In the good books

A2 MILK COMPANY (A2M) was upgraded to Hold from Lighten by Ord Minnett

Ahead of the first half results on February 25 Ord Minnett upgrades to Hold from Lighten and raises the target to $10.30 from $9.90. The broker expects operating earnings of NZ$182.6m, down -30.6%. The company faces challenges such as a recovery in daigou amid excess inventory, and the timing of a resolution is unclear. Following recent share price weakness, some valuation support is emerging, the broker argues, and this makes the risk/reward argument more balanced, in the broker’s view.

ADORE BEAUTY GROUP (ABY) was upgraded to Buy from Neutral by UBS

UBS upgrades to Buy from Neutral after a strong maiden first half result. Gross margin expanded 130 basis points, driven by improved supplier terms and increasing customer retention. While aware of the uncertainty regarding online retail once the pandemic subsides, the broker considers Adore Beauty a good business with attractive growth opportunities. Target is $6.20.

APA GROUP (APA) was upgraded to Buy from Hold by Ord Minnett

APA Group’s first-half net profit of $162m was below Ord Minnett’s forecast of $166m with operating earnings within -1% of the broker’s estimate. An interim dividend of 24c was announced. Management has reaffirmed the full-year guidance which implies the second half operating income will be between $822-$842m. The broker believes the recent share price weakness was driven by an increase in benchmark interest rates. While macro drivers could represent a near term headwind, Ord Minnett finds the stock attractive at current price levels and given the group’s stable, predictable earnings. Ord Minnett upgrades to Buy from Hold with the target rising to $11.30 from $11.09.

AUSTAL (ASB) was upgraded to Hold from Lighten by Ord Minnett

Ord Minnett envisages significant risk to earnings expectations as the LCS program winds down in FY23. This risk appears heightened by management changes and ongoing US regulatory investigations. The president of the US operations has resigned. The earnings outlook for the business from FY24 remains unclear and the broker envisages meaningful downside risk. Still, the share price has fallen to a level where some of this appears priced in. Austal maintains some strategically located assets and remains a large employer in the US, which should underpin future work. Rating is upgraded to Hold from Lighten and the target is reduced to $2.30 from $3.00.

BANK OF QUEENSLAND (BOQ) was upgraded to Add from Hold by Morgans

Bank Of Queensland will acquire 100% of Members Equity Bank Limited for cash consideration of $1.325bn. The acquisition will be funded by an underwritten capital raising of $1.35bn at a price of $7.35. Morgans expects the acquisition to be around 10% cash EPS accretive once $80m per annum of pre-tax cost synergies are realised. In a trading update, the company expects first half cash earnings of $163-166m. The bottom end of this range is 26% better than the broker’s expectation and circa 29% better than consensus. The return on tangible equity (ROTE) outlook has improved with and without the acquisition, and this leads to an improved dividend outlook, forecasts the analyst. Upgrade to Add from Hold and the target is increased to $10 from $8.

EVENT HOSPITALITY AND ENTERTAINMENT (EVT) was upgraded to Buy from Sell by Citi

Citi has upgraded Event Hospitality to Buy from Sell in the wake of the first half results. The broker’s price target has lifted to $12.25 from $9.20. Citi’s upgrade is based upon the premise that core operations will start recovering from here onwards, from a low base, plus value shall be unlocked through the -$250m property divestment program. As no buyer was found for the German cinemas, Citi was forced to include these operations back into estimates, which has depressed forward numbers as these operations remain loss-making. Dividends have been scrapped for both FY21 and FY22.

GOODMAN GROUP (GMG) was upgraded to Outperform from Neutral by Credit Suisse, to Outperform from Neutral by Macquarie and to Buy from Hold by Ord Minnett

Credit Suisse upgrades Goodman Group to Outperform from Neutral with the target price falling to $19.62 from $19.84. While Credit Suisse had expected Goodman Group to upgrade its guidance for FY21, the upgrade (12% growth in net profit versus 9%) exceeded the broker’s pre-result expectations. Earnings for the half were up 14.9% year on year and above the broker’s expected 30.5c. Development income was also more than expected while management income was flat versus last year and investment income was down -8%. Funds under management growth were modest in the half due to asset sales, highlights the broker, but Credit Suisse expects this to resume.

