Weekly Reports | Feb 05 2024
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 29 to Friday February 2, 2024
Total Upgrades: 8
Total Downgrades: 12
Net Ratings Breakdown: Buy 56.86%; Hold 34.74%; Sell 8.40%
For the week ending Friday February 2, 2024, there were eight rating upgrades and twelve downgrades to ASX-listed companies by brokers covered daily by FNArena.
Percentage downgrades to average earnings forecasts were again greater than for upgrades, and this week the top-ten places in the earnings downgrade table below were all filled by companies in the resources sector.
Running counter to this negative trend for resources were uranium companies Paladin Energy and Boss Energy, which featured first and third, respectively, on the list for percentage increase to average target price.
Paladin received rating upgrades to Buy from Hold, or equivalent, from Bell Potter and Citi following the prior week’s quarterly cashflow and activities report.
The company’s Langer Heinrich mine moved closer to a restart in the December quarter, with management advising first ore had been fed into the mine's beneficiation plant. First production is on track for around the end of the current quarter.
Citi also raised its uranium price forecasts in the expectation of a more imminent Russian nuclear fuel ban, and potential for ongoing mine development issues in both Niger and Kazakhstan.
This broker forecasts U3O8 will average US$101/lb and US$110/lb in 2024 and 2025, respectively, while the long-term forecast was raised to US$115/lb from US$87/lb.
Bell Potter noted Boss Energy is the most leveraged of stocks under coverage to a spot price increase. After reviewing second quarter operational results, forecasts for FY25 and FY26 were increased after the broker lifted short and mid-term uranium pricing, and anticipated a peak spot price of US$130/lb. However, the average FY24 forecast for Boss in the database fell, hence the company’s appearance in the earnings downgrade table.
Management announced the restart of the Honeymoon Uranium Project is 96% complete, with first "uranium in drum" expected in the current quarter. Macquarie suggested Boss is well positioned for the ramp-up, with a solid balance sheet, including cash and uranium inventory.
The average target prices for Credit Corp and City Chic Collective also rose by 17% and 10%, respectively, after second half updates.
While Credit Corp's first half underlying profit missed the consensus forecast by more than -15%, Morgans FY25/26 earnings outlook remained largely unchanged. The Add rating was kept, but the broker cautioned trust is required in management's execution in the US.
Macquarie noted Credit Corp is taking share in the A&NZ purchased debt ledger (PDL) market with purchasing guidance upgraded to $100-110m from around $50m prior.
As the weight of growth is shifting to the US, where competition is fierce, Ord Minnett predicted future returns on equity are likely to remain constrained. This broker forecasts lower profit growth in the five years ahead compared with the five years past. It’s felt the market is too optimistic and the shares are “expensive”.
City Chic's second quarter gross margins were higher than the prior quarter, and remain on track to return to historical levels, according to Morgan Stanley.
The company logged a 10% rise in gross trading margins in the December quarter and management reiterated its expectations of a return to profitability in the June half.
Management is contemplating selling the North American business, which accounts for around 50% of group revenue.
The top-five (and material) reductions to average target prices (where there are at least three covering brokers in the FNArena database) were for the following resource companies: 29Metals, Liontown Resources, IGO Ltd, Gold Road Resources and Chalice Mining.
Of those five, only Chalice Mining did not appear in the top-ten (all were material) reductions to average earnings forecasts in the database.
Chalice received an upgrade to Buy from Neutral after UBS identified value in the wake of an -83% share price fall since the company’s August-2023 scoping study for the nickel-copper-platinum group element (PGE) Gonneville project in Western Australia.
At the time of the scoping study, Morgans noted a more challenging path than previously expected for development of the project after misses on forecast average feed grades, expected recoveries, and estimated development capex.
Now, UBS can see the advantages of a smaller project including lower capital expenditure and reduced risks around funding, execution and permitting.
