In the good books
CORPORATE TRAVEL MANAGEMENT (CTD) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett observes stocks within the travel agency segment have declined materially since December, largely because of valuation concerns. The broker now assesses valuations have become more reasonable and believes it is time to revisit those stocks that have strong fundamentals. Corporate Travel fits the bill and the rating is upgraded to Buy from Accumulate. Target is raised to $22.11 from $21.93.
DETERRA ROYALTIES (DRR) was upgraded to Buy from Neutral by UBS and to Outperform from Neutral by Credit Suisse
UBS forecasts a 5% lift in world’s steel production in 2021. This drives a 3% lift in expectations for seaborne iron ore demand and the market is likely to be in deficit, requiring high-cost supply to remain. As a result, UBS lifts expectations for 2021 average iron ore prices to US$125/dmt and the long-term price to US$65/dmt. The broker upgrades the rating for Deterra Royalties to Buy from Neutral and raises the target to $5.15 from $5.00.
Since listing in October 2020, Deterra Royalties has underperformed the AUD iron ore price by circa -28% and is down almost -10% year to date. Even so, the broker takes a constructive house view on iron ore pricing and the South Flank ramp up, upgrading its rating to Outperform from Neutral. Target price moves to $4.80 from $4.40.
FORTESCUE METALS GROUP (FMG) was upgraded to Outperform from Neutral by Credit Suisse
Led by a more bullish view around iron ore pricing, Credit Suisse lifts its Fortescue Metals Group target to $23.50 from $16.50. Rating is upgraded to Outperform from Neutral. With only US$0.1bn in net debt, Eliwana ramping up to plan along with a strong dividend outlook, the broker has enough reasons to justify the upgrade ahead of what is expected to be a strong result in February.
HEALIUS (HLS) was upgraded to Buy from Sell by UBS
UBS resumes coverage after a short hiatus and upgrades to Buy from Sell. Target is raised to $4.40 from $2.70. The broker is confident the company is better placed to benefit from favourable demand for diagnostic services and a more benign reimbursement environment. The sale of the GP component within the medical centre division has significantly improved the capital structure, in the broker’s view, and Healius is now in a position to increase the dividend pay-out and fund an on-market share buyback.
SMARTGROUP CORPORATION (SIQ) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett considers the company’s novated leasing and salary packaging a market leader in Australia. The rating is upgraded to Buy from Hold, as the broker changes its view on the outlook. Anticipated challenges with novated yields and softness in novated volumes are no longer a key issue. Ord Minnett suspects the yield story is moderating and volumes are currently improving. Target is raised to $7.70 from $6.80. The broker assesses the 2021 PE ratio of 12.6x signals an attractive entry point.
THE STAR ENTERTAINMENT GROUP (SGR) was upgraded to Accumulate from Hold by Ord Minnett
Star Entertainment shares are at an attractive buying level, Ord Minnett assesses, given cost management, margin expansion and likely suspension of the Barangaroo licence of rival Crown Resorts (CWN). The broker assumes the Barangaroo licence will be withheld temporarily, and notes FY21 expectations for Crown Resorts appear optimistic for a Melbourne recovery and a Sydney opening. Ord Minnett notes the merger discussions between the two persist but considers this an unlikely tie-up at this stage, unless Crown’s licence is revoked. Star Entertainment’s rating is upgraded to Accumulate from Hold and the target raised to $4.10 from $3.50.
UNITED MALT GROUP (UMG) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse upgrades its rating on United Malt Group to Neutral from Underperform with the target falling to $4.18 from $4.23. While expecting a below-market first-half update, the group will likely be an early beneficiary of a second-half re-opening, suggests the broker, led by a recovery in the on-premise channel. Reducing its capital expenditure burden and increasing the returns on incremental capital will raise the company’s attractiveness, adds Credit Suisse.
WEBJET (WEB) was upgraded to Buy from Hold by Ord Minnett
Stocks within the travel agency segment have declined materially since early December, largely because of valuation concerns. Ord Minnett believes valuations have returned to more reasonable levels and, as Webjet retains sound fundamentals, upgrades the rating to Buy from Hold. The B2C business is expected to have benefited from the gradual opening of domestic borders in the first half. Target is raised to $5.65 from $5.52.
WORLEY (WOR) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett had become more cautious on Worley’s prospects, as shown through the Lighten rating, and still was surprised by the company’s profit warning yesterday. The broker continues to see the near-term outlook as challenged, but post the share price fall, has decided to upgrade to Hold from Lighten. The price target falls to $10.60 from $11.50 (last increased in December) on sharply reduced forecasts. Ord Minnett reminds investors the company is suffering subdued conditions because of covid, and management had been communicating tough conditions since December last year. Staff numbers have now reduced a further -1,600 to 47,600.
See downgrades below.