Goodman’s FY21 first-half result romped in 9% ahead of consensus, and 13% ahead of Macquarie. Management upgraded FY21 guidance to rise 12%, compared with 9% previously. Growth in working in progress and production helped the company hit its full-year target in September and management points to a strong, imminent pipeline. Macquarie estimates that this could yield a three-year compound average growth rate of 17%. The broker expects EPS will be no less than 10% between FY21 and FY24 for this business It also expects the funds management platform to yield returns in the mid-teens in FY21, EPS are raise 1.5% in FY21, 4.1% for FY22, and 4.5% for FY23. Target price rises 9% to $20.39. Broker upgrades to Outperform from Neutral.

First half operating profit was well ahead of Ord Minnett’s forecast. Development volumes have doubled over the past year and strong margins have been maintained. Development revenue rose 32% and was well ahead of forecasts. The company remains a beneficiary of exceptionally strong demand for industrial property. Ord Minnett considers the prospective 23x PE multiple and double-digital earnings growth attractive and upgrades to Buy from Hold. Target is raised to $20 from $19.

LENDLEASE (LLC) was upgraded to Outperform from Neutral by Credit Suisse

First half results were better than expected. No guidance was provided, as is usually the case. Credit Suisse remains of the view that Lendlease is positioned for improved earnings, although the ramp up in development production to $8bn per annum and related earnings benefits remains an issue for FY23. Despite short-term challenges, the broker is comfortable the company is well leveraged to urbanisation globally and upgrades to Outperform from Neutral. Target is reduced to $13.47 from $14.81.

LOVISA HOLDINGS (LOV) was upgraded to Overweight from Equal-weight by Morgan Stanley

Lovisa Holdings’ first-half result was well ahead of Morgan Stanley’s forecasts with sales and operating income higher than expected. The company almost achieved the broker’s operating income forecast for the entire year in the first half at $34m. Comps were back to positive for the first 7 weeks of the third quarter, after being negative for the last 9-12 months. From this point onwards, Morgan Stanley thinks Lovisa offers investors an early global store rollout story. The model is considered resilient while the quality of management has been proven over the last year, adds the broker. Rating is upgraded to Overweight from Equal-weight rating with the target rising to $15 from $11.50. Industry view: In-line.

NEW HOPE CORPORATION (NHC) was upgraded to Neutral from Underperform by Macquarie

New Hope Corp reported second quarter production results featuring a beat at New Acland and a rebound after maintenance for Bengalla, to meet expectations. Macquarie remains cautious over the medium-term outlook for thermal coal but notes spot prices are up 50% from October. On the earnings upside implied, and the fact the stock has fallen -20% year to date to below valuation, the broker upgrades to Neutral from Underperform. Target rises to $1.30 from $1.20.

QBE INSURANCE (QBE) was upgraded to Neutral from Underperform by Macquarie and to Buy from Neutral by UBS

QBE Insurance Group’s FY21 half-year result pleased Macquarie. Management failed to provide guidance but the broker notes the FY23 Expense Ratio target of roughly 13% (combined with restructuring costs of about $150m over three years) is attainable and provides clarity around underlying combined operating ratios. Given the positive foreign exchange environment, the broker upgrades to Neutral from Underperform. EPS upgraded 68% for FY21 and 56% for FY22 to reflect strong gross written premiums, FX tailwinds and the new expense ratio target. Target price rises to $9.40 from $7.70.

