Weekly Ratings, Targets, Forecast Changes – 17-11-23

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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 November 13 to Friday November 17, 2023
Total Upgrades: 11
Total Downgrades: 5
Net Ratings Breakdown: Buy 57.68%; Hold 34.10%; Sell 8.22%

For the week ending Friday November 17 there were eleven ratings upgrades and five downgrades to ASX-listed companies by brokers covered daily by FNArena.

Following AGM commentary by nib Holdings, which included a July to October FY24 business update, two brokers upgraded ratings to Buy (or equivalent) from Hold, while Ord Minnett upgraded to Hold from Lighten.

Year-to-date group revenue increased by around 13% on the previous corresponding period, excluding the ending of a Qantas Airways contract, which Morgans considered a "relatively robust" outcome, while Ord Minnett felt the trading update was a mixed affair.

While claims inflation is picking up amid some out of cycle contract renegotiations with hospitals, Citi felt the company is well placed to manage the problem, particularly in the shorter term. 

On the other side of the ledger, ANZ Bank received ratings downgrades last week to Neutral from Buy from both Citi and UBS after FY23 results missed expectations.

Both market revenues and the net interest margin (NIM) disappointed Citi, offset by strong fee income and several one-offs. The broker also thought management’s choice of a bonus dividend instead of a buyback meant there was no benefit in terms of a reduced share count moving forward.

The results reflected the impact of growing above-market during a period of heightened competition and some irrational mortgage pricing, but still demonstrated ANZ is better positioned than peers, according to UBS, given its relative share of institutional earnings.

While first quarter earnings for News Corp were a 10% beat against the consensus forecast last week, the company’s top position on the average target price upgrade table below owes more to the reintroduction of UBS into the database after a prolonged absence of research coverage.

FleetPartners Group was next on the table for increased target price. Morgan Stanley upgraded to Overweight from Equal-weight and raised its target to $3.20 from $2.70 on growth momentum apparent from FY23 results.

The results outpaced Ord Minnett's forecasts, thanks to a 13% jump in new business writing as novated leases grew 38% and fleet posted growth of 4.5%.

Macquarie believes the outlook remains positive for the group supported by "robust" demand, a strong pipeline and supportive government policy.

On the flipside, Clinuval Pharmaceuticals received the largest percentage reduction in average target by brokers last week, but only after two brokers initiated research coverage accompanied by lesser 12-month price targets than the $24 level set by Bell Potter in early October.

Morgans commenced with an Add rating and suggested the current share market valuation presents both a solid trading opportunity and a reasonable place to begin building positions in the stock.

The company's primary asset, called Scenesse, is used for the rare phototoxic condition called erythropoietic protoporphyria (EPP), which is approved for use in most major jurisdictions. Lately, there has been weakness in the general sector and perception of an increasing competitive risk for Scenesse, explained the broker. Nonetheless, the asset is expected to generate plenty of cash beyond 2030.

While beginning with just a Hold recommendation, Ord Minnett suggested the market is too pessimistic about this biotech's future.

The average target price for APM Human Services International also fell (by over -10%) last week. Bell Potter highlighted a disappointing AGM statement pointing to lower first half year-on-year earnings due to lower employment volumes and because of interest costs and higher tax rates.

Currently, low unemployment and lower caseloads from higher margin programs are proving headwinds to first half earnings, yet Morgan Stanley suggested prospects for FY25 (and potentially the second half of FY24) are looking attractive.

The average target for Chalice Mining also fell by just over -10% after Bell Potter lowered its long-term palladium price forecast to US$1500oz from US$1700oz.

In the same research note, the broker noted Chalice had just released an update on test works at its Gonneville nickel-copper-PGE project in WA, which augurs well for greater recoveries than those suggested by the August scoping study.

This broker estimated Gonneville is still making money at spot prices and generating decent cash flow. Incremental improvements in metallurgical recoveries should add strong value to the project and the Speculative Buy rating was retained.

AMP also received lower target prices from stockbroker analysts last week after a trading update revealed a lower net interest margin (NIM) than the consensus forecast due to price competition.

On the one hand, Citi felt the market was left to fear the worst, given no specific reasons were proffered for the rapid deterioration in NIM. On the other hand, Ord Minnett, while disappointed in the short-term, believed the market is undervaluing the potential longer-term recovery for the Bank division's margins.

GrainCorp and Incitec Pivot received the two largest percentage downgrades to average earnings forecasts by brokers last week after reporting FY23 results. 

