For the week ending Friday March 24 there were 10 upgrades and five downgrades to ASX-listed companies by brokers in the FNArena database. Repeated guidance downgrades and ongoing cash-burn have raised the likelihood of a capital raising at Fineos Corp, according to Citi. As a result, the broker downgraded its rating to Neutral High Risk from Neutral, and the company recorded the largest percentage fall in average target price last week.

Citi lowered its target to $1.39 from $2.50, which compares to a $4 target as recently as February 28 this year, when the stock was rated a Buy.

Star Entertainment Group received the second largest percentage drop in average target price in the FNArena database after Outperform-rated Macquarie resumed coverage following an equity raising.

Macquarie feels the main swing factor for the company’s future gearing level will be the eventual monetary penalty from AUSTRAC and outcomes from class actions.

Star also heads up the table below for the largest percentage downgrade to forecast earnings in the database.

While NextDC was second on the table, the size of the percentage change was exaggerated by the small forecast numbers involved.

In its review of the Technology and Communication sector following the February reporting season, Citi retained its Buy rating for NextDC and raised its target to $12.70 from $12.60.

Commenting on the company’s first half results, the broker appreciated the company’s strong revenue (buoyed by strong billing utilisation and CPI price links) and falling cost profile. On the downside, bookings disappointed, particularly out of Melbourne.

Appen received the next largest fall in forecast earnings, also as a result of Citi’s review of the Technology and Communication sector.

The analyst assessed FY22 results in late-February were on balance negative, with Appen beginning to underperform its closest peer, Telus International. The broker’s target was reduced to $2.00 from $2.30 and the Sell rating retained.

On the flipside, Brickworks received a material increase in average forecast earnings last week. As noted by Ord Minnett, Brickworks managed to deliver a 26% earnings increase over its first half (ending in January), with the result underpinned by strength in the Property and Investments divisions.

This outcome was achieved despite a somewhat disappointing performance from both the Australian and North American Building Products divisions, explained the analyst.

While earnings for Building Products will face FY24 headwinds from input costs, suggested UBS, the Property division’s earnings should fare better with strong rental earnings offsetting cap rate headwinds.

The Property division contributed a large slice ($453m) of the $607m in earnings for the first half, of which $263m was from property sales.

Morgans pointed out the Investments division is a key contributor to the underlying Brickworks share price. The company’s interest in Washington H Soul Pattinson & Co, for example, accounts for around $17 of the Brickworks share price, which closed last week at $22.67.

In the good books

 

A2 MILK COMPANY LIMITED ((A2M)) was upgraded to Accumulate from Hold by Ord Minnett .B/H/S: 2/1/3

Ord Minnett upgrades its rating for a2 Milk Co to Accumulate from Hold on valuation after a recent share price decline.

No changes are made to the broker’s forecasts and the $7.20 target is unchanged.

AUB GROUP LIMITED ((AUB)) was upgraded to Accumulate from Hold by Ord Minnett .B/H/S: 4/0/0

Ord Minnett upgrades its rating for AUB Group to Accumulate from Hold valuation after a recent share price decline.

No changes are made to the broker’s forecasts and the $29 target is unchanged.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) was upgraded to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/0

Credit Suisse warns Cleanaway Waste Management is likely at risk of severe economic sensitivity, based on impacts on peers in the US and UK during the global financial crisis. The peer companies in question saw revenue decline as much as -12%, and earnings as much as -50%.

Extrapolating these results, Credit Suisse expects a gross domestic product decline of between -1-2% would see Cleanaway Waste Management’s revenue decline -2-4% and earnings -6-8%, while in the less likely case of a -5% gross domestic product decline would see revenue decline -10-12% and drive a materially greater earnings decline.

The rating is upgraded to Neutral from Underperform and the target price of $2.50 are retained.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) was upgraded to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/1

Ord Minnett upgrades its rating for Insurance Australia Group to Accumulate from Hold on valuation after a recent share price decline.

No changes are made to the broker’s forecasts and the $5.50 target is unchanged.

MYER HOLDINGS LIMITED ((MYR)) was upgraded to Hold from Lighten by Ord Minnett .B/H/S: 0/1/0

While the Australian department store sector has long been in decline, and likely to continue on that trend according to Ord Minnett, the broker does consider Myer to offer the greatest leverage to the sector and points out the retailer is following clear strategy to address the challenges facing the wider sector.

Ord Minnett expects the introduction of Amazon to the Australian market to prove disruptive to incumbent retailers, and this impact to emerge at the same time as decline in the sector’s relevance to consumers who are shifting spending to entertainment, leisure and specialty stores.

The rating is upgraded to Hold from Lighten and the target price of $0.75 is retained.

PREMIER INVESTMENTS LIMITED ((PMV)) was upgraded to Lighten from Sell by Ord Minnett .B/H/S: 3/2/0

Ord Minnett has lifted its rating on Premier Investments, operator of retail brands including Just Jeans, Jay Jays, Portmans, Jacqui E, Dotti and Peter Alexander, as well as stationary brand Smiggle.

The broker highlights Smiggle, which has limited competitors, a unique concept and an affordable price point, remains pivotal to growth plans. Having already achieved success with the brand in Australia, New Zealand and the UK, the company intends to pursue expansion in Europe to drive long-term growth.

The rating is upgraded to Lighten from Sell and the target price of $19.00 is retained.

See also PMV downgrade.

RIO TINTO LIMITED ((RIO)) was upgraded to Hold from Lighten by Ord Minnett .B/H/S: 2/4/1

Ord Minnett upgrades its rating for Rio Tinto to Hold from Lighten after a recent share price decline.

