In the good books
AUSTRALIAN CLINICAL LABS (ACL) was upgraded to Buy from Neutral by Citi and to Outperform from Neutral by Credit Suisse
Having last week reassured investors that margins would be in line with pre-covid levels, in its first half result Australian Clinical Labs has suggested business as usual margins look to be at or above 11% in the second half and beyond, in what Citi found to be a highlight of the result. The update has given Citi more confidence in Australian Clinical Labs’ ability to reach targeted low teens earnings margins moving forward. The rating is upgraded to Buy from Neutral and the target price increases to $4.10 from $3.30.
Australian Clinical Labs’ underlying earnings, excluding one-offs, came in slightly below Credit Suisse’ forecast. Margins were nevertheless maintained on solid cost control despite an -83% decline in covid-related revenue. Australian Clinical Labs has outperformed Healius ((HLS)) on all metrics, the broker notes, achieving a stronger earnings performance due to its Unified Laboratory Network, where uniform equipment and systems across all high-volume central laboratories has enabled greater agility in managing its labour cost base over varying demand. Seeing no immediate change in this trend, Credit Suisse upgrades to Outperform from Neutral. Target rises to $3.80 from $3.45.
ALUMINA LTD (AWC) was upgraded to Neutral from Sell by Citi
With Alumina Ltd delivering an 11% ‘beat’ to Citi’s full year profit expectations at US$109m, the broker has lifted its 2023 forecast modestly, albeit off a low base. The broker has described operations as a double-edged sword, with lower Alcoa World Alumina and Chemicals (AWAC) production likely to support a higher alumina price, and with AWAC production down -6% for 2023, the broker has accordingly raised its alumina price 4% for the year to US$360 per tonne. The rating is upgraded to Neutral from Sell and the target price increases to $1.55 from $1.50. While the result beat Citi, it was some -8% below market consensus.
AMP (AMP) was upgraded to Accumulate from Hold by Ord Minnett
As the share price has moved through the trigger point, Ord Minnett upgrades AMP to Accumulate from Hold. Target is $1.35.
CHARTER HALL (CHC) was upgraded to Accumulate from Hold by Ord Minnett
As the share price has moved through the trigger point, Ord Minnett upgrades Charter Hall to Accumulate from Hold. Target is $15.85.
GOODMAN GROUP (GMG) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett increases estimates in the wake of the first half result. Goodman Group shares still appear slightly overvalued but the rating is now upgraded to Hold from Lighten. Management has indicated it will not increase distributions, preferring to retain capital amid profitable development opportunities. The broker commends the business on its positioning as it takes advantage of favourable conditions in industrial property without exposing shareholders to too much risk. Earnings growth is expected to offset the headwind of rising interest rates. Target is raised to $18.60 from $18.00.
HEALTHCO HEALTHCARE & WELLNESS REIT (HCW) was upgraded to Outperform from Neutral by Macquarie
First half results were weaker than Macquarie expected. HealthCo Healthcare & Wellness REIT has revised up its yield on cost assumptions for future developments to 6-7 “over 5%” amid rental growth. Not only is there a positive earnings benefit in a higher interest-rate environment but Macquarie points out this results in development margins of 30%. Meanwhile, the broker suggests the downside risks, such as the outlook for GenesisCare, which represents 8% of the portfolio and has been reported as having liquidity concerns, are factored into the share price. Macquarie upgrades to Outperform from Neutral and raises the target to $1.80 from $1.76.
INTEGRAL DIAGNOSTICS (IDX) was upgraded to Neutral from Underperform by Credit Suisse and to Outperform from Neutral by Macquarie
Integral Diagnostics reported better than expected revenues but profit was a clear miss. While operating cashflow conversion was very strong, it was partially aided by an unsustainably high accounts payable figure, Credit Suisse warns. Management’s expectation is for the second half to be “materially stronger” than the first, with volumes and margin both improving. Despite an improving operating performance it is difficult to be comfortable with near-term earnings prospects, Credit Suisse suggests. On balance the broker believes investors have some time before they need to take a position to benefit from improved outer year earnings. An upgrade to Neutral from Underperform reflects a longer term view. target rises to $2.70 from $2.63.
First half results from Integral Diagnostics were below expectations, although Macquarie observes improved activity in the second half is underpinning earnings growth, margin improvement and a better balance sheet. While the balance sheet is stretched it remains within covenants. The broker upgrades to Outperform from Neutral and raises the target to $3.30 from $3.05.
