There have been 4 upgrades and 15 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
Challenger Limited (CGF) was upgraded to Neutral from Sell by Citi and Hold from Lighten by Ord Minnett
Challenger’s FY22 earnings results highlighted previous concerns Citi noted in the earnings profile for the group, including the shift to shorter-dated Life sales which had a negative impact on margins.
The broker also notes, with surprise, the poor outcome from the bank, with the analyst explaining the goodwill write-off and strategic review pointing to reasons for concern over the state of the operations. Challenger refers to “dis-synergies rather than the synergies it expected” within the recently acquired bank.
Citi views the FY23 guidance as disappointing relative to the market, but broadly in line with the broker’s forecasts, leading to a marginal adjustment in earnings forecasts.
The target is upgraded to Neutral from Sell, adjusting to the share price fall and the price target is lowered to $6.70 from $6.80.
FY22 pre-tax profit was in line. Guidance for FY23 pre-tax profit of $485-535m is ahead of forecasts, stemming from Challenger envisaging reduced capital pressure compared with Ord Minnett’s prior assumptions.
The capital position included a mark-up in property values, which the broker suspects could face a future reversal if capitalisation rates in the market start to drift lower or credit losses emerge in a meaningful way.
While still cautious about the outlook, given the share price decline Ord Minnett raises the rating to Hold from Lighten. Target is reduced to $6.20 from $6.40.
Seek Limited (SEK) was upgraded to Add from Hold by Morgans and Buy from Accumulate by Ord Minnett
FY22 results for Seek included a -2% earnings (EBITDA) miss versus the consensus forecast, while revenue was around 2% above the upper end of management guidance.
A highlight for Morgans was a strong performance by A&NZ, due to robust job advertisement volume growth of 39% and 11% average advertisement yield growth. The rating rises to Add from Hold as it’s believed prices may be raised if necessary to increase yield.
The broker lowers its FY23-FY25 EPS estimates by -7-14%, partly due to the provided FY23 guidance (earnings of $560m-$590m) and an increased investment spend. The target falls to $29.40 from $32.33.
FY22 earnings were ahead of Ord Minnett’s estimates. Seek’s frank discussion regarding the outlook, which the broker notes incorporated “classic cost creation” in terms of investment for a long-term opportunity, encountered a surprising amount of criticism.
Hence, the performance of the share price in future will rely on interpretations of management’s confidence that it can execute on the long-term opportunities.
In the company’s favour, the broker points out the labour market remains structurally tight, and costs come with benefits from FY24. Rating is upgraded to Buy from Accumulate. Target is lowered to $31 from $35.
In the not-so-good books
Bendigo & Adelaide Bank Limited (BEN) was downgraded to Lighten from Hold by Ord Minnett
While Bendigo & Adelaide Bank’s result beat Ord Minnett on the profit line, and the dividend was as expected, it was a very soft underlying result with net interest margin falling -11 basis points in the second half, -6bp more than forecast.
This was due to competitive pressures, calling into question the growth strategy that has been pursued by management, the broker suggests.
The bigger issue for Ord Minnett however was the revelation that Community Bank revenue sharing is likely to significantly reduce rate leverage – the broker estimated more than one-third of the benefit could be given up.
Target falls to $8.70 from $10.60, downgrade to Lighten from Hold.
Beach Energy Limited (BPT) was downgraded to Neutral from Buy by Citi and Underperform from Neutral by Macquarie
Beach Energy reported FY22 earnings after tax of $504m which came in -12% below Citi’s forecasts and -10% below consensus.
Higher costs, including higher tax and restoration expenses provided for an -8% miss on EBITDA earnings for Citi.
Beach Energy reduced the production guidance to 20.0-22.5MMboe for FY23, which is reliant on Otway customer nominations.
The broker’s earnings forecasts have been reduced by -8% for FY23 and -2% for FY24, following the results, to reflect higher costs, a downgrade in reserves and risks to the ambitious targets of 28MMboe in FY24.
Citi downgrades the rating to Neutral from Buy and the target price is lowered to $1.85 from $2.10.