The 2020 result headline was pre-announced while underlying trends were slightly better than UBS expected. While the -US$1.5bn loss justifies a -40% underperformance in the share price over the last 12 months, the broker believes the provisions taken by QBE are for currently unreported claims. With the earnings hit and negative news flow now captured in the share price UBS upgrades to Buy from Neutral. Target is raised to $10.25 from $9.00.

SEEK (SEK) was upgraded to Buy from Neutral by UBS

UBS upgrades Australasian revenue estimates materially, given the current strength in the business and the dynamic pricing/product levers. A fall in its share of placements and recruiter feedback that threatens to lower volumes are the main risks. Still, the broker’s data suggest Australian volumes are currently up 6% and if this persists there is still upside to FY21 operating earnings guidance of $460m. UBS upgrades to Buy from Neutral and raises the target to $32 from $26.

SKYCITY ENTERTAINMENT GROUP (SKC) was upgraded to Buy from Neutral by UBS

SkyCity Entertainment’s interim report provided enough evidence for UBS to see further profitability improvement with the path ultimately taking profits well above pre-covid level, reports the broker. Note: the stock was upgraded on Friday, but due to our oversight on the day, this is only being reported today. As the valuation has increased, so too has UBS’s price target, now at NZ$3.35 from NZ$3.05 prior. The released financials proved below forecasts, Adelaide in particular, but additional covid trading restrictions were to blame, according to the broker. Both EPS and DPS forecasts have been lowered (from November), but nothing to stop this broker from getting more excited.

TYRO PAYMENTS (TYR) was upgraded to Buy from Accumulate by Ord Minnett

Tyro Payments delivered slightly lower revenue than Ord Minnett expected while gross profit beat estimates because of good cost control. Moreover, merchant acquisition is back on track since the outage in January. The broker believes the business has a compelling offer for small-medium enterprises and will take market share. Upgrade to Buy from Accumulate. Target is reduced to $4.50 from $5.00.

WESTERN AREAS NL (WSA) was upgraded to Outperform from Neutral by Macquarie

Western Areas’ FY21 first-half result fell well short of Macquarie’s estimates but the production guidance cut had already been anticipated. Cost guidance rose. The broker expects a longer ramp down profile for Spotted Quoll, and cuts FY23 production estimates 36%, and raises FY24 estimates 8%. The broker slashes FY21 earnings forecast 71% to reflect higher depreciation and amortisation.  Western Areas offers the greatest leverage on average to nickel prices in FY21, highlights the broker, and this could be significant given a forecast boom in vehicle electrification in the fourth quarter. The Neutral rating has moved to Outperform. Target price rises to $3 from $2.70.

In the not-so-good books

APOLLO TOURISM & LEISURE (ATL) was downgraded to Lighten from Hold by Ord Minnett

Understandably, Ord Minnett notes the interim result was indicative of a company coming under fire from multiple directions during the pandemic. The main issue is that the rental business relies on inbound visitors, hence the need to wind back the size of the fleet and reduce net debt. While there are benefits from demand for recreational vehicles in the retail business the earnings benefit has been modest. The business has managed to survive although Ord Minnett remains cautious, given the need to reinvest in the fleet and grow earnings. Rating is downgraded to Lighten from Hold. Target is raised to $0.28 from $0.25.

BINGO INDUSTRIES (BIN) was downgraded to Neutral from Outperform by Credit Suisse

First half results were mixed, with revenue ahead of expectations and underlying operating earnings below. The latter miss was driven by weaker contributions from collections and higher corporate costs. With a recovery after the pandemic coming up next, the broker forecasts the existing asset base could generate $250m in EBITDA and this will level of earnings could then justify the fundamental value. Credit Suisse lowers the rating to Neutral from Outperform and raises the target to $3.15 from $3.00.

COCHLEAR (COH) was downgraded to Sell from Neutral by Citi

First half underlying net profit was well ahead of Citi’s estimates. While growth is expected to return in developed markets the broker suspects a recovery in emerging markets outside of China will take some time. The company remains in a good position to gain market share in both implants and acoustics. Over the longer term, earnings growth will be dependent on market growth and Citi expects Cochlear will reinvest in expanding the market and maintain a net profit margin of 18%. Rating is downgraded to Sell from Neutral on valuation. Target is steady at $200.

