Weekly Ratings, Targets, Forecast Changes – 27-10-23

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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 October 23 to Friday October 27, 2023
Total Upgrades: 17
Total Downgrades: 4
Net Ratings Breakdown: Buy 57.17%; Hold 34.30%; Sell 8.53%

For the week ending Friday October 27 there were seventeen ratings upgrades and four downgrades to ASX-listed companies by brokers covered daily by FNArena, yet the size of average earnings forecast downgrades was far greater than upgrades, as can be seen in the tables below.

Liontown Resources received two ratings upgrades from separate brokers and the largest percentage downgrade to average broker target price.

New financing arrangements were announced in the wake of Albemarle withdrawing its $3.00 per share bid, a decision Macquarie attributed to Hancock Prospecting's increased ownership in Liontown Resources.

Liontown raised $376m in equity at $1.80 per share and announced a $760m committed debt facility, which included the refinancing of a pre-existing $300m debt facility.

Macquarie upgraded to Outperform from Neutral and its target price decreased to $2.70 from $3.00 on share dilution from the equity raise.

Citi noted Liontown had satisfactorily resolved the funding gap for development at the Kathleen Valley project and increased its rating to Neutral from Sell, while the broker’s target fell by -40c to $1.90.

Insignia Financial had the second largest percentage fall in average target price after reporting first quarter results showing greater outflows than brokers expected, while the CEO announced an imminent departure, adding to overall uncertainty.

UBS was disappointed by the size of fund outflows, felt near-term operational risks are to the downside, and lowered its target to $2.00 from $2.70.

Management’s claims of better times ahead in FY25 invoked scepticism from Citi due to recent poor execution and the departing CEO in February next year.

Also, guidance for an earnings (EBITDA) margin fall of between -0-0.5bps on the 11.8% achieved in FY23 assumes normalised markets, in the analyst’s view, an occurrence which has not been in evidence so far in 2023.

Flows are challenged in the short-term, noted the broker, with the formal announcement of the MLC wrap migration causing increased outflows in the first quarter. 

Citi’s new target for Insignia of $2.10 (down from $2.50) was set at a -20% (was -15%) risk discount to the broker’s valuation, while a Neutral rating was retained.

In terms of average earnings forecasts in the FNArena database, once the Zip Co entry is ignored due to a data glitch, the next eight positions on the percentage downgrade table below were filled by mining companies. 

Liontown was the first of these, followed by Aeris Resources after releasing first quarter gold, copper and zinc production details.

While Ord Minnett noted results were in line with its forecasts, a "precarious balance sheet position" was also highlighted.

This broker forecast an additional $30m debt drawdown will be required to fund working capital and growth commitments. The analyst will become more constructive than a Hold rating once the balance sheet is refinanced to unlock growth and value appeal. 

While first quarter production results beat Bell Potter’s forecasts, enthusiasm was tempered by costs at Tritton, which were higher than the broker’s forecasts and guidance. It’s felt these costs need to fall to lift free cash flows and strengthen the balance sheet. 

The near-term outlook remains highly leveraged to increasing copper grades at the Tritton copper mine, according to Bell Potter, with capital constraints and debt service requirements likely to limit growth opportunities in the near-term.

The Jaguar copper-zinc operations have also been transitioned into care and maintenance, with management commencing cost cutting and redundancies in the quarter.

Alumina Ltd was next, but the small numbers involved in the brokers’ forecast earnings numbers exaggerated the percentage fall in average earnings on the table below. Allkem was the next rung down on the table.

Despite a strong production quarter, according to Bell Potter, including a record quarter from Mt Cattlin, average realised prices for Allkem were weak although consistent with the market.

While Morgans had anticipated the -12% quarter-on-quarter fall in Olaroz production, revenue from these operations was around -30% lower than expected due to lower carbonate prices.

This broker’s target fell to $14.10 from $15.30 though the Add rating was unchanged on large growth potential, despite potential for short-term weakness in lithium pricing.

On the flipside, Regis Resources was atop the table for percentage increase to average broker earnings forecasts last week. 

Morgans noted first quarter cost numbers and gold production were in line with the estimates of consensus, and highlighted delivery of operational stability and the third consecutive quarter of cash-build.

Moreover, the company’s the low-price hedge book is scheduled to roll-off at the end of FY24, pointed out the broker.

Bell Potter reiterated Regis has sector leading leverage to rising gold prices and mooted the business would represent an appealing corporate target for acquisition. 

