Weekly Ratings, Targets, Forecast Changes – 07-04-23

This story features LYNAS RARE EARTHS LIMITED, and other companies. For more info SHARE ANALYSIS: LYC

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 April 3 to Friday April 7, 2023
Total Upgrades: 6
Total Downgrades: 11
Net Ratings Breakdown: Buy 58.53%; Hold 33.20%; Sell 8.27%

For the shortened week ending Thursday April 6 there were six upgrades and eleven downgrades to ASX-listed companies by brokers in the FNArena database.

Lynas Rare Earths received two ratings upgrades by separate brokers.

Since recent January highs, the company’s share price had fallen by -32%, prompting UBS to upgrade its recommendation to Buy from Neutral. It’s felt current neodymium and praseodymium (NdPr) price weakness is temporary and a recovery may follow as early as the second half of 2023.

Long term fundamentals appeal to UBS, based upon robust growth markets for both the electric vehicle and renewables markets.

NdPr oxide is used in the production of permanent NdFeB magnets, which in turn, are used in the production of electric motors in electric vehicles and for direct-drive wind turbines.

Bell Potter agreed with UBS the share price sell-off in Lynas Rare Earths was overdone and upgraded its rating to Buy from Hold.

This broker highlighted the company owns and operates what is arguably the world’s best rare earth deposit at Mount Weld in Western Australia. Also, the company has a sound balance sheet with multiple pathways for growth.

Ord Minnett downgraded its rating for Stockland last week to Hold from Accumulate on valuation after a recent share price rally, while Citi raised its rating to Buy from Neutral.

Citi also increased its rating for Mirvac Group to Buy from Hold after becoming cautiously positive on the housing outlook over the next 6-12 months. 

The broker cited positive medium-term dynamics including rising immigration, low housing supply, ongoing low unemployment and rental vacancies at near record lows.

The broker can see more upside for Stockland relative to Mirvac given a lower relative valuation and higher residential exposure. Strong growth is also anticipated for Stockland’s logistics and retail businesses by comparison to Mirvac’s office exposure.

For the second consecutive week, Mincor Resources headed up the lists for the largest percentage fall in both target price and forecast earnings.

In last week’s article, FNArena noted the company had recently approached and been rejected by BHP Group in a bid to revise offtake agreements to allow for product specification variations.

Unfortunately, ore was then delivered to BHP that failed to meet a minimum nickel-to-arsenic ratio, and because of the resultant uncertainty, Mincor withdrew its FY23 production guidance.

In further developments last week, the board of Mincor Resources advised shareholders to accept the $1.40 takeover offer from Wyloo Metals. While Shaw and Partners felt the bid undervalues the company’s long-term potential, shareholders were still advised to sell into the offer.

Shaw reduced its target to $1.40 from $1.80 and downgraded its rating to Sell from Buy, while Macquarie also reduced its target to $1.40 from $1.50 to align with the takeover bid price.

Total Buy recommendations comprise 58.53% of the total, versus 33.20% on Neutral/Hold, while Sell ratings account for the remaining 8.27%.

Upgrade

LYNAS RARE EARTHS LIMITED ((LYC)) Upgrade to Buy from Neutral by UBS and Upgrade to Buy from Hold by Bell Potter .B/H/S: 3/0/2

In light of market developments, UBS lowers its forecasts for rare earths for 2023 to US$86/kg while the long-term real price forecast of US$95/kg is unchanged.

This has led to a reduction in estimates for earnings per share for Lynas Rare Earths of -19% and -15% in FY23 and FY24, respectively.

While the target is lowered to $8.80 from $9.00, the rating is upgraded to Buy from Neutral as the share price is now down -33% from its peak in January.

While aware of the risks around near-term production the broker, consistent with company guidance, models Kalgoorlie feed starting in the fourth quarter of FY23.

Despite the near-term earnings risk because of the commissioning of Kalgoorlie as a replacement for Malaysia, along with a weaker commodity price, Bell Potter believes the sell-off in Lynas Rare Earths is overdone.

Fundamentally, the business is the leader in the rare earths segment and has a sound balance sheet with multiple pathways for growth, the broker asserts.

This is underpinned by what is arguably the best rare-earth deposit at Mount Weld. Rating is upgraded to Buy from Hold and the target is reduced to $8.06 from $8.15.

MIRVAC GROUP ((MGR)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/3/0

Analysts at Citi are adopting the view that rising share prices for landlords in Australia likely have further to run as worst case scenarios for property prices don't seem to be materialising.

Ofsetting the negatives, Citi argues rising immigration along with low supply create a positive medium-term backdrop for the sector.

Mirvac Group has been upgraded to Buy from Neutral. Stockland, also upgraded today, is the preferred exposure. No change has been made to the $2.40 price target.

ORICA LIMITED ((ORI)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Macquarie reviews the fundamentals and ascertains Orica's relative earnings defensiveness is driven by solid demand for resources, internal margin improvement as well as a recovery after the pandemic.

Rating is upgraded to Outperform from Neutral as the stock offers an attractive growth outlook for earnings. FY23-25 estimates are lifted by 5-6% because of the improved price/mix and demand recovery. Target is raised to $17 from $16.