Once these FY23 forecasts rolled off broker financial models and were replaced by less sunny outlooks for FY24 and onwards, automatic earnings ‘downgrades’ were triggered, helping to make the actual results appear worse.

Proving this point, the average target price by brokers covering GrainCorp and Incitec Pivot in the database only fell by -8c and -4c, respectively.

Morgans described a "commendable" FY23 result for GrainCorp, showing strong operating cash flow and a large core cash position, allowing a fully franked final dividend of 30cps and a $50m on-market buyback.

While investors fear a step-down in earnings from FY24 as drier conditions emerge, UBS argued this outcome is factored in and the stock should be assessed on its mid-term cash flows and scope for capital returns and/or reinvestment.

For Incitec Pivot, the FY23 result exceeded Morgans expectations. While the Explosives result was "solid", according to the analysts, Fertilisers was weak due to lower fertiliser prices and poor currency hedging, along with manufacturing and gas supply issues.

Following the sale of the Waggaman ammonia manufacturing facility in Louisiana and shareholder approval (AGM December 20), management intends to distribute up to $1bn via a capital return ($300m), special unfranked dividend ($200m) and a $500m on-market share buyback.

APM Human Services International also received lower earnings forecasts from brokers for reasons already explained above.

On the flipside, Regis Resources received the largest percentage upgrade to average earnings forecasts by brokers.

Regis (Buy) remained Morgans top pick from stocks under coverage in the Gold sector with positive upcoming catalysts for McPhillamys and the rolling-off of a lower-price hedge book in FY24. The company also trades at a cheaper valuation than peers, noted the broker.

UBS raised its target for Regis to $1.86 from $1.65 after increasing its gold price forecast by around US$200 per ounce through to 2026, now assuming the commodity fetches prices of US$2,085, US$2,200 and US$1,950 per ounce in 2024, 2025 and 2026, respectively.

The broker anticipates gold will benefit as we approach the end of the Federal Reserve’s rate hiking cycle and expects prices will reach new heights over 2024 and 2025 as the US faces a recession.

Buy-rated Gold Road Resources also benefited from the higher gold price forecast by UBS and appears third on the earnings upgrade table below.

Travel software company Serko is second on the table after first half results exceeded the expectations of all three Buy-rated (or equivalent) covering brokers in the FNArena database.

Macquarie noted the company's Booking.com partnership accounted for 90% of revenue growth in the half, and the renewal update on this partnership (due next May) is key to the outlook. The broker raised its target to NZ$5.00 from NZ$3.51.

Ord Minnett highlighted the huge operating leverage in the business, demonstrated by the first half result, and envisaged potential for material share price upside over time. It’s felt FY25 and FY26 will be about harvesting the benefits from the Booking deal as the sheer size of the revenue numbers begin to materially exceed costs.

The company upgraded guidance for FY24 revenue by 6%, which implied to Citi lower total cash burn than both consensus and the broker had been expecting.

Total Buy recommendations in the database comprise 57.68% of the total, versus 34.10% on Neutral/Hold, while Sell ratings account for the remaining 8.22%.

Upgrade

A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/0

Citi upgrades its rating for a2 Milk Co to Buy from Neutral following surprising reiteration of FY24 earnings guidance at the AGM. It's now felt the required 2H skew may not be as significant as previously thought.

The broker notes the company is trading on an undemanding price earnings multiple and reviews data suggesting birth rate declines may be approaching the end.

In an abbreviated research note by Citi, no mention is made of any change to the prior $4.74 target price.

ARISTOCRAT LEISURE LIMITED ((ALL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/0/0

Aristocrat Leisure's FY23 performance beat Ord Minnett's forecasts and thus the fair value calculation has shifted to $45 from $43 previously.

Commentary blames the broker underestimating the interest income on the company's net cash position. The momentum shift in favour of digital gaming over land-based gaming machines during covid is now reversing, the analyst points out.

Aristocrat is expected to continue grabbing market share in electronic gaming. More investing in design and development has triggered miniscule reductions to forecasts. Accumulate (which implies an upgrade from September).

ALS LIMITED ((ALQ)) Upgrade to Lighten from Sell by Ord Minnett .B/H/S: 2/1/0

Ord Minnett had downgraded ALS Ltd's rating to Sell from Lighten in early October, expecting a slowing in its commodities business in FY24, which constitutes the majority of earnings.

