In the good books
BEACH ENERGY (BPT) was upgraded to Add from Hold by Morgans
Morgans upgrades its rating to Add from Hold despite second quarter production missing the consensus forecast by -5% and Beach Energy downgrading reserves at Waitsia. The target falls to $1.81 from $1.91. Production fell for Bass Gas, Otway and Kupe, though the analyst notes the latter two were afflicted by plant outages and lower customer demand, rather than poor operational performance. Also, the lower reserves at Waitsia won’t impact delivery of commitments to customers over the next five years, explains the broker. Morgans’ FY24 and FY25 dividend forecasts are raised by 30% and 55%, respectively, as the company will likely move to a free cash flow metric.
BORAL (BLD) was upgraded to Outperform from underperform by Credit Suisse
In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. The broker expect Boral will benefit from this new outlook for the above two factors (having suffered from them in 2022). The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration. Boral benefits most, relative to other stocks in the sector, from these Credit Suisse preferences and the rating is upgraded to Outperform from Neutral. There are no changes to forecasts and the $2.50 target is unchanged.
CHARTER HALL LONG WALE REIT (CLW) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett is not anticipating much in terms of negative surprises from A-REITs in the upcoming February reporting season, though the broker does believe market pressure is mounting for more capital management from the sector. The reason for the latter, the broker explains, is due to the strong disconnect between listed and unlisted assets currently. Ord Minnett’s top picks for the season are Charter Hall Long WALE, RAM Essential Services Property and Waypoint REIT. Target price for Charter Hall Long WALE REIT has fallen to $4.87 from $4.93. Upgrade to Buy from Accumulate.
COLES GROUP (COL) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse expects food inflation of 10% for December largely carried across to similar rates of supermarket industry inflation, and retains a preference for supermarkets over non-food retail in the first half. Credit Suisse expects Coles Group can deliver 16% year-on-year earnings growth, supported by robust industry growth, margin benefits derived from food inflation, and an absence of covid-related costs. The rating is upgraded to Outperform from Neutral and the target price increases to $19.31 from $18.02.
NEWCREST MINING (NCM) was upgraded to Add from Hold by Morgans
In the wake of Newcrest Mining’s 2Q production report last week, Morgans reduces long-term sustaining capex assumptions at Cadia. When these changed capex forecasts are combined with upgraded gold price assumptions, the broker’s target is increased to $25.70 from $20.60 and the rating upgraded to Add from Hold. The analyst sees an emerging value proposition for Newcrest thanks to the company’s diversification, solid margins, and long-life reserves. Highlights for the 2Q included a solid performance from Cadia, a 25% rise in gold production year-on-year and all-in sustaining costs (AISC) of US$32/oz (after by-product credits).
TABCORP HOLDINGS (TAH) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously. This has resulted in an upgrade for Tabcorp Holdings to Hold from Lighten and a target price increase to $1.00 from 90c.
WOOLWORTHS GROUP (WOW) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse expects food inflation of 10% for December largely carried across to similar rates of supermarket industry inflation, and retains a preference for supermarkets over non-food retail in the first half. Credit Suisse expects Coles Group can deliver 22% year-on-year earnings growth, supported by robust industry growth, margin benefits derived from food inflation, and an absence of covid-related costs. The rating is upgraded to Outperform from Neutral and the target price increases to $36.51 from $33.01.
In the not-so-good books
ADBRI (ABC) was downgraded to Underperform from Neutral by Credit Suisse
In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. The broker expects Boral and Adbri will benefit from this new outlook for the above two factors (having suffered from them in 2022). The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration. Adbri (downgraded to Underperform from Neutral) should benefit to a lesser degree than Boral (upgraded to Outperform) from the improved weather and the stated sub sector preferences above, explains Credit Suisse. There are no changes to earnings forecasts or target price.
ARDENT LEISURE (ALG) was downgraded to Lighten by Ord Minnett
Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously. While it had appeared Ord Minnett had ceased coverage of Ardent, the switch has resulted in a “cut” (downgrade) to Lighten as the share price has moved through the broker’s trigger level. Fair value 55c.
