Weekly Reports | May 13 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 May 6 to Friday May 10, 2024
Total Upgrades: 4
Total Downgrades: 7
Net Ratings Breakdown: Buy 55.61%; Hold 34.90%; Sell 9.49%
For the week ending Friday May 10, 2024, FNArena recorded four ratings upgrades and seven downgrades for ASX-listed companies by brokers monitored daily.
The tables below show percentage downgrades by brokers to average earnings forecasts and average target prices were only slightly larger than upgrades.
The average FY24 earnings forecast for Sims fell by over -160% as the two divisions which had been driving growth, A&NZ and SA Recycling (in the US), stumbled. Morgan Stanley pointed out the poor sentiment in global steel markets is flowing through to weakness in scrap markets.
Management had previously guided for underlying earnings growth in the second half of FY24, but now expects a decline versus the first half. Weakness in A&NZ has been driven by impacts from increased China ferrous exports, explained Macquarie, while SA Recycling experienced margin compression from a sudden fall in selling prices, along with unfavourable inventory levels.
More positively, the broker believes EPS recovery potential is high, supported by management's cost-out program, which remains on track. Citi concurred, suggesting the time is right to pick-up shares in Sims as earnings are currently at cyclical lows and should lift beyond FY24.
UBS also retained a Buy rating, citing upcoming cost-out initiatives and potential for the UK metals business to be sold as part of a strategic review, with proceeds likely to exceed book value.
The next three largest downgrades to average earnings forecasts were directed at Baby Bunting, Tourism Holdings Rentals, and Lindsay Australia. All three unpleasantly surprised with a profit warning. All three feature in the target price table below for the three largest percentage falls.
Ord Minnett downgraded Baby Bunting to Hold from Accumulate and reduced its target to $1.60 from $2.00 after sales activity deteriorated in the second half, with comparable store sales falling by -7.7%. Management attributed weak trading to ongoing cost of living pressures afflicting young families (the company’s core customers), and declining average transaction values as consumers trade down.
The year-to-date gross profit margin contracted to 36.9% from 37.2% in the first half as management invested over March and April to generate higher sales activity, explained the analysts.
The second-hand market has emerged as a temporary headwind to sales, noted Overweight-rated Morgan Stanley, while Citi will need further evidence Baby Bunting's scale can be leveraged to respond in an effective way to heightened competition in the nursery category before upgrading from a Neutral recommendation.
For Tourism Holdings Rentals, Ord Minnett (Buy) lowered its target to NZ$3.13 from NZ$5.34 following management's new FY24 guidance for profit of between NZ$50-53m, down from NZ$75m previously.
Weakness in demand and pricing for used recreation vehicles in A&NZ markets was behind the downgrade, explained the broker, which are cyclical (not structural) factors. Based on history, conditions are expected to normalise (for the better).
Morgans, which slashed its target to $1.94 from $4.70, also downgraded to Hold from Add in the belief difficult fourth quarter trading conditions are likely to continue into FY25 and lead to a very weak first half FY25 result.
The company has significant leverage to improved economic conditions, but for now the market won't be in an accommodating mood to give management the benefit of the doubt, predicted the broker.
Wet weather impacts weighed on Lindsay Australia's operations over the March quarter, leading to a downgrade in FY24 earnings guidance to $88-$94m from $102-$108m.
Ord Minnett explained reasons for the downgrade included: flow on weather impacts in Far North Queensland; rail outages on the key East-West line during March and April; cyclical softness in the rural segment; and subdued volumes post-Easter.
The weather impacts in Queensland and rail outages are largely abnormal events, noted the analyst, and the East-West rail line is now back in operation.
This broker reduced its target to $1.31 from $1.52, but maintained a Buy rating, noting potential for a cyclical upswing in industry conditions following the weather impacted year.
Morgans (Add) believed recent negative events for the company are likely one-off factors, yet the analyst chose to be more conservative around the recovery in horticulture volumes and utilisation rates and reduced its target to $1.20 from $1.45.
