Weekly Ratings, Targets, Forecast Changes – 02-04-21

This story features AUSTRALIAN FINANCE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: AFG

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 March 29 to Thursday April 1, 2021
Total Upgrades: 14
Total Downgrades: 8
Net Ratings Breakdown: Buy 54.32%; Hold 38.36%; Sell 7.33%

For the shortened week ending Thursday 1 April, there were fourteen upgrades and eight downgrades to ASX-listed companies by brokers in the FNArena database.

There were no material changes to forecast target prices for the week.

Brickworks was atop the table for percentage earnings upgrades by brokers last week and New Hope Corp was fourth. As mentioned last week, brokers upgraded earnings forecasts for Brickworks after first half results showed stronger contributions from the Investments and Property segments though building products North America was weaker than expected.

Meanwhile, New Hope Corporation was also mentioned last week after first half earnings and a four cent dividend exceeded broker forecasts. This was driven by higher than expected realised prices and a cost reduction at Bengalla. Thermal coal prices have increased around 100% since the lows of mid-2020. 

The two companies are related in that Brickworks has a 39.4% interest in Washington H. Soul Pattison, which in turn owns 61.1 % of the New Hope Corp.

Karoon Energy was runner up in terms of a percentage upgrade to forecast earnings by brokers last week. This flowed from the previous week when the Morgans commodities team upgraded oil price forecasts for the sector for 2021-2023. The company is one of the broker's key picks as the transformation into a high-margin pure-oil producer is seen as complete and there is a low-risk organic growth profile. 

As long as there is not another major event this financial year, brokers worst earnings fears seemed somewhat allayed after Insurance Australia Group provided a natural perils update following recent flooding across NSW and QLD. Morgans even ventured to upgrade to Add from Hold with the share price at seven year lows.

Western Areas headed the list last week for the largest percentage fall in earnings forecasts by brokers in the FNArena database. Ord Minnett materially reduced earnings estimates after a reduction of the broker’s nickel price forecast by -15% to US$7.50/lb. The analyst left the $3.10 target price unchanged after including the AM6 mine and allowing for increased mill capacity at Odysseus.

Next was Coronado Global Resources after Morgans weighed the effect of a falling met coal price upon the company’s outstanding debt. The broker downgraded to Hold from Add on the potential for further coal price slippage though highlighted attractive leverage should coal prices turnaround.

While lowering earnings forecasts and noting 2020 was a year of underperformance despite record gold prices, Credit Suisse retained an Outperform rating for OceanaGold Corp. The broker feels the worst may be over with a runway for multi-asset production growth in New Zealand.

Total Buy recommendations take up 54.32% of the total, versus 38.36% on Neutral/Hold, while Sell ratings account for the remaining 7.33%.

Upgrade

AUSTRALIAN FINANCE GROUP LTD ((AFG)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0

Morgans increases EPS forecasts for FY22 and FY23 by 6.8% and 8.4% due to increased net interest margin (NIM) forecasts and increased loan growth forecasts. The rating is upgraded to Add from Hold and the target to $2.90 from $2.60.

The broker expects the current contraction in residential mortgage backed securities (RMBS) will allow the AFG securities (AFGS) business to offer sharper pricing on its variable rate home loan products.

ALUMINA LIMITED ((AWC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 4/2/0

Macquarie upgrades to Neutral from Underperform as rallying prices and demand for aluminium have transformed the earnings outlook.

The broker notes Alumina Ltd is trading at a free cash flow yield of around 10% at spot prices. Target is raised to $1.70 from $1.50.

CAPRICORN METALS LIMITED ((CMM)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/0

Macquarie upgrades to Neutral from Underperform following recent weakness in the share price.

A modest strengthening in the Australian dollar drives reductions in gold earnings estimates. Target is $1.60.

GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/1/3

Ord Minnett updates production profiles amidst a recovery in demand and pricing for lithium chemicals. As the market tightens, sourcing lithium units is being prioritised over grades.

As the share price has pulled back somewhat, the broker envisages opportunities in the sector and upgrades Galaxy Resources to Buy from Hold. Target is raised to $3.70 from $2.70.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Add from Hold by Morgans .B/H/S: 4/3/0

Morgans downgrades FY21 EPS forecasts by -8% and lowers the target price to $5.35 from $5.68 on revised management claims guidance as a result of the NSW/QLD floods. However, the rating is raised to Add from Hold with the share price at seven year lows.

