In an even-handed performance for the week ending Friday January 29, brokers in the FNArena database delivered 14 upgrades and 14 downgrades to ASX-listed companies.
There were dual upgrades by separate brokers for Charter Hall Retail REIT. Both Ord Minnett and Morgan Stanley expressed a general preference toward non-discretionary retail REITs. Morgan Stanley also sees the advantage of regional exposure which is being driven by tourism and the potential for de-urbanisation.
Citi downgraded Orocobre to Neutral from Buy, while Credit Suisse lowered its rating to Underperform from Neutral. Despite both brokers being happy with the operating performance, the downgrades were necessary on valuation grounds as the share price has risen 137% since November lows.
Ratings were lifted for both Webjet and Corporate Travel Management after a travel sector review by Credit Suisse. The broker anticipates good 2022 earnings, led by a strong top-line from pent up demand, share gains, and profitability due to cost-containment during the pandemic. In addition, Corporate Travel Management may grow market share via a global footprint and in-house built technology.
South32 headed the weekly table for the largest percentage upgrade to earnings forecasts by brokers in the FNArena database. As mentioned last week, Macquarie upgraded the rating for South32 to Neutral from Underperform, after lifting earnings estimates.
Morgan Stanley also noted December quarter performance overall was better-than-expected. The soon-to-be-divested South African Energy Coal (SAEC) was universally seen by brokers as an underperformer.
Next on the table was Fisher & Paykel Healthcare, which received universal acclaim from the four brokers that cover the stock in the FNArena database. Citi perceives the key change across the third quarter is accelerating hardware sales growth, coupled with stronger margins.
Not to be outdone, Reliance Worldwide garnered the praise of six brokers in the database, after reporting impressive first-half sales and operating income. Investors were cautioned about a more challenging second half due to currency translation and higher commodity costs.
Citi’s forecast FY21 and FY22 earnings for Pilbara Minerals were materially lifted in anticipation of a strong demand recovery for spodumene. The price of the mineral is hitching a ride on a robust electric vehicle (EV) outlook.
In terms of percentage downgrades to earnings forecasts by brokers for the week, an energy flavour prevailed. Karoon Energy and Cooper Energy were atop the table, with Viva Energy Group and Oil Search not far behind.
The earnings forecasts compiled by Macquarie for an initiation of coverage for Viva Energy Group (with an Outperform rating) only served to lower the average of all brokers’ estimates.
All seven brokers in the FNArena database reviewed fourth quarter results for Oil Search and on the whole noted lower earnings and higher debt. The latter was potentially related to lower revenue and higher cost guidance.
Second quarter revenue was lower due to delayed shipments by Karoon Energy, while foaming at Cooper Energy’s Orbost operations is causing some hesitation among brokers.
Prima facie, the appearance of Corporate Travel Management and Webjet in the leading percentage downgrades list is perplexing. The mystery is explained by a reassessment of the aviation sector by UBS. The broker foresees short-term headwinds from deteriorating covid conditions in both the US and UK, and border closures locally.
Total Buy recommendations take up 50.95% of the total, versus 40.03% on Neutral/Hold, while Sell ratings account for the remaining 9.02%.
In the good books
ATLAS ARTERIA (ALX) was upgraded to Add from Hold by Morgans B/H/S: 2/3/0
Second half revenue for Atlas Arteria was 5-7% ahead of Morgans forecasts, leading to upgrades for the broker’s FY20-21 local currency earnings (EBITDA) estimates. The broker also upgrades the rating to Add, with a potential 12 month total return of around 12%, comprising 7% upside and around 5% yield. Fourth quarter traffic and toll revenue continued to be impacted by covid-19-related movement restrictions. The target price is decreased to $6.51 from $6.74, with the uptrend in AUDEUR and AUDUSD offsetting the benefit of short-term forecast upgrades. The company’s FY20 result release is scheduled for 25 February.
CHARTER HALL RETAIL REIT (CQR) was upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 3/2/1
Morgan Stanley upgrades its Charter Hall Retail REIT rating to Equal-weight from Underweight. Target moves to $3.72 from $3.60. Industry view: In-line. The broker is of the opinion that retailers with regional exposure will have an advantage in the short to medium term, driven by tourism and potential de-urbanisation. Within its coverage, Morgan Stanley finds the REIT’s assets to be the most appropriately located to capitalise on that theme.
DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/3/0
Credit Suisse estimates that NSW accounts for up to 60% of Domain Holdings’ residential depth revenues with the company in the broker’s view likely to be a key beneficiary of stamp duty reform in NSW. Highlighting its exposure to the Sydney market, Domain Holdings reported 15% residential depth revenue growth in the first quarter, despite the negative impact of the Melbourne lockdown. Credit Suisse upgrades to Outperform from Neutral with the target rising to $5.10 from $4.40.
EVOLUTION MINING LIMITED (EVN) was upgraded to Outperform from Neutral by Macquarie B/H/S: 2/4/1
Evolution Mining’s December quarter gold production beat Macquarie by 6%, with costs in line. The miner is well placed to achieve the top end of guidance, the broker suggests, with a strong second half anticipated and elevated copper prices helping to reduce costs. Red Lake’s transformation plan also appears to be going well. On a valuation basis, the broker upgrades to Outperform from Neutral. Target rises to $5.40 from $5.30.
RAMELIUS RESOURCES LIMITED (RMS) was upgraded to Outperform from Neutral by Macquarie B/H/S: 2/0/0
Ramelius Resources’ December quarter was solid, with a beat in sales offsetting higher costs. The miner has a solid track record compared to guidance, Macquarie notes, and a strong second half is expected. Studies due for completion over 2021 have the potential to provide meaningful upside. On a valuation basis the broker upgrades to Outperform, retaining a $1.90 target.
RELIANCE WORLDWIDE CORPORATION LIMITED (RWC) was upgraded to Buy from Accumulate by Ord Minnett B/H/S: 3/2/1
Reliance Worldwide Corp’s first-half trading update included sales growth increase of 17%. Ord Minnett notes the company achieved strong operating leverage due to the combination of higher volumes and cost savings initiatives. The second half outlook is expected to be slightly more challenging given headwinds from currency translation and higher commodity costs. Rating is upgraded to Buy from Accumulate with the target rising to $5.30 from $4.50.
ST BARBARA LIMITED (SBM) was upgraded to Neutral from Underperform by Macquarie B/H/S: 3/2/0
St Barbara produced 89.7koz of gold in the second quarter FY21, 9% above Macquarie’s forecast. The all-in-sustaining-cost (AISC) was 5% above the broker’s expectation. The broker notes Simberi was the key point of weakness, with lower recovery resulting from the processing of transitional ore. The rating is raised to Neutral from Underperform. Macquarie views this as the low point, as production metrics are expected to improve. The target price of $2.40 is unchanged.
TECHNOLOGYONE LIMITED (TNE) was upgraded to Buy from Sell by UBS B/H/S: 2/1/0
In the wake of TechnologyOne’s recent de-rating, the broker has double-upgraded to Buy from Sell. The stock has underperformed the Small Ordinaries by -15% since its November earnings result, and -25% since the prior May result. The broker sees upside risk from faster SaaS conversion, improving UK momentum and greater traction in domestic state/federal government business. Value is on offer compared to both domestic and foreign peers, the broker suggests. Target rises to $9.15 from $8.45.
In the not-so-good books
BWP TRUST (BWP) Initiation of coverage with Underweight by Morgan Stanley B/H/S: 0/2/2
Morgan Stanley initiates coverage on BWP Trust with an Underweight rating with a target price of $3.65. Industry view: In-line. While BWP Trust has predominantly triple-net and/or long weighted average lease expiry (WALE) leases and derives circa 90% of its income from Bunnings tenancies, Morgan Stanley sees some risks due to the retailer’s track record of relocating upon lease expiry. With vacancies rising, the broker expects circa 2% earnings growth (compounded annual growth rate) over three years to FY24.
