For the week ending Friday 3 May 2024, FNArena recorded five ratings upgrades and seven downgrades for ASX-listed companies by brokers monitored daily.
Bapcor received the largest downgrade to average target price after management lowered FY24 profit guidance to between $93-97m, when consensus was sitting at $116m. The miss was attributed to softer retail conditions, less-than-expected transformation benefits from the ‘Better than Before’ cost-out program, and higher overheads and interest costs, observed Morgan Stanley. Management also pointed to specialist wholesale (SWS) margin compression.
The company remains without a permanent CEO and CFO, while also having an outgoing Chair. Against this backdrop, Ord Minnett found it difficult to mount a positive investment case, despite the recent share price underperformance.
Morgan Stanley’s calculation of intrinsic value for Bapcor is currently greater than both the current share price and the broker’s new target of $4.00, which was reduced from $5.75.
Macquarie agreed with Morgan Stanley on the valuation discount, noting trading conditions and demand across end-markets remain robust, and highlighted a quality business with a strong competitive position. It’s felt the company is a potential M&A target.
Bapcor received the third largest downgrade to average earnings forecast by brokers in the FNArena database, behind Coronado Global Resources and Atlas Arteria.
Coronado’s March quarter result was impacted by softer production and higher costs than Ord Minnett expected due to maintenance, rainfall at the Curragh coal mine in Central Queensland, and a lower yield at the underground Buchanan mine in the US state of Virginia.
Bell Potter still expects a positive 2024 for the company due to improved production volumes, and subsequent cost benefits, following self-funded investment across its Australian and US operations.
UBS highlighted improving cash flow is a key target for management (which retained 2024 guidance) and felt the second half of 2024 would be stronger on improved volumes and lower costs at Curragh.
For Atlas Arteria, UBS highlighted first quarter toll revenue was weak, but noted the temporary and non-recurring nature of the disruptions to the French APRR network and the Chicago Skyway due to strike action and extreme weather, respectively. Following several months of share price weakness, the broker identified some valuation support, but not enough to alter the Neutral rating.
Lynas Rare Earths was next on the earnings downgrade table after brokers continued to react to March quarter operational results released in the prior week. Headline revenue missed UBS’s expectations, with the broker left disappointed by the decision to withhold sales in a low-price environment.
This broker felt Lynas can recover revenue if rare earth pricing continues to improve. By contrast, Citi (in the prior week) downgraded its rating to Sell from Neutral due to a bleaker pricing outlook coupled with elevated unit cost expectations.
The average earnings forecast for Star Entertainment also declined last week. Macquarie lowered its target to 50c from 70c and downgraded to Neutral from Overweight. The analyst explained Star is suffering from multiple uncertainties including problems with the Star Sydney license, the AUSTRAC penalty, the debt refinancing for the Queen’s Wharf Brisbane project, as well as management changes. The recent trading update by Star demonstrated to the broker costs continue to impact profitability, despite somewhat resilient revenue trends.
Aeris Resources and Sandfire Resources received the only two material increases in average target price last week, and effectively filled the top two placing on the earnings upgrade table below. The entry for Liontown Resources should be ignored due to the small forecast numbers involved.
Due to recent strength in the Aeris Resources share price, Macquarie downgraded its rating to Underperform from Neutral, but the target was increased by 33% to 20c on the back of EPS forecasts changes following third quarter results. Group copper production for the quarter was -7% weaker than the broker’s forecast, while gold production beat by 11%. Quarter-on-quarter copper and gold production rose by 19% and 13%, respectively. Higher copper and gold price estimates resulted in increased earnings forecasts by Bell Potter and a target of 30c, up from 23c.
Sandfire Resources reported a marginally softer March quarter result than Ord Minnett expected, with lower zinc production at the Matsa mining complex in south-western Spain more than offsetting slightly better group level copper production. FY24 production guidance was maintained.
