Zip Co received the largest percentage increase in average earnings forecast and the largest percentage increase in average target price after releasing a stronger-than-expected third quarter trading update.
UBS raised its cash earnings forecasts by an average of 19% to reflect operating leverage from lower net bad debts and improving funding costs. It’s felt the key positive was the strength and quality of US total transaction value (TTV) growth over the quarter. Despite losing -200,000 net new customers, growth increased by 44% year-on-year compared to the second quarter, while credit risk metrics remained stable.
The broker forecasts Zip can grow US TTV at a 31% compound annual growth rate (CAGR) over the next three years to reach $10.4bn TTV by FY26. US penetration is still less than 2% of total payments as the company pivots to larger spend verticals such as electronics and automotives, explained the analyst.
Ord Minnett focused on Zip’s increasingly healthy margins. With bad debts remaining steady, a 9.1% jump in the revenue margin for the quarter translated to a 3.9% rise in the net interest margin, compared to management’s medium-term outlook for 3-4%. In the US, TTV growth of almost 50% versus the previous corresponding period combined with an uptick in revenue margins to 9.1% from 8.7% three months prior.
Also, the balance sheet is improving, according to this broker, with available cash and liquidity of $95.2m, and the convertible note balance continuing to dwindle to the current $21.7m level.
The Zip Co share price closed at $1.09 last Friday which compares to the $1.55 target set last week by Ord Minnett and UBS, up from $1.08 and $1.43, respectively.
Evolution Mining was second on the positive change to target price table below after management maintained FY24 guidance, albeit at the lower end of the range, following its third quarter production release.
To achieve guidance requires a (very strong) 34% quarter-on-quarter increase for June quarter gold production on higher grades across Cowal, Mungari and Red Lake, noted UBS.
Macquarie felt guidance risk is now elevated, and following a strong share price run, downgraded its rating for Evolution to Neutral from Outperform, after increasing the target by 8% to $4.10.
Avita Medical received the largest percentage fall to average target price last week and the second largest fall in average earnings forecast behind Alumina Ltd. The only broker in the FNArena database to issue new research on Avita last week was Bell Potter, which downgraded to a Speculative Hold rating from Speculative Buy and slashed the target to $3.50 from $6.85.
The analysts noted a worrying and unexplained decline in utilisation rates in the company’s core burns market after management downgraded first quarter revenues to between US$11.1-11.3m from the midpoint of the prior range of US$15.2m.
Softness in the burns market may be due to overstocking of the channel in the December quarter, speculated the broker, and/or budget restraints within US hospitals in favour of cheaper treatment alternatives. Also, it’s thought burns adoption could have been flat with negligible uptake in full-thickness skin defects (FTSD).
In last week’s article, a material downgrade to average earnings forecast for APM Human Services International was highlighted following another earnings and profit downgrade. Historically low unemployment rates continue to weigh on the company’s earnings, explained UBS at the time.
Last week, the company again received a material downgrade to average target price after Bell Potter refreshed research. Part of the reason for current weak trading, according to the broker, is a change in the type of clients to those more difficult to place, and problems associated with implementation of a customer relationship management system.
On April 8, management announced an offer of $1.40/share from Madison Dearborn Partners (MDP) on a non-exclusive basis. Prior to this, on February 19, the APM Board (including MDP directors) rejected a $1.60/share offer from CVC Asia Pacific as not sufficiently reflecting “fundamental value”.
This board approach raised a lot of questions for Bell Potter including: Why is the board entertaining this offer and not simply rejecting it? Could the board persuade MDP or someone else to pay more?; Has the “fundamental value” of the business changed that much since February, even after the latest profit warning?
On balance, the broker felt the MDP offer of $1.40/share will be successful and lowered its target to $1.40 from $1.93.
Other material downgrades to average earnings forecasts by brokers, apart from the largest for Avita Medical mentioned above, were directed to Star Entertainment and Genesis Minerals.
