In the good books
JAMES HARDIE INDUSTRIES (JHX) was upgraded to Buy from Neutral by Citi
The first quarter result revealed a strong uptake of high-value product amidst volume growth. Citi expects earnings momentum will remain in the company’s favour amid a multi-year recovery in US housing. While expectations are running high the broker still considers the stock attractive on a PE relative basis and upgrades to Buy from Neutral. The medium-term prospects of Colorplus and textured panels underpin forecasts for ASP growth of 6.8% and 6.3% in FY23 and FY24, respectively. Target is raised to $56.20 from $46.20.
SUNCORP GROUP (SUN) was upgraded to Outperform from Neutral by Credit Suisse
FY21 results were very strong, Credit Suisse observes. Suncorp Group has maintained guidance for an FY23 return of 10-12% and a costs-to-income ratio of 50% for the bank. Credit Suisse expects further growth in earnings and distributions, given the excess capital. With mortgage processing times now better than most major banks and a higher retention than market average, the broker expects strong growth from FY22 onwards while benign bad debts should add further upside. Rating is upgraded to Outperform from Neutral and the target raised $14.00 from $12.20.
See downgrade below.
In the not-so-good books
ACCENT GROUP (AX1) was downgraded to Sell from Neutral by Citi
Citi envisages the current multiple of 22x FY22 price/earnings reflects little risk stemming from recurring lockdowns, disrupted sales and casual employment. There is also less stimulus in the economy compared with the same time in 2020 amid increasing supply chain risks. For example, key supplier Adidas has recently indicated it was affected by factory lockdowns in Vietnam. The broker now expects like-for-like sales in the first half will decline by -7.5%. Rating is downgraded to Sell from Neutral and the target reduced to $2.50 from $3.10.
ARB CORPORATION (ARB) was downgraded to Neutral from Buy by Citi
Citi considers there is long-term potential in the US expansion yet a 53% rise in the share price over the year to date means the rating is downgraded to Neutral from Buy. Risks in terms of a slower-than-expected contribution from the Ford partnership or weaker conditions in the Australian aftermarket as well as the supply chain challenges are not adequately factored in, the broker suggests. Target is $47.15.
AURIZON HOLDINGS (AZJ) was downgraded to Underweight from Equal-weight by Morgan Stanley and to Hold from Add by Morgans
While Aurizon Holdings’ near-term earnings and growth outlook are sound, it is Morgan Stanley’s view that a fossil fuel reliance will impact investor appeal. The broker anticipates continued share price underperformance. Morgan Stanley highlights Aurizon Holdings’ high earnings linkage to fossil fuels of around 88% will see the stock excluded from many investor mandates. The company reported underlying earnings for FY21 for $903m, up 1% on Morgan Stanley’s forecast, with net profit of $533m, a 6% beat on the broker’s forecast. The rating is downgraded to Underweight and the target price decreases to $3.92 from $4.03. Industry view: Cautious.
Aurizon Holdings FY21 result beat Morgans expectations, while first-time FY22 earnings guidance was in-line. The broker lowers its rating to Hold from Add on recent share price strength and lowers the target price to $4.06 from $4.09. The analyst reminds investors of the balance between long-term sustainability issues facing Coal and Network, and the generation of strong cashflow to support a pivot into Bulk. The second half dividend of 14.4 cps (70% franked) was above Morgans forecast of 13.7cps.
FLIGHT CENTRE TRAVEL GROUP (FLT) was downgraded to Neutral from Outperform by Macquarie
Macquarie reviews forecasts ahead of the FY21 result on August 26. The earnings recovery is pushed out by 6-9 months because of prolonged border closures. More emphasis is likely to be placed on the corporate business where Macquarie anticipates gains in market share. The business remains loss-making for the short term and break-even is now expected in FY23. Target is reduced to $15.50 from $17.50 and the rating is downgraded to Neutral from Outperform.
