valued.

An $8 target is retained.

Morgan Stanley has used a deep dive into the Australian market for mortgages to downgrade Bank of Queensland to Equal-weight from Overweight. Price target falls to $8.30 from $8.50.

All in all, Morgan Stanley expects the banks to enjoy margin increases that are "materially" higher than consensus forecasts in the September and December quarters, but at the same time multiples should remain subdued on the back of macro uncertainty.

On average, EPS forecasts have lifted by 3-4% across the board for FY23 and FY24.

The broker's major bank order of preference is now ANZ Bank on top, followed by Westpac, National Australia Bank, then CommBank. Industry view is In-Line.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/2/2

Ord Minnett has adjusted earnings forecasts for Insurance Australia Group to include the business interruption provision release, share buyback, mark-to-market, weather and flood costs, outlook for reinsurance and interest rates.

The result is a downgrade to Hold on valuation grounds following recent share price performance. There is more upside on offer for Suncorp, the broker believes, and the latter is upgraded to Buy.

IAG target unchanged at $5.40.

UNIVERSAL STORE HOLDINGS LIMITED ((UNI)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

The Thrills acquisition by Universal Store is considered as positive assesses Citi, as the accretive earnings may offset the more challenging macro environment.

Citi views the retail expertise of Universal Store management should assist the existing Thrill's stores as well as the two new stores in November.

Citi adjusts earnings estimate by -13% in FY24 while FY23 remains largely unchanged.

The rating is downgraded to Neutral from Buy due to concerns over the consumer outlook as well as lower earnings and a lower valuation. 

Accordingly, the target is adjusted to $4.55 from $5.75.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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