Weekly Ratings, Targets, Forecast Changes – 15-03-24

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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 11 to Friday March 15, 2024
Total Upgrades: 9
Total Downgrades: 10
Net Ratings Breakdown: Buy 55.83%; Hold 34.90%; Sell 9.27%

For the week ending Friday March 15, 2024, FNArena recorded nine rating upgrades and ten downgrades for ASX-listed companies by brokers monitored daily.

The tables below show percentage downgrades by brokers to average earnings forecasts were broadly similar to upgrades, while percentage upgrades to average target prices proved noticeably greater than negative adjustments.

In fact, there is hardly any negative target change that is worth highlighting, with plenty of positive adjustments.

Brickworks received the largest percentage upgrade to average earnings forecasts, though on small forecast numbers which make the percentage increase look somewhat exaggerated. 

Macquarie increased FY24 forecasts for the company after surveying contractors around the US to get a read on market conditions in various end markets and product categories relevant to stocks covered in the Building Products & Services sector.

The industry backdrop for the repair & remodel (R&R) market remains very favourable in the US, according to Macquarie, while Citi is also starting to see evidence activity in the US has bottomed.

Optimism appears to be cautiously lifting on US contractors heading into the spring season, with Macquarie’s optimism index showing a rise of eight percentage points on stronger residential and non-residential new construction.

Forward looking supply indicators continue to improve, and while labour costs remain pressured, availability also continues to improve, noted the analyst.

For greater detail on both Macquarie’s and Citi’s view of Brickworks’ peers in the Building Products & Services sector, readers may also refer to https://fnarena.com/index.php/2024/03/15/in-brief-gold-building-products-online-classifieds-milk/

Zip Co was next on the earnings upgrade table and featured atop the positive change to target price list below.

In last week’s article, FNArena highlighted an upgrade for Zip Co by UBS to Buy from Neutral, along with a very material target price increase to $1.43 from 36c. 

First half results on February 27 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 over 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.

A week on and Citi raised its target for Zip Co to $1.40 from 78c and upgraded to Buy from Neutral due to stronger total transaction value (TTV) forecasts in the US across FY25 and FY26.

While this broker expects net bad debts will increase in the US as the company pivots its focus to growth (new customers typically have higher losses), offsets should arise from a higher revenue yield and lower funding costs. Stable net transaction margins are anticipated.

Citi also noted management has made good progress with balance sheet repair.

Paladin Energy also received a material lift in average earnings forecasts last week after Citi revised estimates higher.

In anticipation of financial results at the end of last week for Kazatomprom, the world's largest producer and seller of natural uranium, the broker suggested the announcement could be a catalyst for higher uranium prices upon a 2025 production downgrade and/or lower inventory levels.

Citi noted a lack of sulphuric acid availability, and ramp-up challenges make achieving Kazatomprom's 2025 production target unlikely, which would be positive for Paladin Energy as its share price is highly correlated to the uranium price. The Buy rating and $1.45 target were left unchanged.

After Citi’s research, Kazatomprom reported it had "contracted the relevant volumes of sulphuric acid to meet its 2024 production guidance", but added delays in construction works at new deposits/sites "make significant uncertainties" and may affect operating performance for the year.

Management noted global output of uranium will not be sufficient to cover demand after 2030 amid current geopolitical uncertainties, inflationary pressures, and global supply chain challenges.

On the flipside, Iluka Resources and Southern Cross Media both received material downgrades to average earnings forecasts last week.

Regarding Iluka, Morgan Stanley felt the near-term consensus forecast for neodymium and praseodymium (NdPr) prices were too high given potentially slower electric vehicle growth in 2024/25. This broker does, however, anticipate a growing deficit in the NdPr market by 2030 and forecasts a US$113/kg price, 12% ahead of the consensus estimate.

After a further review of first half results, Southern Cross Media received lower earnings forecasts from UBS to reflect both a radio market decline and a lower metro radio share.

Despite lower earnings forecasts, the broker increased its 12-month target price to 96c from 74c largely due to lower capital intensity following management’s updated cost guidance. The Neutral rating was maintained.

Zip Co landed also atop the positive change to target price table below, for reasons already discussed, followed by Virgin Money UK which received a takeover offer from Nationwide Building Society.

