Weekly Ratings, Targets, Forecast Changes – 12-02-21

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

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 February 8 to Friday February 12, 2021
Total Upgrades: 15
Total Downgrades: 10
Net Ratings Breakdown: Buy 50.98%; Hold 40.62%; Sell 8.40%

By Mark Woodruff

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

ASX received three upgrades to Neutral from Sell by separate brokers and Transurban Group received two upgrades to Neutral from Sell.

There was some consensus amongst brokers regarding a turnaround for ASX. Ord Minnett considers the company has reached the bottom of its earnings cycle and is expected to see some rebound in FY22, while Citi believes all of the main negatives are now known.

Citi upgraded Transurban Group after a -20% share price underperformance over the past three months. Meanwhile, Credit Suisse raised FY21 distribution estimates with higher numbers expected in FY22 and FY23, due to lower financing costs after Chesapeake proceeds are received.

Pilbara Minerals had the largest percentage rise in target price for the week, despite Credit Suisse lowering its rating to Neutral from Outperform after a recent share price rally. Ord Minnett also rewarded Harvey Norman with the second largest percentage target price rise and simultaneously lowered its rating to Hold from Accumulate on valuation grounds.

For Pilbara Minerals, Credit Suisse doubts we are going back to a period of extreme oversupply and price depression and the stock continues to be the broker’s preferred pick. Meanwhile, Ord Minnett anticipates Harvey Norman’s underlying pre-tax profit for the first half will be up 91% at $545.7m. The company’s earning result is due on March 1.

In terms of percentage downgrades to target prices for the week, all four of the brokers that cover Cimic Group in the FNArena database were disappointed by the FY20 results.

The ‘miss’ seemed to largely stem from pandemic effects on the awarding of new projects and on construction activity. Operating cash flow conversion was also weak, impacted by the unwinding of Leighton Asia projects and a reduction in debtor factoring.

Next in terms of negative revision to broker target prices was Origin Energy. As mentioned last week, the company lowered guidance for FY21 and headwinds facing the electricity sector do not appear to be weakening anytime soon.

An adjustment in data due to no recent updates by broker Ord Minnett had Pushpay Holding atop the table for downgrades to price targets.

The largest percentage fall in earnings forecasts by brokers in the FNArena database went to Transurban Group.

Cimic Group, Origin Energy and Pilbara Minerals have already received dishonourable mentions above in regard to falling target prices. They were also placed in the top three for percentage declines in forecast earnings by brokers.

Next was Crown Resorts which has been deemed unsuitable for the Crown Sydney licence and Macquarie assesses the pathway to obtaining approval is onerous and may take two years.

In the case of positive revisions to earnings forecasts for the week, Insurance Australia Group was the standout. Six of a possible seven brokers updated estimates and Citi upgraded the rating to Buy from Neutral.

It seemed to be a case of relief after first half results were impacted by a -$1.2bn provision loss, booked due to Business Interruption claims. Macquarie feels the result was strong under the circumstances and Citi can see momentum starting to build in the business.

There were surprises all around for the four brokers that updated earnings forecasts for News Corp after second half results. They were by driven by cost-out and operating leverage and the trends from both the Move and Dow Jones businesses were seen as indicative of structural growth.

GrainCorp appeared high on the table for largest percentage earnings upgrades after higher-than-expected grain receivals and grain exports. This comes after the largest east coast winter grain crops on record. 

Nickel Mines was next after Macquarie noted a remarkable surge in electric vehicles in the fourth quarter, which has has propelled nickel sulphate prices higher. The company is the broker’s preferred nickel exposure, featuring strong forecast free cash flow yields, which increase further in a spot price scenario.

Finally, Oil Search and fellow Papua LNG partners (Total and ExxonMobil) have finally signed an agreement with the PNG government. This is considered an important milestone for the project.

Total Buy recommendations take up 50.98% of the total, versus 40.62% on Neutral/Hold, while Sell ratings account for the remaining 8.4%.

Upgrade

AMP LIMITED ((AMP)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/6/0

Having initially retained an Underperform rating after a first glance at AMP's result yesterday, Macquaire has now decided to upgrade to Neutral.

The result was overshadowed by the back-down of Ares Management from any takeover intentions, which led to the big share price fall.

