Weekly Ratings, Targets, Forecast Changes – 12-11-21

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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 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 November 8 to Friday November 12, 2021
Total Upgrades: 11
Total Downgrades: 10
Net Ratings Breakdown: Buy 55.40%; Hold 37.97%; Sell 6.63%

For the week ending Friday November 12, there were eleven upgrades and ten downgrades to ASX-listed companies covered by brokers in the FNArena database.

Full year results for Orica were a beat versus consensus forecasts and as a result the company headed the table for the largest percentage upgrades to forecast earnings last week. Credit Suisse decided to lift its rating for the company to Outperform from Neutral, and noted management initiatives to improve product pricing, delivery of which should result in profit upside.

Despite ratings downgrades by Citi (Neutral from Buy) and Morgans (Hold from Add) on the basis of recent share price outperformance, both brokers were upbeat on Orica’s FY21 results and refreshed strategy to drive profitable growth.

At first glance, ratings upgrades for Xero by Ord Minnett (Hold from Lighten) and Citi (Buy from Neutral) were inconsistent with slightly disappointing first half results. However, Ord Minnett had a relatively low starting target price of $103, which has now been raised to $130, and now sees lower rates of churn and rising average revenue per user.

Meanwhile, Citi attributed weaker than anticipated core accounting growth to lockdowns. While holding only modest expectations for North America, the analyst sees new markets opening up for Xero, Nonetheless, across all brokers in the FNArena database, the company was top of the list for the largest percentage downgrades to forecast earnings last week.

Second on that list was Tyro Payments after revealing gross margin and total transaction value pressure (TTV) in the current period. Macquarie can see the TTV is rapidly recovering after lockdowns though remains cautious on the competitive environment, which will likely intensify through 2022. 

Ord Minnett was similarly enthusiastic about the latest TTV figures and expects the momentum will continue to the end of 2021.

Finally, GrainCorp had a very positive week and came in second behind Orica for the largest percentage upgrade to forecast earnings. Credit Suisse suggests the company’s position as a competitive player in the east coast grain market has rarely been stronger. 

This comes as FY21 results landed at the top end of the recently-upgraded guidance range. UBS attributes this to a bumper east coast winter crop and strong margins in the Processing segment, while Morgans believes the upgrade cycle is very much intact.

Total Buy recommendations take up 55.40% of the total, versus 37.97% on Neutral/Hold, while Sell ratings account for the remaining 6.63%.

Upgrade

AUSTAL LIMITED ((ASB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0

Austal has received approval to take on the lease of Marine Group Boat Works in the port of San Diego. Credit Suisse observes this is a major development for Austal, particularly given the environmental and regulatory pressures with respect to new or expanded dry docks in the area.

A dry dock in San Diego could support the awarding of contracts for Austal as a prime contractor. The broker raises FY22 and FY23 forecasts by 2% and 6%, respectively. Rating is upgraded to Outperform from Neutral and the target increased to $2.50 from $2.25.

ALUMINA LIMITED ((AWC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/0

Alcoa will deploy technology improvements to reduce its capital expenditure and carbon intensity. Macquarie suggests the long-term earnings outlook has improved after incorporating updated AWAC production guidance.

The broker upgrades to Outperform from Neutral because of an improved earnings outlook and the potential for cash returns in the short term. Target is raised to $2.00 from $1.90. 

COLES GROUP LIMITED ((COL)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/1

Citi analysts have used a general sector update on retailing in Australia, in which they predict a slower-than-broadly-anticipated normalisation post covid and post lockdowns, to upgrade Coles to Buy from Neutral.

Earnings estimates have been lifted and this pushed up the price target to $19.60 from $18.90.

CSL LIMITED ((CSL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/4/0

Having reviewed the opportunities and risks for CSL's immunoglobulin, and notwithstanding elevated multiples, Macquarie envisages a favourable growth profile and says the balance sheet remains attractive.

Over the medium to longer term, immunoglobulin growth should be supported by increased diagnosis of conditions in which the product is used. The new plasma collection platform could also improve efficiency.

