Weekly Ratings, Targets, Forecast Changes – 19-01-24

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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 January 15 to Friday January 19, 2024
Total Upgrades: 6
Total Downgrades: 11
Net Ratings Breakdown: Buy 56.85%; Hold 34.96%; Sell 8.19%

For the week ending Friday January 19, 2024 there were six upgrades and eleven downgrades to ASX-listed companies by brokers covered daily by FNArena.

While average percentage earnings upgrades by analysts were broadly similar in magnitude to downgrades, average percentage target price rises were greater than falls, as may be seen in the tables below.

Perhaps the biggest disappointment for investors on the ASX last week was the performance of APM Human Services International after management downgraded guidance for first half results. The average target price in the database fell by nearly -24%.

While the workforce solutions company is still regarded by UBS as a high quality, best-in-breed operator in its field, headwinds are now too strong to ignore, and the broker downgraded its rating to Neutral from Buy. Higher interest rates and taxes are combining with low levels of unemployment in both the UK and Australia, explained the analysts.

Management now anticipates a first half group earnings margin of 13%, which Bell Potter compared to the 23% achieved in FY22 post the initial public offering in November 2021.

Ord Minnett chimed in with a -29% cut to its earnings forecasts for APM over the next two years. It’s felt abnormally low unemployment levels will drive depressed client flows and placement fees, while recent North American contract wins and acquisitions will not prove as profitable as previously thought.

The target for Evolution Mining also fell by around -7% following a disappointing quarterly production update which saw the share price being punished even more. The latter saw both Citi and Ord Minnett upgrade their ratings to Buy from Neutral and to Accumulate from Hold, respectively.

Citi felt a -20% share price fall in the wake of the gold miner’s December quarter operational result was overdone, while Ord Minnett also spied a valuation opportunity.

Ord Minnett attributed a -16% production miss for the quarter (also resulting in a -16% miss on costs) to a poor grade performance at the Red Lake operations in Canada and weather-related issues at both Cowal (NSW) and Mt Rawdon in Queensland.

Management downgraded FY24 production guidance at Red Lake by -24% though overall group guidance was maintained.

On the flipside, there were material percentage increases in average targets last week for Link Administration, Cooper Energy and Alumina Ltd.

In a somewhat delayed reaction, Citi raised its target for Link Administration to $2.20 from $1.40 to broadly align with the scheme implementation deed with Mitsubishi UFJ whereby Mitsubishi will acquire 100% of Link shares.

Also, in the interim since the broker's last research update, the company has signed a memorandum of understanding (MoU) with AusSuper to extend its services contract to 2028.

Cooper Energy is benefiting from a production increase via its Orbost Improvement Project, which is delivering results from the H2S polishing unit, explained Macquarie. Greater production is allowing the company to increase sales in the current spot market, which is around 20% higher than its contract pricing. 

In a further positive, decommissioning of the Basker Manta Gummy (BMG) subsea oil facilities is underway, which could prove to be a share price catalyst, according to the broker.

Morgan Stanley maintained its Overweight rating for Alumina Ltd and increased its target to $1.10 from 90c following an update by US miner Alcoa showing 2023 production for the AWAC JV was in line with the broker's forecast, but a slight miss against management's guidance.

Realised prices for the second half beat forecasts by the analyst and consensus by 2%, likely due to timing, while, as expected, fourth quarter costs were -4% lower compared to the prior quarter.

Near-term volume growth is negative, yet a return to profitability and removal of unprofitable tonnes from the market (Kwinana curtailment) are positive medium-term drivers, suggests the broker. AWAC will stop producing alumina at its loss-making Kwinana refinery in Western Australia by September.

Alumina Ltd also came a close second on the table for the biggest increase in average earnings forecast by brokers in the FNArena database, behind Fortescue.

While Ord Minnett raised its target price for Fortescue by 8% to $17.30 due to higher near-term iron ore price forecasts, the Lighten rating was retained.

Unsurprisingly, APM Human Services headed up the earnings downgrade table below for reasons explained above.

UBS raised its target for TPG to $5.45 from $5.14 on higher longer-term growth assumptions for postpaid average revenue per user (ARPU), and after the analyst assumed a broader postpaid back book reprice for March/April of around $4 per month.

This broker sees a more positive environment for a general re-rating of the Australian Telecom sector in 2024 due to falling 10-year bond yields and underperformance of the sector versus the ASX200 in 2023. The analysts’ preferred pick from stocks under coverage of the sector is Telstra.

Total Buy recommendations in the database comprise 56.85% of the total, versus 34.96% Hold, while Sell ratings account for the remaining 8.19%.

Upgrade

CHARTER HALL GROUP ((CHC)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/1/0

Within the Australian Real Estate sector, Charter Hall has historically been one of the best ways for investors to capitalise on falling bond yields, according to Morgan Stanley.

