Weekly Ratings, Targets, Forecast Changes – 05-07-24

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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 July 1 to Friday July 5, 2024
Total Upgrades: 12
Total Downgrades: 10
Net Ratings Breakdown: Buy 58.43%; Hold 32.86%; Sell 8.71%

For the week ending Friday July 5, 2024, FNArena recorded twelve ratings upgrades and ten downgrades for ASX-listed companies by brokers monitored daily.

Four of the upgrades and five of the downgrades were a direct result of a report issued by UBS largely reducing forecasts across its research coverage of the Australian REIT sector, placing the broker’s forecasts below consensus in most cases.

UBS analysts argue the sector is now less likely to find support from RBA rate cuts as many A-REITs are growth challenged and funds management benefits are harder to achieve. It’s felt valuations for the winners in the sector are currently “stretched”.

Developers are faced with tougher conditions, explained the broker, with asset sales on the menu (and a must for some), while performance fees for fund managers will be much harder to achieve.

UBS ratings for both Mirvac Group and Lendlease Group were upgraded. Citi chimed in with upgrades for both companies on valuation grounds, following market sensitive announcements last week.

Mirvac downgraded its FY24 residential settlement target by -4% (but still retained FY24 EPS guidance) and announced the sale of a 66% stake in the 55 Pitt Street Sydney office development to Japanese company Mitsui Fudosan.

Citi felt Lendlease had progressed well on its asset divestment strategy, post the sale announcement of the US Military Housing business at a substantial premium to book value.

Lendlease shares are discounting a lot of bad news at current levels, according to this broker.

A-REITs favoured by UBS are Mirvac, Dexus and Region Group, while Scentre Group, Goodman Group and Centuria Capital are now least preferred (valuations are seen as too elevated).

The tables below show percentage downgrades by brokers to average earnings forecasts were larger than upgrades, while changes in average target prices were broadly equal.

Liontown Resources received the largest reduction in average earnings forecast from brokers after Macquarie incorporated the company’s US$250m convertible note issue to LG Energy Solutions into forecasts. This change resulted in higher interest repayments, and EPS reductions of between -4-9% across the broker’s FY25-29 forecast period.

The note issue removes a funding gap for Liontown and enables LG to gain a subsequent stake of up to 8% in Liontown equity. 

Citi upgraded its rating for Liontown to Neutral from Sell after share price underperformance against peers of around -10% so far in 2024.

This broker now applies a 10% risk weighting (down from 20%) to valuation for Liontown given the new funding, which offsets around -9% net asset value (NAV) dilution from the note issue.

Average earnings forecasts for Nickel Industries also fell last week after management guided to second quarter earnings of between US$75-85m, significantly below Morgan Stanley’s US$133m forecast.

Lower guidance was due to higher-than-average rain at the Hengjaya mine in Indonesia, which has impacted the delivery of ore to the Morowali Industrial Park.

Separately, Macquarie is expecting share price support for Nickel Industries given a US$100m share buyback has been approved and retained an Outperform rating. 

The buyback is now feasible, explained Morgan Stanley, driven by FIRB approval for United Tractors to increase its equity interest in Nickel Mines beyond 20%.

While Megaport’s average earnings forecast fell by over -13% last week, Ord Minnett’s new research arrangement was the sole cause.

For many stocks under coverage the broker is transitioning to in-house analysis from whitelabeling Morningstar’s research.

This change also impacted AMP which appears just below Megaport on the earnings downgrade table this week.

More generally for insurers, Ord Minnettt noted how rising bond yields in the June quarter tempered expectations for interest rate cuts and helped reduce the impact of weaker equity markets.

The analyst also highlights diversified financials experienced slight earnings downgrades over the quarter due to underperforming equity markets.

On the flipside, Cobram Estate Olives received the greatest lift in average earnings forecasts from brokers, but the percentage change was exaggerated by the relatively small numbers involved.

Following management’s 2024 trading and harvest update, Shaw and Partners highlighted the harvest was in line with Cobram’s expectations but below the analyst’s forecasts. However, the broker upgraded FY24 and FY25 EBITDA forecasts due to higher-than-expected output pricing amid a global shortage of olive oil.

