Weekly Reports | Mar 25 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 18 to Friday March 22, 2024
Total Upgrades: 6
Total Downgrades: 12
Net Ratings Breakdown: Buy 55.48%; Hold 35.37%; Sell 9.15%
For the week ending Friday March 22, 2024, FNArena recorded six rating upgrades and twelve downgrades for ASX-listed companies by brokers monitored daily.
The tables below show percentage upgrades by brokers to average earnings forecasts were larger than downgrades, while percentage upgrades to average target prices were only slightly greater than negative adjustments.
A third of the ratings downgrades, and several earnings and target price changes, related to resource companies after Macquarie updated earnings estimates across the sector.
The broker's iron ore and spodumene forecasts across 2026/27 were cut by -14/-27% and -10%/-29%, respectively, resulting in rating downgrades for BHP Group, Champion Iron, IGO Ltd and Pilbara Minerals.
Macquarie’s 2024/25 forecasts for copper, gold, zinc and nickel were raised by 11%/4%, 4%/6% and 7%/5%, respectively. For the longer-term, alumina, zinc and copper forecasts were raised by 18%, 4% and 1%, respectively.
Overall, the broker holds an Underweight view for iron ore and thermal coal and an Overweight outlook for aluminium, nickel, lithium, copper, and metallurgical coal.
Sigma Healthcare headed up the earnings upgrade table after FY24 earnings came in at the top end of management’s guidance range, though Macquarie noted these results were largely a sideshow when set against the ongoing reverse takeover by Chemist Warehouse Group.
While Sigma had been targeting a completion of the merger in the second half of 2024, a detailed review being undertaken by the ACCC has added to difficulties in determining a timeline, explained Citi.
According to Shaw and Partners, the valuation for Sigma is full, suggesting the market is treating ACCC approval as a foregone conclusion. This broker's rating was downgraded to Sell from Hold, while Morgans also downgraded to Hold from Add on valuation.
Life360 sits next on the earnings upgrade table after joining Morgan Stanley's list of stocks where the broker has high conviction for both earnings and the outlook, based on strong subscriber growth and upside from a potential new advertising stream.
Management recently announced an advertising offering for the non-paying user base of more than 50m monthly active users. The Life360 app not only has high-frequency usage but also highly affluent users, highlighted the broker.
Unlike subscriptions, the analysts pointed out advertising monetises users from the moment of sign-up, implying revenue generation for all new users straight away, as opposed to just those who choose to subscribe.
To gain additional views from other brokers on Life360, the reader may refer to an article penned last week (https://fnarena.com/index.php/2024/03/20/life360-growth-outlook-boosted-by-advertising/)
Brickworks also received a material upgrade to earnings forecasts last week.
While first half earnings declined across three of Brickworks’ four operating segments, Ord Minnett envisaged longer-term upside, particularly via the Property segment due to demand for high-quality Industrial property. This segment is also expected to benefit from further increases in rental income in the medium term.
Management is bullish on the longer-term, believing Australia is on the verge of a property boom due to record immigration levels and population growth. It’s felt the current “air pocket” for the Australian Building Products segment will last until the start of 2025, before migration and an under-supply of housing leads to a new demand cycle.
There are now two Buy recommendations for Brickworks in the FNArena database and four Hold (or equivalent) ratings after Bell Potter last week downgraded to Hold from Buy, on valuation.
Both Newmont Corp and Sandfire Resources were beneficiaries of Macquarie’s higher 2024/25 forecasts for gold and copper mentioned above.
Newmont was assisted by higher gold leverage and copper exposure, while Sandfire is the broker’s preferred key copper exposure, with the Motheo operations ramping-up on time and on budget.
From among Ord Minnett’s research coverage of resources, Sandfire Resources and Evolution Mining are preferred on a near-term view, while AIC Mines and Aurelia Metals are seen as representing the best opportunities in the medium-term.
Last week, this broker pointed to a valuation disconnect between current equity trading for copper companies on the ASX and recent transactions multiples. It's thought investors will benefit as the disconnect unwinds and the appetite for small cap exposures improves.
The average target price for copper-focused base and precious metals mining company 29Metals increased by 13% last week, the highest jump in the FNArena database, after Macquarie raised its target to 54c from 29c on the the broker's changes to commodities prices forecasts.
As mentioned previously, Sigma Healthcare topped the earnings upgrade table. This company also featured second on the positive change to average target price list below.