For 29Metals, December quarter copper and zinc production proved respectively -20% and -11% below Outperform-rated Macquarie's estimates. Maiden 2024 copper and zinc production guidance also fell a little short of the broker’s forecasts. Morgan Stanley felt the -32% share price drop was overdone and retained an Overweight rating.
December quarter reports for Liontown Resources and IGO were negatively impacted by ongoing falls in lithium prices, with IGO receiving a double-whammy from declining nickel prices.
Hold-rated Morgans suggested Liontown was in a tricky situation with current spot lithium prices indicating a potential funding gap for the development of the Kathleen Valley project.
Without sufficient reason to be more positive on lithium prices, UBS downgraded its IGO rating to Neutral from Buy. See also: https://fnarena.com/index.php/2024/02/01/tough-times-for-igo/
Most of the December-quarter metrics for Gold Road Resources had been pre-released (and were quite a negative shock to Macquarie at the time), yet last week’s report still included 2024 guidance that was much softer than the broker anticipated.
Along with inflationary pressures, delayed access to higher grade ore from the Gruyere open pit resulted in increased use of lower-grade stockpiles, explained Ord Minnett, which joined Macquarie and UBS in lowering its target price.
Sandfire Resources headed up FNArena’s earnings downgrade table, despite generally meeting (or just missing) brokers’ production forecasts for copper in the second quarter, and management reaffirming FY24 guidance. The size of the forecast earnings downgrade (in percentage terms) owed more to the small forecast numbers involved.
Seven brokers in the database issued new research last week on Mineral Resources resulting in lower average earnings forecasts, though four remained Buy-rated, or equivalent.
Mount Marion’s spodumene realised price declined by -61% in the second quarter, and Wodgina’s battery chemical realised price fell by -45%. Iron ore prices lifted by 20% quarter-on-quarter.
Macquarie noted beats for sales of iron ore and lithium, combined with the strong realised iron ore prices, were offset by the soft lithium pricing. Lower costs reported at both Mt Marion and Wodgina were, however, considered a key positive.
For the overall sector, Morgans feels the down cycle has largely played out, presenting some attractive value opportunities. From among stocks under coverage, it was suggested investors stick with quality: namely Mineral Resources and Pilbara Minerals, which are both assigned Add recommendations.
29Metals, Gold Road Resources and Liontown Resources also received forecast earnings downgrades from brokers, for the reasons explained above.
Turning to increases in average earnings forecasts, here resource companies were also prominent. Due to the small forecast numbers involved, Regis Resources registered an exaggerated percentage increase. Second quarter production and costs (AISC) were in line with consensus forecasts, and Citi felt unchanged FY24 guidance will be met.
UBS downgraded its rating to Sell from Neutral following an around 20% share price rally, and also suggested there are better alternatives to Regis within the ASX Gold sector.
Paladin Energy and Chalice Mining were next for reasons explained above, followed by Aeris Resources.
While December quarter results for Aeris were mixed, with copper production -14% below Macquarie's forecasts, gold output was largely in line. This broker was pleased management maintained FY24 copper production and cost guidance.
Atlas Arteria’s average earnings forecast rose by around 11% last week after toll revenue in the December quarter rose by 6%.
Hold-rated Ord Minnett explained revenue and traffic for the part-owned APRR motorway network in France increased by 12% and 3%, respectively, above pre-covid levels in 2023, suggesting full recovery from the pandemic. It’s thought traffic volumes are benefiting from low unemployment, increased holiday traffic and motorway upgrades.
While earnings forecasts edged up last week for Netwealth Group after second quarter results, two brokers downgraded ratings.
Ord Minnett downgraded to Hold from Accumulate on valuation, after recent share price appreciation, while Macquarie downgraded to Underperform from Neutral with the stock seen as “priced for perfection.”
Total Buy ratings in the database comprise 56.86% of the total, versus 34.74% on Neutral/Hold, while Sell ratings account for the remaining 8.40%.
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