Weekly Reports | Jul 19 2021
This story features ADBRI LIMITED, and other companies. For more info SHARE ANALYSIS: ABC
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 July 12 to Friday July 16, 2021
Total Upgrades: 9
Total Downgrades: 6
Net Ratings Breakdown: Buy 53.80%; Hold 39.22%; Sell 6.98%
For the week ending Friday 16 July, there were nine upgrades and six downgrades to ASX-listed companies by brokers in the FNArena database.
There were no material changes to target prices by brokers during the week.
Coronado Global Resources had the largest percentage increase in forecast earnings. Morgans upgraded its rating to Add from Hold, and estimates leverage to sharply higher coking coal prices will offset any dilution after the company recently raised capital.
Credit Suisse notes the Curragh operations are generally subject to a three-month pricing lag, and expects the met coal pricing rally from May to take effect in the June half, with significant free cash flow growth likely to be reflected beyond the December half.
Next was Viva Energy Group. A first half trading update and a lift in FY21 guidance was lauded by all five brokers who cover the stock on the FNArena database. Macquarie was impressed by an ability to capture market share in both retail and commercial. The dividend is expected to be reinstated and a return of up to $100m in capital from the sale of the property portfolio could follow at the August result.
Meanwhile, UBS pointed out total fuel volumes (ex-jet) are now above pre-covid levels and diesel demand in regional Australia, particularly from agriculture and resource industries, has offset weakness in lockdown-affected metro fuel sales.
Both Pilbara Minerals and Galaxy Resources featured in the top percentage gainers to forecast earnings by brokers, after Ord Minnett lifted lithium forecasts. An estimated 10% market deficit out to 2024 supports higher near-term prices and the broker sees risk attached to an aggressive demand increase.
The broker’s rating for Pilbara Minerals was upgraded to Hold from Lighten and its target price increased to $1.50 from $1.05. Based on the assumption that the proposed merger with Orocobre will go ahead, the broker’s rating for Galaxy Resources was also upgraded to Buy from Accumulate, and its target price increased to $4.80 from $4.20.
A trading update and increased FY21 guidance from ARB Corp resulted in forecast earnings upgrades by brokers in the FNArena database last week. The main drivers included a marked uplift in new vehicle sales in Australia, strong export sales growth and higher operating margins.
While Ord Minnett expects demand will stay strong in the short term and future sales are likely to be driven by continued growth in demand in 4WD and SUV markets, Credit Suisse feels visibility beyond the first half FY22 remains low, and sees some risk to end-demand as international travel resumes.
Sydney Airport had the largest negative percentage change in forecast earnings. Commentary centred on management’s rejection of a $8.25 takeover offer from an infrastructure consortium. Morgans believes it is a signal of optimism for the future by the board and suspects this is not the last takeover approach, while the share price languishes due to covid. Citi expects the consortium, or another potential bidder, will eventually acquire the company, albeit at a slightly higher price.
Another consortium made a takeover approach for Spark Infrastructure Group. Ord Minnett feels management may come under pressure to engage though it doesn't recommend investors buy the stock in anticipation of a higher bid price. The broker estimates there's circa -14% potential downside to consensus valuation and the offer price appears fair.
Next was Audinate Group, and while FY21 guidance was a 2.5% beat on Morgan Stanley's revenue estimates, there remains some impact from chip headwinds. With a record order backlog, the analyst highlights a head start in FY22. However, the Live segment is still likely depressed.
Finally, Western Areas appeared in the list of material forecast earnings downgrades. Macquarie lowered its rating to Neutral from Outperform last week after a mixed June quarter production report, with nickel production 7% higher than forecast, but shipments -5% lower. Given Flying Fox continues to underperform expectations, the ability to deliver a replacement source is now a key catalyst. The broker now expects the miner to report a small loss at its FY21 result release.
Total Buy recommendations take up 53.8% of the total, versus 39.22% on Neutral/Hold, while Sell ratings account for the remaining 6.98%.
Upgrade
ADBRI LIMITED ((ABC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/6/1
Morgan Stanley makes revisions to the ratings and preferences for building materials companies. While challenges remain in the short term, it's felt Adbri will be well positioned to benefit, once encouraging infrastructure lead indicators translate to materials demand.