MEGAPORT (MP1) was downgraded to Sell from Hold by Ord Minnett
FY21 saw some lumpy growth, notes Ord Minnett, as it was affected by currency movements and covid-19, although the company finished on a high note with record fourth-quarter growth. The broker lowers the rating to Sell from Hold and the target price falls to $15 from $15.50, as growth investment may take time to bear fruit. These investments include in the indirect sales channel and the continued focus on new product developments. In a largely pre-released result, the company reported FY21 revenue of $78.3m, up 35% on FY20 and in-line with the broker’s forecast. The reported net loss of -$55m widened on a year ago, driven largely by unrealised currency losses, explains the analyst.
NATIONAL AUSTRALIA BANK (NAB) was downgraded to Hold from Add by Morgans
Due to recent share price strength the broker lowers its rating to Hold from Add and the $27.50 target price is unchanged. Morgans sees a marginal benefit in the wider context, of the agreement to purchase Citigroup’s Australian consumer business. Pre-tax cost synergies of circa -$130m pa are expected to be realised over three years, with the majority expected to be achieved in the first two years.
RESMED (RMD) was downgraded to Neutral from Outperform by Macquarie
Earnings in the fourth quarter were slightly below Macquarie’s estimates. Management has indicated potential upside from the recall of the Philips device. Combining expectations for higher market share with revised assumptions in relation to masks/accessories revenue for new patients associated with the recall, Macquarie raises the target to $37.40 from $34.85. As a result of a 14% outperformance to the ASX200 since June, Macquarie downgrades to Neutral from Outperform.
SPARK NEW ZEALAND (SPK) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse expects Spark New Zealand will deliver operating earnings at the top end of guidance when it reports on August 18. As part of the results, management is also due to update the market on a review of the infrastructure assets. Other areas the broker will be scrutinising include commentary on the shift from pre-paid to monthly payment subscribers and the resulting revenue benefit, as well as the take-up of fixed wireless plans. With the stock now trading through valuation the broker lowers the rating to Neutral from Outperform. While the upcoming infrastructure review has potential to be a positive catalyst Credit Suisse does not expect immediate monetisation. Target is steady at $4.50.
SUNCORP GROUP (SUN) was downgraded to Neutral from Buy by Citi
Following Suncorp Group’s strong rally and with further significant improvement unlikely before second-half FY22, Citi pulls back to Neutral from a Buy and the target price lifts to $12.80 from $11.80. Following underlying insurance margins of 7.4% in second half FY21, the group has now clarified that it expects margins to remain broadly in line or “hopefully a little better” in first-half FY22, before expanding in second half FY22 as strategic initiative benefits kick in. While Citi still believes the group’s banking target of a 50% cost to income ratio will be hard to achieve, the broker sees the return to growth in mortgage lending as a positive sign. The $250m buyback is largely as anticipated and is now factored into Citi’s forecasts, and the broker continues to expect the group to deliver on its FY23 margin guidance of 10%-12%.
See upgrade above.
Ord Minnett lithium stock upgrades
Ord Minnett has raised its long term-lithium spodumene price assumption by 31% to US$850 per tonne from US$650/t. Ord Minnett has also launched a new supply-demand model, highlighting a tight market for the foreseeable future, leading to an increase in the broker’s medium-term price forecasts. After factoring in higher price forecasts, the broker’s valuations have increased materially for the lithium miners. Ord Minnett notes the lithium commodity complex is one of the few remaining in the broker’s coverage where it sees meaningful potential upside in the medium-term, given the strong demand backdrop.
MINERAL RESOURCES (MIN) was upgraded to Buy from Hold by Ord Minnett
Based on these updates, Ord Minnett has upgraded Mineral Resources to Buy from Hold, with the target price lowering to $59.03 from $66.00.
PILBARA MINERALS (PLS) was upgraded to Buy from Hold by Ord Minnett
Based on these updates, Ord Minnett has upgraded Pilbara Resources to Buy from Hold, with the target price increasing to $2.10 from $1.60.
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.