Weekly Ratings, Targets, Forecast Changes – 14-01-22

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

By Rudi Filapek-Vandyck, Editor FNArena

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 January 10 to Friday January 14, 2022
Total Upgrades: 5
Total Downgrades: 8
Net Ratings Breakdown: Buy 57.37%; Hold 35.85%; Sell 6.78%

Readers of the daily Australian Broker Call Report already know the local stockbroking community hasn't genuinely awoken yet from the end-of-year celebrations and hibernation, but last week, ending Friday 14th January 2022, nevertheless generated eight downgrades in ratings for individual companies and only five upgrades.

This suggests January weakness coincides with analysts, on balance, adopting a negative bias. Such a conclusion is supported by last week's table of positive and negative revisions for earnings forecasts which carries a decisive emphasis on quite heavy-looking reductions, led by soon-to-depart Afterpay.

The notion of an extremely bifurcated share market is in particular expressed through the balance of broker ratings. 57% of total ratings now consists of a Buy or equivalent rating while major indices are not that far off their all-time high. If ever there was an indicator to illustrate extreme polarisation, we are staring at it right here, right now.

Five of the regular seven stockbrokers have their largest allocation in Buy ratings, with Citi and Credit Suisse the two exceptions.

Not much is happening with valuations and price targets, not so far. This might change as more and more previews ahead of the February reporting season are released. Two more weeks and February will be upon us.

Though in Australia, reporting season doesn't genuinely start until mid-month. So there's plenty of time, still. Too early to get nervous just yet.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/0

AGL Energy was recently upgraded to Outperform from Neutral with an increased price target of $8.30 (from $7.30).

Credit Suisse last upgraded its rating to Neutral from Underperform in mid-August last year, while at that time raising its target price to $7.30 from $6.70. 

EPS and DPS forecasts have been noticeably increased.

APOLLO TOURISM & LEISURE LIMITED ((ATL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/0/0

It is Ord Minnett's opinion that Apollo Tourism and Leisure's proposed merger with Tourism Holdings ((THL))  offers benefit to all shareholders and give Apollo Tourism and Leisure shareholders an opportunity to hold a stake in a larger business. 

Despite this, the broker notes Tourism Holdings' current share price suggests the market has concerns that the merger will not go ahead or won't gain approval but sees no reason why the deal would not receive ACCC approval. 

The rating is upgraded to Buy from Hold and the target price increases to $0.77 from $0.31.

This report was published on December 22, 2021.

PRO MEDICUS LIMITED ((PME)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/1/1

Last week, with hardy an attentive soul around, Morgans had decided to downgrade its rating for Pro Medicus to Reduce but a quick sell-off in the share price has occurred and today the stockbroker has reversed that move; so it's back to Hold.

While acknowledging the shares are still trading on a high PE multiple, the broker sees continued strong growth on the horizon with "a strong and competitive product offering paired with long-term contracted revenues".

As the current level, near the bottom of the six months trading range, is seen as a reasonable entry point, the rating has been pulled up to Hold, negating last week's downgrade. Target $54.49.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 7/0/0

Given strengthening in the global premium rate environment, Macquarie has improved its forecasts for QBE Insurance Group's FY22 growth to 6.1% from 3.3%. The broker also updates earnings per share forecasts 3.3%, -0.4% and 1.9% for FY22-FY24. 

Macquarie noted that QBE Insurance Group is trading at a 12% discount to international peers, and expects this discount to peers to reduce long-term as underperforming portfolios are addressed. 

The rating is upgraded to Outperform from Neutral and the target price increases to $13.90 from $12.10.

TPG TELECOM LIMITED ((TPG)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 5/1/0

Ord Minnett has upgraded to Buy from Neutral with the TPG Telecom share price seen as too cheaply priced while the telco challenger is also considered a prime beneficiary from the (coming) post-pandemic recovery.

The broker's thesis is based upon growth in subscribers as well as improved mobile pricing. In addition, TPG is equally preparing for the sale of its tower assets in 2022.

Ord Minnett calculates the latter could ad $0.75 (up to) to its valuation for the stock. Target price lifts to $7.45 from $6.80.

Downgrade

ARB CORPORATION LIMITED ((ARB)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/1/2

Credit Suisse expects to see yet another cracking result (interim) in February, but also that ARB Corp will temper expectations regarding the outlook as the company will need to allow for costs to rise because of the step-up in the revenue base.

