Weekly Ratings, Targets, Forecast Changes – 10-02-23

This story features 3P LEARNING LIMITED, and other companies. For more info SHARE ANALYSIS: 3PL

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 February 6 to Friday February 10, 2023
Total Upgrades: 11
Total Downgrades: 22
Net Ratings Breakdown: Buy 52.81%; Hold 36.69%; Sell 10.49%

The February reporting season has begun in earnest. For the week ending Friday the 10th there were eleven upgrades and twenty-two downgrades for ASX-listed companies covered by brokers in the FNArena database. 

The rating for ARB Corp was downgraded by two separate brokers after a weaker-than-expected trading update showing a -5% year-on-year decline in sales for the first half.

Macquarie explained margins were hit by both lower sales volumes and cost inflation, though this pressure is now easing and the order book remains strong and in line with levels throughout 2022. 

The broker lowered its rating to Neutral from Outperform on recent share price strength and raised its target to $33 from $30.

Citi also lowered its rating to Neutral from Buy and its target to $31.79 from $39.25, after reducing FY23-FY25 net profit forecasts.

While new car sales growth continued in January, this broker pointed out momentum looks to have slowed across the key categories of ARB Corp's business. 

Boral received the only material (and positive) change in average target price last week. First half earnings beat the consensus forecast by 19%, while FY23 guidance implied 5% upside to consensus.

The share price initially surged after the result though retraced most of those gains by week’s end. Brokers were cautious on pricing and cost management, with labour costs posing the biggest headwind. See https://www.fnarena.com/index.php/2023/02/09/boral-shares-surge-brokers-remain-cautious/ for a summary of all broker opinions.

Boral also appeared fourth on the table below for the largest percentage increase in forecast earnings last week.

Liontown Resources headed up that table, helped along by the addition of a new broker in the FNArena database after UBS initiated coverage with a Buy rating and $1.85 target.

Outperform-rated Macquarie (target $2.60) also refreshed its research last week, as open pit mining has recently commenced at the Kathleen Valley project, with first production expected by mid-2024.

Elsewhere, the company is advancing its direct shipping ore opportunity and preparing samples for customers. The broker noted earnings from this source are not included in its base case and offer upside to its valuation. 

Macquarie Group was next after releasing its nine-month performance for FY23 to-date, which has already topped the record profit in the same period last year, but brokers debate whether FY24 might be a different story. For further details please refer to https://www.fnarena.com/index.php/2023/02/08/can-macquarie-keep-it-up/

Brokers also increased profit forecasts for Sims prior to first half results.

Credit Suisse raised its second half earnings forecast by 93% to $121m, which compares to the consensus estimate of $107m.

After taking into account the recent result of overseas peer Steel Dynamics, the broker also reduced its forecast second half US volume decline to -5% from -10%. The target price was increased to $14.30 from $12.20 though ongoing volume weakness will slow any margin recovery and a Neutral rating was kept.

Underperform-rated Macquarie also raised its target to $12.75 from $9.60 on higher scrap prices, which is still way below the current share price of $14.52.

This broker expects earnings pressure from lower volumes, due to weaker economic activity, and lower trading margins, due to competition.

On the flipside, Healius was atop the table for the largest percentage decrease in broker earnings forecasts last week.

Pre-released unaudited first half results missed against consensus forecasts for revenue and earnings (EBIT) by-3% and -30%, respectively. Morgan Stanley (Underweight from Equal-weight) noted covid testing continues to decline, while the Pathology base business is being impacted by staff and GP shortages. 

On the other hand, Add-rated Morgans felt industry volumes are slowly reverting back to normal and costs easing, as the company transitions from covid testing to business-as-usual diagnostics. Macquarie (Outperform) also expects margin support via the company's Sustainable Improvement Program.

Taking a longer-term view, Ord Minnett updated its rating for Healius to Accumulate from Hold. The group earnings margin is expected to expand to 13% by fiscal 2027 from the 8% prior to the pandemic in FY19. The strategy of selling medical centres and day hospitals to invest in infrastructure is also considered sound.