INGHAMS GROUP (ING) was upgraded to Outperform from Neutral by Macquarie and to Add from Hold by Morgans
Macquarie observes Inghams Group has successfully transitioned from the operating disruptions experienced in FY22. First half earnings and net profit were ahead of expectations and the strong result increases the broker’s confidence in an earnings recovery. As a result, the rating is upgraded to Outperform from Neutral and the target raised to $2.97 from $2.62. Multiples also appear more attractive, with the stock trading on 13.3x and 11.0x FY23 and FY24 PE, respectively, a -15% and -25% discount to peers.
Inghams Group’s 1H result was a material beat versus Morgans forecast and management expects the positive momentum to continue in the 2H. The company also noted inflationary cost pressures remain for grain, labour fuel, freight packaging, utilities and ingredients. The broker raises its forecasts and expects earnings will normalise through FY24/25 due to price rises and improvements in operations. The rating is upgraded to Add from Hold and the target rises to $3.15 from $2.97.
MINERAL RESOURCES (MIN) was upgraded to Hold from Lighten by Ord Minnett
As the share price for Mineral Resources has moved through the trigger point, Ord Minnett upgrades to Hold from Lighten. Target is $75.
NIB HOLDINGS (NHF) was upgraded to Buy from Neutral by Citi, to Hold from Lighten by Ord Minnett and to Buy from Neutral by UBS
A disappointing first half result from nib Holdings, according to Citi, with the broker noting much of the ‘miss’ stemmed from pre-flagged losses from Midnight Health. Further investment in Midnight Health looks to be a feature of the next three to four halves, with Citi not anticipating a breakeven until FY25. Despite arhi margins declining markedly in the period, the broker points out this segment continues to grow ahead of system and the company expects growth of 3-4% over the year. Both iihi and travel are demonstrating quick recovery, suggests the broker. The rating is upgraded to Buy from Neutral and the target price increases to $7.85 from $7.60.
First half results were mixed, with a strong rebound in travel and international insurance partially offset by weaker-than-expected Australian private health insurance. In addition to deferral of premium price increases, nib Holdings’ bottom line was affected by higher acquisition costs and additional investment expenditure. Ord Minnett increases FY23 profit estimates by around 5% following the result. Rating is upgraded to Hold from Lighten while the target of $7 is unchanged.
First half results were below consensus expectations yet UBS considers these were optimistic. The broker assesses the decline in the nib Holdings stock price is overdone and there is now a unique entry point. As a result, the rating is upgraded to Buy from Neutral and the target raised to $8.00 from $7.80. The broker observes policy growth in Australian resident insurance remains buoyant and the brand continues to gain market share. Policy growth is expected to exceed the 3-4% guidance range in FY23.
OBJECTIVE CORP (OCL) was upgraded to Add from Hold by Morgans
Morgans notes a mixed 1H result as Objective Corp continues to phase out Perpetual Right To Use (PRTU) licensing and returns opex to normalised post-covid levels. While this transition should weigh on near-term revenue recognition for the rest of FY23, the analyst feels costs were re-based in the 1H, and the stage is now set for margin improvement well into FY24. The broker raises its rating to Add from Hold after becoming more comfortable with visibility for revenue and margins. While earnings forecasts are slightly lowered, the target rises to $15.70 from $15.20 on a roll forward of the financial model.
QBE INSURANCE (QBE) was upgraded to Hold from Lighten by Ord Minnett
2022 results were much stronger than Ord Minnett expected. The underwriting result more than doubled to US$2.2bn, supported by a 9% increase in premiums and a drop in expense and commission ratios. The broker makes minor changes to estimates but is now more positive on operating costs. Given a higher cash rate environment, Ord Minnett expects QBE Insurance to generate stronger returns on its policyholder and shareholder funds in 2023. Rating is upgraded to Hold from Lighten and the target lifted 8% to $13.
See downgrade below.
RAMELIUS RESOURCES (RMS) was upgraded to Outperform from Neutral by Macquarie
Ramelius Resources’s December-half result outpaced Macquarie’s net debt and net-profit-after-tax forecasts, and management reiterated guidance. Strong revenue, a beat on production costs, and lower depreciation and amortisation boosted the top line, although a slight miss on corporate costs and exploration expenditure weighed on earnings (EBITDA). The company finished the half with net cash, including leases, of $101m (up $14.1m), thanks to a lower lease balance, advises the broker. EPS forecasts rise four-fold in FY23; and 2% to 4% thereafter to reflect an improved lease balance. Rating upgraded to Outperform from Neutral. Target price is steady at $1.20.
