There have been 3 upgrades and 5 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
Evolution Mining Limited (EVN) was upgraded to Neutral from Sell by UBS
UBS retains its US$1,500/oz long-term gold price forecast and expects supply chain pressures and opex/capex inflation to persist, along with the shortage of skilled labour.
For the producers, the broker retains a preference for new(er) mines benefiting from new infrastructure, highest grades and limited or brownfield capex.
While Evolution Mining is not the broker’s preferred play at current prices, much risk is already priced-in and the rating is upgraded to Neutral from Sell. The target price slips to $4.05 from $4.13.
IGO Limited (IGO) was upgraded to Buy from Neutral by UBS
IGO has announced the consistent first production of battery-grade lithium hydroxide at its Kwinana Lithium Hydroxide factory.
UBS says this is a key de-risking event for the TLEA joint venture.
The broker updates realised spodumene price forecasts (-1.7% in FY22 and -11.3% in FY23) and remain structurally bullish on lithium and nickel in the medium and long term.
Upgrade to Buy from Neutral given the recent share-price retreat. Target price dips to $12.15 from $12.40.
Wesfarmers Limited (WES) was upgraded to buy from Neutral by UBS
UBS upgrades its rating for Wesfarmers in recognition that non-retail divisions were the source of upside in the 1H and are becoming a larger share of earnings.
The broker estimates the Chemicals Energy & Fertilisers (WesCEF) business along with exposure to lithium upside can counter the mixed outlook for retail. The target price rises to $56 from $54.
In the not-so-good books
Challenger Limited (CGF) was downgraded to Lighten from Hold by Ord Minnett
Challenger left its profit guidance unchanged at its investor day though suggested a return on equity (ROE) enhancement
from yields may be delayed and pointed to a weaker capital position.
The analyst explains the capital position has gone from being strong to just at the target range over the past five months.
Following a 53% rise in share price over the last year, Ord Minnett lowers its rating to Lighten from Hold and reduces its target price to $6.90 from $7.00.
Dexus Industria REIT (DXI) was downgraded to Neutral from Outperform by Macquarie
Dexus Industria REIT has divested of a Sydney property at 17% above book value, with proceeds to be used to fund the development pipeline. Macquarie estimates the divestment is -0.6% dilutive to FY23 earnings.
The broker has nevertheless taken the opportunity to update its model for rising rates and low hedging. FY23-24 forecast earnings fall by -9%-plus.
Despite being attracted to the REIT’s development pipeline, Macquarie warns higher construction and interest costs could impact returns. Downgrade to Neutral from Outperform. Target falls to $3.25 from $3.59.
Integral Diagnostics Limited (IDX) was downgraded to Neutral from Outperform by Macquarie
Medicare benefits data highlighted weaker trends for Jan-Feb 2022 with modest recovery in March, Macquarie notes. For the March quarter, combined benefits in key states for Integral Diagnostics fell -9% quarter on quarter and -6% year on year.
Commentary from peers has highlighted operational challenges and elevated costs associated with covid in early 2022, and in addition, the broker sees supply chain constraints as presenting potential upside risk for consumables/equipment expenses in the near term.
Downgrade to Neutral from Outperform, target falls to $4.15 from $4.30.
Incitec Pivot Limited (IPL) was downgraded to Equal-weight from Overweight by Morgan Stanley
First-half earnings (EBIT) were in-line with Morgan Stanley’s estimate but -8% below the consensus forecast. An increased Henry Hub gas price forecast is the main reason for a -5% cut to the broker’s FY22 earnings forecast.
The broker downgrades its rating to Equal-weight from Overweight and sees a more challenging backdrop for short-
term performance. While fertiliser prices appear to have peaked, they are expected to remain supportive.
Orica (ORI) is preferred in the sector. The target price falls to $4.05 from $4.70. Industry view: In-Line.
The analyst expects a period of share price range-trading while demerger discussion rages following the decision to separately list the Fertilisers and Dyno Nobel businesses. It’s considered a moot point whether strategic benefits outweigh one-off and ongoing costs.
Tabcorp Holdings Limited (TAH) was downgraded to Neutral from Outperform by Macquarie
Following the demerger of Lottery Corp (TLC), Tabcorp has closed its first day of trading with a market capitalisation of $2.4bn. Macquarie expects investors to take a cautious view of Tabcorp given structural challenges to be overcome.
The broker noted additional capital may be required for license renewals and the WA TAB tender. Macquarie expects covid recovery to drive near-term growth and hopes the company can stabilise earnings in FY23 before achieving long-term annual growth of 2%.
Notably, with Tabcorp closing out its first day of trading at a price of $1.06 per share and Lottery Corp at $4.70 per share, the combined value implies the creation of more than $900m compared to the previous price.
The rating is downgraded to Neutral from Outperform and the target price decreases to $1.00 from $6.00.
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.