There have been 9 upgrades and 5 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
Abacus Property Group (ABP) was upgraded to Outperform from Neutral by Macquarie
Following Abacus Property’s mid-March capital raising shares have underperformed to the extent they are now trading at a -24% discount to peers, according to Macquarie. The rating is lifted to Outperform from Neutral.
After the raising and the sale of 464 St Kilda Rd, the broker is more comfortable with near-term funding capacity. A continuation of the strong performance in self storage is seen as key. The target rises by 1% to $3.65.
AGL Energy Limited (AGL) was upgraded to Add from Hold by Morgans
Morgans expects wholesale market conditions for electricity and gas to result in strong earnings for AGL Energy in FY24-25 and upgrades its rating to Add from Hold. The target price rises to $8.83 from $7.24.
Electricity prices are currently rallying, and winter futures prices are also rising given tight conditions in the spot coal market, explains the analyst. Meanwhile, domestic gas prices are also starting to rally with Victorian 2023 gas futures lifting.
Domain Holdings Australia Limited (DHG) was upgraded to Buy from Hold by Ord Minnett
Following an encouraging, though in-line trading update, Ord Minnett upgrades its rating for Domain Australia to Buy from Hold largely due to a recently weak share price. The target price of $4.80 is unchanged.
The analyst is cautious around aspects of both the Realbase acquisition and the company’s wider marketplace strategy. Realbase is the largest campaign management technology platform across Australasia.
The broker reminds investors the company’s record of integrations points to the difficulty, and greater-than-expected expense, of stitching together ‘proptech’ businesses.
Gold Road Resources Limited (GOR) was upgraded to Outperform from Neutral by Macquarie
Gold Road has made a unanimously recommended all scrip offer for DGO Gold ((DGO)) valued at $299m. Comparing the miner’s stakes in De Grey Mining ((DEG)), Dacian Gold ((DCN)) and Yandal Resources ((YRL)), Macquarie values DGO at $395m.
The offer thus represents a 10% premium on DGOs’ last price but a -24% discount on net asset value as far as the broker is concerned.
Target rises to $1.80 from $1.70, upgrade to Outperform from Neutral.
Iluka Resources Limited (ILU) was upgraded to Neutral from Underperform by Credit Suisse
Iluka Resources has chosen to approve the Eneabba rare earth element refinery, in what Credit Suisse has described as a high-risk option given experience in the separation of rare earth elements is scarce outside of China.
Refinery capacity will exceed Eneabba’s requirements, and while the company hopes to treat third party concentrate the broker sees approval as a nod to the Wimmera resource. A $1,250m loan from the Australian government will facilitate the refinery.
Credit Suisse commends the company for aiming high, noting optimistic modelling could offer a higher valuation. The rating is upgraded to Neutral from Underperform and the target price increases to $13.00 from $9.00.
Kelsian Group Limited (KLS) was upgraded to Outperform from Neutral by Macquarie
Macquarie likes Kelsian Group’s exposure to defensive transportation contracts (with sovereigns or established corporates), that include a hedge against inflation and fuel prices. The rating is increased to Outperform from Neutral, while the target rises to $8 from $6.90.
It is contract indexation and structure that provide the hedge against inflation and increases in other cost items, explains the analyst. It’s also expected the Marine & Tourism space will approach pre-covid levels over 2022.
Mineral Resources Limited (MIN) was upgraded to Hold from Sell by Ord Minnett
Ord Minnett has raised its price forecast for iron ore by 22% to US$139/t in 2022 and by 14% to US$115/t in 2023. Strong steel output from China and lacklustre supply from the iron ore majors in Australia and Brazil due to weather, covid and labour costs contributed.
Along with iron ore, the broker is very positive on the lithium outlook and also notes higher prices for base metals and coal from supply disruptions from the Russia/Ukraine conflict.
