Weekly Ratings, Targets, Forecast Changes – 19-07-24

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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 July 15 to Friday July 19, 2024
Total Upgrades: 9
Total Downgrades: 6
Net Ratings Breakdown: Buy 58.68%; Hold 32.63%; Sell 8.68%

For the week ending Friday July 19, 2024, FNArena recorded nine ratings upgrades and six downgrades for ASX-listed companies by brokers monitored daily.

The tables below show percentage upgrades by brokers to average earnings forecasts were larger than downgrades, while changes in average target prices were broadly equal if the increase for Zip Co is excluded.

All three covering brokers in the FNArena Database raised Zip Co’s target price dramatically, lifting the average to $1.92 from $1.50.

The June-quarter market update pleased Citi as customer spending in the US rose by 43% year on year, helping to contain bad debts to below target in a tough operating environment.

In a highly accretive move for cash earnings per share, management simultaneously announced (and then later completed) a $217m equity placement. Proceeds will be used to retire a $130m corporate debt facility, along with associated exit fees.

UBS raised its forecasts given $23m of annual interest savings and an improved cash earnings margin profile as management continues to focus on operating leverage.

Zip Co was also placed second on the earnings upgrade table below, behind Patriot Battery Metals.

Citi initiated research coverage on lithium hopeful Patriot Battery Metals last week with a Buy, High Risk rating and a 75c target price.

Patriot’s Corvette project in Quebec is a tier 1 deposit due to its location, size, and grade, making the company an attractive acquisition target despite tough short-term lithium fundamentals, explained the broker.

The inferred resource can support 800ktpa of production for decades, which could underpin a sizeable 100ktpa chemicals facility, according to Citi, which would place Corvette in the top-ten lithium mines by lithium carbonate equivalent globally.

FNArena has prepared a dedicated story on Patriot Battery Metals, which is due for publication later today.

Next on the earnings upgrade table we find Nanosonics, Polynovo, and Cooper Energy.

Ord Minnett highlighted a “strong” finish to FY24 by Nanosonics with stronger-than-expected second half earnings guidance. Group revenue of $90.4m for the second half beat the analyst’s forecast for $87m.

While installations of the flagship Trophon device were fewer-than-expected by the broker, a wider gross margin and higher sales of consumables provided a greater offset.

Regulatory approval for the Coris device is the next likely share price catalyst, suggested Bell Potter. After the broker’s carrying value for this device was increased following a regulatory submission, and after other minor forecast earnings changes, the target was raised to $3.45 from $3.00.

FY24 results are due on August 27 for Nanosonics where Morgans is hoping for an early FY25 trading update.

PolyNovo’s FY24 result is due on August 23, prompting Morgans to refresh research in anticipation.

Solid revenue growth achieved in the first half is set to continue into the second half and for the next three years, suggested the analyst. The target was raised to $2.50 from $2.22 on a valuation roll-forward of the broker’s financial model which captured an additional year of growth.

For Cooper Energy, Macquarie raised earnings forecasts following fourth quarter sales and gas price realisation numbers which beat the broker’s forecasts by 4% and 15%, respectively.

In line with Ord Minnett’s forecast, the company produced 950,000 barrels of oil equivalent for the quarter, leaving the total for FY24 in the middle of management’s guidance range.

The Sole pipeline is now functioning at its regular pressure level, and operations will return to normal within a fortnight, stated management. Next quarter, an increase in production is expected at Orbost following recent enhancements at the plant.

Cooper Energy’s FY24 capital expenditure, as well as decommissioning costs for the Basker Manta Gummy (BMG) subsea oil development (located in the Gippsland Basin) should meet guidance, suggested Bell Potter.

On the flipside, Kelsian Group received the largest, and sole material downgrade by brokers to average earnings forecast in the FNArena database last week.

The ongoing shuffle of research coverage continues at Ord Minnett. In-house analysis of Kelsian Group has been transferred to a “retail research partner” and the stock is now rated a Buy (from Hold previously), with a $6.60 target price.

The share price has lost nearly one third of its market value in just five months partly due to investor fears over squeezed margins in the company’s Australian operations and increasing capital intensity, explained the analyst.

Such concerns should be allayed in FY25, according to the broker, and earnings should rise over the FY25-28 forecast period due to new contract wins and successful execution of the US strategy.

