In the good books
ADAIRS (ADH) was upgraded to Add from Hold by Morgans
Despite lowering EPS forecasts for FY22 after FY21 results, Morgans views Adairs as one of the cheapest retailers in the sector and upgrades its rating to Add from Hold. The price target eases to $4.20 from $4.46. Mocka was the only disappointment for the analyst, with second half margins falling materially half-on-half due to a lower gross margin (supply chain challenges) and investment in talent and marketing. Overall, FY21 produced a very strong period of growth in FY21, with heightened demand for product, material gross margin expansion and opex leverage, points out Morgans.
APOLLO TOURISM & LEISURE (ATL) was upgraded to Add from Hold by Morgans
The FY21 earnings (EBIT) loss was in line with expectations and Morgans believes the liquidity position looks set to see the company through to other side of covid. The rating rises to Add from Hold and the target increases to $0.539 from $0.351. Assuming key markets open up with increasing vaccination rates, the analyst can increasingly see the path to vastly improved earnings. The company has $48m in available liquidity currently. Morgans highlights even just a freely operating domestic environment would lift earnings materially versus FY21.
BORAL (BLD) was upgraded to Outperform from Neutral by Macquarie
According to Macquarie, Boral has reported a soft FY21 result in Australia, with the broker expecting covid to continue to impact on FY22 results. Group earnings were at the upper end of the guidance range, but Australia was impacted by volume falls and soft pricing. The broker expects a slow, gradual recovery, and notes markets are unlikely to get worse although covid impacts could linger. The broker has updated earnings per share forecasts by -34.3%, -12.7% and -5.6% through to FY24. The rating is upgraded to Outperform from Neutral and the target price decreases to $7.30 from $7.80.
CLEANAWAY WASTE MANAGEMENT (CWY) was upgraded to Neutral from Underperform by Credit Suisse
Cleanaway Waste reported FY21 underlying earnings of $535m, in line with Credit Suisse forecast and consensus, while underlying attributable net profit of $151m was below expectations, due to higher D&A than the broker had forecast. Mainly driven by increased landfill amortisation at Erskine Park, and full-year contribution from acquisitions and new contract wins, management expects D&A to step up further to -$290m (excl. Suez Sydney) in FY22. While Cleanaway faces a period of severe headwinds, the broker suspects earnings growth momentum could return from second half FY22. Credit Suisse has raised FY22 net revenue forecasts by 2%, to $2,330m on higher contribution from Solid Waste Services. Credit Suisse has upgraded Cleanaway to Neutral from Underperform and increased the target to $2.60 from $2.40.
HUB24 (HUB) was upgraded to Add from Hold by Morgans
Morgans assesses an in-line overall FY21 result, with the Platform revenue margin a slight miss on the back of revenue margin compression. Management stated the Administration fee pricing environment is stable and operating margin expansion is expected. In moving back to a long-term view, the analyst upgrades the rating to Add from Hold. It’s felt scale benefits will deliver a step-change in earnings over the next three years, with long-term growth supported by the entrenched nature of the platform within the adviser base. Morgans lifts its target price to $31.65 from $28.05.
MONADELPHOUS GROUP (MND) was upgraded to Buy from Hold by Ord Minnett
Monadelphous Group’s FY21 result fell shy of the broker and consensus by -4% and -5% and the company guided to lower FY22 revenue. On closer inspection, the broker upgrades to Buy from Hold. Target price eases to $11.50 from $12. Ord Minnett expects headwinds to continue this year (noting the unprecedented shortfall of skilled labour) but appreciates the company’s operational history, its strong market position in WA and healthy net cash balance. As conditions normalise, the broker expects the company will expand margins and profit, so given the recent sell-off, it favours buying now, spying 14% upside to its revised target price despite steady margins and a -16% fall in construction revenue.
