Weekly Ratings, Targets, Forecast Changes – 02-06-23

This story features AURELIA METALS LIMITED, and other companies. For more info SHARE ANALYSIS: AMI

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

By Mark Woodruff

Guide:

The FNArena database tabulates the views of eight major Australian and international stockbrokers: Citi, Bell Potter, Macquarie, Morgan Stanley, Morgans, Ord Minnett, Shaw and Partners 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 May 29 to Friday June 2, 2023
Total Upgrades: 13
Total Downgrades: 5
Net Ratings Breakdown: Buy 58.22%; Hold 33.50%; Sell 8.28%

For the week ending Friday June 2 there were thirteen ratings upgrades and five downgrades to ASX-listed companies by brokers in the FNArena database.

While downgrades were fewer in number, the average percentage falls for both earnings forecasts and target prices were greater than percentage rises, as can be seen in the tables below.

Latitude Group received both the largest percentage reduction to average target price (nearly -15%) and forecast earnings after issuing lower FY23 guidance in the wake of its March cyber attack.

The incident has proven more costly than initially expected by Morgan Stanley, while the underlying business was also significantly impacted.

In the first half, costs of $7m are now expected for containment and remediation, while an additional provision for $46m of costs was also made. These figures don't include potential regulatory fines, class actions or insurance.

Cash net profit guidance of $15-25m for FY23 was materially below Citi's expectations, with the difference due to lower net interest margins and lower volumes, although it was difficult for the analyst to isolate the impact of the cyber incident from a worsening macroeconomic backdrop.

The new guidance implied to Macquarie a -40-50% reduction to its FY24-25 earnings estimates. Management flagged a first half dividend is unlikely.

IDP Education also suffered an around -15% reduction in average target price after three additional English proficiency tests were approved by the Canadian Government for the Student Direct Stream (SDS) visa class from this August. Previously, this stream was IDP's sole domain for its IELTS test.

When this change is combined with some recent signals of capacity pressures in major markets (Indian visa numbers to Canada; some UK visa rule changes), Morgans lowered its FY24 EPS forecast for the company by -8.7%.

This broker also noted around 45% of IDP’s test volumes in Canada are now open to competition from the first half of FY24, while Morgan Stanley’s lower volume forecasts assumed IELTS loses around -30% of volumes attributable to Canada SDS. 

Macquarie pointed out management had indicated in February that the Indian IELTS business was slower as Indian students had begun selecting Pearson because of the competitor's increased sales and marketing efforts. After also taking in to account the Canadian change, the broker decided to lower the company’s rating to Neutral from Outperform.

By contrast, Bell Potter noted its forecast English language testing volumes were already conservative, having factored-in lost IELTS market share for both India and Canada, and upgraded its rating for IDP Education to Buy from Hold, while also lowering its target to $27.40 from $30.00.

Nickel Industries received the second highest percentage reduction in average earnings forecasts.

In a review of its forecasts, unprompted by any company announcement, Bell Potter reduced its target to $1.73 from $1.87 after making allowances for higher input costs and lower price realisations.

The broker retained its Buy rating and its enthusiasm for the stock. The company is considered unique among ASX-listed producers because its business is dominated by the value of its downstream processing facilities, with multiple nickel product exposures and a strong growth outlook.

Nickel Industries offers exposure to low-cost nickel mining and production in Indonesia. Until the recent listing of two similar companies on the Indonesian stock exchange, the analyst noted the company’s worth was difficult to assess. Now, it’s felt the business represents a compelling value proposition.

Moving to the Gold sector, UBS noted interest rate hikes in the US may have finished. Although a June hike is still considered a risk, May could be the end, meaning in September the Federal Reserve may look to pivot and reduce rates, and gold could reach US$2,100/oz by year’s end.

Despite this positive outlook, the broker remained cautious on Northern Star Resources and lowered its earnings forecasts heading into June quarter production targets and upcoming news flow on the Kalgoorlie Consolidated Gold Mines (KCGM) mill optimisation study. 

However, the company’s valuation is no longer stretched, according to UBS, which upgraded its rating to Neutral from Sell last week.

Total Buy recommendations in the database comprise 58.22% of the total, versus 33.50% on Neutral/Hold, while Sell ratings account for the remaining 8.28%.

Upgrade

AURELIA METALS LIMITED ((AMI)) Upgrade to Speculative Buy from Hold by Ord Minnett .B/H/S: 2/0/0

Aurelia Metals has announced the Federation funding package which Ord Minnett assesses will be sufficient to fund the project, and assumes the new US$24m loan facility will remain undrawn.

The package largely addresses prior concerns regarding the terms at which it could be agreed. Trafigura is providing the debt financing and the terms do not appear onerous to the extent equity holders are barred from upside potential.