Macquarie sees it differently, suggesting the focus can now return to that within mangement's control. That includes an unchanged cost-out target. AMP managed to get close to its FY20 cost-out target even with additional unforeseen covid costs.

No dividend was declared but the board is committed to reinstating capital management, and a breakdown of divisional earnings has provided more clarity, and led the broker to upgrade forecasts. Target rises to $1.45 from $1.30.

ASX LIMITED ((ASX)) Upgrade to Neutral from Sell by Citi and Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/6/1

Citi upgrades its rating to Neutral from Sell.

ASX has increased guidance for both capex and costs, a development that had already been anticipated by Citi. Costs grew 8% in the first half but Citi still expects cost growth to moderate from here while expecting higher revenue.

Issuer services revenue grew strongly by 44% in the first half, notes the broker, mainly reflecting the strong growth in retail broking accounts and activity. Citi expects momentum to soften from here.

With all the main negatives now known, the broker upgrades its earnings forecasts for FY21-23.

Target price rises to $70 from $68.

Credit Suisse upgrades its rating to Neutral from Underperform with a target price of $71.

ASX's first-half net profit was 3% above Credit Suisse's forecast. ASX's latest result demonstrates the resilience of its business, suggests the broker, with earnings down only -3% versus last year.

Going ahead, the broker believes ASX's earnings will contract by -5-10% in FY21 and a further -0-5% in FY22 led by softening of certain revenue lines like capital raisings supporting issuer services and elevated cash equities activity.

Ord Minnett looks at some key issues investors should look for in the interim result. In the broker's view, ASX has reached the bottom of its earnings and the broker expects to see some rebound in FY22.

Rating is upgraded to Hold from Lighten with the target price reducing to $73.78 from $77.28.

CHALLENGER LIMITED ((CGF)) Upgrade to Add from Hold by Morgans .B/H/S: 3/4/0

The normalised profit (NPAT) for Challenger was -2-3% below Morgans expectations, due to a -50 basis point decline in the life cash operating earnings (COE) margin. 

The broker notes this margin is expected to be assisted in the second half when excess liquids are further invested. Morgans sees FY21 as the bottoming out of earnings and moves to an Add rating from Hold. The target is decreased to $6.72 from $6.80.

The analyst lowers FY21 and FY22 EPS forecasts by -4% and -7%, respectively, mainly reflecting higher net book growth assumptions, offset by reduced COE margin forecasts.

See also CGF downgrade.

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

Citi raises benchmark iron ore forecasts to US$140 and US$110 per tonne for 2020 and 2021, respectively. The broker believes the higher-for-longer iron ore prices will benefit Champion Iron and upgrades to Neutral from Sell.

On Citi's modelling the share price is implying a long-term benchmark iron ore price of US$65/t versus its forecast of US$60/t.

COCHLEAR LIMITED ((COH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/3/2

After an encouraging first-half update and positive feedback from the US, Ord Minnett is confident Cochlear will a report a strong earnings recovery led by market share gains and flat operating costs. No guidance is expected.

Earnings estimates have been increased by 8% in FY21 and 7% in FY22.

Cochlear will report its first-half FY21 result on February 19.

Rating is upgraded to Hold from Lighten with the target rising to $200 from $175.

DETERRA ROYALTIES LIMITED ((DRR)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/1/0

Citi upgrades its rating to Neutral from Sell with a target of $4.50.

Citi highlights Iron ore prices rose 80% in 2020 to nine-year high levels of US$177/t before moving back to US$150/t. The broker expects prices to rise to US$165/t over the next 3 months before falling to US$140 in 2021.

Deterra Royalties will report on a fiscal year basis and report first half results on 24 Feb. Citi expects earnings of $26m but notes this will be a tricky result since the first half will have a different incorporation date (15 June 2020) and implementation date (2 Nov 2020).

Citi forecasts a first half interim dividend of $0.02 with full-year dividend expected to peak at $0.22 in FY23.

G8 EDUCATION LIMITED ((GEM)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/4/0

Macquarie reviews sector conditions and upgrades to Neutral from Underperform. Feedback from the industry signals improving occupancy with some potential for limited price increases.

This is offsetting rent and sector funding, where there is limited appetite from financiers that may affect divestment plans.

The broker upgrades 2020 earnings (EBIT) by 5%, adjusting its model such that earnings per share are reduced by -11%. EPS estimates for 2021 and 2022 are raised by 161% and 21%, respectively.

