Weekly Ratings, Targets, Forecast Changes – 27-08-21

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

Weekly update on stockbroker recommendation, target price, and earnings forecast changes.

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 August 23 to Friday August 27, 2021
Total Upgrades: 24
Total Downgrades: 26
Net Ratings Breakdown: Buy 53.08%; Hold 39.19%; Sell 7.73%

For the week ending Friday 27 August, there were twenty four upgrades and twenty six downgrades to ASX-listed companies by brokers in the FNArena database.

Several companies received ratings changes from two separate brokers. Iluka resources, Qube Holdings and Scentre Group had twin ratings upgrades while nib Holdings, experienced dual downgrades. The reasoning behind these changes is available at the FNArena Corporate Results Monitor. (https://www.fnarena.com/index.php/reporting_season/)

While the link also provides commentary on companies that experienced material changes to either price targets or earnings forecasts by brokers last week in the FNArena database, the following paragraphs highlight the largest moves.  

WiseTech Global had the largest percentage increase in forecast price target after a FY21 result beat, which set-off a spectacular rise in its shares on results day. This failed to inspire two of the four brokers that have so far maintained prior target prices. Citi noted a decline in both profit margin and acquired customer revenue, while R&D capitalisation increased. Despite lowering its rating to Neutral from Outperform, Credit Suisse can see the broader business strategy coming together and expects continued revenue growth.

Next was Charter Hall Group with FY21 operating earnings 7% ahead of guidance, driven by development income. Macquarie sees around 10% upside to FY22 guidance, while Credit Suisse cautions that a degree of faith in management is required as funds under management and all-in management fee expectations for the year ahead are not disclosed.

Cooper Energy was first on the table for the most material percentage fall in forecast price target last week, after its FY21 result and FY22 guidance missed consensus forecasts. Morgan Stanley downgraded its rating to Underweight from Equal-weight, which was partly attributable to rising uncertainty around the Sole project. More hopefully, Macquarie points to Phase 2B works at the Orbost gas plant as having potential to improve production rates and enable normal operations.

Coming second on the table was Monadelphous Group after a failure to fully recover costs has led to a substantial reduction in operating margins, explains UBS. The company has guided to lower FY22 revenue and Morgan Stanley expects input inflation and labour shortages will continue to plague the stock.

The recipient of the largest percentage rise in forecast earnings from brokers in the FNArena database was Pilbara Minerals. FY22 guidance surprised Ord Minnett to the upside, with improving spodumene shipments expected, while capital expenditure guidance was also lower than anticipated. However, the stock has already run hard and the broker downgrades to Hold from Buy. 

Next up was Whitehaven Coal with FY21 operating earnings better than Macquarie expected. Also, Citi strategists raised second half 2021 coal price forecasts, with FY22 thermal coal estimates also rising by 11%. Meanwhile, Morgans forecasts net cash by the end of FY22, supporting dividend upside.

Last week, Star Entertainment Group was in receipt of the largest percentage downgrade to earnings forecasts from brokers in the FNArena database. Despite this, Morgans assessed it was a good performance by management to keep earnings flat in the midst of a complete disappearance of earnings from the International VIP business. The broker feels it's important to look past the next few months to the potential of the business coming out of lockdown.

Finally, oOh!media's first half revenue and earnings beat Ord Minnett’s forecasts though lockdowns are expected to impact for an indeterminate length. Macquarie agrees and lowers EPS forecasts for FY21-23 by -88%, -39% and -37%, respectively. It’s thought Fly and Locate (offices) may also remain structurally impacted post-covid. Though, with fixed costs now captured, any recovery will result in material positive operating leverage, points out the analyst. 

Total Buy recommendations take up 53.08% of the total, versus 39.19% on Neutral/Hold, while Sell ratings account for the remaining 7.73%.

Upgrade

A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/2

Cit came away from FY21 results encouraged by the resolution of the excess and dated inventory position, restructured distributor agreements, as well as improved inventory tracking and traceability systems. The rating increases to Buy from Neutral.

