Weekly Ratings, Targets, Forecast Changes – 04-06-21

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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 May 31 to Friday June 4, 2021
Total Upgrades: 6
Total Downgrades: 6
Net Ratings Breakdown: Buy 54.82%; Hold 38.89%; Sell 6.29%

For the week ending Friday 4 June, there were six upgrades and six downgrades to ASX-listed companies by brokers in the FNArena database.

Both Citi and Ord Minnett raised their Pilbara Minerals' Sell recommendations, to Neutral and Lighten from Sell respectively. As the only pure spodumene producer, Ord Minnett feels the company is the most leveraged to the broker’s recently-upgraded price forecasts from the lithium stocks under coverage. Meanwhile, Citi believes strong demand for lithium is uncovering latent supply, and forecasts many a producer will be operating plants at full throttle.

Reflecting a quite week for forecast changes by brokers in the FNArena database, Pilbara Minerals not only headed up the table for the largest (and only material) percentage adjustment to target price, but also the table for largest percentage gain in earnings.

Second up for forecast earnings changes by brokers was another lithium producer in Galaxy Resources, after raising FY21 spodumene production guidance for Mt Cattlin. In addition, management expects third quarter spodumene prices to be above US$750/t, including the cost of insurance and freight, which was higher than Macquarie expected.

Ord Minnett feels higher prices reflect spodumene catching up to the improving chemical prices, continued tightness along the lithium supply chain and the lack of any significant supply response.

Costa Group experienced the only material percentage downgrade to forecast earnings by brokers last week. As mentioned in this article for the week ending 28 May, more limited visibility for the earnings potential of the domestic Produce business  prompted Morgans to lower the rating to Hold from Add. Additionally, there’s considered uncertainty remaining over the extent of the second half earnings recovery.

Conversely, Credit Suisse upgraded to Outperform from Neutral while lowering the target price dropping to $4.15 from $4.70. While management guidance was below market expectations it resulted from factors the broker considers are seasonal and not structural. Meanwhile, the company expects the June half performance to be marginally ahead of the last year.

Total Buy recommendations take up 54.82% of the total, versus 38.89% on Neutral/Hold, while Sell ratings account for the remaining 6.29%.

Upgrade

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/4/0

On the observation that prices for both steel and scrap remain in an uptrend, Citi analysts have lifted their EPS estimates for BlueScope Steel and Sims "materially".

For BlueScope Steel specifically, the analysts suggest volume expansion at North Star, while cash is building fast, can offset price weakness later on.

Citi predicts the company will announce large scale capital management within the next 24 months. Rating is upgraded to Buy from Neutral. Price target moves to $25 from $22.

ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ((EOS)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/0/0

Citi increases the rating for Electro Optic Systems Holdings to Buy (High Risk) from Neutral (High Risk), following the -19% share
price decline since 29 April 21. The target price is lowered to $5.15 from $5.28.

The broker highlights cash collection from a key customer has resumed and revenue is being progressively diversified. Additionally, it's believed the current share price appears to be factoring in limited upside from new defence opportunities.

The analyst's FY21 earnings (EBIT) estimate reduces to $5.5m (excluding FX losses and interest income) in-line with the mid-point of the company’s guidance range, driven by higher than expected costs. Earnings estimates for FY22-3 are also cut by -$11m on higher costs.

HOTEL PROPERTY INVESTMENTS ((HPI)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Morgans lifts the rating of Hotel Property Investments to Add from Hold after the purchase of six pubs for $32.7m. All properties are leased to Australian Venue Co and have an initial term of 20 years.

Potential catalysts include accretive acquisitions and asset revaluations. The target price is increased to $3.52 from $3.31.

PILBARA MINERALS LIMITED ((PLS)) Upgrade to Neutral from Sell by Citi and Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 1/2/0

Strong demand for lithium is unraveling latent supply, report analysts at Citi. It is their forecast the market will likely remain in surplus for quite some time, with many a producer operating their plants at full throttle.

Citi thinks the price of lithium is likely to remain range-bound over the next 18 months.

Pilbara Minerals' price target has lifted to $1.30 from $1.10. Upgrade to Neutral/High Risk from Sell/High Risk.

As the only pure spodumene producer, Ord Minnett notes Pilbara Minerals is most leveraged to the broker's recently upgraded price forecasts of 10–25% over the next five years.

