Weekly Ratings, Targets, Forecast Changes – 09-06-23

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This story features A2 MILK COMPANY LIMITED, and other companies.
For more info SHARE ANALYSIS: A2M
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

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 June 5 to Friday June 9, 2023
Total Upgrades: 13
Total Downgrades: 6
Net Ratings Breakdown: Buy 58.35%; Hold 33.59%; Sell 8.06%

For the week ending Friday June 9 there were thirteen ratings upgrades and six downgrades to ASX-listed companies by brokers in the FNArena database.

Sigma Healthcare received rating upgrades from two separate brokers after securing the Chemist Warehouse wholesale pharmaceuticals contract away from rival Ebos Group.

The contract is worth $2bn annually and adds to Sigma’s existing Chemist Warehouse contract of $1bn.

Sigma was already the incumbent supplier for fast-moving-consumer-goods (FMCG) products, which currently represent around 29% of group net sales revenue, according to Shaw and Partners, which upgraded its rating to Buy from Hold.

The new contract represents an important milestone for the business, suggests the analyst, as it optimises capacity utilisation.

Sigma has bought some certainty with the new contract, according to Morgan Stanley, by paying Chemist Warehouse with around -$80m of shares and providing a right to acquire "certain assets" for $24.5m.

This broker upgraded its rating to Equal-weight from Underweight and raised its FY24 and FY25 EPS estimates materially, given Sigma’s large fixed-cost leverage.

Four of the five covering brokers in the FNArena database issued updated research last week on Sigma, and the average target price rose by 34% to 76c.

The second largest target price increase in the table below for Aussie Broadband should be ignored on a data anomaly, though Shaw and Partners did refresh research last week. The analysts remained bullish on growth prospects and suggested the recent softness in share price presents a buying opportunity.

On the flipside, Baby Bunting received the greatest percentage downgrade (-43%) to average target price by brokers last week, after FY23 profit guidance fell to $13.5-15m from $21.5-24m.

Morgan Stanley was surprised by the extent of the guidance downgrade, which implied trading has deteriorated materially in the last few months. It’s felt cyclical headwinds will persist into FY24 and the rating was downgraded to Equal-weight from Overweight. 

Citi was also concerned about the outlook for FY24, as the decline in sales comes at a time when costs are intensifying, and downgraded its rating to Sell from Neutral. The question was raised whether the company’s products still fit into the category of non-discretionary items.

Fellow retailer Adairs also had a rugged week after downgrading FY23 sales and earnings guidance by -4 and -15%, respectively. As a result, the company’s average broker target fell by -35%.

UBS downgraded its rating to Neutral from Buy and noted the core drivers of the downgrades were subdued trading for the core Adairs brand and the Focus brand. A slowdown for the latter surprised the broker given recent upbeat commentary from management about the outlook and the potential for Focus to be a "trade-down" beneficiary.

Lower traffic in stores and online are evidence of declining household goods expenditure resulting from rising interest rates and higher cost of living, noted Ord Minnett.

Adairs received the third largest percentage fall in average earnings forecast (not in the table below due to a data glitch) behind Baby Bunting (-35%) and the -57% fall for Copper Energy.

Cooper Energy also appeared second on the negative change to average target price table below after lower production and earnings guidance.

Morgans wasn’t overly surprised by this outcome given the Orbost Gas Processing Plant continues to deliver a mixed performance and the Athena Gas Plant experienced an outage in May.

The analyst was understanding of the increased abandonment spend budget for the Basker Manta Gummy (BMG) subsea facilities, given a change in scope as well as cost headwinds.

Shares are trading well below any bearish case Morgans can mount and the broker’s Add rating was maintained, while its target fell to 23c from 26c.

Earnings forecasts also fell for Appen due to lower estimates by Citi, which took into account last month’s first half trading update and FY23 guidance showing ongoing weakness in project spend. 

This weakness was partially offset by growth in the broker’s FY24 and FY25 revenue expectations from large-language model (LLM) work.

After Citi changed its valuation methodology, its target rose to $2.40 from $1.94. Based on Appen’s cost-out program as well as operating leverage from top-line growth, the earnings (EBITDA) margin is expected to rise to 12% in the second half of FY25 from -11% in the first half of FY23.

Origin Energy received the only material upgrade to average earnings forecast after Macquarie played catch-up by updating earnings forecasts a month after management sharply raised guidance, largely due to a strong performance from Octopus Energy.