SEEK LIMITED ((SEK)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/1/0

After the Seek investor briefing Macquarie upgrades to Outperform from Neutral, assessing the five-year growth aspirations of high single digits for Australasia are conservative.

While the company downgraded FY23 revenue guidance to reflect softer job advertisements this, the broker observes, was entirely offset by cuts to operating expenditure. The risk/reward is now skewed to the upside, Macquarie asserts. Target is raised to $32.50 from $23.50.

STOCKLAND ((SGP)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/0

Analysts at Citi are adopting the view that rising share prices for landlords in Australia likely have further to run as worst case scenarios for property prices don't seem to be materialising.

Ofsetting the negatives, Citi argues rising immigration along with low supply create a positive medium-term backdrop for the sector.

Citi's rating for Stockland has been upgraded to Buy from Neutral. Stockland becomes the broker's preferred exposure. The target lifts to $4.60 from $3.90.

See also SGP downgrade.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/2/0

AGL Energy's share price has moved through Ord Minnett's trigger level. As a result the rating is reduced to Accumulate from Buy. Target is $12.80.

GOLD ROAD RESOURCES LIMITED ((GOR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/1/0

The outlook for production for Gruyere as well as longer-term production estimates are in line with Macquarie's expectations.

The broker states key to the outlook is improvement in grade along with mill throughput as Gold Road Resources heads towards its 10mtpa target.

Given the recent strength in the share price, the broker downgrades to Neutral from Outperform. Target is unchanged at $1.80. The price of gold and FX pricing present the key risks to the outlook.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/1

The share price of Insurance Australia Group has moved through Ord Minnett's trigger level and thus the rating is downgraded to Hold from Accumulate. Target is steady at $5.50.

MINCOR RESOURCES NL ((MCR)) Downgrade to Sell from Buy by Shaw and Partners .B/H/S: 0/2/1

The board of Mincor Resources has advised shareholders to accept the offer from Wyloo, at $1.40 a share. Shaw and Partners continues to believe the bid undervalues the long-term potential but follows suit and advises shareholders to sell into the offer.

The broker points out the bid from Wyloo highlights the scarcity value in high-grade nickel sulphide deposits in low-risk jurisdictions. Target is reduced to $1.40 from $1.80, in line with the bid price, and the rating is downgraded to Sell from Buy.

NEWS CORPORATION ((NWS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

The share price of News Corp has moved through Ord Minnett's trigger level and as a result the rating is downgraded to Hold from Accumulate. Target is $29.

PREMIER INVESTMENTS LIMITED ((PMV)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 3/2/1

The share price of Premier Investments has moved through Ord Minnett's trigger level and the rating is downgraded to Sell from Lighten as a result. Target is $19.

STOCKLAND ((SGP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/0

Stockland's share price has moved through Ord Minnett's trigger level and, hence, the rating is downgraded to Hold from Accumulate. Target is $4.35.

See also SGP upgrade.

WASHINGTON H. SOUL PATTINSON AND CO. LIMITED ((SOL)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/0/0

WH Soul Pattinson's share price has moved through Ord Minnett's trigger level and the rating is subsequently downgraded to Lighten from Hold.

The cross-holding in Brickworks ((BKW)) is considered valuable, allowing the company to invest with long-term horizons and, in the broker's view, at times in a contrarian manner. Target is $26.90.

SANTOS LIMITED ((STO)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/1/0

Citi assesses, in isolation, the regulatory changes and restrictions on the oil & gas industry can be absorbed by the industry while in aggregate they could result in greater execution risk for projects amid reduced cash flows and reduced investment in Australian projects.

To reflect the reality, the broker reduces the risk weighting, increases the PRRT calculation and forecasts a shortfall in gas on the east coast.

From 2027-30 GLNG may have to spend -US$700m on buying gas from other LNG exporters, reducing the broker's valuation for Santos by -9c in isolation.

Santos appears efficiently priced and the broker downgrades to Neutral from Buy. Target is reduced to $7.55 from $8.30.

VIVA ENERGY GROUP LIMITED ((VEA)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/2/0

Ord Minnett finds "a lot to like" regarding Viva Energy's business.  The broker is yet to incorporate the OTR takeover into modelling but the company has indicated its acquisition of the South Australian business could drive earnings accretion of 6-26%, which is a material lift.

Completion of the transaction is expected in the second half of 2023. The broker points out earnings accretion is not the same as value creation and at this stage does not expect a material change in fair value.

Observing that the shares rose more than 5% on the back of the announcement, the broker downgrades to Hold from Accumulate. Target is steady at $3.35.

WOODSIDE ENERGY GROUP LIMITED ((WDS)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/3/1

Citi assesses, in isolation, the regulatory changes and restrictions on the oil & gas industry can be absorbed by the industry while in aggregate they could result in greater execution risk for projects amid reduced cash flows and reduced investment in Australian projects.

To reflect the reality, the broker reduces the risk weighting, increases the PRRT calculation and forecasts a shortfall in gas on the east coast.

The broker assesses Woodside Energy's share price is yet to reflect these factors and the rating is downgraded to Sell from Neutral.

Moreover, there is downside potential to even its forecasts which the broker argues undermines the investment thesis for the company as a scarce source of inflation-hedged income. Target is reduced to $30.00 from $36.40.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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