Weekly Ratings, Targets, Forecast Changes – 13-08-21

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

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 August 9 to Friday August 13, 2021
Total Upgrades: 6
Total Downgrades: 15
Net Ratings Breakdown: Buy 53.83%; Hold 38.51%; Sell 7.66%

For the week ending Friday 13 August, there were six upgrades and fifteen downgrades to ASX-listed companies by brokers in the FNArena database.

In the wake of FY21 result announcements, there were two broker ratings downgrades apiece for Commonwealth Bank, Goodman Group and Aurizon Holdings.

Credit Suisse downgraded earnings estimates for Commonwealth Bank because of a lower net interest margin and higher expenses. Given the shares are trading on high multiples the broker sees little upside, and downgrades its rating to Underperform. Meanwhile, Citi downgrades its rating to Sell, suggesting excess liquidity is having an adverse effect on the ability to generate revenue. The analyst expects only 1% revenue growth in FY22, and notes underlying core earnings are declining.

Both UBS and Ord Minnett downgraded Goodman Group’s rating to Neutral and Accumulate, respectively, based upon valuation only, and considered the result was in line with estimates. 

For Aurizon Holdings, Morgan Stanley anticipates continued share price underperformance as reliance upon fossil fuel will impact investor appeal and downgrades to Underweight. Morgans also reminds investors of the balance between long-term sustainability issues facing the Coal and Network divisions, and the generation of strong cashflow to support a pivot into Bulk. However, despite downgrading to Hold the broker acknowledges the FY21 result beat the analyst’s expectations.

There were no material reductions in target prices by brokers in the FNArena database last week.

James Hardie headed up the table for the largest percentage increase in forecast target price in the FNArena database last week. First quarter results beat the expectations of four of the six brokers covering the stock. While the company continues to experience cost pressure across the business, they are being more than offset by price, mix and savings from the company's LEAN manufacturing initiative, points out Ord Minnett. Macquarie notes the stock continues to trade at a discount to the historical price earnings ratio relative to the ASX200 Industrial index.

Next on the table was Pilbara Minerals after Ord Minnett raised its long term spodumene price assumption by 31%. The analyst notes the lithium commodity complex is one of the few remaining in the broker's coverage where it sees meaningful potential upside in the medium-term, given the strong demand backdrop. The broker raised its rating to Buy from Hold, with the target price increasing to $2.50 from $1.60.

Commentary from Macquarie was generally positive. The analyst noted rising spot lithium prices present the key upside risk to base case forecasts. Despite again heading the list last week, there was still nothing to contradict the positive tone of the prior week, as evidenced by the above paragraph pertaining to target price.

AGL Energy also saw a material percentage fall last week in forecast earnings. While FY21 underlying EPS was in line with Morgans’ expectations, FY22 guidance for underlying profit fell -36% short. Morgan Stanley anticipates near-term underperformance for the stock, while UBS still expects margin compression as east coast gas prices are expected to rise through to FY23-24 as supply tightens.

Transurban Group had the largest percentage rise in forecast earnings by brokers in the FNArena database last week, as target prices were both raised and lowered. 

Morgans assumes that traffic will recover to trend by 2022 (one year further covid-delayed for the airport-linked roads), and will grow at 2% thereafter, until capacity constrained. Ord Minnett also suggests traffic will rebound quickly when lock downs in Australia end.

A maximum of seven brokers cover Insurance Australia Group. Five raised target prices, reflecting the company’s second place on the list for percentage earnings upgrades. 

Citi highlighted the company has scope to drive improvements in intermediated margins, while Macquarie believes gross written premium growth targets of ‘low single-digit’ in FY22 are too low. Meanwhile, the final dividend was slightly ahead of Credit Suisse forecasts and the broker is now more confident on the outlook, given the extra detail disclosed on underlying claims improvement and industry tailwinds.

Next up was News Corp. After releasing FY21 results, Morgan Stanley suggests the performance and outlook for Move Inc/Realtor.com and Dow Jones are encouraging. Credit Suisse assessed there’s limited downside risk to its FY22 estimates, forecasting that growth will be supported by payments from Facebook/Google and a number of acquisitions.

