There have been 4 upgrades and 11 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
INVOCARE (IVC) was upgraded to Add from Hold by Morgans
Morgans notes higher funeral case volumes and a higher case average, as well as double-digit growth in burials and cremations, saw InvoCare deliver first-half earnings of $68.5m and a net profit of $27.9m. The broker notes earnings were a slight miss to Morgans’ expectations, but net profits were stronger than anticipated. The company has suggested momentum has carried into the second half, and excess mortality rates in Australia, New Zealand and Singapore support the outlook. The rating is upgraded to Add from Hold and the target price decreases to $12.80 from $13.60.
JOHNS LYNG (JLG) was upgraded to Buy from Accumulate by Ord Minnett
FY22 underlying operating earnings were in line with guidance while revenue was ahead of expectations. FY23 guidance is slightly below current market forecasts although Ord Minnett envisages potential upside from catastrophe-related contract awards during the year. Johns Lyng is considered well able to deliver strong revenue and earnings growth amid industry tailwinds as there is low capital intensity and exposure to inflation. Ord Minnett upgrades to Buy from Accumulate and raises the target to $8.50 from $8.40.
RAMSAY HEALTH CARE (RHC) was upgraded to Buy from Neutral by City and to Add from Hold by Morgans
Citi lowers FY23-25 estimates for earnings per share as the negative impact of the pandemic continues to delay an earnings recovery. Ramsay Health Care provided no guidance but signalled a gradual recovery is expected throughout FY23, with more normal conditions from FY24. Following the FY22 result, the KKR-led consortium has withdrawn its indicative proposal of $88 a share and made an alternative offer that was rejected by the board, as it valued that at $85. Citi believes there is a greater than 50% chance of a formal bid still occurring and upgrades to Buy from Neutral. Target is reduced to $85 from $88.
Morgans maintains a takeover premium in its valuation for Ramsay Health Care and upgrades its rating to Add from Hold after rolling forward its financial model after FY22 results. The broker lowers FY23-24 underlying earnings forecasts by -6.4% and -7.5% in a challenging operating environment. No FY23 guidance was provided though management expects a “gradual recovery” through FY23 and more “normalised” conditions from FY24 onwards.
In the not-so-good books
A2 MILK CO (A2M) was downgraded to Sell from Neutral by Citi
Citi downgrades to Sell from Neutral in the wake of the FY22 results. While the fundamental valuation is largely unchanged, the broker assesses the opportunity to obtain US market access, and a primary reason for upgrading to Neutral back in May appears to have narrowed. Moreover, over the next six months, there are Chinese regulatory events where the risk is largely to the downside. a2 Milk Co’s recent performance in China has improved but then the broker points out this has come at the cost of margin. Target is reduced to $4.58 from $4.64.
ADORE BEAUTY (ABY) was downgraded to Equal-weight from Overweight by Morgan Stanley
Morgan Stanley acknowledges an incorrect Overweight call (now Equal-weight) for Adore Beauty, partly due to overestimating a higher covid benefit for sales and underestimating the competition. Near-term concerns now include leadership transition and low earnings visibility. While FY22 results were ahead of expectations, Morgan Stanley was surprised by the magnitude (-28%) of sales declines in the first seven weeks of FY23. Margin guidance downgrades for FY23 from inflation and higher investment also surprised. As a result, the broker reduces FY23 sales and EBITDA forecasts by -13% and -59%, respectively, which suggests margins of 1.4%, compared to prior guidance of 2-4%.
HEALIUS (HLS) was downgraded to Neutral from Buy by Citi
Healius’s FY22 result was in line with consensus and Citi’s forecasts, thanks to strong demand for covid testing. No guidance was provided and the limited disclosure for pathology fell short of peers, says the broker. EPS forecasts rise 12% in FY23 as covid testing continues apace; and falls -21% in FY24, to reflect lower base business revenue forecasts after the company said it expects a period of catch-up before trade normalises. Citi says it will be hard for any pathology companies to outpace given earnings are forecast to more than halve in the next 1-2 years, a more severe covid variant being the only obvious wildcard.
