Weekly Ratings, Targets, Forecast Changes – 13-10-23

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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 October 9 to Friday October 13, 2023
Total Upgrades: 19
Total Downgrades: 6
Net Ratings Breakdown: Buy 56.44%; Hold 34.69%; Sell 8.87%

For the week ending Friday October 13 there were nineteen ratings upgrades and six downgrades to ASX-listed companies by brokers covered daily by FNArena.

Three of the ratings upgrades resulted from a higher long-term lithium price forecast by Citi and another three via a higher iron ore price forecast by UBS.

Citi forecasts lithium prices will track sideways for the next 12-18 months, but remains bullish on the long-term outlook. As a result, the rating for Core Lithium was upgraded to Neutral from Sell, while IGO and Pilbara Resources both received an upgrade to Buy from Neutral.

Across its coverage of the Lithium sector, this broker highlighted Pilbara Minerals as its preferred exposure and the cleanest leverage to pricing, while Allkem is preferred for its growth outlook.

UBS upgraded its ratings for the majority of iron ore stocks under coverage after raising its long-term iron ore price forecast to US$85/t from US$65/t, and raising its global iron ore sector call to Neutral from Sell.

The analysts suggested iron ore prices will fall by less than originally anticipated as costs will likely remain higher for longer.

While ex-China demand for iron ore is expected to be offset by the generational reset for property in China, UBS predicted around 90% of global steel demand, and circa 87% of seaborne iron ore demand, won't be driven by China residential property construction from 2025 onwards.

Add-rated Rio Tinto and BHP Group stand out as safe havens, suggested the analysts, and offer potential value in both capital and dividend terms. The ratings for both stocks were upgraded by UBS to Neutral from Sell, as well as the recommendation for Deterra Royalties.

Morgans agrees with UBS on a positive outlook for iron ore and maintains its bullish stance. It’s thought iron ore's relative strength compared to several key commodities will continue in 2024.

For all iron ore stocks under Morgans coverage, Fortescue Metals has the most sensitivity to the iron ore price, and this broker upgraded its rating to Hold from Reduce. UBS also upgraded its rating to Neutral from Sell (which is not shown in the table below due to a data entry glitch).

In the sector, Morgans expressed a preference for Rio Tinto over BHP Group partly due to higher growth and returns, as well as lower net debt.

Platinum Asset Management received the largest percentage reduction to average target from brokers covered daily by FNArena last week. Bell Potter noted another disappointing month of funds under management, with further outflows of -$173m following -$912m of outflows in August.

Management fee growth is falling and expense growth is rising, explained the analysts. 

Without significant change, the broker pointed out Platinum is likely to continue to leach value, and ultimately become worthless. Bell Potter’s valuation was lowered to what the fund manager could be worth to an acquirer, who would cut the cost base by -50% and improve the revenue decline to just -3% per year in perpetuity. 

On this new valuation basis, Bell Potter’s target was reduced to 84c from $1.45 and the rating downgraded to Sell from Hold.

The Bank of Queensland was next with a nearly -10% fall in average target price following a weak FY23 result, marked by a reduction in market share, downward pressure on margins and rising costs, noted Underperform-rated Macquarie.

The bank’s second half net interest margin (NIM) fell by -21bps to 158bps, a -7% miss versus the consensus expectation, and management expects further margin pressure in FY24.

While management maintained high conviction in its FY26 return on equity and cost-to-income targets, Morgan Stanley (Underweight) felt these are based on an optimistic view of the industry and competition. 

The bank also appears second on the table below for negative change to its average earnings forecast by brokers.

In first place was Tabcorp Holdings, after reporting a weaker first quarter than UBS (Neutral) anticipated due to soft consumer demand and elevated industry promotions. 

The company reported a -6.1% decline in group revenue, with wagering and media revenue down -5.4% and gaming services falling by -12.7%.

Morgan Stanley retained it Overweight recommendation based on the potential for significant earnings upside from a Victorian license reset, achievement in part, or in full, of opex reduction targets, along with potential digital market share gains.

On the flipside, Polynovo headed up the positive forecast earnings change table with a 300% increase mostly due to the tiny forecast numbers involved.

The company did, however, release a trading update showing accelerating sales for its biodegradable temporising matrix (BTM), which Bell Potter explained can be applied to complex wounds and severe burns.