As the broker forecasts 10-year bond yields (US Treasuries) will fall to 3.95% by December 31 (after peaking at around 5% in the 2H of 2023), and the macro environment has stabilised, the rating for Charter Hall is upgraded to Overweight from Equal-weight.

The analysts also anticipate a more active transactions market, and a nadir for the REIT's EPS. The target is increased to $13.25 from $11.10. Equal-weight. Industry view: In-Line. 

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Buy from Neutral by Citi and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

Evolution Mining's share price slipped close to -20% following the company's December quarter result, outlining an operational miss and ongoing issues at its Red Lake site, amid uncertainty as to whether the company can achieve its revised guidance.

Citi finds the reaction overdone, despite assuming the company reaches only the lower end of full year production guidance at 749 ounces and a modest miss of cost guidance at $1,430 per ounce.

Evolution Mining maintained group guidance, but guidance for Red Lake reduces -35,000-45,000 ounces off the weak half.

The broker sees the decline as an opportunity to own leverage to gold. The rating is upgraded to Buy from Neutral and the target price of $3.95 is retained.

Evolution Mining's 2Q production was around -16% shy of Ord Minnett's forecast (resulting in a -16% miss on costs) due to a poor grade performance at Red Lake and weather-related issues at both Cowal and Mt Rawdon.

Management downgraded FY24 production guidance at Red Lake by -24% though overall group guidance was maintained.

The analysts expect FY24 group guidance will be ultimately missed, given the 47% production uplift required in the 2H to meet the midpoint of the guidance range.

The broker sees a valuation opportunity given the -22% share price decline since January 3, and upgrades its rating to Accumulate from Hold. The target falls to $3.40 from $3.70.

GLOBAL LITHIUM RESOURCES LIMITED ((GL1)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0

Lithium pricing has faced a material drop over the last year, with spodumene declining to US$1,000 per tonne from US$6,000 per tonne over the past twelve months as the market moved from a deficit in 2022 to a now clear surplus.

With this in mind, Macquarie expects the market to be keeping a close eye on potential production cuts, capital delays and impairments in the near term.

For Global Lithium Resources, the rating is upgraded to Outperform and the target price of $1.30 is retained.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/4/2

Morgan Stanley sees an improvement in the balance of risks for the Australian economy, as well as competition dynamics within the banking industry, and suggests National Australia Bank will be the biggest beneficiary.

The analysts arrive at this conclusion due to the bank's business mix, sound retail and business franchise performance, along with low execution risk on cost management, excess provision levels and strong capital.

The prospect of a 'soft landing' could potentially lift consensus EPS NAB estimates for FY25 by more than 10%, suggests the broker.

Morgan Stanley upgrades its recommendation to Equal-weight from Underweight and raises its target to $30.30 from $27.40. Industry View: In-Line.

NETWEALTH GROUP LIMITED ((NWL)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/3/0

With markets rallying towards the end of the second quarter and stronger net flow forecasts, Citi has issued upgrades to both Netwealth Group and HUB24 ((HUB)). 

The broker lifts its funds under asset forecast for Netwealth Group 5%, and its earnings forecast 4-8%.

It expects the company to deliver second quarter net flows of $2.6bn, up 11% quarter-on-quarter.

The rating is upgraded to Neutral from Sell and the target price increases 19% to $16.10 from $13.45.

Downgrade

ALKANE RESOURCES LIMITED ((ALK)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/0/0

The quarterly activities report released by Alkane Resources undershot Ord Minnett's expectations due to lower-than-forecast grades and recoveries at the Tomingley Expansion Project. Production, sales and costs (AISC) all missed the broker's forecasts.

Management maintained FY24 guidance, implying to the broker a 2H skew.

Ord Minnett downgrades the rating to Accumulate from Buy and lowers the target to 70c from 75c on the weaker result and
a higher capital expenditure forecast.

APM HUMAN SERVICES INTERNATIONAL LIMITED ((APM)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/0

UBS had already been warnings its clientele on short-term headwinds for APM Human Services International in 2023, but yesterday's market update has forced the broker's hand; downgrade to Neutral from Buy.

The overall trading environment is too much for the company to cope with in the short term, the broker has concluded. APM Human Services International is still seen as a high quality, best-in-breed operator in its field but headwinds are too strong to ignore.

In addition, the broker argues, the share price valuation doesn't look compelling either. Higher interest rates and taxes are combining with low levels of unemployment in both the UK and Australia, UBS highlights.

Target price drops to $1.27 from $3 as forecasts have received the chainsaw treatment.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/1

Strong coal volumes in the second quarter should prove a positive for freight operator Aurizon Holdings, says Macquarie. Network volumes are above full year targets, particularly in the high-margin Blackwater corridor.

