Weekly Ratings, Targets, Forecast Changes – 15-12-23

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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 December 11 to Friday December 15, 2023
Total Upgrades: 5
Total Downgrades: 13
Net Ratings Breakdown: Buy 57.50%; Hold 34.74%; Sell 7.76%

For the week ending Friday December 15 there were five ratings upgrades and thirteen downgrades to ASX-listed companies by brokers covered daily by FNArena.

Average earnings upgrades by analysts were larger than downgrades as can be seen in the tables below.

Morgans and Bell Potter downgraded Volpara Health Technologies to Hold from Buy (or equivalent) after South Korean-listed Lunit Inc agreed to acquire 100% of the company’s shares at $1.15 via a Scheme of Implementation Agreement.

The transaction value was broadly in line with Morgans valuation for Volpara, and management and major shareholders unanimously recommended voting in favour of the proposed scheme. The analysts suggested shareholders sit tight to see if another bidder emerges.

Bell Potter pointed out the bid at a 47.4% premium to the previous closing price, valuing Volpara at $296m. It’s thought the absence of significant scale and rapid growth will be barriers to a competing bid.

The average target in the FNArena database for Volpara rose to $1.15 from $1.01 to align with the bid by Lunit Inc.

PolyNovo received the largest upgrade to average earnings forecasts in the FNArena database though it should be noted the percentage gain was somewhat exaggerated by the very small forecast numbers involved.

Higher forecasts by Bell Potter followed the release of record sales numbers in November, with US commercial sales up 74% year-on-year to $6.1m.  The sales acceleration was attributed to increased utilisation by surgeons of the NovoSorb BTM products, and further supply to hospitals.

The broker is anticipating momentum will continue into 2024 as surgeons continue to explore uses for the NovoSorb products. It’s estimated the US market will represent around 75% of product sales in FY24, even with strong growth in markets outside the US.

Despite material upgrades to revenue growth forecasts across FY24-26, Bell Potter’s target price was reduced to $1.80 from $2.05 due to increases in the broker’s assumed risk-free rate and other adjustments to the valuation model.

Regis Resources was next after announcing the closure of its gold hedge book last week, following the buyback of 63,000 forward-sold ounces at a cost of -$98m. Bell Potter noted the company is now fully unhedged, with a final hedge book delivery made in the December quarter.

This Buy-rated broker calculated a net closure price of circa $3,120/oz, implying that if the Australian dollar gold price trades above that level through FY24, the company will come out ahead of its -$98m outlay.

More importantly, according to Bell Potter, is the company’s ongoing operating margin expansion and the increase in quarterly cash flow generation metrics, which the analysts feel the market rates highly in its valuation of gold producers. The target was increased to $2.37 from $2.31.

Newmont also received higher forecast earnings by brokers. While UBS was not initiating coverage on Newmont, the broker’s research was included in the FNArena database for the first time, which increased the average earnings forecast of all covering brokers.

UBS is proceeding with caution on the outlook for Newmont ahead of the upcoming fourth quarterly report and announcements on combined Newmont/Newcrest production guidance, as well as technological studies on key assets.

Having visited and reviewed the company's Boddington (gold-copper) and Tanami (gold) mines, the analysts felt consensus estimates were too high for Boddington for FY24 and FY25, as well as forecasts for the Newcrest assets.

The broker lowered its 2024-2025 production estimates by -20-25% to 633,000 ounces. And retained Neutral rating with a target of $60.00.

By contrast, the same visit to Boddington reaffirmed to the analyst at Macquarie the status of the mine as a tier-1 gold asset of global significance. Boddington competes with Newmont's Cadia asset for title of largest gold mine in Australia, noted the broker.

While management indicated that mine life into the 2040's is probable via cutbacks to the current pits, it also noted Boddington has the opportunity to extend mine life into the 2060’s due to near-mine exploration. Macquarie maintained its Outperform rating and target of $69.