In addition, it was revealed the Biomedical Advanced Research and Development Authority (BARDA) will provide an additional US$10m in funding for the pivotal trial program of NovoSorb.

Bell Potter raised its target to $2.05 from $2.00 as a result of the expected reduction in net R&D for the company due to this additional funding.

29Metals was next after Macquarie resumed coverage after a period of restricted research with an Outperform rating, up from Neutral.

Following a de-risking of the balance sheet via a $151m capital raising, the broker noted 29Metals is well capitalised to continue the recovery of the Capricorn Copper mine, and spot prices suggest strong upside. 

Redbubble also received forecast earnings upgrades from brokers. Morgan Stanley suggested a return in the first quarter to positive free cash flow on higher gross margins and cost control was clearly positive, though sales growth remains elusive. 

Despite a softer revenue environment, Redbubble managed to expand its gross profit after paid acquisition (GPAPA) margin by 490bps on the previous corresponding period.

In response to a previously declining margin, noted Morgans, the company reduced marketing and promotional activities.

Management predicted trading conditions will remain soft in the near term, particularly in the US.

A new analyst with a higher earnings forecast began coverage of Helloworld Travel at Shaw and Partners, which raised the company’s average earnings forecast in the FNArena database. The quality of management was noted, as well as the strong macroeconomic outlook for travel and leisure.

The analyst observed travel agency customers are often older and more cashed-up than the average traveller, and spend relatively more, while rising interest rates serve as a pay-rise for such a demographic. The Buy, High Risk rating was retained.

Total Buy recommendations in the database comprise 55.44% of the total, versus 34.69% on Neutral/Hold, while Sell ratings account for the remaining 8.87%.

Upgrade

29METALS LIMITED ((29M)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

Macquarie resumes coverage of 29Metals after a period of restriction with an Outperform rating and 80c target price.

Following the company's $151m capital raising, the broker says 29Metals is well capitalised to continue the recovery of Capricorn, and spot prices suggest strong upside.

The balance sheet has also been derisked.

EPS forecasts rise 46% in 2023 and 2024 to -19.9c and -9.6c, ease a touch in 2025 to -0.2c, and fall -42% in 2026 due to forecast dilution.

AMCOR PLC ((AMC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/5/0

Guidance from Amcor suggests the company will continue to be challenged in the coming year, particularly in the first half. Morgan Stanley expects destocking progression and softening consumer demand will impact on the company's first half, but anticipates cost saving initiatives and price rises will take effect and drive a second half earnings lift. 

Despite challenges, Morgan Stanley finds Amcor to offer defensive earnings and quality management, and finds near-term challenges to be priced in. 

The rating is upgraded to Equal-Weight from Underweight and the target price increases to $14.50 from $14.00.

BEGA CHEESE LIMITED ((BGA)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/2/0

Following a -15% decline in shares of Bega Cheese since in-line FY23 results, Bell Potter upgrades its rating to Buy from Hold. Stable year-on-year milk supply and rising Australian ingredient prices also contributed to the broker's upgrade.

While the analysts raise their earnings (EBITDA) forecasts for FY25 and FY26 by 5% and 8%, respectively, the target falls to $3.35 on $3.50 on changes to the broker's financial modeling.

There is material valuation upside should Bega Cheese execute on its five-year targets of a greater than 10% return on funds employed (ROFE) and $250m in earnings, points out the broker.

BHP GROUP LIMITED ((BHP)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/0

UBS upgrades its ratings for the majority of iron ore stocks under coverage after raising its long-term iron ore price forecast to US$85/t from US$65/t, while noting consensus sits at US$75/t. The broker raise its global iron ore sector call to Neutral from Sell.

The analysts believe iron ore prices will fall by less than originally anticipated as costs will likely remain higher for longer.

Ex-China demand for iron ore will offset the generational reset for property in China, in the broker's opinion. It's thought around 90% of global steel demand and circa 87% of seaborne iron ore demand won't be driven by China residential property construction from 2025.

The UBS rating for BHP Group is upgraded to Neutral from Sell and the target rises to $43 from $36. Rio Tinto is the broker's preferred exposure over BHP, partly due to higher growth and returns and lower net debt.