Ord Minnett upgrades to Speculative Buy from Hold, using the speculative qualifier given risks associated with the development and delivery of the project, while reducing the target to $0.18 from $0.25.

Ord Minnett is acting as joint lead manager and underwriter to the $40m equity raising which will close on June 28.

ASX LIMITED ((ASX)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/4/0

Ord Minnett transfers coverage of ASX to another analyst and raises the target to $75 from $66, upgrading to Accumulate from Hold. The broker notes ASX is a natural monopoly, providing essential infrastructure to Australia's capital markets.

The business is likely to remain well protected with a wide economic moat, despite a deteriorating regulatory environment.

Volatility is expected to increase the relative attractiveness of exchanges because of increased trading and clearing volumes, while the energy transition, the broker asserts, is also an under appreciated tailwind for ASX.

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/2

Bank of Queensland has entered into enforceable undertakings with both APRA and AUSTRAC to address risk management.

Given the additional oversight and sign-off required as well as improvement in systems, controls and governance, Macquarie asserts there is increased risk of additional costs as business complexity grows.

APRA has also applied a $50m capital charge for operational risk, effective immediately. Despite this, the broker notes the bank is well capitalised.

As the downside risks are now better reflected in the share price Macquarie upgrades to Neutral from Underperform and lowers the target to $5.70 from $6.15.

DE GREY MINING LIMITED ((DEG)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/0/0

UBS revisits its gold coverage. Following poor production performances, a preference is maintained for quality while expectations for the June quarter are conservative.

The broker is confident De Grey Mining's inventory will reach more than 10m ounces, with current resources standing at 10.6moz and 64% already in measured and indicated categories.

As the rate of material greenfield discoveries declines and portfolios struggle to replace reserves, UBS believes Mallina has significant strategic value. Rating is upgraded to Buy from Neutral and the target is steady at $1.80.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/0

In the wake of the FY23 result Fisher & Paykel Healthcare has reset margin expectations and Macquarie envisages scope for incremental upside. The gross profit margin had been under pressure from a range of cost factors but the company has guided for a100 basis points recovery in FY24.

The broker believes signals from new apps and device demand should be construed as a positive for the medium term outlook for the hospital division. Rating is upgraded to Outperform from Neutral and the target is lifted to NZ$28.09 from NZ$27.82.

IDP EDUCATION LIMITED ((IEL)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 3/2/0

Immigration, Refugees and Citizenship Canada (IRCC) has announced the approval of several other English language tests for the Student Direct Stream visa program starting in August. Previously, only IDP Education's IELTS was accepted.

Bell Potter has revised forecasts for this announcement, noting that the broker's English language testing volumes were already conservative, factoring in lost IELTS market share in both India and Canada.

IDP has stated that the IRCC’s decision is not expected to have a material impact on the company’s FY23 revenue or earnings so there is no change to the broker's forecast FY23 IELTS volumes.

Target falls to $27.40 from $30.00. On the stock's de-rating, upgrade to Buy from Hold.

See also IEL downgrade.

LIBERTY FINANCIAL GROUP LIMITED ((LFG)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

For non-bank financial institutions (NBFIs) and smaller players, higher deposit funding costs at the banks should correct an uneven playing field, suggests Citi.

While this may not result in a rebound for activity, the analysts believe it will end the de-rating of price earnings (PE) ratios for this group of companies.

The funding cost disadvantage had previously driven the PE discount to the majors to a record -45%, explains Citi.

The broker upgrades its rating for Liberty Financial to Buy from Neutral and increases its target to $4.15 from $3.95. No changes are made to forecasts.

NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/2

For the seventh time in around seven months, Morgans oscillates its rating between Hold and Buy for Nanosonics.

This time, the rating returns to Add from Hold as the share price has fallen back to around $5.00, which allows circa 10% upside to the broker's new target price of $5.49, up from $5.24.

No changes are made to Morgans forecasts though the analyst has increased confidence FY23 guidance will be comfortably achieved.

NORTHERN STAR RESOURCES LIMITED ((NST)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/2/0

UBS revisits its gold coverage. Following poor production performances a preference is maintained for quality while expectations for the June quarter are conservative.

The broker assesses Northern Star Resources will require a strong fourth quarter to reach FY23 guidance, which was maintained at 1.56-68m ounces at the March quarter, and hopes for an improved and undisrupted FY24 delivering 1.76moz.

Rating is upgraded to Neutral from Sell and the target is steady at $12.70.

PEPPER MONEY LIMITED ((PPM)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/1/0

For non-bank financial institutions (NBFIs) and smaller players, higher deposit funding costs at the banks should correct an uneven playing field, suggests Citi.

