Weekly Reports | Feb 19 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 February 12 to Friday February 16, 2024
Total Upgrades: 13
Total Downgrades: 15
Net Ratings Breakdown: Buy 56.54%; Hold 34.52%; Sell 8.93%
In the second week of the reporting season ending Friday February 16, 2024, there were thirteen rating upgrades and fifteen downgrades to ASX-listed companies by brokers covered daily by FNArena.
For the duration of the current reporting season this weekly article should ideally be read in conjunction with FNArena’s daily Corporate Results Monitor (Corporate Results Monitor - FNArena.com), which provides a summary of broker research on all companies that have reported results to-date.
The tables below show percentage downgrades by brokers to average earnings forecasts were broadly similar to upgrades, though positive percentage adjustments to 12-month target prices were greater than negative changes.
Audinate Group received both the largest percentage upgrade to average earnings forecasts and the second largest increase in average target price after first half results comfortably beat forecasts by analysts.
The share price has risen by over 140% in the last year due to ongoing strength for the core Audio offering and an acceleration for the more recent Video business.
The release of the company’s FY23 result last August and this month’s first half result both resulted in a material share price jump after research analysts scrambled to upgrade forecasts.
The share price move following the FY23 result was stalled after management launched a $50m share placement and $20m share purchase plan in early-September.
Proceeds are intended for strategic investment to drive organic growth, enhance and accelerate growth in Video, and to explore a pipeline of identified bolt-on M&A opportunities.
This time around, perhaps based on experience, some brokers are suggesting management is being conservative in maintaining FY24 guidance and by alluding to potential macroeconomic headwinds.
The Boral share price has also risen strongly (by over 50%) in the last 12 months. This company received the second largest percentage upgrade to earnings forecasts by brokers, after performance for the first half exceeded the consensus forecast by 25%, despite revenues in line with expectations.
Underlying earnings rose by 144% year on year, reflecting strong cost discipline, benefits from operational efficiencies and good price realisation, noted Bell Potter. Flat direct labour costs were considered a positive achievement, given reported shortages and wage pressures across the industry.
Brokers in the FNArena database remain wary with three Sell (or equivalent) ratings, two Holds and an Outperform recommendation by Macquarie.
Link Administration releases its interim result tomorrow, but the average earnings forecast by brokers in the FNArena data base rose last week after Morgan Stanley updated its estimates.
Following the recently completed sales of the BCM and Fund Solutions divisions, the broker increased its earnings forecasts by 4%, assuming improved operating conditions for the remaining divisions. The analyst’s full year net profit estimate increased by 54% on the timing of proceeds from the divestments.
Morgan Stanley’s FY25 net profit estimate was also raised by 5%. The broker is currently on research restriction for Link Administration, meaning no rating or target price are set.
Temple & Webster also appears on the table for positive earnings forecast change and received the largest percentage upgrade to target price in the database, along with two rating upgrades from separate brokers.
The company has grown sales by 35% in the second half to-date, Macquarie noted, having already experienced 23% growth in the first half, which is resulting in significant market share gains.
Macquarie also noted early signs of AI-driven cost leverage, with fixed costs at 10.7% of sales in the first half of FY24, down from 12% in FY23.
According to Citi, which upgraded to Buy from Neutral, management’s next step is to steal market share from physical retailers. Citi’s target price was increased to $13 from $7.40.
Pro Medicus came third on the table for the largest percentage increase in target price (21%), but this will likely provide little solace for investors who witnessed a material fall in share price last week.
Prior to the release of first half results, which left most analysts unsatisfied given how strong the share price had been, Morgans felt a significant 'beat' was required to sustain the current valuation.
Bell Potter downgraded its rating to Sell from Hold. At face value, this broker noted there was only a slight gap between the company’s first half revenues and market expectations, but a deeper dive revealed softer-than-expected growth in exam revenues offset by once-off hardware sales. Also not helping, operating expenses grew faster than revenues, something not witnessed in a long while, according to the broker.
Macquarie remained steadfast with an Outperform rating and unchanged $120 target (shares closed at $87.24 on Friday), while Ord Minnett (Sell; unchanged target $34.50) has felt for a while the company is materially overvalued with the market likely underestimating competitive threats.
In addition to speed and functionality superiority, Macquarie noted the company’s cloud capabilities support recent market share gains and is expecting cost savings from cloud deployment and a broadening of the pool of potential customers.
The company's share price has traditionally traded above the average target price of brokers in the FNArena database. The average target of five covering brokers is currently $77.30 (Citi is yet to update research for the result), which suggests nearly -11% downside to the current share price.
Note: the sharply lower target set by Ord Minnett (whitelabeling Morningstar) does act as a heavy anchor on the average.
It was a big week for investors in Altium. The company’s average target price in the database increased after Japanese company Renesas Electronics agreed to acquire Altium for $9.1bn in an all-cash offer.
Ord Minnett raised its target for the company to $68.50 to align with the cash offer price. It's felt the company is certain to be acquired as the transaction has been unanimously approved by the boards of directors of both parties.
The offer price represents a 39% premium to Altium's one-month volume-weighted average price prior to the announcement.
Turning to earnings downgrades, here GrainCorp headed up the table below as updated guidance provided at the AGM missed consensus forecasts, even before the surprise announcement of -$10m to -$12m in upcoming transformation costs, noted UBS. The company's Canadian joint venture proved the major disappointment, suggested the broker, which cut its FY24 EPS forecast by -29%.
Management provided FY24 guidance for underlying earnings and profit -12.6% and -31.3% below consensus estimates.
Ord Minnett was the only broker (of five in the database) that didn’t lower its target, perhaps because the analyst's valuation is based on an average year with average conditions, partly because GrainCorp utilises volume-based insurance.
Given an improving macroeconomic backdrop, last week’s first half results for Fletcher Building were as poor as Citi has seen, and have cost the CEO and Chairman their respective jobs. As a result, the company placed second on both the earnings downgrade and negative change to target price tables below.
Reflecting the better economic conditions, noted Citi, revenues beat the consensus forecast by 7%, yet EBITDA and EBIT were misses of -9% and -16%, respectively. The interim dividend was cut and some growth projects have also been adjusted. An equity raise is now potentially in prospect, suggested the broker.
Macquarie took the hatchet to Fletcher Building’s rating with a downgrade to Underperform from Outperform, thereby passing over the Neutral rating in between.
While revenue outpaced forecasts by consensus and the analyst, by 5% and 10%, respectively, rising product claim issues weighed on the result.
Management announced six measures to shore up the balance sheet ahead of product claims and legacy contract outcomes, one being the suspension of the December-half dividend.
Commentary on companies not mentioned above, with materially positive changes in the tables below, can be read in the daily Corporate Results Monitor. These include Magellan Financial Group, JB Hi-Fi, Seven Group and Goodman Group.
On the flipside, there were negative changes for Seek, Seven West Media, Evolution Mining and Strike Energy.
Total Buy ratings in the database comprise 56.54% of the total, versus 34.52% on Neutral/Hold, while Sell ratings account for the remaining 8.93%.
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