There have been 4 upgrades and 12 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
Incitec Pivot Limited (IPL) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley expects ongoing upside for ammonia prices, after a recent positive move. It’s felt Incitec Pivot is ideally positioned to leverage the dislocation in global gas markets and subsequent favourable pricing across the nitrogen complex.
The analyst estimates that for every US$10/t rise in the ammonia price Incitec Pivot’s earnings (EBIT) rise by around $7.7m.
The broker upgrades its rating to Overweight from Equal-weight and raises its target to $4.75 from $4.05. Industry view: In-Line.
OZ Minerals Limited (OZL) was upgraded to Accumulate from Lighten by Ord Minnett
In an initial review of the $25/share takeover bid by BHP Group, Ord Minnett raises its rating for OZ Minerals to Accumulate from Lighten. It’s thought the sale process could yield a higher price and the broker raises its target above the bid price to $27.40 from $16.00.
In light of the recent copper price correction, the broker feels the bid is opportunistic and notes the OZ Minerals board has rejected the offer.
The analyst sees large synergies in a combined entity due to BHP’s Olympic Dam and Oak Dam assets in South Australia. By 2027 it’s estimated OZ Minerals could add an additional 14% in earnings (EBITDA) for BHP.
See downgrade below
Redbubble Limited (RBL) was upgraded to Buy from Neutral by UBS
BS sees limited near-term downside risk for Redbubble ahead of the company delivering its full-year result and anticipates a result that meets or exceeds expectations would likely be a positive catalyst for the stock.
The broker points to signs that sales and margin trends could exceed what the market appears to be pricing in, including a 10% base price rise from May and reports from US peers that digital marketing costs have not significantly worsened.
Given what the broker describes as an “extreme level of investor disinterest” and a valuation implying further downgrades, it sees an attractive risk-reward balance. The rating is upgraded to Buy from Neutral and the target price increases to $1.60 from $1.45.
Reece Limited (REH) was upgraded to Neutral from Underperform by Macquarie
With Reece due to report on its full year before the end of the month, Macquarie notes volumes should continue to be supported by an elongated pipeline but sees a risk of affordability constraints impacting the detached housing segment in Australia.
In the US, the broker notes earnings have benefited from the current US dollar strength but anticipate the segment to be operationally weaker in FY24. Earnings per share forecasts updated 0%, -8% and -12% through to FY24.
The rating is upgraded to Neutral from Underperform and the target price decreases to $15.80 from $18.50.
In the not-so-good books
ASX Limited (ASX) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett reduces its rating for the ASX to Lighten from Hold on valuation and concerns over July volumes which showed pressures that may be ongoing for a few months. The target also falls to $82.50 from $84.86.
These pressures are from expenses related to the CHESS replacement, explains the analyst. There’s also concerns around a new management team and the regulator’s own concerns about the IT rollouts.
The broker estimates any benefits from the block chain technology will be small and have been pushed further out.
Bendigo & Adelaide Bank Limited (BEN) was downgraded to Underperform from Neutral by Macquarie
Macquarie notes Bendigo & Adelaide Bank continues to lead the banking sector in 2022, outperforming peers 12-35% year-to-date with strong lending growth driving the result.
The bank has also benefited from its relatively higher exposure to rising rates, but the broker warns as deposit pricing benefits normalise, and with Bendigo & Adelaide Bank not demonstrating margin upside like peers National Bank (NAB) and Suncorp Group (SUN), valuation is increasingly stretched.
The broker finds cost ambitions unrealistic and presents a key risk to its recommendation. The rating is downgraded to Underperform from Neutral and the target price of $10.00 is retained.
Boral Limited (BLD) was downgraded to Neutral from Outperform by Macquarie
With Boral due to report on its full year before the end of the month, Macquarie believes strong underlying demand remains for the cement and aggregate market despite weather impacts.
The broker does remain cautious, with expected further high rainfall between September and November for the eastern states presenting risk but sees favourable infrastructure developments. Energy costs also remain a risk and could drive downside if costs worsen.
The rating is downgraded to Neutral from Outperform and the target price decreases to $3.20 from $4.05.
Beach Energy Limited (BPT) was downgraded to Hold from Add by Morgans
Ahead of FY22 results due on Monday August 15 for Beach Energy, Morgans lowers its rating to Hold from Add, partly due to valuation.
The broker also fears FY23 production guidance may not be as strong as hoped for, and prices aren’t likely to lift materially until FY24, partially due to an expected increase in Origin Energy’s (ORG) GSA pricing.
The target price falls to $1.91 from $1.95.
