Weekly Ratings, Targets, Forecast Changes – 26-05-23

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Weekly update on stockbroker recommendation, target price, and earnings forecast changes.

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 22 to Friday May 26, 2023
Total Upgrades: 14
Total Downgrades: 8
Net Ratings Breakdown: Buy 57.67%; Hold 33.82%; Sell 8.50%

For the week ending Friday May 26 there were fourteen upgrades and eight downgrades to ASX-listed companies by brokers in the FNArena database.

In a reversal of the recent trend, the quantum and number of positive earnings upgrades held sway over downgrades, as can be seen in the tables below.

ResMed achieved the feat of largest percentage earnings upgrade in an unconventional way, as UBS initiated coverage with higher earnings forecasts than the existing average of five brokers in the database.

UBS also initiated coverage on five other stocks in the Australian Healthcare sector during the week (ResMed most preferred) and noted average EPS growth for its Healthcare coverage looks set to outstrip the ASX by 10% in FY24.

ResMed has increased its revenue share of global Sleep and Respiratory devices over FY19-FY22 to 65% from 46%. As this period coincides with competitor Philips’ device recall woes, the analyst noted ResMed’s current competitive advantage is being underestimated by the market.

The broker forecasts revenue growth of 12% in FY24 yet felt the share price only incorporates high-single-digit growth. Part of this growth was attributed to an expanding gross margin as the product mix swings to the new AirSense11 for sleep apnea.

The analysts began with a US$290 price target (for the US listing) and a Buy rating. 

In the same week, Outperform-rated Macquarie updated its research on ResMed and noted potential for improved industry growth in devices amid sizeable share opportunities for ResMed. The broker’s A$38 target was left unchanged.

Webjet received the next largest percentage upgrade to earnings forecasts and headed up the table for the largest percentage increase in target price (over 20%), following consensus-beating FY23 results.

While no forward guidance was provided, management expects to significantly exceed pre-covid earnings. The company has exited the pandemic with a materially lower cost base, consolidated systems and a large business in the US, observed Morgans.

Five brokers in the database kept their Buy (or equivalent) ratings, though Morgan Stanley preferred to stay with an Equal-weight recommendation, partly due to Webjet's more than 30% valuation premium compared to travel peers and looming consumer headwinds for the business-to-consumer segment.

Next up was Strike Energy with third and second place, respectively, for earnings and target price upgrades.

Macquarie raised its target for the company by 31% to 55c due to its high earnings sensitivity to WA spot gas prices, which have more than doubled in the last year, and are now trading in the $8-9/GJ range. 

Strike is the only remaining pure-play on the Perth basin and is the broker’s preferred way to play WA gas, given its large and growing uncontracted gas resource base. It’s thought the company may also be a natural target of M&A interest.

On the flipside, Universal Store last week single handedly undermined the case for the resilience of discretionary spending by the youth consumer. 

The company’s shares plummeted, and the contagion spread to shares of Accent Group and Lovisa Holdings, which depend on the same demographic for sales.

Universal’s FY23 earnings guidance missed consensus forecasts by -13% due to a slump in April and May trading, triggering operating deleverage and (by extrapolation) margin pressure, according to Macquarie.

Morgans retained its positive investment thesis for the company and drew attention to Universal’s current low valuation and attractive dividend yield.

It was a busy week for TechnologyOne, which had its rating downgraded to Hold from Buy by both Shaw and Partners and Bell Potter following first half results.

No reason for investors to panic though, as the average target price of seven covering brokers in the FNArena database rose by just under 10%. The downgrades were on valuation concerns after a recent share price rally.

The company’s profit for the period rose by 24% year-on-year to a record level, as Ord Minnett expected, given the acceleration of legacy customers to cloud-based SaaS. 

The broker felt TechnologyOne’s existing competitive advantage will be strengthened by the deployment of additional capabilities and the opportunity to more easily up-sell complementary software modules.

Morgans agreed and highlighted the largely complete transition to SaaS in A&NZ is a game changer by making the value of the company's solution way more compelling for the end customer.

Total Buy recommendations in the database comprise 57.67% of the total, versus 33.82% on Neutral/Hold, while Sell ratings account for the remaining 8.50%.

Upgrade

AFT PHARMACEUTICALS LIMITED ((AFP)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/0/0

FY23 results from AFT Pharmaceuticals revealed a 27% increase in product sales revenue and an increase in its gross profit margin to 46.3%. Operating expenses also rose sharply.

Bell Potter observes the next catalyst is the upcoming approval date for Maxigesic IV in the US. The commercial launch will trigger a NZ$6m milestone, currently included in the broker's FY25 forecast.

Guidance for FY24 operating profit in the range of NZ$22-24m appears well within reach and the broker upgrades its rating to Buy from Hold, raising the target price to $4.00 from $3.16.

AUSTAL LIMITED ((ASB)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

Citi raises its FY24-FY25 profit forecasts by 13% and 17%, respectively, to incorporate  revenue from winning the US$114m design contract for the auxiliary general ocean survelilance ship T-AGOS 25 Class with the US navy.