Coming third on that list was Alumina Ltd, again assisted by Macquarie’s new outlook for commodities, but also because Citi raised its target to $1.30 from $1.05 on the back of movement in Alcoa's share price. Alcoa is currently offering its own scrip under a take-over approach for full ownership of Alumina Ltd.
Turning to negative adjustments, here KMD Brands appeared atop the tables below for reductions in average earnings forecast and target price after brokers were (yet again) disappointed by first half results.
As the retailer has missed earnings expectations several times, Morgan Stanley now lacks confidence medium-term targets can be achieved. The near-term outlook for the Kathmandu brand is considered challenging due to past execution issues and a more competitive backdrop.
While earnings in the half were slightly better than UBS expected, as management pulled back on operating expenses, finance costs provided a nasty surprise, dragging the net profit below expectations. There was no interim dividend for shareholders.
The hand of Macquarie’s commodity price changes was behind a material fall in average earnings forecast for Arcadium Lithium, though, prima facie, reduced earnings forecasts for De Grey Mining didn’t appear to tally with Macquarie’s higher gold price forecasts.
The Macquarie analyst explained the company’s forecast earnings failed to benefit from near-term gold price upgrades (as De Grey is not yet in production) and suffered from a slightly lower gold price forecast in FY28.
The average earnings forecast for Nickel Mines fell by nearly -11% last week as management lowered first quarter earnings guidance to a range of between US$65-75m (down from US$137m) due to mining licence delays.
Bell Potter explained the Hengjaya mine in Indonesia was left unable to sell ore during January and much of February, as the company awaited renewal of its Rencana Kerja dan Anggaran Biaya mining licences.
These delays were driven, in part, by enhanced regulatory scrutiny arising from the recently completed Indonesian presidential elections, explained Macquarie.
Ore sales have recommenced at record rates, and Bell Potter declared any share price weakness off the back of the delayed licence news should be viewed by investors as a buying opportunity.
The second largest fall in average target price last week, behind KMD Brands, went to Southern Cross Media after Ord Minnett slashed its target to $1.20 from $1.70, and downgraded the rating to Accumulate from Buy.
Southern Cross has received a revised offer from ARN Media and Anchorage Capital Partners for the business, prompting Ord Minnett to alter its valuation for Southern Cross based on a reshuffle of probabilities for deal completion.
The broker ascribed a 75% likelihood of success, partly because the Southern Cross board has effectively capitulated and all but endorsed the revised offer. It’s felt the resolve to fight the invaders is fading, as reflected by the fast-tracked retirement of the chairman and another director.
For those few remaining companies that reported results last week, the reader may refer to FNArena’s daily Corporate Results Monitor (https://www.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 55.48% of the total, versus 35.37% on Neutral/Hold, while Sell ratings account for the remaining 9.15%.
Upgrade
BAPCOR LIMITED ((BAP)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/4/0
Morgan Stanley has a more upbeat outlook for the consumer in Australia, citing positive jobs growth, lower taxes, migration, and flat interest rates that will eventually fall. All these tailwinds are relevant for the Bapcor outlook, note the analysts.
The rating is upgraded to Equal-weight from Underweight and the target increased to $5.75 from $5.00. Industry view: In-Line.
Given the 8% year-to-date share price rally for Bapcor, the broker believes the market is willing to forgive near-term earnings weakness and apply a more generous multiple.
The broker was not willing to upgrade all the way to Overweight due to a lack of conviction around near-term earnings and the growth trajectory.
BABY BUNTING GROUP LIMITED ((BBN)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/0
Morgan Stanley sees scope for a re-rating of Baby Bunting shares due to a better macroeconomic backdrop, accelerated technology adoption and a stronger, simpler customer value proposition. The latter includes a simplified loyalty program, note the analysts.
The broker upgrades its rating to Overweight from Equal-weight and increases the target to $2.20 from $1.65. Industry view: In Line.
Already the inventory position (a former headwind) has improved considerably, according to Morgan Stanley, and birth-rate indicators have turned positive.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 5/0/0
Morgan Stanley upgrades its rating for Evolution Mining to Overweight from Equal-weight after raising the target price to $3.95 from $3.35. Industry view is Attractive.
From among the broker's coverage of the Gold sector, Evolution Mining has the largest upside to spot gold prices, aided by only around 5% of gold production being hedged. The company's implied gold price (around US$1,650/oz) is also the lowest under coverage.
Evolution's copper exposure (around 30-35% of Morgan Stanley's FY24 revenue forecast) could also benefit from current copper supply tightness, suggest the analysts.
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