The broker upgrades the rating to Equal-weight from Underweight and retains the $3.30 target. Industry view: Cautious.
The analyst's prior Underweight stance was more predicated on being the least preferred sector exposure rather than any meaningful issue with the valuation or demand drivers.
CSR LIMITED ((CSR)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/0
Morgan Stanley makes revisions to the ratings and preferences for building materials companies. The rating for CSR is lifted to Overweight from Equal Weight, due to underperformance versus the ASX200 by -18% since the FY21 results in May.
This runs counter to the company's position of having the greatest exposure of peers to the detached housing market, the strongest
domestic end market, explains the broker. The target price of $6.30 is unchanged. The industry view is cautious.
With a net cash position and strong cash generation, the analyst expects special dividends will be a regular feature and sees CSR trading on an attractive 6% fully franked yield for FY22.
GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/2/1
Ord Minnett has provided an update to its lithium supply-and-demand model and near-term pricing, resulting in boosted earnings estimates to lithium stocks.
The broker has increased demand for lithium carbonate equivalent by 7% by 2030. Although supply constraints will ease in the later part of the decade, near-term supply is lower and risk is attached to an aggressive demand increase. Ord Minnett notes a forecasted 10% market deficit to 2024 supports higher near-term prices.
Based on the assumption that Galaxy's proposed merger with Orocobre will go ahead, the rating is upgraded to Buy and the target price increases to $4.80 from $4.20.
MAAS GROUP HOLDINGS LIMITED ((MGH)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Morgans raises the rating to Add from Hold and maintains its $5.85 target price. It's considered the $79m capital raising will further strengthen the balance sheet position, and the broker now forecasts FY22 net debt of just $54.7m.
Along with total debt facilities, recently increased to $300m, the company is now free to pursue further M&A opportunities, believes the analyst. The broker makes modest EPS forecast downgrades, as the placement dilution is partially offset by lower net interest costs.
NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/4/0
Macquarie suspects the perceived benefit for banks from rising interest rates is inflated. Various offsets, including competition, have constrained margin upside.
The broker expects banks will remain leveraged to bond yields and, if the sector continues to outperform from rising rate expectations, then investors are advised to take profits ahead of the turn around.
National Australia Bank's rating is upgraded to Outperform from Neutral, following the recent underperformance in the share price.
The strong capital position and provisioning leaves the balance sheet well-placed to absorb potential issues for both AUSTRAC and an economic slowdown, Macquarie suggests. Target is steady at $28.
OCEANAGOLD CORP ((OGC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/2/0
OceanaGold has received renewed approval from the Philippines government for its Didipio mine, allowing it to restart. This removes a key obstacle to the resumption of operations and the company is now prioritising the retraining and hiring of its workforce.
Meanwhile, news on Haile was less positive as re-handling and processing problems are weighing on costs and approval delays could affect the mine over the longer term.
Didipio, in Macquarie's view, remains the best asset and the rating is upgraded to Neutral from Underperform. Target is steady at $2.70.
OROCOBRE LIMITED ((ORE)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/3/0
Ord Minnett has provided an update to its lithium supply-and-demand model and near-term pricing, resulting in boosted earnings estimates to lithium stocks.
The broker has increased demand for lithium carbonate equivalent by 7% by 2030. Although supply constraints will ease in the later part of the decade, near-term supply is lower and risk is attached to an aggressive demand increase. Ord Minnett notes a forecasted 10% market deficit to 2024 supports higher near-term prices.
Based on the assumption that Orocobre's proposed merger with Galaxy Resources will go ahead, the rating is upgraded to Buy and the target price increases to $8.45 from $7.40.
PILBARA MINERALS LIMITED ((PLS)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/3/0
Ord Minnett has provided an update to its lithium supply-and-demand model and near-term pricing, resulting in boosted earnings estimates to lithium stocks.
The broker has increased demand for lithium carbonate equivalent by 7% by 2030. Although supply constraints will ease in the later part of the decade, near-term supply is lower and risk is attached to an aggressive demand increase. Ord Minnett notes a forecasted 10% market deficit to 2024 supports higher near-term prices.
The rating on Pilbara Minerals is upgraded to Hold and the target price increases to $1.50 from $1.05.
