Weekly Ratings, Targets, Forecast Changes – 01-12-23

Weekly Reports | Dec 04 2023

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 27 to Friday December 1, 2023
Total Upgrades: 4
Total Downgrades: 4
Net Ratings Breakdown: Buy 58.15%; Hold 33.82%; Sell 8.03%

For the week ending Friday December 1 there were four ratings upgrades and four downgrades to ASX-listed companies by brokers covered daily by FNArena.

The trend of several months continued, with larger percentage downgrades to average earnings forecasts than upgrades by analysts.

Life360 received the largest of these downgrades, mostly because Ord Minnett initiated research coverage in the database with lower forecasts than existing estimates by Morgan Stanley and Bell Potter. 

Later in the week, Buy-rated Bell Potter also reacted to recent 3Q results by lowering average revenue-per-paying circle (ARPPC) forecasts, which reduced subscription estimates slightly. The broker lowered its target to $11.25 from $11.50 but remained upbeat.

Ord Minnett (Buy) began with a $8.84 target and suggested a recent share price sell-off post those 3Q results provided an attractive entry point.

Bundling of the Tile offering is set to represent a paradigm shift for customer retention, in this broker’s view, while meaningful free cash flow is expected in FY24 as cost pressures ease.

Tiles emit a secure Bluetooth signal, so when a customer's phone with the Life360 or Tile app passes by a missing item, the customer receives a location update as part of the Tile Network.

As mentioned in last week’s article, management’s outlook commentary at 1Q results for Brickworks was arguably the weakest among building product peers, according to Morgans.

After heading up the earnings downgrade table in the prior week, Brickworks again appears second on the list below, after Ord Minnett lowered forecasts in the expectation of a challenging FY24 due to a more difficult construction outlook, particularly in Australia.

Property valuations will also be impacted by cap rate expansion to 5.2% from 4.1%, note the analysts, which management expects will drive a -10% decline in the Industrial Property assets.

There were also ongoing earnings forecast downgrades by analysts for City Chic Collective last week, after the prior week’s AGM trading update.

Neutral-rated Macquarie lowered its target by -22% to 38c, partly due to a lower assumed multiple, while Morgan Stanley (Equal-weight) decreased its target to 40c from 45c in reaction to a -30% decline in revenue so far in the first half of the financial year.

Morgan Stanley warned of the impacts on City Chic's brands from aggressive discounting, and cautioned gross margins could be permanently impacted if discounts become entrenched.

Following an AGM trading update, Ramsay Health Care also received lower earnings forecasts last week. 

Morgan Stanley noted greater-than-expected (ongoing) margin pressure in both France and the Nordic countries, while high tax rates also negatively impacted the broker's EPS forecasts. Overall volumes are improving, yet the analysts explained inflation and currency movements are continuing to pressure earnings in these countries.

Citi is all for a sale of Ramsay Sante, the second largest private care provider in Europe, to provide Ramsay Health Care with lower financing risk and a higher return on invested capital.

On the flipside, Temple & Webster had a good week in receiving the highest percentage increase in average target price in the FNArena database.

At an AGM trading update, management revealed 23% sales growth so far in FY24 (to November 27). The company is on track to exceed the consensus estimate for 15% growth in the first half, and Morgan Stanley noted growth was gaining momentum as FY24 progressed.

Citi highlighted momentum into the second half looks promising, despite ongoing cost-of-living pressures, but downgraded its rating to Neutral from Buy as the share price had rallied by 30% over the last month.

Collins Foods also received the largest percentage increase in average target price from analysts last week after reporting a stronger-than-expected first half result, with net profit 37% ahead of the consensus forecast.

Citi noted Europe performed strongly, with earnings from the region up 52% year-on-year, partly on 16% store count growth, while the company's Taco Bell brand also returned to same store sales (SSS) growth in the period.

For additional detail on first half results for Collins Foods please refer to: https://www.fnarena.com/index.php/2023/11/29/collins-foods-fast-food-resilience-taco-bell-turnaround/

On the other side of the coin, Aeris Resources received the largest percentage reduction in average target price in the FNArena database last week after raising $30m in new equity to fund capital requirements.