City Chic Collective Limited (CCX) was downgraded to Neutral from Buy by Citi
Website analysis by Citi reveals weaker-than-expected website visits (one driver of online sales) for City Chic Collective and the broker downgrades its rating to Neutral from Buy, after trimming FY23 and FY24 EPS forecasts by -3%.
The earnings downgrades also reflect a challenging FY23 outlook, explains the analyst. The target falls by -17% to $2.47 due to the earnings changes, lower market multiples and a lower price/earnings premium.
Domain Holdings Australia Limited (DHG) was downgraded to Neutral from Buy by Citi
Citi downgrades its rating for Domain Holdings Australia to Neutral from Buy as consensus growth expectations for FY23 and FY24 are likely too optimistic. This view considers a near halving of house lending over the next two years and double-digit house price declines.
Despite this, the broker upgrades its FY22 earnings (EBITDA) forecast by 3% for stronger 4Q new listing volumes and expects positive momentum into the 1Q of FY23.
As Sydney and Canberra were in lockdowns in the first quarter of FY22, Citi expects Domain to provide a strong upcoming trading update.
The target falls by -30% to $4.10. REA Group is preferred in the space.
GWA Group Limited (GWA) was downgraded to Neutral from Outperform by Macquarie
With GWA Group due to report on its full year before the end of the month, Macquarie is flagging risks to the company’s pipeline as affordability pressures mount, particularly highlighting exposure to residential as home buyers look to cut costs on fixtures and fittings.
The broker notes a more significant downturn in the housing market remains a key risk to GWA Group, while a weaker Australian dollar could place pressure on margins. Earnings per share forecasts updated 0%, -6% and -14% through to FY24.
The rating is downgraded to Neutral from Outperform and the target price decreases to $2.15 from $3.30.
Lovisa Holdings Limited (LOV) was downgraded to Neutral from Buy by UBS
UBS lifts its target price for Lovisa Holdings to $18.50 from $16.00 on greater forecast US store growth and a greater valuation from an increased trading multiple. As shares have rallied strongly, the rating is pulled back to Neutral from Buy.
The broker expects scale and price optimisation (promotions etc) will outweigh near-term headwinds from labour and supply chain costs.
OZ Minerals Limited (OZL) was downgraded to Hold from Add by Morgans
Morgans agrees with the board of OZ Minerals in finding the $25/share takeover bid by BHP Group undervalues the company and is highly opportunistic. OZ Minerals shares have corrected by around -35% from a 12-month high above $29.
The analyst feels the odds favour a higher offer in time, given the solid logic for BHP Group and the potential synergies.
The broker downgrades its rating to Hold from Add after a share price rally in reaction to the announcement already incorporates most of the potential upside.
Apart from factoring in the bid, Morgans makes allowances for 2Q production that was -10% below the broker’s expectation, and higher unit costs, as well as lower near-term copper forecasts. The target rises to $25.40 from $23.12.
See upgrade above
REA Group Limited (REA) was downgraded to Neutral from Buy by Citi, Accumulate from Buy by Ord Minnett, and Neutral from Buy by UBS
Citi downgrades its rating for REA Group to Neutral from Buy as consensus growth expectations for FY23 and FY24 are likely too optimistic. This view considers a near halving of house lending over the next two years and double-digit house price declines.
Despite this, the broker upgrades its FY22 earnings (EBITDA) forecast by 2% for stronger 4Q new listing volumes and expects positive momentum into the 1Q of FY23.
The target falls to $133.05 from $153.50.
Post REA Group’s FY22 release, Ord Minnett has pulled back its rating to Accumulate from Buy. Target price remains unchanged at $140.
REA’s underlying net profit missed the broker’s forecast, but it’s predominantly the uncertain outlook that keeps Ord Minnett on the cautious side.
In addition, the broker did spot some cost pressures emerging.
REA Group 2H22 results beat UBS earnings forecasts by 4% with revenues of $579m, which came in line with expectations.
UBS is forecasting 10% yield growth for FY23 to FY27 which is at the lower end of REA Group’s guidance as highlighted at the Investor Day, with declines in listings in major cities Sydney and Melbourne and slower rentals acting as a drag on yield.
The UBS macro-outlook is -10-15% house price declines through the cycle and peaking in the 2H23, accordingly the analyst lowers the FY23 forecast volume growth to -6% from -4% in line with previous downturns in the housing cycle.
The broker’s earnings forecasts are lowered by -5% and the stock is considered as reasonably valued.
The recommendation is downgraded to Neutral from Buy and the price target is raised to $142.60 from $130.
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 into account 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.