There have been 16 upgrades and 8 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
ARB Corporation Limited (ARB) was upgraded to Neutral from Underperform by Credit Suisse and Outperform from Neutral by Macquarie
First half results were in line with estimates and the pre-release. Credit Suisse upgrades to Neutral from Underperform on recent share price weakness.
Upside is envisaged as further traction is obtained in the US and motor vehicle sales improve. The broker is not excessively bullish, being uncertain whether a very strong second half result will be bettered.
The US remains key to the stock over the next couple of years, and Credit Suisse retains a $40.60 target.
Following interim results, Macquarie upgrades its rating for ARB Corp to Outperform from Neutral. The outlook is considered positive based upon a strong order book, ongoing investment across the business and improved visibility for margins.
The first half delivered solid revenue growth for all segments including Original Equipment revenue, which rose by 51%, while exports revenue grew 40%. The target price is adjusted down -2.6% to $48.
Bluescope Steel Limited (BSL) was upgraded to Overweight from Equal-weight by Morgan Stanley
BlueScope Steel’s December first-half result met consensus and Morgan Stanley’s forecasts but second-half guidance disappointed consensus by -18%.
Earnings (EBIT) hit record highs but cash flow fell well shy of the broker’s forecasts due to a $1.1bn working capital build as higher inventories and inventory prices met higher receivables.
Uncertainty surrounds US spreads after US steel prices fell -45% from peaks but the broker expects stabilisation will soon occur as the industry rationalises and consolidates, supporting higher prices and a normalisation of spreads.
FY22 EPS forecasts fall to match guidance but Morgan Stanley upgrades to Overweight from Equal Weight, believing the value in the stock (company), with its net cash balance sheet and strong cash flow generation, is impossible to ignore.
Target price rises to $25 from $23.50. Industry view: In-Line.
Cochlear Limited (COH) was upgraded to Buy from Neutral by Citi, Equal-weight from Underweight by Morgan Stanley, and Add from Hold by Morgans
Cochlear’s December first-half result outpaced Citi’s forecasts and management upgraded guidance by 5% but advised of a softening in the net profit after tax margin to below the company’s long-term target of 18% in FY22 and FY23.
Covid continued to hamper sales through operations but the company is expected to counterbalance this with a switch to replacements – Services and Acoustics (services revenue was a key feature of the result as was 40% revenue growth from Ossia).
EPS forecasts rise 5% for FY22, fall -1% for FY23 and rise 1% for FY24.
Buy rating retained. Target price rises to $235 from $220.
Cochlear’s December first-half result missed consensus and Morgan Stanley’s forecasts at the top line, as covid continued to hamper trade.
But margins managed to outpace thanks to a reduction in operating expenses and research and development. EPS outpaced by a decent clip.
Management reiterated FY22 guidance (which the broker believes to be conservative) and predicts a reduction in net profit margins with implants continuing to be stymied by hospital staffing shortages.
Despite this, the broker says the debate is shifting to robust services and upgrades revenue as a counterbalance. Upgrade to Equal-weight from Underweight. Target price rises to $208.00 from $180. Industry view: In-line.
Cochlear delivered better than anticipated first half results, with Morgans noting improving clinic access allowed for strong sales growth in the Services and Acoustics segments which were up 21% and 40% respectively.
Expect the second half to be weighted to the same segments as operating theatre capacity remains constrained. Capacity and staffing issues continue to drag but easing restrictions should see a surgical backlog addressed, increasing optimism in the company’s outlook.
The rating is upgraded to Add from Hold and the target price increases to $233.20 from $214.50.
Coles Group Limited (COL) was upgraded to Neutral from Sell by UBS
Following 1H results for Coles Group, UBS upgrades its rating to Neutral from Sell as Supermarkets earnings (EBIT) exceeded both the broker’s and the consensus forecast. In addition, Liquor and a lower net interest assumption drive the target to $17.25 from $16.50.
Despite market share concerns, the analyst now has greater confidence in cost management for Supermarkets. The Smarter Selling cost saving program is thought to have offset a negative channel shift to online and helped reduce the negative covid impact.
Lendlease Group (LLC) was upgraded to Equal-weight from Underweight by Morgan Stanley
Lendlease reported profit below Morgan Stanley’s forecast, but the broker admits profit is difficult to forecast given the lumpiness of development projects. Investments and Construction were in line with estimates, but Development earnings came in well short.
The broker notes the all-important goals for FY24 remain intact, with return on equity and return on invested capital targets reiterated. Of the $16bn of current work in progress, $7bn is slated for completion in FY24.