Following a review of commodity prices by UBS, Lynas Rare Earths also received a boost to its average earnings forecast by covering brokers in the FNArena database. Despite this, the broker lowered its target to $9.20 from $9.60, and unfortunately the truncated research note offered no explanation.

In general, the Resources sector offers a combination of defensive dividend yields (particularly iron ore), and exposure to structural commodity price upside (copper/aluminium) anchored to the energy transition thematic, highlighted the broker. Potential leverage to lower interest rates in 2024 was also noted.

The average earnings forecast for Audinate Group also rose last week, boosted by higher estimates made by Shaw and Partners, which also raised its target to $14.70 from $11.75.

The group’s share price has demonstrated strong outperformance recently, up 87% year-on-year, benefiting from the normalisation of covid-related supply chain impacts, explained the broker.

Management has outlined a record backlog, noted Shaw, and has forecast gross profit growth of above 25%, alongside improved profitability and cashflow.

The broker suggested investors wait for a better entry point before purchasing shares and downgraded its rating for Audinate Group to Hold from Buy.

Costa Group received the largest downgrade to average earnings forecasts last week as can be seen in the table below.

Ord Minnett recommended shareholders vote in favour of the proposed takeover by Paine Scwartz Partners as the $3.20 offer is relatively attractive on valuation grounds.

The transaction is very likely to proceed, in the broker’s opinion, with unanimous director support and little chance of a higher bid. The analyst lowered the FY23 underlying earnings (EBITDA) forecast by -13% as conditions have deteriorated, and because of management's latest outlook for the remainder of the year.

Macquarie felt the likelihood of the takeover transaction closing is high, after the independent expert concluded the Scheme Implementation Agreement is fair and reasonable. 

A valuation range of $2.62-$3.28 per share was set by the expert, with the Scheme consideration of $3.20 falling within that range.

This broker downgraded its rating to Neutral from Outperform and moved its target price to $3.20 (to align with the bid) from $3.19.

Total Buy recommendations in the database comprise 57.50% of the total, versus 34.74% on Neutral/Hold, while Sell ratings account for the remaining 7.76%.

Upgrade

ALUMINA LIMITED ((AWC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/1/0

Macquarie has upgraded it's commodity price outlook and raised its price forecasts for copper, zinc, lead and iron ore and downgraded  forecasts for nickel and coal.

While price forecasts for alumina and aluminium were little changed, the broker upgrades the rating for Alumina Ltd to Neutral from Underperform due to recent share price weakness.

Research was released by Macquarie on December 8.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/1

With US steel prices holding strong, Macquarie anticipates the commencement of an earnings recovery for BlueScope Steel through the second half of FY24 as spot pricing supports 23% upside to earnings.

The broker anticipates pricing to recede as economies soften, but is confident in a recovery into FY25, and believes growing focus on this potential recovery could prove supportive to the stock, which continues to trade well below long-range averages.

The rating is upgraded to Outperform from Neutral and the target price increases to $24.00 from $19.00.

SIMS LIMITED ((SGM)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/2

With scrap prices rallying in recent weeks, Macquarie is anticipating the market's focus to turn to Sims' earnings per share recovery potential in FY25. The rally comes amid increased rebar demand in Turkey and restocking ahead of the new year.

The broker feels market expectations are low and the potential recovery under appreciated, remaining 27% ahead of consensus net profit forecasts for FY25.

The rating is upgraded to Outperform from Neutral and the target price increases to $17.30 from $13.20.

REJECT SHOP LIMITED ((TRS)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0

Morgans updates its earnings estimates for Consumer Discretionary stocks under the broker's coverage for recent currency movements and trading updates during the AGM season. It's felt the key picks are Lovisa Holdings and Super Retail Group.

While profit forecasts fall by -1% in both FY24 and FY25, generally due to lower gross margins and higher operating cost assumptions, the broker's revised FY24 estimates still sit 3% above consensus.

The analysts' target for the Reject Shop rises to $6.25 from $5.85 on higher peer multiples, and the rating is upgraded to Add from Hold.

