For the week ending Friday 5 February, there were 16 upgrades and 13 downgrades to ASX-listed companies by brokers in the FNArena database.
Deterra Royalties received two upgrades from Neutral to Buy from separate brokers, while Worley was on the receiving end of two downgrades to Neutral from Buy.
For Deterra Royalties UBS forecasts a 5% lift in world steel production in 2021, which drives a 3% lift in expectations for seaborne iron ore demand and a market likely to be in deficit. Credit Suisse is also positive on future iron ore pricing and the company’s South Flank ramp up.
Understandably disappointed by a first half update by Worley (around -40% below consensus forecasts), UBS admits to underestimating the disruptive impact from the second wave of infections in the northern hemisphere. Likewise, Credit Suisse was surprised by the magnitude of deterioration in business conditions.
Pinnacle Investment Management Group had the largest percentage earnings upgrades by brokers during the week. The group reported profit up 120% on the previous corresponding period, with significant performance fees the main driver. Forecast upgrades were largely driven by higher funds under management, increased second half net inflow assumptions and higher performance forecast fees in outer years.
Whitehaven Coal’s operating income forecasts for FY21-22 were upgraded by Credit Suisse during the week in the order of 29-41%. The broker upgraded internal near-term thermal coal price forecasts to incorporate higher demand from a La Niña-driven cold winter in the northern hemisphere.
Production generally exceeded broker forecasts in the December quarter for Sandfire Resources. According to Macquarie, copper prices are driving upside momentum. Ord Minnett also assesses potential upside to valuations for the Black Butte operation and/or T3 expansion.
Mineral Resources was another to receive a large percentage rise in earnings forecasts by brokers for the week. Macquarie raised the earnings outlook to reflect an increase in iron ore price realisations and a stronger volume in mining services.
Six of a possible seven brokers in the FNArena database reviewed earnings forecasts after a strong trading update from BlueScope Steel. The company also upwardly revised FY21 operating income guidance on the back of a stronger performance by all divisions.
There were some significant percentage declines in earnings estimates by brokers in the FNArena database last week. The two largest belonged to Karoon Energy and Cooper Energy. As mentioned last week, 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.
There was an earnings downgrade for Seven West Media at the hands of Credit Suisse, despite an upgrade to estimates to reflect its latest FY21 Metro TV ad market forecasts. However, the broker expects to see market declines of -2% for the first half.
Both Origin Energy and AGL Energy were also prominent in the table for percentage forecast earnings declines. The reasons for the former company’s woes are outlined above, while AGL Energy incurred a -$2.7bn post tax impairment charge at the first half results, due to the impact of lower long-term electricity prices.
Morgan Stanley lowered overall earnings and retained an Underweight rating for Galaxy Resources, after a December quarter report of production, shipments and costs. However, the broker raised the target price to $1.45 from $1.35 and upgraded forecast 2023 EPS after assuming a return to reserve Lithium Grade for mining Mt Cattlin.
Western Areas also had a rough week in terms of broker earnings forecasts. December quarter production revealed to Ord Minnett another difficult quarter for Forrestania, with reduced nickel volumes and increased costs because of lower grades and recoveries.
The broker also reduced remaining reserve estimates for Flying Fox by -15% and models a limited grade recovery at Spotted Quoll.
Finally, Worley pulled of an unenviable trifecta for the week. The company received a dual downgrade to rating, the largest percentage fall in target price and an appearance in the list for largest percentage downgrade to percentage earnings.
Total Buy recommendations take up 51.08% of the total, versus 39.99% on Neutral/Hold, while Sell ratings account for the remaining 8.93%.
In the good books
ADBRI LIMITED (ABC) was upgraded to Neutral from Underperform by Macquarie B/H/S: 0/5/2
Macquarie expects the momentum in housing will last a while and the longer-term concerns around the lack of immigration and the impact on sustainability are considered less pertinent in the current investment thesis. Accommodating monetary and fiscal policies are being met by a focus on consumer homes like never before, the broker observes. Macquarie upgrades to Neutral from Underperform as the improving market conditions offset ongoing structural risks for Adbri. Target is $3.05.
AMCOR LIMITED (AMC) was upgraded to Buy from Neutral by UBS B/H/S: 5/2/0
First half results beat UBS estimates. Earnings growth was supported organically along with the Bemis merger synergies and share buyback accretion. The positive trends have accelerated and Amcor has raised its FY21 constant currency growth guidance to 10-14%. Nevertheless, UBS expects growth rates will moderate as synergies from the merger fade. The broker is attracted to the company’s leading position across global consumer packaging markets and upgrades to Buy from Hold. Target is reduced to $16.60 from $16.66.