Yesterday's interim release proved a positive surprise and we note the broker's rating has shifted to Lighten, which is one step up from Sell. No change in the view the shares are materially overvalued or that a slow down will arrive for the minerals testing business.

Life sciences' result was in line with the broker's forecast. Fair value assessment has lifted to $8.60 from $8.40. That awaited slow down is now anticipated to arrive in FY25. The broker has penciled in no growth that year (from FY24).

FLEETPARTNERS GROUP LIMITED ((FPR)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/0/0

Following FleetPartners Group's FY23 results, Morgan Stanley upgrades its rating to Overweight from Equal-weight and raises its target to $3.20 from $2.70 on growth momentum. Industry View: In-line.

Strong order intakes across fleet and novated are now complemented by supply improvements, note the analysts.

FY23 NPATA  was an 11% beat versus the consensus estimate driven by elevated end of lease (EOL), while 2H new business writings (NBW) rebounded on both increased supply and ongoing robust demand, explains the broker.

Morgan Stanley suggests a high likelihood of ongoing elevated EOL supporting further buyback programs. A 2H $30m buyback was launched.

NIB HOLDINGS LIMITED ((NHF)) Upgrade to Hold from Lighten by Ord Minnett and Upgrade to Add from Hold by Morgans and Upgrade to Buy from Neutral by Citi .B/H/S: 3/3/0

It is Ord Minnett's view nib Holdings' trading update was a rather mixed affair, but there are no consequences for the broker's medium-term projections.

The broker's forecasts assume a lower-than-expected claims catchup post covid. This has been supporting the insurer's earnings, but Ord Minnett flags it will become less of a tailwind from here onwards.

The travel business is performing weaker-than-expected since the white-label agreement with Qantas Airways ((QAN)) was discontinued. There's a new agreement with Woolworths Group ((WOW)), expected to launch in November, the analyst points out.

Fair value estimation remains at $7.50. The Hold rating implies an upgrade from the Lighten in August.

Following AGM commentary by nib Holdings, which included a July to October FY24 business update, Morgans makes relatively nominal positive changes to its forecasts, which are offset by a higher assumed discount rate.

Excluding the ending of a Qantas Airways ((QAN)) contract, year-to-date group revenue increased by around 13% on the previous corresponding period, which the analyst considers a "relatively robust" outcome.

The target falls to $8.38 from $8.77 and the broker's rating is upgraded to Add from Hold on valuation.

Citi finds nib Holdings attractive, noting ARHI is reporting stronger growth than a year ago, with policyholders up 1.3% in the four months to the end of October, while IIHI and New Zealand are showing decent momentum. 

The broker pointed out claims inflation is picking up amid some out of cycle contract renegotiation with hospitals, but it expects nib Holdings is well placed to manage, particularly in the shorter term. 

The rating is upgraded to Buy from Neutral and the target price decreases to $8.35 from $8.55.

NUFARM LIMITED ((NUF)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0

Having completed its examination of Nufarm's FY23 result, Citi upgrades the company to Buy from Neutral and raises the target price to $5.60 from $4.65.

Citi says Nufarm posted a solid result at a time when global peers are still staring down softer demand.

Management delivered positive FY24, albeit mixed guidance, Crop Protection remaining under pressure in the first half before recovering in the second.

The company expected to generate solid earnings from base seeds Carinata and Omega 3, despite the latter being in a ramp-up phase, with much more to come once production is in full swing.

PANTORO LIMITED ((PNR)) Upgrade to Hold from Sell by Bell Potter .B/H/S: 1/1/0

Pantoro will divest its lithium, nickel, copper and cobalt rights at the Norseman gold project to Mineral Resources ((MIN)) for a price of $60m, plus royalties.

Bell Potter states this will see Pantoro retain rights to precious and base metals and battery materials at the project.

Payment will involve a $30m upfront cash payment, $30m deferred payment due with a final investment decision, and a 2% royalty on nickel, copper and cobalt and a 0.75% royalty on lithium. 

Bell Potter finds the deal timely for Pantoro, which was facing a cash shortfall in coming quarters. The rating is upgraded to Hold from Sell and the target price increases to $0.042 from $0.025.

SEEK LIMITED ((SEK)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/0/0

Yesterday's Report included an initial assessment by UBS of Seek's AGM address. Today, upon further reflection and analysis, the broker has decided to upgrade to Buy from Neutral.