GrainCorp’s forecast earnings by brokers also rose, following a second FY21 profit upgrade. FY22 outlook commentary was considered upbeat by Morgans, due to the planted area and favourable outlook for the 2021/22 winter crop. It's also thought benefits will derive from upgraded carryover grain. UBS also noted demand for Australian grain is booming amid supply challenges in the northern hemisphere, which is driving higher exports, stronger supply chain margins and elevated levels of forward contracted sales for the company.

Finally, forecast earnings upgrades and QBE Insurance Group do not normally appear in the same sentence. However, last week’s first half result was met with general applause by brokers, and was even described as ‘cracking’ by UBS after a 32% EPS beat. 

There was considered to be strong rate-driven gross written premium growth (GWP), higher margins and a cash return on equity (ROE) of 11.9%. In further good news, GWP growth was not only rate-driven, as around 7% came from new business and higher retention, pointed out the broker. 

Total Buy recommendations take up 53.83% of the total, versus 38.51% on Neutral/Hold, while Sell ratings account for the remaining 7.66%.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/3/2

Credit Suisse upgrades its rating to Neutral from Underperform and raises its target price to $7.30 from $6.70, now that consensus and guidance are consistent with forward prices. 

The broker estimates FY21 earnings (EBITDA)  were in-line, with higher Customer earnings being largely offset by lower Wholesale Gas. The midpoint of FY22 guidance was -5% below consensus, while FY22 profit guidance -12% below, explains the analyst.

DOWNER EDI LIMITED ((DOW)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 5/1/0

Ord Minnett lifts its rating for Downer EDI to Hold from Lighten and increases its target price to $5.60 from $5.30, after FY21 underlying net profit came in 10% ahead of the analyst's forecast. An unfranked final dividend of 12 cents was declared.

The broker highlights earnings (EBITA) margins in the second half were returned to the company’s five-year pre-pandemic average (FY15–19).

To get more positive on the stock, Ord Minnett would look for continued execution of the urban services strategy and further margin expansion.

JAMES HARDIE INDUSTRIES PLC ((JHX)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0

The first quarter result revealed a strong uptake of high-value product amidst volume growth. Citi expects earnings momentum will remain in the company's favour amid a multi-year recovery in US housing.

While expectations are running high the broker still considers the stock attractive on a PE relative basis and upgrades to Buy from Neutral.

The medium-term prospects of Colorplus and textured panels underpin forecasts for ASP growth of 6.8% and 6.3% in FY23 and FY24, respectively. Target is raised to $56.20 from $46.20.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/1/1

Ord Minnett has raised its long term-lithium spodumene price assumption by 31% to US$850 per tonne from US$650/t.

Ord Minnett has also launched a new supply-demand model, highlighting a tight market for the foreseeable future, leading to an increase in the broker's medium-term price forecasts.

After factoring in higher price forecasts, the broker's valuations have increased materially for the lithium miners. Ord Minnett notes the lithium commodity complex is one of the few remaining in the broker's coverage where it sees meaningful potential upside in the
medium-term, given the strong demand backdrop.

Based on these updates, Ord Minnett has upgraded Mineral Resources to Buy from Hold, with the target price lowering to $59.03 from $66.00.

PILBARA MINERALS LIMITED ((PLS)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/2/0

Ord Minnett has raised its long term-lithium spodumene price assumption by 31% to US$850 per tonne from US$650/t.

Ord Minnett has also launched a new supply-demand model, highlighting a tight market for the foreseeable future, leading to an increase in the broker's medium-term price forecasts.

After factoring in higher price forecasts, the broker's valuations have increased materially for the lithium miners. Ord Minnett notes the lithium commodity complex is one of the few remaining in the broker's coverage where it sees meaningful potential upside in the
medium-term, given the strong demand backdrop.

Based on these updates, Ord Minnett has upgraded Pilbara Resources to Buy from Hold, with the target price increasing to $2.50 from $1.60.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/4/0

FY21 results were very strong, Credit Suisse observes. Suncorp Group has maintained guidance for an FY23 return of 10-12% and a costs-to-income ratio of 50% for the bank.

Credit Suisse expects further growth in earnings and distributions, given the excess capital. With mortgage processing times now better than most major banks and a higher retention than market average, the broker expects strong growth from FY22 onwards while benign bad debts should add further upside.

Rating is upgraded to Outperform from Neutral and the target raised $14.00 from $12.20.