On the other hand, Bell Potter observed domestic competitors are finally catching up with price increases, EU extra virgin olive oil pricing indicators appear to have peaked, and EU crop volumes have improved.

The average broker target price for Insurance Australia Group rose the most in the FNArena Database last week following a trading update and restructure of reinsurance arrangements. The latter is likely to improve investor perceptions of earnings quality, UBS suggested.

Management raised FY24 guidance to the “upper end” of the earnings ranges, which conforms with the margin momentum UBS is seeing across the industry.

Morgan Stanley increased its target for Insurance Australia Group to $6.60 from $5.45 as stronger, multi-year CAT cover, alongside a new reserving cover, reduces the group’s cost of capital.

The average Origin Energy target price also rose by over 7% last week. 

Ord Minnett updated for actual commodity prices in the June quarter, as well as slightly increasing LNG volumes for the period, and raised earnings forecasts for part-owned UK energy retailer Octopus Energy in FY25 and beyond.

Back home, should evening peak price spreads expand to more than $500/MWh over time from over $300/MWh year-to-date, UBS forecasts circa $2.4bn (or $1.40/share) of valuation upside for Origin.

Total Buy ratings in the database comprise 58.38 % of the total, versus 33.02% on Neutral/Hold, while Sell ratings account for the remaining 8.60%.

Upgrade

AMPOL LIMITED ((ALD)) Buy by Ord Minnett .B/H/S: 2/2/0

In the ongoing transition from whitelabelling Morningstar to in-house research, and after updating for a reduction in refining volumes and a slight decrease in refining margins, Ord Minnett sets a $36.50 target and Buy rating for Ampol.

The broker lowers forecast refining margins for 2024 to US$11.8 per barrel from US$12.1 per barrel. More modest Fuel & Ingredients (F&I) International trading activity is also anticipated, which typically yields low margins, explains the analyst.

CSL LIMITED ((CSL)) Upgrade to Buy from Neutral by Citi .B/H/S: 6/0/0

Citi upgrades CSL to Buy from Neutral on the basis of less headline risks going into the 2H of 2024. This follows the CSL112 trial failure, a downgrade of Vifor expectations, and approval of Vyvgart in Chronic Inflammatory Demyelinating Polyneuropath (CIDP) for argenx.

The broker anticipates double digit EPS growth and a 14% NPATA compound annual growth rate (CAGR) between FY23 and FY27, in-line with the consensus forecast.

The target rises to $335 from $305.

DETERRA ROYALTIES LIMITED ((DRR)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/3/0

UBS is of the view the announced acquisition of Trident and subsequent negative impact on available dividends for shareholders is distracting investors’ attention from the underlying quality of Deterra Royalties’ assets.

Therefore the share price weakness following the Trident announcement is seen as offering an attractive entry point into a business that remains “fundamentally sound”.

Upgrade to Buy from Neutral. Target price $4.90.

EBOS GROUP LIMITED ((EBO)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/2/0

Citi upgrades its rating for Ebos Group to Neutral from Sell on valuation after a share price decline.

The key near-term risk remains the unwind of the Chemist Warehouse contract, suggests the broker, and its impact on top-line growth and margin.

The target falls to $31.50 from $33 as the analysts cut the company’s mid-term growth rate to 4% from 5% and roll-forward the financial model.

G8 EDUCATION LIMITED ((GEM)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0

Macquarie anticipates G8 Education will experience better occupancy rates, although the rate of improvement may slow in the 2H24.

Lower than expected wage increases and the sale of 17 underperforming centres is expected to boost the company’s margins on the analyst’s forecasts.

The broker anticipates any further wage increases post the May Budget will be subsidised and support increased female work participation.

Adjusting for the updates, Macquarie lifts EPS forecasts by 0.5% for FY24 and 0.6% for FY25.

The target price is increased to $1.35 from $1.26 and the rating upgraded to Outperform from Neutral.