Fineos Corp was second on the positive earnings table, though relatively small forecast numbers exaggerated the percentage increase. 

Ord Minnett acknowledged some disappointing first quarter numbers due to delays in cash receipts and higher-than-expected general administrative expenses, yet still maintained shares are substantially undervalued and margins should expand over the longer-term.

Earnings forecasts for Whitehaven Coal were also on the rise last week, after analysts included forecasts for the Daunia/Blackwater assets acquired from BHP Group.

While US$4.1bn was not a bargain price, in Morgans view, terms reached with BHP allowed Whitehaven to avoid dilutive/expensive equity and reduced the risks of expensive/excessive debt.

This broker also liked the diversification into metallurgical coal and likely resultant improvements for financing optionality and potential for wider investor appeal.

The transaction resulted in Ord Minnett's net asset valuation for the company rising by 31%, and the broker’s rating was upgraded to Accumulate from Hold, while the target price increased to $8.20 from $7.20.

Total Buy recommendations in the database comprise 57.17% of the total, versus 34.30% on Neutral/Hold, while Sell ratings account for the remaining 8.53%.

Upgrade

ARB CORPORATION LIMITED ((ARB)) Upgrade to Buy from Sell by Citi .B/H/S: 2/2/1

The rating for ARB Corp rises by two notches, under Citi's system, to Buy from Sell following last Thursday's AGM update. In a truncated research note, the new target price (previously $24.40) was unavailable.

The broker expects Australian Aftermarket will be more resilient than previously expected and believes a stronger balance sheet will allow issues within the US business to be addressed.

Citi's research issued last Friday on the AGM was summarised as follows:

Overall, Citi considered the trading update at ARB Corp's AGM to be positive, with Sep Q profit growth well ahead of expectations. The beat appears to be driven by margins as sales were flat, below a forecast of 4% growth.

The broker believed the market will view the 30% investment in Off Road Warehouse as positive as it suggests ARB is taking a more aggressive approach to resolve its US export issues which have largely arisen from the sale of 4 Wheel Parts last year.

ALUMINA LIMITED ((AWC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/0/1

Ord Minnett expects Alumina Ltd's part-owned Alcoa World Alumina and Chemicals (AWAC) will not have access to higher grade bauxite reserves reinstated until later than initially thought. 

AWAC continues to make progress with relevant government agencies, and has submitted a revised mine management plan program through to FY27. 

With Alumina Ltd's share price having halved since January, Ord Minnett expects a positive ruling allowing access to higher grade bauxite would be a likely catalyst for a re-rate. The rating is upgraded to Accumulate from Hold and the target price decreases to $1.18 from $1.30.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/3/1

Citi upgrades Beach Energy to Neutral from Sell following a fall in the share price, retaining a $1.55 target. Fundamentally, the broker thinks there is little downside remaining.

Indeed, there may be positive news flow in the coming months from continued Perth Basin exploration success, Lattice repricing when arbitration finalises, and Waitsia productivity improvements could see an early start-up versus mid-2024 guidance.

But Citi also advises waiting for the new CEO to outline his strategy before piling in.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Buy from Neutral by Citi and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/3/1

BlueScope Steel's downgrade to December half earnings (EBIT) guidance did not surprise Citi given US HRC min-mill spreads have risen from recent lows; and the broker expects lower Asian HRCE prices will continue to dampen export earnings in the short term.

But Citi is confident that China will retreat from loss-making steel exports in coming months and spies resilience in the Australian domestic market.

Rating is upgraded to Buy from Neutral. Target price falls to $21.40 from $23.50.

BlueScope Steel has downgraded guidance for its first half by around -12%, with earnings from North Star, which accounted for 25% of group earnings last year, set to halve in FY24. 

With US steel spreads reaching record highs in FY23, Ord Minnett is anticipating a return toward longer-term averages, and BlueScope Steel expects spreads to decline around -US$100 per metric tonne. 

Outside of North Star, the company has retained its outlook for the remainder of its business. The rating is upgraded to Hold from Lighten and the target price of $16.50 is retained.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/3/0

Despite Cleanaway Waste Management guiding to strong year-on-year earnings growth of 16% in FY24, equating to $350m, Ord Minnett expects the benefits of price increases and easing costs are being muted by inflationary pressures.

