Weekly Ratings, Targets, Forecast Changes – 08-09-23

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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 September 4 to Friday September 8, 2023
Total Upgrades: 2
Total Downgrades: 12
Net Ratings Breakdown: Buy 55.04%; Hold 36.13%; Sell 8.84%

For the week ending Friday September 8 there were two ratings upgrades and twelve downgrades to ASX-listed companies by brokers covered daily by FNArena.

Liontown Resources received two ratings downgrades from separate brokers after US-based Albemarle issued a final, conditional and non-binding indicative cash proposal at $3.00 per share.

The board has granted Albemarle a limited period of exclusive due diligence and intends to unanimously recommend the proposal in the absence of a superior offer and subject to an independent expert opinion.

Macquarie now doubts a rival bid will emerge and downgraded its rating to Neutral from Outperform, while Bell Potter sees a medium likelihood of a superior competing proposal and downgraded to Speculative Hold from Speculative Buy.

Chalice Mining received both a ratings upgrade and downgrade. Negatives contained within the company's scoping study on the Gonneville project drove Morgans to downgrade its rating to Hold from Add and slash its target to $3.45 from $8.20. A more challenging path to development is now expected.

Key differences against the broker's expectations were in the average feed grades, expected recoveries and estimated development capex for the study's two production scenarios.

UBS was also disappointed in the scoping study and now expects the next round of project optimisation in the pre-feasibility study will look at a smaller, higher-grade project.

The broker suggested a smaller project will be more attractive, and on this basis upgraded its rating to Neutral from Sell, while its target was halved to $3.00.

There was no earnings changes for Zip Co last week. However, once FY23 forecasts rolled off broker financial models and were replaced by sunnier outlooks for FY24 and onwards, the company received the largest (56%) increase to average earnings forecast in the table below.

Regis Resources and De Grey Mining were next on the table after Macquarie upgraded its gold price outlook and raised its 2024, 2025 gold price estimates by 9% and 3%, respectively, and its long-term price forecast by 10% to US$1,650/oz.

This broker believes emerging cracks in the US labour market should widen into next year, and bring back a conducive environment for financial inflows to gold. It’s thought the balance of risks is now for prices to be materially higher in the first half of 2024.

De Grey featured among Macquarie’s key picks given the Mallina Gold project shows clear tier-1 potential following the delivery of the project’s pre-feasibility study and recent resource upgrade.

Ord Minnett raised its earnings forecast for Strike Energy last week after management agreed to acquire Talon Energy, its joint venture partner in the Walyering gas field in the Perth Basin.

Management suggested the all-scrip deal will be earnings and cash flow accretive, with corporate and operational synergies expected. Talon will own 11% of an enlarged Strike upon completion of the deal.

City Chic Collective received the largest percentage reduction to average earnings forecasts.

FY23 earnings missed estimates by consensus and Morgan Stanley, with the latter concerned by the potential long-term impact on the company’s brands from aggressive discounting. There’s a risk gross margins will be permanently impaired should such discounts become entrenched.

City Chic’s US-based competitor Torrid recently downgraded its FY23 net sales guidance for the second time, with management now opting to renew its focus on offering “value” for customers. This new direction suggested to Citi that City Chic’s strategy to sell higher priced products may now prove to be challenging, especially in a weaker retail environment.

As mentioned in last week’s article, FY23 earnings for Sandfire Resources largely beat broker expectations, but the company’s average earning forecast declined last week due to a delayed research update by UBS.

In the broker’s view, the benefit from a faster-than-expected ramp-up at its Motheo operations was more than offset by higher underground development capital expenditure, higher general and administrative expenses and deferred stripping at Motheo.

While UBS acknowledged the scarcity of ASX-listed copper plays and Sandfire's leverage to the copper price, the company's share price is approaching the analyst’s $7.00 target price. Accordingly, the rating was downgraded to Neutral from Buy.

Total Buy recommendations in the database comprise 55.04% of the total, versus 36.13% on Neutral/Hold, while Sell ratings account for the remaining 8.84%.

