Weekly Ratings, Targets, Forecast Changes – 11-08-23

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This story features CITY CHIC COLLECTIVE LIMITED, and other companies.
For more info SHARE ANALYSIS: CCX

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 August 7 to Friday August 11, 2023
Total Upgrades: 4
Total Downgrades: 8
Net Ratings Breakdown: Buy 55.70%; Hold 35.18%; Sell 9.11%

For the week ending Friday August 11 there were four ratings upgrades and eight downgrades to ASX-listed companies by brokers covered daily by FNArena.

James Hardie Industries received the largest percentage increase (18%) to its average 12-month target price last week after a first quarter revenue beat of 4% against the consensus forecast.

Morgan Stanley explained this outperformance was due to growth in average selling price across the company’s three segments, offset by an -11% volume decrease. 

Costs also moderated in a slowing macro environment, noted the broker, resulting in record margins for North America Fibre Cement (NAFC) and the APAC region Fibre Cement businesses. Citi pointed to declining input costs and lower selling, general and administrative (SG&A) expenses leading to increased profits despite the lower volume.

Furthermore, management increased second quarter guidance with margin improvement expected across the three segments.

There are four Buy (or equivalent) recommendations for James Hardie by brokers updated daily by FNArena, while Ord Minnett is Hold-rated.

This broker suggested shares are modestly overvalued and was a little surprised the market remains so bullish on James Hardie given some of the risks around demand, inflation and interest rates.

Boral was not far behind James Hardie with a 15% increase in average target price after releasing FY23 results. 

Macquarie noted management is "controlling the controllables" and price traction remains strong across the portfolio, while overhead costs fell by -7% year-on-year.

FY24 earnings guidance of $270-300m beat the forecasts by Morgan Stanley and consensus of $262m and $274m, respectively, though the analyst cautioned this target assumes "no significant shift in market demand or price environment".

Ord Minnett assessed a significant medium-term downturn appears unlikely for construction, and for Boral in particular, given its exposure to the resilient non-residential and infrastructure markets.

City Chic Collective was next after Bell Potter increased its target for the plus-size women’s apparel, accessories and footwear group to 70c from 42c. The broker also upgraded its rating to Buy from Hold following news of the divestment of its UK-based Evans business for $12m amd sold off its EMEA region inventory via an asset sale and purchase agreement.

The Evans deal will help re-size inventory, given most inventory problems stemmed from the UK, explained the broker, and will enable City Chic to direct capital towards generating better returns in the A&NZ region, as well as in the US.

The analyst felt there is now a clearer path to profitability for the retailer with less likelihood of a capital raise. Also, emerging green shoots were identified from website traffic trends in Australia and the US.

On the flipside, the average target for Aeris Resources fell by -42% last week, while its average earnings forecast also fell by -18% after Bell Potter updated its research for quarterly results that were released a week prior.

As mentioned in last week’s article, the company’s zinc, copper and silver operations at the Jaguar mine in WA have been placed on care & maintenance. 

While Bell Potter lowered its target to 29c from 91c, the Buy-rated broker pointed out the company’s Tritton copper mine in NSW enables investors to gain exposure to the largest Australian copper asset on the ASX.

For the second consecutive week, percentage upgrades to earnings forecasts by brokers covered daily by FNArena were greater than for downgrades.

Boral and James Hardie came second and fourth on the table below for the largest percentage upgrades.

AGL Energy headed the table after FY23 profit came in 6% ahead of the consensus forecast and the 23c unfranked interim dividend was also a strong beat. 

Despite a strong lift in broker forecasts, the average broker target price stayed relatively flat. The electricity market could be squeezed again, leading to higher earnings for AGL, yet Morgans noted the market is more likely to attract government intervention, undercutting those potential earnings.

On the other hand, Ord Minnett expected a bright outlook driven by higher retail electricity prices from the passing through of high wholesale prices, amid improved generation availability and flexibility.

Downer EDI also received an 18% boost to average earnings forecasts by brokers last week, in the wake of its FY23 results. UBS highlighted improvement in second half margins supported by a recovery in road services volumes, amid better weather, as well as a strong performance in long-term rail maintenance contracts.

Management also reiterated its FY25 margin restoration target of more than 4.5% and its -$100m cost reduction target, while Ord Minnett broker noted strong public-sector demand driving compound annual earnings growth of 10% by FY28.

Next up was Audinate Group with a boost to its average earnings forecast after Macquarie predicted FY23 results, due on August 21, will reveal higher prices following management initiatives to manage supply-chain impacts. 

Upgrades to the consensus revenue forecast for Audinate is expected after the company provides bullish outlook commentary and continued evidence of strong operating momentum.

Also, ahead of FY23 results on August 31 for Sandfire Resources, Morgan Stanley upgraded its earnings forecast for the Motheo copper operations in Botswana.

The same broker also raised its forecasts for Suncorp Group after solid FY23 earnings that were in line with the consensus forecast. Personal lines pricing is increasing by 15-20%, investment yields are at around 5% and claims inflation looks to be peaking, according to the analyst.

The 27cps final dividend was a miss versus the consensus expectation for 40cps due to the potential impact of a more difficult reinsurance environment, explained Morgans, though Citi suggested the lower dividend will be a one-off as the payout would have been higher if the group’s bank sale had not been blocked by the ACCC.

The trials and tribulations continue for AMP with lower average earnings forecasts last week. This time the trials actually related to upcoming class actions. 

Morgan Stanley noted, as part of its review of the company’s first half result, capital management has been paused while the company awaits further clarity on litigation matters, though believed a new cost-out program will support the stock price.

According to Citi, the company delivered on its promises in the first half, with targeted cost savings well above expectations. Yet, in the second half costs are guided to rise and the broker warned that investors will need to take on the risks of court judgements and class actions.

Nonetheless, Ord Minnett suggested AMP's transformation will ultimately deliver value for long-term shareholders. Downside from fee margin compression should be offset by greater volumes while cost efficiencies are expected to offset any growth in expenditure.

It should be noted the average earnings forecast for AMP actually rose after these first half results towards the end of the week but were more than offset by a research update by Morgan Stanley (Equal-weight) at the beginning of the week.

This broker maintained a positive vibe on the company's prospects but downgraded its earnings forecasts, noting the requirement for more reinvestment into the company’s wealth and bank and New Zealand businesses, with AMP either sub-scale or facing elevated margin pressure in some segments. 

Total Buy recommendations in the database comprise 55.70% of the total, versus 35.18% on Neutral/Hold, while Sell ratings account for the remaining 9.11%.

Upgrade

CITY CHIC COLLECTIVE LIMITED ((CCX)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/5/0

City Chic Collective has divested its Europe/Middle East/Africa business, Evans.

This supports inventory re-sizing for the group, Bell Potter suggests, given majority of the inventory build has been associated with the UK where trading has remained weak, and enables the company to channel capital towards generating better returns in existing regions.

The broker believes the next few months can thus be well supported in A&NZ and the US as continuing tough retail conditions persists.

On sale proceeds the target rises to 70c from 42c. Upgrade to Buy from Hold.

CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/5/0

Charter Hall Long WALE REIT's FY23 results were in line with guidance and expectations. FY24 guidance of $0.26 per security is below Macquarie's expectations and appears to be driven by higher-than-expected interest expense.

The company reported strong rental growth of 4.4% in FY23 and with 51% of the portfolio linked to CPI and the remainder to fixed increases, the broker expects rental growth will remain elevated.

Rating is upgraded to Neutral from Underperform on valuation, yet the broker remains cautious regarding the balance sheet amid headwinds from higher debt costs.. Target is reduced to $3.56 from $3.77.

CORONADO GLOBAL RESOURCES INC ((CRN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/0/0

First half results were largely in line with Ord Minnett's expectations although the dividend was significantly softer.

The broker considers the sell-off in Coronado Global Resources overdone given there is reduced risk in terms of delivery and an apparent willingness to abandon recent M&A opportunities that proved less attractive.

The broker also revises assumptions for fixed-price contracts in the US and adjusts pricing realisations to reflect historical results.  Rating is upgraded to Accumulate from Hold and the target lifted to $1.70 from $1.60.

PILBARA MINERALS LIMITED ((PLS)) Upgrade to Add from Hold by Morgans .B/H/S: 3/1/1

Following a 36% increase in the mineral resource estimate (MRE) at Pilgangoora, Morgans believes the valuation for Pilbara Minerals looks attractive compared to other hard rock pure plays. The rating is upgraded to Add from Hold.

More significantly, according to the analyst, the biggest increase at Pilgangoora was in the measured and indicated resource (more certain than inferred) which increased by 64%.

