Weekly Ratings, Targets, Forecast Changes – 18-06-21

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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 14 to Friday June 18, 2021
Total Upgrades: 6
Total Downgrades: 15
Net Ratings Breakdown: Buy 54.79%; Hold 38.42%; Sell 6.78%

For the week ending Friday 18 June, there were six upgrades and fifteen downgrades to ASX-listed companies by brokers in the FNArena database.

There were two downgrades to ratings by separate brokers for both Coles Group and Suncorp Group during the week.

Credit Suisse lowered its rating for Coles to Neutral from Outperform after a strong share price rally leading into a strategy update. Overall, the update was considered positive, despite the increase in depreciation guidance, which led to a reduction in the broker’s FY22/23 earnings forecasts. Citi downgraded earnings forecasts for the group by around -4% in FY22 and -8% in FY23, to account for the higher D&A and a step up in supply chain implementation opex in FY23. The rating was lowered to Neutral from Buy.

Macquarie took the opposing view by raising the rating for Coles to Outperform from Neutral. However, this was partly attributable to a timing issue, given the broker moved in anticipation of the strategy briefing. Nonetheless, the rating was held at Outperform after the briefing, partly due to the support from normalising consumer behaviour.

Following the Victorian storms and flooding, Suncorp will likely come in between $50m-$100m above its original FY21 natural hazard allowance. Morgans left forecasts unchanged, having already factored-in adverse events. However, the broker lowered the group’s rating to Hold from Add to reflect a strong share price rise over the last month. The share price also prompted Credit Suisse to downgrade to Neutral from Outperform.

There were no material changes to price targets by brokers in the FNArena database during the week.

Tyro Payments had the largest percentage upgrade in earnings forecasts by brokers in the FNArena database last week. Morgan Stanley assesses the company is fighting back after its terminal outages caused havoc in January-February. The company is now considered better equipped than its competitors to deal with any future outage and this message appears to be resonating with small-medium enterprise merchants. The broker also sees potential from the deal with Bendigo & Adelaide Bank ((BEN)), with the rollout of hardware and software to the bank's customers having just commenced.

Sims was next as earnings forecasts were upgraded after the company provided a strong FY21 earnings guidance update to $360-380m from $260-310m. As post-covid normalisation continues, Macquarie expects improvement should continue, given a better backdrop for scrap. Morgan Stanley cautions on how much of the trading upgrade is driven by inventory yet still raised FY21 earnings (EBIT) forecasts by around 20%. Meanwhile, Ord Minnett upgraded to Buy from Hold, believing scrap and zorba markets will remain strong in the short term.

Insurance Australia Group had the only material downgrade to earnings after six brokers in the FNArena database updated forecasts last week. Morgans lowered the FY21 EPS forecast by around -9% following the Victorian storms and flooding, as the group will likely come in between $50m-$100m above its original FY21 natural hazard allowance. Additionally, ongoing market share contraction in the group’s most profitable products leads Macquarie to believe the company may turn to M&A to fill the gap. 

Total Buy recommendations take up 54.79% of the total, versus 38.42% on Neutral/Hold, while Sell ratings account for the remaining 6.78%.

Upgrade

COLES GROUP LIMITED ((COL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/4/0

Macquarie reviews its outlook for Coles Group ahead of the strategy briefing on June 17. The broker envisages upside from normalising consumer behaviour with comparable sales narrowing.

The stock screens attractively on valuation and the broker switches its preference to staples, upgrading to Outperform from Neutral.

Coles is expected to be a beneficiary from the unwinding of the "local shopping" trend. Coles supermarkets are over-indexed to shopping centres and the CBD, areas most affected by the pandemic. Target is raised to $18.20 from $17.30.

See also COL downgrade.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/1

Strong demand and ongoing supply issues are driving zircon prices higher, Macquarie notes, hence the broker has upgraded forecasts.

The broker had forecast Sierra Rutile to post negative earnings over the next two years, thus concurs with the decision to suspend operations, which should provide a modestly positive impact on rutile prices.

With price momentum for both zircon and titanium turning positive, the broker upgrades to Outperfom from Neutral. Target rises to $8.60 from $7.30.

NICKEL MINES LIMITED ((NIC)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/0

Nickel Mines Ltd has underperformed the London Metal Exchange nickel price by around 10% in the past six months. 

Citi highlights that expansion of nickel pig iron production in Indonesia has seen the company's realised pricing average around 83% of the London Metal Exchange pricing over the last year. The broker reduces assumed realisation versus London Metal Exchange by 6% accordingly, reducing FY22 sales forecast by around 6%. 

Nickel Mines has also signed a memorandum of understanding with Shanghai Decent Investment to modify two RKEF lines to produce matte. Citi notes this is an imminent market challenge. 

The rating is upgraded to Buy and the target price decreases to $1.30 from $1.50. 