See also SUN downgrade.

Downgrade

ARB CORPORATION LIMITED ((ARB)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/0

Citi considers there is long-term potential in the US expansion yet a 53% rise in the share price over the year to date means the rating is downgraded to Neutral from Buy.

Risks in terms of a slower-than-expected contribution from the Ford partnership or weaker conditions in the Australian aftermarket as well as the supply chain challenges are not adequately factored in, the broker suggests. Target is $47.15.

ACCENT GROUP LIMITED ((AX1)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/1

Citi envisages the current multiple of 22x FY22 price/earnings reflects little risk stemming from recurring lockdowns, disrupted sales and casual employment. There is also less stimulus in the economy compared with the same time in 2020 amid increasing supply chain risks.

For example, key supplier Adidas has recently indicated it was affected by factory lockdowns in Vietnam.The broker now expects like-for-like sales in the first half will decline by -7.5%.

Rating is downgraded to Sell from Neutral and the target reduced to $2.50 from $3.10.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Hold from Add by Morgans and Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/1

Aurizon Holdings FY21 result beat Morgans expectations, while first-time FY22 earnings guidance was in-line. The broker lowers its rating to Hold from Add on recent share price strength and lowers the target price to $4.06 from $4.09.

The anlyst reminds investors of the balance between long-term sustainability issues facing Coal and Network, and the generation of strong cashflow to support a pivot into Bulk.

The second half dividend of 14.4 cps (70% franked) was above Morgans forecast of 13.7cps.

While Aurizon Holdings' near-term earnings and growth outlook are sound, it is Morgan Stanley's view that a fossil fuel reliance will impact investor appeal. The broker anticipates continued share price underperformance. 

Morgan Stanley highlights Aurizon Holdings' high earnings linkage to fossil fuels of around 88% will see the stock excluded from many investor mandates.

The company reported underlying earnings for FY21 for $903m, up 1% on Morgan Stanley's forecast, with net profit of $533m, a 6% beat on the broker's forecast.

The rating is downgraded to Underweight and the target price decreases to $3.92 from $4.03. Industry view: Cautious.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Sell from Neutral by Citi .B/H/S: 0/1/5

Following the FY21 result Credit Suisse downgrades earnings estimates by -1.3% because of lower net interest margin and higher expenses.

The bank underperformed expectations in FY21 despite the investment in technology providing some operating leverage, and the broker envisages little upside for a stock trading at 21x PE.

As a result, Credit Suisse downgrades to Underperform from Neutral and maintains a $95 target.

Citi reports excess liquidity has enabled balance sheet normalisation for Commonwealth Bank of Australia, with a $6bn off-market buy-back, approximate 75% dividend payout ratio and provision write backs. 

Despite this, the broker notes excess liquidity is also having adverse effect on the ability to generate revenue. The broker expects only 1% revenue growth in FY22, and notes underlying core earnings are declining.

Citi has downgraded cash earnings forecasts for FY22 and FY23 by -6-7%, and increased underlying cost growth.

The rating is downgraded to Sell and the target price decreases to $94.50 from $96.75.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/6/1

Macquarie reviews forecasts ahead of the FY21 result on August 26. The earnings recovery is pushed out by 6-9 months because of prolonged border closures.

More emphasis is likely to be placed on the corporate business where Macquarie anticipates gains in market share.

The business remains loss-making for the short term and break-even is now expected in FY23. Target is reduced to $15.50 from $17.50 and the rating is downgraded to Neutral from Outperform.

GOODMAN GROUP ((GMG)) Downgrade to Accumulate from Buy by Ord Minnett and Downgrade to Neutral from Buy by UBS .B/H/S: 5/1/0

Goodman Group reported an FY21 operating profit of $1.22bn, or 65.6c per share, up 14% on FY20 and in line with Ord Minnett’s $1.21m forecast.

The result was underpinned by a 25% increase in development earnings, with development work in progress (WIP) lifting from $4.1bn two years ago to $10.6bn.

Ord Minnett believes this should result in strong increases in development earnings over the next two to three years, in turn driving strong assets under management (AUM) growth.

The broker believes Goodman carries material built-up development and performance fee profits, which have been held back for future years, and expects more than 10% earnings per share (EPS)  growth in each of the next three years.