The broker is "pleased" the company reiterated guidance for FY24. The trend in H1 is "resilient", comments the analyst, and that's sufficient for a more positive skew about the outlook for the rest of the year.

Listings are declining but in line with expectations. UBS does lower its projections for Asia as the Seek Asia tracker shows volumes weakening in most markets, except Indonesia.

Buy. Target lifts to $27.40.

SOLVAR LIMITED ((SVR)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 2/0/0

Solvar provided a trading update with its AGM that was very similar to its October update, albeit this time, says Bell Potter, with more detail on debt facilities and funding costs.

Beyond FY24, Bell Potter's forecasts reflect a view that rising interest rates should restrain inflation, leading to a relatively benign slowdown in the economy without a lengthy recession. This should allow Solvar to grow and take market share without a significant rise in bad debts.

The broker will review these forecasts as the outlook becomes clearer. Recent weakness in the share price leads Bell Potter to upgrade to Buy from Hold. Target unchanged on $1.09.

Downgrade

ANZ GROUP HOLDINGS LIMITED ((ANZ)) Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/0

Citi analysts, on closer examination, conclude ANZ Bank's FY23 cash earnings have fallen short of forecasts by -4% (Citi) and -2% (consensus) respectively.

Even though the "miss" doesn't appear to be significant, the analysts highlight the point that, compositionally, this is a "weak" result.

The bank's weighting to institutional business, formerly a boon, came home to roost as institutional offshore deposits fell, leaving the bank to fall back on more expensive domestic retail TD deposits to support their above-system mortgage growth, which hit retail profits, says the broker.

Both market revenues and NIM proved a disappointment, offset by strong fee income and several one-offs. Citi also thinks opting for a bonus dividend instead of a buyback means there's no benefit in terms of shares count moving forward.

On the upside, the bank's bad and doubtful debts were nearly half consensus forecasts.

Rating is downgraded to Neutral from Buy. Target price falls to $26 from $27.

ANZ Bank has delivered a slight miss to UBS's expectations with its full year results, but the broker attributes the result to the cost of the bank growing above market during a period of heightened competition and some irrational mortgage pricing. 

Cash net profits declined -6% year-on-year to $3.6bn, with net interest income down -5% to $8,078m, but some net interest income pressure offset by stronger than expected non-net interest income.

The broker does find ANZ Bank better positioned than its peers given its relative share of institutional earnings, but sustained lending and deposit pressure in the retail business have had a greater than expected margin impact, and driven a rating downgrade.

The rating is downgraded to Neutral from Buy 

APM HUMAN SERVICES INTERNATIONAL LIMITED ((APM)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 3/1/0

Bell Potter highlights a disappointing AGM statement from APM Human Services International, pointing to lower first half earnings year on year due to lower volumes in employment, as well as interest costs and higher tax rates.

Since coming to market the company has made a number of acquisitions, which shareholders could reasonably expect to be driving improving levels of profitability, the brokers suggests. Instead, margins have fallen, debt levels have risen, and cash conversion has been
weak.

Bell Potter believes the shares are likely to remain weak until there is a clearer path to improvement and downgrades to Hold from Buy. Target falls to $1.90 from $2.21.

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

While TPG Telecom doesn't have a debt servicing problem, stresses Morgan Stanley, gearing levels are too high to justify a trading multiple near parity with Telstra Group ((TLS)).

Relative to Telstra, TPG Telecom has higher debt, a weaker mobile position and a greater exposure to any negative technology trends being experienced by enterprises, explains the broker. 

Morgan Stanley's rating for TPG Telecom is downgraded to Underweight from Equal-weight and the target is reduced to $4.40 from $5.60. It's felt the company could explore cutting its dividend to zero, rather than selling its high quality fibre assets.

Industry View: In-Line.

WOODSIDE ENERGY GROUP LIMITED ((WDS)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/3/1

Citi analysts have taken a chainsaw to their forecasts for earnings and cashflow for Woodside Energy, resulting in material downgrades, which pulls back the broker's price target by -16% to $26.50.

Given this is substantially lower than today's share price, Citi has downgraded its rating to Sell from Neutral.

Adding more weight to their decision: Citi believes market consensus will follow in its footsteps as the downgrades in forecasts are based upon the company's own projections for the next five years.

Citi believes Woodside's earnings power is deteriorating. The decline of legacy LNG and acquired assets mean Woodside is increasingly capex intensive, evidenced by circa US$20bn of committed capex merely keeping production flat, the broker concludes.

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