Weekly Reports | 10:00 AM
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 August 26 to Friday August 30, 2024
Total Upgrades: 14
Total Downgrades: 21
Net Ratings Breakdown: Buy 59.00%; Hold 32.82%; Sell 8.17%
The week ending Friday August 30, 2024, was one of the busiest of the August reporting season with FNArena recording fourteen ratings upgrades and twenty-one downgrades for ASX-listed companies by brokers monitored daily.
Overall, positive percentage changes to average earnings forecasts materially outpaced negative changes while falls for average target prices outweighed positive changes, as may be seen in the tables below.
Leading the falls in target prices, Tabcorp Holdings also received ratings downgrades to Hold (or equivalent) from Buy from three separate brokers.
The company's FY24 result proved disappointing as earnings fell -3% short of the consensus forecast, and FY25 guidance was abandoned with management referring to materially higher-than-expected operating costs.
Tabcorp also announced an additional -$645m write-down of its wagering assets, taking total impairment charges for the year to -$1.4bn.
Macquarie suggested Tabcorp is in a tough spot with wagering volumes experiencing ongoing regulatory impacts, against a ballooning cost base.
Management had initially aimed to reduce group opex to between -$587-597m in FY24 and -$640-660m in FY25. Instead, FY24 opex came in at -$614m and guidance is for around -$700m for FY25.
The only real positive from the result, according to Ord Minnett, was better-than-expected second half revenues where cash wagering rose by 5% and online wagering outperformed the broader market.
The only companies to experience greater falls in average earnings forecasts than Tabcorp last week were lithium sector names IGO Ltd, Mineral Resources (also iron ore exposure) and Pilbara Minerals.
Inghams Group followed Tabcorp on the earnings downgrade list after FY24 results and FY25 guidance missed market forecasts.
In a threat to Ingham's cozy duopoly with Baida Poultry in Australia (a combined market share between 70-75%), industry dynamics are changing, highlighted by Woolworth Group's decision to progressively diversify its supplier base away from Inghams.
Greater detail on FY24 results and the outlook for Inghams Group are provided at https://fnarena.com/index.php/2024/08/29/inghams-group-cracks-appear-in-poultry-duopoly/
Fortescue's FY24 underlying profit also missed consensus forecasts due to higher-than-expected interest expenses and D&A charges, but both Bell Potter and Ord Minnett upgraded their respective ratings after a -14% share price fall since June 30.
After upgrading to Hold from Sell, Bell Potter reminded investors overall risks remain to the downside for earnings and dividends despite short-term positives around iron ore pricing seasonality and stimulus measures in China.
The final dividend of 89 cents beat the consensus forecast and was a highlight of the result, in this broker's view. The full year payout totaled $1.97 per share.
While Fortescue reiterated FY25 guidance across production, shipments and costs, Ord Minnett highlighted additional capital expenditure of -US$4bn over FY26-FY28 on green ammonia projects, comprising -US$3bn on the Pecem development in Brazil and -US$1bn on the Holmaneset project in Norway.
On the flipside, average earnings forecasts increased for Sandfire Resources, Paladin Energy and Zip Co though FY24 results for all three were largely in line and each benefited as FY24 forecasts rolled off broker financial models to be replaced by better outlooks for FY25 and beyond.
For Sandfire, Morgans noted free cash generation is on the improve, partly reflecting a reduction in growth capex post completion of Motheo, but (modest) dividends still look 12 months away.
The analyst likes the current trajectory including material de-gearing, the eventual dividend resumption, and steady progress to optimise/unlock value in defined and yet-to-be-discovered resources close to the Matsa and Motheo process infrastructure.
Management has scaled up its FY25 exploration budget to -US$40m, versus -US$24m in FY24, as it pursues significant mineral inventory growth across the portfolio.
Ord Minnett agrees with Morgans on significant exploration upside and attributes $2.85 per share for the exploration component of its sum-of-the-parts valuation.
Paladin Energy is Shaw and Partners' preferred ASX uranium sector exposure. From FY24 results, the analysts noted production from Langer Heinrich is ramping up well and in line with management's guidance.
The comeback story continues for Zip Co largely based on the outlook in the US, where management is anticipating total transaction value growth of more than 30% in FY25.
Remaining positive on the medium-term growth outlook, UBS also noted potential longer-term capital-light expansion into new adjacencies in Australia such as Home Loans, Insurance, and white labelling.
Zip Co heads up the positive change to target price table below followed by newly listed Guzman y Gomez after an FY24 beat, Bega Cheese (in line) and a beat by PolyNovo.
At the head of the earnings downgrade table is Tabcorp followed by Kelsian Group, Johns Lyng, and Helloworld Travel after respective FY24 result misses.
For a summary of earnings beats and misses as they relate to the tables below and for other companies that reported last week, please refer to https://fnarena.com/index.php/reporting_season/ which also has FNArena's calendar of upcoming results.
Total Buy ratings in the database comprise 59.00% of the total, versus 32.82% on Neutral/Hold, while Sell ratings account for the remaining 8.17%.
Upgrade
ACCENT GROUP LIMITED ((AX1)) Upgrade to Buy from Neutral by UBS .B/H/S: 6/0/0
According to UBS, Accent Group reported FY24 earnings before tax and interest which met expectations.
In the first seven weeks of FY25, the company recorded like-for-like sales of 3.5%, slightly below the analyst's estimates, including weakness to peers such as Unversal Store ((UNI)) and slowing sales versus the previous 34-52 weeks of 5.9%.
Higher year-on-year comps also make it more challenging, the broker notes.
FY25 outlook is mixed because of store closures, loss-making Glue and sale of 14 Trybe stores.
UBS revises EPS forecasts by -6.9% for FY25 and -2.8% for FY26, as lower retail revenue and gross margins impact.