The company's reinsurance will cap the maximum event loss at -$165m though the company is estimating around -$135m. The broker views the flood impact as relatively contained.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/4/1

Ord Minnett adds stage 2 of the Eneabba project and stronger mineral sands prices to its financial modelling for Iluka Resources. As a result estimated value increases by 25%.

Little new supply is expected in the short term and strength in demand continues for mineral sands and rare earths.

Incorporating higher prices and adding stage 2 significantly improves cash flow and Ord Minnett upgrades to Buy from Hold. Target is raised to $8.10 from $6.60.

JUPITER MINES LIMITED ((JMS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

Macquarie points out Jupiter Mines was South Africa's largest exporter of manganese in FY21, at 3.4mtpa. The broker expects a 2c final dividend, bringing the full year dividend yield to 10%.

Stronger manganese prices are driving the upside and the impact of weather has been offset by improvements in logistics. Rating is upgraded to Outperform from Neutral. $0.35 target retained.

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

Macquarie incorporates stronger demand and prices, upgrading 2021 iron ore, manganese and thermal coal forecasts by 18%, 22% and 17% respectively.

Mount Gibson is upgraded to Outperform from Neutral, having materially underperformed its peers in the year to date. The completion of Koolan Island cutback is a key development for the company. Target is raised to $1.00 from $0.95.

OROCOBRE LIMITED ((ORE)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/2/2

Ord Minnett updates production profiles amidst a recovery in demand and pricing for lithium chemicals. As the market tightens, sourcing lithium units is being prioritised over grades.

Share prices have pulled back a little and the broker envisages more opportunities in the sector and upgrades Orocobre to Buy from Hold. Target is raised to $5.50 from $5.40.

OIL SEARCH LIMITED ((OSH)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/5/1

Macquarie raises Brent oil price assumptions by 20% for 2021 and by 7% for 2022, expecting prices will peak at US$72/bbl in the third quarter of 2021.

The broker notes the sell down in Alaska is now critical for Oil Search as this has the potential to reduce net capital expenditure exposure and provide upfront funding.

Rating is upgraded to Neutral from Underperform. Target rises to $4.40 from $4.10.

REA GROUP LIMITED ((REA)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/0

REA Group will acquire all of Mortgage Choice ((MOC)) via a scheme of arrangement. The offer is $1.95 a share. Credit Suisse estimates the acquisition will more than triple the market share of REA Group in the mortgage broking channel to around 7%.

This should provide opportunities for synergies from greater scale and the ability to negotiate better rates. It will also be able to stream leads generated from its platform to a business which is fully owned.

Nevertheless, Credit Suisse warns mortgage broking is a business that is exposed to cyclical fluctuations and, while the scale of the investment is not enough to change the earnings profile, it is marginally dilutive to the multiple.

Rating is upgraded to Neutral from Underperform as the stock is now trading in line with valuation. Target is $136.70.

SOUTH32 LIMITED ((S32)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/1/0

Macquarie upgrades to Outperform from Neutral as rallying prices and demand for manganese and aluminium have transformed the earnings outlook.

The broker notes South32 is trading at a free cash flow yield of around 10% at spot prices. Target is raised to $3.10 from $2.90.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0

Citi notes Suncorp's flood costs of $240m are likely to mean it will exceed its FY21 allowance by around $40m, assuming around $25m per month in attritional hazard losses from March to June 2021.

Citi lowers estimates by -3% to reflect the overrun to date. As the stock has retreated since its result and capital initiatives will potentially come into play in August the rating is lifted to Buy from Neutral. Target is reduced to $11.40 from $11.50.

Suncorp's recovery story is considered more about the medium term and the broker continues to nominate QBE Insurance ((QBE)) as its top pick.

TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 4/1/0

Morgan Stanley upgrades to Overweight from Underweight after recent news of the separation into three operating companies and the injection of external investors into Mobile Towers. The price target is raised to $4 from $3.

The broker feels the greater the degree of freedom headquarters allows each entity the better. The Towers spin-off provides a near term catalyst though it's considered the primary risk continues to be intense competitive rivalries preventing mobile and fixed line price inflation.

Additional options are now emerging to create value including but not limited to InfraCo and the NBN and the analyst thinks additional
changes in structure across other operating units are also possible. Industry view: In-Line.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/3/3

AGL Energy will divide into two energy businesses, basically retail and generation. Ord Minnett notes a lack of detail regarding capital structures, offtake arrangements and final asset allocations which makes it difficult to assess how the split will appeal to investors.