BEACH ENERGY (BPT) was downgraded to Underperform from Neutral by Macquarie
Beach Energy’s December-quarter result disappointed Macquarie, Waitsia drilling results disappointing (reserves cut by -15% – another downgrade); capital expenditure rising given a tight labour skills market; and news of a contractor reselection (the company is sensitive to schedule delays given LNG prices are unlikely to stay this high forever). EPS forecasts fall -16% in FY23; and -15% in FY24. Rating is downgraded to Underperform from Neutral. Target price falls to $1.45 from $1.70.
COLES GROUP (COL) was downgraded to Sell from Hold by Ord Minnett
Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously. This has led to a downgrade to Sell from Hold for Coles Group, and a fair value set at $13.60 (previous target $15.80).
FLETCHER BUILDING (FBU) was downgraded to Neutral from Outperform by Credit Suisse
In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. Fletcher Building benefited in 2022 from passing through costs associated with the above two factors. Relatively speaking Boral and Adbri will now benefit more with the new outlook and the broker’s rating for Fletcher Building falls to Neutral from Outperform. The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration. No changes to Fletcher Building’s forecasts or $7.00 target price are made.
FORTESCUE METALS (FMG) was downgraded to Underperform from Neutral by Credit Suisse
Credit Suisse assesses another strong quarter (2Q) for Fortescue Metals, with beats for iron ore production and price realisation of 4% and 2%, respectively, while unit costs were also around -2% lower than expected. The broker’s rating falls to Underperform from Neutral on a 50% share price rally since last November. It’s suggested investors take profits and reallocate funds to sector peers with more favourable valuations. The target rises to $17.20 from $15.30.
GOLD ROAD RESOURCES (GOR) was downgraded to Accumulate from Buy by Ord Minnett
Ord Minnett has been disappointed by 2023 cost guidance from Gold Road Resources being 12% ahead of its expectations, with the company suffering the impacts of inflationary inputs and sustained higher spend. The broker lowers its earnings forecasts -14% and -4% in FY23 and FY24. Guidance followed a fourth quarter where production declined -11% quarter-on-quarter, and costs were higher than expected on larger mining and capital expenditure. Ord Minnett describes the latest result as a “slight step back” after Gold Road Resources outperformed peers over the last six months. The rating is downgraded to Accumulate from Buy and the target price decreases to $1.80 from $2.00.
GWA GROUP (GWA) was downgraded to Underperform from Neutral by Credit Suisse
In a review of the Australian Building Materials sector on January 24, Credit Suisse suggests spot energy costs have peaked and extraordinary rainfall is now normalising. The broker favours exposure to infrastructure and non-residential over residential, new construction and repair and remodel (R&R). Housing, along with additions and alterations (A&A) approvals/prices are falling, and the broker expects further deterioration. Boral (upgraded to Outperform) benefits most from these preferred exposures by Credit Suisse, while in relative terms GWA Group benefits less. The rating falls to Underperform from Neutral. There are no changes to earnings forecasts or the $2.30 target price.
LIFESTYLE COMMUNITIES (LIC) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett expects settlements for both Ingenia and Lifestyle Communities to record a greater second half skew compared with the average 40/60 split recorded over the past three years. The broker points out demand remains strong and construction bottlenecks are showing tentative signs of easing. While the broker continues to believe Lifestyle Communities is underpinned by strong underlying long-term fundamentals and a high-calibre management team, it is viewed as being fully valued on a 12-month basis. Downgrade to Hold from Accumulate, target falls to $18.25 from $18.31.
MYER (MYR) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously. This results in a downgrade for Myer to Lighten from Hold on a fair value of 75c.
NIB HOLDINGS (NHF) was downgraded to Lighten from Accumulate by Ord Minnett
Ord Minnett has switched to whitelabeling research from Morningstar instead of JP Morgan previously. This has resulted in downgrade to Lighten from Accumulate and a target cut to $7.00 from $7.50.
PINNACLE INVESTMENT MANAGEMENT (PNI) was downgraded to sell from Neutral by UBS
UBS had already expressed its lack of enthusiasm for Pinnacle Investment Management, but today’s February reporting season preview for diversified financials has gone one step further. The broker has downgraded to Sell from Neutral while reducing the price target by -3% to $8.50. Pinnacle Investment Management has been nominated as one of the companies likely to disappoint in February on higher costs, weaker fund flows and a weaker outlook for performance fees.
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.