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/2/3

On closer exmaination of Bank of Queensland's FY23 result (which missed consensus earnings forecast by -1% to -5%) Citi has chosen to focus on management's guidance, which retains its longer-term return on equity target of 9.25% and CTI target of 50%.

The broker says there is no doubt the result reveals significant challenges with both revenues and the net interest margins disappointing forecasts and, by its calculations, can't see how the company will possibly meet the above targets.

But Citi believes that, given management has reset expectations for FY24 and given $200m in productivity savings, this builds confidence in management's forecasts and suggests FY24 could prove the nadir for core earnings.

While still doubting the company will meet its targets, Citi says progress and ongoing work on cost cutting is likely to put a floor under earnings.

EPS forecasts rise 1% in FY24; and 15% in FY25.

Rating is upgraded to Neutral from Sell. Target price rises to $5.20 from $5 (which assumes a 6.3% terminal return on equity).

See also BOQ downgrade.

CORE LITHIUM LIMITED ((CXO)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/2/0

Citi forecasts lithium prices will track sideways for the next 12-18 months, but remains bullish on the long-term outlook. As a result, long-term pricing assumptions rise. The latest forecasts are: hydroxide US$23k/t, carbonate US$20k/t and hydroxide US$1600/t (real).

Earnings estimates and target prices are lowered for the pure-play miners. The Core Lithium target falls to 38c from 40c though its rating is upgraded to Neutral from Sell after a share price fall.

Citi considers Pilbara Minerals the preferred exposure and the cleanest leverage to pricing while Allkem is preferred for its growth outlook.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/1

Encouraged by the company's strategies over the six months past, Citi has decided it's time to upgrade Domino's Pizza Enterprises to Buy from Neutral.

While there remains a longer road to be traveled, the broker acknowledges, the view taken is that an inflection point has been crossed, and ongoing improvement in key financial metrics should follow.

Short term, Citi believes current gearing is limiting M&A, but management is working on resolving this. An upgrade to multiples pushes up the price target to $58.60 (was $57.95).

DETERRA ROYALTIES LIMITED ((DRR)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/3/0

UBS upgrades its ratings for the majority of iron ore stocks under coverage after raising its long-term iron ore price forecast to US$85/t from US$65/t, while noting consensus sits at US$75/t. The broker raise its global iron ore sector call to Neutral from Sell.

The analysts believe iron ore prices will fall by less than originally anticipated as costs will likely remain higher for longer.

Ex-China demand for iron ore will offset the generational reset for property in China, in the broker's opinion. It's thought around 90% of global steel demand and circa 87% of seaborne iron ore demand won't be driven by China residential property construction from 2025.

The UBS rating for Deterra Royalties is upgraded to Neutral from Sell and the target rises to $4.80 from $3.90. In the sector, Rio Tinto is preferred to BHP Group partly due to higher growth and returns and lower net debt.

FORTESCUE METALS GROUP LIMITED ((FMG)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/1/5

Morgans believes some steel mills in China may be overproducing in anticipation of possible mandatory steel production cuts in late-2023. So, while iron ore fundamentals remain healthy the analysts feel there may be some short-term risk.

Evidence of this overproduction comes from high steel volumes despite low margins, explains the broker.

Despite this short-term view, Morgans maintains its bullish stance and expects iron ore's relative strength compared to several key commodities will continue in 2024. It's thought the market needs to support high-cost US$90-100/t supply to maintain balance.

Add-rated Rio Tinto and BHP Group stand out as safe havens, suggest the analysts, and offer potential value in both capital and dividend terms. 

For all iron ore stocks under its coverage, Fortescue Metals has the most sensitivity iron ore and Morgans upgrades its rating to Hold from Reduce and the target rises to $19.40 from $16.20.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/1

Insurance Australia Group has provided FY24 guidance for double digit gross written premium (GWP) growth and re-affirmed a reported insurance margin of between 13.5%-15.5%.

Management noted FY24 has been benign from a natural perils perspective so far.

While Morgans expects earnings momentum will improve further throughout FY24, the broker makes only minor adjustments to its forecasts. As the share price has recently declined, the rating is upgraded to Add from Hold.

The target slips to $6.24 from $6.26.