The stock is upgraded to Buy from Neutral, due to valuation de-rating. Target price $2.20.
CITY CHIC COLLECTIVE LIMITED ((CCX)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/2/0
Following FY24 results, and arguably conservative earnings estimates by management, Citi raises its target for City Chic Collective to 25c from 16c (yesterday's share price rallied by circa 60% to 17c). The rating is upgraded to Buy from Neutral.
For FY25, management guided to between $142-160m in revenue and $11-18m in EBITDA (post-AASB 16), which compares to the broker's respective $145m and $12.2m forecasts.
The turnaround is progressing well, according to Citi, with a repositioning to focus on the core A&NZ region and relevant demographic.
CLINUVEL PHARMACEUTICALS LIMITED ((CUV)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0
Following the recent progress update by Clinuvel Pharmaceuticals on the Phase 3 Vitiligo study highlighting challenges in patient retention and recruitment, and associated share price weakness, Morgans upgrades to Add from Hold.
The broker still considers the underlying erythropoietic protoporphyria (EPP) business as a cash cow with years of growth ahead. However, the analyst explains the ratings upgrade should be seen as only a short-term trade until several issues are addressed by management.
These issues include an ongoing lack of segmental disclosures and recent management and board turnover which have further exacerbated strategic direction concerns, notes Morgans.
The $16.00 target is unchanged.
FORTESCUE LIMITED ((FMG)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Hold from Sell by Bell Potter .B/H/S: 2/2/3
Fortescue's FY24 underlying profit missed consensus forecasts due to higher than expected interest expenses and D&A charges, although a final dividend of 89c was above Ord Minnett's expectations.
Management reiterated previous FY25 guidance across production, shipments and costs, but also flagged additional capital expenditure on green ammonia projects.
Ord Minnett expects FY25 underlying profit to fall as expenses increase and the iron ore price declines. In addition, net debt will probably rise as Fortescue funds additional capital expenditure and maintains its dividend payout ratio at 70%.
Upgrade to Accumulate from Hold post the share price sell-off. Target unchanged at $20.
Fortescue delivered a FY24 result that was largely "in line", Bell Potter asserts. Profit growth was driven by higher iron ore prices rather than production or costs with EBITDA margins remaining at 59%.
With a subdued iron ore price outlook and interest-rate differentials pointing to a stronger Australian dollar the broker believes pressure will build on margins. Capital expenditure on energy projects may also weigh on free cash flow.
As the stock has pulled back to a level more consistent with the broker's valuation, the rating is upgraded to Hold from Sell. Target is raised to $17.58 from $17.41.
IDP EDUCATION LIMITED ((IEL)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/0
IDP Education reported FY24 underlying profit down -1% year on year but the second half reflected the impact of policy changes, with profit down -34%. IELTS volumes were down -28% and while placements were flat, new policy was yet to impact, Morgans notes.
Management expects new international student admissions to be down -20-25% in FY25 but hopes to outperform this via meaningful market share gains. Morgans sees earnings falling -12%, with some benefits from pricing, market share gains and solid cost control.
The broker has been looking for more certainty in the near term earnings base' during this period of ongoing policy changes. There is
clearly still some downside risk, but Morgans feels like the majority of the reset is captured.
Riding out near-term volatility maybe required, however the broker believes IDP Education can return to delivering sustained growth from FY26. Upgrade to Add from Hold, target rises to $18.20 from $17.40.
IGO LIMITED ((IGO)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/2
Further to the FY24 result Macquarie upgrades IGO to Outperform from Neutral, encouraged by the better-than-expected payout although acknowledges this does not of itself create value.
The broker points out instead the business is a "productivity-driven yield vehicle", generating cash from it is tier-1 asset.
The focus appears to be on Greenbushes optimisation and free cash flow yield and the broker looks forward to the strategy briefing that should be a further positive catalyst. Target is raised 9% to $6.10.
LIBERTY FINANCIAL GROUP LIMITED ((LFG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0
Macquarie believes the majority of the margin headwinds for Liberty Financial are in the rearview mirror and lower funding spread should support margins in the second half of FY25 onwards.
With margin stability and the book returning to growth there are signs for cautious optimism, the broker adds, upgrading to Outperform from Neutral.
In FY24 overall book growth was 8%. Competitive trends appeared stable, and with potential rate cuts, Macquarie envisages upside risks. Target is unchanged at $4.10 and EPS for FY25 is upgraded by 6% and FY26 by 3%.
MATRIX COMPOSITES & ENGINEERING LIMITED ((MCE)) Upgrade to Speculative Buy from Hold by Bell Potter .B/H/S: 1/0/0
FY24 revenue from Matrix Composites & Engineering was in line with guidance and Bell Potter's forecast and was heavily skewed to the second half. Subsea revenue was $73.9m, up 103%. Corrosion technology sales were $6.4m and down -32%.
Bell Potter upgrades the outlook for both subsea and advanced materials along with higher gross profit margin assumptions for FY25-26.
The business is exposed to a capital expenditure cycle that is ramping up across the global offshore energy sector. Rating is upgraded to Speculative Buy from Hold and the target lifted to $0.44 from $0.42.
NAVIGATOR GLOBAL INVESTMENTS LIMITED ((NGI)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0
Macquarie upgrades Navigator Global Investments to Outperform from Neutral following recent share price weakness and the release of FY24 results. The target slips to $2.02 from $2.22.
Adjusted earnings (EBITDA) of US$90.5m for FY24 came in slightly above the top end of guidance range driven by aggregate asset under management (AUM) growth of 3% to US$75bn, explains the broker.
Revenue growth was partly offset by a -14% worsening of operating expenses primarily driven by senior executive compensation, notes the analyst, along with additional office space costs and increased third-party distribution costs.
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