Most importantly for the analyst, the China brand health metrics remain positive, a sign that the brand is stronger and more resilient than previously thought.

The target price rises to $7.20 from $6.05 due to higher net cash, lower capex and a roll-forward of valuations to FY23. Citi highlights the company is working on innovations to improve its formulation and reduce reliance on a single product.

ADBRI LIMITED ((ABC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/5/1

First half results beat Macquarie's expectations. Adbri is progressing with increasing its infrastructure exposure, the broker ascertains.

Macquarie believes market conditions have bottomed and most of the structural headwinds such as lime and NSW cement are now more evident in terms of the impact.

Valuation is also more supportive and the broker upgrades to Outperform from Neutral. Target is raised to $3.80 from $3.20.

ADAIRS LIMITED ((ADH)) Upgrade to Add from Hold by Morgans .B/H/S: 2/1/0

Despite lowering EPS forecasts for FY22 after FY21 results, Morgans views Adairs as one of the cheapest retailers in the sector and upgrades its rating to Add from Hold. The price target eases to $4.20 from $4.46.

Mocka was the only disappointment for the analyst, with second half margins falling materially half-on-half due to a lower gross margin (supply chain challenges) and investment in talent and marketing.

Overall, FY21 produced a very strong period of growth in FY21, with heightened demand for product, material gross margin expansion and opex leverage, points out Morgans.

ARDENT LEISURE GROUP LIMITED ((ALG)) Upgrade to Buy from Sell by Ord Minnett .B/H/S: 2/0/0

Ardent Leisure reported a net loss of -$95.9m in FY21, an improvement on FY20 and better than Ord Minnett estimated. The broker believes the results have eased a number of its key concerns regarding the stock.

Strong trading has continued into early FY22, signalling demand is less led by stimulus than previously thought. Earnings are now returning to record levels, which reduces the concern that the private equity partner will be able to exercise the option over 51% of Main Event and reap the majority of upside from the recovery.

Moreover, a sale of Main Event would mean Ardent Leisure moves to a significant net cash position after some significant financial hurdles. All up, this is enough for Ord Minnett to multiple upgrade to Buy from Sell. Target is raised to $1.75 from $0.75.

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

Top-line metrics for FY21 were known following the trading update in July while UBS was mostly surprised by the 159% increase in second half sales and marketing costs.

Although the higher costs would have originally disappointed the market, the focus is now on the proposed acquisition by Square. The broker has now assumed the acquisition as a base case valuation and upgrades to Neutral from Sell, raising the target to $140 from $42.

UBS believes the ambitions for both companies are complementary and overlapping and this may attract regulatory scrutiny that is not priced in by the market.

APOLLO TOURISM & LEISURE LIMITED ((ATL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

The FY21 earnings (EBIT) loss was in line with expectations and Morgans believes the liquidity position looks set to see the company through to other side of covid. The rating rises to Add from Hold and the target increases to $0.539 from $0.351.

Assuming key markets open up with increasing vaccination rates, the analyst can increasingly see the path to vastly improved earnings. The company has $48m in available liquidity currently.

Morgans highlights even just a freely operating domestic environment would lift earnings materially versus FY21.

BLACKMORES LIMITED ((BKL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/4/1

Blackmores missed consensus FY21 earnings expectations, with A&NZ earnings down -31% on the previous period due to lower volumes from retail shuts and fewer international students and daigou shoppers.

China achieved significant underlying growth aided by the company building a new e-commerce capability, and international earnings grew 89% in the second half FY21 versus second half FY20, with covid introducing many new consumers to the vitamin/supplement category through immunity aids.

Credit Suisse notes with Blackmores staking out bold 2024 revenue targets in its FY21 result presentation, the broker recognises the company has advanced to the master class of projecting company value.

Credit Suisse notes Blackmores has laid out a stretch, but achievable, 2024 revenue target that was $100m (15%) above the broker's previous modelling.

Credit Suisse upgrades Blackmores to Outperform from Neutral rating and the target price increases to $100 from $77.