Beach Energy has reported a net profit of $504m in FY22, missing Macquarie’s forecasts by -13%.
The broker noted the dividend was unchanged and highlighted higher capital expenditure costs in the Cooper Basin, pending class action and approaching decommissioning provisions are likely to encourage conservatism from management.
The broker also found FY23 guidance disappointing, with the company suggesting production of 20.0-22.5m barrels of oil equivalent in the coming year, a -7% miss on Macquarie’s forecasts, with capital expenditure of $800-1,000m, 16% above Macquarie’s forecasts.
The rating is downgraded to Underperform from Neutral and the target price decreases to $1.55 from $1.85.
Bluescope Steel Limited (BSL) was downgraded to Neutral from Outperform by Macquarie
While BlueScope Steel delivered a beat to Macquarie’s expectations in FY22, supported by ongoing strength in residential demand, the company’s FY23 guidance is softer than expected, implying a weak first half according to the broker.
The company is guiding to earnings of $800-900m in the first half, and Macquarie has downgraded its earnings per share forecasts -32%, -19% and -17% through to FY25. The broker also noted BlueScope Steel lifted capital expenditure estimates again, accounting for acquisitions and further investment intent in the US.
The rating is downgraded to Neutral from Outperform and the target price decreases to $18.25 from $19.55.
Carsales.Com Limited (CAR) was downgraded to Neutral from Outperform by Macquarie and Neutral from Buy by UBS
Having pre-released results, Macquarie notes no surprises in Carsales’ full-year result but highlights FY23 guidance surprised to the upside.
The broker also noted company commentary that depth penetration will increase as time to sell declines reflects the less cyclical nature of Carsales and supports Macquarie’s preference for Carsales over other online classifieds.
The broker highlighted Korean operations as the only soft spot in the update, where Carsales is undergoing its third year of investment in Dealer Direct, with the company expecting cost growth to exceed revenue in the coming year.
The rating is downgraded to Neutral from Outperform and the target price increases to $24.40 from $22.00.
Carsales reported in line with the guidance provided in late June. Trading commentary indicates positive momentum across the company’s businesses but is generally in line with the broker’s forecasts.
In addition to updating for the FY22 result, UBS has updated forecasts to reflect the consolidation of Trader Interactive following the acquisition of the remaining 51% stake Carsales did not previously own and the subsequent capital raising.
Dilution from the capital raising more than offsets accretion from the deal, UBS estimates, hence target falls to $24.60 from $25.00. On recent share price performance, the broker downgrades to Neutral from Buy.
Insurance Australia Group (IAG) was downgraded to Hold from Add by Morgans
Morgans notes the FY22 Insurance Australia Group earnings report came in line with the pre-released downgrade of $374m, compared to $474m in the previous year.
FY22 numbers were mixed according to the analyst with an improving trend in underlying insurance margins in 2H22, which the company is guiding to continue into FY23 of between 14-16%.
Reserve strengthening and higher natural disaster events were highlighted as providing weakness in FY22.
Morgans’ earnings forecasts are lowered by 9% for FY23 and FY24 with reduced estimated investment income and inflation noted as a key earnings risk.
The price target is reduced to $4.95 from $5.09 and the analyst downgrades the rating to Hold from Add as the share price has reached the fair value.
Mount Gibson Iron Limited (MGX) was downgraded to Neutral from Outperform by Macquarie
Mount Gibson Iron reported a fire at its Koogan Island crushing plant has caused damage to screening and conveyor equipment, impacting production capabilities. Macquarie notes this will impact volumes and costs in the near-term, and the anticipated production ramp-up in the coming half.
While still assessing the damage, the company announced a preliminary plan to process and ship ore at 40% capacity until repairs are complete. Macquarie decreases near-term production and sales forecasts by 38% and 21% and lifts cash costs by 8% and 10% in FY23 and FY24 respectively.
The rating is downgraded to Neutral from Outperform and the target price decreases to $0.50 from $0.70.