Apart from updating earnings estimates, the broker noted the Brookfield/MidOcean consortium has filed an application with the ACCC for authorisation of its takeover of Origin.

By seeking authorisation, Brookfield can claim its takeover will help accelerate Australia’s clean energy transition and create public benefits that easily outweigh any competition concerns.

Macquarie pointed out the ACCC must decide within 90 days and a favourable ruling may accelerate the timing of the transaction.

Total Buy recommendations in the database comprise 58.35% of the total, versus 33.59% on Neutral/Hold, while Sell ratings account for the remaining 8.06%.

Upgrade

A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/3/1

Citi upgrades its rating for a2 Milk Co to Neutral from Sell due to encouraging China momentum and the increasing likelihood of Chinese State Administration for Market Renewal (SAMR) approval over the next few months.

Longer-term concerns around birth rate and margin expectations prevents the broker from assigning a Buy rating.

While Citi lowers its FY23-25 forecasts on lower management guidance for revenue and weaker Australian sales, the target rises to $5.35 from $4.70 on the potential SAMR outcome.

AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/2/1

As a result of the PSE4 regulatory pricing outcome, Auckland International Airport's revenue forecasts are significantly ahead of Citi's expectations.

While the airport expects substantial capital expenditure over the next decade, a commitment to the current credit rating should mean gearing remains "comfortable", the broker adds.

Rating is upgraded to Neutral from Sell and the target increases to NZ$8.78 from NZ$7.82.

ARDENT LEISURE GROUP LIMITED ((ALG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/0/0

As the share price of Ardent Leisure has moved through the trigger level, Ord Minnett upgrades to Accumulate from Hold. Target is $0.60.

AUB GROUP LIMITED ((AUB)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/0/0

As the share price of AUB Group has moved through the trigger level Ord Minnett upgrades to Accumulate from Hold. Target is $29.

BORAL LIMITED ((BLD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/2

Boral has upgraded second half guidance, expecting EBIT will exceed the first half. Macquarie finds the rate of change in the business tangible, with management intent on delivering double-digit EBIT margins.

While market conditions could hamper the speed at which this occurs, the broker assesses the potential to unlock profitability is meaningful. Operating improvements appear to be gaining pace with a focus on commercial outcomes.

The completion of the chlorine bypass upgrade at Berrima will enable 60% alternative fuel use in time. Macquarie upgrades to Outperform from Neutral and raises the target to $4.50 from $4.05.

EBOS GROUP LIMITED ((EBO)) Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 3/1/0

As the share price of Ebos Group has moved through the trigger level Ord Minnett upgrades to Lighten from Sell. Target is $29.

FORTESCUE METALS GROUP LIMITED ((FMG)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/1/5

On hope for China stimulus, soon, Citi has upgraded Fortescue Metals to Neutral from Sell.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/3/0

As the share price has moved through the trigger level Ord Minnett upgrades Fisher & Paykel Healthcare to Hold from Lighten. Target is $20.50.

NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/0

The share price of New Hope has moved through the trigger level and Ord Minnett upgrades to Accumulate from Hold. Target is $6.10.

NRW HOLDINGS LIMITED ((NWH)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/0

Citi believes the around -20% selloff in NRW Holdings shares since interim results in February is overdone as the company currently has a robust order book based on announced contract wins.

Moreover, the analysts expect major contract award momentum could begin and accelerate in the near term.

The broker points out customers have been increasingly keen to secure capacity and have been awarding (unannounced) small work packages. Larger contracts are expected to follow.

The rating is upgraded to Buy from Neutral, while the target rises to $2.90 from $2.80.

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

On hope for China stimulus, soon, Citi has upgraded Rio Tinto to Buy from Neutral.

SIGMA HEALTHCARE LIMITED ((SIG)) Upgrade to Buy from Hold by Shaw and Partners and Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/3/1

Sigma Healthcare has been awarded a $3bn supply contract with Chemist Warehouse commencing July 1 2024, replacing the current contract worth around $1.1bn.

Sigma Healthcare is the incumbent supplier for fast-moving-consumer-goods (FMCG) product which currently represents around 29% of group net sales revenue.

Shaw and Partners updates forecasts to reflect the announcement and upgrades to Buy from Hold. The broker believes this is an important milestone for the business as it optimises capacity utilisation. Target is raised to $0.90 from $0.65.

