Weekly Ratings, Targets, Forecast Changes – 16-04-21

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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 April 12 to Friday April 16, 2021
Total Upgrades: 12
Total Downgrades: 7
Net Ratings Breakdown: Buy 54.70%; Hold 38.30%; Sell 7.00%

By Mark Woodruff

For the  week ending Friday 16 April, there were twelve upgrades and seven downgrades to ASX-listed companies by brokers in the FNArena database.

Mainstream Group received two downgrades from separate brokers. Both Ord Minnett and Morgans downgraded the company to a Hold rating in the belief the $2 bid for the company by SS&C Technologies was both fully valued and likely to be final. This has proven to be correct as the deadline of Friday 16 April has passed without a matching offer or more favourable terms from prior bidder Vistra.

The adjectives hefty and expensive were applied by two brokers to the price paid by Regis Resources for a  30% stake in the Tropicana gold mine. As a result,  the company headed the table for the largest percentage decrease in target price by brokers last week. Nonetheless, the term transformational was also applied to the transaction and an increase in both scale and diversity were seen as positive attributes for the ‘new’ company. 

Galaxy Resources had the largest percentage increase in forecast target price by brokers in the FNArena database last week. This was a reaction to preliminary production at Mount Cattlin and an updated development plan for Sal de Vida. For the latter, Macquarie estimates the plan has delivered production rates 28% higher than expected.

Galaxy Resources also had the largest percentage increase in forecast earnings by brokers in the FNArena database last week.

A technical glitch has put Crown Resorts atop the table for earnings downgrades, so best to ignore.

The effective clubhouse leader was Whitehaven Coal after universal disappointment from the five brokers in the FNArena database that updated earnings forecasts last week. Production and sales were weaker than expected in the third quarter, impacted by floods in NSW, port damage and geological issues at the Narrabri mine.

Finally, it was no surprise to see Regis Resources feature in earnings downgrades after the downgrades to estimated target prices noted.

Total Buy recommendations take up 54.7% of the total, versus 38.30% on Neutral/Hold, while Sell ratings account for the remaining 7%.

Upgrade

ABACUS PROPERTY GROUP ((ABP)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/1/0

The acquisition of ezStorage by Public Storage in the US highlights for Ord Minnett the material difference in implied capitalisation rates between large US and UK listed self storage entities and Australia's Abacus Property and National Storage ((NSR)).

Both the Australian companies remain industry consolidators and the broker believes Australian self storage assets are undervalued. Abacus Property is upgraded to Accumulate from Hold. Target is steady at $3.10.

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

Bank of Queensland's first-half net profit of $165m was broadly in line with Ord Minnett’s forecast of $166m. An interim dividend of 17c was declared, in line with the broker's forecast. The result was pre-guided with hardly any surprises.

Ord Minnett observes the bank delivered strong pre-provision profit growth of 3% half-on-half with support from funding cost tailwinds and improved execution in its mortgage business.

The broker argues the bank is the best turnaround prospect in the sector, with potential upside from improvements in deposit mix and the delivery of revenue synergies at ME Bank.

Ord Minnett upgrades to Accumulate from Hold with the target rising to $9.50 from $9.30.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/3/0

Ord Minnett upgrades its rating on BlueScope Steel to Buy from Accumulate with a target price of $26 from $23.

Ord Minnett has marked to market its forward-curve-based commodity and currency forecasts and increases its steel price estimates. The broker notes BlueScope Steel’s spreads continue to grow and expects another guidance upgrade.

GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 3/1/2

Macquarie believes the earnings outlook has been transformed by material upgrades to the outlook for lithium and spodumene prices. Earnings estimates have been more than doubled for the next five years and the increased cash flow is expected to reduce debt funding requirements.

The broker's previous forecast of a cumulative loss of -US$68m over 2021-23 has swung to a cumulative profit of US$154m. Forecasts for 2024 and 2025 earnings rise 64% and 26%, respectively.

