Core Lithium received the largest reduction in average broker target price last week, yet also topped the table below for the largest percentage increase in forecast earnings by analysts. The around 700% percentage increase looks impressive but was exaggerated by the small numbers involved.
On September 29, the company reported a $10.8m profit for FY23, which was materially better than the -$13.4m loss Macquarie anticipated due to larger-than-expected capitalised waste stripping at the Finniss lithium project in the Northern Territory.
Management also maintained FY24 guidance. Shipments into the company’s long-term offtake agreements with Sichuan Yahua and Ganfeng Lithium commenced in early September.
The broker also noted a robust balance sheet with $153m on hand, in addition to the $111.4m raised in the mid-August institutional placement and share purchase plan (SPP) to help fund growth and exploration. However, Morgans now feels there is ongoing material uncertainty around the investment proposition for Core Lithium given the need for this capital raise.
After incorporating equity dilution from the raise into its forecasts and allowing for higher longer-term operating overheads, this broker slashed its target price to 41c from 60c. No changes were made to production or pricing forecasts.
Sell-rated Citi also lowered its target for core Lithium to 35c from 38c and noted management and Tesla are seeking to resolve a potential legal claim by Tesla without litigation.
De Grey Mining was second on the table below for negative change to average target price after also raising equity. This was needed for the ordering of long-lead items, exploration drilling and early works at the Hemi gold project in the Pilbara region of WA.
Having released a definitive feasibility study for this project, the company announced a two-tranche $300m equity raise, with the second tranche of $54m subject to shareholder approval.
While the feasibility study was largely as expected, Bell Potter noted the study’s release was a key de-risking milestone for the project and confirms Hemi as a global Tier 1 asset.
The largest percentage reduction in average earnings forecast by brokers last week went to Avita Medical after management warned of a delay of between four and six months for the launch of its Recell Go device as the FDA in the US has requested additional information.
The main cause of the delay is time needed for a different method of statistical analysis to compare suspended skin cells from the automated process (Recell Go) and the current method of using Recell (manual disaggregation), explained Morgans.
As Bell Potter noted, this pushes approval to mid-2024, though its forecast for FY24 revenues of $86m were retained. The Buy rating was also retained while the target price fell to $6.85 from $7.45.
Add-rated Morgans had not previously incorporated a step-up of sales into its forecasts for Recell Go and left its $6.74 target unchanged.
Liontown Resources was next after releasing an update for its Kathleen Valley lithium project north of Kalgoorlie in WA.
Capital and operating costs came in 6% higher than Macquarie had anticipated. As the takeover offer from Albemarle of $3.00/share still stands, the broker felt the update from management only reduced the risk of a binding offer not emerging.
Both Macquarie and Cit retained their $3 targets and Neutral ratings for Liontown.
UBS is currently under research restriction for the company but did reduce its price forecasts for lithium last week by between -10-30%. As a result, EPS forecasts for lithium companies under the broker’s coverage were reduced by -19%-57% for FY24-26, depressing valuations by -5%-13%.
While overall industry transparency is improving, this broker noted the lithium market within China in particular, remains opaque for outsiders. In addition, demand expectations outside of China are being tested in the light of macro-economic weakness.
Coronado Global Resources also received downgrades to earnings forecasts by brokers last week.
Brokers continued to lower earnings forecasts for Bank of Queensland last week after warning in the prior week that its second half will be affected by a sharp erosion of margins, negative mortgage growth and rising costs.
Management stated the FY23 result would include one-off charges of -$125m pre-tax, including -$113m of non-cash items relating to restructuring costs and the ME Bank integration.
The Bank of Queensland FY23 result is due this Wednesday. Morgans forecasts a final dividend of 20cps, flat on the first half, and a -17% EPS decline in the second half compared to the first half.
In the good books: upgrades
- TABCORP HOLDINGS LIMITED ((TAH)) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S: 3/2/0
Tabcorp Holdings has breached Ord Minnett’s trigger level and the broker upgrades its rating to Accumulate from Hold. Target price is $1.10.
In the not so good books: downgrades
- ALS LIMITED ((ALQ)) was downgraded to Sell from Lighten by Ord Minnett. B/H/S: 2/1/1
Ord Minnett downgrades ALS Ltd’s rating to Sell from Lighten, expecting a slowing in its commodities business in FY24, which constitutes the majority of earnings. While the broker expects demand for battery minerals will support the company over the long term, the near to medium term looks less encouraging. Given the company is barely earning its cost of capital including goodwill given recent expansion, the broker considers the company to be materially overvalued. The less-cyclical Life Sciences segment is looking chirpier – the broker expecting a compound annual growth rate of 10%, compared with 1% for Commodities, but its weighting is insufficient to sway the earnings profile. Ord Minnett observes the company plans to raise Life Science’s contribution to group revenue to 60% (Commodities comprises just under 50%). Target price is steady at $8.40. The broker’s 61c FY24 EPS forecast equates to a 3.7% partly franked yield.
- ATLAS ARTERIA ((ALX)) was downgraded to Hold from Add by Morgans. B/H/S: 0/5/0
In a draft budget, the French government has announced a new tax (commencing 2024) that will negatively impact large motorway and airport concessions in France. Following parliamentary debate, final legislation is due in December. Atlas Arteria estimates the proposed tax on 4.6% of revenues exceeding EUR120m would have totalled EUR117m when applied to the APPR motorway in 2022, notes Morgans. The broker lowers its target for Atlas Arteria to $5.67 from $6.44 and downgrades its rating to Hold from Add. It’s thought the company’s current DPS level is no longer sustainable beyond FY25 given the hit to cash flows.
The analyst sees valuation upside from either the (uncertain) legal process to extract compensation under the concession agreement and/or a takeover bid. The probability weighting applied to a takeover by IFM has now been reduced to 40% from 50%.
- CARNARVON ENERGY LIMITED ((CVN)) was downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/0/1
Macquarie sees limited opportunity for Carnarvon Energy to re-rate amid ongoing regulatory challenges for Australian projects. With activists having successfully challenged environmental plan approval for both the Barossa and Scarborough projects, citing insufficient consultation with Traditional Owners, it is expected new offshore oil and gas projects would be subject to the same challenges. Given there is little Carnarvon Energy can do to progress Dorado until a final investment decision can be made, likely now past 2025, Macquarie downgrades its rating to Underperform from Neutral and the target price decreases to 10 cents from 14 cents. The broker expects there will be temptation to deploy capital into other opportunities.
- SEVEN GROUP HOLDINGS LIMITED ((SVW)) was downgraded to Lighten from Hold by Ord Minnett. B/H/S: 3/0/0
Ord Minnett has cut its rating for Seven Group to Lighten from Hold, on valuation.
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.