Given Sigma Healthcare's large fixed cost leverage, Morgan Stanley's EPS estimates for FY24 and FY25 rise dramatically after the signing of a contract with Chemist Warehouse.

The contract is to supply both PBS and fast-moving consumer products (FMCG) products for five years from July 1, 2024.

The broker lifts its rating to Equal-weight from Underweight and increases its target to 75c from 38c. Industry view is In-Line.

The analyst highlights Sigma has bought some certainty with the new contract by paying Chemist Warehouse with around -$80m of shares and providing a right to acquire "certain assets" for $24.5m.

Downgrade

ADAIRS LIMITED ((ADH)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/3/0

Adairs has cut FY23 sales guidance by -4% and EBIT by -15%. The drivers of the downgrade were the core Adairs brand and Focus, with the latter surprising UBS given recent upbeat commentary from management about the outlook and potential as a "trade-down" beneficiary.

UBS reassesses top-line and cost assumptions from FY24 and reduces EPS estimates by -36%, cutting FY25 by -28%. The visibility into FY24 across the brands remains challenging, given the consumer backdrop and recent execution issues.

UBS downgrades to Neutral from Buy and reduces the target to $1.65 from $2.95.

ASX LIMITED ((ASX)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/3/1

ASX has emphasised the investment required in its ageing systems, and guidance for both operating and capital expenditure was materially increased.

UBS assesses the modernisation and a backlog of postponed projects will be more expensive and time-consuming than previously envisaged.

While the broker believes ASX is an ideal platform to kickstart new financial technology, this does not appear to be high on the agenda for now.

UBS reduces EBIT margin forecasts to 58-59% in FY24-25 and downgrades to Sell from Neutral. Target is reduced to $59 from $70.

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Sell from Neutral by Citi and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/4/1

As sales momentum deteriorates, Citi questions whether Baby Bunting's category is as non-discretionary as previously presumed. Hence, the outlook for FY24 is increasingly of concern, as the decline in sales comes at a time when costs are intensifying.

The broker would like further disclosure on bank covenants to mitigate the uncertainty. A new CEO starting in October also clouds the strategic direction.

The broker reduces FY23-25 estimates by -36-58% and lowers the target to $1.10 from $2.40. Rating is downgraded to Sell from Neutral.

Following on from yesterday's commentary from Morgan Stanley (below), the broker decides to lower its rating for Baby Bunting to Equal-weight from Overweight. Cyclical headwinds are expected to persist into FY24.

The target is also lowered to $1.65 from $3.50. Industry View: In-Line.

Yesterday's commentary: Morgan Stanley and consensus were already doubtful about Baby Bunting's prior profit guidance as it required a significant 2H skew.

Despite holding this view, the broker was still surprised by the extent of yesterday's guidance downgrade, which suggests trading has deteriorated materially in the last few months.

Profit guidance of $13.5-15m missed the analyst's forecasts by -30% and was -37% below prior guidance.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/2/0

Morgan Stanley cautions the emergence of new technologies (like AI/ChatGPT) has the potential to change consumer and enterprise behaviours. These changes can then lead to changes in total addressable markets, market shares, profit margins and returns.

For Internet/Classifieds stocks under coverage, the broker remains positive overall and notes AI will help better service users and lead to new products though there is potential for major negative disruption.

Threats may emerge should AI strengthen existing peers, completely new entrants and/or even the major US/global tech companies at the forefront of AI development, explain the analysts. These parties may elect to chase the large pool of classified advertising revenues on offer.

Morgan Stanley lowers its price targets for its Internet/Classifieds coverage by -2-3% to reflect the increased uncertainty detailed above.

The target for Domain Holdings Australia slips to $3.50 from $3.60. 

Separate to AI concerns, the rating is downgraded to Equal-weight from Overweight on the broker's caution regarding the residential property market. Industry View: Attractive.

REA GROUP LIMITED ((REA)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/1

Clearance rates continue to be strong, house prices have returned to growth and lending commitments saw a month-on-month improvement in April, observes Citi.

Despite these improvements, Citi downgrades its rating for REA Group to Neutral from Buy on valuation. Target price rises to $145.20 from $141.30.

The broker expects yield growth will be the key driver of Residential depth revenue, and forecasts 18% year-on-year growth for the company.

While the analysts perceive risk to the listings outlook in 2023 from additional interest rate rises, the company has options to reduce the cost base which could offset any revenue headwinds in FY24.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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