Weekly Ratings, Targets, Forecast Changes – 24-09-21

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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 September 20 to Friday September 24, 2021
Total Upgrades: 9
Total Downgrades: 3
Net Ratings Breakdown: Buy 53.72%; Hold 38.41%; Sell 7.87%

For the week ending Friday 24 September, there were nine upgrades and three downgrades to ASX-listed companies covered by brokers in the FNArena database.

Sandfire Resources had the largest percentage fall in target price last week after announcing the acquisition of the MATSA underground copper mine and production plant project in Spain for $2.6bn. This will add around 110,000 tonnes per annum copper production in FY22 and will be funded by a $1.2bn equity raising, $1.1bn in debt and existing cash. Credit Suisse estimates the deal may be -30% dilutive to shareholders and downgrades its rating to Neutral from Outperform.

Meanwhile, New Hope Corp had the largest forecast percentage rise in both target price and earnings by brokers in the FNArena database, after a FY21 result that was largely in line with expectations. Nonetheless, Credit Suisse reacted by lifting its coal price forecasts, which in turn increased FY22 earnings estimates by 29%. Assuming no M&A or major investment in the near-term, Morgans sees upside for both capital and shareholder returns. 

Coming second on the table for a rise in forecast earnings was Kathmandu Holdings. Management announced an offshore launch of the Kathmandu brand, with expansion into Europe and Canada due in FY22. While Macquarie does not include this expansion in estimates, a successful execution is thought to deliver upside to forecasts. A recovery later in FY22 is expected, assuming no lockdowns and a moderation of supply chain headwinds.

Next up was Transurban Group after announcing a $5.6bn acquisition cost for a 49% stake in WestConnex via a 1-for-9 entitlement offer at $13 to raise $4.2bn. Ord Minnett considers the transaction is positive, given the group's expertise, intimate knowledge and control of the asset. Management emphasised the acquisition will mean a further $600m in capital is released in coming years that will be used to offset dilution caused by the acquisition.

After FY21 results, Karoon Energy received a material percentage increase in earnings forecast by brokers. Macquarie (Outperform) notes production guidance was better than expected from Bauna and highlights strong cash flow at spot oil prices. 

A technical glitch has put Crown Resorts atop the table for earnings downgrades, so best to ignore.

The largest percentage fall in forecast earnings by brokers in the FNArena database last week went to Premier Investments. The final dividend of 46cps was below consensus of 54.7cps and the forecast for 64.5cps by UBS. Retail earnings margins were also slightly lower than the analyst's forecast. Morgan Stanley feels earnings growth in FY22 is looking increasingly challenged due to lockdowns, lower demand and lower margins.

Total Buy recommendations take up 53.72% of the total, versus 38.41% on Neutral/Hold, while Sell ratings account for the remaining 7.87%.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/2/2

With shares now trading below the estimated value for AGL Australia (Retail) alone, Ord Minnett upgrades its recommendation on AGL Energy to Buy from Hold, while the target price reduces to $7.55 from $7.80.

The company remains committed to separating its business into retail and generation (Accel Energy) by mid-2022.

While the broker sees potential for strong corporate appeal in AGL Australia, there's likely to be very little interest in Accel Energy. This is because of its exposure to coal, its leverage to wholesale prices and its sizeable rehabilitation costs, explains the analyst.

AUSNET SERVICES LIMITED ((AST)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/6/0

The potential for corporate activity, with the company receiving an offer from Brookfield, highlights for Morgan Stanley the cost of capital differential between listed and unlisted investors.

This drives the broker to upgrade to Equal-weight from Underweight. Target is raised to $2.41 from $1.77.

Should the proposed transactions proceed, the de-listing of both AusNet Services and Spark Infrastructure ((SKI)), Morgan Stanley points out, will mean there is no pure regulated utility left on the ASX.

The main concern is that the Australian Energy Regulator may perceive the premium in the proposed transactions a sign that regulated allowances are overly generous and seek to reduce them accordingly, suggests the analyst. Industry view: Cautious.

BAPCOR LIMITED ((BAP)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0

Citi considers the risk/reward trade-off has become favourable now the share price has declined substantially from its August peak. The emergence from lockdowns in NSW and Victoria should start from October and the company obtain a benefit.

Rating is upgraded to Buy from Neutral and the target raised to $8.25 from $8.20.

