Weekly Ratings, Targets, Forecast Changes – 10-05-24

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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%.

Upgrade

ARB CORPORATION LIMITED ((ARB)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/2/1

ARB Corp reported a 6.4% rise in 3Q24 sales with 9-month sales up 2.1%.

Breaking down the divisions, Ord Minnett notes domestic aftermarket sales lifted 6.8% in the 3Q and export sales fell -8.8%, with OEM up 25.5% over the quarter.

New vehicle sales underpinned growth in aftermarket sales, according to the analyst, and the company is expected to benefit from the investment in its network.

Target lifts to $44 from $42.50 and the rating is upgraded to Buy from Accumulate.

BRAMBLES LIMITED ((BXB)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/2/1

Ord Minnett raises its target for Brambles by 36% to $19.00 and upgrades the rating to Accumulate from Hold.

A new analyst at Ord Minnett takes over the research on the company and expects a higher mid-cycle operating margin of 21%, up from the 16% previously forecast.

The broker now assumes prices are increased broadly with inflation and volume gains will occur due to rising consumer spending, leading to market share gains in both existing and new markets.

For the firm's largest segment in the US, Ord Minnett predicts average volume growth of 2% (up from 1%) over the forecast period.

REA GROUP LIMITED ((REA)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/4/1

Following the March quarter release, UBS upgrades REA Group to Buy from Neutral, with a new price target of $214, up from $184.40.

The upgrade reflects stronger than expected residential yield growth and a positive outlook on volume growth.

REA Group's strategic pricing and product enhancements are expected to sustain double-digit yield growth, supporting margin expansion over the medium term.

Estimates have been upgraded.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/2/1

UBS upgrades Super Retail Group to Neutral from Sell with a new price target of $13, down from $13.75 following the release of March quarter trading numbers.

The broker states the adjustment reflects a balanced risk/reward scenario after a significant share price decline. Earnings estimates have been reduced.

Downgrade

AUSSIE BROADBAND LIMITED ((ABB)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/0/0

Aussie Broadband reconfirmed FY24 earnings guidance at the March quarter trading update where 33,159 subscribers were added, which is marginally below the Ord Minnett forecast of 34,704.

Around 132,000 customers are expected to migrate from the Origin White ((ORG)) label by October 2024, while the NBN market share lifted to 6.8% with 14,788 subscribers added over the quarter. Singapore results from Symbio should be earnings positive.

Ord Minnett forecasts EBITDA at $118.8m at the midpoint of management's EBITDA guidance of $118m-$121m. 

The rating is downgraded to Accumulate from Buy and the target is lifted marginally to $4.19 from $4.16.

ANZ GROUP HOLDINGS LIMITED ((ANZ)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/4/2

ANZ Bank served up a mixed 1H24 earnings report with higher expenses offseting a slightly better than forecast cash profit according to Morgan Stanley, although this met consenus expectations as a result of lower loan loss provisions.

Notably, the dividend at 83c per share was  2 cents better than forecast and the $2bn on-market buyback $0.5bn above the analyst's estimate.

Headline margin declined by -9 basis points with a -7 basis point impact from markets.

Expenses were greater by 0.5%, 2% above consensus, due to what appears to be higher restructuring costs and 'strategic investments' ANZ Plus and the cloud.

Management didn't offer guidance. The broker's FY25 EPS forecasts are raised by 2% for FY24, due to lower loan losses and FY25 EPS lowered by -3%.

The rating is downgraded to Equal Weight from Overweight, due to the strategic challenges for the bank, which makes earnings upgrades challenging, says the broker.

Target price is lowered to $27.70 from $27.90. Industry view: In-Line.

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/0

Ord Minnett downgrades its rating for Baby Bunting to Hold from Accumulate and reduces the target to $1.60 from $2.00 after sales activity deteriorated in the 2H, with comparable store sales falling by -7.7%.

Management attributed weak trading to ongoing cost of living pressures afflicting young families (Baby Bunting'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 1H as management invested over March and April to generate higher sales activity, explain the analysts.

Ord Minnett expects household expenditure will remain under pressure in the near-term.

IMDEX LIMITED ((IMD)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

Citi analysts have downgraded to Neutral from Buy in response to Imdex shares rallying by some 30% since the release of interim financials.

Citi suspects rising prices for gold and copper are responsible as they feed into expectations of progressive improvement in exploration activity levels.

Citi, however, has seen no evidence that step-up in exploration is actually occurring. With typical lead time of 6-9 months between junior fund raisings and exploration, the broker believes could still be in excess of 12 months before such a meaningful contribution from juniors can be witnessed.

Target price has lost -5c to $2.20.

JUMBO INTERACTIVE LIMITED ((JIN)) Neutral by Macquarie .B/H/S: 2/1/0

Jumbo Interactive's trading update at the Macquarie conference revealed a 38% rise in Lottery retailing year-to-date against the broker's forecast of 29% for FY24.

The Macquarie analyst, however, retains a cautious outlook for May/June and the forecasts are retained.

Management highlighted that participation rates are high in the lower jackpots with 50% of players in the $200m jackpot having played again.

Strategically, Managed Services remains a priority for Jumbo Interactive with three acquisitions of -$50m already in hand. Looking ahead, expansion will be disciplined and a special dividend in lieu of no corporate activity is seen as unlikely.

Neutral rating and $17.15 target remain unchanged.

PSC INSURANCE GROUP LIMITED ((PSI)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/1/0

In what Ord Minnett considers a "strong offer" and an excellent outcome for shareholders, global insurance broking platform, Ardonagh, has proposed to acquire PSC Insurance for $6.19/share in cash.

