Upgrades

1. BABY BUNTING GROUP LIMITED ((BBN)) Upgrade to Add from Hold by Morgans and Upgrade to Accumulate from Hold by Ord Minnett. B/H/S: 2/3/0

FY23 results for Baby Bunting were largely in line with those pre-released in late-July though Morgans increases its profit estimates for FY24 and FY25 due to cost-out initiatives and higher sales assumptions.

The broker raises its target to $2.50 from $1.90 on the higher profit estimates, model roll forward and higher peer multiples and the rating is upgraded to Add from Hold.

The FY23 dividend of 7.3cps was in line with Morgans forecast but above the consensus estimate. Overall sales growth of 4.4% is expected in FY24 driven by an expansion of the store network and the recently announced launch of the online Marketplace.

Baby Bunting reported a -51% decline in underlying net profit in FY23, in line with updated guidance provided in July. Ord Minnett notes the short term consists of challenging trading conditions, made more difficult by the cycling of strong comparable sales growth in the first quarter.

While household expenditure is likely to remain under pressure, the business should return to growth in the second half of FY24, the broker adds. Rating is upgraded to Accumulate from Hold and the target lifted to $2.35 from $1.60.

2. BEACON LIGHTING GROUP LIMITED ((BLX)) Upgrade to Buy from Neutral by Citi. B/H/S: 2/0/0

FY23 gross margins of 68% from Beacon Lighting were in line with estimates and, while the company expects these will be in line in FY24, Citi envisages rapid growth in the trade business is a risk, given its lower margin profile, forecasting gross margins of 67% in FY24.

On further analysis the broker cuts FY24 and FY25 net profit forecast by -26% and -17%, respectively, to reflect slower sales and higher costs.

Beyond the short term, which Citi acknowledges is challenging from a sales perspective, the growth prospects are positive. The company has competitive advantages around its design capabilities, vertical integration and scale.

Rating is upgraded to Buy from Neutral, and the target raised to $2.10 from $1.73.

 3. EVOLUTION MINING LIMITED ((EVN)) Upgrade to Hold from Lighten by Ord Minnett. B/H/S: 1/4/1

Following yesterday’s FY23 results, Ord Minnett upgrades its rating for Evolution Mining to Hold from Lighten as the share price has slumped by -12% since June quarterly results on July 17.

Apart from the share price fall, the broker also justifies the upgrade after gaining more confidence in the Mungari operations following a site visit and in the belief negative news (impairments) has passed.

While FY23 earnings were a miss versus the broker’s forecast, the 2cps dividend was double the forecast. The target rises to $3.25 from $3.15.

4. GWA GROUP LIMITED ((GWA)) Upgrade to Outperform from Neutral by Macquarie. B/H/S: 1/0/0

GWA Group reported FY23 results that were slightly ahead of Macquarie’s estimates. The broker observes the business has executed well and managed costs despite a weakening environment.

Some traction is being gained in the strategy to win over plumbers, as programs are expanded, and engagement is observed to be growing.

No specific guidance for FY24 was provided. Macquarie assesses the valuation is low, upgrading to Outperform from Neutral. Target is raised to $2.30 from $1.80.

5. INGHAMS GROUP LIMITED ((ING)) Upgrade to Buy from Hold by Bell Potter. B/H/S: 3/2/0

Inghams Group’s FY23 result outpaced Bell Potter’s forecasts by a decent clip thanks largely to a lower than forecast tax rate, although top line revenue was also strong.

The company closed June 30 with net debt of $394.7m, marking two straight years of declines.

No formal FY24 guidance was provided but management advised operational performance and prices of key feed ingredients had stabilised (the latter remains high); poultry volumes were recovering to norms; capital expenditure was forecast to rise about $30m in FY24; and the company had finalised NSR increases and planned to keep pricing ahead of inflation.

Rating is upgraded to Buy from Hold, the broker appreciating the company’s stronger balance sheet and spying an FY24 growth runway. Target price jumps to $3.90 from $2.90.

6. MIRVAC GROUP ((MGR)) Upgrade to Outperform from Neutral by Macquarie. B/H/S: 4/1/0

The FY23 results were slightly below Macquarie’s estimates yet FY24 guidance is better than previously expected. Mirvac Group is guiding to FY24 operating earnings per share of 14-14.3c.