BORAL LIMITED ((BLD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/1

According to Macquarie, Boral has reported a soft FY21 result in Australia, with the broker expecting covid to continue to impact on FY22 results. 

Group earnings were at the upper end of the guidance range, but Australia was impacted by volume falls and soft pricing. The broker expects a slow, gradual recovery, and notes markets are unlikely to get worse although covid impacts could linger.   

The broker has updated earnings per share forecasts by -34.3%, -12.7% and -5.6% through to FY24. 

The rating is upgraded to Outperform from Neutral and the target price decreases to $7.30 from $7.80. 

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/4/0

Cleanaway Waste reported FY21 underlying earnings of $535m, in line with Credit Suisse forecast and consensus, while underlying attributable net profit of $151m was below expectations, due to higher D&A than the broker had forecast.

Mainly driven by increased landfill amortisation at Erskine Park, and full-year contribution from acquisitions and new contract wins, management expects D&A to step up further to -$290m (excl. Suez Sydney) in FY22.

While Cleanaway faces a period of severe headwinds, the broker suspects earnings growth momentum could return from second half FY22.

Credit Suisse has raised FY22 net revenue forecasts by 2%, to $2,330m on higher contribution from Solid Waste Services.

Credit Suisse has upgraded Cleanaway to Neutral from Underperform and increased the target to $2.60 from $2.40.

FINEOS CORPORATION HOLDINGS PLC ((FCL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/0/0

Fineos Corportion's FY21 result outpaced Ord Minnett's forecasts by 4% triggering upgrades, thanks to strong organic growth, topped up by acquisitions.

Covid hampered new customer additions but the company compensated with work from existing customers, highlighting the potential of the upgrade business.

The company guides to a stronger FY22, which should include a contribution from the newly acquired Spraoi as well as new customers. The broker notes the strong cross-sell and up-sell pipeline and spies looming growth expenses.

Ord Minnett upgrades to Accumulate from Hold. Target price rises to $4.54 from $4.01.

HUB24 LIMITED ((HUB)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/0

Morgans assesses an in-line overall FY21 result, with the Platform revenue margin a slight miss on the back of revenue margin compression. Management stated the Administration fee pricing environment is stable and operating margin expansion is expected.

In moving back to a long-term view, the analyst upgrades the rating to Add from Hold. It's felt scale benefits will deliver a step-change in earnings over the next three years, with long-term growth supported by the entrenched nature of the platform within the adviser base.

Morgans lifts its target price to $31.65 from $28.05.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Buy from Neutral by Citi and Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/3/0

Iluka Resources' first half underlying earnings were in-line with consensus expectations, although an -8% miss on Citi's forecast. Net profit was -20% below expectations, but the broker notes results were impacted by non-cash inventory moves that were difficult to forecast.

Looking forward, Citi notes the SR1 kiln restart is now committed. Both the Narngulu MSP and SR2 Kiln are at full capacity, and Citi notes production will likely constrain second half sales. 

Citi increases underlying earnings forecast for FY23 by 14%.

The rating is upgraded to Buy from Neutral and the target price increases to $10.00 from $9.10. 

Principally driven by $17m non-cash inventory, Iluka Resoures first half FY21 underlying net profit ($135m) was -15% lower than consensus ($159m), and a 12cps interim dividend was also softer than consensus expectation (13.8cps).

Iluka announced a restart of the second synthetic rutile kiln.

While Credit Suisse believes the company is rich in catalysts, the broker believes the key catalyst is the feasibility study for a rare earths refinery due early 2022, for which the broker believes the Street has high hopes.

Credit Suisse upgrades Iluka Resources to Neutral from Underperform and the target increases to $8.80 from $7.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/1/0

Further to yesterday's response to the FY21 results, Ord Minnett observes FY22 guidance for a flat EBIT outcome seems difficult to achieve.

There is valuation appeal in the stock, nevertheless, and recent corporate interest and the $150m share buyback could help it recover some ground.