SEEK (SEK) was upgraded to Neutral from Underperform by Macquarie
Seek’s December-half result met consensus estimates and outpaced Macquarie’s forecasts by 6%. Management narrowed guidance to the low end of its range in response to weaker turnover in Australian and New Zealand, and the bringing forward of unification costs into operational expenditure. On the upside, Asia posted a strong yield, the segment growing at 22% year on year (A&NZ yields improved slightly). EPS forecasts rise 23% in FY23; 43% in FY24; and 51% in FY25 to reflect the Asia beat. Rating upgraded to Neutral from Underperform. Target price rises to $23.50 from $19.50.
STOCKLAND (SGP) was upgraded to Accumulate from Hold by Ord Minnett
A softer outlook for residential settlements has caused Ord Minnett to slightly reduce estimates for earnings, or FFO, to 33.3c per security. The first half results signalled the business is on track to meet FY23 guidance. The broker considers the securities undervalued, as Stockland has one of the strongest balance sheets in the sector, with gearing at 22.1%. Target is raised to $4.35 from $4.30 and the rating is upgraded to Accumulate from Hold. While the long-term outlook for the residential business, with strong population growth exceeding new housing supply, is becoming more certain the broker does not assume boom conditions will return.
In the not-so-good books
A2 MILK CO (A2M) was downgraded to Underperform from Neutral by Credit Suisse
a2 Milk made strong gains in Chinese infant formula market share in the first half on excellent marketing and execution, Credit Suisse declares. Brand awareness continues to improve in China. Upside risk is nonetheless difficult because the Chinese infant formula demand rate of decline appears to have quickened. The broker’s modelling now suggests a further -10% decline in demand in 2023. Credit Suisse is concerned the China re-registration process could cause market disorder. Downgrade to Underperform from Neutral on valuation. Target falls to $5.10 from $5.30.
AMPOL (ALD) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett finds no longer-term implications from a very strong 2022 cash result, which was well ahead of expectations. The main surprise was Ampol rewarding shareholders with a special dividend of $0.50 on top of the underlying full year dividend of $1.75. The results reflected the Z Energy acquisition although the main feature in profit growth was extraordinarily strong refiner margins. The rating is reduced to Hold from Buy and the target remains at $34.50, with the shares now considered only marginally undervalued.
Altium (ALU) was downgraded to Sell from Neutral by UBS
Altium missed UBS on softer subscriptions and new licence sales, despite earnings being in line. The broker is cautious on the medium term outlook as we are yet to see true impact of 10-15% price hikes in December on new seat sales and subscription renewal rates. Octopart is likely to see further normalisation in clicks and CPC growth and there is limited scope for operating leverage in the medium term as Altium transitions to SaaS and invests in Enterprise/Nexus, the broker notes. Altium is trading at an average 40% premium to high-growth SaaS and Australian tech peers despite delivering below-peer margins and free cash flow, points out UBS. Downgrade to Sell from Neutral. Target falls to $37.30 from $37.70.
BABY BUNTING (BBN) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett found the first half results “poor”, with EBIT down -47% and gross profit margins declining to 37.2% and suspects it will be difficult for Baby Bunting to meet profit guidance over the short term. Nevertheless, the broker acknowledges there is significant long-term growth potential. Rating is downgraded to Hold from Buy and the target is lowered to $2.45 from $3.30.
BLUESCOPE STEEL (BSL) was downgraded to Underperform from Neutral by Credit Suisse
BlueScope Steel’s first half result was in line with guidance but second half guidance is below expectation. In 2021, Credit Suisse concluded there was no evidence Australian Steel Products was outperforming spreads over five years, while NorthStar had underperformed. Strong realised pricing and market share growth in Colorbond and other products in the interim led the broker to a rethink. But on the first half result and second half guidance, Credit Suisse now suggests this may have been cyclical, not structural. Target falls to $14.40 from $19.90, downgrade to Underperform from Neutral.
COSTA GROUP (CGC) was downgraded to Neutral from Outperform by Credit Suisse and to Hold from Add by Morgans
Costa Group has announced it will postpone blueberry acreage expansion in 2023, and Credit Suisse downgrades its rating to Neutral from Outperform. The company closed the year with net debt ex leases of -$350m. The broker expects the impact on earnings will land in 2024. Elsewhere, the broker is forecasting a strong citrus recovery as wet weather subsides, and that the company should benefit from new citrus acreage purchases. The broker believes this, combined with the resumption of China acreage purchase by 2025, could trigger a 2025 earnings upgrade. Target $2.50.
