Weekly Ratings, Targets, Forecast Changes – 11-12-20

This story features AINSWORTH GAME TECHNOLOGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGI

By Mark Woodruff

Guide:

The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett 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 December 7 to Friday December 11, 2020
Total Upgrades: 14
Total Downgrades: 20
Net Ratings Breakdown: Buy 51.14%; Hold 38.96%; Sell 9.90%

For the week ending Friday December 11 there were fourteen upgrades and twenty downgrades to ASX-listed stocks in the FNArena database. Two of the broker upgrades were for Evolution Mining, while Fortescue Metals Group and Lynas Rare Earths received two downgrades apiece.

While Morgan Stanley expects gold to be in a holding pattern in 2021, the broker likes the expansion potential for Evolution Mining and that the share price has recently retraced. Macquarie concurs on the latter point and upgrades the stock to Neutral from Underperform. The mirror-opposite was true for Fortescue Metals, with two brokers downgrading the rating after a 40% rally in the share price in the last six months.

This seems insignificant when compared to the 115% rally of the Lynas share price since July, which prompted two broker downgrades on valuation grounds. This is despite the company’s exposure to electric vehicles and strategic position as one of only two non-China rare earth producers.

While there were no material negative percentage changes to target prices for the week, there were several material positive changes made by brokers. Metcash was second on the table for largest percentage rise in target price. Six brokers had their say on first half results and concluded operating income, net profit and dividends were all significantly above expectations. Hardware is now considered the medium-term driver of growth given the robust expectations for the recent Total Tools acquisition.

The mining sector accounted for the remainder of companies with a positive material percentage change to target price. For the second week in a row the biggest change related to Syrah Resources, despite Morgan Stanley downgrading the rating. Positivity has been building with expectations for a tightening of the graphite market and the positive implications for a restart at the Balama facility. However, with significant capital expenditure needed for the 40ktpa AAM facility at Vidalia, the broker expects funding could become a key issue. UBS counters by highlighting the raising of $124m via a three-tier funding package.

Other mining companies included Fortescue Metals, BHP Group and Western Areas. Last week broking houses were overhauling forecasting models to account for the ongoing rise in the iron ore price and revisions for other metals and oil. Perhaps expectations by Macquarie for earnings upgrades over the next three years of around 60% for BHP Group summarises the prevailing mood.

An improved earnings outlook for base metals and, in particular, better leverage to an improving nickel price resulted in Macquarie upgrading Western Areas to Outperform from Neutral.

Given all the above, it comes as no surprise that both Fortescue Metals and Western Areas also appeared in the top four percentage rises in forecast earnings for the week. Michael Hill International had the largest gain after revealing an over 200 basis point gross margin improvement. After a period of defending market share, Credit Suisse believes this now reflects a good balance between margin and sales growth.

As mentioned last week, Karoon Energy shares are on an earnings upgrade roll since the recent Bauna acquisition. Macquarie also envisages "forgotten" upside in the Neon & Goia oil fields. The broker assesses the company is turning its attention to a broader Santos Basin strategy in order to boost oil production.

Metcash also had strong forecast earnings upgrades on top of the lift in average price target for the week explained above.

Finally, Alliance Aviation Services was a key beneficiary of the changes in the Western Australian and Queensland aviation services market. Consequently, Ord Minnett upgraded earnings after a positive trading update that revealed first half pre-tax profit guidance 20% ahead of the broker’s expectations.

On the flipside, Qantas Airways had the largest percentage fall in forecast earnings by brokers for the week. Concerns arose as Virgin is expected to gain a higher share of the profit under Bain's ownership, and a third entrant (the regional airline Regional Express) is planning to enter the intercity market in March 2021.

Next in order of percentage move was Cooper Energy. As detailed last week, there are now five brokers researching the company in the FNArena database. This is after Morgan Stanley initiated coverage last week with an Equal-Weight rating and a target price of $0.40. The new broker’s earnings projection had the effect of lowering the overall average earnings of the five.

Finally, Coronado Global Resources has benefitted as Macquarie increased earnings multiples for FY21 and FY22 to capture the recovery in metallurgical coal. The broker notes a current premium being paid for Western coal, resulting from the perceived Chinese import ban on Australian coal. The analyst notes a 10% change in metallurgical coal prices is considered to drive a circa 50% change in earnings.

