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

This story features CHARTER HALL LONG WALE REIT, and other companies. For more info SHARE ANALYSIS: CLW

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 19 to Friday June 23, 2023
Total Upgrades: 12
Total Downgrades: 17
Net Ratings Breakdown: Buy 57.39%; Hold 34.13%; Sell 8.48%

For the week ending Friday June 23 there were twelve ratings upgrades and seventeen downgrades to ASX-listed companies by brokers in the FNArena database.

The average target price of five covering brokers in the FNArena database for AGL Energy rose by just over 17%, the largest increase last week. This followed a narrowing of management’s FY23 guidance range and the issuing of strong first time FY24 guidance.

The improved guidance reflected increased reliability for power stations and growth in retail customers, according to brokers. High wholesale electricity prices are being passed on to customers which is expected to deliver accelerated earnings in FY24.

The magnitude of potential earnings upside in FY24 was a surprise to Macquarie as it brings forward the growth that had been anticipated in FY25 from electricity prices.

On the other hand, Johns Lyng received the largest percentage downgrade to average target price last week. While FY23 catastrophe (CAT) guidance was better-than-expected, business-as-usual (BAU) growth fell -23% short of Citi’s forecast.

Bell Potter felt the relative infancy of the company’s US business drove the majority of second half margin compression for BAU and downgraded its rating to Hold from Buy on expectations for a softer domestic demand outlook heading into El Nino.

Regarding broker earnings forecasts, Gold Road Resources received the largest average percentage downgrade last week after management lowered 2023 production guidance. Recent drill and blast problems were exacerbated by inclement weather during the June quarter, which has delayed access to high-grade sections of the Gruyere open pit.

Bell Potter noted all-in sustaining cost (AISC) guidance is now expected to be higher (due to lower production), when released as part the upcoming June 2023 quarterly report. The broker’s target was reduced to $1.95 from $2.05 after also performing a mark-to market exercise on the company's 19.74% holding in De Grey Mining, after a recent share price decline.

Morgan Stanley released a sector report on Australian material stocks last week, which resulted in material earnings downgrades for Alumina Ltd and Syrah Resources as can be seen in the tables below.

Economists at the broker remain hopeful for counter-cyclical stimulus in China targeting property and infrastructure (green capex and rail). Some monetary easing is anticipated.

The broker expects base metal prices overall to be range-bound.

Falling input costs lead to a flattish alumina outlook though the Indonesian bauxite export ban remains in focus, explained the analysts. For Alumina Ltd, Morgan Stanley lowered its target to $1.65 from $1.70 on changes to alumina and aluminium price forecasts and the Overweight rating was maintained.

The broker’s target price for Syrah Resources was reduced to $1.00 from $1.25 on lower graphite price forecasts for FY23-25 and adjustments to the broker's valuation methodology. The Equal-weight rating was retained.

On the flipside, IGO received the largest percentage upgrade from brokers to average forecast earnings in the FNArena database last week.

Again, the Morgan Stanley Materials sector report was largely responsible for this forecast boost. Near-term support for lithium is expected from battery electric vehicle sales.

This broker's target for IGO was increased to $14.70 from $10.50 on financial model changes and higher spodumene price forecasts for FY23-25, which more than offset the impact of a lower nickel price forecast.

Total Buy recommendations in the database comprise 57.39% of the total, versus 34.13% on Neutral/Hold, while Sell ratings account for the remaining 8.48%.

Upgrade

CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/4/0

UBS downgrades the A-REIT sector by an average of -4% in FY24 and -5% in FY25 to reflect cost inflation, debt pricing and lower residential development earnings.

The broker believes rates are likely to stablise in the second half and that the economy is starting to adjust but believes it is too early to move to an overweight position on the sector.

The broker is favouring funds with defensive income and a favourable supply/demand profile and lists logistics, MHE, non-discretionary malls, residential, office, funds management then discretionary shopping centres, in order of preference. In particular, UBS is favouring mid-cap shopping centres over discretionary retail.

The broker believes gearing remains a risk for Charter Hall Long WALE REIT after June 2023 valuations fell -5.8% and does not consider the yield sufficient to justify the risk. The broker expects asset recycling given balance sheet constraints.

Rating is upgraded to Neutral from Sell. Target price falls to $4.27 from $4.39.

See also CLW downgrade.

CENTURIA OFFICE REIT ((COF)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/1/0

UBS downgrades the A-REIT sector by an average of -4% in FY24 and -5% in FY25 to reflect cost inflation, debt pricing and lower residential development earnings.

The broker believes rates are likely to stablise in the second half and that the economy is starting to adjust but believes it is too early to move to an overweight position on the sector.