Rating is upgraded to Neutral from Underperform and the target is raised to $1.20 from 85c.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/4/0

Citi assesses momentum is building in the business and underlying margins although on current estimates there is only modest value appeal. Still, enough to upgrade to Buy from Neutral.

The broker anticipates the margin target of 15-17% will be achieved by FY23. Target is raised to $5.90 from $5.00.

Citi expects a significant increase in hazards allowance in FY22 while in the short term there is likely to be a modest adverse impact from lower investment returns and higher costs.

MOUNT GIBSON IRON LIMITED ((MGX)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

Citi raises 2020 and 2021 benchmark iron ore price forecasts to US$140 and US$110 per tonne. Since the beginning of the year the Mount Gibson share price has fallen -15%.

Along with large earnings revisions this causes the broker to upgrade the rating to Buy/High Risk from Neutral/High Risk. Target is raised to $1.20 from $1.10.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/0

Morgans regards strong cash flow and progress towards operational growth at Lihir and Cadia as positives for Newcrest Mining after first half results were released.

The company is on track for mid-point FY21 guidance for gold and copper production, predicts the broker.

The analyst highlights guidance for costs was revised to the top of the range for FY21, on the back of a higher Australian dollar and additional covid-19 costs.

Underlying profit (NPAT) was up 98% from the first half FY20 and broadly in-line with consensus, driven by an increase in the gold and copper price, assesses Morgans.

The broker lifts the target price to $29.98 from $27.87, driven by the longer-term growth and strategy spelt out by management for both Lihir and Cadia. The rating is lifted to Add from Hold.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/1/1

Northern Star’s result was in line with Ord Minnet's forecast and the broker can see over 10% free cash flow (FCF) yields from FY23.

With $123m net debt and no material capex on the horizon, cash flow and returns will remain an important part of the analyst's investment case.

The company has reconfirmed the 6% revenue-based dividend policy.

Ord Minnett highlights significant leverage to the gold price with only 13% of the three year forward production hedged in the broker's model.

Upgrade to Buy from a Hold rating with the price target rising to $14.40 from $14.3.

TRANSURBAN GROUP ((TCL)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Neutral from Sell by Citi .B/H/S: 3/4/0

Credit Suisse upgrades its rating to Neutral from Underperform with the target price increasing to $13 from $12.6.

Transurban Group's first-half result showed toll revenue at $1,165m, -3% below Credit Suisse's forecast of $1,204m. Proportional operating income for the half came in at $840m, -11% below the broker's forecast. Credit Suisse notes the miss was driven by weak traffic performance in Melbourne, and lower average dynamic toll pricing in the US Express Lanes.

FY21 distribution estimates have been raised by the broker in FY21 to 33.8c with higher numbers expected in FY22 and FY23 due to lower financing costs after the Chesapeake proceeds are received.

Citi has upgraded Transurban Group to Neutral from Sell following the release of an interim report that proved slightly above expectations, even though the analysts also suggest it missed market consensus by some -5% at the operational (EBITDA) level.

The upgrade was more so inspired by the -20% share price underperformance over the past three months, explain the analysts.

Three key factors are preventing Citi from lifting the rating to a Buy: the valuation remains above long term average, with leverage high and potential downside risks medium term from increased work-from-home (which impacts on the traffic on toll roads).

Citi's target price has lifted to $13.35 from $12.83.

Downgrade

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/4/0

FY21 guidance for normalised net profit remains in a range of $390-440m, despite lower rental abatements. First half results slightly missed expectations.

Macquarie notes the life division missed consensus forecasts by -6%, although this was broadly offset by strength in funds management. Given the slower rebound of life margins, the broker downgrades to Neutral from Outperform.

Target is raised to $6.30 from $4.60 to reflect the stronger life balance growth from institutional sales over the longer term.

See also CGF upgrade.

CIMIC GROUP LIMITED ((CIM)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/3/0

Rating is downgraded to Neutral from Outperform. Target is reduced to $21.90 from $34.

Credit Suisse is disappointed by CIMIC Group's weak full-year result noting the subdued result was further compounded by various one-offs and suboptimal cash flows that will likely dampen sentiment in the near term.

While the company's investment thesis includes a capital-light structure and an improving balance sheet, Credit Suisse believes this will take time to reflect in the stock's multiples.