Total Neutral/Hold recommendations take up 51.14% of the total, versus 38.96% on Neutral/Hold, while Sell ratings account for the remaining 9.9%.

Upgrade

AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/1

Ainsworth Game appears likely to return to profitability in FY22 and Macquarie notes material operating leverage from improved volumes.

The broker believes slot products suppliers should be through the worst of the pandemic now, as most casinos around the world have reopened. The broker now forecasts a -$22m pre-tax loss in FY21.

Ainsworth should gain from opportunities in North America, with Kentucky Historical Horse Racing turnover at 30% above pre-pandemic levels.

The MTD Gaming acquisition should also deliver incremental sales, supported by an exclusive year deal with Golden Gaming in Montana. Macquarie upgrades to Outperform from Neutral and raises the target to $0.65 from $0.45.

APPEN LIMITED ((APX)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/1/0

Appen's trading update highlights a weaker than expected pipeline of project work over the third and fourth quarters of 2020.

The company has cut its 2020 operating earnings guidance by -15-16% to $106–109m, citing pandemic disruption to its key customers and currency moves affecting Appen’s large mature projects.

Ord Minnett believes there is some uncertainty in the short term with respect to the sales pipeline although the industry backdrop remains favourable. The broker expects growth momentum to bounce back over FY21-22.

Led by the change in its earnings forecasts, Ord Minnett reduces the target for Appen to $30 from $35 while upgrading its recommendation to Accumulate from Hold.

ESTIA HEALTH LIMITED ((EHE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

Macquarie acknowledges the short-term outlook for the residential aged care sector is uncertain, yet increased government funding represents potential upside while corporate action is also a possibility.

The broker assesses Estia Health has lower relative earnings risk and a favourable balance sheet. Hence, the rating is upgraded to Outperform from Neutral. Target is raised to $1.95 from $1.70.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Equal-weight from Underweight by Morgan Stanley and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/2

Morgan Stanley expects a global v-shaped recovery, bolstered by the recent covid vaccine discoveries. The broker expects inflation to return in late 2021, leading to a weaker USD and in turn supporting commodities.

The broker expects gold to be in a holding pattern in 2021 with global growth offset by a weaker US dollar and inflation.

Driven by its recent pull-back which has brought the stock closer to its valuation and noting further expansion potential, Morgan Stanley upgrades its rating to Equal-weight from Underweight. Target falls to $4.60 from $4.90. Industry view: Attractive.

The spot price for gold presents some upside to Macquarie's FY21 earnings forecasts, primarily a function of currency.

The broker's gold price forecasts calls for a -21% and -22% drop in gold prices in Australian dollar terms in 2021 and 2022, respectively.

Rating is upgraded to Neutral from Underperform on valuation. Target is steady at $5.30.

IGO LIMITED ((IGO)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/0

IGO will acquire a 25% interest in Greenbushes lithium and a 49% interest in downstream Kwinana lithium hydroxide, for US$1.4bn. Funding will be via debt and equity.

The deal is expected to be accretive from FY23 and cash flow accretive from FY24. Credit Suisse welcomes the deal, as the transaction is at the bottom of the cycle from a forced seller in a sector where the structural growth theme prevails.

It also addresses the mine life deficiency in the company's portfolio. Rating is upgraded to Outperform from Neutral and the target raised to $6.00 from $4.90.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/1/0

Strong US demand and higher fertiliser prices over the last month have underpinned Incitec Pivot, which has also been able to capture some of the premium in US diammonium phosphate prices via US exports.

Macquarie expects this will continue over the short term before supply moves to the key Australian season.

The share price is still at a discount to traditional fertiliser price correlation and book value, hence Macquarie upgrades to Outperform from Neutral. Target is raised to $2.67 from $2.30.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 5/2/0

Macquarie upgrades to Neutral from Underperform on valuation. The broker's gold price forecasts are -21% and -22% lower, in Australian dollar terms, versus spot prices over 2021 and 2022, respectively.

The company's copper exposure has a beneficial impact, providing amplified earnings upside, the broker adds. Target is steady at $29.