An unfranked final dividend of 15c was declared, taking the full-year payout to 30c per share.

Ord Minnett downgrades the rating to Accumulate from Buy and the price target increases to $24 from $21.

FY21 earnings growth of 14% was in line with UBS estimates. The key metrics that are driving the medium-term earnings outlook suggest guidance for growth of 10% is very conservative. The broker forecasts 14% and anticipates upgrades to guidance throughout FY22.

UBS points out the new 10-year investment plan is market-leading in its alignment with security holders but comes at a cost. The company has extended the testing period to four years and the vesting period to 10 years and included more challenging hurdles and ESG targets.

The broker downgrades to Neutral from Buy on valuation grounds and higher market expectations. Target is raised to $22.50 from $21.20.

KELLY PARTNERS GROUP HOLDINGS LIMITED ((KPG)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Despite reporting an underlying FY21 profit (NPATA) rise of 27.5% on the previous corresponding period, Morgans downgrades the rating to Hold from Add, as the stock is trading in-line with its upgraded valuation. The target price rises to $3.44 from $2.35.

FY21 revenue growth of 7.5% was primarily driven by acquisitions of 4.8%, with accounting organic growth contributing 1.5% and complementary businesses 1.2%.

Total dividends (including specials) for the year were 5.84 cents, up 8.3%. Management commented that the group was “inundated” with further acquisition opportunities and further partnerships remain core to the strategy.

MEGAPORT LIMITED ((MP1)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 1/1/1

FY21 saw some lumpy growth, notes Ord Minnett, as it was affected by currency movements and covid-19, although the company finished on a high note with record fourth-quarter growth.

The broker lowers the rating to Sell from Hold and the target price falls to $15 from $15.50, as growth investment may take time to bear fruit. These investments include in the indirect sales channel and the continued focus on new product developments. 

In a largely pre-released result, the company reported FY21 revenue of $78.3m, up 35% on FY20 and in-line with the broker's forecast. The reported net loss of -$55m widened on a year ago, driven largely by unrealised currency losses, explains the analyst.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/0

Due to recent share price strength the broker lowers its rating to Hold from Add and the $27.50 target price is unchanged.

Morgans sees a marginal benefit in the wider context, of the agreement to purchase Citigroup’s Australian consumer business. Pre-tax cost synergies of circa -$130m pa are expected to be realised over three years, with the majority expected to be achieved in the first two years.

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

Earnings in the fourth quarter were slightly below Macquarie's estimates. Management has indicated potential upside from the recall of the Philips device.

Combining expectations for higher market share with revised assumptions in relation to masks/accessories revenue for new patients associated with the recall, Macquarie raises the target to $37.40 from $34.85.

As a result of a 14% outperformance to the ASX200 since June, Macquarie downgrades to Neutral from Outperform.

SPARK NEW ZEALAND LIMITED ((SPK)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/3/0

Credit Suisse expects Spark New Zealand will deliver operating earnings at the top end of guidance when it reports on August 18. As part of the results, management is also due to update the market on a review of the infrastructure assets.

Other areas the broker will be scrutinising include commentary on the shift from pre-paid to monthly payment subscribers and the resulting revenue benefit, as well as the take-up of fixed wireless plans.

With the stock now trading through valuation the broker lowers the rating to Neutral from Outperform. While the upcoming infrastructure review has potential to be a positive catalyst Credit Suisse does not expect immediate monetisation. Target is steady at $4.50.

SUNCORP GROUP LIMITED ((SUN)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/4/0

Following Suncorp Group's strong rally and with further significant improvement unlikely before second-half FY22, Citi pulls back to Neutral from a Buy and the target price lifts to $12.80 from $11.80.

Following underlying insurance margins of 7.4% in second half FY21, the group has now clarified that it expects margins to remain broadly in line or "hopefully a little better" in first-half FY22, before expanding in second half FY22 as strategic initiative benefits kick in.

While Citi still believes the group's banking target of a 50% cost to income ratio will be hard to achieve, the broker sees the return to growth in mortgage lending as a positive sign.

The $250m buyback is largely as anticipated and is now factored into Citi's forecasts, and the broker continues to expect the group to
deliver on its FY23 margin guidance of 10%-12%.

See also SUN upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms