Weekly Ratings, Targets, Forecast Changes – 25-06-21

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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 21 to Friday June 25, 2021
Total Upgrades: 8
Total Downgrades: 12
Net Ratings Breakdown: Buy 54.31%; Hold 38.99%; Sell 6.70%

For the week ending Friday 25 June, there were eight upgrades and 12 downgrades to ASX-listed companies by brokers in the FNArena database.

Both Macquarie and Credit Suisse upgraded their ratings for South32 to Outperform from Neutral. The commodities team at Macquarie lifted its 2021-25 aluminium price forecast by 4-5%, driving strong longer-term earnings upgrades for the company. In raising the target price to $3.60 from $3.00, Credit Suisse cited the potential for the global aluminium market to head into protracted deficits from 2022. The broker expects a free cashflow contribution from the company’s aluminium division of 44% in 2022, or 62% if the alumina refineries are included. It’s also felt the ESG-compliance of the company is a big plus.

Adairs suffered a downgrade in rating to Hold from both Morgans and Ord Minnett. Morgans continues to forecast earnings will fall by circa -20% in FY22. This is based on the assumption that like-for-like (LFL) sales growth turns negative, gross margins ease from elevated levels and operating expense deleverage will occur, on the negative LFL sales growth assumption. Ord Minnett feels sales growth has been well above average while operating margins appear unsustainably high, after the company has benefited from elevated demand in the home improvement segment over the past 12 months.

Two separate brokers downgraded the rating for CSL. Citi downgraded to Neutral from Buy, purely on valuation, due to share price outperformance since March. Also, Credit Suisse downgraded to Neutral from Outperform, partly due to valuation but also because the market hasn't factored-in the negative margin impact from lower volumes and higher donor fees. Additionally, the broker sees headwinds for the recovery in FY23, not only from structurally higher donor fees, but also from continued pressure on collections, resulting from the US customs and border protection prohibiting Mexican nationals from donating.

There were no material falls in either target prices or earnings forecasts by brokers in the FNArena database last week.

Meanwhile, New Hope Corporation had both the largest target price rise and the largest percentage upgrade in forecast earnings. This was a result of coal price revisions by both Credit Suisse and Macquarie. The latter raised forecast thermal coal prices by 9% and 7% for 2021 and 2022, respectively, resulting in material upgrades to earnings estimates for those years.  

After adjusting thermal coal prices for the June quarter, Credit Suisse lifted FY21 estimates for New Hope Corporation’s operating earnings by 23%. The broker also increased its Newcastle thermal price assumption to US$100/t for FY22.

The same rationale by both brokers also applied to Whitehaven Coal, which had the next largest percentage rise in earnings forecast. Across the sector, Macquarie continues to prefer the company after a recent upgrade to the long-term metallurgical coal outlook. Despite management guiding to a FY21 production downgrade last week, Credit Suisse considers the damage to be limited, given spot prices remain above US$120/t.

Finally, the Macquarie commodities team remains bullish on the outlook for lithium. This elevated Pilbara Minerals last week into third position on the table for percentage increase in forecast earnings by brokers in the FNArena database.

Total Buy recommendations take up 54.31% of the total, versus 38.99% on Neutral/Hold, while Sell ratings account for the remaining 6.70%.

Upgrade

BORAL LIMITED ((BLD)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/2/0

Boral has sold its North American building products business to Westlake Chemical. The sale price of $2.9bn (US$2.15bn) is $1bn more than Ord Minnett's valuation. Boral is looking at options for capital returns.

Net debt has been reduced to $1.3bn and the broker calculates there could be up to $3.56bn in potential shareholder returns.

The rating is upgraded to Hold from Lighten as the valuation has increased and Ord Minnett assesses Seven Group ((SVW)) could raise its bid for Boral. Target is raised to $6.70 from $5.70.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/5/1

Flight Centre's leisure business is, globally, one the last travel recovery stories, Credit Suisse asserts, because of onerous government restrictions. The long-term earnings potential of this division is also an issue and the broker prefers other operators in the sector.

That said, increased travel complexity could benefit bricks & mortar participants although the store footprint has halved, reducing the scale advantage.

Credit Suisse transfers coverage to another analyst, noting the corporate business is the value driver and new business has been won during the travel shutdown. The broker upgrades to Neutral from Underperform and raises the target to $17.00 from $15.44.

NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0

Adjusting thermal coal prices for the June quarter, Credit Suisse lifts FY21 estimates for New Hope's operating earnings by 23% to $350m. The broker also increases the Newcastle thermal price assumption to US$100/t for FY22.

This drives an expected earnings upgrade of 95% for FY22. The broker upgrades to Outperform from Neutral and raises the target to $1.95 from $1.30.