The broker is projecting margin pressure and slower growth which, all else remaining equal, should spell trouble for shares in this high quality company as it is trading on elevated multiples.

Credit Suisse anticipates market consensus will reset at a lower level post February. Target price falls to $38 from $46.90. Downgrade to Underperform from Neutral.

BEGA CHEESE LIMITED ((BGA)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

Bega Cheese's trading update missed Ord Minnett's forecast despite strong demand, explains the broker. Challenges from supply chain disruptions and rising farm gate milk prices are to blame.

Earnings forecasts have been reduced. Price target drops to $5.40 from $6.30. Downgrade to Hold from Accumulate.

CARNARVON ENERGY LIMITED ((CVN)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/1/0

Ord Minnett revisits resources stocks after updating its commodity price forecasts and also increases earnings estimates across its energy and utilities coverage by roughly 21% for 2023/FY23, with the largest beneficiaries being AGL Energy and Origin Energy.

The broker downgrades Carnarvon Petroleum to Accumulate from Buy, given the recent sharp run in the share price.

The in-house Brent oil price forecast (thanks JPMorgan) is now for an average price of US$78 per barrel for 2022 (+7%), US$75 for 2023 (+7%) and US$71 for CY24 (+2%).

FORTESCUE METALS GROUP LIMITED ((FMG)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/3/3

Citi analysts have downgraded their recommendation for Fortescue Metals' shares to Sell from Neutral. While acknowledging the price of iron ore has surprised to the upside, they find the large valuation gap with peers creates too large a challenge -mathematically- to ultimately be justified.

Citi observes following a strong rally in the share price, Fortescue's valuation is now at a material premium to the broker's DCF-based Net Asset Value (NAV) calculation, as well as vis-a-vis competitors in the sector.

Price target $17.20 (unchanged).

JAMES HARDIE INDUSTRIES PLC ((JHX)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/2/0

Morgan Stanley downgrades James Hardie to Equal-Weight from Overweight on the assessment that uncertainty has increased now that the CEO has left and US housing is slowing.

James Hardie remains a quality business, the broker suggests, while not anticipating the interim CEO is ready to make any major changes.

Forecasts have been slightly increased (2%), towards the top end of guidance, with the FY23 forecast lifting by 5%. Management uncertainty injects a -10% discount, which is why the price target falls to $58 from $62.

Industry view is In-Line.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/3/0

Link Administration Holdings has entered into a scheme of arrangement deed with Dye&Durham, a software and technology solutions provider offering services. Ord Minnett notes Dye&Durham will acquire 100% of Link Administration shares at $5.50 per share.

The broker notes a 3 cent per share dividend will be paid by Link Administration prior to the payout of shares, with upside potential for a higher interim dividend payment based on banking and credit management. 

Given little synergy between the companies' core business, the broker suggests Dye&Durham's interest is driven by Link Administration's PEXA stake. 

The rating is downgraded to Hold from Accumulate and the target price increases to $5.60 from $5.30.

This report was published on December 23, 2021.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0

The rapid spread of omicron over the holiday season has wreaked havoc for Sonic Healthcare, the company battling staff shortages, a sharp rise in demand, and the resulting inability to pool test, which has resulted in lower capacity.

Credit Suisse expects the number of tests performed to fall from 10 tests per 1,000 people per day to two tests per 1,000 people (based on 50,000 daily tests) by FY23.

The broker expects the past December half will represent peak earnings for the company, as covid testing gives way to rapid antigen testing. But all of this is inline with consensus forecasts.

The broker downgrades to Neutral from Outperform on valuation grounds. Target price steady at $46.50.

REJECT SHOP LIMITED ((TRS)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/0

Morgans has remodeled The Reject Shop, this time incorporating the AASB 16 lease accounting standard and although no major changes have occurred in forecasts, the price target rises as peers are now trading on higher multiples.

Incorporating a higher  multiple, the broker's price target climbs to $6.80 from $6.51. Alas, the share price is trading at a higher level, hence why the decision was made to downgrade to Hold from Add.

The company, with a long-established, 40-year history, has positioned itself as a turnaround story, suggests the broker, but near-term challenges are on the horizon. Think supply chains and cost inflation on top of reduced foot traffic.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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