Weekly Reports | May 06 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 29 to Friday May 3, 2024
Total Upgrades: 5
Total Downgrades: 7
Net Ratings Breakdown: Buy 55.68%; Hold 34.61%; Sell 9.71%
For the week ending Friday May 3, 2024, FNArena recorded five ratings upgrades and seven 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 in size to downgrades, although an argument can be made the bias is towards larger positive revisions for both.
Bapcor received the largest downgrade to average target price after management lowered FY24 profit guidance to between $93-97m, when consensus was sitting at $116m.
The miss was attributed to softer retail conditions, less-than-expected transformation benefits from the ‘Better than Before’ cost-out program, and higher overheads and interest costs, observed Morgan Stanley. Management also pointed to specialist wholesale (SWS) margin compression.
The company remains without a permanent CEO and CFO, while also having an outgoing Chair. Against this backdrop, Ord Minnett found it difficult to mount a positive investment case, despite the recent share price underperformance.
Morgan Stanley’s calculation of intrinsic value for Bapcor is currently greater than both the current share price and the broker's new target of $4.00, which was reduced from $5.75.
Macquarie agreed with Morgan Stanley on the valuation discount, noting trading conditions and demand across end-markets remain robust, and highlighted a quality business with a strong competitive position. It’s felt the company is a potential M&A target.
Bapcor received the third largest downgrade to average earnings forecast by brokers in the FNArena database, behind Coronado Global Resources and Atlas Arteria.
Coronado’s March quarter result was impacted by softer production and higher costs than Ord Minnett expected due to maintenance, rainfall at the Curragh coal mine in Central Queensland, and a lower yield at the underground Buchanan mine in the US state of Virginia.
Bell Potter still expects a positive 2024 for the company due to improved production volumes, and subsequent cost benefits, following self-funded investment across its Australian and US operations.
UBS highlighted improving cash flow is a key target for management (which retained 2024 guidance) and felt the second half of 2024 would be stronger on improved volumes and lower costs at Curragh.
For Atlas Arteria, UBS highlighted first quarter toll revenue was weak, but noted the temporary and non-recurring nature of the disruptions to the French APRR network and the Chicago Skyway due to strike action and extreme weather, respectively.
Following several months of share price weakness, the broker identified some valuation support, but not enough to alter the Neutral rating.
Lynas Rare Earths was next on the earnings downgrade table after brokers continued to react to March quarter operational results released in the prior week.
Headline revenue missed UBS's expectations, with the broker left disappointed by the decision to withhold sales in a low-price environment.
This broker felt Lynas can recover revenue if rare earth pricing continues to improve. By contrast, Citi (in the prior week) downgraded its rating to Sell from Neutral due to a bleaker pricing outlook coupled with elevated unit cost expectations.
The average earnings forecast for Star Entertainment also declined last week. Macquarie lowered its target to 50c from 70c and downgraded to Neutral from Overweight.
The analyst explained Star is suffering from multiple uncertainties including problems with the Star Sydney license, the AUSTRAC penalty, the debt refinancing for the Queen's Wharf Brisbane project, as well as management changes.
The recent trading update by Star demonstrated to the broker costs continue to impact profitability, despite somewhat resilient revenue trends.
Aeris Resources and Sandfire Resources received the only two material increases in average target price last week, and effectively filled the top two placing on the earnings upgrade table below. The entry for Liontown Resources should be ignored due to the small forecast numbers involved.
Due to recent strength in the Aeris Resources share price, Macquarie downgraded its rating to Underperform from Neutral, but the target was increased by 33% to 20c on the back of EPS forecasts changes following third quarter results.
Group copper production for the quarter was -7% weaker than the broker’s forecast, while gold production beat by 11%. Quarter-on-quarter copper and gold production rose by 19% and 13%, respectively.
Higher copper and gold price estimates resulted in increased earnings forecasts by Bell Potter and a target of 30c, up from 23c.
Sandfire Resources reported a marginally softer March quarter result than Ord Minnett expected, with lower zinc production at the Matsa mining complex in south-western Spain more than offsetting slightly better group level copper production. FY24 production guidance was maintained.
Most brokers raised targets prices for Sandfire after allowing for improved spot copper prices.
Recent M&A news flow surrounding BHP Group and Anglo American highlights Sandfire’s growth appeal, suggested Ord Minnett, when a large portion of copper producers (domestic and global) appear to be ex-growth or lack substantial exposure within their portfolio.
Earnings forecasts for Megaport also rose last week after management raised full year earnings guidance by 5.6% at the midpoint of the range, alongside what Macquarie considered conservative revenue guidance.
Despite a delay in turnaround for KPI’s, the broker was encouraged by a favourable mix shift to higher value products, as well as partnership announcements.
Morgan Stanley highlighted Megaport shares are trading at a -10% discount to Australian software peers, while UBS noted a compelling long-term opportunity with strong demand underpinned by a structural shift to multi-cloud and AI.
Total Buy ratings in the database comprise 55.68% of the total, versus 34.61% on Neutral/Hold, while Sell ratings account for the remaining 9.71%.
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