For the week ending Friday December 18, there were 14 upgrades and 9 downgrades by brokers for ASX-listed stocks in the FNArena database. On a valuation basis Northern Star Resources, Perseus Mining and Regis Resources were upgraded after Citi reviewed the gold sector.  In a moderation of prior forecasts, the broker simultaneously lowered earnings forecasts and target prices for the companies.

The broker expects “peak gold” in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth. It’s considered prices will push above US$1975/oz in the next six-nine months. Citi observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices.

As a result of Citi’s review, all three gold stocks appeared near the top of the table for the largest percentage decline in forecast earnings by brokers for the week. Coming third on the table was Nickel Mines after Credit Suisse initiated coverage with an Outperform rating and target price of $1.35. Nothing inherently negative here, other than earnings forecasts were set below other existing brokers in the FNArena database, thereby reducing the average.

Appen suffered significant forecast earnings declines by brokers with Citi raising concerns over earnings visibility. Perhaps this resulted in UBS’s surprise at the magnitude and timing of the earnings downgrade by management.

As part of its relief measures for the refining sector, the federal government will be bringing forward its interim refinery production payment, from which Viva Energy Group will benefit. After three brokers upgraded earnings forecasts, the group had the largest rise for the week in percentage terms.

Next was oOh!Media, after the company issued a trading update. Ord Minnett noted emerging signs of a regional recovery and promising digital penetration, amid the company’s delivery of cost savings. Also posting a better-than-expected trading update was Michael Hill International. Citi observed this was driven by favourable retail conditions and self-help strategies and consequently increased FY21-23 earnings forecasts by 4-6%.

Trading updates were in vogue during the week, as Eagers Automotive showcased the powerful margin tailwind that comes when inventory conditions are tight. Morgans considered the second half had also benefited from the structural cost-out executed during the second quarter FY20. In an additional announcement, the company will divest the Daimler truck business and related property. Morgan Stanley envisages no shortage of structural growth opportunities for the company and expects proceeds will be reinvested.

Finally, Western Areas received forecast earnings upgrades from Ord Minnett. The broker has marked-to-market its forward-curve-based commodity forecasts with the result that prices of some key commodities have been pegged 10-20% higher than the broker’s previous estimates.

Going into 2021, the broker is positive on the mining sector in the post-covid era.

In the good books

EBOS GROUP LIMITED (EBO) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/1/0

Credit Suisse likes EBOS Group’s modest organic growth outlook and execution track record. Stronger first half trading versus the broker’s initial expectations for FY21, coupled with moving to a lower weighted average cost of capital, leads to a rating upgrade to Outperform from Neutral. The broker sees further upside from bolt-on acquisitions, a potential covid-19 vaccine distribution and the return of daigou for consumer products. Top-line growth was supported by the first full year from the Chemist Warehouse wholesale contract. Credit Suisse increases the target to NZ$29.20 from NZ$22.47.

HT&E LIMITED (HT1) was upgraded to Buy from Neutral by UBS B/H/S: 2/1/1

UBS has upgraded its ad market forecasts based on SMI data showing a return to positive ad market growth for the first time in two years, along with trading updates from listed corporates. Earnings have been revised for HT&E for FY20-23 to the tune of 30-55%. UBS upgrades its rating to Buy from Neutral with the target rising to $2 from $1.40.

MINERAL RESOURCES LIMITED (MIN) Initiation of coverage with Buy by UBS B/H/S: 2/1/1

UBS initiates coverage on Mineral Resources with a Buy rating and a target price of $41.90. Mineral Resources offers exposure to a growing mining services business along with exposure to iron ore and lithium, assesses UBS.  The broker sees the company at an inflection point in terms of growth opportunities for the commodities business. Over the last 12 months, the company has expanded Koolyanobbing and Iron Valley. Iron ore prices are expected to remain elevated over the next 12-18 months which will likely see strong free cash flows, helping Mineral Resources fund its development pipeline.

NORTHERN STAR RESOURCES LTD (NST) was upgraded to Buy from Neutral by Citi B/H/S: 2/2/1

Citi has downgraded its outlook for gold, anticipating “peak gold” in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth. Gold prices are expected to make a push above US$1975/oz in the next 6-9 months. The broker observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices. This drives a ratings upgrade to Northern Star, to Buy from Neutral, and the target price is lowered to $13.90 from $15.90.

