Weekly Reports | Mar 11 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 March 4 to Friday March 8, 2024
Total Upgrades: 7
Total Downgrades: 0
Net Ratings Breakdown: Buy 55.74%; Hold 35.16%; Sell 9.10%
In the fifth week of the reporting season ending Friday March 1, 2024, there were seven rating upgrades and no downgrades for ASX-listed companies by brokers monitored daily by FNArena. It was a quieter period by comparison to recent weeks, and over the next three weeks there will be only sporadic earnings releases by a relatively tiny number of companies.
The tables below show percentage downgrades by brokers to average earnings forecasts and negative adjustments to average target prices were broadly similar to upgrades and positive adjustments, apart from a few outliers.
Two of those outliers were Zip Co and Life360, which, along with Xero, received material upgrades by brokers to average earnings forecasts and target prices.
At the beginning of the week, brokers began upgrading forecasts for Life360, following the release of FY23 results on the Friday prior.
The results delivered on Morgan Stanley's sales forecast, beat the broker's earnings forecast, while FY24 guidance by management also exceeded the consensus forecast.
The highlight, according to Ord Minnett, was the announced move into advertising which will add a new, high-margin (around 70%), low-investment revenue stream. The introduction of advertising to non-paying monthly active users (MAU) is capital light, agreed Morgan Stanley, and even at very modest monetisation rates, implies revenue upgrades by consensus.
FNArena's daily monitoring of Life 360 consists of three brokers. Morgan Stanley has an Overweight rating, while Ord Minnett and Bell Potter both have Buy recommendations. The average target price of these three brokers last week rose to $13.63 from $10.45, suggesting a further 10.4% upside to the latest share price.
For Zip Co, UBS upgraded its rating to Buy from Neutral and raised its target materially to $1.43 from 36c. First half results in the prior week revealed stronger-than-expected cash earnings. The analyst was surprised by the addition of 100,000 net new active customers in the US for the half, reversing declining customer trends in the previous two years.
This broker noted US BNPL penetration is less than 2% of total payments, compared to 13-15% in Australia, suggesting significant room for further growth.
Last week, stockbroking analysts reacted to Xero’s presentations in the prior week of management's FY25-27 strategy and aspirations for future growth.
Macquarie increased its target to $152.60 from $87 and upgraded by two rating notches to Outperform from Underperform. These changes reflect the broker's increased confidence in new management’s strategy for better product development and an improved customer value proposition. A demonstration of the generative AI assistant (Just Ask Xero) reflected an advanced data and AI strategy that will potentially improve efficiency, in the analyst's view.
Anticipating the new strategy will increase annual revenue per user and subscription growth, Buy-rated Citi increased its target to $159 from $129.40. On the other hand, Ord Minnett maintained its Sell rating and $78 target in the ongoing belief Xero's international expansion is doomed to failure, despite the updated strategy.
On the flipside, Strike Energy headed up the negative change to average target price table below and came third on the earnings downgrade table. While first half earnings were largely as Ord Minnett anticipated, management unexpectedly reported discouraging results at the South Erregulla gas field, with appraisal wells SE-2 and SE-3 failing to flow.
Consequently, the Accumulate-rated broker reduced the prior 1,000 petajoule reserve and resource base forecast for the company by -40%, and the price target was also slashed by -40% to 30c.
More positively, the analyst noted the performance at the Walyering gas field (onshore Perth Basin) has been excellent and (unlike the market) believes the South Erregulla result is an isolated event and doesn't impact on the company's other resource positions.
Platinum Asset Management’s average target price fell by around -11% last week after Ord Minnett (Hold) and Underweight-rated Morgan Stanley reacted to interim results in the prior week.
Ord Minnett observed profitability in the core funds management division has deteriorated further, as indicated by the net profit margin of 34%, down from 36% in the previous corresponding period. Net outflows from higher-margin retail funds under management were also worse-than-anticipated, resulting in a faster-than-expected compression in management fees.
This broker suggested a return to net inflows for Platinum Asset Management will be challenging given underperformance relative to comparable peers. Morgan Stanley was also concerned by the current elevated rate of outflows and felt the newly appointed CEO will need time to pivot to a new strategy.
Healius received the largest percentage downgrade to average earnings forecast by brokers in the FNArena database, though it should be noted the percentage move last week was exaggerated by the small numbers involved. Healius had already been issuing a number of profit warnings beforehand.
Interim results were released prior to last week (on February 27), and still managed to disappointed brokers even though management had issued a profit warning on February 21.
Last week, the focus was on the announcement by Healius of a strategic review of assets and structure, and the resignation of CEO and Managing Director Maxine Jaquet. Taking over these dual roles will be the company’s current CFO, Paul Anderson.
The most likely outcome of the strategic review, suggested Citi (Sell), is a sale of the Imaging division, while a partial sale of the Pathology department may also be on the cards. The sale of Imaging would solve near-term gearing issues, yet the analyst cautioned it would not be sufficient to solve the profitability and structural challenges facing the Pathology department.
Both Citi and Buy-rated Ord Minnett left their 12-month target prices for Healius unchanged at $1.10 and $3.00 respectively.
Sandfire Resources was next on the earnings downgrade table, but both UBS (Buy) and Morgan Stanley (Equal-weight) remained upbeat about the outlook.
After further contemplation of in-line first half results released on February 23, Morgan Stanley increased its target to $6.35 from $6.30, while UBS raised its 2025-27 copper price forecasts by 13%, 19% and 13%, respectively, on increasing conviction over a supply crunch ahead and a robust demand outlook beyond the short term.
UBS also has Buy ratings for South32 and Evolution Mining due to their respective copper exposures.
Turning to the earnings upgrade table, the average earnings forecast for MMA Offshore, a provider of marine and subsea services globally, rose by 14% last week after Citi initiated research coverage with a Buy rating and $2.60 target. The company is benefiting from a robust cyclical upswing in offshore capex coinciding with no new vessel supply, explained the analysts.
MMA’s revenue is generated from both time charter of vessels as well as from integrated projects which encompass vessel-hire as well as a suite of various technical services.
Management is optimistic about the benefits of diversification for the business, and the extent to which the growth in offshore wind and decommissioning reduces dependency on the Oil & Gas capex cycle. While an earnings trough in a downturn for the energy sector is likely to be less than for prior cycles, Citi cautioned the risk/reward for MMA is arguably less compelling than 12 months ago.
For those companies covered (and not covered) in commentary above, the reader may also refer to FNArena’s daily Corporate Results Monitor (https://fnarena.com/index.php/reporting_season/)
The Monitor provides a summary of broker research on all companies that have reported results to-date.
Total Buy ratings in the database comprise 55.74% of the total, versus 35.16% on Neutral/Hold, while Sell ratings account for the remaining 9.10%.
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