OCEANAGOLD CORPORATION ((OGC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/2/0

OceanaGold has provided an update on the renewal process for Didipio, having been instructed to engage with the Philippine natural resources department to finalise the renewal of the licence.

Macquarie assesses this is a clear positive, although the blockade by the local authority still needs to be resolved and a re-start will take time once the licence is granted.

Nevertheless, Didipio is now incorporated into forecasts and the uplift to earnings estimates highlights the importance of the operation.

Rating is upgraded to Neutral from Underperform and the target raised to $2.70 from $1.70.

PANORAMIC RESOURCES LIMITED ((PAN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/2/0

Panoramic Resources has leverage to an improving nickel price environment, Macquarie assesses.

The broker lifts the rating to Neutral from Underperform following progress on development. Target edges up to $0.13 from $0.10.

PERPETUAL LIMITED ((PPT)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/4/0

Credit Suisse now assesses Perpetual is offering value, amid a reduced attrition risk and a likely moderation in outflows.

The broker believes the recent outperformance of value versus growth could benefit the company through reduced gross outflows as client retention improves, amid higher gross inflows because of allocations to value strategies.

Rating is upgraded to Outperform from Neutral and the target is raised to $39 from $31.

TYRO PAYMENTS LIMITED ((TYR)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/1/0

The company's updates have revealed a sustained recovery is occurring and merchant acquisition fee margins remain resilient. The main risk, in Macquarie's view, is the elevated churn which incorporates a degree of uncertainty.

The broker increases FY21 transaction value forecasts to $26bn, which does not include any uplift from the transaction with Bendigo & Adelaide Bank ((BEN)) and completion earlier than the slated date of June 30 could provide a slight timing benefit.

Rating is upgraded to Neutral from Underperform and the target raised to $3.50 from $3.25.

WEST AFRICAN RESOURCES LIMITED ((WAF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

Macquarie makes modest reductions to 2021 and 2022 Australian dollar gold price forecasts. For the majority of gold stocks this means small reductions to earnings forecasts for FY21-23.

West African Resources is upgraded to Outperform from Neutral on valuation. Target is steady at $1.10.

WESTERN AREAS NL ((WSA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

An improved earnings outlook for base metals and, in particular, better leverage to an improving nickel price has resulted in Macquarie upgrading Western Areas to Outperform from Neutral.

Spot copper and nickel prices are trading 7-17% above upgraded FY21 and FY22 forecasts and as a result the broker calculates earnings upside of 60% to more than 100% under a spot price scenario for FY22. Target rises to $2.60 from $2.00.

Downgrade

BHP GROUP ((BHP)) Downgrade to Hold from Add by Morgans .B/H/S: 5/2/0

Morgans upgrades iron ore forecasts after Brazilian major Vale (again) downgraded forward iron ore shipments guidance.

The broker adjusts forecast 2021 supply balance to a deficit from a surplus, all else remaining equal.

The analyst considers earnings support for big Australian iron ore miners looks set to continue beyond current consensus expectations, though a lot is already factored into share prices.

Taking account of this recent share price strength, Morgans downgrades BHP Group to Hold from Add, while the target price increases to $40.90 from $39.40.

CHAMPION IRON LIMITED ((CIA)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/0/1

Champion Iron is considered the star performer amongst global iron ore exposures. Citi has revised upwards its FY22-23 operating income forecasts by 26-59%.

Even so, the broker notes the shares price has risen by 60% in three months, surpassing the mid-term earnings changes.

Citi downgrades its rating to Sell from Neutral with the target price rising to $4.40 from $3.35.

CARNARVON PETROLEUM LIMITED ((CVN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

Macquarie updates oil price revisions, raising 2021 oil price forecasts by 3.1% to US$50/bbl and lowering 2022 estimates by -4.9% to US$53.75/bbl.

The broker assesses Carnarvon Petroleum has performed well and downgrades to Neutral from Outperform. Target is steady at $0.30.

While there is potential for more upside in testing the Apus & Pavo oil prospects there is also the risk associated with these projects and the likely requirement for more equity ahead of the final investment decision on Dorado.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Equal-weight by Morgan Stanley .B/H/S: 4/3/0

Morgan Stanley notes large commercial and industrial customers are looking into reusing their waste or improve packaging materials, but the overall waste production behaviour in Australia has changed little.

