Weekly Ratings, Targets, Forecast Changes – 11-06-21

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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 June 7 to Friday June 11, 2021
Total Upgrades: 6
Total Downgrades: 8
Net Ratings Breakdown: Buy 54.96%; Hold 38.47%; Sell 6.57%

For the week ending Friday 11 June, there were six upgrades and eight downgrades to ASX-listed companies by brokers in the FNArena database.

Whitehaven Coal earned the largest percentage increase in forecast target price. Early last week, Ord Minnett raised its target price for the company to $3.00 from $1.90 on the basis of an escalating thermal coal price, and the oversold nature of the stock after a series of downgrades. By the end of the week, Macquarie had made upgrades to metallurgical coal price forecasts and Whitehaven Coal remains the broker's preferred exposure, because of its leverage to both metallurgical and thermal coal.

Coming second on the table was Pilbara Minerals. As discussed in last week’s article, both Citi and Ord Minnett upgraded their respective Sell recommendations, to Neutral and Lighten. As the only pure spodumene producer, Ord Minnett feels Pilbara is the most leveraged to the broker’s recently-upgraded price forecasts among 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.

The largest percentage fall in forecast target price by brokers in the FNArena database went to the The Reject Shop. Ord Minnett downgraded to Hold from Buy and expects lower gross margins in the second half. Morgans has longer-term concerns over sales momentum, after FY21 revenue and earnings (EBIT) guidance came in below expectations. Sales deficits in CBD/large shopping centre stores were the main driver of underperformance. Providing some counterbalance, Morgan Stanley feels the company is in the "fix" stage on store format, location and product mix, which will likely transition to "grow" over the next few years.

For the above-mentioned reasons, The Reject Shop also had the second largest percentage downgrade to forecast earnings by brokers in the FNArena database. The largest downgrade went to Megaport though caution should be applied in adopting a too-bearish stance, as only one broker, UBS, updated coverage last week after positive news emerged on building momentum in SD-WAN partnerships. Overall, the broker remains positive on the stock though would be happier with some sign that new sales initiatives are in place and driving stronger port growth.

Brickworks had the largest percentage upgrade in earnings forecasts by brokers in the FNArena database last week. Ord Minnett observes benefits from an acceleration in housing activity in Australia, while in the US non-residential construction is now slowly improving after a significant first half decline.  Morgans continues to see a cyclical recovery in the Building Products businesses over FY21-23 and scope for further bolt-on M&A in North America.

The only other material rise in forecast earnings was for Pilbara Minerals.

Total Buy recommendations take up 54.96% of the total, versus 38.47% on Neutral/Hold, while Sell ratings account for the remaining 6.57%.

Upgrade

AIRTASKER LIMITED ((ART)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Morgans upgrades the rating on Airtasker to Add from Hold and lifts the target price to $1.29 from $1.23. Early traction in the US, and continued development in the UK, has seen plans sped up, versus the broker's expectation, to attack the international opportunity. 

The company has acquired ‘Zaarly’, a marketplace that brings with it an established tasker and user base in two US cities. A $21m capital raise provides an additional $12m (post acquisition costs and cost base) to invest in sales and marketing, explains the analyst.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Macquarie has upgraded its outlook, expecting US steel prices will stay around current levels over the third quarter and any moderation subsequently will be mild.

The broker expects earnings momentum should be strong in the short term and considers the risk/reward balance has improved for BlueScope Steel.

As a result, the rating is upgraded to Outperform from Neutral and the target raised to $25.40 from $23.90.

DACIAN GOLD LIMITED ((DCN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

In a review of mid/small cap gold stocks, the Macquarie commodities team expects the impetus for gold's recent rally from inflationary expectations is transitory. While there's an expected interest rate lift, gold should be pushed lower as the Fed moves towards tapering.

Despite this, the broker believes investors are again willing to pay a valuation premium for leveraged gold exposures such as gold equities, noting that gold stocks have materially outstripped the recent positive movement in gold.

Macquarie makes no changes to EPS estimates for gold stocks under coverage. The analyst upgrades the rating for Dacian Gold to Outperform from Neutral on recent share price weakness, and retains the $0.32 target price.

NATIONAL STORAGE REIT ((NSR)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/2/1

In the wake of another capital raising of $325m at $2.00 per share, Ord Minnett comments National Storage's operating metrics have improved materially in FY21, as stabilised occupancy levels have lifted 9% and revenue per available square metre (RevPAM) is now 17% higher.

In addition, the broker points out the asset class looks undervalued in Australia, with global storage comparable companies trading on 4% implied capitalisation rates.

Following through on management's updated guidance, Ord Minnett has lifted its target price to $2.20 from $2.05. Rating is upgraded to Accumulate from Hold.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/3/0

As the stock has fallen since the announcement regarding the offer for Spire Healthcare and underperformed the ASX 200 by -14% over the last quarter, Citi upgrades to Buy from Neutral.

The business is severely affected by the pandemic but incremental news is expected to be positive as health systems return to normal in FY22-23.

