Weekly Reports | Apr 22 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 15 to Friday April 19, 2024
Total Upgrades: 5
Total Downgrades: 6
Net Ratings Breakdown: Buy 55.63%; Hold 34.89%; Sell 9.48%
For the week ending Friday April 19, 2024, FNArena recorded five ratings upgrades and six downgrades for ASX-listed companies by brokers monitored daily.
The tables below show percentage downgrades by brokers to average earnings forecasts were larger than upgrades, while average target price increases were marginally greater than decreases.
Zip Co received the largest percentage increase in average earnings forecast and the largest percentage increase in average target price after releasing a stronger-than-expected third quarter trading update.
UBS raised its cash earnings forecasts by an average of 19% to reflect operating leverage from lower net bad debts and improving funding costs. It’s felt the key positive was the strength and quality of US total transaction value (TTV) growth over the quarter. Despite losing -200,000 net new customers, growth increased by 44% year-on-year compared to the second quarter, while credit risk metrics remained stable.
The broker forecasts Zip can grow US TTV at a 31% compound annual growth rate (CAGR) over the next three years to reach $10.4bn TTV by FY26. US penetration is still less than 2% of total payments as the company pivots to larger spend verticals such as electronics and automotives, explained the analyst.
Ord Minnett focused on Zip’s increasingly healthy margins. With bad debts remaining steady, a 9.1% jump in the revenue margin for the quarter translated to a 3.9% rise in the net interest margin, compared to management’s medium-term outlook for 3-4%. In the US, TTV growth of almost 50% versus the previous corresponding period combined with an uptick in revenue margins to 9.1% from 8.7% three months prior.
Also, the balance sheet is improving, according to this broker, with available cash and liquidity of $95.2m, and the convertible note balance continuing to dwindle to the current $21.7m level.
The Zip Co share price closed at $1.09 last Friday which compares to the $1.55 target set last week by Ord Minnett and UBS, up from $1.08 and $1.43, respectively.
Evolution Mining was second on the positive change to target price table below after management maintained FY24 guidance, albeit at the lower end of the range, following its third quarter production release.
To achieve guidance requires a (very strong) 34% quarter-on-quarter increase for June quarter gold production on higher grades across Cowal, Mungari and Red Lake, noted UBS.
Macquarie felt guidance risk is now elevated, and following a strong share price run, downgraded its rating for Evolution to Neutral from Outperform, after increasing the target by 8% to $4.10.
Readers may like to refer to (Material Matters: Gold, Gold Stocks & Rare Earths - FNArena.com), which details Wilsons' preference for Evolution Mining in the sector and bullish gold price forecasts by Citi.
Avita Medical received the largest percentage fall to average target price last week and the second largest fall in average earnings forecast behind Alumina Ltd. [Due to the small forecast numbers involved for Alumina Ltd, the percentage forecast changes were so exaggerated they should be ignored.]
The only broker in the FNArena database to issue new research on Avita last week was Bell Potter, which downgraded to a Speculative Hold rating from Speculative Buy and slashed the target to $3.50 from $6.85.
The analysts noted a worrying and unexplained decline in utilisation rates in the company’s core burns market after management downgraded first quarter revenues to between US$11.1-11.3m from the midpoint of the prior range of US$15.2m.
Softness in the burns market may be due to overstocking of the channel in the December quarter, speculated the broker, and/or budget restraints within US hospitals in favour of cheaper treatment alternatives. Also, it’s thought burns adoption could have been flat with negligible uptake in full-thickness skin defects (FTSD).
In last week’s article, a material downgrade to average earnings forecast for APM Human Services International was highlighted following another earnings and profit downgrade. Historically low unemployment rates continue to weigh on the company’s earnings, explained UBS at the time.
Last week, the company again received a material downgrade to average target price after Bell Potter refreshed research. Part of the reason for current weak trading, according to the broker, is a change in the type of clients to those more difficult to place, and problems associated with implementation of a customer relationship management system.
On April 8, management announced an offer of $1.40/share from Madison Dearborn Partners (MDP) on a non-exclusive basis. Prior to this, on February 19, the APM Board (including MDP directors) rejected a $1.60/share offer from CVC Asia Pacific as not sufficiently reflecting “fundamental value”.
This board approach raised a lot of questions for Bell Potter including: Why is the board entertaining this offer and not simply rejecting it?; Could the board persuade MDP or someone else to pay more?; Has the “fundamental value” of the business changed that much since February, even after the latest profit warning?
On balance, the broker felt the MDP offer of $1.40/share will be successful and lowered its target to $1.40 from $1.93.
Other material downgrades to average earnings forecasts by brokers, apart from the largest for Avita Medical mentioned above, were directed to Star Entertainment and Genesis Minerals.
Star reported a -12% year-on-year decline in earnings over the third quarter, with weakness in premium gaming rooms continuing to weigh on earnings, observed Ord Minnett. While main floor gaming is up around 5%, premium across the company’s properties have reported double-digit revenue declines.
The broker pointed out Star lacks competitive advantages, noting Crown Sydney appears to be taking market share for table games.
Costs are tracking in line with the previous corresponding period despite Star having delivered a -$100m per annum cost-out program, highlighted UBS, noting the program appears to be offset by inflation along with the cost of reinvestment in risk controls and compliance.
While Genesis Minerals released a slightly softer-than-anticipated third quarter performance update last week, Ord Minnett highlighted FY24 guidance remains intact, and the five-year plan shows organic growth towards (more than) 300koz annual output.
The current valuation and near-term prospect for limited free cash flow kept Ord Minnet's rating on Hold, while Macquarie maintained its Outperform recommendation.
The latter broker felt FY24 guidance is well in hand, with year-to date production at 74% of the production guidance mid-point, while costs (AISC) are below the guidance range. The company’s stockpiling of bullion remains important, in Macquarie’s view, as it mitigates risk for the single asset producer.
Apart from the Gwalia mine in Leonora, Western Australia, Genesis also owns various satellite resources that could feed into the Gwalia process plant, as well as the Mt Morgans gold mine at Laverton (just over an hour’s drive west of Leonora), which is currently in care and maintenance.
Total Buy ratings in the database comprise 55.63% of the total, versus 34.89% on Neutral/Hold, while Sell ratings account for the remaining 9.48%.
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