Laws and policies now require more of recycled content in packaging manufacturing and in the government procurement process although standardisation of landfill levy is difficult to achieve across states given the regulation structure and transport costs.

Cleanaway Waste Management could improve its competitive advantage by working on its digital strategy, suggests Morgan Stanley, and help the company win municipal contracts and potentially national accounts.

Equal-Weight rating. Target is $2.50. Industry view: Cautious.

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

UBS downgrades Deterra Royalties to Neutral from Buy to reflect the run-up in the share price. The target rises to $5 from $4.80.

After a covid impacted first quarter for the miners, the mining sector has rebounded strongly and is up 23% year to date against the ASX300 which is up 4% year to date.

With balance sheets restored, capital spend contained and free cash flow at record levels, the broker considers miners to be in a strong position which should see increased returns in 2021.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Neutral from Buy by Citi and Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/3/1

Backed by Citi's revised iron ore price forecasts, the broker has revised Fortescue Metals Group's FY21-22 operating income and net profit forecasts up by 32-33% and 38-43% respectively. 

On the flip side, the company's shares are up 40% in the last six months.

Citi downgrades its rating to Neutral from Buy with the target rising to $21 from $18.50.

Ord Minnett was impressed with the company's deep review of the operating performance. Fortescue Metals has guided to 175-180mt of ore shipped at a cost of US$13-13.50/t. Capital expenditure budget remains at US$3-3.4bn.

Further gains are expected from the installation of a wet high intensity magnetic separator at Christmas Creek.

Fortescue Metals has also outlined a target of 2040 for net zero emissions although provided no update on plans for 235GW of renewable power or specifically on the Bell Bay project.

Rating is downgraded to Accumulate from Buy following the recent run up in the share price. Target is unchanged at $20.40.

ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/5/0

Morgan Stanley expects a global v-shaped recovery, bolstered by the recent covid vaccine discoveries. The broker expects inflation to return in late 2021, leading to a weaker USD and in turn supporting commodities.

Supportive supply-demand benefitted iron ore this year but the second half of 2020 could be weaker, suggests the broker.

Noting Iluka resources has reached the broker's valuation levels, the broker downgrades its rating to Equal weigh from Overweight.

Target price rises to $5.20 from $5. Industry view: Attractive.

JUPITER MINES LIMITED ((JMS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Macquarie reduces manganese price forecasts which drives material reductions to earnings estimates for Jupiter Mines in FY21-24.

Rating is downgraded to Neutral from Outperform. Target is reduced to $0.30 from $0.35.

LYNAS CORPORATION LIMITED ((LYC)) Downgrade to Neutral from Buy by UBS and Downgrade to Lighten from Buy by Ord Minnett .B/H/S: 0/1/0

Lynas Corp's share price has risen circa 80% year to date and has moved from being a large discount to UBS's net present value of the stock to a small premium.

The broker thinks the circa US$65-70/kg for Neodymium-Praseodymium is now priced in versus the circa US$40-45/kg at the beginning of the year. Also, there remains execution risk on the plant restructure which is set to cost around $500m.

While UBS likes Lynas’ exposure to electric vehicles and acknowledges its strategic position as one of only two non-China rare earth producers, the broker considers the risk/reward more balanced.

UBS downgrades its rating to Neutral from Buy with the target rising to $4.30 from $4.05.

Ord Minnett has substantially downgraded its rating to Lighten from Buy with the target unchanged at $4.2.

The broker highlights Lynas Corp's stock price is up 115% since July and is now considered fair value. Investors are advised to wait for a more attractive re-entry level since the outperformance looks unsustainable, in Ord Minnett's view.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/2

Credit Suisse lowers estimates to allow for weaker funds under management and first half performance fees. The Global Fund underperformed in November and the broker notes the one-year performance is at risk of deteriorating.

The broker suggests this could remove "a little of Magellan Financial's shine" amid concerns over fund flows and a small PE de-rating.

The broker estimates only the High Conviction Fund is on track to generate performance fees, although these will be modest. Rating is downgraded to Neutral from Outperform and the target is lowered to $58.50 from $66.00.

