For the week ending Friday 27 August, there were 24 upgrades and 26 downgrades to ASX-listed companies by brokers in the FNArena database.
Several companies received ratings changes from two separate brokers. Iluka resources, Qube Holdings and Scentre Group had twin ratings upgrades while nib Holdings, experienced dual downgrades.
The recipient of the largest percentage rise in forecast earnings from brokers in the FNArena database was Pilbara Minerals. FY22 guidance surprised Ord Minnett to the upside, with improving spodumene shipments expected, while capital expenditure guidance was also lower than anticipated. However, the stock has already run hard and the broker downgrades to Hold from Buy.
Next up was Whitehaven Coal with FY21 operating earnings better than Macquarie expected. Also, Citi strategists raised second half 2021 coal price forecasts, with FY22 thermal coal estimates also rising by 11%. Meanwhile, Morgans forecasts net cash by the end of FY22, supporting dividend upside.
Last week, Star Entertainment Group was in receipt of the largest percentage downgrade to earnings forecasts from brokers in the FNArena database. Despite this, Morgans assessed it was a good performance by management to keep earnings flat in the midst of a complete disappearance of earnings from the International VIP business. The broker feels it’s important to look past the next few months to the potential of the business coming out of lockdown.
Finally, oOh!media’s first half revenue and earnings beat Ord Minnett’s forecasts though lockdowns are expected to impact for an indeterminate length. Macquarie agrees and lowers EPS forecasts for FY21-23 by -88%, -39% and -37%, respectively. It’s thought Fly and Locate (offices) may also remain structurally impacted post-covid. Though, with fixed costs now captured, any recovery will result in material positive operating leverage, points out the analyst.
Total Buy recommendations take up 53.08% of the total, versus 39.19% on Neutral/Hold, while Sell ratings account for the remaining 7.73%.
In the good books
A2 MILK COMPANY LIMITED (A2M) was upgraded to Buy from Neutral by Citi B/H/S: 3/1/2
Citi came away from FY21 results encouraged by the resolution of the excess and dated inventory position, restructured distributor agreements, as well as improved inventory tracking and traceability systems. The rating increases to Buy from Neutral. Most importantly for the analyst, the China brand health metrics remain positive, a sign that the brand is stronger and more resilient than previously thought. The target price rises to $7.20 from $6.05 due to higher net cash, lower capex and a roll-forward of valuations to FY23. Citi highlights the company is working on innovations to improve its formulation and reduce reliance on a single product.
ADBRI LIMITED (ABC) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/5/1
First half results beat Macquarie’s expectations. Adbri is progressing with increasing its infrastructure exposure, the broker ascertains. Macquarie believes market conditions have bottomed and most of the structural headwinds such as lime and NSW cement are now more evident in terms of the impact. Valuation is also more supportive and the broker upgrades to Outperform from Neutral. Target is raised to $3.80 from $3.20.
ARDENT LEISURE GROUP LIMITED (ALG) was upgraded to Buy from Sell by Ord Minnett B/H/S: 2/0/0
Ardent Leisure reported a net loss of -$95.9m in FY21, an improvement on FY20 and better than Ord Minnett estimated. The broker believes the results have eased a number of its key concerns regarding the stock. Strong trading has continued into early FY22, signalling demand is less led by stimulus than previously thought. Earnings are now returning to record levels, which reduces the concern that the private equity partner will be able to exercise the option over 51% of Main Event and reap the majority of upside from the recovery. Moreover, a sale of Main Event would mean Ardent Leisure moves to a significant net cash position after some significant financial hurdles. All up, this is enough for Ord Minnett to multiple upgrade to Buy from Sell. Target is raised to $1.75 from $0.75.
AFTERPAY LIMITED (APT) was upgraded to Neutral from Sell by UBS B/H/S: 3/3/0
Top-line metrics for FY21 were known following the trading update in July while UBS was mostly surprised by the 159% increase in second half sales and marketing costs. Although the higher costs would have originally disappointed the market, the focus is now on the proposed acquisition by Square. The broker has now assumed the acquisition as a base case valuation and upgrades to Neutral from Sell, raising the target to $140 from $42. UBS believes the ambitions for both companies are complementary and overlapping and this may attract regulatory scrutiny that is not priced in by the market.
BLACKMORES LIMITED (BKL) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/4/1
Blackmores missed consensus FY21 earnings expectations, with A&NZ earnings down -31% on the previous period due to lower volumes from retail shuts and fewer international students and daigou shoppers. China achieved significant underlying growth aided by the company building a new e-commerce capability, and international earnings grew 89% in the second half FY21 versus second half FY20, with covid introducing many new consumers to the vitamin/supplement category through immunity aids. Credit Suisse notes with Blackmores staking out bold 2024 revenue targets in its FY21 result presentation, the broker recognises the company has advanced to the master class of projecting company value. Credit Suisse notes Blackmores has laid out a stretch, but achievable, 2024 revenue target that was $100m (15%) above the broker’s previous modelling. Credit Suisse upgrades Blackmores to Outperform from Neutral rating and the target price increases to $100 from $77.
