Weekly Ratings, Targets, Forecast Changes – 25-09-20

This story features BRICKWORKS LIMITED, and other companies. For more info SHARE ANALYSIS: BKW

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 September 21 to Friday September 25, 2020
Total Upgrades: 10
Total Downgrades: 3
Net Ratings Breakdown: Buy 50.21%; Hold 39.09%; Sell 10.70%

The week ending Friday September 25 delivered ten ratings upgrades by stockbroking analysts for individual ASX-listed stocks. Nine of those ten were upgraded to a direct Buy and five upgrades related to stocks in the gold sector. The gold sector upgrades resulted from broker Macquarie upgrading earnings forecast across the entire gold sector, driven by an increase in its commodity price forecasts. That same review of the gold sector resulted in two of the three downgrades to ratings across all sectors for the week. Despite the revision upwards to commodity forecasts for Panoramic Resources and West African Resources, recent share price strength prompted the broker to downgrade ratings for both companies.

Flexigroup had the largest percentage uplift to target price after brokers factored in a recent equity raise. While the stock is considered a value play in the buy now pay later sector, some brokers are concerned over the lack of detail on exactly where and how the capital will be applied. Reinforcing that the share market is largely comprised of future expectations, brokers reacted to a better-than-feared profit result for Brickworks with a universal lift in price targets. Despite this, there were some earnings concerns mentioned later in this article. Coming in third and fourth on the table for the largest percentage target price changes were gold stocks Northern Star Resources and Newcrest Mining for reasons previously discussed.

Led by higher unemployment, lower occupancy, challenged leasing environment and delayed work from home risks, Dexus Property Group received the only rating downgrade for the week outside of the gold sector. In addition, the company had the leading percentage decline in target price for the week. Coming second was United Malt Group after Credit Suisse initiated coverage with a target price that lowered the average target price already in place by brokers covering the stock. The lower target price resulted from a glum assessment from the broker, including the group's valuation is constrained by history. That is, significant capital expenditure has been incurred in the past with only modest returns to show for it.

Nufarm led the table for the largest percentage rise in forecast earnings after brokers reflected upon the FY20 result and concluded recent earnings momentum is likely to continue. Fonterra Shareholders' Fund also had a significant percentage rise in earnings expectations after the fund achieved the top end of guidance in FY20 and appears to have stabilised its earnings and repaired its balance sheet.

Despite receiving favourable increases to price targets, Brickworks received brickbats for a material percentage reduction in earnings forecasts. The target prices can depend upon where the prevailing share price sits. The earnings concerns arose as prospects in some parts of the portfolio, including the Investments segment, were seen as mixed. Webjet also appeared on the table for largest percentage earnings downgrades for the week. An operating loss is expected in FY21 before a return to profitability in FY22. Clearly, a pandemic is not the ideal time to be leveraged to leisure air travel. Additionally, the intensity of competition is considered to be on the increase.

Total Neutral/Hold recommendations take up 50.21% of the total, versus 39.09% on Neutral/Hold, while Sell ratings account for the remaining 10.70%.

Upgrade

BRICKWORKS LIMITED ((BKW)) Upgrade to Add from Hold by Morgans .B/H/S: 4/0/0

The FY20 result for Brickworks was better than feared by Morgans, with building products Australia (BPA) delivering a materially higher second half performance and the Property division also beating the broker's forecast.

The analyst points out while risks remain to activity in NSW and VIC, outlook comments in regard to BPA were cautiously optimistic. Property is expected to remain resilient and building products North America (BP NA) should benefit from rationalisation efforts and recent acquisitions, according to the broker.

The analyst expects the Industrial Property Trust tailwinds, asset heavy balance sheet and dividend yield will provide investors ongoing valuation support until a cyclical recovery in the operational business occurs. Valuation upside is considered likely from a further compression in cap rates and stronger than expected recovery in BPA and BPNA over FY21-23.

Morgans upgrades BPA forecasts (from a low base) and increases Property estimates over FY21-23. This has been largely offset by material downgrades to Investment earnings.

The rating is upgraded to Add from Hold and the target price is increased to $19.98 from $18.24.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/2

Citi observes over the last week the benchmark iron ore price has softened. Investor nervousness remains high as some are concerned that China's steel production will enter a sustained downward correction.

The broker suspects as Golden Week approaches in China mills may well moderate production and defer some purchases. However, ex-China steel production is now starting to recover and will add significantly to demand for both metallurgical coal and iron ore.

Fortescue Metals should be able to provide an FY21/22 dividend of $2.05/$1.31 at a pay-out ratio of 80%, Citi calculates. The broker estimates the share price is now discounting a long-term benchmark iron ore price of US$65/t. Rating is upgraded to Buy from Neutral. Target is $18.50.

GOLD ROAD RESOURCES LIMITED ((GOR)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/0/0

Macquarie has upgraded its earnings forecast for the gold sector driven by an increase in its price forecasts for the commodity.

Gold Road Resources' rating is upgraded to Outperform from Underperform with the target price rising to $1.90 from $1.80.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/2

Magellan Financial Group has announced an investment into a newly established financial services firm named ‘Barrenjoey Capital Partners’. The new firm will provide full service institutional corporate advisory and broking.