Next on the table was Insurance Australia Group. UBS was disappointed, but not altogether surprised by an update on first half net profit which missed consensus expectations by -22%, largely on a weak insurance margin of 8.5%. 

Despite management’s heavily reduced full year margin guidance, the analysts still found the new level overly optimistic. 

Broker earnings forecasts also fell for both Transurban Group and Alliance Aviation Services last week as both companies released first half results. For reasons underlying these forecast changes for both companies (and others) please check out  https://www.fnarena.com/index.php/reporting_season/

Total Buy recommendations comprise 52.81% of the total, versus 36.69% on Neutral/Hold, while Sell ratings account for the remaining 10.49%.

Upgrade

3P LEARNING LIMITED ((3PL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/0/0

Morgan Stanley reassesses software stocks under its coverage with a renewed focus on predictability of earnings, cash generation, defensiveness of demand and end market exposures.

The analysts higlight 3P Learning's exposure to the economically resilient education market and expect low volatility in end demand. 

The broker also likes the company's education exposure to not-for-profit B2B customers and a consumer product targeting parents who rate kids education highly.

The rating is raised to Overweight from Equal-weight, while the target is increased to $1.60 from $1.40. Industry view: In-Line.

APM HUMAN SERVICES INTERNATIONAL LIMITED ((APM)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/0/0

Ord Minnett raises APM Human Services International's target price to Accumulate from Hold after the company's recent share price retreat.

Target price is steady at $2.80.

ARENA REIT ((ARF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/0

Arena REIT's first half was in line with Macquarie and FY guidance is reaffirmed.

The ACCC has launched an inquiry into childcare pricing, which may lead to limitations and downside catalysts as the year progresses, but the broker is comfortable with the REIT's growth outlook and returns from developments should increase from here.

Given a defensive balance sheet, a solid earnings growth outlook and resilient income, Macquarie upgrades to Outperform from Neutral.

Target rises to $4.05 from $3.94.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 5/1/1

Mitsui and Beach Energy have appointed Webuild to complete construction of the Waitsia gas plant subject to finalisation of the Clough administration process.

The previously unquantified risks to Waitsia timing and cost arising from the Clough collapse had been a key area of potential downside for Beach, Macquarie notes.

With Webuild having earlier appeared out of the Clough process, securing a deal which sees both cost and timing delays less than the broker had anticipated is seen a key positive.

The resultant reduction in risk leads to an upgrade to Neutral from Outperform. Target rises to $1.50 from $1.45.

BWP TRUST ((BWP)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/1/3

Ord Minnett raises its rating for BWP Trust to Hold from Lighten on valuation, noting significant investor demand for warehouse properties and the likelihood of a gradual increase in distributions.

The broker doesn't refer to half year results released on February 8. 

The target of $3.60 is unchanged.

ENDEAVOUR GROUP LIMITED ((EDV)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/2/2

Following a -19% share price decline for Endeavour Group since its August peak, UBS has upgraded its rating on the stock finding the regulatory risk is now better reflected in the valuation. 

With regulatory risk to gaming rising, UBS estimates gaming represents 70% of Endeavour Group's hotel earnings and 30% of group earnings.

The broker does point out that New South Wales and Tasmania, where risk is highest, represent only 13-15% of the company's gaming revenue. 

The rating is upgraded to Neutral from Sell and target price of $6.75 is retained.

See also EDV downgrade.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/1

Reflecting on Flight Centre Travel's UK acquisition and subsequent equity raise, Macquarie suggests Scott Dunn complements the company’s Leisure business.

Meanwhile, the trading update and guidance were ahead of the broker, underpinned by strong momentum and market share gains in the Corporate business.

More broadly, economic and consumer data have held up better than feared against an aggressive rate rising cycle that could create further upside risk to forecasts if the trend continues.

Target rises to $20.75 from $17.35. Upgrade to Outperform from Neutral.

HEALIUS LIMITED ((HLS)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/1/2

Ord Minnett upgrades its rating for Healius to Accumulate from Hold on valuation and retains its $3.55 target price. No changes are made to earnings forecasts.