VIRGIN MONEY UK PLC ((VUK)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/0

Macquarie upgrades its rating for Virgin Money UK to Outperform from Neutral on valuation following recent FY23 results showing stable margins and a strong capital position. More negatively, the broker observed subdued loan growth and elevated cost growth.

FY24 guidance was conservative, in the analyst's opinion. Management expects a net interest margin (NIM) of 1.90-1.95% and common equity Tier 1 (CET1) within the targeted 13.0-13.5% range.

The broker's target rises to $3.45 from $3.20 with increased forecasts for revenue and buy-backs partially offset by increased costs.

Downgrade

AUDINATE GROUP LIMITED ((AD8)) Downgrade to Hold from Buy by Shaw and Partners .B/H/S: 3/1/0

Off the back of a strong year Audinate Group's share price has demonstarted strong outperformance recently, up 87% year-on-year, benefitting from the  normalisation of covid related supply chain impacts. Given this, Shaw and Partners suggets investors wait for a better entry point.

Management has outlined a record backlog, and looking ahead suggests gross profit growth likely above 25%, alongside improved profitability and cashflow.

The rating is downgraded to Hold and the target price increases to $14.70 from $11.75.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/5/0

Macquarie believes the likelihood of the Paine Schwartz Partners transaction closing is high, after the independent expert concluded the Scheme Implementation Agreement is fair and reasonable.

A valuation range of $2.62-$3.28 per share for Costa Group was set by the expert, with the Scheme consideration of $3.20 falling within the that valuation range.

Costa Group confirmed the scheme booklet for the acquisition of all issued shares in Costa not already owned at $3.20 cash per share has been registered with ASIC.

The broker downgrades its rating to Neutral from Outperform and moves its target price to $3.20 (to align with the bid) from $3.19.

Based on trading since August and the outlook for the remainder of the year, notes the analyst, management expects 2023 EBITDA-S below 2022.

EROAD LIMITED ((ERD)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/1/0

Having recently updated on Eroad following the company's first half results release last month, Bell Potter makes no changes to its forecasts. However, with the stock now trading modestly above the broker's target price, it downgrades its rating from Hold from Buy.

The broker retains it's full year forecast for revenue of NZ$179.8m, and earnings of NZ$4.4m. While this is towards the upper end of guidance, Bell Potter expects there may remain some conservatism in both its forecast and company guidance.

Target price of 95 cents is retained.

GENESIS MINERALS LIMITED ((GMD)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

Macquarie has upgraded it's gold price outlook resulting in only modest upgrades to near-term earnings forecasts for stocks under coverage in the Gold sector.

Due to recent share price strength the rating for Genesis Minerals is downgraded to Neutral from Outperform.

Northern Star Resources ((NST)) is Macquarie's key pick in the sector. The target price rises to $2 from $1.90.

Research was released by Macquarie on December 8.

GOLD ROAD RESOURCES LIMITED ((GOR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/1/0

Macquarie has upgraded it's gold price outlook resulting in only modest upgrades to near-term earnings forecasts for stocks under coverage in the Gold sector.

Due to recent share price strength the rating for Gold Road Resources is downgraded to Neutral from Outperform.

Northern Star Resources is Macquarie's key pick in the sector. The $2 target price is unchanged.

Research was released by Macquarie on December 8.

LEPIDICO LIMITED ((LPD)) Downgrade to Hold from Buy by Shaw and Partners .B/H/S: 0/1/0

Lepidico continues to consider funding options for its lepidolite to lithium hydroxide project, with one options being selling a mica concentrate to China to generate early cash flow.

This project will see Lepidico mine lepidolite and generate a mica concentrate in Namibia, before converting the mica concentrate to lithium hydroxide in Abu Dhabi, but funding processes have taken far longer than Shaw and Partners had expected.

The broker notes selling mica concentrate will have the benefit of providing early cash flow while the chemical plant is constructed and commissioned.

The rating is downgraded to Hold from Buy and the target price decreases to 2 cents from 6 cents.