Hence, the broker upgrades to Accumulate from Hold, while reducing the target to $5.00 from $5.75.

See also LNK downgrade.

MONADELPHOUS GROUP LIMITED ((MND)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/3/0

For Ord Minnett's initial response, see yesterday's report. Monadelphous Group's FY21 result fell shy of the broker and consensus by -4% and -5% and the company guided to lower FY22 revenue.

On closer inspection, the broker upgrades to Buy from Hold. Target price eases to $11.50 from $12.

Ord Minnett expects headwinds to continue this year (noting the unprecedented shortfall of skilled labour) but appreciates the company's operational history, its strong market position in WA and healthy net cash balance.

As conditions normalise, the broker expects the company will expand margins and profit, so given the recent sell-off, it favours buying now, spying 14% upside to its revised target price despite steady margins and a -16% fall in construction revenue.

QUBE HOLDINGS LIMITED ((QUB)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Hold from Reduce by Morgans .B/H/S: 3/3/0

On the back of a strong FY21 result, upbeat outlook, and expected buyback from Moorebank proceeds, Credit Suisse has upgraded Qube Holdings to Outperform from Neutral, and the target price increases to $3.30 from $3.

Qube is due to complete the sale of Moorebank warehousing to the Logos consortium in December with $1.36bn of proceeds on
completion and $312m deferred.

The broker makes minimal changes to FY22 net profit forecast of $197m (23% growth) but trims FY23 -4% and FY24 -9% on lower margin assumptions.

Credit Suisse forecasts $600m of share buyback to be announced at first half FY22 results.

Morgans upgrades its rating to Hold from Reduce and raises its target price to $2.90 from $2.80. This comes after the FY21 result delivered growth in cashflows that were stronger than expected though earnings were weaker than forecast.

Management is confident of solid earnings growth in FY22, while the Moorebank Property sale will allow for growth and capital management opportunities. The broker feels the earnings growth and balance sheet stories may support the stock.

SOUTH32 LIMITED ((S32)) Upgrade to Add from Hold by Morgans .B/H/S: 7/0/0

The FY21 result was ahead of Morgans estimates, and the broker upgrades its rating to Add from Hold given recent share price weakness. FY22 guidance was considered mixed, leading to higher production assumptions across some operations along with higher costs.

While cost pressures across the alumina smelters look like a key challenge heading into FY22, they look well covered by strength in metal prices, explains the broker. The target price rises to $3.30 from $3.15.

SCENTRE GROUP ((SCG)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/2/2

Scentre Group's first-half FY21 result was in line with Credit Suisse, with funds from operations (FFO) up 28% over the previous period to $463.4m, aided by lower credit loss provisions, partially offset by higher net interest costs, with no reversal of FY20 provisions boosting the result.

With restrictions impacting the portfolio, as well as mandated rent relief in NSW and Victoria, Credit Suisse expects second-half FY21 to be weaker.

The Group has not disclosed its expectations for likely rent relief.

The broker has revised FY21-FY23 FFOps estimates by -12.8% and 1.1% respectively but sees scope for earnings recovery over the medium term, albeit not to pre-covid levels.

Credit Suisse upgrades the group to Outperform from Neutral. Target is raised to $3.01 from $2.97.

Scentre Group's first half FY21 funds from operations were up 28% from a year ago but shy of Ord Minnett's forecast. The result was nevertheless of better than expected quality, with property net operating income stabilising at a higher level than assumed.

Retail conditions broadly improved within the portfolio in the period, although new lockdowns cloud the second-half outlook, the broker notes. But sales and visitation data show that the centres rebound quickly once restrictions are eased.

Current valuation implies a further drop in asset values, with no value for funds management and development. Hence the broker upgrades to Buy from Hold. Target rises to $3.20 from $3.00.

STOCKLAND ((SGP)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/3/0

FY21 results were in line with the top end of guidance and slightly below Ord Minnett's forecast. The broker highlights the strong residential sales in the fourth quarter and the growing commercial development pipeline.