Macquarie placed a high probability on deal completion and felt there is only a small chance of an improved offer, though does list other potentially interested parties including Natwest, Santander UK and HSBC. Ord Minnett doesn't anticipate a higher competing bid and suggested investors contemplate downside risk should the acquisition not proceed.

One alternative for investors, highlighted Ord Minnett, is to sell shares of Virgin Money UK on market and invest in another UK bank (with some currently trading at discounts to the broker's fair value) to maintain exposure to the sector.

Macquarie downgraded its rating for Virgin Money UK to Neutral from Outperform and raised the target to $4.25 (based on the offer price) from $3.70, while Ord Minnett maintained a Hold rating and also increased its target to $4.25.

Task Group, which provides technology solutions for the global hospitality sector, was the only company to receive ratings changes from multiple brokers in the FNArena database, with Bell Potter and Ord Minnett both downgrading to Hold from Buy.

Task looks set to be acquired by PAR Technology, with the two companies having entered into a scheme implementation agreement. Cash consideration is 81cents per share, with an alternative for Task shareholders to receive up to 50% of consideration as stock in PAR Technology. 

The average target for Task in the FNArena database rose to 83c from 58.5c but this material change doesn’t appear in the table below which requires a minimum of three covering brokers.

For those few remaining companies that reported results last week, the reader may refer to FNArena’s daily Corporate Results Monitor (https://fnarena.com/index.php/reporting_season/)

The Monitor currently provides a summary of broker research on all companies that have reported results post February.

Total Buy ratings in the database comprise 55.83% of the total, versus 34.90% on Neutral/Hold, while Sell ratings account for the remaining 9.27%.

Upgrade

AUSSIE BROADBAND LIMITED ((ABB)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/0/0

Ord Minnett lowers Aussie Broadband' earnings (EBITDA) forecasts for FY24 and FY25 by -11% and -14%, respectively, after Origin Energy ((ORG) unexpectedly terminated the whitelabel broadband agreement.

The broker still anticipates double-digit EPS growth into the medium and long-term, and stresses the negative surprise doesn't impact growth potential in other markets. The analysts are referring to the branded residential, enterprise, government and unified communications markets.

Management has reaffirmed FY24 earnings (EBITDA) guidance.

The target falls to $4.16 from $4.89 and the rating is upgraded to Buy from Accumulate.

ACCENT GROUP LIMITED ((AX1)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 5/1/0

As Accent Group's younger customers have been most negatively impacted by the challenging macroeconomic conditions over the last few years, Morgan Stanley believes they should benefit most in a cyclical recovery.

The broker is optimistic on upcoming consumer spending, which should drive a recovery in margins on fixed-cost leverage for Accent Group. 

Longer-term, the analysts like the store-rollout story for new formats such as Nude Lucy and Stylerunner and established brands Skechers and Platypus.

The rating is upgraded to Overweight from Equal-weight and the target increased to $2.45 from $1.95. Industry view: In-Line.

BHP GROUP LIMITED ((BHP)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/4/0

In response to share price weakness, Citi has upgraded BHP Group to Buy from Neutral with a price target (unchanged) of $46.

The broker continues to preference Rio Tinto ((RIO)) because of better growth prospects.

CLINUVEL PHARMACEUTICALS LIMITED ((CUV)) Upgrade to Add from Hold by Morgans .B/H/S: 2/1/0

In an appropriate response to share price weakness, suggests Morgans, Clinuvel Pharmaceuticals has announced an on-market buyback of around 3% of shares on issue.

The broker has been noting for some time excess cash (and equivalents) sitting on the balance sheet amounting to around 25% of the company's market capitalisation.

The share price has weakened since prior research by the analyst, so the rating is upgraded to Add from Hold. The $16 target is unchanged.

FORTESCUE LIMITED ((FMG)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/2/5

In response to recent share price weakness, Citi has upgraded Fortescue to Neutral from Sell with an unchanged price target of $24.

The broker's sector favourite remains Rio Tinto ((RIO)).

METCASH LIMITED ((MTS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/0

The recent acquisitions of Superior Food, Alpine and Bianco by Metcash should provide medium-term growth, says Macquarie. In particular, the broker sees Superior Food as a key entrypoint to the $21bn food service industry for Metcash.