The Group’s investment includes $90m cash, 1.2m Magellan Financial Group shares (around $68m) and a $50m working capital facility. The group will have a 40% economic interest. While this is a deviation from the funds management strategy, the start-up is assessed by Morgans as a relatively low outlay versus group capital.

In the core business, steady net inflows have been recorded in the financial year so far, reports the broker. The flows outlook is considered supported by partnership initiatives and the product pipeline.

The analyst views the group as having a quality earnings base and solid growth potential in the core business. Additionally, there is optionality from new ventures and the group is trading on a reasonable multiple, explains Morgans.

The broker views the group’s short-term valuation as reasonable, with strong prospects to deliver future sustainable growth. Market direction and performance fees are considered the near-term forecast swing factors.

The rating is upgraded to Add from Hold and the target price is decreased to $61.05 from $64.05.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 4/3/0

Macquarie has upgraded its earnings forecast for the gold sector driven by an increase in its commodity price forecasts.

Newcrest Mining's earnings forecasts between FY21-25 have seen a strong upgrade mostly due to Cadia's low costs and copper exposure combined with less exposure to the AUD, observes the broker.   

Macquarie upgrades its rating to Neutral from Underperform with the target price rising to $35 from $28.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/2/1

Macquarie has upgraded its earnings forecast for the gold sector driven by an increase in its commodity price forecasts. Northern Star Resources is one of its preferred picks in the sector.

Progress at the Super Pit and production performance are the key catalysts for Northern Star in FY21, according to the broker.

Macquarie upgrades its rating to Outperform from Underperform with the target price rising to $16.40 from $13.30.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/1/0

Macquarie has upgraded its earnings forecast for the gold sector driven by an increase in its commodity price forecasts.This outlook drives an increase in the rating and target price for Perseus Mining 

The broker upgrades its rating to Outperform from Underperform with the target rising to $1.70 from $1.40.

QUBE HOLDINGS LIMITED ((QUB)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/3/1

Ord Minnett has upgraded its recommendation on Qube Holdings to Buy from Accumulate with a target price of $3.03.

The broker considers Qube to be a likely beneficiary from a bumper soft commodity harvest forecast for the East Coast in FY21. The Moorebank monetising process is expected to deliver a return to Qube by the end of 2020.

Qube has acquired Agrigrain, a logistics and storage operation in NSW which services 800 growers in regional NSW. The broker believes Agrigrain is likely to integrate with Qube’s broader Agri footprint in NSW.

SARACEN MINERAL HOLDINGS LIMITED ((SAR)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/3/0

Macquarie has upgraded its earnings forecast for the gold sector driven by an increase in its commodity price forecasts. Saracen Mineral Holdings is one of its preferred picks in the sector.

Progress at the Super Pit and production performance are the key catalysts for Saracen in FY21, according to the broker.

Macquarie upgrades its rating to Outperform from Underperform with the target price rising to $6.10 from $4.70.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/4/0

Credit Suisse upgrades to Outperform from Neutral given the recent weakness in the share price amid observations that signal the Penfolds brand equity among consumers is unaffected by the anti-dumping investigation in China.

The broker expects further improvement in shipments into the mid autumn festival/Golden Week as well as some pent-up demand from weddings as celebrations were likely moved to the upcoming holiday season from Chinese New Year. Target is $12.30.

Downgrade

DEXUS PROPERTY GROUP ((DXS)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 3/2/1

Morgan Stanley believes equity investors should be more cautious over the next 6-12 months on the Australian office market. The broker elaborates by stating it expects occupancy to drop to circa 93% in the next 12 months with incentives expected to elevate to 30% in FY22, from 20%.

Dexus Property Group's office portfolio's weighted average lease expiry at 4.2 years is the weakest versus its peers Mirvac Group ((MGR)) and GPT Group ((GPT)), notes the broker, and reflects 28% of its portfolio will be expiring in the next 24 months. Morgan Stanley recommends Mirvac Group above Dexus or GPT Group for investors keen on Office.

Led by higher unemployment, lower occupancy, challenged leasing environment and delayed work from home risks, Morgan Stanley downgrades its rating to Underweight from Overweight. The target price decreases to $8.15 from $10.20. Industry View: In-line.

PANORAMIC RESOURCES LIMITED ((PAN)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/0/1

Upside risk to copper price continues to strengthen, assesses Macquarie. However, Panoramic Resources is expected to report earnings losses in FY21-22. Its operations predominantly involve nickel.

Oz Minerals ((OZL)), Western Areas ((WSA)) and Nickel Mines ((NIC)) are Macquarie's preferred picks while the broker downgrades its rating for Panoramic Resources to Underperform from Neutral due to its recent share price strength.

Target rises slightly to $0.08 from $0.07.

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

Macquarie has upgraded its earnings forecast for the gold sector driven by an increase in its commodity price forecasts. This also drives target price increases for West African Resources.

However, West African Resources' recent share price strength prompts the broker to downgrade its rating to Neutral from Outperform. Target rises to $1.20 from $1.10.  

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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