Weekly Ratings, Targets, Forecast Changes – 07-07-23

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

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 July 3 to Friday July 7, 2023
Total Upgrades: 2
Total Downgrades: 12
Net Ratings Breakdown: Buy 56.68%; Hold 34.64%; Sell 8.68%

For the week ending Friday July 7 there were two ratings upgrades and twelve downgrades to ASX-listed companies by brokers in the FNArena's daily coverage, while percentage earnings forecast adjustments, positive and negative, were of a similar magnitude.

Costa Group received two ratings downgrades by separate brokers and received the largest percentage increase in average target price in the database.

Paine Schwartz Partners, a private equity company specialising in sustainable food chain investing, launched a confidential non-binding indicative cash proposal at $3.50 per share. In 2022, Paine Schwartz had already acquired a 14% stake in Costa Group.

Bell Potter raised its target to align with the $3.50 offer and moved to a Hold rating from Buy after the share price rallied in reaction to the bid.

While the broker believed the proposal would move to a formal offer, it was felt the price was opportunistic given the Costa Group share price was trading higher prior to 2022 citrus crop issues that are unlikely to repeat. 

Moreover, the offer price only implies limited value for earnings upside over 2024/25 from biological assets, suggested the analyst.

Macquarie also downgraded its rating to Neutral from Outperform and raised its target to $3.43 from $2.86. This broker noted the offer price is set at an 11% premium to the company’s average price of $3.15 over the past three years.

On the flipside, Link Administration received the largest percentage downgrade to average target price in the database last week after the emergence of Grow Inc as a serious competitor, which Citi felt may have blindsided the company.

Superannuation fund HESTA will partner with Grow for its outsourced administration services, a contract worth close to $50m in revenue. Citi cautioned other super funds could do the same and noted some large Link contracts due for renewal over the next few months. 

Even if these contracts are retained, the broker suggested EPS growth may be hard to achieve, especially following the sale of UK subsidiary Link Fund Solutions (LFS), which will likely result in a loss of cash on balance sheet and an associated increase in net debt.

The average target price for SiteMinder in the database also fell by around -12% last week after Morgan Stanley initiated research with a $2.90 target, dragging the average of (now) four brokers down to $4.92 from $5.59.

While the three existing brokers all had a Buy rating, Morgan Stanley began with an Equal-weight (Hold equivalent) recommendation after weighing up the company’s high quality recurring revenues against a demanding valuation, high cash burn and lack of leverage to a travel recovery.

In earlier times, SiteMinder's software helped hotels manage rates and occupancy (and avoid double-bookings) and then evolved to include a property management system for small hotels, explained the analysts. Separate modules now also provide payments, marketing and guest communication tools.

In Morgan Stanley’s bull case scenario, the company would add more features to its offerings, become the distribution platform of choice for smaller hotel operators and show an accelerated path to free cash flow.

In terms of average earnings forecasts, Core Lithium received the largest percentage boost last week after Citi performed a general review of the sector.

The analyst raised the price target to 80c from 75c though retained a Sell recommendation for the miner, which is building the Finniss Lithium Project on the outskirts of Darwin in the Northern Territory.

Earnings forecasts for Johns Lyng Group were also raised after brokers reacted to the acquisitions of Smoke Alarms Australia and a 70% equity interest in Link Fire Holdings for a cash outlay of $61.8m, and a potential earn-out of $17.3m.

The transactions are being funded via a successfully completed $65m institutional placement at $5.15 per share, and management is targeting an additional $5m via a non-underwritten share purchase plan to existing shareholders.

The acquisitions are consistent with the group's existing strategy to gain wallet share in strata, and management explained the new businesses will help found the company's fifth strategic growth pillar, to be called Essential Home Services.

Liontown Resources headed up the table below for percentage downgrades to broker earnings forecasts.  

Citi was unconvinced about the valuation or sustainability behind the recent share price rally and downgraded its rating to Sell from Neutral, though remained positive on Kathleen Valley as a long-term project, noting near-term updates on operating expenses will be key.

Coming second on the earnings downgrade table was 29Metals after Macquarie lowered the production profile for the Golden Grove mine (copper, lead, silver, zinc and gold) and updated the recovery cost profile for its Capricorn Copper mine, which contains high-grade copper and silver.

Management noted the recovery plan at Capricorn Copper, originally outlined on May 23, is progressing to plan with a restart of operations scheduled for August. 

While the company has now drawn down on additional debt, a softer cash balance highlighted balance sheet risks to Macquarie, as the restart progresses. 

The Neutral-rated broker lowered its target to 80c from 90c, after its 2023 and 2024 EPS estimates were adjusted by -35% and 6%, respectively, with further reductions of -7-8% from 2026.

Total Buy recommendations in the database comprise 57.68% of the total, versus 34.64% on Neutral/Hold, while Sell ratings account for the remaining 8.68%.

Upgrade

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/3/1

UBS believes Evolution Mining presents a copper option given the lack of alternatives on the ASX, as more than 20% of near-term earnings are from copper.

Having recently eased back on forecast for copper output, UBS now adds some incremental growth for the medium term and includes Bert at Ernest Henry into its base case, which adds $0.10 to valuation.

The stock appears inexpensive compared to gold peers although Sandfire Resources ((SFR)) remains the broker's preferred stock for copper leverage. 

Rating is upgraded to Neutral from Sell and the target lifted to $3.40 from $3.30. UBS expects a tighter copper market in 2024 before moving into a more protracted deficit from 2025 and beyond.

TELSTRA GROUP LIMITED ((TLS)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/0

UBS upgrades Telstra Group to Buy from Neutral as its latest survey reveals the Australian mobile market is relatively rational and the company is leading the market on price increases.

Telstra appears to have gained a slight increase in share for its main brand with reduced churn intentions, despite the increased prices and a softer consumer environment.

UBS upgrades longer-term ARPU growth assumptions beyond FY24 for mobiles to 2.5%, from flat, while assuming CPI-linked price increases are more possible given the company's network differentiation. Target is raised to $4.75 from $4.60.

Downgrade

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

Morgan Stanley shuffles the cards in its software coverage based on a new preference for stocks with an ability to meaningfully scale, but are also ideally free cash flow positive, or at least transitioning that way.

The broker struggles to see 3P Learning meeting these requirements and lowers its rating to Equal-weight from Overweight.

The analyst makes little change to either near-term forecasts or longer term revenue estimates but allows for the persistence of cost inflation in outer years of the forecast period.

The target falls to $1.20 from $1.40. Industry view: In-Line.

ARB CORPORATION LIMITED ((ARB)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/3/1

ARB Corp may have several long-term growth options but Macquarie assesses structural differences reduce its addressable market in the US. Hence, the pace of growth there is likely to be "slow and steady".

The US market is skewed to different products, has a fragmented distribution network and more competing brands, which positions ARB is an enthusiast brand compared with its market-leader position in Australia.

Moreover, rising consumer headwinds create downside risk to FY24 earnings and Macquarie downgrades to Underperform from Neutral. Target is reduced to $25.70 from $32.09.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/1

Morgans downgrades its rating for Aurizon Holdings to Hold from Add on valuation after recent share price appreciation. 

The target rises to $3.95 from $3.80 as high inflation is driving Coal’s quarterly CPI-linked price escalation, and Bulk earnings are rising from both growth in capital investment and organic growth.

While the company has relatively defensive earnings, the broker cautions investors around the capital-intensive nature of the business and ongoing concerns around the remaining life of the highly coal-concentrated earnings base.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Hold from Buy by Bell Potter and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/5/0

Paine Schwartz Partners already had a 13.8% stake in Costa Group and yesterday launched a confidential non-binding indicative
proposal to acquire the remainder for $3.50/share in cash.

Bell Potter suspects the proposal will move to a formal offer, though feels the price is opportunistic given the higher Costa Group share price prior to 2022 citrus crop issues that are unlikely to repeat.

Moreover, the offer price only implies limited value for earnings upside over 2024/25 from biological assets, suggests the analyst.

Bell Potter raises its target to align with the $3.50 offer and moves to a Hold rating from Buy after the share price rally in reaction to the bid.

