Weekly Ratings, Targets, Forecast Changes – 28-03-24

Weekly Reports | Apr 02 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 25 to Thursday March 28, 2024
Total Upgrades: 6
Total Downgrades: 7
Net Ratings Breakdown: Buy 55.53%; Hold 35.33%; Sell 9.14%

For the week ending Thursday March 28, 2024, FNArena recorded six rating upgrades and seven 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 also greater than negative adjustments.

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/), which currently provides a summary of broker research on all companies that have reported results post February.

The Monitor provides explanations for why Sigma Healthcare and Premier Investments sit atop the tables for positive change to earnings forecast and target prices, respectively.

For the second week in a row, Sigma headed up the earnings upgrade table after FY24 earnings came in at the top end of management’s guidance range. Last week’s update of research by Ord Minnett propelled the average earnings forecast in the FNArena database even higher.

Despite a "weak" FY24 result due to fewer covid test sales, cost inflation and intense competition, the broker predicted materially better earnings in coming years due to improved operating leverage, and an ongoing focus on both cost efficiencies and private label products.

The analyst raised the FY25 margin forecast for Sigma by eight basis points as management announced the development of over 250 private label products, 80% of which will launch in the second half of FY25. The broker highlighted the gross margin for private label products is typically six times higher than for branded products.

The potential merger with Chemist Warehouse Group is not factored into Ord Minnett's forecasts at this time, due to the risk of regulatory intervention.

Sigma also came third on the positive change to average target price list behind Webjet, which was boosted by positive management commentary at the WebBeds B2B strategy day.

According to UBS, the update highlighted Webjet's ability to leverage technology, big data and AI projects (currently underway) to customise and increase delivery speed to customers. As a result of these initiatives, the analyst is expecting material growth well in advance of consensus expectations.

Morgan Stanley agreed with UBS and came away from the strategy day with a more constructive outlook for the short term. Stronger total transaction value growth and lower, more competitive take-rates are expected to provide a net tailwind for near-term earnings.

An ongoing rebound in leisure travel and Webjet's market share were implied by several targets that management expects to achieve by FY30, which were all ahead of analysts' forecasts.

Management anticipates the B2B division will deliver $10bn of total transaction value by FY30, two years earlier than Ord Minnett’s original forecast.

Average broker earnings forecasts increased last week for Cooper Energy, Sandfire Resources, and 29Metals.

During last week, Morgans adopted a more positive view than consensus on demand conditions for commodities, in the expectation US dollar weakness and a return to growth in the West combine to offset the weak property market in China. Due to sustained supply deficits in coming years, copper and oil exposures are preferred.

The broker raised its price forecasts for both oil and LNG, resulting in higher earnings forecasts for Cooper Energy and a target of 30 cents, up from 28 cents.

Morgans is also optimistic around the early track record of the company’s new management team, who have rolled out a series of value-accretive debottlenecking activities at the long-troubled Orbost gas plant.

Citi’s earnings forecast for Sandfire Resources increased last week after the broker’s commodities team upgraded the second quarter copper price outlook to an average US$9,000 per tonne. Citi noted softer copper supply and the expectation of more aggressive interest rate cuts by the US Federal Reserve.

While the analyst’s target price for Sandfire increased to $7.30 from $6.90, the recommendation was downgraded to Sell from Neutral on a full valuation after a 20% year-to-date share price rally. It’s thought Sandfire has benefited from being the go-to-name for copper exposure on the ASX.

Early last week, 29Metals also benefited from Citi’s increased copper price forecasts, but (more) bad news was to follow.

Following the suspension of operations at the company’s Capricorn Copper operations due to an extended period of rainfall, Macquarie downgraded its rating for 29Metals to Underperform from Neutral and lowered the target by -44% to 25 cents. The broker listed several negatives including: 29Metals is now a one asset producer with a leveraged balance sheet; there's a high operating cost base at Golden Grove; and the CEO is in transition.

Morgan Stanley is also concerned about liquidity levels at 29Metals though suggested additional capital may not be required should the spot copper price rise another 5%, or debt payments are delayed. An additional insurance payment of around $15m would also help stave off the need for additional cash.

Management will ramp-down operations at Capricorn Copper over the next six weeks and a re-start plan will be provided at the March quarterly result.

Genesis Minerals received the only materially negative change to average earnings forecast by brokers last week. After taking into account details released by management on the five/ten-year outlook, Macquarie lowered EPS forecasts for FY24-28 by -28%, -9%, -54% and -43%, respectively, with meaningful upgrades for following years.

Genesis plans to mine 1.3m ounces of gold over the next five years (in line with the broker's forecasts) though management’s estimates for around 75,000 ounces per annum over the subsequent five years is stronger than the analyst’s prior forecast. An Outperform rating and $2.00 target were maintained.

