In the good books
ADBRI (ABC) was upgraded to Add from Hold by Morgans
Morgans raises Adbri’s rating to Add from Hold on greater confidence in a FY22/23 earnings recovery. This is despite first half results that were slightly below expectations, with margins considered to be impacted by some small lime volume losses and price resets. The analyst sees progress on strategic initiatives, with positive initial results in infrastructure and a focus on unlocking land value. The price target rises to $3.80 from $3.31. Management stated second half earnings will be negatively impacted because of a reduction in Alcoa volumes, the anticipated start of a competing NSW cement import terminal and covid impacts.
ALTIUM (ALU) was upgraded to Buy from Neutral by Citi
Despite risks, Citi has taken a positive outlook on Altium’s FY22 outlook. The broker considers weakness following the FY21 result a buying opportunity, and continues to see medium- to long-term upside from the monetisation of the A365/Nexar Platform. Citi considers Altium’s FY22 revenue guidance of 16-20% as solid given headwind from the transition away from perpetual licenses, and is forecasting 19% growth in FY22 underpinned by strength in China. The rating is upgraded to Buy from Neutral and the target price decreases to $35.40 from $37.60.
See downgrades below.
AUTOSPORTS GROUP (ASG) was upgraded to Outperform from Neutral by Macquarie
Driven by better-than-expected margin outcomes in the final weeks of the period, Autosports Group’s FY21 profit and revenue were both above the guidance range. While no FY22 profit guidance is set, management believes the second half FY21 gross profit margin of 17.5%, 200bps above the pre-COVID average is sustainable, while Macquarie has this normalising to 16% in FY23. Macquarie notes current lockdowns are leading to uncertainty, with 27 showrooms currently closed to customers. The broker’s earnings per share (EPS) estimate changes of FY22 (up 3.1%), FY23 (up 8.9%), and 8% in outer years from a higher revenue base have incorporated increased D&A. Macquarie has upgraded Autosports Group to Outperform from Neutral. Target is raised to $2.70 from $2.50.
BUBS AUSTRALIA (BUB) was upgraded to Neutral from Sell by Citi
Following a 10% gross sales increase in the second half of FY21, it is Citi’s view that there is evidence of improving sales momentum in key cross-border e-commerce and daigou channels, and that Bubs Australia could benefit in FY22 from an improved inventory position. The broker notes potential for Bubs Australia to capture market share despite pressures in China infant milk formula sales. Excluding China, the company grew international sales 65% on the previous comparable period. The rating is upgraded to Neutral from Sell and the target price increases to $0.41 from $0.33.
MAYNE PHARMA GROUP (MYX) was upgraded to Buy from Neutral by Citi
Mayne Pharma is in a transition phase, Citi notes, moving from being dominated by generic drug revenue to branded products being the company’s largest segment. To that end FY22 guidance includes a big step-up in the cost of the launch of Nextstellis. In the meantime, generic revenues will likely continue to fall, while Nextstellis should make a loss until revenues become meaningful. The launch is not without significant risk, the broker warns. Target falls to 35c from 43c but on the stock market reaction Citi upgrades to Buy (High Risk) from Neutral.
NATIONAL AUSTRALIA BANK (NAB) was upgraded to Accumulate from Hold by Ord Minnnett
Following the August reporting season, Ord Minnett believes National Australia Bank is well positioned to drive top-line growth, with strong net promoter scores (NPS) in the Australian consumer and business segments. The broker upgrades its rating to Accumulate from Hold and feels the bank offers more stable margin trends than peers, given less mortgage headwinds and a positive outlook for small business. The target price rises to $29.50 from $28.20.
PARADIGM BIOPHARMACEUTICALS (PAR) was upgraded to Hold from Reduce by Morgans
Paradigm Biopharmaceuticals reported its FY21 result with net losses increasing as regulatory programs progress, but there were major surprises on this front given quarterly reporting. The company’s largely in-line result was aided by a difference in R&D rebate treatment with the company recognising its expected rebate in FY21. While there are clearly some major upcoming catalysts, which are likely to increase volatility and may present a short-term trading opportunity, over the long term Morgans continues to see risks to the downside around narrower marketability and higher competition than consensus suggests. Morgans upgrades the company to Hold from Reduce and lowers the target price to $1.68 from $1.69.