Macquarie selects the midpoint of the guidance range, underpinned by a beat in residential settlements in FY23, along with commercial & mixed-use earnings anticipated to perform in line with FY23.

The broker upgrades to Outperform from Neutral, given the improved guidance and an incrementally supportive macro backdrop. Target is raised to $2.66 from $2.22.

7. NICK SCALI LIMITED ((NCK)) Upgrade to Buy from Neutral by Citi. B/H/S: 1/1/0

After FY23 results for Nick Scali, Citi upgrades its FY24 and FY25 core profit estimates by 17% and 14%, respectively, to reflect an improved gross margins outlook. Lower debt levels also lead to lower interest costs.

The profit estimates also benefit from synergies following the Plush acquisition. The broker believes the market under-appreciates Nick Scali’s resultant increased scale.

The analyst upgrades the rating to Buy from Neutral, noting the company’s made-to-order, minimal working capital business model is relatively attractive in a weak demand environment. The target jumps to $14.35 from $9.96.

July 2023 orders were down -8% on previous corresponding period with both Nick Scali and Plush delivering negative orders, notes the broker, with weakness likely a function of the housing market.

8. PRO MEDICUS LIMITED ((PME)) Upgrade to Hold from Reduce by Morgans. B/H/S: 0/3/1

In the wake of FY23 results, Morgans upgrades its rating for Pro Medicus to Hold from Reduce and raises its target to $66 from $61.35. Profit of $60.6m beat forecasts by the analyst and consensus for $55.8m and $58.4m, respectively.

The broker points out being efficient from contract win to go-live at the customer end is extremely valuable. It’s felt the main surprise in the result stemmed from these integration efficiencies rather than a step-change to organic volume or study pricing.

Morgans considers Pro Medicus one of the highest quality businesses on the ASX with earnings support via high margins and a long-contracted revenue base.

9. REA GROUP LIMITED ((REA)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Overweight from Equal weight by Morgan Stanley. B/H/S: 1/4/0

REA Group’s FY23 EBITDA was in line with Macquarie’s estimates. The broker finds sufficient drivers to underpin revenue growth such as depth penetration, geographic mix and the earlier-than-expected monetisation of Premiere Pro.

Macquarie has recently become more positive about the cycle and believes the risk is skewed to the upside, upgrading to Neutral from Underperform.

While the main risk is valuation, the broker highlights its preference over Domain Holdings ((DHG)) given the relative valuation spread between the two. Target is raised to $178 from $135.

Morgan Stanley assesses REA Group is one of the highest quality digital businesses in Australia with a dominant market position in a large and growing vertical. It is also highly profitable with multiple options for growth.

After 12-18 months of falling volumes/listings the broker believes an inflection point has been reached and a recovery is now underway.

In what may be a differing view, Morgan Stanley considers the real driver of earnings growth is the company’s track record of significant and repeatable double-digit price//yield increases.

The broker believes the market spends too much time debating volumes and it is pricing power which is far more critical.

Rating is upgraded to Overweight from Equal-weight and the target is raised to $200 from $130. Industry View: Attractive.

10. RIO TINTO LIMITED ((RIO)) Upgrade to Add from Hold by Morgans. B/H/S: 3/2/1

Some key large cap Mining picks under coverage by Morgans are starting to represent value on a longer time frame. This comes as the ASX200 Materials index has fallen by around -7% in the last month, partly attributed to weakness in Chinese growth indicators.

From a value perspective, the broker’s top preferences are BHP Group and South32, while Mineral Resources provides an attractive diversified lithium exposure.

The broker points out Rio Tinto’s recent underperformance compared to close peer BHP has widened significantly over the last month. At the same time the recent performance of Rio’s Pilbara iron ore business has increased the analyst’s conviction on the stock.

In addition, the fundamentals for iron ore are considered to be healthier than consensus implies.

Morgans upgrades its rating to Add from Hold and leaves its $122 target unchanged.

11. SIMS LIMITED ((SGM)) Upgrade to Neutral from Underperform by Macquarie. B/H/S: 0/2/2

Sims reported FY23 results that beat Macquarie’s expectations. A&NZ and the SA Recycling joint venture were both meaningfully more resilient than expected.

The group continues to pivot its US exposure to provide domestic/export flexibility, a key driver of the resilience, the broker notes. Sims made another acquisition in the form of Baltimore Scrap Corp.