MIRVAC GROUP ((MGR)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/1/0

Due to the cumulative impact of a number of minor but negative factors in the outlook for Mirvac Group, Morgan Stanley downgrades its rating to Equal-weight from Overweight. The target is reduced to $2.30 from $2.55. Industry view: In-Line.

Residential sales have not recovered since the slow September quarter and the broker forecasts reported gearing will be at the top half of management's targeted 20-30% range in the 1H.

The analysts also point out the company is relying heavily upon 2H EPS to meet full year guidance of between 14-14.3cps.

PILBARA MINERALS LIMITED ((PLS)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/2

Citi's commodities team has responded to lithium pricing pulling back faster and further than expected, reducing its lithium forecasts by -20-30% in the next calendar year and anticipating spodumene pricing will track sideways in the coming year.

Citi pulls back its rating on Pilbara Minerals, noting the stock has tracked sideways since October. The broker does, however, note Pilbara Minerals should be most leveraged to any price bounce back.

The rating is downgraded to Neutral from Buy and the target price decreases to $3.90 from $4.40.

SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Hold from Buy by Shaw and Partners .B/H/S: 1/5/0

Sigma Healthcare's share price is up circa 37% since it announced its intended merger with Chemist Warehouse. Based on the information released, Shaw and Partners estimates that this is effectively a nil premium/discount merger.

As the transaction is subject to regulatory approval, the broker makes no changes to forecasts at this time. Given the current share price, and the regulatory review process that will likely take several months, the broker downgrades to Hold from Buy.

90c target retained.

SMARTGROUP CORPORATION LIMITED ((SIQ)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0

Morgans raises its FY25 EPS forecast for Smartgroup Corp by 7.4% following a large contract win with the South Australian government. The target rises to $9.70 from $9.00, while the rating is downgraded to Hold from Add on valuation.

The company has been appointed as the exclusive administrator of salary packaging services and novated leasing services under an initial five-year agreement.

Based upon management's trading update, the broker notes revenue has benefited from strong industry deliveries. The company is guiding to FY23 revenue and profit (NPATA) of around $249m and $63m, respectively.

The company noted electric vehicle orders have increased by 60% from the 1H of FY23 and now comprise 40% of total orders.

VOLPARA HEALTH TECHNOLOGIES LIMITED ((VHT)) Downgrade to Hold from Add by Morgans and Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/2/0

South Korean-listed Lunit Inc has agreed to acquire 100% of Volpara Health Technologies' shares at $1.15 via a Scheme of Implementation Agreement.

The transaction value of $285.5m is broadly in line with Morgans valuation for Volpara, and management and major shareholders have unanimously recommended voting in favour of the proposed scheme.

The analysts suggest shareholders sit tight to see if another bidder emerges.

The broker's target falls to $1.15 from $1.17 to align with the offer, while the rating is downgraded to Hold from Add.

Volpara Health Technologies has received an all cash takeover bid from Korean company Lunit at $1.15 per share, an offer that the Board finds in the best interests of shareholders to accept. The company's two largest shareholders have indicated they will vote in favour of the offer.

Bell Potter points out the bid is a 47.4% premium to the previous closing price, valuing Volpara Health Technologies at $296m. The broker expects a counter bid is unlikely, feeling an absence of significant scale and rapid growth will be barriers to a competing bid.

The rating is downgraded to Hold from Buy and the target price increases to $1.15 from 85 cents.

WESFARMERS LIMITED ((WES)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/1

Following recent share price outperformance, UBS downgrades its rating for Wesfarmers to Neutral from Buy.

Shares have rallied by around 18.4% from the start of 2023 and outperformed large cap retail peers such as Coles Group ((COL)) and Woolworths Group ((WOW)) whose shares have changed by -4.9% and 8.6%, respectively.

The broker's FY24 and FY25 EPS forecasts are reduced partly due to lower lithium price forecasts and a higher net interest expense estimate. The target falls to $55 from $56.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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