Weekly Reports | Apr 26 2022
This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP
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: Tuesday April 19 to Friday April 22, 2022
Total Upgrades: 5
Total Downgrades: 8
Net Ratings Breakdown: Buy 59.45%; Hold 34.47%; Sell 6.08%
For the shortened week ending Friday April 22 there were five upgrades and eight downgrades to ASX-listed companies covered by brokers in the FNArena database.
After a period of outperformance by Evolution Mining against the broader Gold sector, Citi last week downgraded its rating to Neutral from Buy. The broker also lowered its production forecasts and dividend estimates following the company’s March quarter production report.
Likewise, Ord Minnett lowered its rating to Hold from Accumulate as March quarter numbers were adversely impacted by both weather and covid. Production estimates were lowered on a more conservative ramp-up for FY23 and the 12-month target price was lowered to $4.35 from $4.90.
Meanwhile, Zip Co received the only material (negative) percentage change in target price last week. Brokers reacted to a quarterly trading update though there appeared to be an element of catch-up, with the share price having already moved lower.
Morgans has concerns around the general BNPL space and downgraded its rating for the company to Hold from Add. It’s thought the most likely near-term positive catalyst, which is still several quarters away, would be an improvement in the company’s bad debt charge. The broker’s target price was slashed to $1.26 from $3.94. Ord Minnett also halved its target to $2.00 after noting the BNPL sector had been aggressively sold off, along with the broader Technology sector.
Zip Co added 900,000 customers in the US in the March quarter though use of the service per customer fell to 3.5x from 4.9x in the prior quarter, pointed out Macquarie. Rising bad debts are considered a major risk and the broker also lowered its target price to $1.05 from $1.85.
In terms of earnings forecasts, Santos received the largest percentage increase last week following its March quarter production report. Revenue was higher than Morgan Stanley expected due to better pricing, while production was a slight miss versus expectation.
Higher dividends and larger on-market share buybacks are likely to be driven by divestments, which should prove a major catalyst for the share price, according to the analyst. It’s estimated a sale of 51% of Alaska could generate more than US$1bn, 10% of PNG LNG has potential for US$2.5bn, while 30-40% of Dorado may bring in US$0.5bn. Ord Minnett agrees potential asset sales would be a share price catalyst.
According to Credit Suisse, capital management is also a potential upside catalyst for Whitehaven Coal, which came second on the table for percentage increase in forecast earnings last week. This was despite a March quarter trading update which fell a little short of the broker’s forecasts as covid, tight labour markets and wet weather took their toll.
Morgans felt sales for the quarter showed greater than expected resilience to the recent rains in NSW and raised its target price to $5.24 from $5.10. However, not all brokers agreed. Citi downgraded its rating to Neutral from Buy in the expectation that rising costs and a volatile FY22 coal price will conspire to cap further share price strength.
On the other side of the earnings ledger, Redbubble received the largest percentage downgrade to forecasts. UBS noted downside risk to FY23 consensus expectations for revenue and earnings following third quarter results. While the results showed only a slight miss on the broker's estimates, signs of a turning point for margins are yet to emerge.
Nonetheless, reiteration of FY22 guidance suggests to Morgan Stanley headwinds may have started to stabilise, and the prospect of capital management initiatives may provide a catalyst, given the company’s strong balance sheet.
Next up was Alumina Ltd, after AWAC partner Alcoa reported a fall in March quarter alumina earnings below Ord Minnett’s existing forecast.
While bauxite earnings were in line with the analyst’s forecast, earnings are expected to fall in the June quarter due to the suspension of sales to Russia. Meanwhile, Citi now expects margin pressure will remain prevalent throughout the remainder of 2022 due to elevated prices for energy and caustic soda. More positively, Morgan Stanley sees a silver lining in the potential for a higher alumina price.
Finally, Allkem released its March quarter activities report early last week, and as a result came third on the table for the largest percentage decline in forecast earnings. While costs were lower than forecast, production at the Olaroz project came in softer than Citi had estimated.