The broker is favouring funds with defensive income and a favourable supply/demand profile and lists logistics, MHE, non-discretionary malls, residential, office, funds management then discretionary shopping centres, in order of preference. In particular, UBS is favouring mid-cap shopping centres over discretionary retail. 

Centuria Office REIT is upgraded to Buy from Neutral, the broker considering its -29% discount compelling and the broker observes the company's balance sheet is strong enough to withstand higher interest rates and asset-value falls. 

Target price falls -9% to $1.60. EPS forecasts are steady for FY23 and fall -8% in FY24; and -6% in FY25.

EML PAYMENTS LIMITED ((EML)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/1/0

As the share price of EML Payments has moved through the trigger level Ord Minnett raises the rating to Accumulate from Hold. Target is $0.80.

FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/3/0

Ord Minnett suggests a buying opportunity could emerge with Flight Centre Travel, which provided an update on global leisure that was generally in line with the sector.

The broker points out investors naturally gravitate to stocks they believe are cum upgrade and when this fails to eventuate selling results because of the crowded nature of the trade.

Hence, the share price reaction overshadowed what the broker believes was an "excellent" presentation and an improved level of transparency.

Ord Minnett suspects the company's confidence in revenue margin improvement relates to an increasing portion of non-air products sold relative to pre-pandemic levels. Rating is upgraded to Hold from Lighten. Target is steady at $19.71.

HOMECO DAILY NEEDS REIT ((HDN)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/0

UBS downgrades the A-REIT sector by an average of -4% in FY24 and -5% in FY25 to reflect cost inflation, debt pricing and lower residential development earnings.

The broker believes rates are likely to stablise in the second half and that the economy is starting to adjust but believes it is too early to move to an overweight position on the sector.

The broker is favouring funds with defensive income and a favourable supply/demand profile and lists logistics, MHE, non-discretionary malls, residential, office, funds management then discretionary shopping centres, in order of preference. In particular, UBS is favouring mid-cap shopping centres over discretionary retail. 

HomeCo Daily Needs REIT is UBS's top discretionary retail pick, the broker preferring assets with low capital expenditure and rent, and high land value and development yields with resilient distributions heading into a more defensive investor attitude given expectations of weakening consumer sentiment.

The broker appreciates the company's long WALE, low rents, recently developed assets, low reliance on supermarket turnover for rental growth, defensive tenant mix, and high annual escalations.

UBS upgrades the company to Buy from Neutral. Target price eases -1% to $1.36 from $1.37. EPS forecasts are steady in FY23; fall -1% in FY24; and rise 2% in FY25.

The broker expects development capital expenditure over the next few years will be accretive despite high construction costs and believes the company's targeted yields on expenditure are achievable.

IGO LIMITED ((IGO)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/1/0

Economists at Morgan Stanley remain hopeful of counter-cyclical stimulus in China targeting property and infrastructure (green capex and rail). Some monetary easing is anticipated.

For lithium, Morgan Stanley sees support for near-term prices from battery electric vehicle sales, though sees 2024 softening as African supply ramps up.

The broker's target for IGO rises to $14.70 from $10.50 on financial model changes and higher spodumene price forecasts for FY23-25, which more than offset the impact of lower nickel price forecasts. Equal-weight retained. Industry View: Attractive 

LIFESTYLE COMMUNITIES LIMITED ((LIC)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/1/0

UBS believes the current residential real estate cycle is different: demand exceeding supply is not enough for a recovery.

A rapid "normalisation" of home building approvals is considered unlikely because of a lack of skilled labour and the crowding out by non-residential construction.

Moreover, should demand weaken there is less ability for governments to stimulate via incentives or interest-rate cuts (as per prior cycles), given persistent inflation.

UBS upgrades Lifestyle Communities to Buy from Neutral to reflect superior FY24-27 growth expectations amid recovering volumes, and given the better relative affordability of the company's product. Target is reduced to $17.00 from $17.50.

MIRVAC GROUP ((MGR)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/0

UBS believes the current residential real estate cycle is different: demand exceeding supply is not enough for a recovery.

A rapid "normalisation" of home building approvals is considered unlikely because of a lack of skilled labour and the crowding out by non-residential construction.

Moreover, should demand weaken there is less ability for governments to stimulate via incentives or interest-rate cuts (as per prior cycles), given persistent inflation.

UBS reduces earnings estimates for Mirvac Group by -5% for FY24 and FY25 to reflect a slower recovery for land sales and commercial development headwinds.

Rating is upgraded to Buy from Neutral to reflect superior FY24-27 growth expectations amid recovering volumes, and given the better relative affordability of the company's product. Target is raised to $2.55 from $2.37.

PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/2/1

As the share price of Premier Investments has moved through Ord Minnett's trigger level, its rating is upgraded to Hold from Lighten.