FINEOS CORPORATION HOLDINGS PLC (FCL) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/0/0
Fineos Corportion’s FY21 result outpaced Ord Minnett’s forecasts by 4% triggering upgrades, thanks to strong organic growth, topped up by acquisitions. Covid hampered new customer additions but the company compensated with work from existing customers, highlighting the potential of the upgrade business. The company guides to a stronger FY22, which should include a contribution from the newly acquired Spraoi as well as new customers. The broker notes the strong cross-sell and up-sell pipeline and spies looming growth expenses. Ord Minnett upgrades to Accumulate from Hold. Target price rises to $4.54 from $4.01.
ILUKA RESOURCES LIMITED (ILU) was upgraded to Buy from Neutral by Citi and to Neutral from Underperform by Credit Suisse B/H/S: 2/3/0
Iluka Resources’ first half underlying earnings were in-line with consensus expectations, although an -8% miss on Citi’s forecast. Net profit was -20% below expectations, but the broker notes results were impacted by non-cash inventory moves that were difficult to forecast. Looking forward, Citi notes the SR1 kiln restart is now committed. Both the Narngulu MSP and SR2 Kiln are at full capacity, and Citi notes production will likely constrain second half sales. Citi increases underlying earnings forecast for FY23 by 14%. The rating is upgraded to Buy from Neutral and the target price increases to $10.00 from $9.10.
Principally driven by $17m non-cash inventory, Iluka Resoures first half FY21 underlying net profit ($135m) was -15% lower than consensus ($159m), and a 12cps interim dividend was also softer than consensus expectation (13.8cps). Iluka announced a restart of the second synthetic rutile kiln. While Credit Suisse believes the company is rich in catalysts, the broker believes the key catalyst is the feasibility study for a rare earths refinery due early 2022, for which the broker believes the Street has high hopes. Credit Suisse upgrades Iluka Resources to Neutral from Underperform and the target increases to $8.80 from $7.
LINK ADMINISTRATION HOLDINGS LIMITED (LNK) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/1/0
Ord Minnett observes FY22 guidance for a flat EBIT outcome seems difficult to achieve. There is valuation appeal in the stock, nevertheless, and recent corporate interest and the $150m share buyback could help it recover some ground. Hence, the broker upgrades to Accumulate from Hold, while reducing the target to $5.00 from $5.75.
See downgrade below.
QUBE HOLDINGS LIMITED (QUB) was upgraded to Outperform from Neutral by Credit Suisse and to Hold from Reduce by Morgans B/H/S: 3/3/0
On the back of a strong FY21 result, upbeat outlook, and expected buyback from Moorebank proceeds, Credit Suisse has upgraded Qube Holdings to Outperform from Neutral, and the target price increases to $3.30 from $3. Qube is due to complete the sale of Moorebank warehousing to the Logos consortium in December with $1.36bn of proceeds on completion and $312m deferred. The broker makes minimal changes to FY22 net profit forecast of $197m (23% growth) but trims FY23 -4% and FY24 -9% on lower margin assumptions. Credit Suisse forecasts $600m of share buyback to be announced at first half FY22 results.
Morgans upgrades its rating to Hold from Reduce and raises its target price to $2.90 from $2.80. This comes after the FY21 result delivered growth in cashflows that were stronger than expected though earnings were weaker than forecast. Management is confident of solid earnings growth in FY22, while the Moorebank Property sale will allow for growth and capital management opportunities. The broker feels the earnings growth and balance sheet stories may support the stock.
In the not-so-good books
AUSTRALIAN UNITY OFFICE FUND (AOF) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/1/0
Australian Unity Office Fund reported FY21 funds from operations in line with Ord Minnett. FY22 guidance nevertheless disappointed, given the potential plan to divest of an asset in Paramatta in the third quarter, albeit marketing is still ongoing. The REIT remains in discussions with Telstra with regard a block in Adelaide, but covid is slowing the process. There was no new news on the progress of the proposed merger with the unlisted Diversified Property Fund. The REIT trades at an attractive discount to asset value but given uncertainty regarding both lease expiries and the merger, the broker downgrades to Hold from Accumulate. Target falls to $2.41 from $2.43.
COOPER ENERGY LIMITED (COE) was downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/2/1
Cooper Energy’s FY21 result and FY22 guidance missed consensus forecasts. Morgan Stanley downgrades the company to Underweight from Equal-weight to reflect rising risks and uncertainty around Project Sole and the costs associated with the Basker Manta Gummy abandonment. Low production and Cooper’s requirement to purchase gas on market to meet contract obligation, thanks to the underperforming Project Sole, is expected to continue to dog the company. The broker expects some improvement in the share price, although less than peers. Morgan Stanley prefers Senex Energy (SXY). Target price is 23c. Industry view: Attractive.