PERSEUS MINING LIMITED (PRU) was upgraded to Buy from Neutral by Citi B/H/S: 3/0/0

Citi has downgraded its outlook for gold, anticipating “peak gold” in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth.

Gold prices are expected to make a push above US$1975/oz in the next 6-9 months. The broker observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices.

Citi revises forecasts for Perseus Mining down post 2021 and reduces the target to $1.55 from $1.60. Based on valuation, the rating is upgraded to Buy/High Risk from Neutral/High Risk.

SARACEN MINERAL HOLDINGS LIMITED (SAR) was upgraded to Buy from Neutral by Citi B/H/S: 2/2/0

Citi has downgraded its outlook for gold, anticipating “peak gold” in 2021 before the price unwinds in 2022 based on vaccine developments and a return to global growth. Gold prices are expected to make a push above US$1975/oz in the next 6-9 months. The broker observes the ASX gold index is down -20% over the past three months on expectations of lower gold prices. Citi upgrades Saracen Mineral Holdings to Buy from Neutral and reduces the target to $5.30 from $6.20 after a pullback in the stock. Saracen remains the broker’s preference heading into its potential merger deal with Northern Star (NST).

SEVEN WEST MEDIA LIMITED (SWM) was upgraded to Buy from Neutral by UBS B/H/S: 4/0/0

UBS has upgraded its ad market forecasts based on SMI data showing a return to positive ad market growth for the first time in two years, along with trading updates from listed corporates. Earnings have been revised for Seven West Media for FY20-23 to the tune of 60-80% along with a material change to the company’s equity value. UBS upgrades its rating to Buy from Neutral with the target rising to $0.40 from $0.14.

VIRTUS HEALTH LIMITED (VRT) was upgraded to Add from Hold by Morgans B/H/S: 2/0/1

Morgans upgrades the rating to Add from Hold as industry participants have noted a swift recovery for the first quarter FY21. Positive momentum is considered to be building within the company and industry. The broker finds Medicare data supports this conclusion and growth is now expected to continue, before a more normal activity period in the second half. Following modelling adjustments to reflect more normal conditions in FY22, Morgans increases the valuation and price to $5.82 from $5.31. There are no changes to underlying forecasts.

ZIP CO LIMITED (Z1P) was upgraded to Neutral from Sell by UBS B/H/S: 2/2/1

Zip Co has announced a capital raising of up to $150m. Proceeds will be used for the US and UK expansion. UBS believes the company is now well situated for growth strategies in new markets and new products. Although this is a relatively early-stage investment that is still making a loss, amid significant capital requirements, the broker is confident in management’s strategy. Rating is upgraded to Neutral from Sell, given the recent underperformance of the share price. Target is $5.70.

In the not-so-good books

BANK OF QUEENSLAND LIMITED (BOQ) was downgraded to Hold from Add by Morgans B/H/S: 2/4/1

APRA announced that it will no longer hold banks to a minimum level of earnings retention from the start of 2021, replacing its recommendation in July this year for banks to retain at least half of their earnings. Morgans interprets the announcement to mean that APRA is now more comfortable with the asset quality outlook of the banks. However, the broker highlights APRA has said that a high degree of uncertainty remains in the outlook for the operating environment, and that the onus remains on boards to moderate dividend payout ratios to ensure they are sustainable. The analyst expects the major banks to be able to sustainably operate with dividend payout ratios in the range of 56-83%. If credit growth remains in the current range of 0-3% per annum, then it’s considered dividend payout ratios in the range of 78-100% are possible. Morgans forecasts Bank Of Queensland will have a dividend payout ratio of 50% over the forecast period and forecasts a lower return on tangible equity (ROTE) than the major banks. The rating is downgraded to Hold from Add and the target price is increased to $8 from $7.20

SERVICE STREAM LIMITED (SSM) was downgraded to Neutral from Outperform by Macquarie B/H/S: 1/1/0

Unify Services is expected to generate circa $70m revenue for Service Stream in its first year (FY22), lower than FY20’s circa $330m and $280m in FY19, on account of lower activations. Also, Service Stream has lost New South Wales and Victoria to BSA (BSA), with its market share declining to 25% from 40-45%. Macquarie downgrades its rating to Neutral from Outperform with the target declining to $2.01 from $2.72.

Earnings forecast

Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.

The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.  Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.