COSTA GROUP (CGC) was downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS

Results were slightly better than Credit Suisse expected. Several aspects of the outlook have driven an upgrade but the stock has shot well ahead of valuation and the broker downgrades to Neutral from Outperform. The broker is looking for an opportunity to get in at a better price and notes agricultural stocks always present volatility. Target is raised to $4.70 from $3.60.

Costa Group Holdings delivered a strong result, observes UBS, with operating income circa 4% ahead of UBS’s forecast, almost 80% cash-flow conversion, and solid outlook commentary. The broker highlights 2021 will be aided by reversals with almost -$29m of costs in 2020 expected to reverse in 2021 and expected to drive circa 30% operating income growth in 2021. UBS estimates the group will generate $7m in operating income by 2023. Overall, the earnings backdrop is strong, suggests the broker. Even so, believing the risk-reward is balanced, UBS downgrades to Neutral from Buy with the target rising to $4.60 from $3.55.

HARVEY NORMAN HOLDINGS (HVN) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse highlights since Harvey Norman Holdings’ November update, store closures in some locations have been extended alongside brief lockdowns in Australia and New Zealand. Despite this, the broker does not expect any material detraction from the company’s first-half profit trajectory. The dividend is expected to be 32c. Considering the recent share price appreciation, Credit Suisse downgrades to Neutral from Outperform with the target rising to $5.36 from $5.30.

INTEGRAL DIAGNOSTICS (IDX) was downgraded to Neutral from Outperform by Credit Suisse

Interim earnings were ahead of Credit Suisse estimates. The results have confirmed a resilient industry and the company’s leading position, in the broker’s view. Nevertheless, Credit Suisse assesses the quality is appropriately captured in the multiple and downgrades to Neutral from Outperform. Any upside to a more cautious view comes from M&A. Target is raised to $5.00 from $4.50.

NATIONAL TYRE & WHEEL (NTD) was downgraded to Hold from Add by Morgans

Goodyear and Cooper Tire has entered into a definitive transaction agreement under which Goodyear will acquire Cooper in a transaction valued at around US$2.5bn. National Tyre & Wheel has the exclusive distribution of Cooper/Mickey Thompson tyres in Australia/NZ. The next option date is in September 2022 with a further 5-year renewal period to 2027. Morgans awaits an announcement from the company in the near term. This is considered to provide some long-term uncertainty as to the company’s distribution license. This news overshadowed what Morgans assesses was a strong first half result that was in-line with expectations and recent guidance. The rating is lowered to Hold from Add as it’s expected the takeover news will weigh on the stock for a period of time. Target of $1.11.

OCEANAGOLD CORPORATION (OGC) was downgraded to Hold from Accumulate by Ord Minnett

Ord Minnett downgrades to Hold from Accumulate. 2020 operating earnings were reported at US$57.7m. 2021 production guidance of 340-380,000 ounces is below expectations. Ord Minnett reduces production forecasts for the Haile operation and lifts expectations for group costs. Earnings forecasts are lowered significantly. Value drivers include delivery on Haile and Waihi projects. Target is reduced to $2.00 from $3.60.

PACT GROUP HOLDINGS (PGH) was downgraded to Neutral from Outperform by Credit Suisse

Noting Pact Group Holdings’ share price has rallied and reached its target price, Credit Suisse lowers the rating to Neutral from Outperform with a target price of $2.95. Beyond the FY21 recovery, the broker models low-single-digit earnings growth in the forecasts with not much upside risk. Pact Group Holdings is in the middle of selling its contract manufacturing businesses. The broker values the businesses at $150m and considers the risk of surpassing that price low given the earnings are two-thirds of where they were at the time of acquisition.

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.