The broker considers the contract win significant as it will likely convert to an around US$3bn construction contract, which will have a relatively high margin range for Austal.

In addition, the win shows no lingering impediment to contract success from the recent indictment of three Austal employees in the US by the Department of Justice, explains the analyst.

The target rises to $2.31 from $2.00 and the broker's rating is increased to Buy from Neutral.

CATAPULT GROUP INTERNATIONAL LIMITED ((CAT)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/0/0

Catapult International posted a FY23 result that was much better than Bell Potter expected. No specific guidance was provided although the company expects to be positive in terms of free cash flow in FY24 without the need to raise equity.

The broker takes a conservative stance and downgrades FY24 and FY25 revenue forecasts by -3% and -4%, respectively. EBITDA forecasts are upgraded from breakeven to US$8.7m in FY24.

Rating is upgraded to Buy from Hold and the target lifted to $1.00 from $0.90.

CAPRICORN METALS LIMITED ((CMM)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/1/0

Bell Potter believes an attractive risk/reward proposition has emerged for Capricorn Metals, given the pull-back in its share price.

Following the recently released maiden ore reserve and prefeasibility study for the Mount Gibson gold project there is now a "demonstrable" pathway to grow production to 270,000ozpa from two low-cost long-life gold mining operations in Western Australia.

As a result, the company could emerge as a highly attractive acquisition target. Buy rating maintained. Target edges up to $4.90 from $4.89.

DALRYMPLE BAY INFRASTRUCTURE LIMITED ((DBI)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Following DPS guidance at Dalrymple Bay Infrastructure's AGM, Morgans upgrades its rating to Add from Hold. It's thought shares may be attractive to income-oriented investors given an attractive cash yield as well as CPI-linked and high margin revenues.

In addition, the broker highlights there are numerous risk mitigants protecting future earnings. It's estimated the total return potential of shares over the next 12 months is around 16% at current prices.

Note: Dalrymple begins paying income tax this June, and an unspecified amount of franking credits will be attached to further distributions, explains Morgans.

The target rises to $2.76 from $2.71.

EBR SYSTEMS INC ((EBR)) Upgrade to Speculative Buy by Bell Potter .B/H/S: 2/0/0

EBR Systems has achieved the primary efficacy and interim safety end-points for its Solve-CRT product with freedom from Type 1 complications observed in 80.9% of patients.

If regulatory approval is achieved for the indications Bell Potter observes, this would provide an addressable market of about US$2bn. This decreases the risk weighting towards revenue and earnings across forecasts.

The broker upgrades to Speculative Buy from Hold and raises the target price to $1.30 from $0.70.

MEGAPORT LIMITED ((MP1)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0

Citi's upgrade to Buy/High Risk from Neutral comes with the added comment the analysts do not expect key financial metrics to improve anytime soon and execution risks remain.

But there is some AI exposure and there could be upside to management's guidance for FY24, the analysts surmise. Further cost cutting should remove balance sheet concerns.

Forecasts have been reduced for FY23 (larger losses) but increased for FY24 for a larger than previously predicted positive EPS.

Above all, Citi observes the shares are trading at sizable discount to high-growth peers. Target price lifts to $7.40 from $7.05.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/3/2

As the share price has moved through the trigger level Ord Minnett upgrades National Australia Bank to Accumulate from Hold. Target is $30.

See also NAB downgrade.

QANTAS AIRWAYS LIMITED ((QAN)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/0

The upbeat trading update from Qantas Airways has caused UBS to re-evaluate its valuation. The broker still envisages risks around the impact of the upcoming capex cycle and the strength fo demand heading into 2024.

Yet, at the current share price the effects are considered sufficiently priced. The broker does point out the market has shown diminished sensitivity to the upgrades from the airline over the past year as the focus moves to the outlook for FY24.

UBS upgrades to Buy from Neutral and raises the target to $7.95 from $7.60.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 5/1/0

As the share price has moved through the trigger level Ord Minnett upgrades QBE Insurance to Hold from Lighten. Target is $13.

SIGMA HEALTHCARE LIMITED ((SIG)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/3/2

As the Sigma Healthcare share price has moved through the trigger level, Ord Minnett upgrades to Hold from Lighten. Target is $0.63.

TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/0

Given a potential reset of fees and taxes via the mid-2023 announcement of the Victorian licence award, Morgan Stanley sees meaningful upside to earnings for Tabcorp Holdings should the licence be retained.

Even should the retail licence be lost, and the company operates on a digital-only basis, the analyst points out earnings would be no worse than under the current arrangement.

The broker also reduces its FY25 opex forecast to $630m (consensus $660m), with management targeting a reduction in opex to $600m-620m by FY25.

Morgan Stanley upgrades its rating to Overweight from Equal-weight and raises its target price to $1.30 from $1.08. Industry view is In-Line.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/3/0

As the share price has moved through the trigger level Ord Minnett upgrades Treasury Wine Estates to Hold from Lighten. Target is $11.50.

See also TWE downgrade.

