Weekly Ratings, Targets, Forecast Changes – 08-04-22

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Weekly update on stockbroker recommendation, target price, and earnings forecast changes.

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 April 4 to Friday April 8, 2022
Total Upgrades: 9
Total Downgrades: 6
Net Ratings Breakdown: Buy 59.15%; Hold 34.92%; Sell 5.93%

For the week ending Friday April 8 there were nine upgrades and six downgrades to ASX-listed companies covered by brokers in the FNArena database.

Ord Minnett began the week with an upgrade to its outlook for lithium. The 2023 price forecast for spodumene was doubled to US$5,000/t, while hydroxide and carbonate estimates were raised by 50% and 60%, respectively. Meanwhile, the broker raised its long-term forecast by 18%.

A few days later, UBS increased its 2022 spodumene forecast by around 17%, while longer term price forecasts were placed under review.

As a result of Ord Minnett’s increased lithium forecast, the analyst raised its rating for Pilbara Minerals to Buy from Hold and lifted its price target to $4.50 from $2.90. Credit Suisse also raised its target price to $3.90 from $3.20 after estimating the company should achieve a realised spodumene price in the June quarter near the US$5,000 per tonne that peer Allkem is hoping to achieve for the same period.

Meanwhile, Macquarie sees an opportunity for the company to capture more value along the lithium value chain following a positive scoping study at the Mid-Stream Product Demonstration Plant. A key near-term catalyst due to a potential spot sale on the company’s battery material exchange (BMX) platform was also noted.

As a result of revised views from these three brokers, Pilbara Minerals headed the table last week for the largest percentage increase in price target among stocks in the FNArena database.

Next on the table was lithium (and iron ore) producer Mineral Resources, which announced an agreement with its joint venture partners to increase production from the Mt Marion and Wodgina spodumene mines in Western Australia, in response to unprecedented global demand for its lithium products. Management announced the Wodgina Train restart will yield first production in May; Train 2 will restart in July; and Train 3 is under assessment, as is a possible Train 4 in late 2022. The company will also upgrade Mt Marion spodumene processing facilities to increase output at a cost of -$120m.

Continuing the theme, Pilbara Minerals and Allkem placed second and third on the table for the largest percentage increase in forecast earnings by brokers.

Following Allkem’s strategy day, Macquarie pointed to a material increase in the optionality at the flagship brine-based Olaroz Lithium Facility in Argentina after an upgrade to resources, and highlighted targeted volumes at the Sal de Vida project in Brazil have been both increased and brought forward. Realised spodumene and carbonate prices were also better than UBS had expected.

Top spot on the table for earnings upgrades last week went to Karoon Energy. Morgans likes the potential move to acquire a 50% stake in the Atlanta field, an existing oil field in Brazil that has growth options. Similar to the company's existing Bauna field, Atlanta is located in the Santos Basin. Such an acquisition had been previously flagged by management, noted Macquarie, and the price paid, when disclosed, is considered the key.

Finally, Alumina Ltd also featured in the same earnings table after Ord Minnett increased its 2023 price forecast for aluminium and alumina by around 20% in reaction to rising metal prices from the Russia/Ukraine conflict. Longer term forecast prices were also lifted by 19% for aluminium and 23% for alumina.

Total Buy recommendations take up 59.15% of the total, versus 34.92% on Neutral/Hold, while Sell ratings account for the remaining 5.93%.

Upgrade

ABACUS PROPERTY GROUP ((ABP)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/0

Following Abacus Property's mid-March capital raising shares have underperformed to the extent they are now trading at a -24% discount to peers, according to Macquarie. The rating is lifted to Outperform from Neutral.

After the raising and the sale of 464 St Kilda Rd, the broker is more comfortable with near-term funding capacity. A continuation of the strong performance in self storage is seen as key. The target rises by 1% to $3.65.

AGL ENERGY LIMITED ((AGL)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0

Morgans expects wholesale market conditions for electricity and gas to result in strong earnings for AGL Energy in FY24-25, and upgrades its rating to Add from Hold. The target price rises to $8.83 from $7.24.

Electricity prices are currently rallying and winter futures prices are also rising given tight conditions in the spot coal market, explains the analyst. Meanwhile, domestic gas prices are also starting to rally with Victorian 2023 gas futures lifting.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 4/2/0

Following an encouraging, though in-line trading update, Ord Minnett upgrades its rating for Domain Australia to Buy from Hold largely due to a recently weak share price. The target price of $4.80 is unchanged.

The analyst is cautious around aspects of both the Realbase acquisition and the company’s wider marketplace strategy. Realbase is the largest campaign management technology platform across Australasia.

The broker reminds investors the company's record of integrations points to the difficulty, and greater-than-expected expense, of stitching together ‘proptech’ businesses.

GOLD ROAD RESOURCES LIMITED ((GOR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/0

Gold Road has made a unanimously recommended all scrip offer for DGO Gold ((DGO)) valued at $299m. Comparing the miner's stakes in De Grey Mining ((DEG)), Dacian Gold ((DCN)) and Yandal Resources ((YRL)), Macquarie values DGO at $395m.

The offer thus represents a 10% premium on DGOs' last price but a -24% discount on net asset value as far as the broker is concerned.

Target rises to $1.80 from $1.70, upgrade to Outperform from Neutral.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/4/0

Iluka Resources has chosen to approve the Eneabba rare earth element refinery, in what Credit Suisse has described as a high-risk option given experience in the separation of rare earth elements is scarce outside of China.

Refinery capacity will exceed Eneabba's requirements, and while the company hopes to treat third party concentrate the broker sees approval as a nod to the Wimmera resource. A $1,250m loan from the Australian government will facilitate the refinery. 