Greater confidence in FY24 goals being achievable has the broker upgrading to Equal-weight from Underweight. Target unchanged at $11.40. Industry view: In-Line.
Orora Limited (ORA) was upgraded to Buy from Neutral by Citi
Orora’s December-half result beat consensus and Citi’s forecasts by 10%, and the broker notes that business has stabilised, which traditionally augurs well for packaging companies, and upgrades to Buy from Neutral.
Citi tempers optimism, however, noting areas are only just delivering profit at the earnings (EBIT) level; can supply is constrained; and the company appears to be trading at capacity.
Target price rises to $4.07 from $3.35.
QBE Insurance Group Limited (QBE) was upgraded to Buy from Accumulate by Ord Minnett
While QBE Insurance Group’s FY21 underlying profit was -1.6% shy of Ord Minnett’s forecast, strong rate and growth written premium (GWP) momentum was in evidence. As momentum is expected to continue in 2022, the rating increases to Buy from Accumulate.
The analyst believes new management will seek a more stable earnings trajectory, which probably means more measured, but more sustainable, improvements for margins.
While guidance has been reset for only modest improvement, the analyst believes it is somewhat conservative in relation to margins. The target price of $15.50 is unchanged.
Steadfast Group Limited (SDF) was upgraded to Buy from Accumulate by Ord Minnett
First half earnings were slightly weaker than Ord Minnett expected. FY22 guidance has been upgraded to underlying EBITA of $330-340m, given organic trends.
The broker notes, overall, guidance for earnings per share and EBIT increases 2.5% for FY22, with a strong second-half skew because of the timing of acquisitions.
Ord Minnett also observes a high premium rate currently favours brokers and underwriting agencies. Rating is upgraded to Buy from Accumulate and the target is raised to $5.50 from $5.44.
SomnoMed Limited (SOM) was upgraded to Add from Hold by Morgans
SomnoMed has introduced its “Rest Assure” product that enables its devices to measure efficacy and compliance measures, filling a major gap in CPAP and COAT therapy, says Morgans.
The product provides a sleep score similar to ResMed’s (RMD) AirView platform.
Morgans considers the device to be a potential game-changer, boosting the company’s allure as a takeover target.
Morgans upgrades to Add from Hold, believing the product will improve SomnoMed’s growth prospects. Target price eases to $2.51 from $2.61.
Super Retail Group (SUL) was upgraded to Add from Hold by Morgans
Following yesterday’s -9.5% share slump upon the release of 1H results by Super Retail Group, Morgans sees a buying opportunity and raises its rating to Add from Hold. The target only falls to $13.60 from $13.80 and no major changes are made to earnings (EBIT) forecasts.
First half earnings were 3% above the analyst’s forecast, while sales were considerably better than expected.
Higher costs for freight and promotional activity were offset by selective price increases and efficiencies in sourcing and inventory management, explains the broker.
Tyro Payments Limited (TYR) was upgraded to Outperform from Neutral by Macquarie
First half results missed estimates because of higher costs. Macquarie points out the market appears to have not reflected the -$2.3m in Medipass expenses. Cost pressures are expected to continue in the second half, although not to the same degree.
The broker highlights issues around the ability to generate operating leverage in the competitive payments industry amid limited pricing power and elevated demand for technical staff.
Still, given a healthy balance sheet, Macquarie considers the share price movement an overreaction and upgrades to Outperform from Neutral. Target is reduced to $2.15 from $3.50.
Uniti Group Limited (UWL) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett was underwhelmed by the first half result, amid delays that reduced the number of completed fibre connections. Nevertheless, the broker considers the share price reacted unnecessarily to future planned capital expenditure to upgrade the Velocity network.
The broker believes Uniti Group is justified in investing ahead of the potential growth, as it crystallises a 7-10-year pipeline of work. The broker upgrades to Buy from Accumulate and reduces the target to $3.88 from $4.21, given the marginally lower earnings base.
Xero Limited (XRO) was upgraded to Neutral from Underperform by Macquarie
Macquarie notes the stock is now trading below $100 a share and its fundamental DCF valuation. In the current environment, the broker also notes online accounting peers have experienced a de-rating.
Yet, Xero has traditionally traded at a growth-adjusted premium to peers and the broker assesses the downside risk is limited.
Value is anticipated emerging and Macquarie upgrades to Neutral from Underperform. Moreover, the broker suggests longer-term investors should start reviewing the stock at current valuations. Target is reduced to $100 from $130.