Most brokers raised targets prices for Sandfire after allowing for improved spot copper prices.
Recent M&A news flow surrounding BHP Group and Anglo American highlights Sandfire’s growth appeal, suggested Ord Minnett, when a large portion of copper producers (domestic and global) appear to be ex-growth or lack substantial exposure within their portfolio.
Earnings forecasts for Megaport also rose last week after management raised full year earnings guidance by 5.6% at the midpoint of the range, alongside what Macquarie considered conservative revenue guidance. Despite a delay in turnaround for KPI’s, the broker was encouraged by a favourable mix shift to higher value products, as well as partnership announcements.
Morgan Stanley highlighted Megaport shares are trading at a -10% discount to Australian software peers, while UBS noted a compelling long-term opportunity with strong demand underpinned by a structural shift to multi-cloud and AI.
In the good books: upgrades
AMCOR PLC ((AMC)) was upgraded to Outperform from Neutral by Macquarie. B/H/S: 3/3/0
Amcor’s 3Q24 reported EPS of US17.7c was a 6.6% beat on consensus and the first guidance lift since May 2022, with Macquarie declaring the company is now through the “worst”. The broker points to better volumes and cost improvement measurements as drivers for the better results.
Uncertainty around the new CEO appointment is viewed as a potential “overhang” but forecast de-gearing of the balance sheet to 3.0x at FY24 is a positive, falling to 2.85x in FY25.
EPS forecasts are raised by 2.3% and 2.6% for FY24 and FY25, respectively, and the dividend remains unchanged. Upgrade to Outperform from Neutral. The target price is increased to $15.40 from $14.90.
COLES GROUP LIMITED ((COL)) was upgraded to Buy from Neutral by UBS. B/H/S: 4/1/0
Coles Group is bringing ‘home the bacon’ post the 3Q24 supermarket sales results which rose 5.1%, in line with UBS’s forecast but above consensus of 4.5%. Liquor sales were lower than market expectations, but slightly better than the broker’s estimate.
UBS is expecting positive tailwinds for the company, including gross margin improvements post the FY23 theft problems; cost savings from Witron, alongside better earnings momentum.
The analyst raises the FY24 EPS forecast by 6.2% and 8.7% for FY25. Target price is raised to $18.25 from $17.50. Rating is upgraded to Buy from Neutral on the improved outlook and the potential for a higher valuation.
DRONESHIELD LIMITED ((DRO)) was upgraded to Buy from Hold by Bell Potter. B/H/S: 1/0/0
DroneShield has successfully completed a $100m fully underwritten placement, with the proceeds primarily to be invested in a build-up of its inventory to capitalise on robust global demand and a growing sales pipeline, Bell Potter notes.
The company reported a 2024 sales pipeline of $375m, with a further $145m in 2025 and beyond. The new framework agreement with NATO for the procurement of DroneShield products provides improved confidence in the pipeline, the broker suggests.
DroneShield is now well placed to capitalise on the growing demand for C-UAS solutions in response to current global tensions and the evolution of modern warfare. Bell Potter upgrades to Buy from Hold, retaining a $1.00 target.
HELLOWORLD TRAVEL LIMITED ((HLO)) was upgraded to Buy from Accumulate by Ord Minnett. B/H/S: 3/0/0
Helloworld Travel’s March Q trading update highlighted a company exposed to the right segment and age demographic within the travel industry, Ord Minnett suggests.
The key source of earnings is the sale of Outbound, and to a lesser extent, Domestic Travel to Australian consumers, typically in the 55+ age group.
Ord Minnett has been cautious on the stock for some time given valuation considerations but view the current weakness as a buying opportunity. Upgrade to Buy from Accumulate. Target slips to $3.10 from $3.16.
MINERAL RESOURCES LIMITED ((MIN)) was upgraded to Overweight from Equal weight by Morgan Stanley. B/H/S: 4/2/1
Morgan Stanley has upgraded Mineral Resources to Overweight from Equal weight alongside a price target of $83 (up from $67 previously) and an Attractive sector view.
