Weekly Ratings, Targets, Forecast Changes – 03-03-23

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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.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/0/2

Credit Suisse upgrades its rating to Outperform from Neutral for Platinum Asset Management in the expectation an improved fund performance will lead to a recovery in flows. The $1.90 target is unchanged.

This upgrade follows 1H results, which revealed a -16% miss versus the consensus forecast for underlying profit due to a lower management fee margin and higher compensation.

The higher composition is driven by improved fund performance, which is ultimately expected to deliver flow/performance fee benefits.

An interim dividend of 7cps was declared, which indicates to the analyst both balance sheet strength and the improved fund performance.

Ord Minnett upgrades Platinum Asset Management to Accumulate from Hold as the share price has moved through the trigger. Target is $2.25.

RESIMAC GROUP LIMITED ((RMC)) Upgrade to Buy from Sell by Citi .B/H/S: 1/1/0

Resimac Group's first half net profit was ahead of Citi's estimates. Still, the outlook appears challenging with loan volumes and net interest margins expected to reduce in the second half. On the other hand, the freeing up of equity capital for possible deployment in a new portfolio or adjacent businesses remains a possibility.

Citi observes the shares have fallen -25% since early February despite only a modest downturn in core profit. Rating is upgraded to Buy from Sell. Target is steady at $1.20, as lower earnings are offset by a smaller capital drag.

UNITED MALT GROUP LIMITED ((UMG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/2/0

Ord Minnett upgrades its rating for United Malt to Accumulate from Hold on valuation after recent share price slippage.

The $4.00 target price is retained.

WESTGOLD RESOURCES LIMITED ((WGX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

Westgold Resources first half was softer than Macquarie had anticipated, with the company reported an -$11m loss compared to an expected $3m profit, but the broker expects a better second half is to come. 

Given no change from the company on its full year guidance, Macquarie anticipates a a stronger cost performance over the second half but does lower its full year earnings per share forecasts -74%. 

The rating is upgraded to Outperform from Neutral and the target price decreases to $1.20 from $1.25.

Downgrade

ADBRI LIMITED ((ABC)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/4/2

Having expected Adbri to be reaching a trough at this point, Citi now sees risk of a rebasement moving forward. The broker notes management changes that include a semi-permanent CEO, risk of capital raising, and an uneconomic product mix change, all add to risk for the company. 

On the latter point, the broker expects it will be hard for the company to achieve historic margins long-term as its exposure to lime declines, with earnings margins already declining -230 basis points over the company's second half. 

The rating is downgraded to Sell from Neutral and the target price decreases to $1.50 from $1.55.

AUSTAL LIMITED ((ASB)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/1/0

First half net loss was below forecasts while the broader result was largely in line with the earnings update provided earlier. Citi downgrades estimates for earnings per share FY23-25 by -12-27% to primarily reflect higher depreciation.

Austal appears confident about a rebound in the commercial market and has progressed several opportunities. The broker assesses the potential of projects has never been more diversified and this augurs well, given increased geopolitical tensions.

Support revenue grew 58% and 45% in the US and Australasia, respectively, during the first half. Austal is targeting $500m in support revenue by FY27.

 Citi downgrades to Neutral from Buy and reduces the target to $2.00 from $2.32.

AVITA MEDICAL INC ((AVH)) Downgrade to Accumulate from Buy by Ord Minnett and Initiation of coverage with Add by Morgans .B/H/S: 2/0/0

Ord Minnett raises expense forecasts for sales and marketing by 29%, as Avita Medical plans the US launch of RECELL in July. The broker believes the market materially under appreciates the company's product strength and high gross margins.

Nevertheless, a short-term transition to profitability is considered unlikely. The broker does not expect the business will be positive on cash flow before 2026 although does not expect additional funding requirements.

Rating is downgraded to Accumulate from Buy and the target of $5.60 is maintained.

Morgans initiates coverage on regenerative (skin restoration) medicine company Avita Medical with an Add rating and $4.45 target.

The company has an approved device called the Recell system (spray-on skin) and is largely targeting the US acute burns market. Further approvals are pending mid-2023 in the areas of soft tissue repair and vitiligo (loss of skin colour in patches).

The broker believes management's estimates for total addressable markets are reasonable, as follows: burns US$600m, soft tissue repair US$1bn and vitiligo US$5.2bn.

The analysts note recent revenue guidance for both the 1Q and the whole of 2023 by CEO Jim Corbett has propelled the share price higher.

BRAMBLES LIMITED ((BXB)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/0

As Brambles' Share price has moved up through Morningstar's (Ord Minnett) trigger point, the rating is downgraded to Hold. Target unchanged at $14.00.

See also BXB upgrade.

LYNAS RARE EARTHS LIMITED ((LYC)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/2/1

Lynas Rare Earths' December-half result fell well short of UBS forecasts due to a price lag which led to higher cost of goods sold.

Management advised Kalgoorlie remains on track for June quarter first-feed but UBS says the completion data and ramp-up remain questionable, noting the pressure is on after the renewal of the company's Malaysian operating licence.

The broker downgrades FY24 and FY25 production forecasts accordingly, and raises its cost-of-goods-sold estimates.

EPS forecasts fall -15% in FY23; -65% in FY24; and -41% in FY25. No dividends are forecast.

Rating is downgraded to Neutral from Buy. Target price falls -13% to $9 from $10.30.

MINERAL RESOURCES LIMITED ((MIN)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 4/2/0

Ord Minnett downgrades its rating for Mineral Resources to Lighten from Hold on valuation alone, after a recent share price rally.

The $75 target price is maintained.

MONEYME LIMITED ((MME)) Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0

Morgans pulls back its rating for MoneyMe to Hold from Add and slashes its target to 85c from $1.20 after largely pre-released 1H results. These changes come despite the underlying business performance tracking in line with recent management commentary.

The broker raises its forecasts for funding costs and D&A expenses and is more conservative on long-term margin assumptions, which reduces the target to $1.00. A further -15c cut arises from uncertainty on a debt repayment.

The repayment of the additional -$25m of debt funding from Pacific Equity Partners will remain a key risk and likely overhang the stock until an announcement is made, suggests the broker.

NOVONIX LIMITED ((NVX)) Downgrade to Hold from Speculative Buy by Morgans .B/H/S: 0/1/0

Morgans has significantly pushed back its forecasts for production growth for Novonix and lowers its target to $1.44 from $3.11.

The broker now expects first sales to Kore will occur late in 2024 from production at the Riverside facility (plant under construction) and a second facility may not be operational until 2026.

The rating is also downgraded to Hold from Speculative Buy given the uncertainty and the long timeframe before potential operating profitability.

RED 5 LIMITED ((RED)) Downgrade to Hold from Speculative Buy. by Ord Minnett .B/H/S: 0/1/0

While Red 5 delivered a beat for 1H results, it also raised around $90m in capital (a few days prior to the result) to alleviate balance sheet/working capital issues in the development and ramp-up of the KOTH project.

The analyst predicts the company will miss 2H production and cost guidance by -4% and -17%, respectively, and with past operational underperformance suspects market confidence in management may take time to be restored.

Ord Minnett cautions: should there be further cost overruns or slipups, another capital raise may be required.

The rating falls to Hold from Speculative Buy, while the target plunges to 15c from 37c.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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