No changes are made to the broker’s forecasts and the $107 target is unchanged.

SCENTRE GROUP ((SCG)) was upgraded to Accumulate from Hold by Ord Minnett .B/H/S: 2/4/0

Having delivered a strong earnings rebound in 2022 as pandemic impacts faded, Ord Minnett expects Scentre Group will face slower than historical income growth due to online competition.

The broker highlights the company’s shopping centres continue to lead their catchments thanks to their size, location and access to parking and transport infrastructure.

The rating is upgraded to Accumulate from Hold and the target price of $3.30 is retained.

STAR ENTERTAINMENT GROUP LIMITED ((SGR)) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 3/1/0

Macquarie resumes coverage of Star Entertainment post its equity raising, observing a large earnings discrepancy between consensus input forecasts.

The broker applies an Outperform rating (which compares with its last rating in the FNArena data base on February 13 of Hold), and a target price of $1.65 ($1.55 in February), with the proviso that much depends on the NSW tax outcome ($300m of penalties compares with the company’s $150m provision).

The broker expects the company can cushion some of the blow by cutting capital and operating expenditure and believes the share market is factoring in a worst-case scenario.

UNITED MALT GROUP LIMITED ((UMG)) was upgraded to Buy from Neutral by UBS .B/H/S: 4/1/0

Industry feedback suggests to UBS beer demand has improved while input costs such as barley prices, freight and energy have remained largely supportive.

The broker also expects FY24 earnings will be materially higher than the consensus forecast and decides to upgrade its rating for United Malt to Buy from Hold.  A lower earnings multiple relative to peers was another factor in the upgrade.

The target rises to $3.80 from $3.70.

In the not-so-good books

FINEOS CORPORATION HOLDINGS PLC ((FCL)) was downgraded to Neutral, High Risk from Neutral by Citi .B/H/S: 2/1/0

Citi reviews the Australian technology and communications sector post the February reporting season and, while most companies posted efficiency gains, consensus cost forecasts were raised (with many efficiency plans failing to deliver cuts) and many companies announcing plans for cost-outs.

The broker says FY23 upgrades and downgrades were fairly evenly split with WiseTech Global ((WTC)) the leader, and Fineos Corp ((FCL)) the laggard, but observes greater revenue downgrades for FY24.

Citi expects the outlook for the sector will continue to be dominated by global interest rate movements but believes yields are likely to top-out soon, easing the pressure somewhat, and expects investors will switch their focus to durable growth.

Citi doubles down on its negative view of Fineos Corp. While the broker appreciates the company’s strong subscription revenue, repeated guidance downgrades and hefty cash burns have now raised the likelihood of a capital raising. The broker now assumes a $50m raising in the December half.

Rating is downgraded to Neutral, High Risk, from Neutral. Target price slumps to $1.39 from $2.50. This compares with a Buy rating and $4 target price on February 28, pointing to a rapid decline in Fineos’ outlook.

HEALIUS LIMITED ((HLS)) was downgraded to Hold from Add by Morgans .B/H/S: 2/2/2

In an approach that looks opportunistic to Morgans, given a lack of premium, Healius has received an all-scrip off-market takeover offer from Australian Clinical Labs ((ACL)). The deal is comprised of 0.74 Australian Clinical Labs shares for each Healius share.

The potential to unlock -$95m cost synergies is realistic, believes the broker.

While conceding the potential for scale benefits and cost savings, Morgans sees risk in merging the operations from hiccups or divestments, which may impact on returns achieved. Also, ACCC clearance for the transaction may not be certain, explains the analyst

The rating is downgraded to Hold from Add and the $3.02 target retained.

NEW HOPE CORPORATION LIMITED ((NHC)) was downgraded to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/0

Ord Minnett highlights New Hope will be required to sell some coal into the domestic market at capped prices, as per the New South Wales government’s recently introduced Coal Reservation Scheme.

While this does see the broker modestly reduce its valuation for the company, it continues to expect thermal coal prices to remain well above the marginal cost of production through to 2025.

The rating is downgraded to Hold from Accumulate and the target price decreases to $6.30 from $6.50.

PREMIER INVESTMENTS LIMITED ((PMV)) was downgraded to Neutral from Buy by UBS .B/H/S: 3/2/0

Prior to 1H results due on March 27, UBS downgrades its rating for Premier Investments to Neutral from Buy on valuation after a recent share price rally.

Looking beyond the result, the broker forecasts Retail earnings (EBIT) will fall in FY23 and FY24 on a negative channel shift back to stores. Also, a more challenging environment for the consumer should result in softer demand and some trade down.

The $26 target price is unchanged.

See also PMV upgrade.

SYNLAIT MILK LIMITED ((SM1)) was downgraded to Underperform from Neutral by Macquarie .B/H/S: 0/0/1

Macquarie suggests challenges may persist for Synlait Milk with questions around long-term recovery and return on capital weighing.

The analyst forms this view after management materially downgraded its outlook for FY23 due to lower forecast demand for Advanced Nutrition products, as well as cost and SAP software challenges.

The broker downgrades its rating to Underperform from Neutral and lowers its FY23-25 EPS forecasts by -57%, -35% and -24%, respectively.

The target price falls to NZ$$2.61 from NZ$3.41 on the lower earnings forecast, a lower long-term return on capital employed (ROCE) assumption and a higher risk-free rate, explains the analyst.

 

Earnings forecast

Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.

 

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.