SANDFIRE RESOURCES (SFR) was upgraded to Add from Hold by Morgans
Helped by stronger copper prices and Morgans’ over-estimation of expensed exploration/studies, Sandfire Resources’ FY21 earnings and net profit were 7% and 10% ahead of the broker’s expectations respectively. The 34cps fully franked dividend far exceeded Morgans’ estimate (13cps), with the FY21 payout of 44% far above the company’s 30% “guide”. Morgans notes the company looks comfortably funded – with $513m cash ex-dividend, and no debt – through Motheo construction (-$328m capex, FY24 ramp-up), with capex ramping up in FY22. The broker forecast the company to generate $525m in free cash flow over the balance of Degrussa’s mine life to October 2022. Material earnings upgrades across FY22-23 are supported primarily by higher copper price assumptions. Morgans upgrades Sandfire Resources to Add from Hold and the target is increased to $7.61 from $6.43.
In the not-so-good books
ALTIUM (ALU) was downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie
FY21 revenue was in line with guidance while the EBITDA margin of 36.1% was below guidance. FY22 revenue guidance has been narrowed to US$209-217m and EBITDA reduced to US$72-80m from US$73-87m. Credit Suisse is increasingly concerned about corporate oversight, such as delayed audited accounts, legal claims relating to tax, remuneration claims and the reduced FY22 EBITDA guidance. Key partnerships may also take time to materialise. The broker’s long-term view of the strategic importance of the business remains unchanged. Yet Credit Suisse expects to become more upbeat as the platform develops and downgrades to Neutral from Outperform. Target is reduced to $32 from $42.
FY21 results were below both Macquarie and consensus forecasts as well as company guidance. The FY22 revenue guidance range is narrowed to US$209-217m from US$202-222m while the earnings (EBITDA) margin is lowered to 34-36% from 36-39%. The broker decreases its rating to Underperform from Neutral and it’s felt market confidence will be reduced around the company’s lack of visibility on the longer-term outlook. The target price falls to $27.60 from $30.
See upgrade above.
ANZ BANK (ANZ) was downgraded to Hold from Accumulate by Ord Minnett
Following the August reporting season, Ord Minnett downgrades its rating for ANZ Bank to Hold from Accumulate as loan growth trends worsened in July. Also, mortgage loans have fallen at a -1% annualised pace this fiscal half to date. The target falls to $29.10 from $30.60. Given a heavy reliance on the broker channel, the analyst expects the bank’s turnaround to take longer. Combined with the pushback of official interest rate rises by the Reserve Bank of New Zealand due to the covid outbreak, near-term catalysts are considered light-on.
BWX (BWX) was downgraded to Neutral from Buy by Citi
The FY21 financials surprised to the upside as stronger margins compensated for weaker sales. Citi’s update is a genuine mix of pros and cons, dominated by another acquisition, Go-To, which is financed through new capital, while BWX’s core business is feeling the impact from covid (see slower sales). Following on from the strong share price performance in 2021, Citi has decided it’s time to scale back the Buy recommendation and replace it with a Neutral rating instead. Despite announcing an accretive acquisition, Citi’s forecasts hardly move as downgrades have been necessary elsewhere to account for the covid-impact. New target of $5.63 is only minimally above the prior $5.60.
ELECTRO OPTIC SYSTEMS (EOS) was downgraded to Neutral from Buy by Citi
Citi reports the half-yearly net loss of -$11m was significantly higher than its own forecast of a -$1m loss; lower-than-expected revenue is to blame. Estimates have been cut. Target price drops by -13% to $4.50. Citi downgrades to Neutral/High Risk from Buy/High Risk as the analysts are growing concerned about delays in the award of new defence programs, potentially impacting on the company’s ability to replenish its order book. The current order book, explains the broker, runs out in FY23, while delayed cash receipts remain dependent on a single customer. Citi would like to see a few more extra customers being added, instead of having to rely on one single source for incoming cash.
JAPARA HEALTHCARE (JHC) was downgraded to Hold from Accumulate by Ord Minnett
Japara Healthcare’s FY21 result fell short of Ord Minnett’s expectations though the key focus for both investors and the management team is the recently announced $1.40 takeover offer from Calvary Health Care. The broker raises its target to $1.40 from $1.04 and lowers its rating to Hold from Accumulate. The analyst cuts the FY22 earnings (EBIT) forecast by -35% to reflect ongoing occupancy challenges though expects earnings (EBITDA) to lift in FY22, supported by the additional $10 per day basic fee supplement.