LYNAS RARE EARTHS (LYC) was downgraded to Sell from Lighten by Ord Minnett
While 2H results for Lynas Rare Earths were broadly in line with recent quarterly results and consensus expectations, Ord Minnett is concerned about project execution risk. Capex guidance is for -$1.2bn over FY23 and FY24 versus the broker’s -$754m forecast. In addition, the broker notes commodity price pressure and lowers its rating to Sell from Lighten, while decreasing its target price to $4.85 from $5.35. Despite a -30% year-on-year worsening in unit costs, margins hit what the analyst describes as a “whopping” 65%
OZ MINERALS (OZL) was downgraded to Neutral from Buy by UBS
OZ Minerals’ result was a little short of UBS but immaterial given the offer on the table from BHP Group (BHP). Otherwise, OZ Minerals retained its guidance, outlined operational improvements and confidence around the cave breakthrough at Carrapateena, confirmed West Musgrave final investment timing and highlighted the scarcity of its assets, low geographical risk and its growth pipeline. At $26.50, UBS estimates the market is pricing in a US$3.77/lb copper price. Triangulating between higher commodity price assumptions, and valuing the unmodelled growth pipeline and any synergies could justify a higher bid in the broker’s view.
TYRO PAYMENTS (TYR) was downgraded to Equal-Weight from Overweight by Morgan Stanley
The FY22 result and outlook were a little better than Morgan Stanley expected. Going forward, the broker envisages the likely upside will come from industry consolidation, but this is a bull case proposition. Morgan Stanley acknowledges its prior Overweight rating on Tyro Payments was the wrong call and, while the business largely met FY22 financial metrics, the speed and magnitude of the de-rating of payments stocks came as a surprise. Morgan Stanley points out capital markets have changed permanently and it is not enough that companies grow topline revenue, they need to focus on being meaningfully profitable. Rating moves to Equal-weight from Overweight and the target is lowered to $1.40 from $4.70. Industry view: Attractive.
WESTGOLD RESOURCES (WGX) was downgraded to Neutral from Outperform by Macquarie
Westgold Resources’ FY22 result fell sharply short of Macquarie’s forecasts due to higher-than-expected depreciation and amortisation and pre-announced non-cash impairments of $186m. Management guides to lower production and rising all-in-sustaining costs, also short of the broker’s forecasts. The broker raises its cost assumptions over the next seven years. EPS forecasts fall -62% in FY23; -90% in FY24; and -60% in FY25.
WISETECH GLOBAL (WTC) was downgraded to Sell from Neutral by Citi
Citi retains the view that WiseTech Global remains destined for strong earnings growth over the next few years, on the back of ongoing customer wins and global roll-outs. Moreover, as a core Enterprise software solution the broker considers WiseTech might just be the most defensive software name in its Australian coverage. Forecasts have been upgraded. Though this only pushes up the valuation/price target by 3% to $52.70. Not enough to justify the share price, hence Citi downgrades to Sell from Neutral.
WOODSIDE ENERGY (WDS) was downgraded to Hold from Add by Morgans, to Accumulate from Buy by Ord Minnett and to Neutral from Buy by UBS
Now that the share price has reached the $34.90 target price (down from $35.40) set by Morgans, the rating for Woodside Energy is downgraded to Hold from Add. This change follows 1H results that were in-line with the broker and above consensus forecasts. The broker makes minor changes to forecasts. Management’s 2022 Capex guidance suggests a major 2H skew and negative free cash flow, and the analyst feels the dividend payout ratio could be cut in the short term. A record US109c ordinary dividend was declared for the half.
Woodside Energy’s June first-half result outpaced Ord Minnett by 9%, and the dividend sharply outpaced, the payout ratio setting a new record. Once paid, the company’s gearing will move into the 13% target range, and management advises share buyback and/or special dividends may be on the cards – but not in the near term. Ord Minnett says management appears to be taking a more conservative balance-sheet stance than the broker had forecast, heading into a growth period, which might disappoint investors. While this was a key input into the broker’s forecasts, Ord Minnett still believes the company offers good value, growth, and leverage to spot LNG prices. Rating is downgraded to Accumulate from Buy. Target price slips to $37 from $37.50.
Woodside Energy delivered first-half net profit of $1,819m and announced an interim dividend of 109 cents per share, in line with UBS’s expectations. The company reiterated its significant capital expenditure commitments over the coming 2-3 years, guiding to a $9bn spend on the Pluto-Scarborough and Sangomar projects by December 2024. A higher average spot LNG estimate drives the broker’s earnings per share forecast up 32% for FY22. The broker notes Woodside Energy offers attractive exposure to the tight global LNG market but finds the stock to be trading above fair value. The rating is downgraded to Neutral from Buy and the target price increases to $34.00 from $33.65.
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.