In the not-so-good books
BHP GROUP (BHP) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse prefers Rio Tinto (RIO) over BHP Group given there is more optimism surrounding iron ore in the broker’s commodity deck and Rio has a higher earnings exposure to iron ore. Looking at better supply/demand fundamentals, the broker raises its iron ore price forecasts by circa 45% over the next three years, driving material earnings upgrades with operating income forecasts for BHP lifting 25-40% over the next three years. Credit Suisse downgrades its rating to Neutral from Outperform with the target rising to $42 from $40 target.
FIRSTWAVE CLOUD TECHNOLOGY (FCT) was downgraded to Hold from Add by Morgans
Second quarter results for Firstwave Cloud Technology shows to Morgans continued sales progress, albeit at a slower rate than initially expected. Growth in international annual recurring revenue (IARR) continues, and the broker expects things are largely on-track, despite slight delays from covid lock downs. The Speculative Buy rating is reduced to a Hold following a share price re-rating, while the target price of $0.179 is unchanged.
OROCOBRE (ORE) was downgraded to Hold from Add by Morgans
Lithium carbonate production at Olaroz was 3,727t of lithium carbonate (LCE), up 58% from the previous quarter, and 4% above the December 2019 quarter. The analyst highlights that with increased output (around 85% of nameplate) costs declined -9%. Morgans retains a long-term price of US$10,500/t for LCE. The broker also shortens the projected period of weaker prices and lowers short-term costs to generate a valuation and target price of $5.15. The rating is lowered to Hold from Add due to recent share price strength, and the target price is increased to $5.15 from $3.36.
POINTSBET HOLDINGS (PBH) was downgraded to Hold from Buy by Ord Minnett
PointsBet has impressed Ord Minnett, demonstrating its capabilities in the US. The broker assesses the Australian business had a “cracking” final quarter with turnover and net wins comfortably ahead of estimates. Still, while continuing to expect longer-term goals will be achieved, Ord Minnett now considers the business is trading around fair value and downgrades to Hold from Buy. Target is raised to $15.70 from $12.80.
TABCORP HOLDINGS (TAH) was downgraded to Neutral from Outperform by Credit Suisse
Tabcorp Holdings has received a number of M&A proposals related to its wagering and media business. Credit Suisse thinks of this as a near-term profit-taking opportunity. The broker believes the new board will be more willing to engage in corporate discussion but also thinks any transaction will likely be a lengthy process. Rating is downgraded to Neutral from Outperform, the target rising to $4.50 from $4.40.
VOLPARA HEALTH TECHNOLOGIES (VHT) was downgraded to Lighten from Hold by Ord Minnett
Volpara Health has acquired CRA Health, a breast cancer risk assessment platform based in the US. The acquisition has cost US$18m with a further US$4m payable upon a satisfactory performance and retention hurdles. Ord Minnett is still looking for an acceleration in organic growth but expects the enhanced business generated by the acquisition should drive better growth in FY22. As the cash balance has fallen, the impact on the valuation is to the downside and the broker downgrades to Lighten from Hold. Target is reduced $1.24 from $1.45.
WESTERN AREAS NL (WSA) was downgraded to Neutral from Outperform by Credit Suisse
Rating is downgraded to Neutral from Outperform with a target of $2.50. December quarter nickel production was below September quarter numbers, with the first half production equal to 41% of Western Areas’ FY21 guidance. Ore access was a major issue at the Flying Fox operation. Credit Suisse expects a reversion to more normalised extraction rates in the second half. Grade at the Spotted Quoll operation was also lower than targeted, expected to persist into the second half. The company expects production to be at the lower end its guidance range with higher costs.
WORLEY (WOR) was downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS
Credit Suisse downgrades the company formerly known as WorleyParsons to Neutral from Outperform. The rating drops to $9.20 from $11.70. Worley’s preliminary numbers are pointing towards aggregate revenue of $4.4-4.5bn, down -26% versus last year and -19% below Credit Suisse’s previous forecast. The company expects operating income of $200-210m, down -44% and below the broker’s estimate. With covid impacting demand in its end markets, Worley decided to reduce its staff numbers to 47,600 by the end of December, leaving the broker surprised at the magnitude of the deterioration in business conditions. Operating income forecasts for FY21 and FY22 have been reduced by -36% and -23%.
UBS was disappointed with the first half update. First half earnings are guided to be $200-210m, around -40% below consensus forecasts. Accelerating infection rates globally have meant further project deferrals albeit cancellations are limited. The second half is expected to be better as economic circumstances post the pandemic improve and cost savings are realised. UBS acknowledges it underestimated the disruptive impact of the second wave of infections in the northern hemisphere but still assumes a declining revenue outlook throughout FY22. Rating is downgraded to Neutral from Buy. Target is reduced to $10.80 from $14.45.
See upgrade above.
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.