Weekly Reports | Oct 23 2023
This story features LIONTOWN RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: LTR
Weekly update on stockbroker recommendation, target price, and earnings forecast change.
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 October 16 to Friday October 20, 2023
Total Upgrades: 4
Total Downgrades: 7
Net Ratings Breakdown: Buy 56.61%; Hold 34.50%; Sell 8.88%
For the week ending Friday October 20 there were four ratings upgrades and seven downgrades to ASX-listed companies by brokers covered daily by FNArena.
Citi had a busy week keeping pace with developments at Liontown Resources.
At the beginning of the week, the broker downgraded its rating to Sell from Neutral and cut its 12-month price target by -70c to $2.30 when Albemarle decided not to proceed with its takeover offer.
The analysts felt 19.9% equity holder Hancock Prospecting would not launch its own bid for the company, given existing offtakes are locked in until 2030, and the formidable ramp-up costs to production at Liontown.
Later in the week, Citi lowered its target further to $1.90, but reversed its rating downgrade after Liontown raised $376m in new equity (at $1.80) and $760m in new debt, plugging the $450m funding gap to first cashflows that management had flagged in late-September.
Percentage downgrades to earnings forecasts and target prices by analysts were around double the magnitude of percentage upgrades, as can be seen in the tables below.
Tyro Payments received the largest percentage upgrade to average earnings forecasts from brokers (around 32%) last week after the company’s strategy day.
Macquarie forecast the company’s core business will continue to drive the share price higher though noted one catalyst for its investment thesis had been removed.
Tyro committed to keeping its banking licence, and the broker suggested an opportunity was missed to unlock value and revise its banking strategy.
Ord Minnett agreed with Macquarie on the positive outlook for the company and noted operating leverage is emerging at a time when the share price is greatly undervalued.
While this broker’s forecasts were left unchanged, its target was slashed to $2.00 from $2.60 after the analyst's cost of equity assumption was raised to 9% from 7.5% to align with larger global peers.
On the flipside, Paladin Energy received the largest percentage downgrade to average earnings forecast after Citi reinitiated coverage with a Sell rating on valuation concerns and a target price of 90 cents, the lowest by covering brokers in the FNArena database.
Paladin is effectively on top of the table below, as the position of Regis Resources is ignored due to a data glitch.
Citi suggested the market is pricing Paladin shares beyond perfection and highlighted valuation uncertainty surrounding undeveloped resources in Canada.
Regarding those resources, later in the week Buy-rated Shaw and Partners updated research after the company announced it is now the sole owner of the Michelin uranium project in Canada, in a move that clears the way for the company to advance the project.
The main focus will remain the restart of Heinrich Langer, yet the analyst highlighted Michelin has the potential to become a key growth asset.
While the average earnings forecast for Nickel Industries was dragged down last week by updated research by Macquarie, the broker retained an Outperform rating and $1.10 target.
In the prior week, the company announced a final investment decision for its Excelsior nickel cobalt high-pressure acid leach project, and the broker incorporated this development into its forecasts for the company.
Tabcorp Holdings earnings forecasts also fell after management issued an unscheduled first quarter trading update showing a -6.1% decline in revenue.
Management attributed the outcome to a softer macroeconomic backdrop and unfavourable wagering results, especially in the Sports division.
While Morgans anticipated the -12.7% decline in Gaming Services revenue, an expected uplift from higher Wagering and Media turnover did not eventuate, and actually fell by -5.4%. Unfavourable racing and sports results also impacted fixed odds yields, explained the analysts.
A -1% fall in Wagering turnover was due to the high level of online competition, according to Ord Minnett, which explained digital technology has eroded the value of Tabcorp's state-based physical wagering exclusivity.
More positively, UBS suggested potential regulatory reform, following the Federal inquiry into online gambling, will increase the strategic importance of Tabcorp’s assets.
Last week, Ord Minnett updated commodity price forecasts and noted opportunities within its coverage of the ASX-listed Resources sector among gold and thermal coal companies in particular.
