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

Weekly Reports | Jul 08 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 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.


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