IGO LIMITED ((IGO)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/1

Citi forecasts lithium prices will track sideways for the next 12-18 months, but remains bullish on the long-term outlook. As a result, long-term pricing assumptions rise. The latest forecasts are: hydroxide US$23k/t, carbonate US$20k/t and hydroxide US$1600/t (real).

Earnings estimates and target prices are lowered for the pure-play miners. The IGO target falls to $13 from $15.50 though its rating is upgraded to Buy from Neutral after a share price fall.

Citi considers Pilbara Minerals the preferred exposure and the cleanest leverage to pricing while Allkem is preferred for its growth outlook.

LYNAS RARE EARTHS LIMITED ((LYC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/0

Given both share price weakness and recovery in rare earth pricing, UBS has lifted its rating on Lynas Rare Earths. The company's stock has declined -10% since July, as rare earth prices have climbed 22%. 

For the broker, ramp-up at the Kalgoorlie site remains a risk, but the company does guide to first mixed rare earth concentrate from September.

The rating is upgraded to Buy from Neutral and the target price of $8.00 is retained.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/2/1

Ord Minnett feels Magellan Financial's vulnerability to prolonged market downturns has been highlighted by funds under management updates following the company's full year results. 

The company has reported net institutional outflows of $1.7bn in the September quarter, exceeding Ord Minnett's expectations and equating to 68% of the broker's anticipated -$2.5bn outlfows for the entirety of the financial year. The broker is now anticipating full year  outflows of -$6.8bn. 

The rating is upgraded to Accumulate from Hold and the target price decreases to $10.20 from $11.00.

Magellan Financial suffered continued institutional outflows from its Global Equities fund in Spetember, and Macquarie estimates $3bn of institutional funds under management remain in the fund.

The broker says recent share price falls have elevated the chance of further outflows and churn in its Infrastructure Equities team.

On the flip side, the share price retreat validates an upgrade, says the broker.

Not so the target price. EPS forecasts fall -7.1% in FY24; -10.3% in FY25; and -10% thereafter.

Rating upgraded to Neutral from Underperform. Target price cut to $7 from $9.

NATIONAL TYRE & WHEEL LIMITED ((NTD)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

In a complementary fit to the existing wholesale distribution business, according to Morgans, National Tyre & Wheel has secured the wholesale distribution rights for Dunlop Tyres in A&NZ for an initial 5-year term, on a non-exclusive basis.

The analysts suggest this outcome is a clear turning point for the company, as it strengthens the company's brand portfolio and offering, and provides greater confidence in earnings visibility and the pathway to growth.

The broker's rating is upgraded to Add from Hold and the target increased to $1.20 from 74c.

PILBARA MINERALS LIMITED ((PLS)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/1

Citi forecasts lithium prices will track sideways for the next 12-18 months, but remains bullish on the long-term outlook. As a result, long-term pricing assumptions rise. The latest forecasts are: hydroxide US$23k/t, carbonate US$20k/t and hydroxide US$1600/t (real).

Earnings estimates and target prices are lowered for the pure-play miners. The Pilbara Minerals target falls to $4.50 from $4.70 though its rating is upgraded to Buy from Neutral after a share price fall.

Citi considers Pilbara Minerals the preferred exposure and the cleanest leverage to pricing while Allkem is preferred for its growth outlook.

PANTORO LIMITED ((PNR)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 2/0/0

Preliminary production figures for the September quarter shows growth at the Norseman Gold Project largely in-line with Bell Potter's estimate. A key swing factor for Pantoro, all-in-sustaining costs (AISC), are yet to be revealed.

Management noted mill head grades have improved, supported by open-pit and underground operations. The company is also looking at divestment alternatives for the Nicolsons gold mine which was on care and maintenance during the June quarter.

The broker's target is trimmed to 0.052c from 0.053c and the rating upgraded to Buy from Hold. Following a share price decline, there's thought to be 41% upside from the last closing share price.

REGIS HEALTHCARE LIMITED ((REG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/0/0

Regis Healthcare's outlook continues to improve according to Ord Minnett, with merger and acquisition opportunites increasing and higher resident contributions on the table for FY25 and beyond. 

The rating is upgraded to Accumulate from Hold, with Ord Minnett believing occupancy rates are likely to continue to surprise to the upside and that reduced agency utilisation and improved accommodation income could partially offset the 200-care-minutes transition.