The broker suggests this trends points to potential for a small over-collection in FY24, the first in five years, generating $5-10m near-term earnings upside, but warns it will take sometime for this to translate to an improved payout ratio and yield.

The rating is downgraded to Neutral from Outperform and the target price decreases to $3.88 from $4.04.

BHP GROUP LIMITED ((BHP)) Downgrade to Hold from Add by Morgans .B/H/S: 1/5/0

With operational results looming this month, Morgans expects reporting of strong December quarter iron ore volumes from BHP Group, Rio Tinto and Fortescue.

Rather than potential catalysts, it's thought such an outcome would only confirm already positive market expectations, suggest the analysts. The broker upgrades iron ore volume forecasts for the three companies.

On January 18, Morgans expects BHP Group will deliver 2Q FY24 iron ore volume of 72.3mt compared to the consensus estimate for 72.2mt. Following recent share price strength the rating is downgraded to Hold from Add and the target reduced to $49 from $50.

INSIGNIA FINANCIAL LIMITED ((IFL)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/1/2

UBS has marked-to-market for the share market rally over the last two to three months, and increases its target for Insignia Financial to $2.05 from $2.00.

However, the fundamental outlook for Insignia remains challenging and cost reduction has now become vital, according to the broker. Consequently, the rating is downgraded to Sell from Neutral.

The analyst believes the company will remain at a cost disadvantage compared to more nimble peers, even if management achieves its FY26 -$175-190m cost-out target.

LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/0

UBS feels the risk/reward profile for Lovisa Holdings is less compelling after recent share price outperformance versus the ASX200, and recent data showing a slowing in store growth. Net new store growth is declining compared to the first and second halves of FY23.

The change in net new stores is broadly in line with consensus estimates, but higher in A&NZ and lower in the high-potential Americas market, explains the analyst.

The broker also highlights moderating like-for-like sales growth, which reduces UBS revenue estimates.

The rating is downgraded to Neutral from Buy though the target rises to $24 from $23 due to the analyst's higher assumed multiple.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/0

With operational results looming this month, Morgans expects reporting of strong December quarter iron ore volumes from BHP Group, Rio Tinto and Fortescue.

Rather than potential catalysts, it's thought such an outcome would only confirm already positive market expectations, suggest the analysts. The broker upgrades iron ore volume forecasts for the three companies.

On January 16, Morgans expects Rio Tinto to reveal Pilbara shipments of 333mt (consensus 332mt) versus guidance 320-335mt.

The broker downgrades its rating to Hold from Add due to recent share price strength though raises the target to $127 from $124. 

SEEK LIMITED ((SEK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/1/0

Macquarie is anticipating a guidance revision from Seek to the lower end of its range, or earnings of $520m and net profits of $220m, ahead of the company's first half result. 

The company's Job Ad Index was down -20% year-on-year over the December half, and Macquarie is anticipating volumes to decline -18% over the second half, based on the assumption that the unemployment rate reaches 4.25% by the end of the financial year.

The broker retains its position that Seek has the ability to execute on cost out, but sees willingness from Seek as low given references to continued investment over the next five years.

The rating is downgraded to Neutral from Outperform and the target price decreases to $26.00 from $29.00.

SUPER RETAIL GROUP LIMITED ((SUL)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/2

Super Retail's trading update for the 1H revealed profit before tax (PBT) around 15% ahead of Morgans forecast and circa 16% above the consensus estimate.

The analysts note very strong outperformance by BCF, and results above expectations for Supercheap Auto and Macpac, though Rebel missed Morgans forecast.

While the broker raises its FY24 profit forecast by 8%, the rating falls to Hold from Add on valuation following a strong share price performance. It's felt the business is moving in the right direction and has the right portfolio of brands to succeed.

The target is increased to $17.50 from $17.

VICINITY CENTRES ((VCX)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/4/1

Given Morgan Stanley forecasts no interest rate cuts until early 2025, it's thought households will have to divert more money towards housing costs, resulting in less money to spend at malls.

As Vicinity Centres' malls are in areas with high stress and less wealth, the broker downgrades its rating to Underweight from Equal-weight.

The analysts forecast a negative earnings compound annual growth rate (CAGR) over FY23-26 following the dilutive Chatswood acquisition. Balance sheet pressure is also anticipated from developments/devaluations.

The $1.95 target price is retained. Industry view: In line.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/3/2

Despite an improvement in the balance of risks for major Australian banks, Morgan Stanley sees significant execution risks for Westpac around franchise performance, margin management and the outlook for costs.

As Westpac shares have delivered a total return of around 17% since the beginning of November, and a material return on equity (ROE) improvement is unlikely before FY26, the broker downgrades to Underweight from Equal-weight.

The price target rises to $21.70 from $20.90. Industry View: In-Line.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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