CSR LIMITED (CSR) was upgraded to Outperform from Neutral by Macquarie B/H/S: 5/1/0
Macquarie expects the momentum in housing will last a while and the longer-term concerns around the lack of immigration and the impact on sustainability are considered less pertinent in the current investment thesis. Accommodating monetary and fiscal policies are being met by a focus on consumer homes like never before, the broker observes. Macquarie has been surprised at the momentum in CSR but acknowledges the stock’s exposure to the strength in the Australian cycle and upgrades to Outperform with a $6 target.
GWA GROUP LIMITED (GWA) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/3/0
Macquarie reviews housing data, noting approvals continue to strengthen and this will underpin strong growth into FY22. Home building approvals are the highest levels in 65 years. Previously, Macquarie had expected a rebound in commercial was necessary for a further re-rating in the stock. While forecasts for commercial business are conservative, commentary from the company indicates it is outperforming broader market numbers by targeting specific categories. Macquarie upgrades to Outperform from Neutral and raises the target to $3.90 from $3.25.
MAGELLAN FINANCIAL GROUP LIMITED (MFG) was upgraded to Outperform from Underperform by Macquarie B/H/S: 3/3/1
In a quarterly review of fund managers Macquarie notes value rotation, mixed flows and foreign exchange headwinds drove funds under management (FUM). The broker doesn’t believe valuations are stretched, with central bank policies support of equity markets, driving an overweight view on the sector. Magellan Financial Group continues to impress the broker on flows, with a net inflow of $1.2bn for the December quarter. Despite recent underperformance driven by value rotation and appreciation of the Australian dollar, high watermarks are in reach and therefore performance fees are expected in the second half. The rating is upgraded to Outperform from Underperform and the target price lowered to $53 from $59.
WESFARMERS LIMITED (WES) was upgraded to Outperform from Neutral by Macquarie B/H/S: 2/3/1
Macquarie believes 2021 is likely to see continued strength in consumer spending buoyed by high asset prices, high savings rates and improving confidence. Consumer durable retailers are expected by the broker to remain beneficiaries of constrained travel and service consumption and consumers upgrading home appliances. Low interest rates could spur a housing cycle helping to support such housing-exposed stocks like Wesfarmers. Macquarie upgrades the company to Outperform, as it should benefit from increased housing turnover which spurs renovations. In addition, supply chain issues in the Kmart Group are considered to have improved significantly. Target price lifts to $60 from $49.70. Other tailwinds listed by the analyst include low interest rates, recovering consumer sentiment, personal tax cuts, accumulated household savings, continued restrictions on travel and stronger housing momentum in 2021.
In the not-so-good books
MACQUARIE GROUP LIMITED (MQG) was downgraded to Sell from Neutral by Citi B/H/S: 3/2/1
Citi believes Macquarie Group remains an attractive story, offering longer term structural opportunities and competitive advantage in real estate and green energy. However the rising A$ and a recent lack of commodity price volatility leave expectations looking stretched. Further acquisitions are unlikely to fill the gap, the broker suggests, and Biden’s planned reversal of the Trump tax cuts would create a material headwind. The broker thus downgrades to Sell from Neutral on valuation, dropping its target to $120 from $125.
ORIGIN ENERGY LIMITED (ORG) was downgraded to Neutral from Buy by Citi B/H/S: 3/4/0
Citi believes both Origin Energy and AGL Energy have misread the electricity market, assuming a $75MWh price signal for investment. The broker assumes $60MWh long term and doubts the two utilities have sufficiently hedged their volumes in FY22-23. Origin’s risk management of its use of the benchmark Japan Korea Market index has disappointed the broker, noting JKM can be hedged beyond two years. The company’s profit warning leads Citi to cut its target to $4.76 from $6.61 and downgrade to Neutral from Buy.
TREASURY WINE ESTATES LIMITED (TWE) was downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/4/1
No surprise December wine exports to China were down -98% but Hong Kong sympathised, and exports increased 340%. Unfortunately that’s a loss of -$170m of business for a gain of $31m, the broker notes. Malaysia. Indonesia, Thailand and Canada also tried to help, but off low bases. Net asset value provides a floor but China, covid and US restructuring remain as risks, the broker warns. Recent outperformance leads the broker to pull back to Equal-weight on Treasury Wine from Overweight. Target unchanged at $10.
UNITI GROUP LIMITED (UWL) was downgraded to Accumulate from Buy by Ord Minnett B/H/S: 1/0/0
Unity Group reported an impressive first-half operating cash flow of $26.6m, observes Ord Minnett, up 47% versus the second half of FY20 and beating the broker’s expectations. The broker highlights the beat was driven by strong cash flow conversion, rising momentum in the telco businesses and a buoyant 1-month contribution from OptiComm. Evidence of better housing activity supports Ord Minnett’s private fibre construction forecasts for FY21-22 and de-risks the execution risks around the OptiComm transaction. Even so, Ord Minnett reduces its rating to Accumulate from Buy given the recent share price strength. Target rises to $2.06 from $1.95.
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.
