Weekly Ratings, Targets, Forecast Changes – 05-04-24

Weekly Reports | Apr 08 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 April 1 to Friday April 5, 2024
Total Upgrades: 1
Total Downgrades: 6
Net Ratings Breakdown: Buy 55.48%; Hold 35.37%; Sell 9.15%

For the week ending Friday April 5, 2024, FNArena recorded one rating upgrade and six downgrades for ASX-listed companies by brokers monitored daily.

The tables below show percentage upgrades by brokers to average earnings forecasts and average target prices were broadly similar to downgrades.

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.

Victorian gas producer Cooper Energy’s average target price rose by around 10% following a research update by Macquarie, after management updated the market on decommissioning at the Basker Manta Gummy (BMG) subsea oil facilities, as well as initiatives through the Orbost Improvement Project.

The company has two gas plants: the Orbost plant which processes gas from the Sole field; and the Athena plant which is processing gas from various Otway fields. The BMG facilities in the Gippsland basin were acquired by Cooper from the previous joint venture partner back in 2014.

Cooper Energy has turned the corner, in Macquarie’s opinion, with the decommissioning at BMG nearing completion and because of improving production at the Orbost gas plant.

Orbost is delivering structurally rising production rates and management has reduced by -$10m the anticipated cost of a third absorber, the installation of which is expected to increase the overall production rate, explained the analyst.

The broker also highlighted the company's Athena plant is one of few options for locally sourced gas in Victoria as it is cheaper, more certain and generates lower emissions compared to LNG imports. The Outperform rating was retained and the target price increased by 35% to 27c largely because of the broker's increased valuation for the Otway operations.

On the flipside, the average target price for Orora fell by nearly -10% after five covering brokers in the FNArena database reacted to downgraded second half earnings guidance by management for the base business and the recently acquired French glass bottle maker, Saverglass.

Orora designs, manufactures, and supplies packaging products and services to the grocery, fast moving consumer goods, and industrial markets in A&NZ, the US, and internationally.

The trading update implied to Morgan Stanley consensus will need to make mid-to high-single-digit forecast earnings downgrades due largely to softness in North America and the Saverglass business. Weaker volumes were ongoing through the March quarter driven by Distribution and price deflation, explained the broker, along with ongoing de-stocking by customers of Saverglass.

The performance of Saverglass since acquisition has been underwhelming, in Morgans view, and the overall operating outlook remains weak. 

More positively, Macquarie noted signs of cyclical improvement in the North American box market while spirits volumes are bottoming out, though timing for the end of destocking is uncertain. Citi concurred, cautiously suggesting this should be the last downgrade by management due to an increasing amount of industry data showing sequential improvement/stabilisation in conditions for both paper and glass.

The two top ten earnings change tables below show 17 of the 20 positions were filled by resources companies. This domination was largely due to a report out by the Morgan Stanley commodities team containing new price forecasts.

This report also suggested investors focus on stocks with exposure to commodities that will benefit from lower interest rates and either supply discipline or supply disruptions. For a full summary of Morgan Stanley’s latest views the reader may refer to (https://fnarena.com/index.php/2024/04/04/material-matters-pressure-on-dividends-steel-iron-ore/).

In terms of material changes to average earnings forecasts last week, the Morgan Stanley report was responsible for the appearance in the tables below of Regis Resources, Syrah Resources and 29Metals for positive earnings changes, and Alumina Ltd, which received the largest percentage downgrade to average earnings forecast last week.

Tailwinds are in place to support gold prices, according to the broker, with Evolution Mining, Regis Resources and Northern Star Resources the preferred exposures. The target for Regis Resources was increased $2.45 from $2.40 and the Overweight rating remained unchanged. 

Later in the week, brokers also reacted to management’s claim of substantial progress towards completion of the definitive feasibility study (DFS) for the McPhillamys gold project.