This drives an upgrade to Outperform from Underperform and the target is lifted to $4.20 from $1.60. The broker also remodels production assumptions for Mount Cattlin after the site tour in March and for James Bay and Sal de Vida following recent updates.

HUB24 LIMITED ((HUB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/1/0

Following the recent decision by ANZ Bank ((ANZ)) to terminate its current agreement with Netwealth ((NWL)) for interest paid on pooled cash accounts, Macquarie reviews cash spreads for the platforms.

While there may be some further downward pressure on deposit rates in the short term, the broker envisages scope for competition to re-emerge later in 2021. Margin expansion for the platforms should occur as cash rates begin to increase again.

Macquarie forecasts rates to start increasing from the first quarter of 2023. The broker upgrades to Outperform from Neutral, also noting the short-term outlook for flows is encouraging given the ongoing disruption to larger incumbents. Target edges down to $24.00 from $24.25.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 7/0/0

Ord Minnett upgrades its rating on Newcrest Mining to Buy from Accumulate with a target price of $36.50.

Ord Minnett has marked to market its forward-curve-based commodity and currency forecasts and maintains its price estimate of gold. The broker concedes its US$1,700 near-term and US$1,600/oz long-term price forecasts are not overly optimistic.

Some key stock preferences are Northern Star Holdings ((NST)), Gold Road Resources ((GOR)) and Newcrest Mining. 

NETWEALTH GROUP LIMITED ((NWL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/0

Following the recent decision by ANZ Bank ((ANZ)) to terminate its current agreement with Netwealth for interest paid on pooled cash accounts, Macquarie reviews cash spreads for the platforms.

While there may be some further downward pressure on deposit rates in the short term, the broker envisages scope for competition to re-emerge later in 2021. Margin expansion for the platforms should occur as cash rates begin to increase again.

Macquarie forecasts rates to start increasing from the first quarter of 2023. The broker upgrades to Outperform from Neutral, also noting the short-term outlook for flows is encouraging given the ongoing disruption to larger incumbents. Target is reduced to $16.50 from $17.75.

OROCOBRE LIMITED ((ORE)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 3/3/1

Macquarie finds the medium-term outlook significantly improved because of upgrades to lithium price forecasts. In the shorter term earnings are largely unaffected as lithium carbonate prices have been locked in at US$5500/t for the second half of FY21.

Nevertheless, the improved earnings outlook eases funding concerns for the Olaroz and Naraha expansions and the broker upgrades to Outperform from Underperform. Target is raised to $7.10 from $2.90.

See also ORE downgrade.

ST BARBARA LIMITED ((SBM)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/2/0

Ord Minnett upgrades its rating on St Barbara to Buy from Accumulate with the target price rising to $3 from $2.90.

Ord Minnett has marked to market its forward-curve-based commodity and currency forecasts and maintains its price estimate of gold. The broker concedes its US$1,700 near-term and US$1,600/oz long-term price forecasts are not overly optimistic.

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

Credit Suisse upgrades lottery earnings estimates by around 5% as revenue momentum throughout March has signalled growth is substantial. The broker also reflects the prospect of a de-merger in its valuation after the company announced a strategic review.

A de-merger of the lottery business, with no change in the control of wagering, would avoid the requirement for industry approvals and likely one-off payments to separate the two.

The broker also assumes Tabcorp exits gaming services, effectively divesting 10,000 slot machines back to venue operators or third parties. Rating is upgraded to Outperform from Neutral and the target increased to $5.70 from $4.60.

WESFARMERS LIMITED ((WES)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/5/1

Having reviewed the financial performance of the Wesfarmers retail businesses, Ord Minnett acknowledges its previous Lighten recommendation was the wrong call as the company has allocated capital in a firm manner and benefited from the pandemic.

The broker finds Bunnings is well-positioned in most trading environments and increased home investment is a positive aspect that will allow it to cycle tough comparables.

Catch Group is also proving to be a prescient acquisition with strong growth expected in coming years although operating earnings are likely to remain modest. Hence, Ord Minnett upgrades to Hold and raises the target to $53 from $50.