The analyst noted resource companies have focused upon returning excess cash to shareholders for several years, and are now pivoting towards growth, as evidenced by recent M&A activity in the Gold and Lithium sectors.
The broker forecast higher near-term iron ore and metallurgical coal prices and lower near-term thermal coal and copper prices. Whitehaven Coal and mineral sands miner Iluka Resources are thought to represent the best value.
Ord Minnett’s earnings forecasts for thermal coal producer New Hope fell and the target price duly fell to $6.10 from $6.30.
Total Buy recommendations in the database comprise 56.61% of the total, versus 34.50% on Neutral/Hold, while Sell ratings account for the remaining 8.88%.
Upgrade
LIONTOWN RESOURCES LIMITED ((LTR)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/4/0
Liontown Resources had previously disclosed a funding gap and that has been resolved with this week's capital raising, Citi concludes.
The broker does acknowledge some investors might be disappointed, with the new shares issued at $1.80, well below what Albemarle was prepared to pay to obtain full ownership.
Citi finds the whole exercise reasonable, comparing metrics against where the sector is trading and valued at. Net Asset Value is being diluted by some -6%.
Citi's price target loses -40c to $1.90. The broker upgrades to Neutral from Sell, while pointing out the intentions of Gina Rinehart's Hancock Prospecting (19.9% equity) remain unclear.
See also LTR downgrade.
MIRVAC GROUP ((MGR)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/0/0
Mirvac Group has announced a joint acquisition of Serenitas, a land lease business, for an enterprise value of $1.01bn.
The company will invest $300m up front and $240m on settlement, which is expected in the September quarter, 2024.
Citi estimates gearing will rise 1.4% as a result, and observes it follows the recent sale of Sydney's 60 Margaret Street and Metcentre as the company re-weights its portfolio away from office.
The broker considers the company's valuation to be attractive, observing the company is trading at a -17% discount to net tangible assets, and upgrades its rating to Buy rating from Neutral. Target price steady at $2.50.
NICK SCALI LIMITED ((NCK)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0
At its AGM, Nick Scali delivered maiden first half profit guidance down -32% year on year but 14% ahead of Macquarie, who notes the first half FY23 benefited from a significant unwind of the order book.
Written sales orders have improved since July and while store traffic was down -10-15% in the Sep Q, management noted store conversion rates have improved driven by "better value product offerings for both brands".
Management set a longer-term gross margin target of 62-63% but the broker expects higher margins in the near-term driven by ongoing
benefit from group sourcing and reduced freight.
Target rises to $12.60 from $12.20, upgrade to Outperform from Neutral.
ZIP CO LIMITED ((ZIP)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/3/1
UBS sees limited downside risk for Zip Co and upgrades its rating to Neutral from Sell after a -22% share price fall since the release of FY23 results in August.
The analysts believe management's target for 8-9% revenue yields is achievable, largely due to a recent 25% increase in monthly account fees in Australia for outstanding balances.
Upside risk to yield assumptions is likely, in the analysts' view, with a potential new product launch in Australia before the end of the year.
The target falls to 32c from 36c on lower forecasts due to caution around the macroeconomic backdrop.
Downgrade
AMP LIMITED ((AMP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/3/1
While Ord Minnett finds AMP undervalued at its current price, it also acknowledges corporate uncertainty and high staff turnover in recent years, alongside revelations from the Royal Commission, have impacted on earnings potential and the company's legacy brand.
The broker expects it is unlikely AMP can improve its relative competitive position given its competitive advantages of distributional reach and brand recognition have diminished since 2018.
More likely, according to the broker, is a moderation of flows and rebound in operating margins, which could drive a re-rate. The rating is downgraded to Hold from Accumulate and the target price of $1.35 is retained.
BAPCOR LIMITED ((BAP)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/1
A slow start to the year for Bapcor, with year-to-date revenue in the low single digits compared to the double digit headline growth of the last two years.
While a return to longer-term growth rates had been expected, 3% quarterly growth is a miss on Ord Minnett's expected 6.4% for the first half.
With the result significantly impacted by higher costs, Ord Minnett points out price increases and cost saving initiatives that could offset will take some time to implement and take effect.