The analyst still expects the group earnings (EBIT) margin will expand to 13% by fiscal 2027 from the 8% prior to the pandemic in FY19. The strategy of selling medical centres and day hospitals to invest in infrastructure is considered sound.

See also HLS downgrade.

JB HI-FI LIMITED ((JBH)) Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 2/3/1

Ord Minnett has upgraded JB Hi-Fi to Lighten from Sell after the company's recent share-price retreat.

Target price is steady at $35.50.

MYER HOLDINGS LIMITED ((MYR)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/1/0

Ord Minnett upgrades its rating for Myer to Hold from Lighten on valuation. The target price of 75c is unchanged.

In general commentary, the broker notes the company is targeting greater cost efficiencies, productivity gains and investments in the online space to drive sales and profitability.

REA GROUP LIMITED ((REA)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/1

Citi upgraded REA Group to Buy from Neutral with a price target of $144.

Downgrade

AMCOR PLC ((AMC)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/6/1

On closer examination of Amcor's December half result, Morgan Stanley downgrades its rating to Underweight from Equal Weight and cuts its target price to $15.50 from $17, observing guidance, while confirmed, was cautious.

All up, the broker spies volume softness in the near term and growth headwinds in FY23 and FY24, and expects Amcor is likely to be an underperformer should the market switch to risk-on and growth stocks.

Otherwise the broker considers Amcor's result to be in line, despite some deterioration in volume. Increased caution on the demand environment by the company was noted.

First half earnings (EBIT) were a 1% beat versus the broker's forecast and in-line with consensus.

Industry view: In Line.

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

While new car sales growth continued in January, Citi points out momentum looks to have slowed across key categories to ARB Corp's business. 

A weaker than expected update from ARB Corp, with profitability impacted by elevated input and freight costs inflation, has driven Citi to lower its full year net profit forecast -6%, and -1% and -2% respectively in FY24 and FY25. 

The target price is downgraded to Neutral from Buy and the target price decreases to $31.79 from $39.25.

A trading update from ARB Corp showed sales down -5% year on year in the first half but an improvement on the -10% drop in the first quarter, and on Macquarie's forecast. Margins were hit by lower sales volumes and cost inflation, but pressures are now easing.

The order book remains strong and is in line with order levels throughout 2022.

Volatility in operating margins since FY20, and where margins rebase to, reduce earnings visibility, Macquarie suggests. Following the recent rally, ARB’s share price is around the broker's valuation

Downgrade to Neutral from Outperform. Target rises to $33 from $30.

ALUMINA LIMITED ((AWC)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 2/0/3

Ord Minnett has cut Alumina Ltd to Sell from Lighten, after the broker's recent switch to white-labelling Morningstar research.

The broker says that while Alumina's sole asset (Alcoa World Alumina and Chemicals) enjoys relatively low operating costs to peers, the cost curve is fairly flat and solid competition is emerging from China.

Target price is steady at $1.20.

CREDIT CORP GROUP LIMITED ((CCP)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/1/0

In the wake of Credit Corp 's result, Macquarie has reviewed its US purchased debt ledger expectations, drawing the following conclusions.

The near-term performance for the company's Consumer Lending segment is set to drive second half growth. The US PDL segment requires performance improvement over the medium-term to achieve target performance metrics.

The A&NZ PDL segment is expected to be a drag until supply of PDL books improves.

Downgrade to Neutral from Outperform. Target falls to $20.70 from $24.90.

CHARTER HALL GROUP ((CHC)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/2/0

Ord Minnett downgrades Charter Hall to Hold from Buy, on valuation.

The broker appreciates the company's attractive institutional register and believes there is plenty of petrol left in the tank.

Target price rises to $15.85 from $15.50.

CENTURIA INDUSTRIAL REIT ((CIP)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/3/0

Ord Minnett downgrades Centuria Industrial REIT's rating to Lighten from Hold on valution.

The broker observes the REIT is still benefiting from onshoring of supply chains and e-commerce growth; notes tenancy demand is solid (the broker expects average lease growth of 2.8% a year); and considers the REIT's weighted average lease profile to be attractive.

On the downside, industrial yields are depressed and the broker observes the supply lag will eventually evaporate.

Then there's fee leakage and potential conflicts of interest arising from the REIT's external management structure to consider, posits the broker.

Target price is $3.

COCHLEAR LIMITED ((COH)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/2

Ord Minnett downgrades Cochlear to Lighten from Hold, following share price strength.

The broker believes the move from single to bilateral implants to be largely exhausted (70% of developed world children now have bilateral implants), and the broker expects market growth to eventually slow to the birth rate.

The company is switching its focus to the adult market but the broker says this will come at a cost to margins.

The broker does spy some potential in emerging markets. Target price falls to $193 from $217.00.

DAMSTRA HOLDINGS LIMITED ((DTC)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/0/1

Morgan Stanley reassesses software stocks under its coverage with a renewed focus on predictability of earnings, cash generation, defensiveness of demand and end market exposures.

The analysts note sales at Damstra Holdings are historically unpredictable as they are exposed to end markets that include construction and mining, where demand is often subject to variable capex budgets.

The broker also points to past project exposures that suffered volatility from single customer events and also highlights Damstra's leverage to lumpy hardware sales.

The rating is lowered to Underweight from Equal-weight and the target is reduced to 9c from 22c. Industry view: In-Line.

ENDEAVOUR GROUP LIMITED ((EDV)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/2

Due to valuation, Ord Minnett lowers its rating for Endeavour Group to Lighten from Hold and retains its $6.40 target price.

The broker's switch to Morningstar from JP Morgan for its whitelabeled research means the target in the FNArena database falls to $6.40 from $8.00 in a one-off adjustment.

See also EDV upgrade.

GOODMAN GROUP ((GMG)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 5/0/0

Ord Minnett downgrades Goodman Group to Lighten from Hold after the company's share price broke support.

The broker admires the company's swiftly growing pipeline as supply-chain transformation continues but expects rising interest rates will eventually suppress development, with most of the slump expected to be felt in FY24.

The broker also spies tighter margins on future developments as construction costs and purchase costs rise.

Ord Minnett expects assets under management in long-term investment vehicles to grow but for performance fees to reduce (the reduction to be outpaced by base management and other fee revenue).

Target price falls to $18 from $20.50.

HEALIUS LIMITED ((HLS)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 3/1/2

Preliminary 1H results for Healius revealed misses against consensus forecasts for revenue and earnings (EBIT) of -3% and -30%, respectively.

Morgan Stanley notes covid testing continues to decline, while pressure on the Pathology base business is still evident from staff and GP shortages.

The Pathology earnings (EBITDA) margin fell to 21% from 29.2% in the 2H of FY22 and the analyst fails to see how the Sustainable Improvement Program can offset these margin pressures.

The rating is downgraded to Underweight from Equal-weight. The target falls to $2.65 from $3.00. Equal-weight. Industry view In-Line.

See also HLS upgrade.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/1

After Insurance Australia Group released 1H results, which were a -20% miss on profit versus the consensus forecast and lowered FY23 guidance, Morgans reduces its FY23 EPS forecast by -33%.

The group also issued an update on the impact of the Auckland floods (a maximum event loss), which the analyst considers a worst case outcome. Additionally, motor claims inflation was worse than the market expected.

As the broker lowers its target to $5.04 from $5.57, the differential between the new target and the share price falls, leading to a ratings downgrade to Hold from Add.

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

While Credit Suisse raises its target for Iluka Resources to $10.90 from $10.00 on higher forecast prices for mineral sands, the rating is downgraded to Neutral from Outperform.

The broker believes dividends may be limited due to capex requirements for the company's transformational projects, while technical difficulties for those projects raises the risk of cost overruns.

Full year results are due on February 21.

MIRVAC GROUP ((MGR)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0

Despite a better-than-expected 1H result and retained FY23 guidance, Credit Suisse lowers its rating for Mirvac Group to Neutral from Outperform. Value exists for longer-term investors, though it's felt market sentiment will weigh in the short-term.

The group reported 1H EPS of 7.7cpu, ahead of the broker's forecast for 6.4cpu and the 7.1cpu expected by consensus.

Management retained FY23 guidance for EPS and DPS. An unexpected 2H boost for Commercial development earnings is countered by lower-than-expected Residential earnings, explains the analyst.

The target price falls to $2.42 from $2.45.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/5/0

Ord Minnett has downgraded Medibank Private to Hold from Accumulate, after shifting to whitelabelling of Morningstar research.

Target price rises to $3.20 from $3.

NICK SCALI LIMITED ((NCK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Nick Scali's first half profit was 5% ahead of Macquarie's expectations, featuring higher gross margn percentage and lower operating costs supported by Plush synergies. Delivery time for new customer orders recovered to 12-13 weeks.

Written sales orders were down -12.1% in January year on year for the Nick Scali brand, but up 22.9% on Jan 2020 (pre-covid). January is a large trading month for Nick Scali, the broker notes.

However Macquarie sees the current macro environment of higher interest rates and slowing housing turnover a headwind for furniture retailers, with the order bank support now largely unwound.

Downgrade to Neutral from Outperform, target falls to $11.30 from $12.50.

NEXTDC LIMITED ((NXT)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 5/2/0

Ord Minnett downgrades NextDC to Hold from Accumulate after the company's share price broke support.

The broker appreciates the company's positive exposure to industry megatrends such as the internet of things, AI, and cloud computing, but considers it vulnerable to rapidly growing competition.

Ord Minnett spies continued strong investment in data centre services but considers the company to be lacking an economic moat saying NextDC's network effect is deficient, it has no cost advantage and lacks switching costs.

Target price is steady at $11.

REGION GROUP ((RGN)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/4/1

Region Group's first half adjusted funds from operations were in line with Macquarie, with FY23 AFFO guidance upgraded some 1% driven on lower lease incentives.

Tenant performance was solid, with re-leasing spreads improving, however the broker expects the rising cost of debt will be major headwind into FY24.

Macquarie likes Region's solid defensive revenues and balance sheet, but the AFFO outlook is soft due to interest rate hedging concerns. On an elevated valuation, the broker downgrades to Underperform from Neutral. Target falls to $2.52 from $2.54.

TABCORP HOLDINGS LIMITED ((TAH)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0

Ahead of Tabcorp Holdings' result, Macquarie is cautious on Wagering & Media considering competition, including a recent new entrant, and the waiving of Sky Channel fees in pubs and clubs.

The broker now sees Tabcorp as fair value, balancing downside risks within wagering and uncertainties relating to licence renewals, against
the possible upside to earnings through leveling of the playing field within jurisdictions outside of Queensland.

To that end the broker pulls back to Neutral from Outperform, on an unchanged $1.10 target.

TRANSURBAN GROUP LIMITED ((TCL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/2/1

Transurban Group's December-half earnings missed consensus forecasts by -1.5% and nosed out Credit Suisse's forecasts by 1%. 

Management increased FY23 dividend guidance to 57c from 53c and said the company had a strong investment pipeline, expecting the M4-M8 Link and West Gate Tunnel Project to be cash-flow neutral in the early stages.

As a result, and after incorporating the 50% sale of A25, the broker cuts free cash flow and dividend forecasts

Transurban's CEO Scott Charlton has announced his intention to resign at the end of 2023 and the broker suspects it may be difficult to find a replacement that fits the company's brand.

Rating downgraded to Underperform from Neutral, the broker considering the shares to be fully valued. Target price rises to $12.30 from $12.

LOTTERY CORPORATION LIMITED ((TLC)) Downgrade to Lighten from Accumulate by Ord Minnett .B/H/S: 4/1/0

Ord Minnett has downgraded Lottery Corp to Lighten from Accumulate, after shifting to whitelabelling of Morningstar research.

Target price falls to $4.40 from $4.95.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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