Regis now estimates a McPhillamys' pre-production capital cost of -$960-1,055m, materially exceeding Macquarie's prior estimate of -$650m and higher than the consensus range of between -$550-650m. 

As a result of the update, Macquarie projected McPhillamys could have a negative net present value, and the project was removed from the analyst's base case valuation for Regis. This move had little impact on the broker's valuation as the prior valuation for the project was small.

There is now a hurdle for the project's near-term development, in Macquarie’s view, and management's focus will likely return to the existing operations. Citi felt the project was an expensive option for what is a relatively modest-grade greenfield project in the upper half of the global cost (AISC) curve.

Irrespective of difficult economics, Citi still believes the project will get the go-ahead, partly because production at both the Duketon and Tropicana mines is poised for decline.

Morgan Stanley raised its target for vertically integrated natural graphite and battery anode company Syrah Resources, to 45c from 39c and retained an Equal-weight rating. On the same day, Shaw and Partners (Buy, High Risk) lowered its target to $1.10 from $1.30.

This broker was updating research for Syrah’s March 25 FY23 results and equity placement (on March 13) to raise $98m to preserve operating mode optionality at Balama and fund operating costs for the Vidalia downstream active anode material facility in the United States. Proceeds are also to support Vidalia’s ramp-up and progress.

With no production at the Balama graphite operation in Mozambique since April 2023, Syrah reported a FY23 total loss after tax of -$84m compared with a -$26.8m loss in the previous corresponding period. Shaw's lower target was due to the equity dilution and a six-month delay in first revenue from the Vidalia plant.

The increase in average earnings forecast for 29Metals was solely due to Morgan Stanley’s new commodities forecasts. For base metals, the broker preferred copper and nickel on supply tightness and revealed an order of preference for Evolution Mining (copper/gold), Nickel Industries, 29Metals and South32. The broker’s target for 29metals was increased to 55c from 50c.

For Alumina Ltd, Citi noted the share price was trading at a 45% premium to the broker’s discounted cash flow valuation thanks to a share price surge for Alcoa in the US. In the analyst’s view, a positive for Alumina Ltd is the share price disconnection from alumina pricing, and linkage to Alcoa's current scrip offer price.

Morgan Stanley downgraded its rating for Alumina Ltd to Equal weight on valuation, while increasing its target to $1.30 from $1.10.

The second largest decrease in average earnings forecast for Paladin Energy was untainted by the omnipresent Morgan Stanley commodities report.

The company’s Langer Heinrich mine in Namibia has produced the first drums of U3O8 (uranium concentrate) and Bell Potter noted this was in line with March quarter guidance provided by management.

This inaugural production is "an important milestone", in the broker’s view, as well as the first step towards targeting a 6mlb per annum run rate. The company will now start building inventory for the next three months.

Bell Potter has incorporated a slower rate of sales for Paladin, which increased the broker’s loss forecast for FY24 by quite some margin, though the target did increase to 65c from 60c due to the restart of production. Management will provide FY25 guidance in July.

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

ELDERS LIMITED ((ELD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/2/1

Macquarie raises its target for Elders to $10.45 from $7.12 and upgrades its rating to Outperform from Neutral after adopting profit forecasts around 10% ahead of consensus over FY24 and FY25.

These higher forecasts are based on a more positive view on both the seasonal outlook and livestock prices. Above average rainfall at the end of 2023 on the east coast of Australia is expected to result in a strong winter plant over April to June.

Also, the National Oceanic and Atmospheric Administration (NOAA) in the US is suggesting a 62% probability of La Nina conditions emerging later in the year, providing the analyst with confidence for the 2024/25 season.

Livestock prices have rebounded from depressed levels, and Macquarie expects strong demand for Australian beef (particularly out of the US as slaughter rates decline) will underpin prices over FY24/25.

The broker's target price is also boosted by a multiple re-rate and lower discount applied to earnings thanks to a dissipation of El Nino/weather risk.