Post a lukewarm 2021 guidance, the broker cuts its 2021-22 earnings forecasts by -36-42%.

CROWN RESORTS LIMITED ((CWN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0

Crown Resorts has been deemed unsuitable for the Crown Sydney licence and Macquarie assesses the pathway to obtaining approval is onerous and may take two years.

The broker believes the NSW casino inquiry report brings into question the company's suitability to operate both the Melbourne and Perth casinos. Nevertheless, Macquarie expects Melbourne and Perth gambling will continue without hindrance.

As there is a high level of risk and uncertainty as to how the company will manage the pathway to approval going forward, the broker downgrades to Neutral from Outperform. Target is reduced to $8.30 from $11.00.

ECOFIBRE LIMITED ((EOF)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

Ecofibre's first-half revenue at $14.7m was in line with Ord Minnett's estimate, although the operating loss was more than expected.

The company has revised its guidance from “break-even” to expecting a loss of circa -$7m in FY21 due to the lack a meaningful near-term recovery in revenue.

Ord Minnett remains convinced on the long-term potential of CBD and Hemp and views Ecofibre as a key player in the development of the industry.

Even then, with trading severely curtailed in the US and uncertainty on the timing of the recovery, Ord Minnett downgrades its recommendation to a Hold from Buy with the target price reducing to $1.65 from $2.26.

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

Credit Suisse believes GrainCorp's FY21 guidance puts to rest some arguments with respect to crop leverage under the new crop production contract. Carry out for FY21 is guided to 2.5-3.5mt, implying a circa 0.5-1mt boost to FY22 export volume due to carry-out.

Net profit is guided to be $60-85m versus the broker's $80m forecast. Credit Suisse thinks normalisation of inventory will likely lead to the core net debt rising to $130m in the first half.

Credit Suisse downgrades its rating to Neutral from Outperform with the target price rising to $5.06 from $5.03.

GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/2/3

December quarter production met full year guidance. Record sales were a positive, Credit Suisse notes, but a further improvement in recoveries is required to reduce costs. No sales price was disclosed.

2021 production is guided at 162-175,000t, 55% above the prior year. This assumes full plant throughput at Mount Cattlin from the second quarter.

Credit Suisse downgrades to Underperform from Neutral on valuation grounds. Target is raised to $2.10 from $1.30. The broker notes the updated feasibility study on Sal de Vida is due for release in the June quarter.

HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 5/1/0

Ord Minnett downgrades its recommendation on Harvey Norman to Hold from Accumulate due to the lack of valuation support. Target rises to $5.50 from $5.25.

The broker expects Harvey Norman's underlying pre-tax profit for the first half to be up 91% at $545.7m.

The broker awaits more comments on the tailwinds from rising home investment and the extent to which this can moderate sales and margin declines.

PILBARA MINERALS LIMITED ((PLS)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/1/3

Credit Suisse downgrades its rating to Neutral from Outperform with the target rising to $0.95 from $0.40.

The broker expects lessons learned over the past 24 months including a period of significant lithium oversupply leading to low utilisation rates and prices to translate into more controlled future expansion.

Even so, the likelihood of going back to a period of extreme oversupply and price depression is considered low by Credit Suisse. Pilbara continues to be the broker's preferred pick.

REA GROUP LIMITED ((REA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/4/1

Despite Rea Group reporting first half results broadly in-line with Credit Suisse's estimates, the broker lowers the rating to Underperform from Neutral following the recent strong share price performance.

A key takeaway for the analyst includes a flattening out of depth listings, with a slight sequential decline, despite the 4% year-on-year growth in National listings in the first half. 

The target price is lowered to $136.70 from $137.7 

SUNCORP GROUP LIMITED ((SUN)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/0

Suncorp Group reported a first half FY21 net profit of $490m, below Ord Minnett’s $518m forecast, while the headline result was
boosted by the bank achieving a high net interest margin (NIM) and low bad debt charges.

A fully franked interim dividend of 26 cents was declared, versus the broker's 22 cent forecast.

The analyst makes a significant reduction to forecasts due to weak underlying trends, a period of reinvestment in the business and a strong share price performance relative to other general insurance stocks.

The rating is downgraded to Hold from Accumulate and the target price falls to $12 from $12.83.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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