Star reported a -12% year-on-year decline in earnings over the third quarter, with weakness in premium gaming rooms continuing to weigh on earnings, observed Ord Minnett. While main floor gaming is up around 5%, premium across the company’s properties have reported double-digit revenue declines. The broker pointed out Star lacks competitive advantages, noting Crown Sydney appears to be taking market share for table games.
Costs are tracking in line with the previous corresponding period despite Star having delivered a -$100m per annum cost-out program, highlighted UBS, noting the program appears to be offset by inflation along with the cost of reinvestment in risk controls and compliance.
While Genesis Minerals released a slightly softer-than-anticipated third quarter performance update last week, Ord Minnett highlighted FY24 guidance remains intact, and the five-year plan shows organic growth towards (more than) 300koz annual output.
The current valuation and near-term prospect for limited free cash flow kept Ord Minnett’s rating on Hold, while Macquarie maintained its Outperform recommendation.
The latter broker felt FY24 guidance is well in hand, with year-to date production at 74% of the production guidance mid-point, while costs (AISC) are below the guidance range. The company’s stockpiling of bullion remains important, in Macquarie’s view, as it mitigates risk for the single asset producer.
In the good books: upgrades
AUSTRALIAN UNITY OFFICE FUND ((AOF)) was upgraded to Buy from Hold by Ord Minnett. B/H/S: 1/0/0
Australian Unity Office Fund is selling the property on 150 Charlotte Street in Brisbane for $54m, a 4% premium to the last update on its book value.
Ord Minnett has quickly established the REIT, also selling 96 York Street in Beenleigh, will be net cash positive to the tune of $45m, once also taken into account ongoing capex requirements.
Combine the above with the shares trading at a -24% discount to net tangible assets (NTA) valuation and Ord Minnett shows no hesitation in upgrading to Buy from Hold.
The target price lifts to $1.45 from $1.13.
BWP TRUST ((BWP)) was upgraded to Buy from Sell by UBS. B/H/S: 1/1/2
UBS has upgraded BWP Trust to Buy from Hold, having first incorporated the Newmark acquisition in its modelling. Price target has lifted to $3.80.
The broker highlights BWP Trust has the lowest gearing in the sector locally which means it benefits most in a “higher for longer” environment.
Add a defensive nature of income and shares trading at a -30% discount to the 10 year average premium of 26% and we’ve just discovered the rationale behind the upgrade.
CETTIRE LIMITED ((CTT)) was upgraded to Buy from Hold by Bell Potter. B/H/S: 1/0/0
A strong third quarter trading update from Cettire, according to Bell Potter, with the company reporting sales revenue of $168m in a 14% beat to the broker’s estimates.
The company claims to be well positioned for its fourth quarter, supported by “seasonally improving metrics, growing supply and resilient demand.”
The China launch was confirmed for the coming quarter. The rating is upgraded to Buy from Hold and the target price decreases to $4.00 from $4.50.
ENDEAVOUR GROUP LIMITED ((EDV)) was upgraded to Overweight from Equal weight by Morgan Stanley. B/H/S: 4/2/0
Morgan Stanley upgrades Endeavour Group to Overweight from Equal weight on an undemanding current valuation. It’s also thought an uplift in earnings from Hotels will beat the consensus expectation and the company will continue to dominate in liquor retail.
The broker’s target price rises to $6.40 from $5.80. Industry view is In-Line. Both the gaming regulatory outlook and management execution in hotels have the potential to derail the broker’s positive thesis.
Morgan Stanley’s forecasts Endeavour will attain $125m of its $150mn EBIT target compared to the consensus estimate for $85m.
LGI LIMITED ((LGI)) was upgraded to Add from Hold by Morgans. B/H/S: 2/0/0
Morgans upgrades its rating for green energy producer LGI to Add from Hold following another encouraging update at the company’s investor day.
The broker’s target also rises to $3.12 from $1.99 on a combination of EPS forecasts increasing over FY24-26 by 5%, 12% and 7%, respectively, and a new valuation methodology.
Management confirmed FY24 earnings (EBITDA) guidance and clearly articulated the short-to-medium term development pipeline, suggests the broker, and set out the overall growth strategy. The battery energy storage system capabilities were also demonstrated.