The broker upgrades to Outperform from Neutral and raises its target to $338.00 from $302.50. 

ORICA LIMITED ((ORI)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/5/0

Credit Suisse reports Orica's full-year results were in-line at the underlying earnings level and slightly ahead in both earnings before tax and profit after tax. 

The broker notes the company's ability to achieve price increases has been a point of debate among investors, but delivery should offer profit upside.

New strategy will focus on four customer and product verticals, and the company is confident new systems to improve transparency and reduce cross subsidies should improve product pricing.

The rating is upgraded to Outperform from Neutral and the target price increases to $17.26 from $17.23. 

See also ORI downgrade.

PENDAL GROUP LIMITED ((PDL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/2/0

FY21 net profit was broadly in line with Ord Minnett's forecasts. Lower performance fees from JO Hambro have meant a reduction in forecasts going forward.

The broker suspects fixed cost growth will dampen near-term operating leverage while fund flows are likely to be lumpy.

Ord Minnett increases the rating to Buy from Accumulate while reducing the target to $8.50 from $8.60.

See also PDL downgrade.

QUBE HOLDINGS LIMITED ((QUB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0

Qube Holdings has upgraded its FY22 earnings outlook to 'strong' growth from 'solid' growth following a first quarter performance beat on management's expectations. 

Credit Suisse noted high agri, steel and container volumes drove better-than-expected logistics activity, while strong grain, steel, clinker and vehicle volumes offset covid impacts in port and bulk activity. 

Given recent weak share price performance, the rating is upgraded to Outperform from Neutral and the target price of $3.55 is retained.

SHAVER SHOP GROUP LIMITED ((SSG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/0/0

A surge in trading following the re-opening of retail stores in NSW and Victoria is expected to result in increased earnings and Ord Minnett upgrades to Accumulate from Hold.

Shaver Shop provided a trading update which indicated sales in the year to date eased -0.9%, which the broker considers is quite modest given the widespread closures. Online sales increased 58.6% over the same period and currently represent 50.2% of total sales.

Target is raised to $1.25 from $1.20.

UNITI GROUP LIMITED ((UWL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/1/0

Ord Minnett expects Uniti Group will be a beneficiary of the current environment for greenfield property development. While private dwelling approvals have returned to some level of normality recently, new approvals are still elevated compared with longer-term averages.

The broker expects strong growth in the future construction work as developers plan for larger populations in greenfield areas. The broker expects wholesale revenue will be 50% of group revenues in FY22 and upgrades to Accumulate from Hold.

The broker also envisages the buyback program will be an efficient allocation of capital in the context of options for growth in adjacent markets as well as M&A. Target is $4.21.

XERO LIMITED ((XRO)) Upgrade to Hold from Lighten by Ord Minnett and Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/2

As reported yesterday, Ord Minnett saw Xero's H1 performance as broadly in-line, though international subscriber growth was slower-than-expected.

Average revenue per user (ARPU) for the international business lifted significantly, aided by the recent Planday acquisition, but ARPU in A&NZ only showed limited improvement.

As confidence has grown in the company's ability to lift ARPU and reduce churn, Ord Minnett has lifted its price target to $130 from $103. Rating is upgraded to Hold from Lighten.

Xero's H1 update included slightly weaker-than-anticipated core accounting growth, comment analysts at Citi, but that is seen as a result of lockdowns.

Regardless, subscriber growth in North America was lower than expected, but then average return per user (ARPU) surprised on the upside.

Citi continues to see solid growth for the medium term, with modest expectations for North America, but including Xero penetrating into new markets.

Target price rises to $160 from $135.70. Upgrade to Buy from Neutral.

Downgrade

CREDIT CORP GROUP LIMITED ((CCP)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/0/0

Credit Corp Group provided unchanged FY22 earnings guidance at its AGM, and raised the lower end of its purchased debt ledger (PDL) guidance. Despite this, Ord Minnett lowers its rating to Accumulate from Buy, due to a recently strong share price.

The target price rises to $35 from $32 as the broker sees credit starting to rebuild in the system and future PDL supply also appears to be emerging, particularly in the US.