The broker also feels bolt-on acquisitions could be materially accretive for the company. The target price increases to $2.80 from $2.25.

RIO TINTO LIMITED ((RIO)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/3/0

UBS upgrades its ratings for the majority of iron ore stocks under coverage after raising its long-term iron ore price forecast to US$85/t from US$65/t, while noting consensus sits at US$75/t. The broker raise its global iron ore sector call to Neutral from Sell.

The analysts believe iron ore prices will fall by less than originally anticipated as costs will likely remain higher for longer.

Ex-China demand for iron ore will offset the generational reset for property in China, in the broker's opinion. It's thought around 90% of global steel demand and circa 87% of seaborne iron ore demand won't be driven by China residential property construction from 2025.

The UBS rating for Rio Tinto is upgraded to Neutral from Sell and the target rises to $115 from $95. Rio Tinto is preferred over BHP Group partly due to higher growth and returns and lower net debt.

Downgrade

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/0

Citi downgrades Baby Bunting's to Neutral from Buy following the company's weak trading update.

A sharp fall in sales surprised the broker, which had considered the sector to be non-discretionary.

But the broker retains the faith, observing its analysis of the company's website visits suggests a 9% jump in the September quarter, and advises the cost-out is running in line with guidance.

Target price falls to $2 from $2.20.

BOSS ENERGY LIMITED ((BOE)) Downgrade to Sell from Hold by Shaw and Partners .B/H/S: 0/2/1

Boss Energy has started mining at the Honeymoon uranium project in South Australia and advises the operation is on time and on budget to hit first production this quarter.

Shaw and Partners sings the company's praises but spies better value elsewhere, given there are still risks ahead and uranium sales have yet to be announced.

Rating is downgraded to Sell from Hold to reflect the share price's strong rally. Target price rises to $3.60 from $3.40.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/2/3

Prior to FY23 results on Wednesday for Bank of Queensland, Citi is concerned by potential for an earnings miss against consensus expectations from lending woes, deposit costs and cost headwinds.

As risks are skewed to the downside the broker's rating is downgraded to Sell from Neutral.

The target also falls to $5.00 from $5.75 after the analysts reduce FY24 and FY24 earnings by -4% and -9%, respectively.

Lending has displayed negative growth over the last six months, even as the company continues to grow its relatively expensive deposit book, which implies to Citi a lower net interest margin (NIM), as occurred in the 1H.

The broker is also concerned by the impact of top leadership changes over the last few years upon the business.

See also BOQ upgrade.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 0/3/1

Morgan Stanley spies downside risk to consensus forecasts for BlueScope Steel given Asian steel spreads are trading at decade lows and US spreads are falling. 

The broker also expects that weakness in residential construction will hit the company's high-margin Colorbond volumes.

EPS forecasts fall -25% for FY24 and -27% for FY25.

Rating is downgraded to Underweight from Overweight. Target price falls to $18 from $24. Industry view: In-line.

CROMWELL PROPERTY GROUP ((CMW)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/1/0

Ord Minnett has adjusted its expectations for Cromwell Property's equity raise, now expecting the company will raise $510m at 30 cents a share. The broker had previously assumed the company would demand 50 cents per share, but has downgraded given a rise in bond yields and a share price decline. 

While the company could wait out market concerns, Ord Minnett feels the equity raising is necessary. While the underlying business is in better shape than the balance sheet, according to the broker, it is not as strong as other REITs in coverage. 

The rating is downgraded to Accumulate from Buy and the target price decreases to 70 cents from 85 cents. 

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Sell from Hold by Bell Potter .B/H/S: 1/1/2

Platinum Asset Management recorded another disappointing month of funds under management, Bell Potter notes, with further outflows of -$173m following -$912m of outflows in August.

Management fee growth is falling and expense growth is rising. Even being generous with assumptions, the broker's modelling implies a zero residual value for the equity. Bell Potter would expect management to reduce expenses to reflect lower revenue although to date this has not been the case.

"Without significant change, PTM is likely to continue to leach value, and ultimately become worthless."

The broker's 84c target, down from $1.45, reflects only the value of the business to a potential acquirer. Downgrade to Sell from Hold.

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