Yet the North American Metal business saw the full impact of negative operating leverage, the UK operation continues to struggle, and Lifecycle Solutions printed another soft result, owing to the slow Chinese economy and its impact on price dynamics.

Market conditions remain murky, Macquarie suggests, but the risks to earnings are less pronounced than concerns. Target rises to $16.20 from $12.95, upgrade to Neutral from Underperform.

12. SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Buy from Sell by UBS and Upgrade to Neutral from Underperform by Macquarie.B/H/S: 4/2/0

UBS has become more positive on Sonic Healthcare, upgrading to Buy from Sell. A miss to consensus estimates at the FY23 result meant the shares fell -6% and the broker believes this now captures previous near-term earnings concerns and the stock is now below prior valuation.

The reason UBS is turning more positive is because analysis implies the shares do not reflect two emerging sources of Upside.

The first is a better revenue collection system in the US from which extra revenue will fall directly to the bottom Line. The second is the move to digital viewing of samples which will provide efficiencies. Target is raised to $36.50 from $34.00.

Sonic Healthcare’s revenue was in line with Macquarie’s forecast, but earnings were -4% below due to higher-than-expected operating expenses. Sonic has outlined several initiatives to support organic growth from FY24, with balance sheet capacity for further acquisitions.

FY24 guidance is below expectations. Compositionally, the broker has increased organic revenue growth assumptions, but with higher cost growth and lower earnings margins, and reduced covid testing contributions.

Target falls to $32.00 from $33.50 but on limited downside, Macquarie upgrades to Neutral from Underperform.

13. TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Add from Hold by Morgans. B/H/S: 4/1/1

Morgans upgrades its rating for Treasury Wine Estates to Add from Hold in the wake of FY23 results on an undemanding valuation compared to other luxury brand owners.

The broker expects earnings will accelerate from the 2H of FY24 as Penfolds is outperforming expectations. It’s also felt there is a clear strategy to improve performance at Treasury Americas and Treasury Premium Brands, where growth slowed materially in the 2H of FY23.

Management is targeting high single digit earnings (EBITS) growth in FY24.

The target rises to $13.00 from $12.80. Add.

 

Downgrades

1. BAPCOR LIMITED ((BAP)) Downgrade to Neutral from Buy by UBS. B/H/S: 2/3/1

The FY23 results from Bapcor were in line with expectations with the highlight being strong cash conversion on the back of a reduction in inventory.

While the share price has rallied, given modest expectations and no changes to targets, UBS envisages risks around the underlying business, particularly for the short term.

Medium-term growth is dependent on executing on the “Better Than Before” target as trade growth normalises. The broker considers the valuation fair, given the balance of risks, and downgrades to Neutral from Buy. Target is steady at $7.20.

2. BENDIGO & ADELAIDE BANK LIMITED ((BEN)) Downgrade to Neutral from Buy by Citi. B/H/S: 2/2/1

Bendigo & Adelaide Bank’s FY23 result fell shy of consensus observes Citi, thanks to a miss on cash earnings, a weaker exit net interest margin and a small rise in costs, aided by sharply lower amortisation.

Management remained upbeat, expecting CT1 would improve in FY24, which Citi extrapolates to mean a strong year marked by improved productivity and mortgage market metrics.

Citi doubts an improvement in CT1 in FY24, calling a slight retreat, which would undermine the company’s premises. Yes, there is upside if management executes well, says the broker, but it doesn’t consider the risk worth it.

Rating is downgraded to Neutral from Buy. Target price is steady at $9.25.

3. BEACH ENERGY LIMITED ((BPT)) Downgrade to Hold from Add by Morgans. B/H/S: 3/3/1

While FY23 results for Beach Energy revealed a 2H underlying profit beat against forecasts by Morgans and consensus, FY23 underlying earnings fell by -11% on the previous corresponding period. Higher gas prices were unable to offset an -11% fall in production.

Unfortunately, FY24 production guidance surprised to the downside, especially for gas, which makes up around 70% of this year’s production.

The broker downgrades its rating to Hold from Add and suggests uncertainty will prevail until key projects get traction in late FY24. The target falls to $1.60 from $1.75.