VIVA ENERGY GROUP LIMITED ((VEA)) Upgrade to Add from Hold by Morgans .B/H/S: 5/1/0
After a first half trading update from Viva Energy Group, Morgans upgrades the rating to Add from Hold, and increases the target price to $2.50 from $2.30. It's felt an acceleration in earnings growth will lift earnings above pre-covid levels as the economic recovery continues.
Management raised first half earnings (EBITDA) guidance to $390-$410m compared to the $324m forecast by the broker. A material recovery in refining margin has increased the analyst's confidence in the most volatile part of the business.
Downgrade
ARENA REIT ((ARF)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/2/0
Morgan Stanley downgrades to Equal-weight from Overweight on valuation. At the current share price the stock is implying lofty multiples. The broker assesses Arena REIT is among the most expensive amongst the asset-heavy rent-collecting A-REITs under coverage.
Still, Morgan Stanley finds strong reasons for investors to continue holding the stock including a 15-year weighted average lease expiry and the fact child care operators are one of the more secure tenant classes.
Target is raised to $3.66 from $3.14. Industry view is In-Line.
BORAL LIMITED ((BLD)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/3/1
Morgan Stanley makes revisions to the ratings and preferences for building materials companies. It's felt downside risks prevail for the Boral share price in the short term, with a cessation of the takeover offer coinciding with the completion of the buyback.
The broker expects the company's index weighting to reduce, given Seven Group Holding's increased stake and a reluctance from domestic investors, due to a lower free float and liquidity.
Morgan Stanley downgrades the rating to Underweight from Equal-weight and reduces the target price to $6.80 from $7.60. Industry view is in-line.
COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/3/3
Macquarie suspects the perceived benefit for banks from rising interest rates is inflated. Various offsets, including competition, have constrained margin upside.
The broker expects banks will remain leveraged to bond yields and, if the sector continues to outperform from rising rate expectations, then investors are advised to take profits ahead of the turn around.
Commonwealth Bank's rating is downgraded to Underperform from Neutral, following a strong rally in the share price. The main upside, Macquarie assesses, is ongoing material share gains and the ability to preserve margins despite the impact of lower rates. Target is raised to $88.50 from $86.00.
DACIAN GOLD LIMITED ((DCN)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 0/0/1
Macquarie assesses Dacian Gold had a softer end to FY21, with a modest guidance miss. A materially higher capex forecast at Mt Morgans in FY22 leads the broker to lower the rating to Underperform from Outperform. The target price also falls to $0.28 from $0.32.
FY22 production estimates, however, were in-line with the analyst's forecast. The company will release a new life-of-mine plan for Mt Morgans in the first quarter FY22.
POLYNOVO LIMITED ((PNV)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/1/0
Polynovo has announced FY21 revenue of around $25.5m, signalling 34% growth over FY20. All geographies grew, although from a low base.
Yet there is uncertainty regarding US hospitals re-engaging and a lack of formal guidance was a surprise to Ord Minnett, given robust commentary from US peers.
Ord Minnett suspects FY22 will be lumpy and there is a wide range of potential outcomes. The broker resets base projections and awaits evidence of a more stable and predictable environment, downgrading to Hold from Accumulate. Target is reduced to $2.54 from $3.10.
SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Hold from Add by Morgans .B/H/S: 2/5/0
Morgans downgrades its rating to Hold from Add, given the M&A-driven price spike, after Spark Infrastructure Group announced it had received a takeover approach. The broker's target price of $2.80 is set in-line with the bid price.
Given the group is a minority owner in the bidder's companies, the analyst doesn’t foresee the FIRB having issues with the bid consortium. Also, as the group's key electricity network assets are regulated, it's felt there shouldn’t be issues with the ACCC’s review of the bid.
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: ABC - ADBRI LIMITED
For more info SHARE ANALYSIS: ARF - ARENA REIT
For more info SHARE ANALYSIS: BLD - BORAL LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CSR - CSR LIMITED
For more info SHARE ANALYSIS: DCN - DACIAN GOLD LIMITED
For more info SHARE ANALYSIS: MGH - MAAS GROUP HOLDINGS LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED
For more info SHARE ANALYSIS: PNV - POLYNOVO LIMITED
For more info SHARE ANALYSIS: VEA - VIVA ENERGY GROUP LIMITED