The incorporation of the acquisition into forecasts increases the broker's target to $76 from $67. In terms of the focus on the investment grade rating, Citi calculates Ramsay Health Care will need to raise around $850m in capital and this is included in forecasts.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 7/0/0

Ord Minnett assesses Whitehaven Coal has been oversold after a series of downgrades. With the escalating price of thermal coal, it's believed the company now provides a buying opportunity. The rating is raised to Buy from Accumulate. The target rises to $3 from $1.90.

The broker makes several financial model changes including upgrading coal price forecasts in FY22 by 42% to US$86/t. Spot prices are at US$124/t, and the annual Japanese benchmark was recently set at US$109/t compared to FY22 consensus of US$75/t, explains the analyst.

Downgrade

ASX LIMITED ((ASX)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/6/1

After the release of ASX’s May statistics, Morgans sees trading as broadly soft, with capital raisings/listings the only real bright spot. The rating falls to Reduce from Hold, due to the recent share price rise. The target price increases to $65.87 from $65.59.

The broker sees ASX’s activity growth trends in the second half as fairly lacklustre overall, ex capital raising activity. In cash equities, monthly average growth rates for volume traded and value traded are down -20% and -14%, respectively, on the pcp. 

BRICKWORKS LIMITED ((BKW)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0

Following a strong share price performance, Morgans moves to a Hold from an Add rating and lifts the target price to $23.50 from $21.60. The company provided a stronger-than-expected FY21 guidance for its Property segment.

This was due to the recognition of a further $100m (Brickworks 50% share) in revaluation gains in its Property Trust, explains the broker. FY21 earnings (EBIT) for both Building Products Australia (BPA) and Building Products North America (BPNA) are expected to be higher.

The analyst continues to see a cyclical recovery in the Building Products businesses over FY21-23 and scope for further bolt-on M&A in North America.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Credit Suisse assesses the clearance risk regarding the Suez Sydney acquisition is modest as Cleanaway Waste does not own any putrescible landfills in Sydney.

The broker includes the acquisition in forecasts from the end of FY22. Recent guidance for a lower earnings contribution from the New Chum landfill is interpreted to mean management believes FY22 consensus forecasts are too high.

The broker would prefer more evidence of a post-pandemic recovery and success with the Suez Sydney deal before incorporating additional value and downgrades to Underperform from Neutral. Target is reduced to $2.40 from $2.50.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Reduce from Hold by Morgans .B/H/S: 3/2/2

Morgans lowers the rating for Fortescue Metals Group to Reduce from Add and decreases the target price to $18.70 from $21.10. It's considered a mass-scale low-grade pure iron ore producer will be particularly sensitive to a maturing iron ore cycle. 

The broker also highlights cost pressures are surging in WA, which could lead to a softer fourth quarter sales/cost performance and potential further Iron Bridge downgrades.

The analyst upgrades short-term iron ore forecasts, while also increasing operating cost assumptions and reducing the company’s multiple closer to its peak cycle level.

NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0

While multiples remain attractive for coal miners, Macquarie downgrades New Hope to Neutral from Outperform following recent strength in the share price.

Despite there being significant earnings and valuation upside at spot prices, the broker's base case assumptions for thermal coal are muted. Target is raised to $1.70 from $1.50.

THE REJECT SHOP LIMITED ((TRS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/1/0

Ord Minnett observes the turnaround for the company's business remains in its infancy as the fixes to the store network, re-setting of the product range and renegotiation of leases will take time to produce results.

Sales revenue is expected to decline by -11% in the second half, affected by the cycling of comparable store sales growth and lower foot traffic in shopping centre locations.

The business will also be affected by lower gross margins in the second half. The decline in gross profit margins has been exacerbated in the broker's view by prior management locking in US dollar exposure at what turned out to be a disadvantage.

Rating is downgraded to Hold from Buy and the target is lowered to $5.70 from $10.34.

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

In a review of mid/small cap gold stocks, the Macquarie commodities team expects the impetus for gold's recent rally from inflationary expectations is transitory. While there's an expected interest rate lift, gold should be pushed lower as the Fed moves towards tapering.

Despite this, the broker believes investors are again willing to pay a valuation premium for leveraged gold exposures such as gold equities, noting that gold stocks have materially outstripped the recent positive movement in gold.

Macquarie makes no changes to EPS estimates for gold stocks under coverage. The analyst lowers the rating for West African Resources from an Outperform to a Neutral on recent share price strength. The target price is $1.10.

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

Credit Suisse assesses the de-merger of the retail liquor & hotels business, Endeavour Group, is an important catalyst for Woolworths. The broker removes the business from its forecast for Woolworths from FY22 onwards, valuing this as a discontinued operation.

The rating is therefore downgraded to Underperform from Neutral, largely on valuation, while the target is lowered to $37.98 from $38.05.

Credit Suisse points out Endeavour Group has a varied profit history and reinvestment rates for the retail side have been considerably lower than in Woolworths supermarkets, while the hotels have received higher levels of investment despite achieving low returns.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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