SCENTRE GROUP (SCG) was upgraded to Outperform from Neutral by Credit Suisse and to Buy from Hold by Ord Minnett
Scentre Group’s first-half FY21 result was in line with Credit Suisse, with funds from operations (FFO) up 28% over the previous period to $463.4m, aided by lower credit loss provisions, partially offset by higher net interest costs, with no reversal of FY20 provisions boosting the result. With restrictions impacting the portfolio, as well as mandated rent relief in NSW and Victoria, Credit Suisse expects second-half FY21 to be weaker. The Group has not disclosed its expectations for likely rent relief. The broker has revised FY21-FY23 FFOps estimates by -12.8% and 1.1% respectively but sees scope for earnings recovery over the medium term, albeit not to pre-covid levels. Credit Suisse upgrades the group to Outperform from Neutral. Target is raised to $3.01 from $2.97.
Scentre Group’s first half FY21 funds from operations were up 28% from a year ago but shy of Ord Minnett’s forecast. The result was nevertheless of better than expected quality, with property net operating income stabilising at a higher level than assumed. Retail conditions broadly improved within the portfolio in the period, although new lockdowns cloud the second-half outlook, the broker notes. But sales and visitation data show that the centres rebound quickly once restrictions are eased. Current valuation implies a further drop in asset values, with no value for funds management and development. Hence the broker upgrades to Buy from Hold. Target rises to $3.20 from $3.00.
SOUTH32 (S32) was upgraded to Add from Hold by Morgans
The FY21 result was ahead of Morgans estimates, and the broker upgrades its rating to Add from Hold given recent share price weakness. FY22 guidance was considered mixed, leading to higher production assumptions across some operations along with higher costs. While cost pressures across the alumina smelters look like a key challenge heading into FY22, they look well covered by strength in metal prices, explains the broker. The target price rises to $3.30 from $3.15.
STOCKLAND (SGP) was upgraded to Hold from Lighten by Ord Minnett
FY21 results were in line with the top end of guidance and slightly below Ord Minnett’s forecast. The broker highlights the strong residential sales in the fourth quarter and the growing commercial development pipeline. FY22 guidance is in line with expectations. As the stock is trading in line with the target, raised to $4.60 from $4.20, Ord Minnett upgrades to Hold from Lighten.
SMARTGROUP CORPORATION (SIQ) was upgraded to Add from Hold by Morgans
Smartgroup Corp’s first half profit (NPATA) was in-line with Morgans estimate. Novated lease orders were around 3% above pre-covid levels though settlements lagged by circa -11% below pre-covid, given vehicle supply constraints, explains the broker. Current debt level allows for another special dividend or acquisitions, in the analyst’s view, with a 14.5c special dividend in the second half seen as likely. Major contract risk has largely passed, and add-on insurance earnings risk is now considered manageable. While expecting relatively low growth, Morgans thinks the current free cashflow yield and balance sheet strength are fairly attractive. The broker raises its rating to Add from Hold and lifts its target price to $8.35 from $7.88.
VIVA ENERGY (VEA) was upgraded to Outperform from Neutral by Credit Suisse
Capital allocation has strongly differentiated Viva Energy from Ampol (ALD) currently, with the company electing to undertake an $100m capital return and $40m buyback. Credit Suisse believes a new dividend policy also aims to increase certainty and has upgraded Viva Energy to Outperform from Neutral due to the solid underlying performance and capital management. Target rises to $2.25 from $2.14.
WESTERN AREAS (WSA) was upgraded to Neutral from Underperform by Credit Suisse
Western Areas’ FY21 result was broadly as expected, and Credit Suisse has upgraded the company to Neutral from Underperform having taken the view that existing shareholders have limited reason to sell while a takeover is being considered. The broker’s upgrade also acknowledges that an offer is not guaranteed and that a 19% premium is already built into the valuation. Credit Suisse notes while the key downside risk to the company is if an offer doesn’t materialise, the risk beyond this is if nickel prices decline as per the broker’s forecast. Upside is predominantly on 30%-plus premium offers. Price target increases to $3.25 from $2.
See downgrade below.