Further brownfields expansion beyond the currently planned capacity increase to 1Mtpa may result, suggests Morgans. The target rises to $5.90 from $5.00.

Downgrade

IDP EDUCATION LIMITED ((IEL)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 3/2/1

Macquarie expects a soft result when IDP Education reports on August 23, suspecting consensus is over estimating multi-destination student placement volumes.

The broker forecasts Australian volume growth of 49%. Meanwhile, discounting of competing tests by distributors suggests the IELTS industry may be getting more competitive in price.

With an expensive multiple and expected downgrades to margins and IELTS volumes, Macquarie downgrades the stock to Underperform from Neutral. Target is steady at $21.

JUDO CAPITAL HOLDINGS LIMITED ((JDO)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/1/0

Macquarie expects Judo Capital's deposit margins in the second half will underpin underlying margins well in excess of the target of more than 3% proposed by management

That said and despite the business appearing set to meet FY23 guidance the broker still expects SME competitive pressures and term deposit spreads will put pressure on margins.

With lower growth prospects, normalising funding costs and uncertain credit quality Macquarie downgrades to Neutral from Outperform. Target is reduced to $1.50 from $1.60.

LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/2/1

Macquarie assesses a tough macro outlook will drive margin pressure for Lovisa Holdings, noting Australasian consumers have come under pressure over the June quarter and this has persisted into the early part of the first half of FY24.

Offshore markets, meanwhile, have been vulnerable for longer. While explicitly accounting for this in sales forecasts, Macquarie remains cautious about the short-term and notes scope for weak outlook commentary at the upcoming results.

Industry feedback suggests elevated promotional activity in recent months. Rating is downgraded to Neutral from Outperform and the target lowered to $22.00 from $35.70.

MESOBLAST LIMITED ((MSB)) Downgrade to Speculative Hold from Speculative Buy by Bell Potter .B/H/S: 0/1/0

The US FDA has rejected the biological licence application for remestemcel-L. While the drug is sufficiently safe and efficacious to give away via the expanded assess program in the US and available in Japan, Bell Potter contends it seems it was not good enough for FDA approval.

The broker finds the FDA decision to withhold a life-saving therapy confusing and there are substantial downgrades to revenue and earnings following the announcement.

Additional effficacy data have been requested in the form of a controlled trial in adults and Mesoblast now plans to conduct the study in the highest risk patients with the greatest prospect of mortality.

Rating is downgraded to Speculative Hold from Speculative Buy and the target is reduced to $0.60 from $2.00.

NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/2

Morgans reduces its forecasts for the coal sector due to lower estimates for coal prices and higher longer-term costs. Across FY24-25, forecasts for NEWC (thermal prices) and hot coking coal (HCC) are lowered by -25-35% and -0-3%, respectively.

The broker believes risks to realised coal pricing (met and thermal) are asymmetrically skewed to the upside. It's felt currently depressed share prices imply coal pricing will never again tighten upward in support of windfall cash flows.

Morgans downgrades its rating for New Hope to Hold from Add on valuation and lowers its target to $5.30 from $6.35.

SIMS LIMITED ((SGM)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/1/3

UBS notes, following a period of elevated prices, US steel spreads have started to normalise while East Asian spreads remain depressed despite some optimism regarding potential Chinese stimulus.

The broker downgrades Sims to Sell from Neutral given a weakening scrap price and volume outlook that should lead to significant downside risk to FY24 consensus EBIT.

The company is likely to benefit from strategies to drive longer-term earnings from business models that enable the "circular economy" but UBS believes this is will not be significant over the next five years. Target is reduced to $13.60 from $16.30.

SANTOS LIMITED ((STO)) Downgrade to Hold from Add by Morgans .B/H/S: 5/1/0

Morgans downgrades its rating for Santos to Hold from Add on recent share price strength and reduces its target to $8.30 from $8.45.

For upcoming 1H results, the broker expects the company to maintain a solid group margin and a healthy interim dividend.

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

A trading update from Solvar ahead of its earnings result is in line with Bell Potter's forecast. The outlook for FY24 is less favourable, the broker notes, with increases to funding costs affecting the back book.

Most loans are fixed rate at inception, and the company has taken on more floating rate debt to back these, which has squeezed net interest margins as interest rates have risen.

Bell Potter has revised down forecasts but the outcome is uncertain and will depend future trading through FY24 and into FY25. Target drops to $1.08 from $3.01. Downgrade to Hold from Buy.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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