Weather and inflationary cost pressures weighed on FY22 results for Costa Group with all metrics missing expectations though China operations were a highlight, according to Morgans. Costs pressures are expected to moderate and management noted a positive start to FY23 with an improved weather outlook. The broker leaves its earnings forecasts largely unchanged and downgrades its rating to Hold from Add on valuation. The target price rises to $3.00 from $2.90. There’s considered potential for a takeover as private equity has returned to the share register. Management anticipates significant earnings growth in FY23 with further growth over FY24 and FY25 as numerous growth projects scale up.
CSR (CSR) was downgraded to Underperform from Neutral by Macquarie
Macquarie assesses conditions are weakening for CSR and the risks are growing. While the available work has been robust and builders are generally expected to be busy over 2023, a tightening of affordability and price pressures could result in increased cancellation rates. While the company is likely to perform strongly over FY23, the broker assesses the earnings risk beyond that is distinct. Rating is downgraded to Underperform from Neutral and the target is lowered to $4.55 from $5.05.
DETERRA ROYALITES (DRR) was downgraded to Neutral from Outperform by Macquarie
First half results were in line with expectations. Deterra Royalties has the benefit of the ramp-up of South Flank that has offset the easing of iron ore prices, Macquarie points out. South Flank remains a key catalyst and should lift to nameplate capacity over the next two years. The broker expects spot prices to remain above 7% from FY23. Incorporating the results makes little difference to forecasts and the target is unchanged at $5. Macquarie downgrades to Neutral from Outperform amid recent strength in the share price.
G8 EDUCATION (GEM) was downgraded to Neutral from Buy by UBS
G8 Education posted a solid improvement in occupancy half on half, ending the year at 71%, UBS highlights, and major business improvements are largely done. The demand outlook is improving and the upcoming increase in government rebates should help further stimulate participation. However labour shortages remain the key constraint to further occupancy uplifts and industry supply may again become a headwind. Wage increases could help drive a meaningful step-up in labour availability but government reviews of the industry create another layer of uncertainty, UBS warns. Given the recent share price run the broker downgrades to Neutral from Buy. Target rises to $1.30 from $1.25.
LATITUDE GROUP (LFS) was downgraded to Underperform from Neutral by Macquarie
Results from Latitude Group, at the pre-provision level, were largely in line with forecasts, affected by continued elevated repayment levels and margin pressures. Macquarie envisages re-pricing initiatives and rising rates will broadly offset each other over 2023. As the macro uncertainties are driving soft margin trends and there are persistent material items, the broker finds better value elsewhere in the sector and downgrades to Underperform from Neutral. Target is reduced to $1.20 from $1.30.
MONADELPHOUS GROUP (MND) was downgraded to Neutral from Outperform by Macquarie
Monadelphous Group’s December-half result nosed out Macquarie’s forecasts, thanks to a strong beat in earnings (EBITDA) margins and a buoyant resources sector. Macquarie says the margin beat reflects the company’s earnings quality and targeted bidding. The construction division disappointed due to contract delays and losses (the Rio Tinto Western Range contract) and iron-ore capital expenditure, and the broker observes contract delays are continuing but considers selective tendering is better in the long-term given it allows the company to put its constrained labour forces and resources into higher yielding projects. Management guides to increased revenue in the June half and FY24, and advises the contract pipeline remains at $2bn. Macquarie downgrades its rating to Neutral from Outperform. Target price eases to $13.60 from $13.70.
QBE INSURANCE (QBE) was downgraded to Lighten from Buy by Ord Minnett
Ord Minnett expects higher interest rates will provide a benefit for QBE Insurance in the medium term although the competitive landscape means some of the upside will be eroded through competition via premium rates. The broker now whitelabels Morningstar instead of JPMorgan and the rating is downgraded to Lighten as the share price has moved through the trigger level. Target is $12.
See upgrade above.
SHAVER SHOP (SSG) was downgraded to Hold from Accumulate by Ord Minnett
First half results were largely in line and no FY23 guidance was provided. Ord Minnett observes Shaver Shop has a strong market position and generates high returns on capital. The Australian network has been largely built out but there is scope for expansion in New Zealand. Still, with declining sales in successive quarters and the prospect of more difficult trading ahead, the broker has become more cautious and downgrades to Hold from Accumulate. Target is reduced to $1.25 from $1.30.
SUPER RETAIL (SUL) was downgraded to Sell from Lighten by Ord Minnett
As the Super Retail share price has moved through the trigger point, Ord Minnett downgrades to Sell from Lighten. Target is $9.50.
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.