ResMed Inc (RMD) was downgraded to Neutral from Buy by Citi and Hold from Buy by Ord Minnett
According to Citi, ResMed 4Q22 results were in line with consensus but beat EPS from lower interest and tax charges.
The broker highlights the surprise results from the “card-to-cloud” devices, which offset the lack of available telecom chips.
ResMed pointed to ResMed aiming for sustained market share growth from Philips. No guidance for sales from the recall in FY23 was offered, however, the company expects Philips to remain out of the market for another 12 months.
Following the better than anticipated 4Q22 results, Citi’s earnings forecasts are raised by 2% and 4%, respectively for FY23 and FY24.
The target price is raised to $37.00 from $34.50 and the rating is downgraded to Neutral from Buy, due to valuation.
ResMed’s June-quarter net income outpaced Ord Minnett’s forecasts but its quarterly dividend fell shy.
While acknowledging ResMed’s strong competitive position, the broker believes this upside is priced in and leaves little room for error.
EPS forecasts fall -1% to -2% in the near term. While sales are tipped to rise, gross margins are forecast to fall (and have been falling for the past two years due to covid-induced freight costs and a switch to lower margin devices).
Meanwhile, the acquisition of Medifox has delayed the prospect of a buyback, notes the broker.
Rating downgraded to Hold from Buy. Target price falls to $36.50 from $38.
Sims Limited (SGM) was downgraded to Neutral from Buy by Citi
Citi views the FY22 earnings results from Sims as in line with forecasts with a beat on the 91c dividend, thanks to a 50c final dividend.
While the company benefited from higher scrap prices in FY22, Sims points to a fall in the non-ferrous prices to US$320-US$400/t at the start of FY23 from around US$700/t in March.
The broker’s earnings forecasts are adjusted by -16% and -10% for FY23 and FY24, respectively accounting for the lower scrap metal prices.
The current share buy-back remains in place, but management will assess the viability going forward.
The target price is lowered to $16 from $17 and the rating is downgraded to Neutral from Buy.
Seven West Media Limited (SWM) was downgraded to Hold from Accumulate by Ord Minnett
FY22 underlying net profit of $200.8m was marginally below Ord Minnett’s forecasts. No dividend was declared. Of concern to the broker is the sustainability of Seven West Media’s current market share amid limited potential upside to incremental gains.
Moreover, the content risk may require the use of balance-sheet capacity and there is a lack of cost flexibility to offset any weakness in advertising.
On the positive side, a share buyback was announced. The broker adjusts revenue expectations to factor in the outlook and downgrades to Hold from Accumulate, reducing the target to $0.65 from $0.75.
Tassal Group Limited (TGR) was downgraded to Neutral from Outperform by Credit Suisse
Tassal Group has accepted the Cooke bid at $5.23 cash. The scheme meeting is expected to be held in November. Cooke currently has a 10.5% shareholding, and the scheme is not subject to financing or due diligence.
Credit Suisse considers the price fair and given the background of prior bids; it is highly likely the scheme will be implemented.
Rating is downgraded to Neutral from Outperform while the target is raised to $5.23 from $4.00. Tassal Group reported FY22 EBITDA in line with expectations and net profit was modestly ahead.
Temple & Webster Group Limited (TPW) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse notes growth looks to be slowing for Temple & Webster, with site traffic declining -22% year-on-year in July. The broker remains positive on the long-term opportunity but anticipates the company will suffer slow revenue growth in FY23 as it cycles the higher growth of FY22.
The broker is forecasting Residential, Trade and Commercial revenue growth of 5% year-on-year in FY23 and has updated its earnings per share forecasts -1%, -47% and -26% through to FY24.
The rating is downgraded to Neutral from Outperform and the target price decreases to $4.91 from $9.59.
Universal Store Holdings Limited (UNI) was downgraded to Underperform from Neutral by Macquarie
Due to Universal Store’s recent share price outperformance and current macroeconomic uncertainty, Macquarie lowers its rating to Underperform from Neutral, while keeping its $3.50 target price.
The analyst sees a risk of downside to consensus forecasts from cost inflation and the potential for deterioration in demand among youth customers.
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.