Credit Suisse commends the company for aiming high, noting optimistic modeling could offer a higher valuation. The rating is upgraded to Neutral from Underperform and the target price increases to $13.00 from $9.00.

KELSIAN GROUP LIMITED ((KLS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/0

Macquarie likes Kelsian Group's exposure to defensive transportation contracts (with sovereigns or established corporates), that include a hedge against inflation and fuel prices. The rating is increased to Outperform from Neutral, while the target rises to $8 from $6.90.

It is contract indexation and structure that provide the hedge against inflation and increases in other cost items, explains the analyst. It's also expected the Marine & Tourism space will approach pre-covid levels over 2022.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Hold from Sell by Ord Minnett .B/H/S: 4/1/0

Ord Minnett has raised its price forecast for iron ore by 22% to US$139/t in 2022 and by 14% to US$115/t in 2023. Strong steel output from China and lackluster supply from the iron ore majors in Australia and Brazil due to weather, covid and labour costs contributed.

Along with iron ore, the broker is very positive on the lithium outlook and also notes higher prices for base metals and coal from supply disruptions from the Russia/Ukraine conflict.

Ord Minnett raises its rating for Mineral Resources to Hold from Sell and lifts its price target to $59 from $45.

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

Ord Minnett is very positive on the lithium outlook and doubles its prior 2023 price forecast for spodumene to US$5,000/t, while hydroxide and carbonate estimated have lifted 50% and 60%, respectively. Meanwhile, the long term forecast rises by 18%.

The broker lifts its rating for Pilbara Minerals to Buy from Hold and raises its target price to $4.50 from $2.90.

WESTERN AREAS LIMITED ((WSA)) Upgrade to Add from Hold by Morgans .B/H/S: 1/2/1

Western Areas has requested a trading halt while it considers the draft Independent Expert Report on IGO's ((IGO)) takeover proposal.

Morgans says IGO believes the Western Areas Board intends to terminate the acquisition on the basis of the report.

Morgans has been expecting the strong nickel price could elicit a higher bid from IGO, but management has stressed that the current nickel price does not match its long-term view.

While the broker spies potential short-term weakness as funds sell in response to the news, Morgans has revised its nickel forecasts upward and increases its target price to $4.45 from $3.29 accordingly, and upgrades to Add from Hold.

The broker believes the next most likely acquisition in the nickel arena would be from a potential combination of Western Areas and Panoramic Resources ((PAN)).

Downgrade

A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Sell from Buy by Citi .B/H/S: 1/2/2

Given rising covid cases in China, Citi has reduced its forecasts for a2 Milk Co. A spike in omicron cases has resulted in a lockdown of key port city Shenzhen, delaying deliveries to customers. 

Coupled with falling cross border e-commerce channel prices, covid impacts have driven the broker to reduce net profit forecasts -4-5% through to FY24. 

The rating is downgraded to Sell from Buy and the target price decreases to $4.80 from $7.02.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/2/0

Ord Minnett sees Bank of Queensland's recent net interest margin (NIM) outperformance potentially reversing and lowers its rating to Hold from Accumulate, while the target falls to $8.90 from $9.80.

The broker attributes the potential reversal partly to a greater reliance upon term deposits (spreads are worsening). Additionally, 78% of the bank's lending is exposed to mortgages, which is currently considered a highly competitive space.

NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/0

Given a rebound in markets since the first half result, with the ASX-300 up 3%, as well as heightened volatility caused by European geopolitical tensions, rising rates, and the threat of rising covid cases, Citi adjusts forecasts for domestic small cap wealth platforms. 

Hub24's flow forecast declines to $14.3bn from a previous $14.8bn, driving a -1% decline to the full year net profit forecast. 

The rating is downgraded to Neutral from Buy and the target price decreases to $15.20 from $15.25.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/0

Morgans lowers its rating for Origin Energy to Hold from Add due to the rising potential negative exposure in the electricity market and after the share price moved past the broker's target price.

The Eraring plant is important for management to manage its average pool price exposure, according to the analyst. Should there be a need to buy financial contracts to manage this physical exposure, earnings this half and next financial year could be suppressed.

The target price falls to $6.42 from $6.44.

PENDAL GROUP LIMITED ((PDL)) Downgrade to Hold from Add by Morgans .B/H/S: 5/1/0

Morgans sees merit in the non-binding indicative merger offer from Perpetual Limited ((PPT)) at $6.23/share. Benefits are expected from significant cost synergies and the ability to leverage scale in offshore markets.

The broker believes there is potential for the offer price to be improved though downgrades its rating to Hold from Add. Should the merger lapse, there is considered to be better risk/reward elsewhere in the sector. The $5.65 target price is maintained.

SIMS LIMITED ((SGM)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/0

Sims Metal has signaled it is on track to reach its FY25 targets despite volatile scrap markets and Citi raises earnings estimates accordingly.

Citi expects Sims Metal will continue to benefit from structural decarbonisation tailwinds, including growing demand for recycled scrap and rising landfill costs (rising at 10% to 15% a year).

Sims Lifestyle Services plans to become a one-stop shop as a secure global fulfillment enterprise that helps customers achieve their sustainability goals. Citi says Enterprise data storage is expected to growth 250% over five year.

The broker notes Sims' earnings are linked to sales volumes, margins and operating costs and that EBIT margins are at cyclical highs and absolute margins are increasing. The company expects margins will continue to rise as demand for nonferrous product grows.

Citi raises its target price to $21.60 from $19.50 but downgrades to Neutral from Buy, noting the 70% run in the share price over the past year.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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