In the not-so-good books
AUSTAL (ASB) was downgrade to Neutral from Outperform by Credit Suisse
Austal’s FY21 result was in line with expectations, with margin improvement in the US offset by margin deterioration in Australasia, mainly due to low margin emergent support work in second half FY21. While management guided to $1.5bn, tracking lower on FY21, Credit Suisse views this as conservative, with near-term opportunities that the broker thinks could be crystallised in second half FY22: Notably, the Offshore Patrol Cutter (OPC) program that Austal is bidding for which is expected to be awarded in fourth quarter FY22. The broker has cut FY22 earnings estimates -16%, on lower US revenue contribution and lower margin in Australasia due to reduced throughput and low margin emergent work. Credit Suisse downgrades Austal to Neutral from outperform and the target price is lowered to $2.25 from $2.75.
ALUMINA (AWC) was downgraded to Neutral from Buy by Citi
Citi assesses a modest first half beat though second half dividends will likely be lower on higher capex and downgrades its rating to Neutral from Buy. The target price falls to $1.80 from $1.90 on higher assumed costs. The analyst feels the recent resource sector correction sees improved relative valuation elsewhere in the sector. Management expects ex-China aluminium production to increase in the second half 2021 and this will be positive for alumina prices, notes the broker.
CHARTER HALL GROUP (CHC) was downgraded to Neutral from Buy by UBS
FY21 results were ahead of UBS estimates. Earnings forecasts for FY22 are upgraded by 16% and the broker is impressed by guidance for more than 23% growth in FY22. UBS now forecasts $144m in performance fees in FY22. The broker notes the market has quickly moved to price in upgrades to guidance as the company has a strong track record. Rating is downgraded to Neutral from Buy on valuation grounds as the market adjusts to a new lower growth profile from elevated earnings. Target is raised to $19.30 from $17.00.
DELOREAN CORPORATION (DEL) was downgraded to Hold from Add by Morgans
Delorean Corp released a draft result for FY21 with an expected -$3.4m loss after tax, notes Morgans. While some timing issues were considered to impact, -$1.2m of additional costs (pre-tax) were incurred in energy retailing, covid impacts on projects and overheads. As a result, the broker downgrades the rating to Hold from Speculative Buy and lowers its target price to $0.20 from $0.25. The result highlights to Morgans the inherent risks in the businesses. Volatile electricity markets can disrupt energy retailing margins. Additionally, the analyst highlights the energy saving performance contract (EPC) businesses can also face unexpected cost blowouts, which are difficult to mitigate.
INGHAMS GROUP (ING) was downgraded to Hold from Add by Morgans
Despite an impressive FY21 result which beat expectations on a number of fronts, Morgans moderates forecasts given lockdowns in both Australia and New Zealand and uncertainty over 2H22 grain input costs. The rating slips to Hold from Add after a strong share rally. The broker still forecasts modest growth in FY22 given management’s expectations for volume growth and further operational benefits. Morgans would be buyers of the stock on any material weakness and increases its target price to $4.35 from $4.27.
NANOSONICS (NAN) was downgraded to Neutral from Buy by Morgans
Morgans sees a significant improvement in the second half and expects momentum to continue after the release of FY21 results. As a result of a strong share price the broker lowers its rating to Hold from Add while increasing its target price to $7.26 from $6.57. Unit sales were up 3,030 units with the second half up 20% on the first, which reflects business opening up and likely to continue in FY22, thinks the analyst. Management updated on its next major product a “flexible endoscope”, potentially due for commercial launch in 2023. The company also highlighted an increase in the total addressable market for Trophon2 to 60,000 units from 40,000 in the US. Other regions of Europe and ROW remain at 40,000 units each. The latter is likely understated, according to the broker.
NEWCREST MINING (NCM) was downgraded to Neutral from Outperform by Macquarie
Macquarie reports while Newcrest Mining’s full-year result was strong, with underlying earnings and free cash flow beating forecasts by 11% and 41% respectively, FY22 guidance on costs and capital expenditure were both higher than expected. The broker notes the capital cost for the Cadia 1-2 panel cave was 12% higher than forecast. Given higher cost guidance, Macquarie has reduced free cash flow generation to US$0.5bn over the next four years. Macquarie updates earnings per share forecasts by -15% in FY22, and -2%, 9%, -7% and -2% through to FY26. The rating is downgraded to Neutral from Outperform and the target price decreases to $27.00 from $30.00.