Management highlighted its new product development pipeline, including US Consumer Lending, Auto Lending and a buy now, pay later product.

JB HI-FI LIMITED ((JBH)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/1

Citi analysts have used a general sector update on retailing in Australia, in which they predict a slower-than-broadly-anticipated normalisation post covid and post lockdowns, to downgrade JB Hi-Fi to Neutral from Buy.

Modest increases have been added to forecasts. Price target has gained $1 to $54.

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

Citi analysts have used a general sector update on retailing in Australia, in which they predict a slower-than-broadly-anticipated normalisation post covid and post lockdowns, to downgrade Metcash to Neutral from Buy.

Only modest increases have been applied to forecasts. Price target gains 10c to $4.20.

ORICA LIMITED ((ORI)) Downgrade to Neutral from Buy by Citi and Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/5/0

Citi comments Orica's FY21 results call with analysts reaffirmed the company's strong earnings momentum which is expected to continue in the months ahead.

A refresh of the company's strategy is welcomed, though the analysts also believe it remains too early to expect any tangible benefits from it.

Given the share price has performed strongly, Citi has decided to downgrade to Neutral from Buy. Target price lifts to $15 from $14 on higher forecasts.

After recent share price strength for Orica, Morgans lowers its rating to Hold from Add, despite FY21 results that beat consensus forecasts. The target price rises to $15.26 from $13.70. A final dividend of 16.5cps was declared.

The analyst points to strong 4Q trading that has continued into 1Q22. Increased ammonium nitrate prices are expected to broadly overcome rising input costs and a pass-through lag. The broker approves of management's refreshed strategy to drive profitable growth.

Credit Suisse is constructive regarding Orica yet downgrades to Neutral from Outperform ahead of the FY21 result. Commodity cost pressures are likely to have increased throughout the second half and extend into the first half of FY22.

Higher import parity pricing is expected to create a more favourable environment allowing the company to increase prices, providing some offset. The broker upgrades the target to $17.23 from $16.11.

See also ORI upgrade.

PENDAL GROUP LIMITED ((PDL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/0

While the FY21 results were ahead of Credit Suisse's expectations and the stock is considered inexpensive, catalysts are likely to be more negative over the short term. Credit Suisse envisages downside risk should institutional outflows persist for longer.

Consequently, the rating is downgraded to Neutral from Outperform. The broker will be on the look out for signs that outflows are turning around as well as for the benefits of the multi-year global expansion. Target is reduced to $7.20 from $8.70.

See also PDL upgrade.

REA GROUP LIMITED ((REA)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/3/1

UBS raises its target price for REA Group to $170 from $160 after an "outstanding" first quarter result. While the broker upgrades its FY22 and FY23 EPS forecasts by 8% and 9% respectively, the rating is downgraded to Sell from Neutral on valuation.

While the group recorded 16% listing volume growth in October, the analyst feels volumes will remain volatile for the remainder of FY22. Management cautioned over second half risk from potential regulatory measures to slow house price inflation.

RAMSAY HEALTH CARE LIMITED ((RHC)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/3/1

Ramsay Health Care's operational outlook remains at the mercy of the global pandemic, comments Ord Minnett, as the hospital operator's market update yesterday indicated yet again ongoing negative impacts pretty much everywhere.

Earnings estimates have been lowered in response, with the broker highlighting confidence is not lost in that Ramsay will benefit from the coming recovery.

As such, Ord Minnett has not touched its FY23 forecasts, and those forecasts assume a return to near pre-pandemic conditions.

Downgrade to Accumulate from Buy, with an unchanged price target of $74.

SERVCORP LIMITED ((SRV)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/1/0

Servcorp has reaffirmed FY22 guidance, noting operating conditions are improving. Occupancy rates in September were slightly below June which UBS believes reflects recent mobility restrictions in Australia.

The broker considers the stock a recovery trade as it is highly leveraged to improving market dynamics. The post-pandemic environment is also likely to be structured more favourably as competitors face significant challenges.

As the stock has rallied around 34% since the FY21 results, the broker downgrades to Neutral from Buy. Target is raised 11% to $4.60.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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