Weekly Reports | Oct 07 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 September 30 to Friday October 4, 2024
Total Upgrades: 2
Total Downgrades: 0
Net Ratings Breakdown: Buy 60.10%; Hold 32.03%; Sell 7.86%
For the week ending Friday October 4, 2024, there were relatively few changes to ratings with FNArena recording just two upgrades and no downgrades for ASX-listed companies by brokers monitored daily.
Upgrades to average target prices and average earnings forecasts broadly matched downgrades as can be seen in the tables below.
Star Entertainment suffered the largest percentage decline in both target price and earnings forecast after the re-instatement of trading for the company's shares.
Shares were recently suspended due to management's failure to submit financial results on time after a challenging period when questions were raised about corporate culture and compliance with anti-money laundering regulations.
Last week, the NSW and Queensland casino operator not only submitted FY24 financials, but also a debt refinancing plan and details for a new strategic direction.
Onerous near-term cash requirements forced the debt refinancing, according to Macquarie, providing greater liquidity, albeit at a high rate of 13.5%.
In reaction, Hold-rated Ord Minnett slashed earnings estimates, after incorporating into forecasts $750m in costs savings and proceeds from asset sales (previously flagged by management), along with -$400m for regulatory fines and tax penalties.
Erring on the side of caution, the broker arrived at a new target of 30 cents even though Star's significant asset base may be valued higher in any sale process.
While creating significant execution risk, Macquarie (Neutral) felt cost-out and asset sales are the best way forward to restore equity value.
In coming years, this broker expects multiple cost-out programs beyond the initial -$100m focused on non-customer facing roles. The analyst now allows for an additional -$100m of cost-out in the FY26 forecast. Regarding asset sales, it's felt everything is for sale, at a fair and reasonable price.
The average earnings forecast for Fletcher Building also fell by nearly -8% last week after Citi lowered estimates across FY25 and FY26 following an equity raise.
The new funds will enable the company to ride out the cycle, suggested the broker. When combined with optimism about prospects for interest rate cuts, Citi decided to upgrade its rating to Buy from Sell.
This broker's optimism is also based on a record number of New Zealand mortgages up for repricing within the next year, with forward curves indicating these may be re-priced materially lower. Should this occur, the pace of monetary policy transmission would quicken, explained the analyst.
The second largest fall in average target price of -8.5% went to Synlait Milk following in-line FY24 results (having suffered multiple profit warnings), but the net debt outlook improved partly due to an equity raise, noted Macquarie.
The dairy contractor's appearance in the earnings upgrade table should be disregarded, as this owes more to the rollover of brokers' financial models to FY25.
Aiming to retain suppliers and ensure a stable milk supply, management announced a one-off payment of around -$15m to South Island farmers to withdraw their cessation notices and commit to supplying Synlait in the 2025/2026 season.
Synlait is key supplier for a2 Milk Co's products, but Macquarie noted a potential move by a2 Milk Co to insource English label volumes, in a strategic shift to enhance control over production and supply chain efficiencies.
This broker kept an Underperform rating given risks around the speed and shape of the recovery for Synlait, milk retention, the a2 Milk Co volume risk, and limited valuation appeal.
Bell Potter kept its Hold rating for Synlait on the uncertainty over retaining milk supply post FY26 and the ongoing need to convince farmers to withdraw cessation notices.
On the flipside, the average target price for WiseTech Global rose by around 8% last week after Hold-rated (or equivalent) brokers Citi and Bell Potter raised targets by 53% and 15%, respectively, to $138 and $132.50.
Bell Potter's forecasts for the Rule of 40 measure for WiseTech across FY25-27 are 63%, 68% and 69%, respectively.
Requiring the sum of revenue growth and free cash flow (FCF) margin to exceed 40%, this rule is a popular method to assess quality of technology companies.
Highlighting a current dearth of high-quality global software companies in the ASX100, Bell Potter suggested WiseTech shares will be well supported in an environment of easing global interest rates due to its strong growth outlook.
Certainly, Citi expects continued strong growth over the next few years for WiseTech, underpinned in the near-term by three new products/enhancements.
Of the three, the broker noted Container Transport Optimisation represents the biggest near-term revenue risk, as management is anticipating a strong take-up from existing freight forwarder customers.
Either side of Synlait Milk on the positive change to earnings table below are the leader Strike Energy and Cochlear in third place.
Strike Energy's percentage increase in average earnings forecast can be attributed to the small numbers involved.
The company's FY24 net loss missed Ord Minnett's forecast, primarily due to higher-than-expected depreciation and amortisation charges related to the Talon Energy acquisition, now forming part of the Waylering project in WA.
This project, along with Ocean Hill, South Erregulla and West Erregulla plus cash on hand results in a 68-cent overall valuation by the broker (compared to a 32-cent target), is suggesting material upside should all developments get up and running.
Management has delayed the financial investment decision (FID) on West Erregulla to FY25 from the third quarter this year, raising concerns (by Macquarie) around lack of alignment between Strike and Hancock Prospecting on the FID in its current form.
Given increased M&A potential in the Perth Basin, the analyst suggested it may pay to wait and observe the endgame around Wesfarmers ((WES)) potential interest in the Lockyer Deep and North Erregulla gas fields owned by Mineral Resources ((MIN)) before committing to the FID at West Erregulla.
Cochlear's average earnings forecast in the FNArena database climbed by 9.47% last week after Citi reassessed its investment case, raised the target by $50 to $305, and upgraded to Neutral from Sell.
Noting the share price had declined by more than -13% since the August results, and the valuation was back in-line with the long-term average, the broker also outlined exciting prospects within developed markets.
Here, the total addressable market is more than six million people, with adults and seniors accounting for circa 70% of system sales, yet the penetration rate remains below 6%.
In an effort to capture more of the action, management has been investing to raise awareness and supporting research to improve funding for adults and seniors.
Total Buy ratings in the database comprise 59.87% of the total, versus 32.25% on Neutral/Hold, while Sell ratings account for the remaining 7.87%.
Upgrade
COCHLEAR LIMITED ((COH)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/3/2
After a period of share price underperformance since the FY24 results, Citi upgrades Cochlear to Neutral from Sell, highlighting the stock's valuation has retreated to historical average levels of around 39x FY26 earnings.
The analyst expects the company will generate revenue and earnings growth of 10% going forward equal to the record achieved over the last 10-years.
From a macro perspective, Citi points to the circa 6m person total addressable market in developed countries, largely adults and seniors, as well as the opportunities in emerging markets for children and adults with awareness campaigns and ongoing R&D spend.
Due to a change in the cost of capital, the target price rises to $305 from $255. Neutral.
FLETCHER BUILDING LIMITED ((FBU)) Upgrade to Buy from Sell by Citi .B/H/S: 1/2/1
Citi has turned "cautiously optimistic" on the outlook for Fletcher Building boosted by a stronger balance sheet.
An expected repricing of 60%-70% of outstanding NZ mortgage loans is anticipated over the next 12 months at lower interest rates according to the forward rate pricing curve, the analyst notes. This is a noticeably higher level than the pre-covid levels of 40%-50%.
For Fletcher Building this creates a potentially positive activity level tailwind from rate cuts, mortgage repricing.
Citi lowers EPS forecasts post the equity raising by -23% and -27% for FY25/FY26, respectively.
The stock is upgraded to Buy from Sell. Target price rises to NZ$3.30 from NZ$2.88.
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