ZIP CO LIMITED ((Z1P)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/2

While Citi had expected strong customer growth from Quadpay, the key highlight from Zip Co’s third-quarter update was stronger than expected volume growth.

The growth was led by Quadpay's total transaction value, up 31% ahead of Citi's forecast and up 14% over the last quarter on a seasonally strong December quarter. With Quadpay continuing to beat expectations, Citi upgrades to Buy from Neutral. 

The target drops to $11.30 from $11.35.

Downgrade

MAINSTREAM GROUP HOLDINGS LTD ((MAI)) Downgrade to Hold from Buy by Ord Minnett and Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0

The company has received a new takeover offer from SS&C Technologies for $2.00 cash, exceeding the previous proposal of $1.20 from Vistra. Target is raised to $2.00 from $1.20.

There is risk of further interest from existing or other parties, yet Ord Minnett believes the current proposal represents maximum value and to reflect this downgrades to Hold from Buy. Vistra  has until April 16 to match or better the offer.

Morgans lowers the rating to Hold from Add for Mainstream Group. The target price is increased to $2 from $1.20 to match a bid of $2 per share from SS&C to acquire the company. This is a 67% premium to the previous Vistra bid of $1.20 per share.

The broker views this proposal as a likely knockout bid, given the substantial premium to Vistra’s proposal and because the ‘go shop’ period would have likely drawn out any other potential acquirers. 

The analyst believes this is a fantastic outcome for shareholders and provides the substantial premium for control thought to be lacking in the Vistra proposal. Vistra has until Friday, 16th of April 2021, to match or offer more favourable terms

NATIONAL STORAGE REIT ((NSR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/3/1

The acquisition of ezStorage by Public Storage in the US highlights for Ord Minnett the material difference in implied capitalisation rates between large US and UK listed self storage entities and Australia's Abacus Property ((ABP)) and National Storage.

Both the Australian companies remain industry consolidators and the broker believes Australian self storage assets are undervalued.

Yet Ord Minnett downgrades National Storage to Hold from Accumulate based on valuation. Target is $2.05.

OROCOBRE LIMITED ((ORE)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/3/1

Led by the recent strong run in the share price, Ord Minnett downgrades its rating on Orocobre to Hold from Buy with a target of $5.50.

The broker's lithium chemical price forecasts remain unchanged, although spodumene price forecasts have been increased by 5-10%. Further, with demand for electric vehicles (EV) taking off, supply has tightened quickly.

See also ORE upgrade.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/3

Funds under management of $24.5 bn in March, were down -1.4% amid both net outflows and negative market movements. The International fund continues to experience outflows with around -$65m of outflows in the month.

The stand-out fund for inflows was International Healthcare. Credit Suisse does not believe this is enough to encourage an inflection in flows and suspects disruption/switching in the platform industry could have a significant impact on Platinum Asset Management.

The broker downgrades to Underperform from Neutral following 20% outperformance over the last three months, raising the target to $4.65 from $4.50.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/3/0

Regis Resources will buy a 30% stake in the Tropicana gold mine from IGO Ltd, to be funded with debt and equity. Ord Minnett observes the deal is dilutive on most valuation metrics and was disappointed there was no updated guidance for the asset.

Still, the acquisition should improve asset quality and increase the mine life for the company. Rating is downgraded to Hold from Buy. Target is reduced to $3.40 from $4.20.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/0

Whitehaven Coal's March quarter performance disappointed Credit Suisse with solid output at the open-cut mines undone by problems at Narrabri mine that led to outages for four weeks in the half.

The miner has cut its FY21 production and sales estimates yet again by -0.6-0.8mt for Narrabri. Also, the issues there eliminated cash generation in the quarter with no reduction in the net debt to date.

The broker expected net debt to halve by the end of FY22 but sees that delayed by over two years now.

Credit Suisse downgrades to Neutral from Outperform with the target price dropping to $1.55 from $1.95.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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