While the broker retains its longer-term earnings assumptions for the company, it decreases its FY24 forecast by -4% to $358m. Ord Minnett finds the shares still slightly overvalued at current prices. 

The rating is upgraded to Hold from Lighten and the target price of $2.20 is retained. 

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

Damstra Holdings has announced the receipt of an indicative proposal from Mitratech Holdings (private company) to acquire the business for $0.30c per share.

The board has granted four weeks due diligence, suggesting to Morgan Stanley shares will trade more in line with the probability of deal completion and any counter proposals.

The target rises to 30c from 10c, the latter was based on the analysts' assessment of business fundamentals.

The broker's rating also rises to Equal-weight from Underweight. Industry view: In-Line.

LIONTOWN RESOURCES LIMITED ((LTR)) Upgrade to Buy from Hold by Bell Potter and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

Having successfully raised $365m and refinanced existing debt, alongside a further $45m share purchase plan, Bell Potter notes Liontown Resources is fully funded for the development of its Kathleen Valley project. 

The total capital expenditure for the project is estimated at -$951m, which according to the broker should leave Liontown Resources with a cash buffer of around $350m. 

Liontown Resources is set  to move from lithium developer to producer in the coming year, at a time when near to production lithium resources are scarce globally, the broker highlights.

The broker adds: major lithium groups have highlighted the strategic nature of Kathleen Valley's near-term production. The rating increases to Buy from Hold and the target price decreases to $2.75 from $3.35.

Liontown Resources has secured $760m in debt funding which will fund progression of its Kathleen Valley project along with $376m in equity, largely composed of an institutional placement. 

The news of financing comes as Albemarle has decided to withdraw its bid for the company, a decision that Macquarie expects was driven by Hancock Prospecting's increased ownership in Liontown Resources. 

The rating is upgraded to Outperform from Neutral and the target price decreases to $2.70 from $3.00 on share dilution. 

MCMILLAN SHAKESPEARE LIMITED ((MMS)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/0

The government's electric car discount policy is providing a boost to the novated leasing industry, with around 26% of electric cars purchased in June being financed through a novated lease. 

For McMillan Shakespeare, new electric vehicles have accounted for 36% of novated leases in the September quarter. Citi estimates McMillan Shakespeare holds 12% of the electric vehicle novated market, but could capture 16% given its large employee base. 

Further, Citi expects better education around novated leasing could see the novated industry take a larger share of the new electric vehicle lease market. The rating is upgraded to Buy from Neutral and the target price increases to $20.70 from $17.95.

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

Morgan Stanley identifies latent value and a potential realisation catalyst around Reckon's Legal Group, which has been a low growth and cash burning division.

In March, Reckon increased its stake in nQ Zebraworks to 76% from 70% by outlaying -US$4m, which implies to the broker around US$48m for the company's stake in the business on a fully diluted basis.

This estimated value exceeds Reckon's current market capitalisation, highlight the analysts.

The target rises to 60c from 50c. and the rating is upgraded to Equal-weight from Underweight based on operating leverage across not only Legal Group but also the Business division. Industry view: In-Line.

SANDFIRE RESOURCES LIMITED ((SFR)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/3/0

As there was no deterioration in underlying fundamentals evident from 1Q results, Ord Minnett now sees further upside to the Sandfire Resources share price, especially after recent falls on weak copper sentiment.

The broker upgrades its rating to Buy from Accumulate and suggests investors adopt a longer-term view and await a turn in the cycle. 

There's thought to be around  20% upside to the broker's fair value assumption. De-risked elements of operations at Motheo are also noted.

After making conservative adjustments to forecasts, Ord Minnett lowers its target to $7.10 from $7.25

SMARTGROUP CORPORATION LIMITED ((SIQ)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

The government's electric car discount policy is providing a boost to the novated leasing industry, with around 26% of electric cars purchased in June being financed through a novated lease. 

Citi estimates Smartgroup Corp holds 10% of the electric vehicle novated market, but could capture 15% given its large employee base. 

Further, Citi expects better education around novated leasing could see the novated industry take a larger share of the new electric vehicle lease market. The rating is upgraded to Buy from Neutral and the target price increases to $9.70 from $8.50.

TRANSURBAN GROUP LIMITED ((TCL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 3/3/0

With Transurban Group's share price declining -20% over the last six months, Ord Minnett now finds the stock fairly valued. The broker finds the company to benefit from relatively defensive revenue and expected strong growth from Consumer Price Index-linked tolls.