Costa Group has received an indicative proposal from Paine Schwartz Partners at $3.50 cash per share. Macquarie notes this is an 18% premium to the closing price of $2.96 on July 3. As of March 2023 Paine Schwartz held a 14.8% interest in the stock.

Macquarie is sceptical that, while a potential deal would eliminate execution risk around delivering a "big 21%" earnings recovery in 2023 in line with forecasts, the offer only implies a 20% PE and 8% EV/EBITDA premium.

Rating is downgraded to Neutral from Outperform and the target is raised to $3.43 from $2.86.

FLEETPARTNERS GROUP LIMITED ((FPR)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/1/0

In reaction to shifting sentiment around earnings for autos, Morgan Stanley updates its sector preferences. While the broker concedes the writing of orders has deteriorated, it's felt earnings are more reslient than the market believes.

Overall, the analysts suggest novated leasing is best placed leading into FY23 results.

In the area of fleet management, Morgan Stanley is constructive on such matters as demand resilience, fleet growth and used price normalisation, but suggets fears of other market participants will be easier to address over 2024.

The broker lowers its rating for FleetPartners Group to Equal-weight from Overweight on valuation, but retains the $2.70 target. Industry View: In-line. 

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

Citi has used a general sector update to downgrade IGO to Neutral from Buy, while leaving the price target unchanged at $16.80.

The stock's valuation is labeled "reasonable" but the broker does see headwinds for H2, while positive catalysts remain absent.

IMPEDIMED LIMITED ((IPD)) Downgrade to Hold from Speculative Buy by Morgans .B/H/S: 0/1/0

Morgans expects upcoming volatility for the ImpediMed share price with a pending quarterly cashflow report that may disappoint.

Following recent share price strength after the recent capital raising, the analyst downgrades to Hold from Speculative Buy and suggests investors trim any overweight positions. Any share price pullback should be considered a buying opportunity.

The company completed a $20m placement, with an oversubscribed share purchase plan (SPP) raising an additional $10m at price of $0.13/share.

The broker highlights momentum for private payor coverage though sales in Sozo are expected to lag. The 19c target is unchanged.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/0

Citi suspects Link Administration may have been blindsided by the emergence of Grow Inc as a serious competitor, as superannuation fund HESTA will partner with Grow for its outsourced administration services, a contract worth close to $50m in revenue.

This raises the risk that others super funds could do the same as some large Link contracts are due for renewal over the next few months, the broker adds.

Even if the contracts are retained, higher debt costs are likely to be a headwind and Citi believes growth in EPS now looks very difficult.

Although it is possible the stock offers value the broker has little confidence and reduces the rating to Neutral from Buy. Target is lowered to $1.60 from $2.45.

LIONTOWN RESOURCES LIMITED ((LTR)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/2/1

Citi has used a general sector update to downgrade Liontown Resources to Sell from Neutral, while retaining the $2.80 price target.

The broker remains positive on Kathleen Valley as a long-term project, but seems less convinced about the valuation or sustainability behind the recent share price rally.

In the near term, the broker suggests, the key will be opex updates for Kathleen Valley, and funding.

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

Morgan Stanley shuffles the cards in its software coverage based on a new preference for stocks with an ability to meaningfully scale, but are also ideally free cash flow positive, or at least transitioning that way.

The broker struggles to see Reckon meeting these requirements and lowers its rating to Underweight from Equal-weight.

The analyst makes little change to either near-term forecasts or longer term revenue estimates but allows for the persistence of cost inflation in outer years of the forecast period.

The target falls to 45c from 65c. Industry view: In-Line.

LOTTERY CORPORATION LIMITED ((TLC)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/3/0

While improved Jackpot sequencing has de-risked upcoming FY23 results for Lottery Corp, Morgan Stanley downgrades its rating to Equal-weight from Overweight on valuation.

Based on leverage metrics, the broker suggests the company may surprise with capital management initiatives though this would be more likely in the longer-term, given a recent update to the capital management strategy.

The target rises to $5.50 from $5.20 after the broker rolls forward its valuation measures ahead of FY23 results. Industry view: In-Line.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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