The broker's rating is downgraded by two notches to Hold from Buy and the target clipped by -1c to $6.19, to align with the offer price.

The board has unanimously recommended shareholders vote in favour of the deal, in the absence of a superior offer.

TOURISM HOLDINGS LIMITED ((THL)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0

Tourism Holdings Rentals issued a nasty profit warning and the share price got pummeled in response. Morgans has lowered its rating to Hold from Add.

The broker believes the difficult 4Q trading conditions are likely to continue into FY25 and lead to a very weak 1H25 result. 

Tourism Holdings Rentals has significant leverage to improved economic conditions, the broker highlights, but for now the market won't be in a mood to give management the benefit of the doubt.

The broker's price target has fallen to $1.94 from $4.70.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 ARB CORPORATION LIMITED Buy Buy Ord Minnett 2 BRAMBLES LIMITED Buy Neutral Ord Minnett 3 REA GROUP LIMITED Buy Neutral UBS 4 SUPER RETAIL GROUP LIMITED Neutral Sell UBS Downgrade 5 ANZ GROUP HOLDINGS LIMITED Neutral Buy Morgan Stanley 6 AUSSIE BROADBAND LIMITED Buy Buy Ord Minnett 7 BABY BUNTING GROUP LIMITED Neutral Buy Ord Minnett 8 IMDEX LIMITED Neutral Buy Citi 9 JUMBO INTERACTIVE LIMITED Neutral Buy Macquarie 10 PSC INSURANCE GROUP LIMITED Neutral Buy Ord Minnett 11 TOURISM HOLDINGS LIMITED Neutral Buy Morgans

Target Price

Positive Change Covered by at least 3 Brokers Order Symbol Company New Target Previous Target Change Recs 1 BXB BRAMBLES LIMITED 16.275 15.442 5.39% 6 2 REA REA GROUP LIMITED 184.714 175.343 5.34% 7 3 GMG GOODMAN GROUP 31.503 30.057 4.81% 6 4 PXA PEXA GROUP LIMITED 15.240 14.578 4.54% 5 5 WBC WESTPAC BANKING CORPORATION 25.217 24.217 4.13% 6 6 RRL REGIS RESOURCES LIMITED 2.227 2.152 3.49% 6 7 ORI ORICA LIMITED 19.283 18.638 3.46% 6 8 ARB ARB CORPORATION LIMITED 39.020 37.800 3.23% 5 9 MQG MACQUARIE GROUP LIMITED 193.080 187.080 3.21% 5 10 SCG SCENTRE GROUP 3.280 3.182 3.08% 5

Negative Change Covered by at least 3 Brokers Order Symbol Company New Target Previous Target Change Recs 1 THL TOURISM HOLDINGS LIMITED 1.940 4.700 -58.72% 3 2 BBN BABY BUNTING GROUP LIMITED 1.728 1.930 -10.47% 5 3 LAU LINDSAY AUSTRALIA LIMITED 1.337 1.490 -10.27% 3 4 NWS NEWS CORPORATION 37.925 42.083 -9.88% 4 5 SGM SIMS LIMITED 12.700 14.000 -9.29% 4 6 PPT PERPETUAL LIMITED 25.250 26.830 -5.89% 5 7 SYR SYRAH RESOURCES LIMITED 0.813 0.863 -5.79% 4 8 LTM ARCADIUM LITHIUM PLC 9.633 10.133 -4.93% 3 9 AIS AERIS RESOURCES LIMITED 0.240 0.250 -4.00% 3 10 IMD IMDEX LIMITED 2.113 2.175 -2.85% 4

Earnings Forecast

Positive Change Covered by at least 3 Brokers Order Symbol Company New EF Previous EF Change Recs 1 AIS AERIS RESOURCES LIMITED -0.633 -1.500 57.80% 3 2 SYR SYRAH RESOURCES LIMITED -7.264 -11.540 37.05% 4 3 MQG MACQUARIE GROUP LIMITED 1079.280 921.560 17.11% 5 4 HMC HMC CAPITAL LIMITED 32.740 28.880 13.37% 5 5 NIC NICKEL INDUSTRIES LIMITED 8.047 7.265 10.76% 5 6 NEM NEWMONT CORPORATION REGISTERED 319.366 293.795 8.70% 4 7 IRE IRESS LIMITED 28.200 25.975 8.57% 4 8 LTR LIONTOWN RESOURCES LIMITED -0.466 -0.506 7.91% 5 9 AGL AGL ENERGY LIMITED 114.525 109.900 4.21% 4 10 NXT NEXTDC LIMITED -9.075 -9.467 4.14% 6

Negative Change Covered by at least 3 Brokers Order Symbol Company New EF Previous EF Change Recs 1 SGM SIMS LIMITED -14.425 23.400 -161.65% 4 2 BBN BABY BUNTING GROUP LIMITED 4.860 8.460 -42.55% 5 3 THL TOURISM HOLDINGS LIMITED 21.834 35.173 -37.92% 3 4 LAU LINDSAY AUSTRALIA LIMITED 10.100 12.367 -18.33% 3 5 GNC GRAINCORP LIMITED 31.200 37.520 -16.84% 5 6 TPW TEMPLE & WEBSTER GROUP LIMITED 3.820 4.580 -16.59% 5 7 TPG TPG TELECOM LIMITED 13.360 15.980 -16.40% 5 8 NWS NEWS CORPORATION 100.366 115.042 -12.76% 4 9 MP1 MEGAPORT LIMITED 9.233 9.920 -6.93% 6 10 IMD IMDEX LIMITED 10.725 11.250 -4.67% 4

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