In the good books
ASX LIMITED (ASX) was upgraded to Neutral from Sell by UBS
UBS observes ASX is back at fair value and upgrades the rating to Neutral from Sell. Volumes appear to be at cyclical lows in all key markets and most of the catalysts underpinning the former recommendation have now played out.
While primary and secondary raisings in listings remain weak the broker expects these will inevitably recover. The broker expects second half revenue to fall by -3% before rising 6% in FY24. Target is raised to $70 from $68.
BEGA CHEESE (BGA) was upgraded to Add from Hold by Morgans and to Hold from Lighten by Ord Minnett–
Following 1H results, Morgans feels Bega Cheese is over the worst of recent headwinds and upgrades its rating to Add from Hold.
The half was materially impacted by higher milk and other inflationary costs, as well as the lag impact of implementing price rises, explains the analyst.
Management reduced FY23 earnings (EBITDA) guidance to the lower-end of prior guidance. Rising interest rates are expected to further impact profits and the broker makes large cuts to its FY23 forecast.
The target rises to $4.05 from $3.71 after Morgans applies higher multiples after recent peer outperformance and the net debt forecast falls on asset sales.
First half results were below expectations, with Bega Cheese’s EBITDA down -30% and a commensurate reduction in the interim dividend. A significant increase in farmgate milk prices required substantial increases to retail, yet retail prices lagged input costs resulting in lower margins.
Recent falls in global dairy prices suggest milk prices may have peaked. Ord Minnett observes there has been no demand destruction but this remains a risk.
Rating is upgraded to Hold from Lighten and the target is reduced to $3.50 from $3.75.
BRAMBLES LIMITED (BXB) was upgraded to Equal-weight from Underweight by Morgan Stanley
First half results were mixed with EBIT ahead of Morgan Stanley’s estimates and revenue slightly below. Sales guidance in FY23 has been raised to 12-14% and EBIT guidance to 15-18%, the latter up 7% at the mid point.
Brambles is witnessing a recovery in pallet return rates in the US and UK and is positioned to manage progressive destocking in the second half. An improvement is not expected in Australia until the fourth quarter.
Morgan Stanley assesses the business has managed well in difficult markets and may be nearing the sweet spot where robust earnings are coupled with improved cash generation.
As a result the rating is upgraded to Equal-weight from Underweight and the target raised to $13.20 from $11.80. Industry view: In-Line.
FINEOS CORPORATION (FCL) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett upgrades Fineos Corp to Buy from Accumulate as the share price is moved through the trigger level. Target is $3.75.
INVOCARE LIMITED (IVC) was upgraded to Buy from Hold by Ord Minnett
2022 results were weaker than Ord Minnett expected. While funeral volumes and prices have rebounded, the inflationary effects on the cost base are dampening near-term profitability.
The broker suspects InvoCare lost volume share in Australian funerals in 2022 but expects growth to resume in 2023.
Ord Minnett estimates much of the spike in funeral demand the past year was taken by smaller firms that have latent capacity and can ramp up the labour force. Rating is upgraded to Buy and the target is $14.50.
LIBERTY FINANCIAL GROUP (LFG) was upgraded to Outperform from Neutral by Credit Suisse
Liberty Financial delivered a first half result in line with Credit Suisse’ forecasts, with profit lower year on year given expected macro headwinds affecting areas like funding costs and credit growth.
The broker expects some of the residual impacts of these pressures to further impact the second half and into early FY24, before a return to earnings growth.
Credit Suisse believes the market will likely require evidence of a peak in interest rates before a meaningful re-rate will occur, but trading at a 6x forward PE and with a dividend yield in excess of 10%, on a 12-month view the broker sees valuation as compelling.
Upgrade to Outperform from Neutral, target unchanged at $4.55.
MAGELLAN FINANCIAL GROUP (MFG) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett has now changed its view as the Magellan Financial share price has moved through the trigger, taking the rating back up to Accumulate from Hold. Target is $11.50.
NANOSONICS (NAN) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett upgrades to Hold from Lighten as the share price has moved through the trigger point. Target is $4.
PLATINUM ASSET MANAGEMENT (PTM) was upgraded to Outperform from Neutral by Credit Suisse and to Accumulate from Hold by Ord Minnett–
Credit Suisse upgrades its rating to Outperform from Neutral for Platinum Asset Management in the expectation an improved fund performance will lead to a recovery in flows. The $1.90 target is unchanged.
This upgrade follows 1H results, which revealed a -16% miss versus the consensus forecast for underlying profit due to a lower management fee margin and higher compensation.
The higher composition is driven by improved fund performance, which is ultimately expected to deliver flow/performance fee benefits.
An interim dividend of 7cps was declared, which indicates to the analyst both balance sheet strength and the improved fund performance.
Ord Minnett upgrades Platinum Asset Management to Accumulate from Hold as the share price has moved through the trigger. Target is $2.25.