COMPUTERSHARE LIMITED (CPU) was downgraded to Neutral from Buy by UBS B/H/S: 3/2/1
UBS has resumed coverage of Computershare having last updated in May last year, downgrading to Neutral from Buy. Target rises to $15.00 from $12.30. The broker notes the stock has in the past traded at up to a -20% discount in an market downgrade cycle and a 40% premium in a recovery, implying significant upside on an earnings recovery. But not yet. Uncertainty remains globally and 95% of earnings are derived offshore, hence the strong AUD is a headwind.
IGO LIMITED (IGO) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/3/0
IGO’s first half beat expectations in terms of operating income with earnings from the Nova project forming 70% of the total earnings. There will be no interim dividend while the broker assumes a final dividend of 6cps. The addition of Greenbushes to the portfolio is a differentiator, highlights Credit Suisse, and provides investors exposure to the world’s premier global hard rock lithium asset and downstream hydroxide production. While the broker views IGO as one of the leading battery materials investments but considers that post-rally, its value looks full. Rating is downgraded to Neutral from Outperform with the target rising to $6.40 from $6.
ILUKA RESOURCES LIMITED (ILU) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/4/1
Credit Suisse is happy staying on the sidelines and downgrades its rating to Underperform from Neutral. Target rises to $5.60 from $5.35. The December quarter for Iluka Resources was a bit of a mixed bag, says Credit Suisse, noting strong zircon sales circa 20% above the broker’s forecast. While the result has prompted the broker to lift its 2020 earnings expectations by 28%, Credit Suisse believes it may still be too early for the company to reinstate its suspended dividend. The broker sees the dividend resuming in August.
MIRVAC GROUP (MGR) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/2/0
Based on valuation, Ord Minnett downgrades its rating on Mirvac Group to Hold from Accumulate with the target rising to $2.60 from $2.50. Fundamentals are expected to remain strong for the industrial, self-storage, grocery-anchored retail and long weighted average lease expiry (WALE) assets with listed owners continuing to grow via M&A. Office and retail malls are expected to face some structural challenges with the full impact on valuations uncertain. This is likely to create volatility and provide selective investment opportunities, assesses the broker.
OROCOBRE LIMITED (ORE) was downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Buy by Citi B/H/S: 2/3/2
Orocobre’s production in the December quarter was up 58% quarter on quarter and the third-highest on record, with sales volumes up 28%. Credit Suisse highlights the market focus is shifting to growth with an increase in global EV sales strengthening the outlook for lithium demand, better prices, and improvement in sentiment toward battery materials. The company’s longer-term growth opportunity includes the acquired Cauchari ground. Post the latest rally, Credit Suisse decides to downgrade its rating to Underperform from Neutral with the target rising to $5 from $2.85.
The operating performance at Olaroz improved quarter-on-quarter, with December quarter production up 58% and sales up 28%. This beat Citi’s estimates by 31% and 53%, respectively. The broker revises up FY21 earnings estimates to account for better price realisation and cost performance. The target rises to $6.75 from $5 and the rating is downgraded to Neutral from Buy. The current share price (up 137% since its November lows) is now pricing in much of this upside, explains the analyst.
WOODSIDE PETROLEUM LIMITED (WPL) was downgraded to Neutral from Buy by UBS B/H/S: 3/4/0
The broker has lifted its Brent price forecasts to [all US$/bbl] 57 from 50 for 2021, 60 from 55 for 2022 and 60 from 57.50 for 2023. While the broker was not anticipating a return to strict mobility restrictions around the globe in the first half 21, the underlying assumption of a vaccine-led recovery is unchanged and supported by vaccine developments and OPEC-Plus supply agreements. Woodside Petroleum’s target rises to $26.10 from $23.50 but the broker downgrades to Neutral from Buy suggesting the market is adequately pricing a decision on Scarborough in the second half 21.
WESTERN AREAS NL (WSA) was downgraded to Neutral from Outperform by Macquarie B/H/S: 3/3/0
Western Areas posted December quarter nickel production -13% lower than Macquarie’s forecast and costs 23% higher. Management still expects to achieve guidance at the bottom end of the range. The broker does not. On a possible guidance miss and likely first half earnings loss, the broker downgrades to Neutral from Outperform. Target falls to $2.70 from $3.30.
Earnings forecast
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
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.