The average earnings forecast for GrainCorp also fell by around -17% last week after management lowered FY24 earnings guidance to between $250m-$280m from $270m-$310m, and net profit to $60m-$80m from $65m to $95m.
The company’s significant operating leverage can make forecasting difficult, noted UBS. In prior years leverage worked in favour of upside surprises, this time around the pendulum has swung to the other side.
UBS attributed the downgrade to softer grain and oilseed export margins in April, together with the change-in-mix impact from stronger crop volumes out of southern regions. Bell Potter’s best guess/explanation was downward pressure on margins from interest holding costs and weaker oilseed crush margins in recent weeks.
There was generally only a slight trimming of GrainCorp target prices by the four covering brokers in the FNArena database (the fifth, Morgans is yet to update research after management's new guidance). It was the second profit warning by the company in 2024.
Looking out to FY25, Macquarie noted winter crop production should benefit from higher-than-average soil moisture and a potential La Nina. This broker is forecasting 24.9mmt against a 10-year average of 21.7mmt.
News Corp also featured in both the negative change to average earnings and target price tables below, following third quarter earnings which came in -5% below the consensus forecast. Earnings for News media and subscription video fell by -24% and -3%, respectively, which effectively eliminated the 8% increase in earnings for Dow Jones.
Management intends to increase marketing and product development spending for Move, which is a negative development, according to Macquarie, due to increasing competition from a new entrant. Ord Minnett is not complimentary of Move, describing the asset as “the digital real estate poor cousin” to the 61%-owned REA Group in Australia.
Management is currently reviewing the company’s corporate structure with the aim of maximising shareholder value. This includes the possibility for a sum-of-the-parts value realisation, which Macquarie listed as a potential positive share price catalyst in the next year, along with the signing of new AI contracts.
Buy-rated UBS highlighted management’s strategic focus on digital transformation, which remains a key growth driver for News Corp. An improved performance in digital assets is expected to drive long-term margin expansion.
On the flipside, there was a lift of over 10% in average earnings forecasts for Syrah Resources, Macquarie Group, and HMC Capital last week. The appearance of Aeris Resources in the earnings upgrade table below should be ignored due to the small forecast numbers involved.
A data entry glitch was most likely behind the earnings lift for Syrah Resources, as the sole (UBS) research update in the FNArena database was categorically negative for the company.
UBS reduced its target price to 80c from $1.00 following a general sector update on graphite following the recent release by the US Treasury and IRS of final guidance on the clean vehicle provisions for the Inflation Reduction Act (IRA). This guidance weighed on the broker’s forecasts and valuations for companies with graphite exposure.
In a negative for ex-China graphite and anode materials producers, manufacturers were granted a two-year transition rule (to 2027) to adhere to foreign entity of concern (FEOC) requirements for what policymakers deem "impracticable-to-trace" battery minerals.
For the time being, manufacturers can keep sourcing graphite from China. As a result, UBS doesn’t anticipate market conditions improving for graphite in the near-term.
Brokers’ earnings forecasts for Macquarie Group generally rose last week following "solid” FY24 results, according to Morgans, in a year that has seen multiple guidance downgrades from management.
Morgan Stanley reduced its FY25 EPS forecast by -7.5% largely due to weaker margins in Banking & Financial Services (BFS), and in the expectation of a slower investment gains recovery in the MacCap division. However, the broker still forecast 22% profit growth for FY25 and suggested there could be an upside surprise from operating leverage due to a capital markets-led revenue recovery.
UBS raised its earnings forecasts for the group and highlighted significant cost reductions and ongoing capital management.
On the other hand, Citi, which has the lowest ($176) target in the FNArena database, felt management’s outlook commentary implied downgrades to FY25 expectations, and noted a more muted recovery for green investments.
Earnings for Macquarie Group may have troughed post their FY23-peak, yet this broker remaited its Sell recommendation. While deal-related activity should improve from here, the timing still presents risks for current management guidance, in the analyst’s view.
Total Buy ratings in the database comprise 55.61% of the total, versus 34.90% on Neutral/Hold, while Sell ratings account for the remaining 9.49%.
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