FY22 guidance is in line with expectations. As the stock is trading in line with the target, raised to $4.60 from $4.20, Ord Minnett upgrades to Hold from Lighten.

SMARTGROUP CORPORATION LIMITED ((SIQ)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0

Smartgroup Corp's first half profit (NPATA) was in-line with Morgans estimate. Novated lease orders were around 3% above pre-covid levels though settlements lagged by circa -11% below pre-covid, given vehicle supply constraints, explains the broker.

Current debt level allows for another special dividend or acquisitions, in the analyst's view, with a 14.5c special dividend in the second half seen as likely. Major contract risk has largely passed, and add-on insurance earnings risk is now considered manageable.

While expecting relatively low growth, Morgans thinks the current free cashflow yield and balance sheet strength are fairly attractive. The broker raises its rating to Add from Hold and lifts its target price to $8.35 from $7.88.

VIVA ENERGY GROUP LIMITED ((VEA)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/0/0

Capital allocation has strongly differentiated Viva Energy from Ampol ((ALD)) currently, with the company electing to undertake an $100m capital return and $40m buyback.

Credit Suisse believes a new dividend policy also aims to increase certainty and has upgraded Viva Energy to Outperform from Neutral due to the solid underlying performance and capital management.

Target rises to $2.25 from $2.14.

WESTERN AREAS LIMITED ((WSA)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/5/0

Western Areas' FY21 result was broadly as expected, and Credit Suisse has upgraded the company to Neutral from Underperform having taken the view that existing shareholders have limited reason to sell while a takeover is being considered.

The broker's upgrade also acknowledges that an offer is not guaranteed and that a 19% premium is already built into the valuation.

Credit Suisse notes while the key downside risk to the company is if an offer doesn’t materialise, the risk beyond this is if nickel prices decline as per the broker's forecast. Upside is predominantly on 30%-plus premium offers.

Price target increases to $3.25 from $2.

See also WSA downgrade.

Downgrade

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

Australian Unity Office Fund reported FY21 funds from operations in line with Ord Minnett. FY22 guidance nevertheless disappointed, given the potential plan to divest of an asset in Paramatta in the third quarter, albeit marketing is still ongoing.

The REIT remains in discussions with Telstra with regard a block in Adelaide, but covid is slowing the process. There was no new news on the progress of the proposed merger with the unlisted Diversified Property Fund.

The REIT trades at an attractive discount to asset value but given uncertainty regarding both lease expiries and the merger, the broker downgrades to Hold from Accumulate. Target falls to $2.41 from $2.43.

AUSTAL LIMITED ((ASB)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0

Austal's FY21 result was in line with expectations, with margin improvement in the US offset by margin deterioration in Australasia, mainly due to low margin emergent support work in second half FY21.

While management guided to $1.5bn, tracking lower on FY21, Credit Suisse views this as conservative, with near-term opportunities that the broker thinks could be crystallised in second half FY22: Notably, the Offshore Patrol Cutter (OPC) program that Austal is bidding for which is expected to be awarded in fourth quarter FY22.

The broker has cut FY22 earnings estimates -16%, on lower US revenue contribution and lower margin in Australasia due to reduced throughput and low margin emergent work.

Credit Suisse downgrades Austal to Neutral from outperform and the target price is lowered to $2.25 from $2.75.

ALUMINA LIMITED ((AWC)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/1

Citi assesses a modest first half beat though second half dividends will likely be lower on higher capex and downgrades its rating to Neutral from Buy. The target price falls to $1.80 from $1.90 on higher assumed costs.

The analyst feels the recent resource sector correction sees improved relative valuation elsewhere in the sector. Management expects ex-China aluminium production to increase in the second half 2021 and this will be positive for alumina prices, notes the broker. 

CHARTER HALL GROUP ((CHC)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/2/0

FY21 results were ahead of UBS estimates. Earnings forecasts for FY22 are upgraded by 16% and the broker is impressed by guidance for more than 23% growth in FY22. UBS now forecasts $144m in performance fees in FY22.

