Weekly Ratings, Targets, Forecast Changes – 25-01-24

This story features BABY BUNTING GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BBN

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 January 22 to Thursday January 25, 2024
Total Upgrades: 13
Total Downgrades: 14
Net Ratings Breakdown: Buy 56.87%; Hold 34.98%; Sell 8.15%

For the shortened week ending Thursday January 25, 2024 there were thirteen ratings upgrades and fourteen downgrades to ASX-listed companies by brokers covered daily by FNArena.

As has been the general trend for some time, percentage downgrades to average earnings forecasts were greater than for upgrades.

It was a bad start to the week for investors in Appen with management announcing the loss of one of its top-three customers in Google, which accounted for around 30% and 25% of FY23 revenue and gross profit, respectively.

Morgan Stanley's Underweight recommendation is based on the view Appen's technology is becoming less valuable to its traditional clients. It’s thought competition is intensifying with large customers now creating more sophisticated platforms and using more of their own AI, and relying less on human input.

The broker’s 12-month target was slashed to 60c from $1.94, resulting in the largest (-34%) fall in average target price across  the FNArena database last week.

The average target for Liontown Resources also fell by circa -30% after both Bell Potter (Buy) and UBS reacted to news spending will be cut to preserve capital and near-term funding requirements, because a previously arranged $760m debt facility was terminated (by the banking syndicate) due to the risk of lower-for-longer lithium prices.

While UBS reduced its target to $1.25 from $1.30 on a reduced growth outlook, the share price fall in reaction to the announcement has created value, and the broker upgraded its rating to Buy from Neutral.

Looking through the current price cycle, the analyst can see value in the Kathleen Valley operation and expects management will execute a reduced ($300-400m) debt package with the lending syndicate.

Following the Allkem-Livent Scheme of Arrangement, existing brokers in the database began to provide earnings estimates for newly-named Arcadium Lithium. Citi (Buy) initiated research coverage with a $10.75 target, helping to lower the average target to $11.99 from $14.51 at the end of last week.

This broker felt there was limited downside to current spot lithium pricing, and pointed out Arcadium provides the only exposure on the ASX to a fully integrated lithium product suite. The quality, cost, and size of the upstream portfolio, along with the company's growth outlook, are considered standouts compared to peers.

Macquarie agrees, noting the company is well positioned for a potential re-rating in the medium term, given its diverse portfolio of lithium operations and projects. 

The average target for Nanosonics also fell last week after management pre-announced a worse first half result than Sell-rated Citi was expecting, with sales declining by -2% year-on-year compared to the 17% uplift expected by consensus.

The company cited “softer-than-anticipated upgrade sales and hospitals delaying capital unit purchases due to hospital capital budgetary pressures”.

On the whole, broker commentary was fairly forgiving with both Ord Minnett (upgrade to Hold from Lighten) and Sell-rated Citi maintaining target prices.

Having begun with higher targets than Citi and Ord Minnett, both Morgans (Add) and Bell Potter materially reduced their targets. Morgans felt management would navigate the current environment by adjusting as needed.

While Bell Potter noted the damage was done for existing shareholders, and consequently retained a Hold Recommendation, major positives include a strong balance sheet (with around $112m cash on hand), and the ongoing upgrade cycle for the Trophon product, which is expected to underpin capital sales.

Nanosonics received a -32% downgrade to its average earnings forecast by brokers in a week when six of the top eight placings in the earnings downgrade table were filled by mining companies.

For these companies, brokers made average earnings forecast downgrades of between -92% and -16%, with Paladin Energy the largest, followed by Arcadian Lithium, Lynas Rare Earths, Coronado Global Resources, Pilbara Minerals and South32.

The downgrade for Paladin Energy should be ignored as forecasts numbers were so small, percentage moves were exaggerated. The news was theoretically good for investors in the company, with Shaw and Partners raising its target by 22%, after issuing new research on the uranium sector. Revised forecasts assume a multi-year spot price spike to US$150/lb, before settling to a long-term U3O8 realised price assumption of US$76/lb (2024 Real) in 2030.

The broker’s preferred exposures for stocks under research coverage are Paladin Energy, Silex Systems, Peninsula Energy, Lotus Resources and Bannerman Energy.

Despite a FY24 production upgrade by Lynas Rare Earths alongside second quarter results, brokers identified several concerns. Higher second quarter volumes were offset by weak average realised prices due to product mix changes, explained Macquarie.

