Weekly Reports | Oct 14 2024
This story features MAGELLAN FINANCIAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MFG
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 October 7 to Friday October 11, 2024
Total Upgrades: 2
Total Downgrades: 10
Net Ratings Breakdown: Buy 60.03%; Hold 32.08%; Sell 7.89%
For the week ending Friday October 11, 2024, FNArena recorded two upgrades and eleven downgrades for ASX-listed companies by brokers monitored daily.
While percentage increases in average target prices were slightly greater than declines, changes in earnings forecasts were broadly equal as can be seen in the tables below.
Three brokers in the FNArena database downgraded Arcadium Lithium to Hold from Buy (or equivalent) as 12-month targets were raised following the prospective takeover by Rio Tinto.
If successful, Rio will become the number three lithium miner globally, only behind US-based Albemarle and SQM in Chile.
Certainly, the analysts at Morgans believe a competing offer is unlikely to emerge and Arcadium shareholders will most probably vote in favour of the US$6.7bn cash price offer.
Management at Arcadium assessed the offer as “compelling”, which is unsurprising to Ord Minnett given the 90% premium to the undisturbed share price on October 4, prior to confirmation of takeover talk.
Rio shareholders generally consider the bid is counter-cyclical and makes sense, according to Citi, noting the ‘cheaper to buy versus build’ thesis is playing out.
Unsurprisingly, Arcadium Lithium heads up the positive change to target price list below, followed by Netwealth Group and Judo Capital.
For Netwealth, its September quarterly business update showed record first quarter FY25 growth in funds under administration due to net inflows of $4bn, up from $1.2bn in July.
The group registered $7bn in funds under management for the first time, with market movements well ahead of consensus expectations, observed Morgan Stanley.
Management has a “high level of confidence” in the net flow outlook for FY25.
Judo Capital’s average target price increased by around 7% mainly due to new research coverage by UBS with a target of $2.10, well above the prior average in the FNArena database of $1.64.
Management’s ambitions to scale are likely to be supported by structural drivers within the broader business banking market and via further commercial broker channel penetration, according to the analysts at UBS.
Some brokers are upbeat on the outlook for Judo while Citi remains sceptical as explained here: https://fnarena.com/index.php/2024/10/11/strong-growth-prospects-for-judo-capital/
Champion Iron received the largest percentage upgrade to earnings forecasts last week.
Rising ore grades at the company’s Bloom Lake Mining Complex in Canada raised broker expectations for an increasing price premium against the iron ore benchmark.
A new high-grade direct reduction pellet feed (DRPF) project is 36% complete while the nearby Kami project is progressing towards both a feasibility study and a partnering process.
Apart from the ongoing payment of dividends, an investment in Champion Iron may also appeal to prospective shareholders to play the decarbonisation theme as explained in https://fnarena.com/index.php/2024/10/10/quality-ore-elevates-a-champion/
Operationally, “Guzman y Gomez is flying”, noted Morgans last week, helping explain the company’s second position on the earnings upgrade table.
A first quarter FY25 trading update showed Australian (including Singapore and Japan) network sales rising by 21.1%, compared to the 19.4% consensus forecast.
This broker noted a strong delivery performance and successful execution of the ‘Clean is the New Healthy’ campaign, while customer demand for value menu items such as the $12 Chicken Mini Meal also provided a boost.
The US operation performed in line with expectations, Morgan Stanley highlights, with sales from new stores contributing.
Not everyone is convinced. While lifting its target to $37 from $35, Sell-rated UBS believes the good news is already well and truly in the share price.
The gold sector is also flying, helping lift Regis Resources into third place on the earnings upgrade table below.
Should the gold price hold around the current level and companies deliver on guidance, Citi sees plenty of potential share price upside within the sector.
The analysts forecast a $3,000/oz Australian dollar gold price in 2025. For the long-term (in US$), the broker’s forecast was increased to US$1900/oz from US$1,850/oz early last week.
These forecast changes lifted the broker’s target for Regis to $2.20 from $1.85
Following a September quarter operational update later in the week, Bell Potter also decided to lift its target to $2.48 from $2.02, largely due to its own higher gold price forecasts.
On the flipside, Liontown Resources experienced the largest fall in average earnings forecasts by brokers in the FNArena database last week, though the percentage decrease was exaggerated by small forecast numbers.
Bell Potter lowered its lithium price forecasts as supply deficits are now expected to develop a year later than previously forecast; in 2027.