The broker notes the market has quickly moved to price in upgrades to guidance as the company has a strong track record.

Rating is downgraded to Neutral from Buy on valuation grounds as the market adjusts to a new lower growth profile from elevated earnings. Target is raised to $19.30 from $17.00.

COOPER ENERGY LIMITED ((COE)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/1

Cooper Energy's FY21 result and FY22 guidance missed consensus forecasts.

Morgan Stanley downgrades the company to Underweight from Equal-weight to reflect rising risks and uncertainty around Project Sole and the costs associated with the Basker Manta Gummy abandonment.

Low production and Cooper's requirement to purchase gas on market to meet contract obligation, thanks to the underperforming Project Sole, is expected to continue to dog the company.

The broker expects some improvement in the share price, although less than peers. Morgan Stanley prefers Senex Energy ((SXY))

Target price is 23c. Industry view: Attractive.

DELOREAN CORPORATION LIMITED ((DEL)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Delorean Corp released a draft result for FY21 with an expected -$3.4m loss after tax, notes Morgans. While some timing issues were considered to impact, -$1.2m of additional costs (pre-tax) were incurred in energy retailing, covid impacts on projects and overheads.

As a result, the broker downgrades the rating to Hold from Speculative Buy and lowers its target price to $0.20 from $0.25. The result highlights to Morgans the inherent risks in the businesses. Volatile electricity markets can disrupt energy retailing margins. 

Additionally, the analyst highlights the energy saving performance contract (EPC) businesses can also face unexpected cost blowouts, which are difficult to mitigate.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/5/1

Further to the initial response to the FY21 results, Ord Minnett assesses Flight Centre faces its greatest challenge over coming years not just recovery from the pandemic but structural change in the travel agency revenue model in Australasia.

The broker's analysis suggests a combined impact of downward pressure on commissions, overriders and GDS income will have a material impact on margins. The main task is reducing costs at a sufficient rate in order to protect earnings.

Ord Minnett downgrades to Lighten from Hold on valuation grounds and reduces the target to $13.72 from $15.06.

HANSEN TECHNOLOGIES LIMITED ((HSN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

FY21 results were in line with guidance and forecasts. No earnings guidance was issued for FY22. The revenue performance in FY21 was boosted by the contract with Telefonica.

The exclusive due diligence period for the proposed takeover by BGH Capital has been extended and Ord Minnett considers the prospect of a competing bid now unlikely. Hence, the rating is downgraded to Hold from Buy. Target is reduced to $6.50 from $7.50.

INGHAMS GROUP LIMITED ((ING)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/0

Despite an impressive FY21 result which beat expectations on a number of fronts, Morgans moderates forecasts given lockdowns in both Australia and New Zealand and uncertainty over 2H22 grain input costs. The rating slips to Hold from Add after a strong share rally.

The broker still forecasts modest growth in FY22 given management's expectations for volume growth and further operational benefits. Morgans would be buyers of the stock on any material weakness and increases its target price to $4.35 from $4.27.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/1/0

For Citi's initial response to FY21 results, see yesterday's Report.

The analyst notes earnings (EBITDA) were a miss, driven by lower revenues, particularly in corporate markets, while guidance for operating earnings (EBIT) to be “broadly in line with FY21“ is thought soft compared to the analyst's forecast for 16% growth.

Citi lowers lower EPS forecasts considerably, despite factoring in the announced $150m buyback. Although the stock looks relatively inexpensive if Pexa Group ((PXA)) is valued at market, it's seen as a likely value trap for now.

The broker lowers its rating to Neutral from Buy and its target price to $4.75 from $5.70.

See also LNK upgrade.

NANOSONICS LIMITED ((NAN)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/1

Morgans sees a significant improvement in the second half and expects momentum to continue after the release of FY21 results. As a result of a strong share price the broker lowers its rating to Hold from Add while increasing its target price to $7.26 from $6.57.

Unit sales were up 3,030 units with the second half up 20% on the first, which reflects business opening up and likely to continue in FY22, thinks the analyst. Management updated on its next major product a “flexible endoscope”, potentially due for commercial launch in 2023.

