Weekly Ratings, Targets, Forecast Changes – 01-03-24

Weekly Reports | Mar 04 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 26 to Friday March 1, 2024
Total Upgrades: 14
Total Downgrades: 18
Net Ratings Breakdown: Buy 55.27%; Hold 35.59%; Sell 9.14%

In the fourth week of the reporting season ending Friday March 1, 2024, there were fourteen rating upgrades and eighteen downgrades to ASX-listed companies by brokers monitored daily by FNArena.

In a similar pattern to the past two weeks, the tables below show percentage downgrades by brokers to average earnings forecasts were broadly similar to upgrades (with a few outliers) though positive percentage adjustments to 12-month target prices were greater than negative changes.

While competition remain intense in mortgage lending, Resimac’s first half results beat expectations and Bell Potter upgraded to Buy from Hold while Citi moved to Neutral from Sell.

Citi attributed the beat to lower operating costs and improved bad debts. Despite a pullback in marketing expenditure, the broker found momentum improved in the second quarter.

Bell Botter saw signs of a turnaround for new settlements, but Macquarie (Neutral) cautioned banks still retain a large funding advantage over non-banks and mortgages remain a difficult space in which to compete.

While FY23 results for TPG Telecom met broker expectations, FY24 guidance was softer-than expected due to higher opex and transformation costs. As a result, Morgans and Macquarie downgraded to Hold (or equivalent) from Buy (or equivalent).

Macquarie warned working capital from handset receivable repayments is likely to drag on cash flow and limit dividend growth in the next 12 months. It’s also thought available franking credits will expire by the time of the FY24 interim payment, thereby further reducing appeal for investors. A total of 18cps will be paid out in dividends for FY23 after a 9cps final dividend was declared.

Altium also received two ratings downgrades (from Macquarie and Morgan Stanley) last week after presenting first half results and withdrawing FY24 guidance following the proposed acquisition by Renesas Electronics.

Given recommendations in favour of the acquisition scheme from both boards, Morgan Stanley expects Altium shares will trade more in line with the probability of deal completion, regulation approvals and counter proposals, rather than fundamentals.

Altium also came fourth on the table below for the largest percentage increase in average target price last week after brokers raised the average target price to $66.23, to closely align with the $68.50 bid by Renesas.

Coming first on the positive change to target list was Reece, after first half results exceeded analysts’ expectations. There was higher earnings growth than Morgans expected for Australia, New Zealand and the US, but the broker (Reduce) remains cautious on the outlook for all three countries.

Citi, on the other hand, increased its earnings expectations by 26% through FY24-26 and upgraded its rating to Neutral from Sell.

Next up on the increased target price table was Adairs, followed by NextDC in the wake of their respective interim results.

Thanks to better gross margins and control over operating costs, Adairs’ earnings were 19% better than Morgans expected, and the broker upgraded to Add from Hold. Gross margins increased by 220bps on the first half of FY23 to 60.2%, which the broker explained was due to lower freight rates, reduced clearance activity and generally better promotional discipline.

UBS felt the share price of Adairs looked "somewhat cheap" yet retained a Neutral rating because the sales performance was soft across the company’s brands and there are downside risks to consumer expenditure.

UBS welcomed a strong result from NextDC with first half revenue and underlying earnings ahead of expectations. Demand is strong, driven by the cloud, AI and the enterprise shift to co-location, and momentum in contracted megawatts continues.

For Morgans, the symbiotic relationship between hyperscale and enterprise (cloud and corporate colocation) is the key attraction of NextDC. While cloud/hyperscale represented the majority of the record 149MW’s contracted in the first half, the company also sold a record 4MW of enterprise capacity in the second quarter of FY23.

Leading the earnings upgrade table was Alumina Ltd followed by Latitude Group.

The 2023 result from the Alumina Ltd-Alcoa (AWAC) joint venture missed broker expectations and the size of the percentage earnings upgrade in FY24 for Alumina Ltd should be disregarded due to the small forecast numbers involved.