FLIGHT CENTRE TRAVEL GROUP LIMITED (FLT) was downgraded to Lighten from Hold by Ord Minnett .B/H/S: 0/5/1
Ord Minnett assesses Flight Centre faces its greatest challenge over coming years not just recovery from the pandemic but structural change in the travel agency revenue model in Australasia. The broker’s analysis suggests a combined impact of downward pressure on commissions, overriders and GDS income will have a material impact on margins. The main task is reducing costs at a sufficient rate in order to protect earnings. Ord Minnett downgrades to Lighten from Hold on valuation grounds and reduces the target to $13.72 from $15.06.
HANSEN TECHNOLOGIES LIMITED (HSN) was downgraded to Hold from Buy by Ord Minnett B/H/S: 0/1/0
FY21 results were in line with guidance and forecasts. No earnings guidance was issued for FY22. The revenue performance in FY21 was boosted by the contract with Telefonica. The exclusive due diligence period for the proposed takeover by BGH Capital has been extended and Ord Minnett considers the prospect of a competing bid now unlikely. Hence, the rating is downgraded to Hold from Buy. Target is reduced to $6.50 from $7.50.
LINK ADMINISTRATION HOLDINGS LIMITED (LNK) was downgraded to Neutral from Buy by Citi B/H/S: 4/1/0
The analyst notes earnings (EBITDA) were a miss, driven by lower revenues, particularly in corporate markets, while guidance for operating earnings (EBIT) to be “broadly in line with FY21” is thought soft compared to the analyst’s forecast for 16% growth. Citi lowers lower EPS forecasts considerably, despite factoring in the announced $150m buyback. Although the stock looks relatively inexpensive if Pexa Group (PXA) is valued at market, it’s seen as a likely value trap for now. The broker lowers its rating to Neutral from Buy and its target price to $4.75 from $5.70.
See upgrade above.
NATIONAL STORAGE REIT (NSR) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/3/1
FY21 earnings were slightly below Ord Minnett’s forecast. FY22 guidance is for at least 10% growth in underlying earnings per share. Ord Minnett likes the consolidation (National Storage completed 25 acquisitions in FY21) and significant improvement in operating metrics and believes storage remains undervalued in Australia. Following a strong run up the share price, the rating is downgraded to Hold from Accumulate. Target is raised to $2.30 from $2.20.
1300 SMILES LIMITED (ONT) was downgraded to Hold from Add by Morgans B/H/S: 0/1/0
1300 Smiles has received a takeover offer from Abano Healthcare. Under the offer non-founding shareholders will receive $8.00 per share and founder shares will be offered $6.33. The offer is currently subject to Foreign Investment Review Board approval, which Morgans expects to be likely, as well as a number of clauses, including that founders retain 26.2% of their shares. Morgans considers the offer to be fairly valued and has upgraded the target price accordingly. The rating is downgraded to Hold from Add and the target price increases to $8.00 from $7.82.
PILBARA MINERALS LIMITED (PLS) was downgraded to Hold from Buy by Ord Minnett B/H/S: 1/3/0
FY21 underlying operating earnings (EBITDA) were in line with Ord Minnett’s forecasts. FY22 guidance has surprised to the upside, with spodumene shipments expected to be 440-490,000t. Capital expenditure guidance is also lower than anticipated but has led to the broker pushing out of the next expansion at Pilgangoora. Despite the strong outlook for lithium markets and the company’s positioning, the stock has run hard and Ord Minnett downgrades to Hold from Buy. Moreover, the broker sees no significant stock-specific catalysts on the horizon. Target is reduced to $2.40 from $2.50.
REECE LIMITED (REH) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/0/4
Subsequent to the beat on earnings, the broker increases its target to $18.00 from $16.00. But on 12-month share price outperformance, downgrades to Lighten from Hold.
WAGNERS HOLDING CO. LIMITED (WGN) was downgraded to Neutral from Outperform by Macquarie B/H/S: 2/1/0
FY21 results marginally missed Macquarie’s forecasts. Yet the CMS performance was strong and management remains confident about volume growth. On the other hand, market capacity issues in south-east Queensland continue to put pressure on concrete prices. The company remains hopeful that the easing impact of the pandemic will support a gradual recovery in infrastructure expenditure. Macquarie downgrades to Neutral from Outperform. Target is reduced to $2.05 from $2.25.
WISETECH GLOBAL LIMITED (WTC) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/3/0
Revenue momentum, partly masked by forex headwinds, and the benefits of the broader business strategy coming together were both clearly evident at WiseTech Global’s FY21 result, comments Credit Suisse. Credit Suisse expects continued revenue growth and margin expansion but notes the rate of margin expansion has likely peaked, and, particularly after the FY22 cost-out program, cost growth is likely to return to higher levels.
Credit Suisse notes FY22 guidance of $600-635m requires 18% to 25% reported revenue growth and 21% to 28% forex neutral growth. The broker raises FY22, FY23, and FY24 underlying earnings per share (EPS) by 10%, 8%, and 7% respectively. Revised FY22 revenue and earnings forecasts of $620m and $273m are roughly at guidance midpoints. Credit Suisse downgrades to Neutral from Outperform and the target increases to $45 from $34.
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.