The company also highlighted an increase in the total addressable market for Trophon2 to 60,000 units from 40,000 in the US. Other regions of Europe and ROW remain at 40,000 units each. The latter is likely understated, according to the broker.

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

Macquarie reports while Newcrest Mining's full-year result was strong, with underlying earnings and free cash flow beating forecasts by 11% and 41% respectively, FY22 guidance on costs and capital expenditure were both higher than expected.

The broker notes the capital cost for the Cadia 1-2 panel cave was 12% higher than forecast. Given higher cost guidance, Macquarie has reduced free cash flow generation to US$0.5bn over the next four years. 

Macquarie updates earnings per share forecasts by -15% in FY22, and -2%, 9%, -7% and -2% through to FY26.

The rating is downgraded to Neutral from Outperform and the target price decreases to $27.00 from $30.00.

NIB HOLDINGS LIMITED ((NHF)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Sell from Neutral by Citi .B/H/S: 0/6/1

nib Holdings' reported profit came in below Ord Minnett's forecast. The result was strong in the Australian Residents Health Insurance division but disappointing in the International Inbound Health Insurance business, due to a sharp claims increase.

FY22 suggests International will again be very weak and loss-making but nib appears set to keep a material portion of the large covid benefits expected in FY22 for shareholders to boost Residents margins and offset International pressures.

On a net basis, this may make for a tougher premium setting. The broker pulls back to Hold from Accumulate, target falls to $7.00 from $7.08.

International business was the big disappointment in nib Holdings' FY21 results, according to Citi. The broker notes the international sector not only reported a loss, despite the company reiterating profitability earlier in the year, but nib Holdings is also pointing to the return of international travel as the inflection point for profit. 

Inbound international health insurance (iihi) appeared to be profitable in early May, but several high cost claims led to a -$5.9m loss in the fourth quarter according to Citi. Given the outlook on international, the broker has updated earnings per share forecasts by -4% for FY22 and -4% for FY23. 

Citi notes while the arhi business is likely to continue to benefit from some covid-related claims, these are likely temporary. 

The rating is downgraded to Sell from Neutral and the target price decreases to $6.30 from $6.40. 

NATIONAL STORAGE REIT ((NSR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/3/1

FY21 earnings were slightly below Ord Minnett's forecast. FY22 guidance is for at least 10% growth in underlying earnings per share.

Ord Minnett likes the consolidation (National Storage completed 25 acquisitions in FY21) and significant improvement in operating metrics and believes storage remains undervalued in Australia.

Following a strong run up the share price, the rating is downgraded to Hold from Accumulate. Target is raised to $2.30 from $2.20.

1300 SMILES LIMITED ((ONT)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

1300 Smiles has received a takeover offer from Abano Healthcare. Under the offer non-founding shareholders will receive $8.00 per share and founder shares will be offered $6.33. 

The offer is currently subject to Foreign Investment Review Board approval, which Morgans expects to be likely, as well as a number of clauses, including that founders retain 26.2% of their shares. 

Morgans considers the offer to be fairly valued and has upgraded the target price accordingly. 

The rating is downgraded to Hold from Add and the target price increases to $8.00 from $7.82. 

PILBARA MINERALS LIMITED ((PLS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/3/0

FY21 underlying operating earnings (EBITDA) were in line with Ord Minnett's forecasts. FY22 guidance has surprised to the upside, with spodumene shipments expected to be 440-490,000t.

Capital expenditure guidance is also lower than anticipated but has led to the broker pushing out of the next expansion at Pilgangoora.

Despite the strong outlook for lithium markets and the company's positioning, the stock has run hard and Ord Minnett downgrades to Hold from Buy. Moreover, the broker sees no significant stock-specific catalysts on the horizon. Target is reduced to $2.40 from $2.50.