This broker kept a Speculative Buy rating for Liontown, noting the current debt capacity is sufficient to take the Kathleen Valley project through to steady state production and positive free cash flow.
Because of Bell Potter’s lower lithium price forecasts, Pilbara Minerals and IGO Ltd also appear third and fifth, respectively, on the earnings downgrade table.
In what has become a regular occurrence of late, Star Entertainment also features (second) on the negative change to earnings table.
Morgans lowered its FY25 earnings forecast by -65% due to negative operating leverage as year-on-year revenue is expected to fall, predominately due to regulation (mandatory carded play reducing turnover).
At the same time, Star’s NSW jobs guarantee and elevated compliance costs, mean year-on-year opex reductions are materially less than revenue reductions.
Brokers also dished out a rough week for APA Group, ensuring fourth place on the earnings downgrade table and second for percentage fall in average target price.
UBS lowered its target for the group to $6.60 from $8.05 and downgraded to Sell from Neutral after a review of growing commercial and funding pressures resulted in a sharp reduction in the broker’s long-term earnings forecast.
The analysts suggested management’s growth ambitions are constrained by the balance sheet, and a combination of new equity (up to $1bn), hybrids, and/or cutting the dividend may be required.
The broker also acknowledged other options are available for the pipeline owner such as selling off assets either in full or partially.
Total Buy ratings in the database comprise 60.03% of the total, versus 32.08% on Neutral/Hold, while Sell ratings account for the remaining 7.89%.
Upgrade
MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/1
Management’s key strategies are yet to deliver sustained relative investment outperformance at Magellan Financial after several difficult years, observes Macquarie.
While outflows have stabilised, the analyst fails to see how meaningful inflows can be generated until investment performance metrics consistently outperform benchmarks.
First quarter FY25 retail outflows spiked to -$1.8bn as Magellan Global Fund (MGF) close-ended funds under management (FUM)
was converted to open-ended.
As the funds management multiple now represents more reasonable value, the broker’s rating for Magellan Financial is upgraded to Neutral from Underperform. The target rises to $9.50 from $9.45.
SELECT HARVESTS LIMITED ((SHV)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/1/0
Post the Australian Almond Conference last week, Ord Minnett believes the issues faced by Select Harvests which resulted in an emergency capital raisings and earnings downgrade were industry systemic rather than company specific.
The company has been let off the hook for not scoring an “own goal”.
The industry is expecting a return of volumes in 2024 as well as a good start to 2025 crop season.
Better industry conditions helped raise the target price to $4.60 from $4.35 and upgrade the stock to Accumulate from Hold.
Downgrade
APA GROUP ((APA)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/2/1
UBS has downgraded APA Group to Sell with a sharply reduced price target of $6.60 from $8.05 prior. The broker’s review of growing commercial and funding pressures has resulted in a sharp reduction in long-term earnings forecasts.
UBS sees APA Group’s ambitions constrained by the balance sheet. A combination of new equity (up to $1bn), hybrids and/or cutting the dividend may be required to fund management’s growth ambitions, the broker suggests.
The pipeline owner does have options available, such as selling off assets, in full or partially, the broker acknowledges.
DRONESHIELD LIMITED ((DRO)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 1/1/0
Increasing downside risk to Bell Potter’s 2024 revenue forecast for DroneShield forces the analysts to lower the SaaS revenue forecast over 2025 and 2026.
Year-to-date, the broker had expected more than $40m in contract wins instead of $31.3m after the recent $13.5m contract from a repeat US Government customer.
The target remains at $1.35, but the rating is downgraded to Hold from Buy.
GRAINCORP LIMITED ((GNC)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 3/2/0
Bell Potter removes around -1mt of grain from its FY25 estimate to reflect the potential impact of crop losses after reports of 50-60% frosting in some parts of the Wimmera-Mallee.
For GrainCorp, the broker reduces FY25 and FY26 profit forecasts by -6% and -1%, respectively, on a lower FY25 winter crop forecast.
The broker lowers the target to $9.80 from $10.20 and downgrades to Hold from Buy.
ARCADIUM LITHIUM PLC ((LTM)) Downgrade to Hold from Buy by Ord Minnett and Downgrade to Hold from Buy by Bell Potter and Downgrade to Hold from Add by Morgans .B/H/S: 2/4/0
Matching the takeover offer price by Rio Tinto, Ord Minnett raises its target for Arcadium Lithium to $8.60, positioning the former as the number three lithium miner globally, only behind US-based Abemarle and SQM in Chile.