Upgrade

ATTURRA LIMITED ((ATA)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Atturra has acquired Sabervox and will pay -$5m up front with an earn-out of up to -$2.5m in cash based on performance to September 2024. The business specialises in providing managed IT services and cloud subscriptions to medium-sized customers in regional NSW.

Morgans observes the acquisition will provide better economies of scale in the existing managed services business and allow the company to expand its workforce regionally.

Rating is upgraded to Add from Hold as the broker rates management's execution and its business model highly.

While there is some uncertainty about general IT demand slowing, the broker believes this is offset by the high-growth dishes in which Atturra operates. Target is raised to $1.00 from $0.95.

Downgrade

CHALICE MINING LIMITED ((CHN)) Upgrade to Neutral from Sell by UBS and Downgrade to Hold from Add by Morgans .B/H/S: 2/2/0

Chalice Mining has outlined a scoping study for Gonneville with two large scenarios (15mtpa and 30mtpa), which was disappointing because of higher expenditure, lower grades, lower recoveries and first production envisaged two years later than UBS anticipated.

UBS expects the next round of project optimisation in the prefeasibility study will look at a smaller, higher-grade project and that may prompt a different reaction.

The broker's analysis indicates a smaller project will be more attractive and on this basis the rating is upgraded to Neutral from Sell. The target is reduced to $3 from $6.

Negatives contained within the scoping study on the Gonneville project drives Morgans to downgrade its rating for Chalice Mining to Hold from Add and slash its target to $3.45 from $8.20. A more challenging path to development is now expected.

Key differences against the broker's expectations were in the average feed grades, expected recoveries and estimated development capex for the study's two production scenarios.

The analyst takes nickel as an example, noting recoveries are now expected to average 43% and 41% under the two scenarios compared to the broker's forecasts of 65% and 62%, respectively.

While there is still potential for Gonneville to become a tier 1 asset, Morgans would like to see evidence in the numbers before gaining more conviction.

See also CHN upgrade.

CAPRICORN METALS LIMITED ((CMM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

The Macquarie Commodities Strategy team has made broad upgrades to its US$ gold price outlook, including long-term price lifting 10% to US$1,650/oz. The new gold price outlook drives mixed but generally positive earnings upgrades and lifts target prices by an average of 6% across the broker's coverage.

Macquarie makes only one recommendation change to its gold stock coverage, with Capricorn Metals downgraded to Neutral from Outperform following recent share price strength, along with increased risk around approvals timing for Mt Gibson. Target unchanged at $4.80.

COCHLEAR LIMITED ((COH)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/2/2

Since the FY23 result Cochlear has rallied around 16%, outperforming the S&P/ASX200 industrials. As the stock is now trading "well north" of Morgan Stanley's price target of $240 and at a premium to its historical forward PE average, the rating is downgraded to Underweight from Equal-weight.

The company has guided to slowing unit growth into FY24 and the upgrades from the installed base are now captured in forecasts so the broker assesses there is limited upside surprise potential. Industry view: In-line.

DATA#3 LIMITED. ((DTL)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

The Data#3 share price has run strongly, Morgans observes and, while rating the business highly, the price is now considered "fair". Rating is downgraded to Hold from Add, having been raised back on August 22.

At the time of the results Morgans believed the share price had overreacted to a small miss but since then it has bounced back strongly.

Macro economic uncertainty remains a key focus for investors, the broker adds, specifically regarding whether discretionary IT services expenditure will get cut, although the company is engaged in defensive areas such as health, education and resources so should be well placed. Target is raised to $ 7.00 from $6.50.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/1

Macquarie lowers its rating for Fisher & Paykel Healthcare (March year end) to Neutral from Outperform following the release of FY24 guidance. The target is lowered to NZ$24.30 from NZ$28.09 on revised operational assumptions and updated currency assumptions.

The broker believes any earnings disappointment will result in a multiple de-rating.

FY24 guidance is for revenue of circa NZ$1.7bn, with around 200bps of gross margin improvement (constant currency).

The analyst moderates FY24 Hospital hardware growth assumptions based on trading year-to-date. Revenue of NZ$106m is forecast, below initial guidance for NZ$115m.

HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/2/2

Morgan Stanley reviews the divergent trends in the consumer sector, revealed by the reporting season. July trading updates highlight a slowdown in demand although the slowdown was in most cases less than expected and consumer resilience has surprised the broker.

The broker's overweight ratings are skewed to those retailers where growth is driven by offshore expansion or where there is strategic value. As a result, Harvey Norman is downgraded to Underweight from Equal-weight.

The downgrade is premised on exposure to big-ticket items and housing-related expenditure and franchisee margins being historically more volatile through economic cycles. Target is unchanged at $3.50. Industry view is In-Line.

LIONTOWN RESOURCES LIMITED ((LTR)) Downgrade to Speculative Hold from Speculative Buy by Bell Potter and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/1

Bell Potter downgrades its rating for Liontown Resources to Speculative Hold from Speculative Buy following receipt of a conditional $3.00/share cash proposal from Albemarle.

The offer is to acquire all outstanding shares via a scheme of arrangement and Liontown's board has granted Albemarle a limited period of exclusive due diligence.

The $3.35 target price is unchanged.

Albemarle has issued a final, conditional and non-binding indicative proposal to buy Liontown Resources for $3 cash, valuing the company at $6.6bn.

Macquarie says the bid implies a long-term spodumene price of US$1,940 a tonne. The broker doubts a rival bid will appear and downgrades to Neutral from Outperform.

Target price falls to $3 from $3.10.

ORORA LIMITED ((ORA)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/0

Morgans highlights the acquisition of Saverglass for -$2.2bn comes with both execution and integration risks and forecasts the transaction will be 5% EPS in FY25 and 9% accretive in the third year (FY27) of full ownership.

The size of the deal creates heightened risks to Orora's future earnings growth, and, after incorporating the $1.35bn equite raise, the broker downgrades its rating to Hold from Add. The target falls to $3.00 from $4.05.

After allowing for synergies, management is targeting EPS accretion of mid-single digits in FY25, which the analyst considers modest.

France-based Saverglass manafactures premium and ultra-premium glass bottles, servicing luxury spirits and wine producers globally.

RESIMAC GROUP LIMITED ((RMC)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/3/0

Resimac Group's FY23 results were mixed, Bell Potter suggests. The home loan book is shrinking, down -14% from end-FY22. Net interest income has decreased with higher costs pushing up the cost/income ratio.

Offsetting this is net interest margins have stabilised and competition in the mortgage market is not as tough as it was 6-12 months ago, the broker notes. In addition, bad debt charges remain low helped by low unemployment and low loan-to-value ratios.

Bell Potter believes the short-term outlook for the shares probably depend more on the growth of the loan book than improvement in the net interest margins, bad debts or the cost/income ratio.

The company may be near a turning point, and the forecasts suggest that the shares remain lowly valued, but to buy the shares now requires a belief that the home loan book is about to start growing or the asset finance business will take up the running.

Downgrade to Hold. Target falls to $1.09 from $1.12.

RESMED INC ((RMD)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/2/0

Having previously argued the market was probably running ahead of reality by selling off ResMed shares on the basis of the ever growing popularity of the latest generation of ant-obesity drugs, FNArena believes ResMed shares have been downgraded to Neutral from Buy by UBS.

The broker now believes the competitive threat from these drugs on the sleep apnoea market stands ready to create an estimated -14% volume headwind for the company's sleep business by 2030.

There still is a wide dispersion in potential outcomes, the analysts argue, adding any impact won't be felt until many years into the future. UBS's forecasts drop significantly after 2030.

The target price has fallen to US$170 from US$265.

SANDFIRE RESOURCES LIMITED ((SFR)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/0

Sandfire Resources's FY24 result appears to have met UBS's forecasts and the broker shifts its focus to guidance.

The good news was a faster than expected ramp-up at Motheo, but Wilsons says this was offset by higher underground development capital expenditure, higher G&A costs and deferred stripping at Motheo.

The broker appreciates the scarcity of ASX copper plays and Sandfire Resources' leverage to the copper price, but observes the share price is approaching its target price.

Rating is downgraded to Neutral from Buy. Target price is steady at $7.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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