In the good books
AUSTAL (ASB) was upgraded to Outperform from Neutral by Credit Suisse
Austal’s first-half revenue was below Credit Suisse’s expectations although the result beat the broker’s operating income forecast ($70m versus Credit Suisse’s estimated $62m). The beat was primarily driven by stronger-than-expected margin expansion in the US business. Management has downgraded FY21 revenue guidance to $1.65bn from $1.8bn while leaving the operating income guidance unchanged at $125m, hinting at better productivity levels and cost control, in the broker’s view. The broker has reduced its FY21 revenue estimate by -11% to $1.69bn on fx headwinds and lower sustained throughput due to the US Navy’s decision to cease LCS dockings. Rating is upgraded to Outperform from Neutral with the target rising to $2.75 from $2.70.
CORONADO GLOBAL RESOURCES (CRN) was upgraded to Add from Hold by Morgans
Morgans believes the around -15% discount to fair value looks overdone and upgrades the rating to Add from Hold. The target decreases to $1.27 from $1.35. The 2020 result was well flagged by quarterly reports. The broker describes guidance as mixed with higher-than-expected costs driving a downgrade to forecasts. The analyst says the company will benefit in the second half from fleet sale-and-leaseback and the potential for both property sales and the sale of Greenbriar.
EVOLUTION MINING (EVN) was upgraded to Buy from Neutral by Citi
Citi believes nominal gold prices have peaked this cycle and downgrades gold price forecasts by -5% in 2021 to US$1,800/oz while the long-term gold price remains unchanged at US$1,400/oz. With the Fed tightening being priced-in, Citi thinks the opportunity cost of holding gold will increase. The broker’s key picks are stocks positioned to generate cash through the cycle and expect upcoming news flow. Evolution Mining is upgraded to Buy from Neutral with a target price of $4.80.
ORICA (ORI) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse thinks Orica’s earnings downgrade stems from a mix of external factors likely to normalise in time plus some fundamental factors. The broker highlights the progression of downgrades over the years indicates rising cost pressures, surplus industry capacity and operational delays with key assets. On the bright side, the broker finds the market structure attractive and expects technology to drive further consolidation. In the broker’s view, the reduction in Orica’s share price is an opportunity for investors to get exposure to the leader in a market likely to remain attractive. Credit Suisse upgrades to Outperform from Neutral with the target dropping to $16.84 from $16.99.
See downgrades below.
REECE (REH) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett upgrades to Hold from Lighten and raises the target price to $16 from $13.50 after first half earnings (EBITDA) exceeded forecasts by 2.4%, while earnings margins increased 41 basis points to 11.4%. Financing costs of -$66.6m were significantly higher than the broker’s -$44 forecast due to a foreign currency loss on derivative instruments. The broker feels housing activity in both ANZ and the US looks supportive for earnings growth for the remainder of the calendar year. It’s considered there will be a rebound in capital expenditure, particularly in the US, where further opportunities for expansion exist.
In the not-so-good books
DAMSTRA HOLDINGS (DTC) was downgraded to Equal-weight from Overweight by Morgan Stanley
While Damstra Holdings’ revenue at $12m missed Morgan Stanley’s forecast by -10%, the operating income beat the broker’s estimated $1.3m. Also, the broker expected a net loss of -$1.5m but the company surprised with a net profit of $0.9m. The broker finds the strategic vision of Damstra platform play to be compelling. Even then, there is a near-term lack of visibility that makes the broker think the earnings will be skewed to the downside versus Damstra’s August guidance. Morgan Stanley lowers its revenue forecasts by -8% in FY21 and -11% in FY22. The rating is downgraded to Equal-weight from Overweight with the target dropping to $1.25 from $2. Industry view: In-line.
ORICA (ORI) was downgraded to Neutral from Outperform by Macquarie, to Hold from Add by Morgans and to Neutral from Buy by UBS
Macquarie downgrades to Neutral from Outperform, given the lack of visibility on earnings as well as the CEO transition and tighter balance sheet metrics. The company has made a significant downgrade in its update, with first half earnings affected to the tune of -$105-125m and only partially affected by the pandemic. Macquarie highlights the impact of lower mining demand, while FX and Burrup costs also contribute. The broker’s first half estimate for operating earnings (EBITDA) is reduced by -22%. Target is reduced to $13.65 from $18.46.
Orica’s first half update was materially weaker than Morgans had expected due to covid impacts and China’s ban on Australian thermal coal imports. Also, FX headwinds and issues with transitioning to a new SAP system were considered to play a part in the weak result. Though operating conditions have improved, the broker believes some first half issues will continue to impact the second half. Thus, Morgans downgrades FY21-23 profit (NPAT) forecasts by -33.9%, -16.8% and -16.4%, respectively. The rating is moved to Hold from Add and the target falls to $13.97 from $18.95. Morgans forecasts growth will resume in FY22 reflecting a recovery from covid and the implementation of five strategic growth initiatives.
UBS is disappointed with the trading update, noting there are several factors that drove a reduction to the first half earnings outlook. Orica has indicated a 180,000t reduction in global ammonium nitrate volumes is likely in the first half, given the slump in thermal coal demand. UBS reduces FY21-23 estimates sharply. Rating is downgraded to Neutral from Buy. The broker still believes Orica will provide leverage to a global recovery and the normalisation of mine production, but increasing coal trade dislocation, increased investor concerns and the risk of a re-set under the new CEO will weigh on the short-term performance, the broker predicts. Target is reduced to $13.50 from $19.40.
See upgrade above.
VICTORY OFFICES (VOL) was downgraded to Hold from Buy by Ord Minnett
Victory Offices reported a net loss of -$14.2m on the back of weaker than expected revenue of $6.6m (Ord Minnett expected $7.2m). This along with an impairment of receivables led to the first half cash burn exceeding guidance, notes the broker, implying a limited funding runway. In the long term, Ord Minnett believes covid will offer positive tailwinds as the industry demands a high level of workplace flexibility. For now, the broker expects the negative impacts to prevail. Ord Minnett downgrades to Hold from Buy with the target dropping to $0.33 from $0.71.
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.