Total Buy ratings in the database comprise 58.68 % of the total, versus 33.63% on Neutral/Hold, while Sell ratings account for the remaining 8.68%.

Upgrade

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

Ord Minnett raises its earnings estimates for Acrow to reflect “strong” new hire contract momentum reflected in the July 2 trading update.

The broker’s target is increased to $1.31 from $1.25 (which includes a valuation-roll-forward) and the rating upgraded to Buy from Accumulate.

New hire contracts grew by around 16% to $78.3m in FY24, providing a strong base for growth in FY25, in the analyst’s view.

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

Citi revises the outlook for BlueScope Steel on the back of anticipation of bottoming of US steel prices as an “uptick” is expected as the Fed eases monetary conditions.

Domestically, the risk of another RBA rate hike could impact on volumes.

The broker adjusts earnings forecasts to the lower end of 2H24 guidance at $620m, but is more upbeat on improved Asia export spreads and volumes for North Star in FY26.

The target price decreases to $23.70 from $24 and the rating is upgraded to Buy from Neutral with the valuation for prospective earnings in FY27 at a low.

CAR GROUP LIMITED ((CAR)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/0

Citi upgrades CAR Group to Buy from Neutral with a target price lift to $39.80 from $34.70.

While acknowledging some forex headwinds and a risk of another rate rise domestically, the broker points to the strength of the company’s position and expected robust growth even with macro headwinds.

Overseas, Citi believes falling interest rates will provide tailwinds for Brazil and the US.

Over the medium-term, double-digit earnings growth is forecast by Citi, with the potential for “bolt-on’ acquisitions and mergers.

EPS estimates are tweaked by 0.5% in FY24 and -3.9% for FY25.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/0/0

UBS raises its target for Flight Centre Travel to $27.80 from $21.30 after raising FY25-28 EPS forecasts by between 19-21%, and the rating is upgraded to Buy from Neutral.

According to the broker’s proprietary airfare tracker, Australian international airfares continue to fall which should result in growing volume.

A UBS consumer survey also indicates consumers continue to prioritise travel. Further, Flight Centre’s Leisure demographic is skewed towards older customers with lower mortgages and higher deposits, while Corporate is still delivering new business wins.

IRESS LIMITED ((IRE)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/0

Morgans reviews the financial services sector to reflect broad improvements in equities the June half, as well as fund flows.

Iress has also upgraded FY24 guidance by 4% after bringing forward transformation benefits thanks to strong cost discipline and focus on the core business.

Management is expected to report on the divestment of UK Mortgages soon, says the broker.

Morgans upgrades Iress to Add from Hold to reflect growing confidence in the prospects of a turnaround. Target price edges up to $9.85.

KELSIAN GROUP LIMITED ((KLS)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/0/0

Ord Minnett has transferred coverage of Kelsian Group to its “retail research partner” and the stock is now rated a Buy from Hold previously, with a $6.60 target price.

The broker expects the concerns over margin pressures at the domestic operations, which have resulted in a -30% decline in the stock price, will be alleviated in FY25.

EPS growth of 24% is forecast by Ord Minnett with potential upgrades to expectations through to FY28 from new contracts.

Buy. $6.60 target price.

NICKEL INDUSTRIES LIMITED ((NIC)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/0/0

Post the -14% fall in the share price for Nickel Industries over the last 10-weeks, Citi upgrades the company to Buy (High Risk) as the only pure play nickel producer on the market.

The broker considers 1H24 EBITDA earnings as the trough and expects some earnings growth momentum going forward with the probability of consensus earnings improvements.

Nickel Industries’ 55% owned nickel leach project should start production in 3Q25. Buy (High risk) rating and $1.10 target price.

RIO TINTO LIMITED ((RIO)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/0

Rio Tinto’s June-quarter operational result held, observes Morgans, as high-margin Escondida production outpaced estimates – enough says the broker to offset a medium-term easing in the iron ore prices

The broker spies risks to the timing of Pilbara iron ore mining approvals and trims iron ore forecasts accordingly.

Management advises costs are on the rise due to operational and social expenditure, and expects a -US$0.7bn working capital outflow at the full-year result.

Productivity improved, observes Morgans, and Simandou is on track. Rating upgraded to Add from Hold. Target price eases to $130 from $132.