The rating is downgraded to Hold from Buy and the target price decreases to $6.40 from $7.50.
LIONTOWN RESOURCES LIMITED ((LTR)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/4/0
Suitor Albemarle has decided not to proceed with the intended takeover of Liontown Resources and Citi analysts, in immediate response, have downgraded their rating for Liontown Resources to Sell from Neutral.
The price target has been cut by -70c to $2.30 from $3. Citi analysts are concerned about capital costs and ramp-up expectations while Albermarle's 4.3% shareholding is likely to come on market when management and Hancock Prospecting own circa 40% of the capital.
Citi does not think Hancock (19.9% equity) will now launch its own bid for the company given existing offtakes are locked in until 2030, plus there are still plenty of risks associated with Liontown's ramp-up, the broker adds.
See also LTR upgrade.
NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Sell from Neutral by Citi and Downgrade to Sell from Neutral by Citi .B/H/S: 2/2/1
Netwealth’s Sep Q net flows of $2.0bn were down -34% from the Jun Q and -31% year on year, missing Citi's forecast of $2.5bn. Outflows
are stabilising but continue to be elevated.
Citi sees the underperformance relative to Hub24’s ((HUB)) Sep Q as a function of Netwealth’s skew towards Wrap, which represents 66% of funds under management, rather than Super.
With the stock trading on a 42x FY24 forecast PE, Citi downgrades to Sell from Neutral. Target falls to $13.45 from $14.45.
Citi has decided to downgrade Netwealth Group to Sell from Neutral as Q1 data, released earlier today, signal a weakening in momentum towards the end of the quarter.
Citi analysts are disappointed as management's commentary in August had suggested today's numbers would be better. Netwealth is underperforming peer Hub24 ((HUB)), explains the broker, because of Netwealth's exposure to Wrap rather than to Super.
Forecasts have been lowered. The broker is not sure how to quantify the fresh partnership with iCapital.
RED 5 LIMITED ((RED)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0
Morgans raises its target prices for gold companies under its coverage after raising its long-term gold price forecast by 8% to US$1,560/oz. The gold price is expected to remain elevated for the forecast period, primarily driven by central bank demand and physical buying.
In the interim forecast period, the broker adjusts its gold price estimates for FY24, FY25 and FY27 by -1%, 12% and 23%, respectively. It's thought potential rate cuts in 2024 and a weaker US dollar will see a material uplift in gold prices.
As mid cap producer Red 5 is trading above Morgans 30c target (down from 42c, partly due to a change of analyst) the broker's rating is downgraded to Hold from Add. This change in rating was due to a reappraisal of forecasts by the new analyst.
The company, which operates in the Leonora region, has a quality asset base with good long-term prospects, in the broker's opinion.
SIMS LIMITED ((SGM)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/2/2
Morgan Stanley highlights East Asian ferrous scrap prices are still falling, Turkish scrap prices have continued their downwards trajectory, while US heavy melting steel (HMS) prices have tracked sideways.
The broker now forecasts a 1H earnings (EBIT) loss for Sims and expects the share price will fall on negative near-term sentiment and earnings downgrade risk.
The rating is downgraded to Underweight from Equal-weight and the target falls to $12 from $13.50. Industry view is In-Line.
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Recommendation Changes |
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Positive Change Covered by at least 3 Brokers
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Negative Change Covered by at least 3 Brokers
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Positive Change Covered by at least 3 Brokers
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Negative Change Covered by at least 3 Brokers
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CHARTS
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED
For more info SHARE ANALYSIS: HUB - HUB24 LIMITED
For more info SHARE ANALYSIS: LTR - LIONTOWN RESOURCES LIMITED
For more info SHARE ANALYSIS: MGR - MIRVAC GROUP
For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED
For more info SHARE ANALYSIS: NWL - NETWEALTH GROUP LIMITED
For more info SHARE ANALYSIS: RED - RED 5 LIMITED
For more info SHARE ANALYSIS: SGM - SIMS LIMITED
For more info SHARE ANALYSIS: ZIP - ZIP CO LIMITED