The FNArena database tabulates the views of eight major Australian and international stockbrokers: Citi, Bell Potter, Macquarie, Morgan Stanley, Morgans, Ord Minnett, Shaw and Partners and UBS. September is when investors and financial analysts take a breather post the busy August reporting season in Australia.

This results in below-average volumes on the ASX and significant shrinkage in the number of research reports released by local stockbrokers. Overall activity from the local analyst community did pick up slightly during the week ending Friday 22nd September. FNArena registered six upgrades in ratings and five downgrades, a slight increase on the week prior.

Most changes centred around resources companies with all five downgrades affecting ratings for miners, including two downgrades for coal miner New Hope following its release of FY23 financials. Half of the three upgrades did not revolve around metals and mining, with each of Genetic Signatures, Megaport and Mesoblast receiving a fresh upgrade to Buy.

Mining companies are also the main constituent for the week’s table of positive revisions to valuations and price targets, with most adjustments only minor. Out-of-season reporter Sigma Healthcare saw its performance rewarded with the week’s largest gain, 7.29%. Next followed Megaport (4.23%) and Deterra Royalties (3.87%).

The numbers on top of the table for negative amendments are larger with retailer KMD Brands’ price target falling by -11.11% post result release, and with Syrah Resources’ target declining by -7.22%. Abacus Group’s decline of -6.41% made it third largest loser for the week.

A similar picture dominates the week’s changes to earnings forecasts with negative revisions noticeably larger, and with miners and explorers dominating both sides of the ledger.

On the positive side, Alumina Ltd enjoyed an 89% shrinkage in this financial year’s forecast loss, handsomely beating KMD Brands and Megaport, followed by Fortescue Metals, 29Metals and Monadelphous.

On the negative side, New Hope’s consensus forecast dropped by -49.44%, with significant declines befalling forecasts for each of Sandfire Resources, Sigma Healthcare, Syrah Resources, and Abacus Group.

In the good books: Upgrades

1. 29METALS LIMITED ((29M)) Upgrade to Overweight from Equal weight by Morgan Stanley. B/H/S: 1/3/0

Morgan Stanley updates its modelling to allow for higher 2024 copper prices and 2025 gold prices, as well as a lower Australian dollar over 2023-24. The broker upgrades 29Metals to Overweight from Equal-weight based on valuation and because balance-sheet concerns are being resolved through the entitlement offer amid potential for a faster-than-expected re-start at Capricorn Copper. Target is raised to $0.85 from $0.75. Industry view: Attractive.

2. DETERRA ROYALTIES LIMITED ((DRR)) Upgrade to Overweight from Equal weight by Morgan Stanley. B/H/S: 2/1/1

Morgan Stanley observes iron ore prices have rallied on hopes of softer implementation of steel production reductions. From a fundamental view, the broker’s expectations of a longer tail for prices appears to be materialising, with 2024 forecasts revised up 27% to US$105/t.

Morgan Stanley envisages value upside for Deterra Royalties and upgrades to Overweight from Equal weight. Target is raised to $5.50 from $4.60. Industry View: Attractive.

3. GENETIC SIGNATURES LIMITED ((GSS)) Upgrade to Speculative Buy from Hold by Bell Potter. B/H/S: 1/0/0

The US represents around 65% of the global molecular diagnostics market and, Bell Potter highlights, has always been a target for Genetic Signatures. The launch of core operations was delayed by the pandemic and trial issues, yet the EasyScreen gastrointestinal parasite detection kit validation has now been completed, with the submission to the US FDA this month.

US infrastructure has been established with a distribution/warehouse facility in California and the reimbursement code is in place for US$263 per test. The broker upgrades to Speculative Buy from Hold, reducing the target to $0.90 from $0.95.

4. MEGAPORT LIMITED ((MP1)) Upgrade to Buy from Neutral by Citi. B/H/S: 4/2/0

Citi upgrades Megaport to Buy from Neutral, anticipating upside risk to FY24 forecasts and retaining an EBITDA forecast that is 10% above consensus.

The business is considered a substantial beneficiary of increased cloud adoption and the increased investment and focus on the customer should result in greater share of wallet.

The company is making progress on hiring staff with management expecting 20 new sales roles by the end of October. Target is raised to $12.50 from $11.00.