MMA Offshore was downgraded to Hold form Buy last week by both Shaw and Partners and Bell Potter after a subsidiary of Singapore-based Cyan Renewables offered $2.60 per share in cash for the company after signing a binding Scheme Implementation Deed.

Shaw downgraded to reflect the likelihood MMA Offshore will be acquired at the agreed price, but Bell Potter felt the door was left ajar for a potential competing offer.

Bell Potter described the bid, which reflected an 11% premium to the prior closing price, as reasonable but not a knockout.

Total Buy ratings in the database comprise 55.53% of the total, versus 35.33% on Neutral/Hold, while Sell ratings account for the remaining 9.14%.

Upgrade

APA GROUP ((APA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/0

Following the release of the Australian Energy Market Operator's (AEMO's) Gas Statement of Opportunities (GSOO) and the Victorian Gas Planning Report (VGPR), Macquarie notes (like in 2023) the market is heading for a gas shortfall.

The broker suggests the likely first trouble will occur in the winter of 2026, though the material shortfall will be in 2027 or 2028. It's felt APA Group will benefit from growing contracting in off peak on the energy performance contract (EPC) to deliver more gas in Victoria.

Target rises to $9.40 from $8.90 after the broker also incorporates a lower tax assumption. The rating is upgraded to Outperform from Neutral on valuation.

BHP GROUP LIMITED ((BHP)) Upgrade to Add from Hold by Morgans .B/H/S: 2/4/0

Morgans adopts a more positive view than consensus on demand conditions for commodities in the expectation US dollar weakness and a return to growth in the West offsets the weak property market in China.

Due to sustained supply deficits in coming years, the broker prefers copper and oil exposures. The iron ore price is expected to remain healthy until around 2026 when low-cost, high-quality supply from the Simandou mine in Africa enters the market, and potentially lowers prices.

The analysts anticipate gold stocks could rally to 'catch up' to all-time highs for gold prices. Oil, LNG and uranium price forecasts are increased, while the 2024 spodumene price estimate is further trimmed.

Morgans upgrades its rating for BHP Group to Add from Hold after a recent share price selloff and is preferred over Rio Tinto and Fortsecue for iron ore exposure. The $47.60 target is unchanged.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/0

Morgans adopts a more positive view than consensus on demand conditions for commodities in the expectation US dollar weakness and a return to growth in the West offsets the weak property market in China.

Due to sustained supply deficits in coming years, the broker prefers copper and oil exposures. The iron ore price is expected to remain healthy until around 2026 when low-cost, high-quality supply from the Simandou mine in Afriac enters the market, and potentially lowers prices.

The analysts anticipate gold stocks could rally to 'catch up' to all-time highs for gold prices. Oil, LNG and uranium price forecasts are increased, while the 2024 spodumene price estimate is further trimmed.

The target for Beach Energy rises to $2.15 from $1.65 and the rating is upgraded to Add from Hold after a new analyst at Morgans updates financial assumptions. Higher oil and gas price forecasts are also incorporated into forecasts.

PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/2/1

Premier Investments delivered 1H earnings (EBIT) of $209.8m, exceeding forecasts by consensus, UBS and also beating management guidance for around $200m. The broker upgrades to Neutral from Sell and the target rises to $31 from $27.

Even though sales growth missed expectations held by the broker and consensus, higher gross margins and good management of cost-of-doing-business (CODB) won the day, explains the analyst.

UBS is now more confident of earnings margin expansion beyond FY24, given a change in channel and brand mix along with the sound
cost-of-goods sold (COGS) and CODB management.

The company is working towards a demerger of Smiggle into a separately listed entity by January 2025, and is exploring a demerger of Peter Alexander into a separately listed entity during 2025.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Buy from Hold by Bell Potter .B/H/S: 1/2/2

While management has been notified clients are looking to redeem -$1.4bn from funds under management (FUM) in the coming
months, Bell Potter has raised its target to $1.20 from $1.13.

The broker explains an expected -$20m reduction in costs from the company's first phase of a turnaround program has a large positive impact on earnings, due to operational gearing.

The -20% share price fall in reaction to the announced redemptions is overdone, believes Bell Potter, given an improving
risk/return trade outlook. The rating is upgraded to Buy from Hold.

SIMS LIMITED ((SGM)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/0/1

UBS upgrades its rating for Sims to Buy from Neutral on an improving scrap price and volume outlook and because share continue to trade at around 90-95% of book value. 

Also, the analyst sees ongoing improvement as the company moves away from low-margin dealer-sourced volumes, while simultaneously locking in more domestic buyers.

As the broker's FY25 EPS forecast rises due to increased North America Metals (NAM) EBIT/t margin expectations, the target increases to $14.50 from $13.60. 

With US mill lead times lifting, and service center inventories largely normalised, UBS expects tailwinds to emerge for Sims in the 2Q of 2024, which is a seasonally stronger period for US steel demand.