The target is $19.

See also PMV downgrade.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/1/1

Economists at Morgan Stanley remain hopeful of counter-cyclical stimulus in China targeting property and infrastructure (green capex and rail). Some monetary easing is anticipated.

Regarding gold, the broker expects the price will be steady around current levels and by the first half of 2024 extra support should arrive via softer real yields and a weaker US dollar.

Morgan Stanley raises its rating for Regis Resources to Overweight from Equal-weight on strong FY24 cash flows and the upcoming catalyst of the McPhillamys feasibility study.

Target rises to $2.25 from $2.05. Industry view is Attractive.

See also RRL downgrade.

SKY NETWORK TELEVISION LIMITED ((SKT)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/0/0

As the share price of SKY Network Television has moved through the trigger level Ord Minnett raises the rating to Accumulate from Hold. Target is $2.75.

WOOLWORTHS GROUP LIMITED ((WOW)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/2/2

UBS assesses the sales outlook for Australian food is positive and there is greater confidence that Woolworths can gain further market share. Productivity initiatives and operating leverage support EBIT margin expansion despite rising labour costs.

Despite the elevated multiples and continued PE multiple premium to rival Coles, UBS believes the premium can increase and upgrades to Buy from Neutral. Target is raised to $43.00 from $38.50.

Downgrade

ACCENT GROUP LIMITED ((AX1)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/3/1

UBS highlights evidence that the build up in household savings and the strong labour market during the pandemic are no longer sufficient to offset cost-of-living pressures. Spending is now falling across a broad range of retailers.

As a result earnings estimates are reduced along with valuations and lower multiples.

The broker notes the pandemic had a mixed impact on Accent Group, enjoying strong demand for performance and lifestyle footwear yet enduring difficult supply chains and a less effective transition to online.

UBS cuts FY23 and FY24 estimates by -8% and -26%, respectively, anticipating lower sales and gross margins amid higher costs. Rating is downgraded to Sell from Neutral with the target lowered to $1.60 from $2.25.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

Citi envisages upside risk to North Star earnings guidance in the second half of FY23 amid downside risk to Australian steel products because of weak export pricing.

Earnings forecasts for BlueScope Steel are unchanged but the broker highlights the demand risk for domestic tonnage in 2024 because of weak Australian housing approvals.

In terms of US steel prices, which have moderated from high levels, Citi believes the price is hovering at its nadir for this recent cycle. Rating is downgraded to Neutral from Buy as the shares have rallied 26% since the December 2022 lows. Target is steady at $23.50.

CHARTER HALL LONG WALE REIT ((CLW)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/0

After allowing for higher interest costs and June revaluations, Citi downgrades its rating for Charter Hall Long WALE REIT to Neutral from Buy and lowers its target to $4.40 from $5.00.

Higher gearing and interest rates place the earnings growth outlook at risk, suggests the broker, despite the 50% rental income
linked to CPI, which could benefit from a higher near-term CPI.

The analysts anticipate further downside to asset values due to prospects for a further increase in cap rates.

See also CLW upgrade.

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/2/0

As the share price of Computershare has moved through the trigger level Ord Minnett downgrades to Hold from Accumulate. Target is $25.

EROAD LIMITED ((ERD)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/1/0

Having already acquired a 17.73% interest in Eroad's shares, Canadian-based Brillian APAC Pty Ltd is making a non-binding indicative offer for the company at NZ$1.30/share.

Given the stake already accumulated and because NZ$1.30/share is at a substantial (around 69%) premium to the previous close, Bell Potter feels this is a knock-out bid.

The rating is downgraded to Hold from Buy on valuation and the $1.25 target is unchanged.

ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/3/1

UBS has downgraded Iluka Resources to Sell from Neutral with its price target reduced to $10.90 from $11.95. The broker refers to the steep 25% increase in the share price year-to-date which is in sharp contrast to mineral sands prices over the period (flat).

UBS sees headwinds building from global economies and the Chinese property market and thus believes mineral sands prices are due for weakness. Forecasts have been cut.

For Iluka, EPS estimates have been culled by -5/-27/-40% for this year and the two following. The broker retains a positive view on the company's rare earth project, but believes meaningful production from Enneabba should not be expected until 2026.

JOHNS LYNG GROUP LIMITED ((JLG)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 2/1/0

Bell Potter suspects the relative infancy of Johns Lyng's US business has driven the majority of the margin compression experienced in 2H of FY23 for business-as-usual.

Overall FY23 revenue guidance (excluding the soon to be exited Commercial Construction division) was raised by around $110m to $1.19bn. For earnings, there was a catastrophe upgrade, offset by a Construction downgrade along with a -$2.3m bad debt.