BABY BUNTING GROUP LIMITED ((BBN)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

Citi upgrades its rating for Baby Bunting Group to Buy from Neutral with the risk/reward tradeoff seen as more favourable following the -12% share price decline since the FY21 result. The target price rises to $5.98 from $5.90 on higher market multiples.

The analyst feels the group is well placed to report a relatively stronger AGM trading update compared to most listed retail peers, given the non-discretionary nature of its products.

Ord Minnett forecasts gross margins to expand by 68bps in FY22. This is driven by a forecast increased share of higher margin private label and exclusive product sales, and supply chain efficiencies from the new national distribution centre in Melbourne.

CHAMPION IRON LIMITED ((CIA)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

While Citi lowers its price target for Champion Iron to $6.40 from $7.25, the broker raises the rating to Buy from Neutral after recent share price underperformance. It's thought iron ore may hold at greater than US$100 per tonne levels for longer than the market expects.

The analyst believes China's lead indicators are stabilising and have turned up off recent lows. The fact steel prices have stayed high is considered to point to consumption being driven more by state imposed production cuts than weakness in underlying demand.

EVENT HOSPITALITY & ENTERTAINMENT LIMITED ((EVT)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

Citi sees the company as materially undervalued and raises its rating to Buy from Neutral and lifts the target to $17.70 from $13.45. This is predicated on likely strong pent-up demand after lockdowns and lesser structural concerns surrounding cinemas than initially thought. 

Additionally, there has been a successful property divestment program and a material cost-out program, explains the analyst.

A $2.1bn property portfolio (worth $12.76 per share) implies to the broker that investors are paying circa 4x FY23 earnings for the operating business.

FONTERRA SHAREHOLDERS FUND ((FSF)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 1/1/0

Fonterra reported towards the top end of the guidance range and better than the last update implied. The last quarter was nevertheless slight loss-making, Macquarie notes, on lower milk prices.

The company has revealed its long-term strategy, targeting 40-50% underlying earnings growth by FY30, which would drive around a 75% increase in earnings per share, the broker calculates.

This is driven by increased focus on value-add, including “Active Living”, supported by higher capital investment and ramp up in R&D spending. On this positive outlook, and on current valuation, the broker double-upgrades to Outperform from Underperform.

Target rises to NZ$4.28 from NZ$4.25.

NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/0

Macquarie continues to prefer iron ore and metallurgical coal amongst the bulk commodities. The broker is positive about coal, given the upside from buoyant spot prices.

While upgrading to Outperform from Neutral, the broker notes movements in thermal coal prices present the main risk to its base case valuation of New Hope. Target is raised to $2.40 from $2.20.

TRANSURBAN GROUP LIMITED ((TCL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/0

Transurban in consortium is acquiring the remainder of WestConnex from the NSW government for $11.1bn. This will take its stake to 50% from 25.5% at a cost of $5.6bn.

Credit Suisse believes the deal is attractive as it will provide Transurban with control of all Sydney's toll roads and places the company in a good position to deliver value. Rating is upgraded to Outperform from Neutral and the target raised to $15.10 from $14.00.

Downgrade

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 6/1/0

Credit Suisse expects fertiliser pricing will peak in 2021. Pricing is expected to remain above the mid-cycle average in 2022 as markets appear to be well supplied. Meanwhile, the outlook for the explosives business seems stable.

The broker downgrades to Neutral from Outperform and reduces the target to $2.98 from $2.99, adjusting for fertiliser pricing expectations. Production assumptions are reduced to allow for the outage at Waggaman.

SANDFIRE RESOURCES LIMITED ((SFR)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0

Sandfire Resources' acquisition of the Aguas Tenidas copper/polymetallic mining complex for $2.64bn is expected to close in the March quarter. Credit Suisse notes the transaction is expected to add around 110,000 tonnes per annum copper production in FY22.

It is Credit Suisse's view that the acquisition presents a dilution risk, estimating the deal may be 30% dilutive to shareholders. 

The rating is downgraded to Neutral from Outperform and the target price decreases to $6.00 from $7.70.

SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/0

Citi downgrades its rating to Neutral from Buy as a result of lower-than-expected margins and guidance. The company downgraded FY23 earnings (EBITDA) guidance to $95-100m from $100m. The target price falls to $0.60 from $0.70.

The company reported first half underlying profit around -10% below consensus due to a lower-than-expected gross margin on a normalisation of the sales mix, explains the broker.

While it's too early to see an impact, the analyst feels the potential acquisition of Australian Pharmaceutical Industries ((API)) by Wesfarmers ((WES)) is unlikely to be positive.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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