While this may not result in a rebound for activity, the analysts believe it will end the de-rating of price earnings ratios for this group of companies.

The funding cost disadvantage had previously driven the PE discount to the majors to a record -45%, explains Citi.

The broker upgrades its rating for Pepper Money to Buy from Neutral and increases its target to $1.90 from $1.50. No changes are made to forecasts.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/1

UBS revisits its gold coverage. Following poor production performances a preference is maintained for quality while expectations for the June quarter are conservative.

Regis Resources is expected to be challenged by costs at Duketon going forward and the broker forecasts AISC for the group staying above $1800/oz. This may pressure margins if gold prices were to push lower but for now the risk/reward is considered more attractive.

Rating is upgraded to Buy from Neutral and the target is steady at $2.35.

SUPPLY NETWORK LIMITED ((SNL)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 1/0/0

Market demand is robust and the outlook for Supply Network remains positive with strong activity in all regions, highlights Ord Minnett, following a trading update and upgraded FY23 guidance. The rating is upgraded to Buy from Accumulate.

An exceptionally strong 2H performance is expected by management, and the broker sees strong demand from commercial vehicle customers for parts. It's thought demand partly derives from ageing vehicle fleets and the increasing complexity of those vehicles.

Management guided to FY23 sales of $250m, 7% above the analyst's forecast, and noted growth “will remain above the long-term trend for at least the next year”.

The target rises to $15.40 from $12.90.

WAGNERS HOLDING CO. LIMITED ((WGN)) Upgrade to Speculative Buy from Hold by Morgans .B/H/S: 1/1/0

Morgans upgrades its rating for Wagners Holding Co to Speculative Buy from Hold and raises its target to 90c from 63c on an improving outlook through to FY24/25.

The broker believes recent price increases in SE QLD will hold due to a return of industry discipline. Management's increased focus on profitability and reduced capex plans are also expected to assist.

The main driver of the analyst's higher earnings forecasts is the outlook for the cement business. Rising cement volumes and prices are expected to drive margin expansion through the 2H of FY23 and FY24.

Downgrade

CHALLENGER LIMITED ((CGF)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/4/1

Challenger is diversifying its revenue stream and the 2023 investor briefing highlighted plans to improve distribution capabilities and expand the product range.

Ord Minnett considers the priorities sensible yet defensive, helping to alleviate competition particularly from providers of vanilla fixed-term annuities or term deposits.

The broker continues to envisage room for Challenger to expand both product sales and margins. Nevertheless, the consolidation among super funds has resulted in a smaller pool of institutional customers for retirement product providers.

Rating is downgraded to Hold from Accumulate and the target lowered to $7.30 from $7.90.

HASTINGS TECHNOLOGY METALS LIMITED ((HAS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Hastings Technology Metals will now develop Yangibana in two stages with the first intent on producing a rare earth concentrate from the mine. First production is targeted for early 2025.

The total capital cost for stage I and 2 has increased 40% from the previous estimate, to $948m. Incorporating higher costs translates to material reductions to Macquarie's earnings forecasts.

Forecast losses widen for FY23-25 while earnings fall -35-68% for FY26-30. The next catalyst is securing debt financing agreements for stage 1. Macquarie downgrades to Neutral from Outperform and reduces the target to $1.70 from $2.70.

IDP EDUCATION LIMITED ((IEL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/0

Macquarie notes when Australia initiated new ELT tests for migration study purposes this resulted in market share losses for IELTS and a similar outcome is expected now Canada has opened to competitors.

IDP Education indicated in February that the Indian IELTS business was slower as Indian students turned to selecting Pearson because of the competitor's increased sales and marketing efforts.

Macquarie reduces estimates for FY23 by -4% amid slightly softer IELTS volumes. Rating is downgraded to Neutral from Outperform. Target is reduced to $22 from $34.

See also IEL upgrade.

MICHAEL HILL INTERNATIONAL LIMITED ((MHJ)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/0

Following a greater than expected slowdown in sales, Citi lowers its rating for Michael Hill to Neutral from Buy. It's thought group sales have fallen from positive growth over January and February to at least mid-single digit declines since.

The broker reduces its FY23-25 EPS forecasts by -16-20% and its target falls to 91c from $1.28. Signs of a nadir for macroeconomic risks are required before the analyst becomes more positive.

MEGAPORT LIMITED ((MP1)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 5/1/0

Ord Minnett cuts the rating for Megaport to Accumulate from Buy as the stock has moved through the trigger level. Target is $13.

The broker expects the business to average more than 25% growth in the top-line over the next five years while continuing to narrow its losses, leading to break even by 2025.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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