PSC INSURANCE GROUP LIMITED ((PSI)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

PSC Insurance Group's FY21 result was a 3% beat over Macquarie's underlying profit (NPATA) forecast, largely due to lower costs and interest expenses. On valuation and lower upside risk from acquisitions, the broker lowers its rating to Neutral from Outperform.

The broker estimates the group has around $36m of acquisition capacity left compared to the mid-point of the gearing target range. FY22 guidance is for earnings (EBITDA) of $84m-$89m and profit of between $54m-$58m. Target rises to $4.10 from $3.85.

REECE LIMITED ((REH)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/0/4

For a summary of Ord Minnett's response to the Reece result see yesterday's Report.

Subsequent to the beat on earnings, the broker increases its target to $18.00 from $16.00. But on 12-month share price outperformance, downgrades to Lighten from Hold.

RELIANCE WORLDWIDE CORP. LIMITED ((RWC)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/3/0

UBS notes, following a strong FY21 result, top line growth has started to moderate. Several factors suggest to the broker that Reliance Worldwide is unlikely to experience above-normal volume growth going forward.

Combined with declining margins this results in the broker's forecast for net profit to decline -9% in FY22. After a strong share price performance UBS downgrades to Neutral from Buy. Target is reduced to $5.90 from $6.16.

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

Further to the first half results, Ord Minnett notes the company is confident regarding the market conditions, largely relying on the 5G roll-out in mobile and fixed wireless to drive revenue growth.

As the stock has performed strongly and is nearing valuation the broker downgrades to Hold from Buy while raising the target to $6.85 from $6.50.

UNITI GROUP LIMITED ((UWL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

FY21 results were ahead of Macquarie's expectations. The broker notes cash flow is supporting de-gearing and capital flexibility. Margin improvements were driven by the core network platform.

Despite material upgrades to the broker's forecasts, the share price currently appears to reflect growth and the rating is downgraded to Neutral from Outperform. Target is raised to $4.13 from $3.36.

VIVA LEISURE LIMITED ((VVA)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/1/0

FY21 results revealed the adverse impact of the lockdowns on earnings. Citi expects this will overshadow the network expansion opportunities over the longer term.

With 85% of the locations temporarily closed and the company concentrating on cash preservation, the broker downgrades to Neutral from Buy. Target is reduced to $1.75 from $2.50.

WAGNERS HOLDING CO. LIMITED ((WGN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/1/0

FY21 results marginally missed Macquarie's forecasts. Yet the CMS performance was strong and management remains confident about volume growth. On the other hand, market capacity issues in south-east Queensland continue to put pressure on concrete prices.

The company remains hopeful that the easing impact of the pandemic will support a gradual recovery in infrastructure expenditure. Macquarie downgrades to Neutral from Outperform. Target is reduced to $2.05 from $2.25.

WESTERN AREAS LIMITED ((WSA)) Downgrade to Hold from Add by Morgans .B/H/S: 1/5/0

Morgans downgrades its rating to Hold from Add with moves in the share price now expected to be driven by any takeover process and the potential emergence of other suitors. FY21 results were considered in-line with expectations. No dividend was declared for FY21.

Refreshed production forecasts and an updated resource multiple valuation leads the analyst to lift the target price to $3 from $2.69.

See also WSA upgrade.

WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/3/0

Revenue momentum, partly masked by forex headwinds, and the benefits of the broader business strategy coming together were both clearly evident at WiseTech Global's FY21 result, comments Credit Suisse.

Credit Suisse expects continued revenue growth and margin expansion but notes the rate of margin expansion has likely peaked, and, particularly after the FY22 cost-out program, cost growth is likely to return to higher levels.

Credit Suisse notes FY22 guidance of $600-635m requires 18% to 25% reported revenue growth and 21% to 28% forex neutral growth.

The broker raises FY22, FY23, and FY24 underlying earnings per share (EPS) by 10%, 8%, and 7% respectively. Revised FY22
revenue and earnings forecasts of $620m and $273m are roughly at guidance midpoints.

Credit Suisse downgrades to Neutral from Outperform and the target increases to $45 from $34.

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