NIB HOLDINGS (NHF) was downgraded to Sell from Neutral by Citi and to Hold from Accumulate by Ord Minnett
International business was the big disappointment in nib Holdings’ FY21 results, according to Citi. The broker notes the international sector not only reported a loss, despite the company reiterating profitability earlier in the year, but nib Holdings is also pointing to the return of international travel as the inflection point for profit. Inbound international health insurance (iihi) appeared to be profitable in early May, but several high cost claims led to a -$5.9m loss in the fourth quarter according to Citi. Given the outlook on international, the broker has updated earnings per share forecasts by -4% for FY22 and -4% for FY23. Citi notes while the arhi business is likely to continue to benefit from some covid-related claims, these are likely temporary. The rating is downgraded to Sell from Neutral and the target price decreases to $6.30 from $6.40.
nib Holdings’ reported profit came in below Ord Minnett’s forecast. The result was strong in the Australian Residents Health Insurance division but disappointing in the International Inbound Health Insurance business, due to a sharp claims increase. FY22 suggests International will again be very weak and loss-making but nib appears set to keep a material portion of the large covid benefits expected in FY22 for shareholders to boost Residents margins and offset International pressures. On a net basis, this may make for a tougher premium setting. The broker pulls back to Hold from Accumulate, target falls to $7.00 from $7.08.
PSC INSURANCE GROUP (PSI) was downgraded to Neutral from Outperform by Macquarie
PSC Insurance Group’s FY21 result was a 3% beat over Macquarie’s underlying profit (NPATA) forecast, largely due to lower costs and interest expenses. On valuation and lower upside risk from acquisitions, the broker lowers its rating to Neutral from Outperform. The broker estimates the group has around $36m of acquisition capacity left compared to the mid-point of the gearing target range. FY22 guidance is for earnings (EBITDA) of $84m-$89m and profit of between $54m-$58m. Target rises to $4.10 from $3.85.
RELIANCE WORLDWIDE CORPORATION (RWC) was downgraded to Neutral from Buy by UBS
UBS notes, following a strong FY21 result, top line growth has started to moderate. Several factors suggest to the broker that Reliance Worldwide is unlikely to experience above-normal volume growth going forward. Combined with declining margins this results in the broker’s forecast for net profit to decline -9% in FY22. After a strong share price performance UBS downgrades to Neutral from Buy. Target is reduced to $5.90 from $6.16.
TPG TELECOM (TPG) was downgraded to Hold from Buy by Ord Minnett
Further to the first half results, Ord Minnett notes the company is confident regarding the market conditions, largely relying on the 5G roll-out in mobile and fixed wireless to drive revenue growth. As the stock has performed strongly and is nearing valuation the broker downgrades to Hold from Buy while raising the target to $6.85 from $6.50.
UNITI GROUP (UWL) was downgraded to Neutral from Outperform by Macquarie
FY21 results were ahead of Macquarie’s expectations. The broker notes cash flow is supporting de-gearing and capital flexibility. Margin improvements were driven by the core network platform. Despite material upgrades to the broker’s forecasts, the share price currently appears to reflect growth and the rating is downgraded to Neutral from Outperform. Target is raised to $4.13 from $3.36.
VIVA LEISURE (VVA) was downgraded to Neutral from Buy by Citi
FY21 results revealed the adverse impact of the lockdowns on earnings. Citi expects this will overshadow the network expansion opportunities over the longer term. With 85% of the locations temporarily closed and the company concentrating on cash preservation, the broker downgrades to Neutral from Buy. Target is reduced to $1.75 from $2.50.
WESTERN AREAS (WSA) was downgraded to Hold from Add by Morgans
Morgans downgrades its rating to Hold from Add with moves in the share price now expected to be driven by any takeover process and the potential emergence of other suitors. FY21 results were considered in-line with expectations. No dividend was declared for FY21. Refreshed production forecasts and an updated resource multiple valuation leads the analyst to lift the target price to $3 from $2.69.
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.