REGIS HEALTHCARE LIMITED ((REG)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/0

With reference to M&A generally and multiples relating to the Japara Healthcare ((JHC)) takeover offer in particular, Morgans lifts the rating for Regis Healthcare to Add from Hold. The target price increases to $2.23 from $2.03.

The broker believes the increased level of M&A activity in the sector is likely to increase further, and a successful conclusion to the Japara Healthcare bid will likely attract more investor attention.

SEEK LIMITED ((SEK)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0

Macquarie estimates the removal of the recruiter discount results in a 9% yield tailwind in total for Seek and the broker's recruiter survey suggests a 24% uplift in yield is achievable before volumes are impacted.

The broker's economists are forecasting a fall to the low 4s for the unemployment rate during 2023, and ad volumes and the labour market are strongly correlated. The recent sale of Zhaopin has reduced financial leverage and lowered capital outlay requirements.

Macquarie sees Seek as "quality" stock, and upgrades to Outperform from Neutral. Target rises to $40.00 from $31.60.

SIMS LIMITED ((SGM)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/3/0

Upgraded guidance for EBIT in FY21 is now $360-380m, stemming from higher gross margin and zorba prices. Ord Minnett was surprised at a modest reaction in the share price, given the strong trading update.

The broker increases FY22 estimates for EBIT by 66%, believing scrap and zorba markets will remain strong in the short term. Rating is upgraded to Buy from Hold and the target lifted to $20.00 from $16.30.

Overall, Ord Minnett is attracted to the scrap markets for the medium term because of the potential for Chinese imports to increase and the positive ESG backdrop.

Downgrade

ATLAS ARTERIA ((ALX)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/0

Morgans downgrades the rating for Atlas Arteria to Hold from Add, given recent share price strength. The target price rises to $6.35 from $6.31.

The broker forecasts DPS of 33 cents over the next 12 months, implying a 5.2% cash yield on the current share price. With DPS growth, this yield lifts to greater than 8% by 2025-26. It's felt  this will appeal to income investors and to those looking for a covid-recovery trade. 

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/6/0

UBS considers an otherwise positive sales story at the investor day was offset by management lowering the long-term return on equity (ROE) target. It's the second rebase in two years.

The company re-affirmed FY21 profit (NPBT) guidance at the 'lower end' of $390-440m and provided a maiden FY22 guidance of $430-480m.

UBS lowers the rating to Neutral from Buy and the target price to $5.80 from $7. This largely reflects the lower cost of equity (COE)
spread margin outlook, and the path back towards the lower ROE target, explains the broker.

COLES GROUP LIMITED ((COL)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Buy by Citi .B/H/S: 3/4/0

Despite the increase in depreciation guidance which led to a reduction in FY22/23 earnings forecasts, Credit Suisse regards Coles Group's strategy update, in which it reaffirmed a commitment to pressing ahead with investment as broadly positive.

Commenting on the update, the broker notes Coles plans to accelerate e-commerce performance and maintain momentum on store
renewals take on added importance. The broker believes lower population growth is likely to make market share an even more important differentiator of relative performance near term.

Credit Suisse believes upgraded capital expenditure guidance enables all of those variables to be managed alongside peak expenditure in FY22 for warehouse automation.

In the latest update, 60% of capital expenditure is being directed towards efficiency and growth initiatives.

Given that Coles had a net cash position at the end of first half FY21, Credit Suisse notes funding is not a constraint. Despite higher reinvestment the broker has not materially changed outer year earnings forecasts.

The broker downgrades Coles to Neutral from Outperform and lowers the price target to $17.16 from  $18.19.

Coles' capital expenditure to sales has risen to around 2.6%, compared to 2.0% pre-covid. Citi notes the company was under invested pre-covid compared to Woolworths, and implications of this and subsequent catch-up spend will be less severe if a rational market persists. 

Higher capital expenditure has been invested in supply chain and online improvements. Citi expects return on capital expenditure to be invested rather than flow to underlying earnings, and that expenditure will moderate at around $1.5bn by FY24. 

Earnings are downgraded for FY22 and FY23 by 4% and 8% respectively. 

The rating is downgraded to Neutral and the target price decreases to $17.20 from $18.00. 

See also COL upgrade.

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

Foot traffic at CSL's US collection centres continues to increase, but the pace has slowed somewhat from the burst in April/May, Macquarie notes. Consensus earnings forecasts have risen modestly, while CSL has outperformed the index by 7%.

This implies a level PE multiple expansion that the broker finds stretched. On a forecast total shareholder return now of only 4.4%, Macquarie pulls back to Neutral from Outperform. Target unchanged at $312.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Hold from Add by Morgans .B/H/S: 1/4/1

Domino's Pizza Enterprises will acquire 100% of Domino's Taiwan for a payment of $79m. Morgans considers the move a first step to building a larger presence in Asia, despite the relatively smaller size of the Taiwan business. 