In the not-so-good books: downgrades
AVITA MEDICAL INC ((AVH)) was downgrade to Speculative Hold from Speculative Buy by Bell Potter. B/H/S: 2/1/0
Bell Potter notes a worrying and unexplained decline in utilisation rates in the core burns market for Avita Medical after management downgraded 1Q revenues to between US$11.1-11.3m from the midpoint of the prior range of US$15.2m.
While management has maintained its full year guidance, albeit now at the low end of the guidance range, the analysts don’t share this optimism. The rating is downgraded to Speculative Hold from Speculative Buy and the target slashed to $3.50 from $6.85.
The broker speculates softness in the burns market may be due to overstocking of the channel in the December quarter and/or budget restraints within US hospitals in favour of cheaper treatment alternatives.
Also, burns adoption could have been flat with negligible uptake in full-thickness skin defects (FTSD), suggest the analysts.
BELLEVUE GOLD LIMITED ((BGL)) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/2/0
While Bellevue Gold’s third quarter production of 37,300 ounces of gold left Macquarie a little disappointed, the broker remains optimistic that strong development grades in March bode well for the fourth quarter.
The broker now assumes a long-term mining and milling rate of 1.2m tonnes per annum, subsequently lifting the long-term production outlook by 9%.
The broker looks forward to FY25 guidance for a better indication of Bellevue Gold’s long-term cost base. The rating is downgraded to Neutral from Outperform and the target price increases to $2.00 from $1.90.
DRONESHIELD LIMITED ((DRO)) was downgraded to Hold from Buy by Bell Potter. B/H/S: 0/1/0
A robust first quarter update from DroneShield has demonstrated the significant growth in the business over the last year, says Bell Potter.
First quarter revenue of $16.4m was more than ten times the revenue achieved in the same quarter a year prior, despite the period being the weakest for sales typically.
The company closed out the period with a cash balance of $54.6m, with $35.4m committed to inventory supply chain payments over the next nine months in order to address a contracted backlog and sales pipeline.
The rating is downgraded to Hold from Buy, and the target price increases to $1.00 from 90 cents.
EVOLUTION MINING LIMITED ((EVN)) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 4/1/0
Evolution Mining’s 3Q production and costs (AISC) missed Macquarie’s forecast by -5% and -13%, respectively. Compared to consensus forecasts, production was in line while costs missed by -4%.
Management retained FY24 guidance despite year-to-date production accounting for only 67% of the bottom end of the range. Both Macquarie and consensus are expecting a modest miss against FY24 guidance.
The broker’s target rises by 8% to $4.10 on long-term EPS upgrades and a roll-forward of the valuation period. The rating is downgraded to Neutral from Outperform due to elevated guidance risk and a strong recent share price.
NETWEALTH GROUP LIMITED ((NWL)) was downgraded to Sell from Neutral by Citi. B/H/S: 2/2/2
Citi raises its target for Netwealth Group to $18.65 from $18.35 after 3Q net flows came in ahead of expectations, driven by record gross inflows for a March quarter and moderating outflows.
While the broker expects strong earnings growth underpinned by a recovery in flows and market share gains, the valuation is currently too full for Citi. As a result, the rating is downgraded to Sell from Neutral.
The analysts lower FY24 revenue margin forecasts by -0.5bps to 31bps partly due to lower forecast ancillary revenue.
SELECT HARVESTS LIMITED ((SHV)) was downgraded to Hold from Buy by Bell Potter. B/H/S: 2/1/0
Bell Potter downgrades its rating for Select Harvests to Hold from Buy on valuation after recent share price strength, but also because of the potential development of a La Nina weather pattern during 2024.
While the BOM remains in an El Nino and El nino-Southern Oscillation (ENSO) neutral outlook, the broker has seen a number of other weather agencies transition to a La Nina outlook by the 2H of 2024.
Almond pricing has also weakened from recent peaks as the focus shifts to the 2024 subjective estimate on broadly normal seasonal conditions, explain the analysts.
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.