The company's successful experience in operating retail stores provides Macquarie with confidence in management's ability to add value in the retail side of the food industry, with management outlining a desire to extend value in this segment. 

The company has lifted its capital expenditure targets to -$235m for FY25 and FY26 each.

Following a period of research restriction, Macquarie upgrades to an Outperform rating and the target price increases to $4.30 from $3.90.

SIMS LIMITED ((SGM)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/1

Citi analysts continue to see earnings risks for Sims' FY24, with another tough half year in the making, but the share price has fallen too far from a longer term perspective, hence the upgrade to Buy from Neutral. Target $13.50.

The broker points out, management at Sims is putting in place a new cost-out program targeting -$70-$90m of savings, to be fully realised in FY26, with -$25m anticipated in 2H FY24.

TELSTRA GROUP LIMITED ((TLS)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 5/1/0

While the growth outlook for Telstra Group is not as strong as some comparable companies, says Bell Potter, the stock is starting to look more reasonable. The broker anticipates mid to high single digit earnings growth over FY25, coupled with a dividend yield of 5.0%. 

The broker points out Telstra Group also retains the option of selling part or all of its infrastructure business, which it believes would unlock value. Further, Bell Potter sees little risk in the company not making FY24 guidance. 

The rating is upgraded to Buy from Hold and the target price of $4.25 is retained.

ZIP CO LIMITED ((ZIP)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/0

Citi raises its target for Zip Co to $1.40 from 78c and upgrades its recommendation to Buy from Neutral due to stronger total transaction value (TTV) forecasts in the US across FY25 and FY26.

While the broker expects net bad debts will increase in the US as the company pivots its focus to growth (new customers typically have higher losses), offsets should arise from a higher revenue yield and lower funding costs. Stable net transaction margins are anticipated.

Citi also notes management has made good progress with balance sheet repair.

Downgrade

ARISTOCRAT LEISURE LIMITED ((ALL)) Downgrade to Hold from Add by Morgans .B/H/S: 4/1/0

Morgans raises its target for Aristocrat Leisure to $47 from $45 and downgrades its rating to Hold from Add given the recent strong share price performance.

Prior to interim results due on May 16, the broker raises its earnings (EPSA) estimates  for FY24 and FY25 by 3.8% and forecasts earnings (EBITA) and profit of $930m and $687m, respectively. Consensus is forecasting $956m and $703m, respectively.

Management recently reiterated an expectation for positive NPATA growth in FY24, weighted to the 2H.

ANZ GROUP HOLDINGS LIMITED ((ANZ)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/1

Macquarie downgrades the ratings for all banks under research coverage to Underperform given they are trading at peak multiples without a clear fundamental reason. The analyst sees limited scope for banks to surprise in the medium-term.

The broker suggests the recent rally for bank shares into expensive territory is more reflective of weight of money and various issues impacting alternative investment opportunities.

In the event of the expected interest rate cuts in Australia, Macquarie sees downside to earnings as it will be difficult for banks to offset
margin headwinds associated with those lower rates. It will be difficult to reprice mortgages, particularly in an election year.

The broker's order of preference is National Australia Bank, Westpac, ANZ Bank and CommBank. Targets across the major banks rise by 4-8% mostly due to an increase in the applied market multiple.

ANZ Bank is downgraded to Underperform from Neutral, while the target rises to $27 from $25.

HARTSHEAD RESOURCES NL ((HHR)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/1/0

Hartshead Resources is reviewing project economics and timeline for 40%-held P2607 Phase 1 (Anning and Somerville). This follows uncertainty in the UK gas sector resulting from changes in taxation policy proposed by the UK Labour Party, explains Bell Potter.

The Labour Party plans to increase the Energy Profits Levy (EPL), lifting the sector’s headline tax rate to 78% from 75%. There is also a proposal to cancel the “investment allowance” which currently provides oil and gas producers 91.4% tax relief on capital projects.

The broker downgrades its rating to Hold from Buy in recognition of policy and project uncertainty. The target is lowered to 3c from 9c on higher project risking.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/3/3

Macquarie downgrades the ratings for all banks under research coverage to Underperform given they are trading at peak multiples without a clear fundamental reason. The analyst sees limited scope for banks to surprise in the medium-term.