Ord Minnett raises its rating for Mineral Resources to Hold from Sell and lifts its price target to $59 from $45
Pilbara Minerals Limited (PLS) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett is very positive on the lithium outlook and doubles its prior 2023 price forecast for spodumene to US$5,000/t, while hydroxide and carbonate estimated have lifted 50% and 60%, respectively. Meanwhile, the long term forecast rises by 18%.
The broker lifts its rating for Pilbara Minerals to Buy from Hold and raises its target price to $4.50 from $2.90.
Western Areas Limited (WSA) was upgraded to Add from Hold by Morgans
Western Areas has requested a trading halt while it considers the draft Independent Expert Report on IGO’s (IGO) takeover proposal.
Morgans says IGO believes the Western Areas Board intends to terminate the acquisition on the basis of the report.
Morgans has been expecting the strong nickel price could elicit a higher bid from IGO, but management has stressed that the current nickel price does not match its long-term view.
While the broker spies potential short-term weakness as funds sell in response to the news, Morgans has revised its nickel forecasts upward and increases its target price to $4.45 from $3.29 accordingly, and upgrades to Add from Hold.
The broker believes the next most likely acquisition in the nickel arena would be from a potential combination of Western Areas and Panoramic Resources (PAN).
In the not-so-good books
A2 Milk Company Limited (A2M) was downgraded to Sell from Buy by Citi
Given rising covid cases in China, Citi has reduced its forecasts for a2 Milk Co. A spike in omicron cases has resulted in a lockdown of key port city Shenzhen, delaying deliveries to customers.
Coupled with falling cross border e-commerce channel prices, covid impacts have driven the broker to reduce net profit forecasts -4-5% through to FY24.
The rating is downgraded to Sell from Buy and the target price decreases to $4.80 from $7.02.
Bank of Queensland Limited (BOQ) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett sees Bank of Queensland’s recent net interest margin (NIM) outperformance potentially reversing and lowers its rating to Hold from Accumulate, while the target falls to $8.90 from $9.80.
The broker attributes the potential reversal partly to a greater reliance upon term deposits (spreads are worsening). Additionally, 78% of the bank’s lending is exposed to mortgages, which is currently considered a highly competitive space.
Netwealth Group Limited (NWL) was downgraded to Neutral from Buy by Citi
Given a rebound in markets since the first half result, with the ASX-300 up 3%, as well as heightened volatility caused by European geopolitical tensions, rising rates, and the threat of rising covid cases, Citi adjusts forecasts for domestic small cap wealth platforms.
Hub24’s flow forecast declines to $14.3bn from a previous $14.8bn, driving a -1% decline to the full year net profit forecast.
The rating is downgraded to Neutral from Buy and the target price decreases to $15.20 from $15.25.
Pendal Group Limited (PDL) was downgraded to Hold from Add by Morgans
Morgans sees merit in the non-binding indicative merger offer from Perpetual Limited ((PPT)) at $6.23/share. Benefits are expected from significant cost synergies and the ability to leverage scale in offshore markets.
The broker believes there is potential for the offer price to be improved though downgrades its rating to Hold from Add. Should the merger lapse, there is considered to be better risk/reward elsewhere in the sector. The $5.65 target price is maintained.
Sims Limited (SGM) was downgraded to Neutral from Buy by Citi
Sims Metal has signalled it is on track to reach its FY25 targets despite volatile scrap markets and Citi raises earnings estimates accordingly.
Citi expects Sims Metal will continue to benefit from structural decarbonisation tailwinds, including growing demand for recycled scrap and rising landfill costs (rising at 10% to 15% a year).
Sims Lifestyle Services plans to become a one-stop shop as a secure global fulfilment enterprise that helps customers achieve their sustainability goals. Citi says Enterprise data storage is expected to growth 250% over five years.
The broker notes Sims’ earnings are linked to sales volumes, margins and operating costs and that EBIT margins are at cyclical highs and absolute margins are increasing. The company expects margins will continue to rise as demand for nonferrous product grows.
Citi raises its target price to $21.60 from $19.50 but downgrades to Neutral from Buy, noting the 70% run in the share price over the past year.
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.