Management at Arcadium Lithium assessed the offer as “compelling”, which is unsurprising to the broker given the 90% premium to the undisturbed share price on October 4, prior to confirmation of takeover talks.
Ord Minnett downgrades Arcadium to Hold from Buy.
Bell Potter has downgraded lithium price forecasts due to the current supply/demand outlook. The broker anticipates supply deficits will now develop a year later than previously forecast in 2027. Higher incentive prices are expected from 2026.
The broker believes the approach from Rio Tinto ((RIO)) to acquire Arcadium Lithium makes strategic sense given Rio’s aim to develop lithium operations at scale.
Arcadium Lithium offers the company a lower-risk profile with approved development and expansion projects, as well as an “integrated chemicals business” at the lower end of the cost curve.
Rating downgraded to Hold from Buy. Target price lifts to $6.55 from $6.25.
Having initiated coverage of Arcadium Lithium with an Add rating and $5.40 target price earlier this month, Morgans raises the target to $8.60 to align with the takeover price agreed to with Rio Tinto ((RIO)).
As the share price is now approaching this new target price, the broker’s rating for Arcadium is downgraded to Hold from Add.
The analysts believe it unlikely a competing offer will emerge, and also unlikely shareholders will vote against the offer.
NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Reduce from Hold by Morgans .B/H/S: 1/0/4
Morgans retains an Underweight view on the major banks due to stretched valuation metrics with the following order of preference: Westpac, ANZ Bank, National Australia Bank and CommBank.
Interestingly, when it comes to quality the broker’s preference changes to CommBank, NAB, Westpac and ANZ. Outside of the big four, the analysts remain attracted to Judo Capital’s outstanding growth potential.
For National Australia Bank, the Hold rating is kept, and the target falls to $31.61 from $32.61.
NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/5/0
Ord Minnett raises its target for Netwealth Group to $27 from $22 and downgrades to Hold from Accumulate following an “excellent” 1Q trading update. Management has a “high level of confidence” in the net flow outlook for FY25.
Global equity markets provided a strong boost and net flows of $4.0bn beat the $3.5bn forecast by the analysts.
Group funds under management (FUA) of $95.4bn at quarter’s end was ahead of the broker’s $92.5bn estimate.
STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/3/1
Star Entertainment reported FY24 results in line with June’s guidance, the analyst at Morgans highlights.
The appointment of Steve McCann is believed to be positive and may improve the chances of “reclaiming” the license in Sydney. But the broker remains concerned about the change to mandatory card play (MCP)) and cash limits in NSW.
MCP will be enforceable across entire gaming floors by October which is considered likely to result in a further decline in trading into September from August’s fall of -11%. The policies may eventually be put in place in Qld.
Rising costs are also impacting with the possibility of brand cannibalisation of the Gold Coast property from Queens Wharf Brisbane, the broker suggests.
Morgans decreases EPS forecasts substantially, almost -600% in FY25 and -41.4% in FY26.
Stock is downgraded to Reduce from Hold with a 22c target price.
WOODSIDE ENERGY GROUP LIMITED ((WDS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/1
Following Woodside Energy’s recent acquisitions and the Lousiana LNG final investment decision (FID), Macquarie sees a near doubling in LNG portfolio scale by 2031-32.
Because of the company’s aggressive growth strategy which entails a prolonged heavy capex period, the broker expects a lower dividend outlook.
After implementing a dividend cut and selling down -50% of Louisiana LNG, the broker still has Woodside at the top end of its gearing range over 2025-28.
Macquarie lowers its target for Woodside Energy by -18% to $27.00 after assuming a lower multiple to reflect a 35/65 weighting of US/EU peers from the 75/25 split prior. The rating is downgraded to Neutral from Outperform.
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Broker Recommendation Breakup |
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Positive Change Covered by at least 3 Brokers
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Negative Change Covered by at least 3 Brokers
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Earnings Forecast |
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Positive Change Covered by at least 3 Brokers
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Negative Change Covered by at least 3 Brokers
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CHARTS
For more info SHARE ANALYSIS: APA - APA GROUP
For more info SHARE ANALYSIS: DRO - DRONESHIELD LIMITED
For more info SHARE ANALYSIS: GNC - GRAINCORP LIMITED
For more info SHARE ANALYSIS: LTM - ARCADIUM LITHIUM PLC
For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: NWL - NETWEALTH GROUP LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED
For more info SHARE ANALYSIS: SHV - SELECT HARVESTS LIMITED
For more info SHARE ANALYSIS: WDS - WOODSIDE ENERGY GROUP LIMITED