WOODSIDE ENERGY GROUP LIMITED ((WDS)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/3/0

Citi upgrades Woodside Energy to Neutral from Sell with a $28 target price post a June quarter mark-to-market of forecasts.

The analyst highlights a preference for Santos ((STO)) which is also Neutral rated, due to the structural problem of an “ex-growth” portfolio for Woodside Energy.

Citi’s earnings forecast is in line with consensus for the 2Q2024 results, the broker states, and the Sangomar ramp-up is progressing as anticipated.

A better-than-expected ramp-up would potentially raise forecast production, which is currently at the lower end of the guidance range.

Downgrade

AUSTRALIAN UNITY OFFICE FUND ((AOF)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/0/0

Ord Minnett notes Australian Unity Office Fund announced a contract to sell 2-10 Valentine Ave, Parramatta for $80.5m, which is circa -15% below the December 2023 valuation and -6% below the draft June 2024 valuation.

The broker considers this to be a reasonable result as Parramatta has a 24% vacancy rate.

Following the settlement of this sale and the earlier sale of 96 York Street, Beenleigh, Ord Minnett lowers the target price to $1.37 from $1.45.

Australian Unity Office Fund retains two assets valued at around $97m as of December 2023, down from eight assets two years ago and the analyst expects it may eventually wind up the fund, subject to approval. 

The rating is downgraded to Accumulate from Buy.

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 5/3/0

Ord Minnett believes the consensus earnings forecast for Corporate Travel Management is way too high relative to industry conditions and the company’s positioning within that industry.

The broker’s rating is downgraded to Hold from Accumulate and the target is lowered to $13.16 from $14.91 due to lower forecasts for Asia and Europe.

Industry analysis shows the structural decline in volumes for travel management companies compared to pre-covid driven by virtual meetings and sustainability dynamics, notes the broker. 

A recent decline in economic conditions worsens the outlook further, explains the analyst.

GENESIS MINERALS LIMITED ((GMD)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/1/0

Fourth quarter gold production and costs (AISC) for Genesis Minerals were in line with the forecasts by UBS. The mid-point of management’s FY24 production guidance is set to be achieved, believes the analyst.

The analyst’s target rises to $2.25 from $2.15 on higher volume assumptions for the latter half of this decade. The rating is downgraded to Neutral from Buy after the recently strong share price performance.

MYSTATE LIMITED ((MYS)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/0/0

Ord Minnett raises its target to $4.20 from $3.98 based on a rising market (and higher bank multiples) but downgrades the rating for Mystate to Accumulate from Buy.

The downgrade follows a strong share price rise and a lower forecast total return over the next 12-months of 9%, explains the analyst.

The FY24 profit result is due on August 22 and Ord Minnett is forecasting a profit of $35.2m, which would be a fall of -9% on the previous corresponding period.

PRAEMIUM LIMITED ((PPS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

Praemium’s June Q update was below Ord Minnett’s expectations, with the SMA not growing as fast as forecast and Powerwrap experiencing larger outflows.

The SMA platform is not currently providing sufficient momentum to offset outflows from other areas of the business, the broker notes. OneVue and the new investor-directed portfolio service offer growth opportunities, but not in the short term. OneVue needs to be integrated and the new IDPS needs to be launched.

Praemium is unlikely to post material net new business over the next 12 months, Ord Minnett warns. In that context, valuation is likely to remain discounted. Target falls to 50c from 55c, downgrade to Hold from Buy.

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

Macquarie observes the -17% decline in the SEEK Job Ad Index in the six months to June, and expects the index remains at these levels through FY25, representing an -8% year-on-year decrease.

The upcoming Seek result could be “messy”, states the broker, due to the differences in treatment of Latam (estimated to generate $490m-$530m on sale).

Earnings forecasts are trimmed by -11% for FY24 due to the weak job ads and -26% for FY25 with Macquarie highlighting its estimates sit at -7% and -15% FY24/FY2 below consensus forecasts, respectively.

The target price is sliced by -21% to $23 from $29 and the stock is downgraded to Neutral from Outperform.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=BellPotter,Citi,Macquarie,MorganStanley,Morgans,OrdMinnett,ShawandPartners,UBS&b0=189,130,173,95,228,236,161,137&h0=100,131,165,116,175,149,22,158&s0=8,41,36,52,18,40,5,31″ style=”border:1px solid #000000;”>

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