Weekly Reports | May 20 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 13 to Friday May 17, 2024
Total Upgrades: 7
Total Downgrades: 4
Net Ratings Breakdown: Buy 55.68%; Hold 34.80%; Sell 9.51%
For the week ending Friday May 17, 2024, FNArena recorded seven ratings upgrades and three downgrades for ASX-listed companies by brokers monitored daily.
The tables below show percentage upgrades by brokers to average earnings forecasts were broadly similar to downgrades, but average target price rises were considerably larger than falls.
Peter Warren Automotive received the largest increase in average target price after UBS, one of five covering brokers in the FNArena database, increased its target to $12 from $10 due to a valuation roll-forward, time creep and single-digit upgrades to longer-term revenue forecasts.
The broker attributed recent share price strength to a strong ongoing performance in Motorsports (near-term F1 tailwinds from new car designs), and a further increase in the number of contracts in the Emerging Technology (ET) pipeline.
The company is exposed to around 17% of forecast Electric Vertical Takeoff and Landing (eVTOL) demand prior to 2030, which forms only part of the ET contract pipeline, noted the analyst.
Even though Life360’s share price has nearly doubled since reporting second half results in early-March, the average target for Life360 rose by just over 13% last week when analysts reacted to quarterly results in the prior week.
After a late-quarter rise in monthly active users and paying circles, management is “seeing that higher growth level continuing”, yet left FY24 guidance unchanged.
For a wider perspective on Life360, more detail on the quarterly result, and details regarding a potential listing in the US, please refer to (More Life Left In Life360 - FNArena.com).
FleetPartners was next in line on the positive change to target price table, as first half results revealed year-on-year growth for new business writings (NBW) and assets under management or financed (AUMOF) had jumped by 39% and 10%, respectively. After raising respective target prices, two separate brokers downgraded ratings on valuation.
The company is finding a niche with a strategic focus on electric vehicles and a new green bond initiative. Again, for a more detailed summary please refer to (FleetPartners Green Outlook Is Electrifying - FNArena.com).
Life360 and FleetPartners appear in the earnings upgrade list below at positions one and three, respectively, with Paladin Energy wedged in between after Macquarie raised forecasts following the hosting of Paladin (and 17 other companies) at the yearly Macquarie Australia Conference.
Paladin is experiencing a strong performance at its Langer Heinrich operation following production restart, noted the broker, and the stage is set for first shipment in July 2024 and a full ramp-up by FY26. The company is one of the broker’s preferred uranium stocks and is currently assigned an Outperform rating and a 12-month target price of $15.
Moving to the dark side, brokers materially lowered average earnings forecasts last week for Baby Bunting, Arcadium Lithium, and CSR.
As revealed in this article last week, brokers reduced targets and earnings forecasts for Baby Bunting 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.
Better late than never, last week Macquarie also lowered its earnings outlook for the company in anticipation of ongoing cost pressures and an increasingly competitive operating environment. The Neutral rating was retained, but the broker’s target was reduced to $1.40 from $1.70.
Arcadium Lithium (which on reflection has cornered LTM for lithium as its ASX code) was second placed on the earnings downgrade table, as analysts are still grappling with what to put through their modeling. Citi is outright bullish on the outlook.
The analysts highlighted the company’s current valuation discount to peers is the result of a contract book and capex program positioned for a market downturn, a negative read-across from peer financings, reduced disclosures, and perceived risk from operating in Argentina.
Because of escalating capex requirements, technical challenges, and very few ex-China examples of successfully producing hydroxide (ex-China battery supply chain), Arcadium is trading below ‘replacement cost’, on the broker’s estimation.
It seems pointless to discuss last week's lower CSR earnings forecasts by brokers in the FNArena database, as analysts are maintaining $9.00 target prices to align with (what appears) an inevitable takeover by Saint-Gobain.
For the record, CSR's FY24 operating earnings (excluding property) just missed the consensus forecast. Positives, according to Ord Minnett, included price increases for building products and the settlement of two property sales, though the performance of the Aluminium division mostly offset these wins.
The most disappointing average target price adjustments last week belonged to IDP Education and Fletcher Building.
Late in the week, Morgans noted international student and broader migration policies are being tightened across all IDP Education's major destination markets.
As a result of these changes, the broker expects a re-basing of ‘system’ numbers for international student enrolments and English test demand into FY25. The FY25 EPS forecast was cut by around -15% after allowing for more restrictive macroeconomic settings.
Further restrictive policy can’t be ruled out in the UK, highlighted Morgans, as the Government is scheduled to set migration policy prior to the late-2024 election.
A few days earlier, UBS downgraded its rating for IDP Education to Neutral from Buy because Australian international student caps are extending uncertainty for the company and adding further downward pressure to FY24 and FY25 earnings forecasts.
While it's difficult to assess the extent of the Australian student cap impact, the analysts felt linking future enrolment growth to provision of student accommodation could slow overall market growth.
The broker remained positive on the longer-term structural story and the student placement market share gains opportunity from Fastlane, as well as the US opportunity.
Fletcher Building announced an -11% reduction in FY24 EBIT guidance, exacerbated by a challenging April and May, explained Macquarie, particularly in the Australian market, which constitutes 40% of total core revenue.
The Underperform-rated broker noted structural issues, including contingent liabilities related to product liability claims, which could potentially deter quality leadership hires and impact upon the firm's attractiveness for acquisition.
Ord Minnett sees a greater potential that Fletcher Building will need to raise additional funds given current balance sheet pressures, a view not shared by Citi, which feels management will instead focus on cost-outs and preserving capital.
Total Buy ratings in the database comprise 55.75% of the total, versus 34.74% on Neutral/Hold, while Sell ratings account for the remaining 9.51%.
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