5. MESOBLAST LIMITED ((MSB)) Upgrade to Speculative Buy from Hold by Bell Potter. B/H/S: 1/0/0

Mesoblast has met with the US FDA and provided clarity regarding the nature of the potency assay data that is now required, having confirmed the strategy for resubmission of a Biological Licence Application for Remestemcel-L in paediatric Graft versus Host Disease (GvHD).

Subsequent to the success of generating new data, Bell Potter is encouraged by the outcome of the meeting and estimates a submission could occur in the first quarter of 2024.

The broker makes no changes to earnings and valuation with the target unchanged at $0.58. Rating is upgraded to Speculative Buy from Hold based on the movement in the share price.

6. SOUTH32 LIMITED ((S32)) Upgrade to Accumulate from Hold by Ord Minnett. B/H/S: 4/2/0

As Ord Minnett/Morningstar analysts have updated their projections and thoughts on the mining sector, South32 is now rated as Accumulate, with an unchanged fair value estimation of 44.10. Key statement: “Over the long term, China’s economy is likely to transition to a more consumption-based economy as opposed to investment-based one, which is a headwind for commodity demand”. No changes have been made to forecasts.

 

In the not-so-good books: Downgrade

1. BHP GROUP LIMITED ((BHP)) Downgrade to Lighten from Hold by Ord Minnett. B/H/S: 2/2/1

Ord Minnett/Morningstar have somehow lost the incentive to report a downgrade as a downgrade. Today’s Lighten rating compares with Hold in late August. Valuation has remained at $39.50. Commentary suggests commodity prices have stabilised this quarter on expectations of successful China stimulus. On the other hand, the mining sector feels the need to ramp up investments, including exploration expenditure.

The following statement tells the story: “Excluding impairments, we forecast midcycle returns slightly above our estimated cost of capital”. No changes are made to forecasts.

2. IGO LIMITED ((IGO)) Downgrade to Underweight from Equal weight by Morgan Stanley. B/H/S: 2/1/1

Morgan Stanley notes battery material inventories are high and suspects this could cause weaker demand for battery materials into 2024. The broker envisages pressure on lithium and nickel prices.

Morgan Stanley updates its modelling for IGO, adjusting forecasts in line with company guidance. Lower spodumene prices are now forecast for FY24 while higher lithium price forecasts for FY25 drive estimates higher for that year.

Given the valuation gap between the current price and the broker’s base case the rating is downgraded to Underweight from Equal weight. Target is reduced to $11.60 from $13.40. Industry view: Attractive.

3. NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Sell from Neutral by Citi. B/H/S: 0/2/2

Today’s Hold rating compares with Accumulate in early June. Ord Minnett/Morningstar have lost the habit of reporting downgrades as downgrades.

New Hope’s FY23 performance is labelled as “strong” as higher pricing for thermal coal offset declining production volumes due to wet weather. The broker highlights El Nino should prove a better operational environment.

It is the broker’s view New Hope should continue to enjoy elevated pricing for its coal volumes, with thermal coal pricing forecast to average US$170/tonne in FY24, and US$150/t between FY25-FY27. Fair value: $6.10.

Forecasts have been lowered on a slower ramp up for New Acland stage three.

Much of New Hope’s FY23 had been pre-guided, though yesterday’s release showed a net profit of $1.09bn and this missed Citi’s forecast by -3%. The 70c dividend missed by -2%.

Higher costs and a slower ramp up at Acland see the broker downgrading FY24 and FY25 estimates by -7%-19%. Target price moves to $5.50 from $5.20 on higher assumed multiples, the broker explains.

Given the shares rallied some 32% since July, Citi has decided to downgrade to Sell from Neutral. Also highlighted: New Acland Stage 3 capex spend has risen to -$459m.

It is Citi’s view the recent thermal coal price rally on LNG strikes is overdone and thermal demand should weaken into shoulder season.

4. PANTORO LIMITED ((PNR)) Downgrade to Hold from Buy by Bell Potter. B/H/S: 1/1/0

Pantoro continues to ramp up the Norseman gold project. Since first pour, production has been hampered by issues that have been commonly faced throughout the Australian gold industry, Bell Potter observes, such as rising input costs and shortages of skilled labour.

While three equity raisings have been completed since, proceeds have primarily been directed towards supporting the production ramp up and strengthening the balance sheet.

The plant is now running at close to nameplate and while key metrics have improved the broker believes more is needed and clarity on costs will be key. Rating is downgraded to Hold from Buy, and the target raised to $0.53 from $0.34.

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.