RESMED INC ((RMD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0

Macquarie envisages market share opportunities for ResMed associated with the recent recall of the Philips DreamStation devices.

In the short term supply chain constraints will limit the company's response and, hence, the broker assumes incremental sales will be driven primarily from existing inventory.

Combined with a balance sheet that provides flexibility for capital management/growth, Macquarie judges the outlook is favourable and upgrades to Outperform from Neutral. Target is raised to $34.85 from $27.50.

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

After recent upgrades to the iron ore forecast, Macquarie's commodities team has adjusted forecasts for other commodities. The 2022-25 forecasts for copper rise by 13-14% and 2021-25 aluminium lifts by 4-5%. Thermal coal prices rise 9% and 7% for 2021 and 2022.

The most material downgrades are to manganese, which falls -12% in 2022 and by -6 and -9% for 2024 and 2025.

The bullish outlook for aluminium has driven strong longer-term earnings upgrades for South32 and the broker lifts the rating to Outperform from Neutral. The price target lifts to $3.50 from $3.10.

Credit Suisse lifts the rating for South32 to Outperform from Neutral and raises the target price to $3.60 from $3. It's anticipated the global aluminium market will head into protracted deficits from 2022. Its also felt being ESG-compliant is a big plus for the company.

The broker believes aluminium should be in high demand for its role in electricity transmission, solar projects and light-weight. Credit Suisse forecasts the aluminium price to climb to US$1.20/lb next year.

The analyst expects a free cashflow contribution from the company’s aluminium division of 44% in 2022, or 62% if the alumina
refineries are included.

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

After recent upgrades to the iron ore forecast, Macquarie's commodities team has adjusted forecasts for other commodities. The 2022-25 forecasts for copper rise by 13-14% and 2021-25 aluminium lifts by 4-5%. Thermal coal prices rise 9% and 7% for 2021 and 2022.

The most material downgrades are to manganese, which falls -12% in 2022 and by -6 and -9% for 2024 and 2025.

December year-end producers, such as West African Resources receive material forecast EPS upgrades from the broker in 2021, due to the 2021 gold upgrades aligning with the reporting period.

Macquarie lifts the rating to Outperform from Neutral following recent weakness in the company’s share price. The price target of $1.10 is unchanged.

WOOLWORTHS GROUP LIMITED ((WOW)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/3/0

As Woolworths is to trade ex Endeavour Group from June 24, Credit Suisse lowers the target price to $32.92 from $37.98. The rating increases to Neutral from Underperform.

The broker explains the demerger results in Woolworths being an almost pure-play supermarket retailer and has the attraction
of negative working capital and relatively high return on invested capital (ROIC).

The analyst notes covid-19 travel restrictions did not appear to have a material negative impact on supermarkets in May, and therefore solid two year grwoth is likely in the fourth quarter.

Downgrade

ABACUS PROPERTY GROUP ((ABP)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0

Credit Suisse calculates that roughly half of the December equity raising has been deployed and, from a cash flow perspective, a net outlay of -$235m on investments will occur by the end of the financial year with further proceeds from asset sales to be received in FY22.

The broker makes minor earnings revisions to reflect the impact of known transactions and estimates for FY21-23 FFO per security increase by 1%. Second half distribution guidance of 8.5c is in line with existing estimates.

The broker downgrades to Neutral from Outperform, noting uncertainty exists over how quickly capital is redeployed. Target is raised to $3.21 from $3.04.

ADAIRS LIMITED ((ADH)) Downgrade to Hold from Add by Morgans and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

From a long-term management/investment perspective, Morgans considers the bringing forward of the deferred consideration payment is positive. However, the multiple is considered to imply a softer second half earnings performance versus expectations.

The broker lowers the rating to Hold from Add with the stock now within 10% of the target price. The target price is reduced to $4.46 from $4.50.

The analyst continues to forecast earnings will fall by circa -20% in FY22. This is based on the assumption that like-for-like (LFL) sales growth turns negative, gross margins ease off elevated levels and opex deleverage on the negative LFL sales growth assumption.

Ord Minnett assesses Adairs has been a beneficiary of elevated demand in the home improvement segment over the past 12 months. Sales growth has been well above average while operating margins appear unsustainably high.

The broker suggests this will normalise in FY22. Moreover, following settlement of the Mocka acquisition the implied earnings are below its forecasts.

This has required downgrades to estimates for FY21-23. Ord Minnett lowers the rating to Hold from Accumulate and reduces the target to $4.45 from $4.50.

CSL LIMITED ((CSL)) Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/5/0

Citi downgrades to Neutral from Buy given the stock has outperformed since March. The plasma collection market is expected to normalise this year and the broker asserts the rating change is purely based on valuation.