The broker downgrades its rating to Hold from Buy on expectations for a softer domestic demand outlook heading into El Nino. The target falls to $5.90 from $7.90 on lower EPS forecasts for FY24 and FY25.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/1

As the share price of Magellan Financial has moved through the trigger price Ord Minnett downgrades to Hold from Accumulate.

While the stock has likely passed the worst of its operational headaches, the broker believes it will be difficult to restore its competitive strengths. Target is $10.70.

NORTHERN STAR RESOURCES LIMITED ((NST)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/3/0

Economists at Morgan Stanley remain hopeful of counter-cyclical stimulus in China targeting property and infrastructure (green capex and rail). Some monetary easing is anticipated.

Regarding gold, the broker expects the price will be steady around current levels and by the first half of 2024 extra support should arrive via softer real yields and a weaker US dollar.

Morgan Stanley lowers its rating for Northern Star Resources to Equal-weight from Overweight on valuation and feels the sole catalyst – the KCGM mill expansion – is already incorporated in the share price.

The target falls to $13.15 from $13.65. Industry View: Attractive.

PRO MEDICUS LIMITED ((PME)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/2/2

Morgans downgrades its rating for Pro Medicus to Reduce from Hold on valuation after a recent share price rally.

The analysts suggest existing investors trim overweight positions and new investors wait for a better entry point.

The broker's forecasts are unchanged, as is the $61.35 target price.

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

UBS highlights evidence that the build up in household savings and the strong labour market during the pandemic are no longer sufficient to offset cost-of-living pressures. Spending is now falling across a broad range of retailers.

As a result earnings estimates are reduced along with valuations and lower multiples.

Despite a mixed performance during the pandemic, UBS assesses the increasingly challenging environment will weigh on Premier Investments' brands because of trading down and purchases being deferred.

Estimates are reduced by -5% for FY23 and by -17% for FY24. Rating is downgraded to Sell from Neutral and the target reduced to $20 from $26.

See also PMV upgrade.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 5/0/0

As the share price of QBE Insurance has moved through the trigger level Ord Minnett downgrades to Lighten from Hold. Target is $13.

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

UBS previews fourth quarter and FY23 production results, looking ahead to FY24. Regis Resources is downgraded to Neutral from Buy after its -2.9m resource reduction, which came primarily from Duketon and signals a shorter mine life.

The broker now forecasts a reduced production outlook, potentially falling back to 450,000 ozpa over FY26-27 before getting back to around 500,000 ozpa by the end of the decade with McPhillamys. Target is lowered to $2.00 from $2.35.

See also RRL upgrade.

STOCKLAND ((SGP)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/3/0

UBS believes the current residential real estate cycle is different: demand exceeding supply is not enough for a recovery.

A rapid "normalisation" of home building approvals is considered unlikely because of a lack of skilled labour and the crowding out by non-residential construction.

Moreover, should demand weaken there is less ability for governments to stimulate via incentives or interest-rate cuts (as per prior cycles), given persistent inflation.

As a result the broker reduces earnings estimates for Stockland by -5% in FY24 and FY25 to reflect a slower recovery for land sales and commercial development headwinds. Rating is downgraded to Neutral from Buy and the target reduced to $4.25 from $4.31.

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

As the share price of Santos has moved through the trigger level Ord Minnett downgrades to Accumulate from Buy. Target is $12.

SUPER RETAIL GROUP LIMITED ((SUL)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/1/1

UBS highlights evidence that the build up in household savings and the strong labour market during the pandemic are no longer sufficient to offset cost-of-living pressures. Spending is now falling across a broad range of retailers.

As a result earnings estimates are reduced along with valuations and lower multiples.

For Super Retail EBIT margin expansion has occurred in recent years because of reduced promotions and improved online economics with higher sourcing costs passed on to consumers.

UBS observes this is now changing and reduces estimates by -6% for FY24 and by -8% for FY25. Rating is downgraded to Sell from Neutral and the target lowered to $10.00 from $13.25.

TPG TELECOM LIMITED ((TPG)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/3/0

UBS downgrades TPG Telecom to Neutral from Buy as expectations for a successful MOCN decision by the Australian Competition Tribunal did not eventuate.

At current levels the broker believes the stock is fairly priced for continuing momentum in mobiles, which probably led to the soft upgrade to underlying EBITDA guidance of 1% at the mid point.

The broker raises FY23-25 estimates for EBITDA by around 1.5% to reflect the better-than-expected mobile performance in post-paid and pre-paid.

FY23-25 estimates for EPS are cut by an average of -17% to remove the incremental mobile subscribers in FY25 UBS had assumed from a successful outcome of the MOCN end deal. Target is reduced $5.55 from $6.00.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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