The broker suggests the recent rally for bank shares into expensive territory is more reflective of weight of money and various issues impacting alternative investment opportunities.

In the event of the expected interest rate cuts in Australia, Macquarie sees downside to earnings as it will be difficult for banks to offset
margin headwinds associated with those lower rates. It will be difficult to reprice mortgages, particularly in an election year.

The broker's order of preference is National Australia Bank, Westpac, ANZ Bank and CommBank. Targets across the major banks rise by 4-8% mostly due to an increase in the applied market multiple.

National Australia Bank is downgraded to Underperform from Neutral, while the target rises to $32.50 from $30.

PROTEOMICS INTERNATIONAL LABORATORIES LIMITED ((PIQ)) Downgrade to Hold from Speculative Buy by Morgans .B/H/S: 0/1/0

Following a 50% share price rally so far in 2024 for Proteomics International Laboratories, Morgans downgrades its rating to Hold from Speculative Buy, despite remaing positive on the outlook.

The broker recently lowered its valuation to account for delays in forecast timelines to commercial launch of PromarkerD. Conservatively, the valuation only assumes commercial success in the US.

The $1.38 target is unchanged.

TRANSURBAN GROUP LIMITED ((TCL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0

A newly proposed toll model could leave Transurban Group in conflict with the government, says Macquarie, and could drive a potential need for legal remedies.

This new model was outlined in the Toll Review Interim Report, and, according to Macquarie, fails to ensure Transurban Group and other road investors are "kept whole in the long term."

While the broker points out history is on the side on the road investors, the review increases uncertainty over Transurban Group's value.

The rating is downgraded to Neutral from Outperform and the target price of $13.69 is retained.

TASK GROUP HOLDINGS LIMITED ((TSK)) Downgrade to Hold from Buy by Ord Minnett and Downgrade to Hold from Buy by Bell Potter .B/H/S: 0/2/0

Task Group has effectively agreed to be taken over by PAR Technology Corp by way of a scheme of arrangement. Cash consideration is 81c per share, with an alternative for up to 40% in scrip.

Ord Minnett has raised its own target to 81c and downgrades to Hold from Buy.

Task Group looks set to be acquired by PAR Technology, with the two companies having entered into a scheme implementation agreement.

The agreement gives Task Group shareholders the option to recieve cash consideration for stocks at 81 cents per share, or recieve up to 50% of consideration as stocks in PAR Technology, at a ratio of 0.015 PAR Technology shares for every Task Group share, and the balance paid in cash. 

In the absence of a superior proposal, notes Bell Potter, Task Group's board has unanimously recommended in favour.

The rating is downgraded to Hold from Buy and the target price increases to 85 cents from 59 cents, as the broker's calculations suggest 85c is the implied valuation under the current proposal.

VIRGIN MONEY UK PLC ((VUK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0

Nationwide Building Society plans to takeover Virgin Money UK via a GBP2.9m bid. Nationwide has until April 4 to either announce a firm offer or withdraw its intentions.

Macquarie places a high probability on deal completion and feels there is only a small chance of an improved offer though does list other potentially interested parties including Natwest, Santander UK and HSBC.

The broker's rating is downgraded to Neutral from Outperform and the target raised to $4.25 (based on the offer price) from $3.70.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 1/2/3

Macquarie downgrades the ratings for all banks under research coverage to Underperform given they are trading at peak multiples without a clear fundamental reason. The analyst sees limited scope for banks to surprise in the medium-term.

The broker suggests the recent rally for bank shares into expensive territory is more reflective of weight of money and various issues impacting alternative investment opportunities.

In the event of the expected interest rate cuts in Australia, Macquarie sees downside to earnings as it will be difficult for banks to offset
margin headwinds associated with those lower rates. It will be difficult to reprice mortgages, particularly in an election year.

The broker's order of preference is National Australia Bank, Westpac, ANZ Bank and CommBank. Targets across the major banks rise by 4-8% mostly due to an increase in the applied market multiple.

Westpac is downgraded to Underperform from Outperform, while the target rises to $26 from $25.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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