The proximity of the new business to Japan will allow these two regions to share marketing and operational functions. Management has noted a target of 400 stores in Taiwan, and Morgans expects strategy to be similar to that of Japan with a focus on growing volume and stores. 

Domino's Taiwan currently operates 157 stores and reported underlying earnings of $4.8m in FY20. The purchase price represents 16.5 times FY20 underlying earnings, notably higher than the 10 times paid for the Japan stake. 

The rating is downgraded to Hold and the target price increases to $123.35 from $118.60. 

DOWNER EDI LIMITED ((DOW)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 5/0/0

Ord Minnett suggests labour costs and availability are turning into a key focal point for the industry, and possibly trigger a number of profit warnings.

Based upon in-house research, the situation is most acute in Western Australia.

Downer EDI is the most labour-intensive business under the broker's coverage, and with the lowest margins. Ord Minnett has decided to downgrade to Lighten from Hold, with the target price falling to $5.30 from $5.90.

EVENT HOSPITALITY & ENTERTAINMENT LIMITED ((EVT)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/1/0

Citi has cited the weaker-than-expected Chinese box office performance during the Dragon Boat Festival as a driver of increased uncertainty around the sustainability of the cinema recovery. The broker predicts Event Hospitality & Entertainment's cinema revenues will not recover to pre-covid levels by FY25. 

China's box office revenue reached a seven year low during the Dragon Boat Festival, down 40% on the 2019 festival. 

The rating is downgraded to Neutral and the target price increases to $12.80 from $12.25. 

IGO LIMITED ((IGO)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/1

Morgan Stanley hails the achievement of a "clean energy" transition, noting this business is still in a strong cash position. Nevertheless, the high implied value for the lithium business leaves a significant valuation gap, at around -15%.

Hence, the broker downgrades to Underweight from Equal-weight.

Morgan Stanley suspects IGO Ltd could chase additional opportunities or increase dividend payments and anticipates dividend yields could reach 6% in FY24.  Target is raised to $6.35 from $5.65. Industry view: Attractive.

INVOCARE LIMITED ((IVC)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/3/2

InvoCare management have highlighted a road to recovery, but Citi notes it will be difficult, estimating the company have lost around 260 basis points market share between 2015 and 2020. 

This is despite the $455m spent on acquisition and capital expenditure during that time. The company has set a target of continued annual capital expenditure at around $35m going forward. 

Death rate remains below trend for 2021 to date, presenting a challenging near-term outlook. Citi downgraded earnings per share forecasts for FY21, F22 and FY23 by -29%, -13% and -15% respectively. 

The rating is downgraded to Sell and the target price decreases to $10.00 from $11.50. 

SOMNOMED LIMITED ((SOM)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

SomnoMed shares have rallied in recent months as access to dental and sleep clinics in North America and Europe has improved. The broker looks to a July quarter update for company management to provide guidance on stabilisation of the North American region.

Morgans highlights that a recall on an estimated 3.5m ventilation devices from competitor Philips may provide a boost in demand for MAD devices, but notes it is too early to call. 

The rating is downgraded to Hold and the target price of $2.55 is retained.

SUNCORP GROUP LIMITED ((SUN)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Hold from Add by Morgans .B/H/S: 3/4/0

Suncorp has updated on its catastrophe expenses in the light of flooding in Victoria. In assuming the events in Victoria create an additional expense of -$50m, Credit Suisse assesses FY21 peril expenses will be at least -$1.05bn.

The broker points out the insurer has probably negotiated most of its July 1 reinsurance renewals so while the current event could affect pricing of the remainder of the program, the impact should be minimal.

Following a strong run in the share price, Credit Suisse downgrades to Neutral from Outperform. Target is $11.25.

Following the Victorian storms and flooding, the group will likely come in between $50m-$100m above its original FY21 natural hazard allowance. Morgans forecasts are unaltered, having previously catered for natural hazard costs $80m above allowances.

The broker lowers the rating to Hold from Add to reflect a strong share price rise over the last month. The price target of $11.44 is unchanged.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 6/1/0

While noting the in-house commodities team has revised up 2021 Newcastle 6000kcal thermal coal price forecast to an average of US$93/t from $84/t, Citi sector analysts have downgraded their rating for Whitehaven Coal to Neutral from Buy.

Price target has increased to $2.20 on higher forecasts, incorporating the revised coal price projections, but the share price has rallied too. The latter explains the downgrade.

WOOLWORTHS GROUP LIMITED ((WOW)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/1

Macquarie observes the share price has had a strong run ahead of the upcoming de-merger of Endeavour Group. The broker likes the medium-term growth outlook while the increased focus on core business should drive efficiencies.

Yet, the rating is downgraded to Neutral from Outperform and the broker's preference is switched to Coles Group ((COL)). Macquarie believes the de-merger is priced into the stock and the valuation is now full. Target is steady at $44.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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