UBS highlighted ongoing weakness in the neodymium and praseodymium (NdPr) price, suggesting downside risk to its US$80/kg forecast for the end-of-2024, as spot is currently around US$50/kg. A more robust price outlook is expected in China on demand growth, but Chinese rare earth producers are not yet showing signs of anticipated supply discipline.

On spot pricing, Citi forecasts Lynas will be loss making in FY25 given low demand in China and weaker-than-anticipated electric vehicle demand.The analyst remained constructive on long-term pricing. 

Following fourth quarter results for Coronado Global Resources, Ord Minnett noted full year saleable production tonnes were a -7% miss against initial company guidance. The analyst lowered production forecasts by -2% for both FY24 and FY25 and downgraded its rating to Hold from Accumulate.

The quarterly result was materially weaker than Bell Potter had anticipated, partly on a lower hard coking coal mix. It was felt issues may continue into 2024 with weather and shipping delays expected to impact operations across the Bowen Basin and constrain supply. 

Average broker earnings forecasts for both Pilbara Minerals and South32 were also reduced last week after weaker-than-expected second quarter results.

Production for Pilbara was 8% higher than Macquarie forecast but the average sales price was -21% lower.

The same broker noted "mixed" production results for South32, with strong Cannington volumes offset by weaker coal volumes at Illawarra. Management’s FY24 guidance for group copper equivalent production was reduced by circa -3%, with Brazil Alumina, Mozal, and molybdenum (Sierra Gorda) guidance volumes lowered.

By way of contrast within the mining sector, average broker earnings forecasts for Alumina Ltd and Copper Energy last week rose by around 35% and 22%, respectively.

Alumina Ltd’s sole asset is a 40% stake in Alcoa World Alumina and Chemicals (AWAC), the world’s largest alumina producer. Following an update by 60%-owner Alcoa, Ord Minnett marginally raised EPS forecasts for Alumina Ltd. In an already tight alumina market hit by Chinese production cuts, the analyst noted a 10% rise in alumina price, since AWAC announced it will be ceasing Kwinana production in WA in the second quarter of 2024, will present upside risk to the broker's forecasts for Alumina Ltd.

Following Cooper Energy’s decommissioning update for the Basker Manta Gummy (BMG) wells, Macquarie suggested a blowout in costs, and subsequent share price fall, had created a buying opportunity for the company’s shares, and upgraded its recommendation to Outperform from Neutral.

The broker’s increased BMG decommissioning capex was offset by higher production rates and a higher exploration value for Otway.

In the financial space, earnings forecasts for Judo Capital and Zip Co also increased.

Judo provided a surprise trading and guidance update, leading to a material share price rally. See Judo Answers The Critics – FNArena.com for a full analysis.

At the start of last week, Ord Minnett raised its target for Zip Co target to 75c from 42c and upgraded its rating to Buy from Hold on valuation.

The next day, the broker further raised the target to 95c following strong first half results (indicated). Total transaction value (TTV) growth rose by 9.4% on the previous corresponding period, while fixed costs (such as overhead and marketing) came in under the analysts' expectations.

Revenue margins increased to 8.2% from 7.1% in the previous corresponding period, and bad debts once again performed well, on the broker's assessment

Zip Co headed up the table below for the largest percentage increase in average target price in the FNArena database last week.

The second largest target increase for Link Administration in the table below should be ignored due to a technical anomaly (with the increase relevant to the prior week), as there was no new broker research in the database last week.

Total Buy recommendations in the database comprise 56.87% of the total, versus 34.98% on Neutral/Hold, while Sell ratings account for the remaining 8.15%.

Upgrade

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

Citi found Baby Bunting's first half trading update disappointing, with both sales and margins missing expectations. While total sales of $248.5m were largely in line, like-for-like sales were a -7% miss to the broker's forecast.

According to the company, price competition had a -$6m impact on sales on the half, likely impacting on the 37.2% gross margin. 

Citi expects this year will be seen as a transition year by the market. The broker expects the stock would benefit from demonstrating it can better leveraging its scale to drive higher gross margins.

The rating is upgraded to Buy from Neutral and the target price increases to $2.15 from $2.00.

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

Shaw and Partners has lifted forecasts for the price of uranium and, to little surprise, continues to advocate investors have an overweight allocation to the uranium sector in equity portfolios.

Revised forecasts assume a multi-year price spike to US$150/lb, before settling to a long-term U3O8 realised price assumption of US$76/lb (2024 Real) in 2030.