Both Macquarie and Ord Minnett felt another capital raising will be required, with the latter noting the trade payables position of $121m on June 30, along with an onerous $50m debt at 15.5% interest with WH Soul Pattinson.

While Macquarie downgraded to Neutral from Outperform, FY24 and FY25 EPS forecasts actually rose by 30% and 48%, respectively, on lower exploration estimates, helping Aeris to the top of the (positive change) earnings forecast table below.

Appen was next with its average target price in the FNArena database falling by -21% last week, after Bell Potter incorporated an equity raise and a higher assumed risk-free rate into forecasts, and lowered its target to 65c from $1.70.

Management announced both a further US$14m of cost reductions, on top of the US$46m already slated, and a fully underwritten $30m equity raising.

As part of a trading update, the company noted “the challenging external operating and macroeconomic conditions that were noted at the release of the 1HFY23 result have persisted into 2HFY23”.

For the second week in a row, the average target for Healius fell materially. Last week to $1.83 from 2.07 after Morgan Stanley refreshed research, and to $2.07 from $2.80 in the prior week after several broker updates.

With the share price trading closer to Morgan Stanley's new target of $1.30 (down from $2.31), the broker's rating was upgraded to Equal-weight from Underweight.

Total Buy recommendations in the database comprise 58.15% of the total, versus 33.82% on Neutral/Hold, while Sell ratings account for the remaining 8.03%.

Upgrade

HEALIUS LIMITED ((HLS)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/4/0

With Healius guiding to first half earnings of $14-17m, Morgan Stanley extrapolates the company's full year guidance suggests a sizeable earnings increase in the second half to $78-91m. The broker estimates full year earnings of $74m, below company guidance.

The company is not only anticipating a 6-8% volume increase in the second half, but has also suggested efficiencies will deliver a $15m benefit in the period.

With the share price trading closer to Morgan Stanley's target, the rating is upgraded to Equal-weight from Underweight and the target price decreases to $1.30 from $2.31.

IDP EDUCATION LIMITED ((IEL)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 4/2/0

The Sep Q is typically seasonally weaker for student placement volumes in Australia, which was evident in visas granted across IDP Education’s key source countries being down -12% year on year, Bell Potter notes, albeit slightly above pre-pandemic levels.

Bell Potter is more conservative on IDP’s Australian placement outlook with recent data portraying a normalisation of visas issued along with lower grant rates and the possibility of the government introducing policies to cap international student numbers to lower record migration levels.

However the modest downgrades to the broker's Australia placement assumptions are more than offset by an increase in multi-destination forecasts supported by encouraging northern hemisphere data.

Upgrade to Buy from Hold, target rises to $27.00 from $26.70.

IRESS LIMITED ((IRE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/0

Iress has upgraded guidance for FY23, FY24 and the FY24 exit rate by 4.6%, 8.5% and 6.7%, respectively. The revenue environment appears to have stabilised, notes Macquarie, with monthly average revenue (for the 2H) 2.6% ahead of the 1H average.

October 31 net debt was $308m, down from $375m at 30 June, aided by the previously announced $52m sale of the Managed Funds Administration business, explains the broker.

The rating for Iress is upgraded to Outperform from Neutral, while the target rises to $8.35 from $6.85 on earnings upgrades, and a lower beta due to reduced balance sheet risk.

ORORA LIMITED ((ORA)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/0

Shares in Orora are trading at a significant discount to value, in historical terms, according to Morgan Stanley, after a -24% share price decline following the announced acquisition of Saverglass.

The broker upgrades Orora's rating to Overweight from Equal-weight and anticipates meaningful valuation upside. Consistent earnings and robust cash flows are expected.

A share price re-rating may occur once the market becomes more comfortable with the explanation for the Saverglass acquisition at the 1H 2024 investor day, believe the analysts.

Target $3.50. Industry view: In-line.


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