The broker notes, at the latest closing price of $1.30 the company is imputing a flat US$760/t spodumene price with other commodities at spot.

Ord Minnett's updated model sees the company's production ramping up from 290,000t in FY21 to 1.3Mtpa spodumene, or 155,000t lithium carbonate equivalent at all-in sustaining costs of US$400/t by FY27.

Ord Minnett's rating is upgraded to Lighten from Sell and target price increases to $1.05 from $0.80.

SCENTRE GROUP ((SCG)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/4/1

The risk to the downside is reducing and as a result UBS upgrades to Neutral from Sell. This takes into account the recent underperformance of the stock and improved valuation support along with better operating metrics.

The ongoing re-setting of rents is now reflected in the price of the stock, the broker adds. Recent analysis also highlights a manageable vacancy profile.

UBS expects 2021 growth in earnings per share of 32%, helped by reduction in coronavirus-related abatements. Target is steady at $2.65.

Downgrade

APN INDUSTRIA REIT ((ADI)) Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0

Morgans downgrades APN Industria REIT's rating to a Hold from Add on recent share price strength. The price target is increased to $3.28 from $3.17. Draft valuations have increased for 17 of 23 properties by 11.9% and the average cap rate has tightened by 51bps to 5.83%.

The REIT's portfolio is valued at $1.05bn across 37 assets (circa 60% industrial assets/40% business park assets). Occupancy at December was 97% with the industrial assets 100% occupied and business park assets at 80%.

CENTURIA INDUSTRIAL REIT ((CIP)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/3/0

Centuria Industrial has revalued its entire portfolio of 61 assets to a 4.53% cap rate, reflecting current market strength UBS asserts. The broker now believes the risk/reward is relatively balanced and downgrades to Neutral from Buy on valuation grounds.

The broker's preference is for Goodman Group ((GMG)) as current conditions are favouring developers and valuations for that stock now more conservative. Target is raised to $3.72 from $3.54.

DEXUS ((DXS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/1

After reviewing the earnings drivers for Dexus, Macquarie downgrades to Neutral from Outperform as balance sheet flexibility is more limited and headwinds from work-from-home persist. It's expected DPS will fall -7% in FY22.

The broker highlights key headwinds including over -$2bn of divestments, a reduction in occupancy driven by the expiry of Rio Tinto ((RIO)) contract at 123 Albert St and elevated tenant incentives.

The deployment of around -$1.1bn of capital is not enough to offset the above headwinds, notes the analyst. The target price increases to $10.85 from $10.81.

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

Galaxy Resources expects third quarter 2021 spodumene prices to be above US$750/t including cost of insurance and freight.

Ord Minnett notes, the price upgrade cycle has been confirmed by all players, including China-based Ganfeng Lithium, which holds less than one month’s inventory of both carbonate and hydroxide.

The broker has increased 2024 spodumene price by 25% to US$1,000/t, rivaling the previous cycle high.

Ord Minnett believes higher prices reflect spodumene catching up to the improving chemical prices, continued tightness along the lithium supply chain and the lack of any significant supply response.

With strong demand, low inventories and sidelined mines, Ord Minnett believes this looks set to continue.

The Buy rating is downgraded to Accumulate, and price target increases to $4.20 from $4.10.

INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/2/0

Ord Minnett reviews the investment thesis for Integral Diagnostics. It's believed the company is positioned for above-industry growth, driven by a portfolio inclusive of circa 36% comprehensive sites and a skew towards high end modalities.

Additionally, there are tailwinds from recent acquisitions (including Ascot Radiology) and favourable demographics in key catchments. 

On a transfer of coverage to a new analyst, an Accumulate rating is set, with the price target lowered to $5.09 from $5.16. The trajectory of the recovery remains strong in the key states for the company, as indicated by April statistics, explains the analyst.

Still, the fresh Accumulate rating compares with Buy from the previous analyst. Hence, while not necessarily communicated as such by the broker, today's fresh update represents a mild downgrade from Buy.

NEWS CORPORATION ((NWS)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/1/0

UBS downgrades to Neutral from Buy on the back of recent strength in the share price. The broker assesses additional transparency surrounding Dow Jones, asset sales along with strength in digital real estate have contributed to the re-rating.

The broker envisages continued headwinds at Foxtel while book publishing earnings should normalise in FY22. Target is raised to $35.00 from $33.20.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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