Preferred exposures are Paladin Energy, Silex Systems, Peninsula Energy, Lotus Resources and Bannerman Energy.

Boss Energy is the sole Hold rating in the broker's Australian coverage, now upgraded from the prior Sell, with the broker's price target rising to $4.75 from $3.60 on higher price forecasts that benefit the industry at large.

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

Following yesterday's Basker Manta Gummy (BMG) wells decommissioning update, Macquarie suggests a blowout in costs, and subsequent share price fall, creates a buying opportunity for Cooper Energy shares.

The rating is upgraded to Outperform from Neutral on an improved risk/reward ratio.

In maintaining an 18c target price, the analyst explains the increased BMG decommissioning capex (-2cps) was offset by higher production rates (1cps) and a higher exploration value for Otway (1cps).

While higher debt levels post-BMG decommissioning increase risk, the broker also notes greater investor leverage to improving Orbost production.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/0

Macquarie upgrades its rating for Domain Holdings Australia to Neutral from Underperform in anticipation of a solid 1H result and reiteration of FY24 guidance.

Since last August's results, the broker points out the company's share price has materially underperformed against the ASX200 and the spread between Domain and REA Group ((REA)) is at record highs.

The target rises to $3.49 from $2.87, largely reflecting a roll-forward of the broker's valuation model to FY25.

ENDEAVOUR GROUP LIMITED ((EDV)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/2/0

Morgan Stanley upgrades its rating for Endeavour Group to Equal-weight from Underweight and raises its target to $5.80 from $5.60 as the focus should turn to operational performance now that conflicts have been resolved. 

A mutually agreed board renewal has been agreed after issues between substantial shareholders and management, explains the broker.

The analysts also feels structural risks (i.e. gaming regulation and the long-term decline in alcohol consumption) are reflected in the current share price.

Morgan Stanley's Industry view is In-Line.

HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/2/1

After an investment thesis review, UBS upgrades its rating for Harvey Norman to Buy from Neutral and raises its target by $1.00 to $4.75.

The broker increases its FY24 EPS forecasts by 18% and 11%, respectively, on higher estimates for revenues and margins across the
Franchising Operations and International Retail segments.

Revenues in Franchising Operations are improving partly due to a more resilient consumer and leverage to the older and more affluent consumer, notes UBS.

Regarding International, the analysts expect significant store growth in Malaysia, while expansion in eastern Europe continues.

LIONTOWN RESOURCES LIMITED ((LTR)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/3/0

Liontown Resources has reviewed spend in a bid to preserve capital and near-term funding requirements, following the news that its previously arranged $760m debt facility would be terminated.

UBS is anticipating Liontown Resources will negotiate a reduced debt package between $300-400m, having already stated it is in talks with the lending syndicate. 

The broker feels the company is sufficiently funded for the Kathleen Valley project to remain on time and budget for first production in mid-2024.

The rating is upgraded to Buy from Neutral and the target price decreases to $1.25 from $1.50.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/1/1

Ord Minnett upgrades its rating for Mineral Resources to Accumulate from Hold on valuation following a recent share price slump.

The broker's forecasts are unchanged, as is the $67 target price.

NANOSONICS LIMITED ((NAN)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/2/1

Nanosonics intends to downgrade 1H guidance when results are released on February 26, given sales have fallen by -4% on the previous corresponding period due to the impact on Trophon sales from budgetary pressures at hospitals.

Earnings (EBIT) for the 1H fell by -72% to $3m, with the company still investing in the Coris product. Trophon replacement sales were down by -23% year-on-year and new unit sales fell by -13%.

Despite these shorter-term negatives, Ord Minnett's longer-term assumptions are broadly unchanged. The $4.00 target and Hold rating are maintained.

NORTHERN STAR RESOURCES LIMITED ((NST)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/3/0

Ord Minnett increases its target for Northern Star Resources to $13.90 from $12.40 following an 8% production beat versus the broker's forecast in the 2Q.

The broker attributes this performance to improved availability at the KCGM mill and early access to higher grades at Golden Pike. These positives combined to offset a slightly softer performance at Jundee, where grades were lower-than-expected.

The analysts increase the target by 12% to $13.90 and upgrade the rating for Northern Star to Accumulate from Hold.

PSC INSURANCE GROUP LIMITED ((PSI)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/0/0

PSC Insurance has become a top domestic insurance broker pick for UBS, second only to AUB Group ((AUB)), amid industry leading margins in its Australian business and scope for margin improvement in its UK business.

