Weekly Reports | Feb 26 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 19 to Friday February 23, 2024
Total Upgrades: 20
Total Downgrades: 27
Net Ratings Breakdown: Buy 55.83%; Hold 35.25%; Sell 8.92%
In the third week of the reporting season ending Friday February 23, 2024, there were twenty rating upgrades and twenty-seven downgrades to ASX-listed companies by brokers covered daily by FNArena.
As mentioned last week, this 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.
In a similar pattern to last week, 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.
Reliance Worldwide's first half results beat broker expectations last week and the company received three ratings upgrades, while a2 Milk Co and HMC Capital also beat analysts’ forecasts but received two ratings downgrades apiece after recent share price strength.
Valuation was also considered an issue by Morgans and Citi when downgrading The Lottery Corp to Hold following in-line results.
Average target prices for HMC Capital, Reliance Worldwide and a2 Milk Co increased by 29%, 22% and 13%, respectively, as can be seen in the table below.
UBS labeled HMC Capital’s result a "low quality 41% beat" due to non-cash gains, derivative gains on its HealthCo Healthcare & Wellness REIT investment, and lower tax. Nonetheless, the broker reminded investors management has the ambition to transition HMC Capital to a global diversified alternative asset manager.
Shares in HMC have climbed by over 60% in the last four months. HMC Capital primarily manages real estate assets, particularly convenience-based assets via the ASX-listed HomeCo Daily Needs and the unlisted Last Mile Logistics Fund.
More recently HMC has moved into Healthcare assets via the listed HealthCo Healthcare & Wellness REIT and the unlisted Health & Life Sciences Fund.
Reliance Worldwide reported a resilient first half result, suggested Ord Minnett, given volume declines experienced in each of its three key geographies. Management aggressively tackled the cost base, driving strong margin performance in the Americas, explained the analyst.
Cost reduction initiatives will continue into second half, with the EMEA region in focus. As end-markets will potentially stabilise later this year, and new product initiatives are underway, the broker suggested Reliance is well-placed for an eventual upturn in the cycle.
For a2 Milk Co, Morgans felt interest income tailwinds on large cash balance in the first half would result in material upgrades to consensus forecasts. The transition to the new GB standards for a2 Milk's China label has vastly outperformed the broker’s expectations held a year ago.
Management upgraded FY24 guidance slightly and made some upbeat outlook commentary, noted Morgans. It’s felt earnings will accelerate in both FY25 and FY26.
Other significant average broker target price moves, which occurred after the release of financial results, were for Bega Cheese, Universal Store, WiseTech Global, ARB Corp, Ventia Services Group, and Lovisa Holdings.
The appearance of retailers Universal Store and Lovisa in this grouping is indicative of the 8% rally so far this year for the ASX Consumer Discretionary sector. Exceptions last week within this sector included a -15% average target price fall for the Reject Shop and a -28% decline in the average earnings forecast for Baby Bunting.
Baby Bunting's trading update, which accompanied the release of first half financials, indicated a deterioration in sales. Citi downgraded to Neutral from Buy and suggested the turnaround story will occur at a slower pace and prove more difficult to achieve than initially envisaged.
Profits for the Reject Shop were materially reduced as a result of shrinkage (shoplifting). Earnings fell by -$4m and would have been flat without the subterfuge, which had a -75bps impact on gross margins.
Management only became aware of the situation at stocktake time, post period’s end.
More positively, Morgans noted the company outperformed most companies under the broker’s coverage in retail, with 2.3% like-for-like sales growth as customers gravitated towards well-priced everyday essentials.
The Reject Shop appears in both the negative change to target price and negative change to earnings tables below, as do Corporate Travel Management, APM Human Services International, and Lendlease.
Corporate Travel Management lowered FY24 earnings guidance by -15.4% after delivering underlying earnings which fell short of consensus expectations, largely due to underperformance of the company's UK Bridging contract due to immigration issues and timing delays.
While Citi acknowledged the majority of the downgrade was out of management's control, the broker’s rating was lowered to Neutral from Buy on overall uncertainty, including a lack of clarity around the UK contract.
APM Human Services International reports interim results this Wednesday, but last week Morgan Stanley conceded it was wrong on its Overweight rating and downgraded to Equal-weight and slashed its target to $1.22 from $2.60.
The analyst not only underestimated the impacts from low unemployment rates, but also the complexity of APM’s operations across multiple jurisdictions, with various programs and nuances.
Bell Potter (target $1.50) upgraded to Buy from Hold when APM confirmed (after recent media speculation) it had received and rejected a proposal of $1.60 per share in cash from CVC Asia Pacific Ltd.
Management believes the long-term value of the business is worth considerably more, and the broker concurred, noting revenue growth into FY25 via new contract wins and traction from the health business.
Lendlease Group's December-half result proved a massive miss, with Citi noting core earnings fell -70% short of consensus forecasts and -67% below the analyst’s forecast, due to weakness across the business, particularly in the development segment.
While management expects an earnings recovery, the broker is concerned by ongoing pressure on core earnings and execution risk. Cit’s rating was downgraded to Neutral from Buy and the target reduced to $6.90 from $9.40.
Iress received the largest percentage upgrade to average earnings forecasts in the FNArena database last week, though it should be noted the percentage gain was exaggerated by small numbers involved. FY23 results were in line with management's guidance, and broadly in line with forecasts, with all divisions (excluding Super) displaying half-on-half earnings growth.
Morgans noted Iress has executed on the early stage of its business turnaround strategy via cost-out and de-gearing, yet downgraded its rating to Hold from Buy after recent share price outperformance and because of an opaque outlook for 'base' free cash flow generation. On the other hand, Buy-rated Ord Minnett suggested the share price appears undervalued and is expecting a strong recovery in the core business this year.
Cobram Estate Olives was second on the earnings upgrade table after enjoying much stronger output pricing in Australia in the first half than Shaw and Partners anticipated. The period saw the company gain market share domestically, with Australian packaged oil sales up 41% year-on-year.
The broker (Buy) noted sales are expected to be similar in the second half, but further price increases are likely to be offset by volume constraints.
For further commentary on companies mentioned (and not mentioned) that feature in the tables below, please refer to FNArena’s daily Corporate Results Monitor.
Total Buy ratings in the database comprise 55.83% of the total, versus 35.25% on Neutral/Hold, while Sell ratings account for the remaining 8.92%.
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