IN THE GOOD BOOKS – 4 upgrades
- CITY CHIC COLLECTIVE LIMITED ((CCX)) Upgrade to Buy from Hold by Bell Potter. B/H/S: 1/5/0
City Chic Collective has divested its Europe/Middle East/Africa business, Evans. This supports inventory re-sizing for the group, Bell Potter suggests, given majority of the inventory build has been associated with the UK where trading has remained weak, and enables the company to channel capital towards generating better returns in existing regions. The broker believes the next few months can thus be well supported in A&NZ and the US as continuing tough retail conditions persists. On sale proceeds the target rises to 70c from 42c. Upgrade to Buy from Hold.
- CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Neutral from Underperform by Macquarie. B/H/S: 0/5/0
Charter Hall Long WALE REIT’s FY23 results were in line with guidance and expectations. FY24 guidance of $0.26 per security is below Macquarie’s expectations and appears to be driven by higher-than-expected interest expense.
The company reported strong rental growth of 4.4% in FY23 and with 51% of the portfolio linked to CPI and the remainder to fixed increases, the broker expects rental growth will remain elevated. Rating is upgraded to Neutral from Underperform on valuation, yet the broker remains cautious regarding the balance sheet amid headwinds from higher debt costs. Target is reduced to $3.56 from $3.77.
- CORONADO GLOBAL RESOURCES INC ((CRN)) Upgrade to Accumulate from Hold by Ord Minnett. B/H/S: 5/0/0
First half results were largely in line with Ord Minnett’s expectations although the dividend was significantly softer. The broker considers the sell-off in Coronado Global Resources overdone given there is reduced risk in terms of delivery and an apparent willingness to abandon recent M&A opportunities that proved less attractive. The broker also revises assumptions for fixed-price contracts in the US and adjusts pricing realisations to reflect historical results. Rating is upgraded to Accumulate from Hold and the target lifted to $1.70 from $1.60.
- PILBARA MINERALS LIMITED ((PLS)) Upgrade to Add from Hold by Morgans. B/H/S: 3/1/1
Following a 36% increase in the mineral resource estimate (MRE) at Pilgangoora, Morgans believes the valuation for Pilbara Minerals looks attractive compared to other hard rock pure plays. The rating is upgraded to Add from Hold.
More significantly, according to the analyst, the biggest increase at Pilgangoora was in the measured and indicated resource (more certain than inferred) which increased by 64%.
Further brownfields expansion beyond the currently planned capacity increase to 1Mtpa may result, suggests Morgans. The target rises to $5.90 from $5.00.
IN THE NOT-SO-GOOD BOOKS – 8 downgrades
- IDP EDUCATION LIMITED ((IEL)) Downgrade to Underperform from Neutral by Macquarie. B/H/S: 3/2/1
Macquarie expects a soft result when IDP Education reports on August 23, suspecting consensus is over-estimating multi-destination student placement volumes.
The broker forecasts Australian volume growth of 49%. Meanwhile, discounting of competing tests by distributors suggests the IELTS industry may be getting more competitive in price.
With an expensive multiple and expected downgrades to margins and IELTS volumes, Macquarie downgrades the stock to Underperform from Neutral. Target is steady at $21.
- JUDO CAPITAL HOLDINGS LIMITED ((JDO)) Downgrade to Neutral from Outperform by Macquarie. B/H/S: 2/1/0
Macquarie expects Judo Capital’s deposit margins in the second half will underpin underlying margins well in excess of the target of more than 3% proposed by management That said and despite the business appearing set to meet FY23 guidance the broker still expects SME competitive pressures and term deposit spreads will put pressure on margins. With lower growth prospects, normalising funding costs and uncertain credit quality Macquarie downgrades to Neutral from Outperform. Target is reduced to $1.50 from $1.60.
- LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Neutral from Outperform by Macquarie. B/H/S: 4/2/1
Macquarie assesses a tough macro outlook will drive margin pressure for Lovisa Holdings, noting Australasian consumers have come under pressure over the June quarter and this has persisted into the early part of the first half of FY24. Offshore markets, meanwhile, have been vulnerable for longer. While explicitly accounting for this in sales forecasts, Macquarie remains cautious about the short-term and notes scope for weak outlook commentary at the upcoming results.
Industry feedback suggests elevated promotional activity in recent months. Rating is downgraded to Neutral from Outperform and the target lowered to $22.00 from $35.70.
- MESOBLAST LIMITED ((MSB)) Downgrade to Speculative Hold from Speculative Buy by Bell Potter. B/H/S: 0/1/0
The US FDA has rejected the biological licence application for remestemcel-L. While the drug is sufficiently safe and efficacious to give away via the expanded assess program in the US and available in Japan, Bell Potter contends it seems it was not good enough for FDA approval.
The broker finds the FDA decision to withhold a life-saving therapy confusing and there are substantial downgrades to revenue and earnings following the announcement. Additional efficacy data have been requested in the form of a controlled trial in adults and Mesoblast now plans to conduct the study in the highest risk patients with the greatest prospect of mortality. Rating is downgraded to Speculative Hold from Speculative Buy and the target is reduced to $0.60 from $2.00.
- NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Hold from Add by Morgans. B/H/S: 1/1/2
Morgans reduces its forecasts for the coal sector due to lower estimates for coal prices and higher longer-term costs. Across FY24-25, forecasts for NEWC (thermal prices) and hot coking coal (HCC) are lowered by -25-35% and -0-3%, respectively.
The broker believes risks to realised coal pricing (met and thermal) are asymmetrically skewed to the upside. It’s felt currently depressed share prices imply coal pricing will never again tighten upward in support of windfall cash flows. Morgans downgrades its rating for New Hope to Hold from Add on valuation and lowers its target to $5.30 from $6.35.
- SIMS LIMITED ((SGM)) Downgrade to Sell from Neutral by UBS. B/H/S: 0/1/3
UBS notes, following a period of elevated prices, US steel spreads have started to normalise while East Asian spreads remain depressed despite some optimism regarding potential Chinese stimulus. The broker downgrades Sims to Sell from Neutral given a weakening scrap price and volume outlook that should lead to significant downside risk to FY24 consensus EBIT.
The company is likely to benefit from strategies to drive longer-term earnings from business models that enable the “circular economy”, but UBS believes this is will not be significant over the next five years. Target is reduced to $13.60 from $16.30.
- SANTOS LIMITED ((STO)) Downgrade to Hold from Add by Morgans. B/H/S: 5/1/0
Morgans downgrades its rating for Santos to Hold from Add on recent share price strength and reduces its target to $8.30 from $8.45.
For upcoming 1H results, the broker expects the company to maintain a solid group margin and a healthy interim dividend.
- SOLVAR LIMITED ((SVR)) Downgrade to Hold from Buy by Bell Potter. B/H/S: 1/1/0
A trading update from Solvar ahead of its earnings result is in line with Bell Potter’s forecast. The outlook for FY24 is less favourable, the broker notes, with increases to funding costs affecting the back book.
Most loans are fixed rate at inception, and the company has taken on more floating rate debt to back these, which has squeezed net interest margins as interest rates have risen.
Bell Potter has revised down forecasts, but the outcome is uncertain and will depend future trading through FY24 and into FY25. Target drops to $1.08 from $3.01. Downgrade to Hold from Buy.
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.