The UK operations have operated at a 32.5% margin, lower relative to the broader group margin of 37%, but the company expects the amalgamation of its wholesale operations to drive improved margins. The broker points out sizing this opportunity is difficult, with consensus assuming a 33% margin.

The rating is upgraded to Buy from Neutral and the target price of $5.40 is retained.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/2

Macquarie sees limited upside for Australian banks in FY24, with earnings forecast to decline by around -5-15%, and begins 2024 with an Underweight rating on the Bank sector.

Consensus pre-provision forecasts look reasonable to the analysts, but impairment charges are considered optimistic in light of current interest rate settings.

On the valuation front, the broker notes banks currently trade at an around 15% premium to their three-year relative price/PPOP (pre-provision operating profit) average.

The broker's preferred exposure is Westpac, followed by National Australia bank, ANZ Bank, CommBank, followed by the regionals Bendigo & Adelaide Bank and Bank of Queensland.

The analyst's rating for Westpac is upgraded to Outperform from Neutral on valuation, with scope for the discount to peers to narrow. The target rises to $24 from $20.50.

ZIP CO LIMITED ((ZIP)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/2/0

Zip Co' s business is now generating positive cash earnings, Ord Minnett notes, the balance sheet has been improved and simplified and the stock is trading at a significant discount to the broker's revised target of 75c, up from 42c.

The changes that the company has undergone over the last six months have greatly improved Zip Co's investment potential, Ord Minnett suggests.

The recent launch of the Zip Plus product will assist with driving revenue in the A&NZ business, and the broker expects this to be a higher yielding product than the Zip Pay offering.

Upgrade to Buy from Hold.

Downgrade

ACROW LIMITED ((ACF)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/0/0

Since Ord Minnett included Acrow in its Analyst Conviction List last November, the share price has risen 19%. As a result, the broker downgrades its rating to Accumulate from Buy.

The broker considers the company has strong organic growth opportunities, supported by a robust pipeline and M&A optionality, and expects a strong performance by the key Formwork division at upcoming 1H results.

The target price falls to $1.24 from $1.25.

COCHLEAR LIMITED ((COH)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/1/3

In a review of Australian Healthcare prior to the February reporting season, Citi updates forecasts for stocks under coverage in the sector.

While the broker believes 2023 peaks for wage growth and inflation will provide margin relief for medical services providers, it will take several years for margins to approach pre-pandemic levels.

Following an an exceptionally strong 2023 share price performance, the analysts downgrade Cochlear to Sell from Neutral and keep the $255 target.

Citi forecasts 1H underlying profit of $186m, around 5% above the consensus estimate of $176m.

CORONADO GLOBAL RESOURCES INC ((CRN)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/1/0

With Ord Minnett having adjusted its expectations for weather, Coronado Global Resources' fourth quarter result was broadly in-line, although a miss to the company's recently revised guidance.

The company reported saleable production of 3.9m tonnes, amid excessive rainfall and operational issues at both Curragh and Buchanan, with Coronado Global Resources losing nine and ten operational days at these sites respectively. 

Full year saleable production of 15.8m tonnes was down -1% year-on-year, and a -7% miss to initial company guidance. Ord Minnett has lowered its production expectations -2% each year for FY24 and FY25.

The rating is downgraded to Hold from Accumulate and the target price decreases to $1.80 from $1.90.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Hold from Add by Morgans .B/H/S: 4/1/1

Following a 1H trading update, Morgans assesses Domino's Pizza Enterprises is struggling to restore its position in the Japanese market, and downgrades its rating to Hold from Add.

While both A&NZ and Germany performed well, explains the broker, same store sales (SSS) in Asia and France are weighing on revenue and depressing profits.

The analyst originally forecast $100m profit (PBT) for the 1H (consensus $103m), and now management expects between $87-90m, a fall of between -14-17% on the previous corresponding period.

The target falls to $50 from $61.

IDP EDUCATION LIMITED ((IEL)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/0

Following Canada's announcement of a two-year cap on new International student visas, Morgans anticipates ongoing IDP Education share price uncertainty not only from this announcement but also potential policy changes going forward. 

The new announcement is expected to see a cap of around 360,000 student study permits granted in 2024, down by -35% on 2023, explain the analysts.

While the broker considers the earnings impact on IDP Education is manageable, and the company still has strong long-term growth prospects, the rating is lowered to Hold from Add. The target is also reduced to $23.45 from $27.90.