4. INGHAMS GROUP LIMITED ((ING)) Downgrade to Neutral from Outperform by Macquarie. B/H/S: 3/2/0

Inghams Group’s FY23 result outpaced consensus forecasts thanks to a sharp rise in poultry prices, which allowed earnings to outpace an 11.9% increase in underlying costs.

Macquarie spies room for further price increases over FY24, observes earnings (EBITDA) margins have normalised, and expects automation could yield further improvements.

EPS forecasts rise 7.8% in FY24; 5% in FY25; and 5.1% in FY26.

Macquarie downgrades Inghams Group’s rating to Neutral from Outperform given a rally in the share price. Target price rises to $3.30 from $2.97 to reflect the earnings beat and higher peer multiples.

See also ING upgrade.

5. IPH LIMITED ((IPH)) Downgrade to Hold from Add by Morgans. B/H/S: 3/1/0

FY23 results for IPH slightly exceeded Morgans expectations with EBITDA growth flat in Asia and down by -5% in A&NZ.

The final dividend of 17.5cps was up 8.2% on the previous corresponding period, and there was $284m of net debt as at June 30.

The broker downgrades its rating to Hold from Add on valuation and lowers its target to $8.90 from $9.20. It’s thought some underlying pressures in the Australian and Asian segments will persist into FY24, offset by acquisition contributions.

6. LIFESTYLE COMMUNITIES LIMITED ((LIC)) Downgrade to Neutral from Buy by UBS. B/H/S: 0/2/0

UBS has decided to downgrade Lifestyle Communities to Neutral from Buy with the outlook less certain and the risk reward seen as more balanced post the release of FY23 financials.

At face value, the FY23 net profit was better-than-expected but UBS points at lower overhead costs that made the difference. Costs for servicing debt are expected to “step up” from FY25.

Given the market is expecting high growth in FY25-27, the broker opines the lack of any guidance for FY24 is certainly “underwhelming”. UBS sees limitations to growth, also pointing at increased gearing to 41% from 35% the year prior.

Price target has gained 10c to $17.10. The broker finds the valuation increasingly “stretched”.

7. RUMBLE RESOURCES LIMITED ((RTR)) Downgrade to Speculative Hold from Speculative Buy by Bell Potter. B/H/S: 0/1/0

Rumble Resources has completed an institutional placement worth $8.1m and will undertake a share purchase plan targeting an additional $3m. Bell Potter does not believe this will be sufficient to support its investment thesis.

The broker had expected the business would be funded well enough to continue the large-scale exploration and development work required to unlock value at Earaheedy.

It now appears that the exploration programs will be constrained, at least in the short term. The broker downgrades to Speculative Hold from Speculative Buy and lowers the target to $0.14 from $0.45.

8. SEEK LIMITED ((SEK)) Downgrade to Neutral from Buy by UBS. B/H/S: 3/1/0

Seek’s FY23 result fell a touch shy of consensus but the big disappointment was FY24 guidance.

UBS downgrades Seek to Neutral from Buy, spying few catalysts over the next year given management’s FY24 guidance and its plans to reinvest to achieve its FY28 $2bn revenue target. Costs are guided to grow in the mid to high single digits.

The broker expects the company will maintain its high single digit compound annual growth rate in Australia but believes this is pretty much priced in.

EPS forecasts are cut -23% to account for higher depreciation and amortisation and associate losses from the growth fund.

Target price falls to $26.50 from $27.80.

9. TELSTRA GROUP LIMITED ((TLS)) Downgrade to Hold from Add by Morgans. B/H/S: 3/2/0

Management at Telstra Group noted during the FY23 results presentation the current ownership structure of InfraCo will remain, for at least the medium term. Morgans believes this decision removes the short-term appeal of the stock and downgrades to Hold form Add.

As the stock market generally looks forward by around nine months, the analyst believes investors may rotate away from the defensive Telstra to cyclical growth stocks.

FY23 revenue, underlying earnings and capex were all broadly in-line with guidance and consensus expectations. FY24 guidance also met the consensus estimate.

Management held the 2H dividend flat year-on-year at 8.5cps, the full year dividend rose by 0.5cps after a lift in the 1H.

While the broker’s EPS forecast for FY24 falls by -3.5%, the sum-of-the-parts valuation also falls on management’s delay in releasing value and the target reduces to $4.20 from $4.70.

 

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.