LENDLEASE GROUP ((LLC)) Upgrade to Neutral from Sell by UBS and Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/0

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

As one of few upgrades only, the broker’s rating for Lendlease Group has shifted to Neutral from Sell. The price target has adjusted to $5.79 from $5.56.

Lendlease Group has progressed well on its asset divestment strategy, post the sale announcement of the US Military Housing business, and at a substantial premium to book value or US$320m, Citi highlights.

The sale is expected to deliver $105-$120m in operating profit after tax in FY25.

Management guided FY24 earnings lower again to $260m-$275m from $305m, notes Citi, with $275m-$335m transactions contracted/announced for FY25 profit after tax, compared to consensus estimates of $418m.

Citi believe Lendlease Group shares are discounting a lot of bad news at current levels and views the asset sales to date as encouraging.

The rating is upgraded to Buy from Neutral with a $6.30 target price.

LIONTOWN RESOURCES LIMITED ((LTR)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/4/0

LG Energy Solutions will invest US$250m into Liontown Resources via convertible notes in exchange for offtake.

Management has foregone commercial debt in favour of greater flexibility and less restrictive debt covenants, explains Citi.

If exercised as equity today, the broker notes LG Energy Solutions would hold 8% of Liontown Resources shares, subject to FIRB approval.

Citi upgrades its rating for Liontown Resources to Neutral from Sell given share price underperformance versus peers of around -10% year-to-date. The $1.00 target is unchanged.

MIRVAC GROUP ((MGR)) Upgrade to Buy from Neutral by UBS and Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

The broker’s rating for Mirvac Group has been upgraded to Buy from Neutral. The price target has adjusted to $2.19 from $2.23.

Citi views the sale of the 66% Mirvac Group stake in 55 Pitt Street as a positive development for the group. Assuming a $1.3bn sale price, the value of the office development comes in at around $2bn.

The broker highlights the unchanged end value of the project, suggests the sale price is in line with what was originally expected by Mirvac Group

Management also reported a reduction in the FY24 residential settlement target by -4% to 2400 lots, the broker notes.

The group’s earnings guidance for FY24 was retained at between 14-14.3c.

Citi upgrades the stock to Buy from Neutral. Its forecasts are in line with FY24 and FY25 consensus estimates, although there are downside risks to book values for office landlords in the 2H24, Citi acknowledges.

STRIKE ENERGY LIMITED ((STX)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/2/0

Macquarie points to the -20% retracement in Strike Energy shares this week, which drives an upgrade in the rating.

The analyst believes the market has adjusted to a more accurate reflection of the growth opportunities for Strike Energy including the potential South Erregulla gas peaking plant.

While exploration outcomes could drive upside to the share price, Macquarie emphasises the potential delays in the final investment decision for West Erregulla as a potential downside risk.

The stock is upgraded to Neutral from Underweight with the 22c target price unchanged.

No changes in the analyst’s earnings forecasts.

See also STX downgrade.

VICINITY CENTRES ((VCX)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/3/1

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

The broker’s rating for Vicinity Centres  has been upgraded to Neutral from Sell. The price target remains unchanged at $1.86.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/3/0

The UBS target for AGL Energy falls to $10.85 from $11.25 after extending the terminal year forecast to FY36, despite raising forecasts for long-term wholesale electricity prices.

The broker reminds investors AGL remains favourably exposed to rising electricity demand from data centres and AI, which may add pressure to evening peak prices.

Because management is embarking upon a highly complex retail transformation to the electricity supply and billing platform Kaluza from SAP, UBS lowers its rating for AGL Energy to Neutral from Buy.

The analyst sees downside risks arising from unplanned generation outages and the risk of higher retail costs/weaker retail performance over FY25-28.

ANSELL LIMITED ((ANN)) Hold by Ord Minnett .B/H/S: 1/4/0

Ord Minnett sets a $24.30 target and Hold rating for Ansell after transitioning from whitelabeling Morningstar research.

The broker highlights a significant shift in strategic direction from the acquisition of Kimberly-Clark’s Personal Protective Equipment business (effective on July 1). The related institutional placement and share purchase plan are also factored into forecasts.