While Transurban Group carries significant debt, and has subsequently been hurt by the rapid and ongoing increase in bond yields, Ord Minnett points out the company has long-dated debt which will slow the rise of its borrowing costs. 

The rating is upgraded to Hold from Lighten and the target price of $12.50 is retained.

TELSTRA GROUP LIMITED ((TLS)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/1/0

Ord Minnett finds Telstra Group to be trading at an attractive -16% discount to its fair value estimate, expecting investors remain cautious on the company's slow progress towards T25 targets. 

However, Ord Minnett is forecasting a compound annual growth rate of 8% through to FY26, despite challenges in fixed line units and inflation induced obstacles. 

The broker is cautious on the pending Versent acquisition, describing it as an "opaque technology services firm" with volatile revenue. The rating is upgraded to Accumulate from Hold and the target price of $4.50 is retained.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Neutral from Sell by Citi .B/H/S: 4/2/0

Citi upgrades Treasury Wine Estates to Neutral from Sell, being less concerned about short term downside risk to earnings given the company recently provided quantitative 1H/2H skew guidance which reduces the risk of an earnings miss.

The broker expects incrementally positive newsflow around China following the announcement that wine tariffs are under review
although acknowledges limited related upside to FY24 earnings, while proprietary data suggest a more constructive outlook for the high margin cellar door channel in the US.

Target rises to $12.20 from $10.20.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/1

Whitehaven Coal is set to acquire 100% of the Blackwater and Daunia mines owned by the BHP Group ((BHP)) and Mitsubishi joint venture, BMA, at a cost of US$3.2bn, or US$4.1bn including contingent payments. 

Ord Minnett finds the purchase strategically sensible for Whitehaven, noting it will make Whitehaven the largest met coal producer in Australia, alongside diversifying its mix and improving ESG credentials. 

Incorporating the purchase sees Ord Minnett's net asset valuation for the company increase 31%. The rating is upgraded to Accumulate from Hold and the target price increases to $8.20 from $7.20.

Downgrade

ARGOSY MINERALS LIMITED ((AGY)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Argosy Minerals' lithium carbonate project has not achieved a continuous production state and its ramp-up has suffered multiple delays.

The delay of environmental approval presents a key hurdle for stage 2 construction and the capacity expansion plan, in Macquarie's view.

The broker downgrades to Neutral from Outperform given a weakened earnings outlook and uncertainties in stage 1 production ramp-up and environmental approvals.

Target falls to 18c from 40c.

BRICKWORKS LIMITED ((BKW)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/0

For stocks within Morgans coverage of general industrials on the ASX, the broker expects weaker operating conditions experienced in the 2H of FY23 will likely persist through FY24.

In an AGM season preview, the analyst states preferred stocks, increases its risk-free rate assumption to 4.2% from 3.6% and makes relatively muted earnings/target changes.

Morgans key picks are the Add-rated Qualitas, Ventia Services and Maas Group.

The sole ratings change by the broker is for Brickworks, downgraded to Hold from Add, given the current share price is trading broadly in line with net tangible assets (NTA). The target falls to $25.90 from $26.70.

BRAMBLES LIMITED ((BXB)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/3/1

Citi downgrades its rating for Brambles to Sell from Neutral and lowers its target to $13.15 from $16.

Yesterday's summary of the broker's research following 1Q results was as follows:

Brambles, earlier today, released a strong Q1 trading update, Citi comments in an initial response. Volumes continuing were "muted" the broker suggests but price and rollover benefits stole the show.

Citi analysts doubt whether pricing power is structural, plus Brambles will be cycling tougher comparables. The combination of the two makes the broker more cautious from here onwards.

Further adding to the broker's caution, it is noted management mentioning increasing competitor activity/changing whitewood dynamics, plus there's a year-on-year decline in average pallet prices paid, and Brambles' price realisation will align with a lower cost-to-serve environment.

FORTESCUE METALS GROUP LIMITED ((FMG)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/1/5

UBS says Fortescue Metals performance in Q1 was in line with expectations. The realised product price of US$100/t was better than market consensus.

The broker does believe risks are now skewed towards more negative news flow (such as the Iron Bridge ramp up) and has decided to downgrade to Sell from Neutral.

Target price remains $20.80. The broker also keeps an eye out for progress on the court case regarding potential Yindjibarndi compensation related to Solomon activity.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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