In the not-so-good books
Magellan Financial Group Limited (MFG) was downgraded to Underperform from Neutral by Macquarie and Lighten from Hold by Ord Minnett
Magellan Financial Group’s December-half result outpaced Macquarie’s forecasts, thanks to a beat on fee margins and profits (partly from Barrenjoey).
Macquarie upgrades outer year earnings by roughly 3% to reflect the fee beat.
Magellan Financial is toying with capital management options, but the broker considers them to be out of the money and hasn’t incorporated them into estimates.
EPS forecasts rise 6% for FY22; 3.1% for FY23; and 4.6% for FY24.
Macquarie downgrades the rating to Underperform from Neutral, believing the chance of further downgrades from potential outflows outweighs the scope for earnings upgrades. Target price is $19.25.
Mindful of substantial pressures facing Magellan Financial Group, Ord Minnett lowers its rating to Lighten from Hold. Despite this, the group reported a 6.4% beat versus the analyst’s forecast for first-half underlying profit. The target rises to $20 from $16.50.
The broker is cautious of management prediction for no fee cuts, given the extent of investment underperformance and outflows.
The broker feels the $35 exercise price on bonus share options (staff and investors) only serves to create an artificial ceiling for the share price, despite some merits for retention and team stability.
Origin Energy Limited (ORG) was downgraded to Hold from Add
In advance of weekend news of a potential takeover for Origin Energy, Morgans penned new research that leads to a downgrade in rating to Hold from Add on valuation considerations.
The downgrade arose after the broker lowered its target price by -5% to $6.23 in reaction to a 1H underlying profit that came in less than expected. Moreover, more caution is warranted after the uncertainty introduced upon the brought-forward closure of the Eraring coal plant.
Management guidance for FY22 earnings (EBITDA) rose by 5% on strong commodity pricing for APLNG.
Reliance Worldwide Corp. Limited (RWC) was downgraded to Neutral from Outperform by Macquarie
First half results were in line, with the Americas beating expectations while EMEA missed forecasts.
Macquarie observes, while EZ-FLO provides a potential boost, end-market growth is slowing. As a result, it is hard to find a catalyst to drive a re-rating, in the broker’s view.
Rating is downgraded to Neutral from Outperform and the target to $5.40 from $5.75.
Sonic Healthcare Limited (SHL) was downgraded to Hold from Add by Morgans
While Sonic Healthcare’s 1h results were in-line with expectations, Morgans lowers its rating to Hold from Add and slashes its target price to $39.93 from $50.72. It’s felt covid testing will inevitably slow, placing downward pressure on profits.
The broker suggests no FY22 guidance reflects the pandemic’s uncertain trajectory. However, it’s stressed the company remains in a strong position for ongoing base business growth and has ample liquidity for capital management and M&A.
Regarding the results, operating margins expanded 290bps to 32.4%, an all-time high.
SmartGroup Corporation Limited (SIQ) was downgraded to Hold from Add by Morgans
Following in-line FY21 results from SmartGroup, Morgans feels the concluded financial year provides a solid baseline earnings level for the business, though vehicle delivery in the current half will be vital. Vehicle orders were impacted by lockdowns in the 2H of 2021.
The broker lowers its rating to Hold from Add on limited upside to valuation. However, a future opportunity to buy may arise post dividend and also when there’s more certainty on contract renewals and short-term vehicle supply issues.
The target price slips to $8.78 from $8.80.
Viva Energy Group Limited (VEA) was downgraded to Hold from Add by Morgans
Following Viva Energy’s in-line FY21 results and recent share price strength, Morgans downgrades its rating to Hold from Add, while raising its target price to $2.60 from $2.55. Ongoing pressure on 2022 retail margins from labour, inflation and competition is expected.
Gross refining margins rebounded strongly in the 2H21, while regional refining margins continue to surge in 2022, and overall, the analyst expects another solid year from refining.
FY22 capex guidance of $330-$350m was well above the consensus expectation, as the spend on the energy transition increases, explains the broker.
Virtus Health Limited (VRT) was downgraded to Neutral from Outperform by Macquarie
First half net profit was -12% below Macquarie’s forecasts. This reflects weaker revenue and higher costs. Nevertheless, the broker considers this reflects an investment in future growth and the market should continue to benefit from behavioural shifts.
That said, Macquarie believes growth is captured in current forecasts and downgrades to Neutral from Outperform. Target is raised to $7.35 from $7.10, stemming from an equal weighting of DCF valuations and the CapVest bid at $7.60.
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.