JUDO CAPITAL HOLDINGS LIMITED ((JDO)) Downgrade to Sell from Buy by Citi .B/H/S: 1/3/1

Citi believes FY25 consensus earnings forecasts for Judo Capital are around 60% too high and suggests the nadir for earnings will occur in that financial year instead of FY24.

The broker's rating is downgraded by two notches to Sell from Buy and the target slashed to 87c from $1.35. Judo is now Citi's least preferred bank from among the regionals.

Revenue growth over the next year will be the main problem, according to the analysts, as higher cost of funds will push Judo toward relationship-based lending rather than competing with the major banks.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/1/3

Magellan Financial's remaining $50m option liability has been reduced by -$115m for a cost of $75m (to-date). Macquarie view's
this as a large cost for what appeared to be an unlikely scenario of the options being exercised.

Additionally, if the options were exercised this would have provided Magellan with up to $2bn of close-ended funds, which generates fee income.

This potentially suggests to Macquarie Magellan is planning to convert the close-ended fund to open-ended. This would likely see a
spike in outflows.

Positive market moves have nevertheless taken the target up to $7.60 from $7.00. Downgrade to Underperform.

PRO MEDICUS LIMITED ((PME)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/2

In a review of Australian Healthcare prior to the February reporting season, Citi updates forecasts for stocks under coverage in the sector.

While the broker believes 2023 peaks for wage growth and inflation will provide margin relief for medical services providers, it will take several years for margins to approach pre-pandemic levels.

Following a more than 70% share price increase in 2023, the analysts downgrade Pro Medicus to Sell from Neutral and keep the $72 target.

Citi forecasts 1H EPS of 35.3cps, around 2% above the consensus estimate.

POLYNOVO LIMITED ((PNV)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0

As PolyNovo's 1H trading update revealed profitability ahead of Morgans forecast, the broker's earnings forecasts for the period are increased to $3.8m from $2.8m, which is slightly in advance of the $3.6m forecast by consensus.

The broker's target rises to $1.95 from $1.88 and the rating is downgraded to Hold from Add following a 30% share price rally in the last month.

First half results are due on February 27.

SYNLAIT MILK LIMITED ((SM1)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/1/1

Back on December 22, Bell Potter lowered its rating for Synlait Milk to Hold from Buy and reduced its target to 95c from $1.50, due to a  higher assumed risk profile.

In justifying these changes, the broker noted both the drawn out sale of the Dairyworks business (ahead of upcoming debt payments) and the ongoing dispute with a2 Milk Co ((A2M)). 

The analysts felt a recapitalisation may be required to meet NZ$310m of debt obligations in 2024, unless the Dairyworks sale was executed.

SEVEN GROUP HOLDINGS LIMITED ((SVW)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 2/1/0

Bell Potter increases its target for Seven Group to $38 from $33 after assuming a higher terminal growth rate of 3.5%, up from 3% and a lower weighted average cost of capital (WACC) of 8.8%, down from 9.3%. Changes are driven by lower near-term risk-free rate expectations.

The broker has also initiated coverage of Boral (see in today's Broker Call Report) with only a minor impact on Bell Potter's Seven Group's EPS forecasts.

The rating is downgraded to Hold from Buy with no explanation given in the broker's research note.

LOTTERY CORPORATION LIMITED ((TLC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/2/0

Macquarie upgrades FY24 foreacsts for Lottery Corp as Australian industry lottery volumes have fallen less than expected in the 1H and the 2H is off to a strong start, according to the broker's proprietary tracking data.

The analyst now forecasts 6% lottery volume growth in FY24, up from 4%, with 20% growth anticipated for the 2H.

The rating is downgraded to Neutral from Outperform after a recent share price rally, and the target price rises to $5.05 from $4.95.

WESFARMERS LIMITED ((WES)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 2/2/2

Ord Minnett downgrades its rating for Wesfarmers to Sell from Lighten on valuation following a recent share price rally.

The broker's forecasts are unchanged, as is the $42 target price.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/1

Mixed 2Q production results for Whitehaven Coal didn't greatly change Morgans investment view. It's felt the acquisition of the BHP Mitsubishi Alliance's (BMA) assets is progressing strongly and can transform appeal of the company's shares due to superior scale, diversification and investor reach.

Sales in the Q2 were a 10% beat versus the broker's forecast, while achieved pricing was a -13% miss on lower-than-expected NEWC pricing, explains the analyst.

Given the share price has risen to within 10% of the new target of $8.50 (down from $8.60), Morgans downgrades its rating to Hold from Add.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms