Weekly Ratings, Targets, Forecast Changes – 29-09-23

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

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 September 25 to Friday September 29, 2023
Total Upgrades: 6
Total Downgrades: 5
Net Ratings Breakdown: Buy 55.56%; Hold 35.64%; Sell 8.80%

For the week ending Friday September 29 there were six ratings upgrades and five downgrades to ASX-listed companies by brokers covered daily by FNArena.

Uranium companies Boss Energy and Paladin Energy headed up the table below for positive average target price changes though both received ratings downgrades.

Uranium prices have increased by 32% in the last three months and shares of Boss and Paladin have risen by 49% and 53%, respectively, highlighting material leverage to upside from uranium prices, noted Macquarie. As both companies are within six months of restarting production, they are considered well positioned to benefit from higher uranium prices and should further re-rate into production. The broker downgraded its rating for Boss Energy to Neutral from Outperform on valuation.

While Bell Potter raised its target for Paladin Energy to $1.31 from $1.12 the rating was downgraded to Speculative Hold from Speculative Buy on valuation. The analysts noted the Langer Heinrich mine is a proven asset in a known uranium mining jurisdiction with a comparatively low restart risk. At full capacity the mine is expected to be a top ten producer supplying 6mlbs per year by FY26.

Macquarie also highlighted Paladin has numerous offtake agreements with global counterparties.

On the flipside, Star Entertainment was dealt the largest percentage reduction to average target price by brokers in the FNArena database last week due to the dilution from a $750m capital raising.

While Ord Minnett (Accumulate) was surprised given only seven months had elapsed since the last capital raise in February, the $589m 1-for-1.65 pro rata non-renounceable rights issue is considered appealing on valuation grounds.

There was also a $161m institutional placement. Proceeds will be used to repay existing debt, which will be replaced with new four-year debt facilities of $450m.

Add-rated Morgans suggested the funds raised will provide some added certainty for investors, while UBS (Buy) forecast earnings growth from a range of sources including seasonal strength in summer and returning inbound tourism.

Synlait Milk was next with a fall in average target price to $1.50 from $1.90. While the company’s FY23 results (July year-end) were consistent with management guidance, Underweight-rated Macquarie anticipated a weaker FY24 volume outlook and slower customer ramp-up.

This broker also noted the likelihood of balance sheet pressures should the Dairyworks sale not proceed and reduced its target to NZ$1.25 from NZ$1.53. Even after assuming a sale of Dairyworks, Bell Potter (Buy) lowered its rating to $1.50 from $1.90.

PolyNovo’s average target price fell by nearly -14% last week despite issuing a strong trading update (according to Macquarie) because Ord Minnett (Lighten) initiated coverage of the company with  a target of $1.00, which was materially lower than existing broker targets in the FNArena database.

The analyst felt the market is too optimistic around the speed and extent of PolyNovo’s commercial roll-out and is underestimating competitive pressures. It’s also felt the potential new indications of the company’s NovoSorb technology is being exaggerated.

Meanwhile, Outperform-rated Macquarie noted reported sales so far in FY24 are up 93% on the previous corresponding period, with momentum supported by sales in new markets and increased product use across different specialities.

Approved products are NovoSorb BTM and NovoSorb MTX, which are synthetic polymer-based scaffolds designed to be used in the treatment of burns and surgical wounds.

PolyNovo and Star Entertainment also appeared first and third on the table below for negative adjustment to average earnings forecasts by brokers.

Brickworks featured in second place after six brokers in the FNArena database updated forecasts following FY23 results last Thursday, though the average target only fell to $27.20 from $27.44.

Macquarie has the lowest target in the database at $25, raised from $24.05, after FY23 margins came in better than expected in the Building Products division while Property also outperformed slightly. FY24 is expected to be impacted by a slowdown in construction activity and less development activity in the Property segment.

Ord Minnett (target $26.20) downgraded its rating to Hold from Buy. Property has been a key driver of earnings for Brickworks over the past five years, explained the analyst, but will come under pressure as capitalisation rates increase. Weak housing markets, both domestically and in the US, are expected to affect Building Product earnings.

Despite expectations for softer earnings in FY24, Buy-rated Citi remained positive because of the timing of property development completions and the cycling of a large profit on a land sale. It’s felt the business provides unique landbank exposure as industrial assets continue to be in strong demand, while approved and serviced industrial land remains in short supply.

The average earnings forecast for Syrah Resources also fell after UBS reinstated coverage. However, the broker was very upbeat with a Buy rating and noted electric vehicle demand growth is expected to quintuple by 2030. Robust growth is expected for global battery demand and in turn the anode material for which natural graphite is a feedstock.

Synlait Milk appeared atop the positive forecast earnings change table below.

Strike Energy was next after a research update by Macquarie noted gas from the Walyering field in the Perth Basin has been successfully delivered to the Pamelia pipeline, the first commercial gas production for the company.

While a comparatively small project, the broker noted the economics are robust with low capital and operating expenditure requirements. The Outperform rating and 59c target were maintained.

Macquarie also raised its earnings forecasts for Sandfire Resources, the broker’s preferred base metals producer, after lifting its long-term price forecast for copper by 3%.

Copper production is expected to increase to around 97kt in FY24 from 84kt in FY23 thanks to the Motheo mill expansion to 5.2Mtpa by the end of 2023.

Total Buy recommendations in the database comprise 55.56% of the total, versus 35.64% on Neutral/Hold, while Sell ratings account for the remaining 8.80%.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/0

The draft ruling from the AEMC has lifted the real maximum price (MPC) by 37% to FY28, increasing volatility in Macquarie's view. This should translate to a lift in market prices by around $10/megawatt-hour over that period.

The gains for AGL Energy will mitigate some earnings pressure associated with loss of gas and coal contracts in FY29. Peak earnings are expected in FY24 and thereafter the decline could be shallower than previously anticipated.

Macquarie assesses value has re-emerged and upgrades to Outperform from Neutral. Target is raised to $11.56 from $11.43.

ALLKEM LIMITED ((AKE)) Upgrade to Add from Hold by Morgans .B/H/S: 4/0/0

Allkem has announced cost increases across its growth project and also increased its long-term commodity price assumptions. Estimated growth capital costs have increased significantly for James Bay, Sal de Vida and Cauchari. Operating costs are also forecast to be higher.

Morgans had largely factored in higher costs compared with earlier studies but also now increases forecasts for some projects. Offsetting this Cauchari is included in the valuation, which lifts the target to $15.30 from $14.20.

Rating is upgraded to Add from Hold as the broker envisages significant upside given recent share price weakness, although higher risk exists as valuation is dependent upon successfully delivering growth.

ANZ GROUP HOLDINGS LIMITED ((ANZ)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/0

Morgan Stanley reasserts its preference for ANZ Bank among the majors because of the business mix, improved operating performance and valuation support.

All banks face revenue headwinds over the next year but the broker believes ANZ Bank will have growth at the top end of its peer group over the three years to FY25. This reflects an improved performance in Australian mortgages, as well as opportunities for market share gains in institutional payments and cash management.

The swing factor is margin, with Morgan Stanley forecasting this will fall by -6 basis points half on half to 1.69% in the second half of FY23.

Despite walking away from its "cost ambition" the bank has a sound track record on cost control, the broker adds. Rating is upgraded to Overweight from Equal-weight and the target lifted to $27.00 from $26.20. Industry View: In-Line.

BRAMBLES LIMITED ((BXB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/4/0

Macquarie, after visiting the US, has now a higher appreciation of the structural benefits to pallet pooling businesses such as Brambles, given their ability to keep pushing price despite increasing pallet availability and some deflationary impacts.

The broker suspects FY24 may continue the company's track record of upgrading guidance throughout a reporting period.

As a result, forecasts are moved to the higher end of the constant-FX range of 6-8% sales revenue growth and 9-12% underlying profit growth. Rating is upgraded to Outperform from Neutral and the target lifted to $15.45 from $15.05.

SOUTH32 LIMITED ((S32)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0

Citi expects the share price of South32 to rebound from recent lows because spot commodity prices are now substantially higher than what was expected for FY24.

Hard coking coal and alumina/aluminium prices are up 25% and 5%, respectively. The stock was hardest hit with earnings downgrades post the FY23 results, but given the underperformance Citi upgrades to Buy from Neutral. Target is unchanged at $3.80.

TECHNOLOGY ONE LIMITED ((TNE)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/5/0

Ahead of TechnologyOne's November result, Bell Potter has modestly upgraded EPS forecasts due to a small decrease in forecast shares on issue and rolled forward its discounted cash flow valuation, leading to a target increase to $17.75 from $17.50.

This takes total expected return to 18% hence the broker upgrades to Buy from Hold.

Bell Potter expects the result to be modestly above both guidance and consensus, and believes there is potential for the company to exceed its guidance of 40% growth in SaaS annual recurring revenue.

Downgrade

BRICKWORKS LIMITED ((BKW)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/2/0

Ord Minnett observes property has been key driver of earnings for Brickworks over the past five years but will come under pressure as capitalisation rates increase. Weak housing markets, both domestically and in the US, are expected to affect building product earnings.

The FY23 result was well below the broker's forecasts with the key difference being lower-than-expected property earnings.

Ord Minnett observes, in North America, market conditions are similar to Australia, with lower home construction activity expected in FY24 although the company's exposure to the more buoyant non-residential segment should provide some support.

Rating is downgraded to Hold from Buy and the target lowered to $26.20 from $28.00.

BOSS ENERGY LIMITED ((BOE)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/0

Boss Energy is due to re-start the Honeymoon uranium mine, expected to ramp up to 2.45mlb/per annum. Macquarie notes there is potential upside to production levels and the life of the mine, given strong recent results from exploration.

Higher long-term uranium forecasts and increasing the life of mine by four years drives 7-20% increases to the broker's estimates for EPS from FY27 onwards.

Adjusting the valuation methodology to reflect momentum means a downgrade to Neutral from Outperform, while the target is raised to $4.50 from $3.50.

DETERRA ROYALTIES LIMITED ((DRR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/1

Share price strength has triggered a downgrade in Macquarie's rating of Deterra Royalties to Neutral from Outperform. Target is steady at $4.80.

Macquarie updates earnings forecasts to incorporate the latest commodity price outlook. The broker raises iron ore and hard coking coal forecasts for 2023 and 2025 but reduces 2024 estimates.

In iron ore, the broker prefers Mineral Resources and Champion Iron to Deterra Royalties and Mount Gibson.

PALADIN ENERGY LIMITED ((PDN)) Downgrade to Speculative Hold from Buy by Bell Potter .B/H/S: 2/1/0

Ahead of the re-start of Langer Heinrich, Bell Potter updates its valuation on Paladin Energy, arguing that operations like this should trade at a premium in the current market, given the relatively low risk versus greenfield developments and increased liquidity versus smaller cap peers.

There is also the potential for strategic consolidation. Langer Heinrich is a proven asset in a known jurisdiction for uranium mining and at full capacity will be a top 10 producer. Rating is downgraded to Speculative Hold from Speculative Buy. Target is raised to $1.31 from $1.12.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/3/1

UBS downgrades Westpac to Sell from Neutral and reduces the target to $20 and $22. The change is driven by a higher cost outlook, somewhat offset by lower credit charges as the asset quality cycle now appears more benign.

 Some of the higher cost should be offset by higher net interest margin expectations, the broker acknowledges.

Return on equity is now expected to compress by around -140 basis points to FY27 and UBS asserts the bank is struggling to contain inflation pressures, particularly around staff expenses, coupled with amortisation headwinds from previous expenditure on regulatory systems.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 AGL ENERGY LIMITED Buy Neutral Macquarie 2 ALLKEM LIMITED Buy Neutral Morgans 3 ANZ GROUP HOLDINGS LIMITED Buy Neutral Morgan Stanley 4 BRAMBLES LIMITED Buy Neutral Macquarie 5 SOUTH32 LIMITED Buy Neutral Citi 6 TECHNOLOGY ONE LIMITED Buy Neutral Bell Potter Downgrade 7 BOSS ENERGY LIMITED Neutral Buy Macquarie 8 BRICKWORKS LIMITED Neutral Buy Ord Minnett 9 DETERRA ROYALTIES LIMITED Neutral Buy Macquarie 10 PALADIN ENERGY LIMITED Neutral Buy Bell Potter 11 WESTPAC BANKING CORPORATION Sell Neutral UBS

Target Price

Positive Change Covered by at least 3 Brokers Order Symbol Company New Target Previous Target Change Recs 1 BOE BOSS ENERGY LIMITED 4.477 3.600 24.36% 3 2 PDN PALADIN ENERGY LIMITED 1.253 1.123 11.58% 3 3 PME PRO MEDICUS LIMITED 63.625 59.750 6.49% 4 4 BKL BLACKMORES LIMITED 95.000 91.750 3.54% 3 5 TNE TECHNOLOGY ONE LIMITED 15.279 14.843 2.94% 7 6 CGC COSTA GROUP HOLDINGS LIMITED 3.108 3.034 2.44% 5 7 PMV PREMIER INVESTMENTS LIMITED 25.190 24.815 1.51% 6 8 NHC NEW HOPE CORPORATION LIMITED 5.350 5.275 1.42% 4 9 ANZ ANZ GROUP HOLDINGS LIMITED 26.772 26.472 1.13% 6 10 CRN CORONADO GLOBAL RESOURCES INC 2.020 2.000 1.00% 5

Negative Change Covered by at least 3 Brokers Order Symbol Company New Target Previous Target Change Recs 1 SGR STAR ENTERTAINMENT GROUP LIMITED 0.950 1.425 -33.33% 4 2 SM1 SYNLAIT MILK LIMITED 1.500 1.900 -21.05% 3 3 PNV POLYNOVO LIMITED 1.895 2.193 -13.59% 4 4 NUF NUFARM LIMITED 6.443 6.970 -7.56% 7 5 AKE ALLKEM LIMITED 16.850 17.825 -5.47% 4 6 NIC NICKEL INDUSTRIES LIMITED 1.247 1.313 -5.03% 3 7 QAN QANTAS AIRWAYS LIMITED 7.600 7.783 -2.35% 6 8 ALX ATLAS ARTERIA 6.280 6.394 -1.78% 5 9 BSL BLUESCOPE STEEL LIMITED 21.000 21.360 -1.69% 5 10 WBC WESTPAC BANKING CORPORATION 22.447 22.780 -1.46% 6

Earnings Forecast

Positive Change Covered by at least 3 Brokers Order Symbol Company New EF Previous EF Change Recs 1 SM1 SYNLAIT MILK LIMITED 9.651 1.167 726.99% 3 2 STX STRIKE ENERGY LIMITED 0.533 -0.700 176.14% 3 3 SFR SANDFIRE RESOURCES LIMITED 2.707 1.704 58.86% 6 4 FMG FORTESCUE METALS GROUP LIMITED 247.218 230.886 7.07% 7 5 BOE BOSS ENERGY LIMITED 8.833 8.267 6.85% 3 6 NHC NEW HOPE CORPORATION LIMITED 71.850 68.000 5.66% 4 7 PME PRO MEDICUS LIMITED 76.050 72.725 4.57% 4 8 AWC ALUMINA LIMITED -1.827 -1.879 2.77% 4 9 CRN CORONADO GLOBAL RESOURCES INC 39.729 38.845 2.28% 5 10 AIS AERIS RESOURCES LIMITED -5.933 -6.067 2.21% 3

Negative Change Covered by at least 3 Brokers Order Symbol Company New EF Previous EF Change Recs 1 PNV POLYNOVO LIMITED 0.025 0.100 -75.00% 4 2 BKW BRICKWORKS LIMITED 113.700 356.533 -68.11% 6 3 SGR STAR ENTERTAINMENT GROUP LIMITED 2.550 3.675 -30.61% 4 4 SYR SYRAH RESOURCES LIMITED -9.925 -8.218 -20.77% 4 5 PMV PREMIER INVESTMENTS LIMITED 146.367 173.440 -15.61% 6 6 NIC NICKEL INDUSTRIES LIMITED 11.520 13.342 -13.66% 3 7 MIN MINERAL RESOURCES LIMITED 412.786 455.643 -9.41% 7 8 NUF NUFARM LIMITED 37.186 39.771 -6.50% 7 9 AKE ALLKEM LIMITED 99.147 104.485 -5.11% 4 10 S32 SOUTH32 LIMITED 26.993 28.037 -3.72% 6

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