TYRO PAYMENTS LIMITED ((TYR)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/1/0

As the share price has moved through the trigger level Ord Minnett upgrades Tyro Payments to Buy from Accumulate. Target is $2.60.

Downgrade

ACCENT GROUP LIMITED ((AX1)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/0

Profit warnings by local retailers and increasing concerns about the macro outlook have prompted a downgrade for Accent Group to Neutral from Buy at Citi.

The broker's price target has fallen to $2.14 from $2.55 as the valuation calculation now includes a -15% discount.

Citi continues to regard Accent Group a well-run business, but a 52% rally over the past twelve months is now meeting too many concerns about the outlook for discretionary spending in Australia.

No changes have been made to forecasts.

METCASH LIMITED ((MTS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/0

Macquarie observes customers are reverting to pre-pandemic habits and seeking value, which means Aldi is gaining share at the expense of  smaller IGA supermarkets.

In the current macroeconomic environment, Macquarie prefers staples, noting the hardware category has contracted in the ABS data. As volumes re-bases following the pandemic liquor sales are also expected to decline, although the Metcash on-premises customer base should offset some of the decline.

Macquarie downgrades to Neutral from Outperform on what appears to be market share losses in food for Metcash. Target is reduced to $3.90 from $4.70.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/3/2

Ongoing mortgage discounting and higher wholesale funding costs for the major banks will result in a -15bps fall in average margins over the next 18 months, according to Morgan Stanley. Emerging deposit competition and mix shift are also expected to weigh.

The tailwind from higher rates is starting to fade, so the analyst believes competition will be the biggest influence on margins, with deposits likely to have a greater impact than mortgages.

The broker suggests the positives for National Australia Bank from having below-system growth in Australian mortgages and above-average exposure to SME loans will not compensate for a greater margin headwind from deposits. 

Morgan Stanley downgrades its rating to Underweight from Equal-weight and its target price falls to $25.30 from $27.70. Industry View: In-Line.

National Australia Bank is third behind ANZ Bank and Westpac as Morgan Stanley's preferred exposure to the big four banks.

See also NAB upgrade.

NAMOI COTTON LIMITED ((NAM)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

FY23 earnings (EBITDA) of $18.3m for Namoi Cotton beat recently downgraded guidance of $15-17m. However, Morgans moves to a Hold rating from Buy as earnings are set to decline in FY24 and the share price lacks near-term catalysts.

The analyst feels listed agricultural stocks in general may struggle over the coming months as the Bureau of Metereology is forecasting dry conditions.

Nonetheless, Namoi Cotton should benefit from well above average cotton crops over the next couple of years, as there is currently ample water in key dams and storages.

The target declines to 45c from 57c.

TECHNOLOGY ONE LIMITED ((TNE)) Downgrade to Hold from Buy by Shaw and Partners and Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/6/1

TechnologyOne's 1H results were strong, according to Shaw and Partners, particularly SaaS annual reccuring revenue (ARR) growth, aided by one-time migration and greater revenues from existing customers.

For FY24, the broker forecasts FY24 SaaS ARR growth of 18% compared to 40% in FY23,  and headline revenue growth of 9% versus 13%. As shares are also trading on a high multiple, the rating is downgraded to Hold from Buy.

Mainly due to existing customer growth, the analyst increases the target to $15.70 from $13.60.

TechnologyOne posted a strong first half result with both revenue and pre-tax profit ahead of Bell Potter's forecast. The key surprise was 40% growth in SaaS recurring revenue, to $316.3m.

FY23 guidance is for 10-15% growth in pre-tax profit, consistent with expectations. The broker updates the valuation which results in a slight increase to the target, to $17.50 from $17.00, while the rating is downgraded to Hold from Buy.

TREASURY WINE ESTATES LIMITED ((TWE)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/0

Treasury Wine Estates provided a FY23 performance outlook with FY23 earnings (EBIT) guidance around -2.3% below the consensus forecast due to a further decline in low-margin sales, explains Morgans.

The weakness in low-margin sales was most evident for Treasury Americas and its 19 Crimes portfolio, while high-margin Luxury wine sales remain strong and in line with the broker's expectations.

There is potential for weakness at Treasury Americas to continue into FY24, believe the analysts, and cost of goods sold (COGS) pressures are building at Treasury Premium Brands.

Morgans' rating is downgraded to Hold from Add given near-term uncertainty over a weaker consumer, and the target falls to $12.80 from $15.05.

See also TWE upgrade.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/4/0

Ongoing mortgage discounting and higher wholesale funding costs for the major banks will result in a -15bps fall in average margins over the next 18 months, according to Morgan Stanley. Emerging deposit competition and mix shift are also expected to weigh.

The tailwind from higher rates is starting to fade, so the analyst believes competition will be the biggest influence on margins, with deposits likely to have a greater impact than mortgages.

Westpac will continue to face mortgage headwinds, suggests the broker, which downgrades its rating to Equal-weight from Overweight and lowers its target price to $21.00 from $22.80. Industry View: In-Line.

Westpac is second behind ANZ Bank as Morgan Stanley's preferred exposure to the big four banks.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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