The risk is to the upside if the CSL 112 phase III trial results due at the end of 2021 are positive. Target is steady at $310.

Credit Suisse sees potential for a short-term de-rate of CSL at current multiples and downgrades the rating to Neutral from Outperform. It's felt the market hasn't factored-in the negative margin impact from lower volumes and higher donor fees.

The broker also sees headwinds for the recovery in FY23, due to the structurally higher donor fees and continued pressure on collections. This is due to the US customs and border protection (CBP) prohibiting Mexican nationals from donating.

The analyst forecasts CSL Behring gross margin to fall -310 basis points in FY22 to 54.1% (vs FY20 gross margin 61.2%) and remaining at around 57% into the medium term. It's estimated EPS for FY23 will fall by -3% and the target is decreased to $310 from $315.

EBOS GROUP LIMITED ((EBO)) Downgrade to Hold from Add by Morgans .B/H/S: 1/4/0

Morgans lowers the rating for Ebos Group to Hold from Add after a 12% rise in the share price over the last three months and suggests an entry point below $30 is appealing.

The broker makes no change to forecasts though a changed valuation method lifts the target price to $31.03 from $28.90. In an update, management noted second half trading conditions had started strongly. The company will post its full year FY21 result mid-August. 

ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/1

After assessing the outlook across a range of commodity prices, Ord Minnett downgrades Iluka Resources to Hold from Accumulate as the stock is trading in line with valuation. Target is raised to $8.10 from $8.00.

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

After recent upgrades to the iron ore forecast, Macquarie's commodities team has adjusted forecasts for other commodities. The 2022-25 forecasts for copper rise by 13-14% and 2021-25 aluminium lifts by 4-5%. Thermal coal prices rise 9% and 7% for 2021 and 2022.

The most material downgrades are to manganese, which falls -12% in 2022 and by -6 and -9% for 2024 and 2025.

The cuts to manganese forecasts drive material downgrades to Jupiter Mine’s forecasts by Macquarie. FY22-24 earnings forecasts fall by -20%, -32% and -4%, respectively. The rating is downgraded to Neutral from Outperform. The target falls to $0.30 from $0.35.

PRO MEDICUS LIMITED ((PME)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/1/1

Morgans decreases the rating to Reduce from Hold after the share price has risen by over 35% in the last month to record highs. In the absence of news, it's felt this may be due to unwinding of short positions in the stock, (down to circa 3.5% from over 5% in January).

While the broker increases the target price to $49.69 from $41.30, current prices are considered unsustainable in the short term. The analyst suggests trimming heavily overweight positions and looking for a better entry point (below $45.00) into this quality name.

Morgans makes no changes to forecasts. The company will post its full year FY21 result in mid-August.

RIO TINTO LIMITED ((RIO)) Downgrade to Sell from Neutral by UBS .B/H/S: 4/2/1

Rio Tinto has delivered a total shareholder return of 79% over the past 12 months, largely thanks to the iron ore price. While substantial cash flow suggests shareholder returns should remain elevated in 2021, UBS believes the top of the cycle may have been reached.

The broker forecasts iron ore prices to retreat in excess of -50% in the 12-18 months. Nearer term, the Fed is turning more hawkish and China is taking action to deflate commodity prices, while Brazilian iron ore production begins to recover.

While retaining a $104 target, UBS downgrades to Sell from Neutral.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/4/0

Citi notes the stock has outperformed the ASX 200 by 6% over the last quarter and 10% over the last 12 months. Sonic Healthcare has benefited enormously from coronavirus testing and Citi anticipates peak earnings will occur in FY21.

While there is a risk FY22 earnings will also be elevated the broker considers the stock fairly valued and downgrades to Neutral from Buy.

Meanwhile, Sonic Healthcare has acquired Canberra Imaging Group, which generates annual revenue of $60m. The acquisition is expected to be immediately accretive. This will increase the company's revenue from imaging by 10%. Target is $37.50.

WESTERN AREAS LIMITED ((WSA)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/4/0

Commodity sector analysts at Morgan Stanley have updated their expectations and price deck. Bottom line: while multiple headwinds are building, the analysts believe ongoing firm demand and supply disruptions continue to dominate the picture, in particular for base metals. Iron ore is experiencing its final leg of upgrades, predicts the broker.

Irrespective of the overall uncertainty, Morgan Stanley finds miners continue to screen cheaply relative vis a vis industrials ex-banks. This is why the sector rating remains Attractive.

The latter also explains why currently 50% of all commodities related stocks in the broker's universe are rated Overweight, with an average upside of 10%.

Operational problems for Western Areas are considered 'transitory'. The shares are seen as fairly valued. The broker has downgraded to Equal-weight from Overweight. Price target lifts to $2.50 from $2.40.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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