METCASH LIMITED ((MTS)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/2/0

First half net profit was ahead of UBS estimates. The pandemic has structurally benefited Metcash, the broker observes, through a "shop local" emphasis and increased at-home consumption.

Nevertheless, UBS finds the risk/reward balanced given the valuation. Scope for capital returns exists, the broker notes, given the business is net cash to the tune of $120m. Rating is downgraded to Neutral from Buy and the target is raised to $3.70 from $3.25.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/3/1

Morgan Stanley expects a global v-shaped recovery, bolstered by the recent covid vaccine discoveries. The broker expects inflation to return in late 2021, leading to a weaker USD and in turn supporting commodities.

Gold is expected to be in a holding pattern in 2021 with global growth offset by a weaker US dollar and inflation.

Factoring the improvements at Pogo and exploration potential across sites more than priced-in, Morgan Stanley downgrades its rating to Underweight from Equal-weight. Target falls to $11.70 from $12.65. Industry view: Attractive.

OIL SEARCH LIMITED ((OSH)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/5/2

Macquarie downgrades further, to Underperform, having downgraded to Neutral in November after a very strong rally in the stock.

The broker suspects further progress on breaking even in Alaska will not be easy to achieve and the sell-down of a 15% stake will be a relatively challenging process. The stock is now considered overvalued. The target is reduced to $3.40 from $3.50.

SCENTRE GROUP ((SCG)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/2/2

Macquarie assesses online penetration will increase to 20% of retail sales by 2025, double pre-pandemic levels. Accounting for supply additions and online leakage, the broker estimates like-for-like bricks and mortar sales growth of 0.7% per annum.

This is below the typical rental escalators the specialties of 4-5%. The broker also assesses online models can deliver competitive margins.

Scentre Group's portfolio does have an inherent advantage in the quality of its assets but the broker envisages downside risk as cash flows remain under pressure with the rise in e-commerce penetration.

Rating is downgraded to Underperform from Neutral, and the target is lifted to $2.68 from $2.18 given a less negative view on the outlook of retail asset values post a coronavirus vaccine.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/0

UBS has made some changes to its base metals forecasts including a lift in the copper price for 2021.

Sandfire Resources has already re-rated strongly post the final investment decision at T3. UBS notes Sandfire's share price is trading in line with the broker's net present value with a balanced risk/reward.

Preferring OZ Minerals ((OZL)) in copper, UBS downgrades its rating to Neutral from Buy with the target price rising to $6 from $5.50.

SYRAH RESOURCES LIMITED ((SYR)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/0/1

Morgan Stanley expects a global v-shaped recovery, bolstered by the recent covid vaccine discoveries. The broker expects inflation to return in late 2021, leading to a weaker USD and in turn supporting commodities.

Morgan Stanley has updated Syrah Resources' forecasts. With the company's flagship mine still under maintenance and with significant capex needed for the 40ktpa AAM facility at Vidalia, the broker expects funding could become a key issue.

The broker downgrades its rating to Underweight from Equal-weight. Target rises to $0.60 from $0.45. Industry view: Attractive.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 4/3/0

Woodside Petroleum has given notice the current CEO will retire mid 2021. Management has assured the market the current strategic plan will be retained, although in Ord Minnett's view the announcement is a surprise and comes at a critical time.

There are particularly important negotiations underway with joint-venture partners as well as a final investment decision due on the Scarborough/Pluto train 2.

The broker downgrades, the second in two days, to Hold from Accumulate. Target is $23.80.

Woodside Petroleum has exercised pre-emptive rights to acquire FAR Ltd's ((FAR)) stake in the Sangomar project in Senegal for US$165-170m.

The transaction is modestly accretive in US dollar terms, Ord Minnett suggests, although increasing the stake to 82% lifts the capital expenditure burden by around US$600m.

Woodside has indicated it will sell down to 40%, and the process of selling down should demonstrate the value of the project more so than the acquisition of the Cairn Energy and FAR stakes.

Ord Minnett downgrades to Accumulate from Buy to reflect the strong performance in the share price. Target is reduced to $23.80 from $24.00.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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