RESIMAC GROUP was upgraded to Buy from Sell by Citi
Resimac Group’s first half net profit was ahead of Citi’s estimates. Still, the outlook appears challenging with loan volumes and net interest margins expected to reduce in the second half. On the other hand, the freeing up of equity capital for possible deployment in a new portfolio or adjacent businesses remains a possibility.
Citi observes the shares have fallen -25% since early February despite only a modest downturn in core profit. Rating is upgraded to Buy from Sell. Target is steady at $1.20, as lower earnings are offset by a smaller capital drag.
WESTGOLD RESOURCES LIMITED (WGX) was upgraded to Outperform from Neutral by Macquarie–
Westgold Resources first half was softer than Macquarie had anticipated, with the company reported an -$11m loss compared to an expected $3m profit, but the broker expects a better second half is to come.
Given no change from the company on its full year guidance, Macquarie anticipates a stronger cost performance over the second half but does lower its full year earnings per share forecasts -74%.
The rating is upgraded to Outperform from Neutral and the target price decreases to $1.20 from $1.25.
In the not-so-good books
ADBRI (ABC) was downgraded to Sell from Neutral by Citi
Having expected Adbri to be reaching a trough at this point, Citi now sees risk of a rebasement moving forward. The broker notes management changes that include a semi-permanent CEO, risk of capital raising, and an uneconomic product mix change, all add to risk for the company.
On the latter point, the broker expects it will be hard for the company to achieve historic margins long-term as its exposure to lime declines, with earnings margins already declining -230 basis points over the company’s second half.
The rating is downgraded to Sell from Neutral and the target price decreases to $1.50 from $1.55.
AUSTAL LIMITED (ASB) was downgraded to Neutral from Buy by Citi
First half net loss was below forecasts while the broader result was largely in line with the earnings update provided earlier. Citi downgrades estimates for earnings per share FY23-25 by -12-27% to primarily reflect higher depreciation.
Austal appears confident about a rebound in the commercial market and has progressed several opportunities. The broker assesses the potential of projects has never been more diversified and this augurs well, given increased geopolitical tensions.
Support revenue grew 58% and 45% in the US and Australasia, respectively, during the first half. Austal is targeting $500m in support revenue by FY27.
Citi downgrades to Neutral from Buy and reduces the target to $2.00 from $2.32.
AVITA MEDICAL INC was downgraded to Accumulate from Buy by Ord Minnett
Ord Minnett raises expense forecasts for sales and marketing by 29%, as Avita Medical plans the US launch of RECELL in July. The broker believes the market materially under appreciates the company’s product strength and high gross margins.
Nevertheless, a short-term transition to profitability is considered unlikely. The broker does not expect the business will be positive on cash flow before 2026 although does not expect additional funding requirements.
Rating is downgraded to Accumulate from Buy and the target of $5.60 is maintained.
LYNAS RARE EARTHS LIMITED was downgraded to Neutral from Buy by UBS
Lynas Rare Earths’ December-half result fell well short of UBS forecasts due to a price lag which led to higher cost of goods sold.
Management advised Kalgoorlie remains on track for June quarter first-feed but UBS says the completion data and ramp-up remain questionable, noting the pressure is on after the renewal of the company’s Malaysian operating licence.
The broker downgrades FY24 and FY25 production forecasts accordingly, and raises its cost-of-goods-sold estimates.
EPS forecasts fall -15% in FY23; -65% in FY24; and -41% in FY25. No dividends are forecast.
Rating is downgraded to Neutral from Buy. Target price falls -13% to $9 from $10.30.
MONEYME (MME) was downgraded to Hold from Add by Morgans
Morgans pulls back its rating for MoneyMe to Hold from Add and slashes its target to 85c from $1.20 after largely pre-released 1H results. These changes come despite the underlying business performance tracking in line with recent management commentary.
The broker raises its forecasts for funding costs and D&A expenses and is more conservative on long-term margin assumptions, which reduces the target to $1.00. A further -15c cut arises from uncertainty on a debt repayment.
The repayment of the additional -$25m of debt funding from Pacific Equity Partners will remain a key risk and likely overhang the stock until an announcement is made, suggests the broker.
RED 5 LIMITED was downgraded to Hold from Speculative Buy by Ord Minnett
While Red 5 delivered a beat for 1H results, it also raised around $90m in capital (a few days prior to the result) to alleviate balance sheet/working capital issues in the development and ramp-up of the KOTH project.
The analyst predicts the company will miss 2H production and cost guidance by -4% and -17%, respectively, and with past operational underperformance suspects market confidence in management may take time to be restored.
Ord Minnett cautions: should there be further cost overruns or slipups, another capital raise may be required.
The rating falls to Hold from Speculative Buy, while the target plunges to 15c from 37c.
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.