The result may prove rather incidental anyway, given Alcoa is aiming to purchase Alumina Ltd’s 40%-stake in the joint venture for $3.3bn.

Latitude Group reported FY23 cash earnings in line with the guidance range, albeit at the bottom end. Citi highlighted the net interest margin stabilised in the second half following an extended period of contraction, as management has undertaken a material reshaping of the cost-base.

The broker expressed growing confidence the near-term bottom has been reached for the company and upgraded its rating to Neutral from Sell given a more supportive outlook. Citi’s target was also increased to $1.15 from 95c.

After delivering in-line FY23 results, 29Metals received a material upgrade to average earnings forecasts by brokers in the FNArena database, but at the same time headed up the list for the largest percentage downgrade to average target price.

The company’s -$21.2m earnings loss for the full year was 17% better than Morgan Stanley had anticipated, but Macquarie could see clouds on the horizon.

A slowing ramp-up at the Capricorn mine is in prospect, and Macquarie noted significant downside risk if permitting approvals are not granted. The analyst also allowed for a late-2024 $75m equity raise to bolster the balance sheet.

Following first half results which missed expectations, DGL Group and Nanosonics had the dubious distinction of featuring in the tables below for both negative change to average target and average earnings forecast.

DGL Group’s profit declined by -41% on the previous corresponding period and fell well short of expectations held by both consensus and Morgans. Earnings missed the broker's forecast by -12% due to weak crop protection product sales, underutilisation of recycling facilities, falling commodity prices and the ongoing impact of overstocking by customers. It’s felt the predictability of earnings continues to decline as they seemingly become more cyclical.

The current $2.77 share price of Nanosonics has now fallen below levels attained in 2016. Pressures on US hospital budgets are expected to continue, according to Sell-rated Citi.

The broker's FY24-26 estimates for EBIT were lowered by -66-85% and the target reduced to $2.70 from $3.90.

While Morgans suggested there was little necessity to buy shares in Nanosonics at this time, based on 1H results and management commentary, the analysts retained an Add rating given long-term value potential for patient shareholders.

Healius received the largest percentage downgrade to average earnings forecasts following first half results. Pathology was the main culprit behind a double-digit fall for underlying operating income and margin compression.

Citi downgraded to a Sell rating from Neutral given the uncertainty surrounding restructuring and limited earnings visibility.

Ord Minnett maintained a Buy rating on valuation and suggested the company's base businesses are well placed to service the current known under-diagnosis for routine healthcare services.

It should be noted impressive earnings and target price upgrades for Lovisa Holdings do not feature below as brokers in the FNArena database updated research in the period spanning last week and the week prior.

Taking both weeks into account, the average target price of seven brokers increased by 22% to $28.43, and the average FY24 and FY25 earnings forecasts rose by 5.9% and 4.6%, respectively.

The gross margin percentage rose by 40bps to 80.7% driven by price and promotion management, noted Macquarie, along with strong execution on product and inventory control. Price rises are now a source of growth, highlighted UBS, but the key driver of like-for-like revenue growth is net store growth.

A key risk, noted Ord Minnett, is a slowdown in the US store rollout, which the broker forecasts will be at 800 stores by FY30, based on an increase of 100 stores per year.

Several analysts showered Lovisa with praise.

The retailer is showing every sign of becoming a truly global brand, according to Morgans. Short-term variations in the pace of growth should not, in the broker’s view, detract from the long-term potential of this business to increase store density significantly in most of its markets.

Morgan Stanley highlighted Lovisa is a unique asset within the Australia small-to mid-cap equity market given it has global growth optionality and a differentiated consumer value proposition in fast fashion jewellery. It’s difficult to find a competitor with the depth and breadth of product, along with speed to market, noted the broker.

For those companies covered (and not covered) in commentary above, the reader may also refer to FNArena’s daily Corporate Results Monitor (Corporate Results Monitor - FNArena.com)

The Monitor provides a summary of broker research on all companies that have reported results to-date.

Total Buy ratings in the database comprise 55.27% of the total, versus 35.59% on Neutral/Hold, while Sell ratings account for the remaining 9.14%.