LOVISA (LOV) was downgraded to Neutral from Outperform by Macquarie
FY21 EBITDA was ahead of Macquarie’s estimates. There has been solid trading for the first eight weeks of FY22 in markets where pandemic-related restrictions are low and stores are able to trade. The company remains focused on opportunities for expanding its network, although Macquarie suspects the roll-out of stores may be affected by logistic challenges. The stock is currently exceeding its pre-pandemic average, trading at 28.5x EV/EBITA and Macquarie downgrades to Neutral from Outperform. Target is raised to $17.00 from $15.50.
MINCOR RESOURCES (MCR) was downgraded to Neutral from Outperform by Macquarie
Mincor Resources has delivered two impressive exploration successes with new discoveries confirmed at Golden Mile and Location 1. Further exploration success at both sites is likely, and Macquarie assumes $100m in exploration potential in the broker’s valuation for the company. Macquarie has not made any changes to production or cost assumptions, hence the broker’s earnings estimates for the company are largely unchanged after incorporating the FY21 result. The company reported FY21 earnings losses wider than the broker had forecast and notes that the variance reflected exploration expensed and was equivalent to just $1m. Macquarie notes production ramp-up and costs assumptions are the key risks to the broker’s forecasts on Mincor. Macquarie downgrades Mincor Resources to Neutral from Outperform: $1.40 target.
NEXTDC (NXT) was downgraded to Accumulate from Buy by Ord Minnett
The adjusted net loss of -$21m was an improvement on the -$44m loss a year ago and in-line with Ord Minnett’s estimate. The broker downgrades its rating to Accumulate from Buy on valuation and lowers its target to $14 from $14.50. The analyst suggests guidance was soft and the company called out some slippage at its S3 Sydney construction site as a result of covid-19 restrictions.
PANORAMIC RESOURCES (PAN) was downgraded to Neutral from Outperform by Macquarie
The FY21 underlying loss was wider than Macquarie had expected though impairment reversals and asset sales swung the underlying loss to a small profit. While the company is expected to return to producer status in FY22, the broker lowers its rating to Neutral from Outperform, as the stock has risen around 50% in the past two months. The target price rises to $0.21 from $0.20, on an improved earnings outlook.
RHIPE (RHP) was downgraded to Hold from Accumulate by Ord Minnett
Rhipe’s FY21 operating profit of $18m, was in-line with guidance and Ord Minnett’s forecast, highlighting solid momentum over the second half though margins were lower than expected. There was no final divided. The main focus for the analyst is the takeover offer from Norwegian IT advisory firm Crayon Group at $2.50 a share. Directors have unanimously recommended the deal to shareholders. A competing bid is unlikely to emerge, given the current offer includes a ‘no-shop’ clause and the broker lowers its target price to $2.50 from $2.57 to align with the bid. The rating is lowered to Hold from Accumulate.
SPARK INFRASTRUCTURE (SKI) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse downgrades to Neutral from Outperform following the recommendation by the board of the offer from KKR/Ontario Teachers/PSP Investments. Under the terms of the offer shareholders will receive a total of $2.95 a share. Meanwhile, first half results were in line with expectations. Target is raised to $2.89 from $2.65.
SHAVER SHOP (SSG) was downgraded to Hold from Buy by Ord Minnett
The FY21 result was in-line with recent company guidance, with earnings (EBITDA) up strongly and operating margins at elevated levels, notes Ord Minnett. Trading has been significantly impacted by current lockdowns, with sales revenue down -7.3% year-to-date, though more recent sales have improved due to online sales growth. The broker lowers its rating to Hold from Buy and the target price falls to $1.20 from $1.53. The analyst believes the company retains a strong market position in the personal care segment, generating strong cash flows and high returns on capital.
WESFARMERS (WES) was downgraded to Neutral from Outperform by Macquarie
FY21 results beat expectations. Bunnings delivered comparable sales growth of 11.9% and total sales reaching a record $16.87bn. Kmart also reaped operating leverage from the store conversion program. Wesfarmers is trading close to peak valuations levels, Macquarie asserts, and there are a larger number of near-term risks posed by global supply chain disruptions. Hence, the rating is downgraded to Neutral from Outperform. The main upside risk will be if lockdowns end sooner than the broker expects and revive consumer confidence. Target is reduced to $61.35 from $63.45.
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.