The transaction enhances Ansell’s presence in the Scientific verticals, explains Ord Minnett.

The company’s product portfolio will now be balanced across Scientific/Industrial segments and geographic presence, as the new business is skewed towards North America, explains the analyst.

ARENA REIT ((ARF)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/2/0

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

The broker’s rating for Arena REIT has been downgraded to Neutral from Buy. The price target has adjusted to $3.94 from $3.97.

BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Lighten by Ord Minnett .B/H/S: 1/0/3

Bendigo & Adelaide Bank announced what Ord Minnett describes as the “surprise” resignation of Marnie Baker post a 35-year career at the bank, highlighted by her investment in technology and a digital transformation.

Richard Fennell will become CEO and MD, formerly having held the CFO and head of Consumer Banking roles with the broker expecting a smooth transition with limited strategic or financial impacts.

Ord Minnett points to the lingering problem for small regional banks like Bendigo & Adelaide Bank to boost return on equity in the face of heavy competition from the four major banks.

The stock has rallied since 16% since May 1 and is rated Lighten with a $10 target price.

BWP TRUST ((BWP)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/2/2

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

The broker’s rating for BWP Trust  has been downgraded to Neutral from Buy. The price target has adjusted to $3.79 from $3.80.

CENTURIA CAPITAL GROUP ((CNI)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/2/1

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

Believing investors are pricing in too much growth in the short term, UBS has downgraded Centuria Capital to Sell from Neutral. Price target is now $1.51, down from $1.53 previously.

GOODMAN GROUP ((GMG)) Downgrade to Sell from Neutral by UBS .B/H/S: 3/1/1

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector, such as Goodman Group, are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

Believing investors are pricing in too much growth in the short term, UBS has downgraded Goodman Group to Sell from Neutral. Price target lifts to $31.71 from $29.25.

MONADELPHOUS GROUP LIMITED ((MND)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 2/4/0

Bell Potter has tempered the outlook for the Monadelphous Group’s engineering construction activity, post a thorough review of anecdotal reports and major Resource and Energy project awards.

The broker now forecasts EBITDA margins in FY25-FY27 to come under pressure as the $750m-plus of contracts awarded in FY24 will roll-off in the 2H25, with only a partial replacement in new contracts now anticipated.

Earnings forecasts are tweaked for FY24 and FY25 with more substantial downgrades the analyst expects in the outlying years at this stage.

The stock is downgraded to Hold from Buy with the target reduced to $14 from $15.40.

SCENTRE GROUP ((SCG)) Downgrade to Sell from Neutral by UBS .B/H/S: 3/1/1

Through a broad sector update on A-REITs, UBS analysts argue the sector is now less likely to find support from RBA rate cuts (as many REITs are growth challenged and funds management benefits are harder to achieve) and valuations for the winners in the sector are seen as “stretched” in the here and now.

Developers are faced with tougher conditions, with asset sales on the menu (and a must for some). Performance fees for fund managers will be much harder to achieve.

UBS has reduced forecasts across the board, placing the broker’s numbers below consensus in most cases.

Believing investors are pricing in too much growth in the short term, UBS has downgraded Scentre Group to Sell from Neutral. Price target is now $2.96, down from $2.98 previously.

STRIKE ENERGY LIMITED ((STX)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/2/0

Macquarie downgrades its rating for Strike Energy to Underperform from Neutral due to excessive market optimism around the timeline and value of the South Erregulla peaking gas power plant project.

The broker risks the project at 50% and assigns a risked value of 1cps net of capex, yet the Strike Energy share price climbed by around 4.5% last week since the announcement of the power plant.

The Neutral rating and 22c target are retained.

See also STX upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=BellPotter,Citi,Macquarie,MorganStanley,Morgans,OrdMinnett,ShawandPartners,UBS&b0=187,126,173,95,227,236,161,138&h0=101,132,165,116,175,146,21,157&s0=7,43,36,52,19,38,5,32″ style=”border:1px solid #000000″>

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