The broker suspects the retail business will not take on significant wholesale price risk so that the generation part, PrimeCo, cannot be structured as an infrastructure asset.

There are challenges ahead and the broker downgrades to Hold from Accumulate, finding it difficult to envisage how PrimeCo can be made attractive as a stand-alone entity. Target is lowered to $11.00 from $14.05.

BHP GROUP ((BHP)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/0

UBS downgrades to Neutral from Buy as the stock has generated a total return of 108% over the past 12 months, mainly on the back of the strong iron ore price.

UBS believes the risk in the iron ore price is building as Brazilian supply recovers and Chinese demand slows. The broker now considers the risk/reward is more balanced.

Target is reduced to $42 from $50. Over the medium term UBS also envisages further headwinds from latent capacity, scrap and greenfield developments.

COOPER ENERGY LIMITED ((COE)) Downgrade to Hold from Add by Morgans .B/H/S: 1/4/0

Morgans lowers the rating to Hold from Add and the target to $0.30 from $0.39 given short-term uncertainty around the path to reaching nameplate at Sole. The broker expects near-term underperformance while APA Group ((APA)) aims to lift production and capital works.

While taking a conservative stance, the broker remains confident in the long-term outlook and intrinsic value in the Gippsland and Otway Basin assets. 

CORONADO GLOBAL RESOURCES ((CRN)) Downgrade to Hold from Add by Morgans .B/H/S: 3/1/0

Morgans believes the share price is vulnerable to a downside pricing scenario in the absence of a sustained met coal price recovery. The broker has always felt the company is a leveraged play on met coal pricing more than a play on production growth or development.

Now with sluggish QLD hard coking coal prices back near US$115/t, it places upward pressure on net debt, explains the broker.This needs to be weighed against a compelling earnings/valuation leverage to healthier prices.

Morgans downgrades the rating to Hold from Add. The target is lowered to $1 from $1.27 after the broker applies a -5% discount to a revised valuation to reflect the potential downside coal price scenario.

CSR LIMITED ((CSR)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/2/0

UBS downgrades CSR to Neutral from Buy. The business is highly leveraged to housing and remains in an earnings upgrade cycle as the benefit from the recent surge in housing approvals is still to come over the next 6-12 months.

The broker also suspects earnings margins could exceed the prior cycle high of 14%. Nevertheless, there is talk of potential macro prudential measures for late 2021 to curb surging home prices and approvals could be near their peak, UBS asserts.

The stock is up 20% from its pre-pandemic levels and the broker believes the price is more than capturing the upside. Target is raised to $5.73 from $5.19.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/3/1

UBS downgrades to Neutral from Buy, reducing the target to $18 from $25. Fortescue Metals has generated a total shareholder return of 213% over 12 months on the back of the strong iron ore price.

Yet the broker believes the iron ore price risk is building as Brazilian supply recovers and Chinese demand slows. Hence, UBS considers the risk/reward is no longer compelling despite the high cash returns.

JB HI-FI LIMITED ((JBH)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/6/1

Morgan Stanley opts for a more cautious stance within the household goods space due to harder comparisons and the vaccine rollout. The broker lowers the rating to Underweight from Equal-weight and the target to $46 from $52. Industry view is Attractive.

The consumer electronics sub-category was an early beneficiary of 'panic-buying' from March 2020 and will therefore face tougher comps earlier than others in March/April, explains the analyst.

Compared to Harvey Norman ((HVN), Morgan Stanley sees more limited underlying upside associated with housing and regional strength. Also, the share price is retesting all-time highs and has outperformed the ASX200 by 39% since the February 20, 2020 market peak.

MCPHERSON'S LIMITED ((MCP)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

An unconditional on-market takeover offer has been lodged by Gallin at $1.34 a share. Ord Minnett notes the offer price represents a 9.8% premium to the pre-bid market and a -7.6% discount to its DCF-based valuation.

The lack of a takeover premium is indicative of the opportunistic nature of the offer and also explained by sub-standard capital allocation decisions during FY21, in the broker's view.

The broker suspects incremental demand may be forthcoming from third-party bidders, given strong levels of brand equity and category leadership in core products. Rating is downgraded to Hold from Buy. Target is $1.45.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms