Weekly Reports | Mar 18 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 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%.
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