Nonetheless, Credit Suisse pointed out sales at the Mt Cattlin project were a 40% beat on the consensus forecast. The broker continues to expect spodumene and carbonate to demand US$35,000 per tonne in the June quarter as tightness continues in the lithium market. Further, there’s considered to be scope for a maiden dividend to be delivered in the next year.
Total Buy recommendations take up 59.45% of the total, versus 34.47% on Neutral/Hold, while Sell ratings account for the remaining 6.08%.
Upgrade
BHP GROUP LIMITED ((BHP)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/0
Big miners, BHP Group included, have been unable to meet expectations during the March quarter, which would have been disappointing under most alternative circumstances, suggest Citi analysts.
This time around, however, the broker suggests it is simply impossible to ignore the tsunami in cash flows producers such as BHP are enjoying.
Hence, despite operational disappointment, an upgrade to Buy from Neutral is now a fact. Price forecasts for iron ore have been upgraded to US$149 and US$110 per tonne respectively for this year and next, while for hard coking coal the new forecasts are US$365 and US$225 per tonne, respectively.
Price target lifts to $56 from $48.
DELOREAN CORPORATION LIMITED ((DEL)) Upgrade to Speculative Buy from Hold by Morgans .B/H/S: 1/0/0
Morgans upgrades its rating for Delorean Corp to Speculative Buy from Hold on a stronger outlook for growth and a stronger balance sheet, following a successful a $4.5m share placement.
The broker's target rises by 5% to $0.215 as domestic energy prices have been rising on higher fuel costs. It's thought wholesale electricity pricing should assist the economics for grid exports relating to the company's project pipeline.
RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/1
A consortium led by investment group KKR has made a bid for Ramsay Health Care at $88 per share. Macquarie notes the bid price is less dividends, and with an expected special dividend of $7.91 and an interim dividend of $0.49 shareholders could expect to receive $79.61 per share.
Macquarie has previously noted upside value in Ramsay Health Care's onshore business, and the broker believes the bid highlights the domestic operations and property portfolio value, assuming an implied 12.6x earnings multiple for the Australian business.
The broker anticipates further upside to the company's share price, and notes deal completion is the key risk to its outlook.
The rating is upgraded to Outperform from Neutral and the target price increases to $88.00 from $69.40.
See also RHC downgrade.
RIO TINTO LIMITED ((RIO)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/3/0
Rio Tinto's March-quarter production and trading update missed Citi and consensus forecasts but management reiterated guidance on both fronts.
While Citi eases iron-ore production forecasts to the lower end of guidance, it sharply upgrades iron-ore price forecasts, which translates to a 2022/2023 earnings upgrade.
Citi upgrades to Buy from Neutral. Target price rises to $135 from $120.
WORLEY LIMITED ((WOR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/1
Macquarie expects Worley will benefit from the redeployment of Russian oil and gas to other regions as governments are imposing bans on Russian imports, as well as from the new energy transition.
With 45% of Worley's revenue currently from the Americas, Macquarie expects the US is likely to increase investment in oil, gas and renewable energy to improve energy self security. Contract wins and earnings delivery will confirm the broker's outlook.
Earnings per share forecasts increase 2%, 5%, 10% and 17% through to FY25. The rating is upgraded to Outperform from Neutral and the target price increases to $15.26 from $12.60.
Downgrade
AGL ENERGY LIMITED ((AGL)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/2/0
Ord Minnett estimates a -$43m reduction in FY22 net profit, following AGL Energy's announcement that Unit 2 at Loy Yang A Power Station has suffered an electrical fault and is now out of service. It's thought higher wholesale prices in Victoria could be an offset.
While the sharemarket has overreacted, in the broker's opinion, the company's rating is still lowered to Accumulate from Buy, while the target price slips to $9.30 from $9.40.
A management update on the financial impact is expected by the first week of May. Meanwhile, the broker notes the outage may last until 1 August.
CHALLENGER LIMITED ((CGF)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/5/1
The strong positive share price response to Challenger's quarterly update yesterday is deemed "overdone" by Citi analysts. They were not in the slightest surprised by the upgrade in guidance and the rise in gross sales.
Among the counter-arguments offered is that asset values in both Life and Funds Management are down and will likely create modest
headwinds moving forward.
Downgrade to Sell from Neutral. Target price drops to $6.90 from $7.
ENDEAVOUR GROUP LIMITED ((EDV)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/3/1
Retail liquor market share losses that were evident in Endeavour Group's first half have continued into the third quarter, with retail liquor volumes marginally below Credit Suisse's expectations for the period.
More positively, sales revenue from hotels increased 2.5% year-on-year as the post-covid recovery continues as expected. With sales revenue now -4% below the third quarter in FY19, Credit Suisse expects further upside is possible.
Finding Endeavour Group expensive compared to better value options on the market, Credit Suisse downgrades the rating to Underperform from Neutral and the target price decreases to $6.60 from $6.62.
EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/3
Evolution Mining's March quarter numbers were adversely impacted by weather and covid, Ord Minnett notes. While these can be looked past, Red Lake is unlikely to perform to the broker's original expectations in FY23 given performance to date.
The broker therefore reduces FY23 production estimates on a more conservative ramp-up, which drives its target down to $4.35 from $4.90.
The miner still provides liquid, high margin, diversified gold exposure, Ord Minnett suggests, but on relative valuation as well as Red Lake risk the broker downgrades to Hold from Accumulate.
Amongst multiple observations, Citi makes the point the March quarter production report suggests things are improving for Red Lake. This is important as the broker observes the share price has outperformed the broader sector of late.
To continue outperforming, Citi believes further improvement at Red Lake remains key. The EHM acquisition has been a great deal for the company, Citi adds.
Given lower production, Citi has reduced its own projections. Downgrade to Neutral from Buy. Price target remains at $4.60. Dividend estimates have been noticeably reduced.
RAMSAY HEALTH CARE LIMITED ((RHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/1
Ramsay Health Care has received a conditional non-binding indicative bid from a KKR-led consortium at $88 a share.
Citi says the bid exposes hidden asset value and appears to carry an option to pay out franking credits on top of the bid price.
Regardless of whether KKR proceeds after due diligence, Citi says the bid highlights the company's value and that private equity's flexibility should allow it to realise the value gap between Ramsay's underperforming share price and the ASX200 (-30% over five years).
The broker further notes the strategic hospital market position in Australia cannot be replicated, the business being built over a 50-year timeframe.
Rating is downgraded to Neutral from Buy. Target price rises to $88 from $74.00.
See also RHC upgrade.
WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/1/0
Whitehaven Coal's March-quarter production met Citi's forecasts but the broker expects rising costs and a volatile FY22 coal price will conspire to cap further price strength.
Management reiterated production and cost guidance and shifted guidance to the top end of the range thanks to strong diesel prices and industry demurrage.
The broker has a new price deck, expecting spot prices to be volatile in the short term and lowers 2022 thermal coal forecasts -12% and raises 2023/2024 prices 12% from a low base.
FY22 EPS forecasts fall -16% accordingly.
Target price rises to $4.90 from $4.20. Rating is downgraded to Neutral from Buy following recent share price strength.
ZIP CO LIMITED ((Z1P)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/2
Morgans has concerns around the general BNPL space and downgrades its rating for Zip Co to Hold from Add. A 3Q update also prompted a reduction in the broker's forecast EPS for FY22 and FY23 by -9% and -13%, on lower near term revenue/earnings assumptions.
The target price is slashed to $1.26 from $3.94. The most likely near-term catalyst of an improvement in the bad debt charge is still considered to be a couple of quarters away, according to the analyst.
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED
For more info SHARE ANALYSIS: DEL - DELOREAN CORPORATION LIMITED
For more info SHARE ANALYSIS: EDV - ENDEAVOUR GROUP LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED
For more info SHARE ANALYSIS: WOR - WORLEY LIMITED