The broker’s motivation is the company is nearing the ramp-up of Ashburton, considered a key driver for a profitable iron ore business. The low cost nature of Ashburton promises additional tonnes for the mining services business that are sustainable through the cycle, the broker believes.
Although balance sheet headwinds remain, the broker acknowledges, cost control and asset sales should see the company through FY24 into a more cash generative FY25.
While the EPS forecast for FY24 has been downgraded, the updated numbers for FY25 and FY26 imply an enormous step up in the pace of growth lays ahead.
In the not so good books: downgrades
AERIS RESOURCES LIMITED ((AIS)) was downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/1/1
Macquarie assesses the 3Q24 results for Aeris Resources as mixed, pointing to better than expected gold output, an 11% beat, against a -7% miss on the copper results. In total, copper and gold production rose 19% and 13% on the year, while AISC came in -13% this quarter but up 10% annually.
The broker views the retention of previous guidance as positive and notes the feasibility study for the Barbara underground has started, due to be finished in the 1Q2025.
The forecast expected loss for 2024 is lowered and FY25 EPS lifts by 5% post the adjustment in the cost expectations.
Due to the strength in the share price, the rating is downgraded to Underperform from Neutral, and the target lifted 33% to 20c on the back of the EPS forecasts changes.
MATRIX COMPOSITES & ENGINEERING LIMITED ((MCE)) was downgraded to Speculative Hold from Speculative Buy by Bell Potter. B/H/S: 0/1/0
Given recent share price strength, Bell Potter downgrades its rating for Matrix Composites & Engineering to Speculative Hold from Speculative Buy.
The broker highlights recent quarterly reporting by global subsea service providers (many of which are Matrix’s customers), while upgraded medium-term outlooks indicate order backlogs remain strong.
Matrix is also leveraged to growing activity across the global offshore floating wind sector, note the analysts.
The 42c target is maintained.
NICKEL INDUSTRIES LIMITED ((NIC)) was downgraded to Neutral from Buy by Citi. B/H/S: 4/1/0
Nickel Industries’ shares have outperformed the nickel price by over 20% year to date. Citi lifts its target price to $1.10 from 80c on commencement of the buyback and funding/offtake as key catalysts for the stock to grind higher alongside the increasing production profile.
The broker downgrades to Neutral from Buy on balance against Citi’s US$16k/t second half nickel price expectations in a surplus market.
REGIS RESOURCES LIMITED ((RRL)) was downgraded to Sell from Neutral by UBS. B/H/S: 4/0/2
UBS anticipates tougher times are ahead for Regis Resources amid uncertainty around the McPhillamys development.
The company reported March quarter gold production of 91,000 ounces at an all-in sustaining cost of $2,735 an ounce, with operations having been up and running since early April.
In the absence of a clearer path ahead for McPhillamys, the broker assumes higher capital and operational expenditure for the project and has included this in its outlook. The broker does remain confident that value is to be gained from ongoing optimisation.
The rating is downgraded to Sell from Neutral, and the target price decreases to $1.80 from $2.15.
SANDFIRE RESOURCES LIMITED ((SFR)) was downgraded to Neutral from Buy by UBS. B/H/S: 2/3/1
UBS highlights the March quarter copper and zinc production from Sandfire Resources was in line with forecasts and management’s FY24 guidance remained unchanged.
The analyst highlights the strong performance form Matsa (4.7mt p.a.) and Motheo running at 6mt p.a. for 20 days.
Timing issues on the delay in a US$25m shipment versus the deferral of US$18m in capital expenditure for Motheo suggests net debt is peaking at US$481m, the broker states.
The target price is lifted to $10 from $9. 35..
STAR ENTERTAINMENT GROUP LIMITED ((SGR)) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/2/0
Star Entertainment is suffering from multiple “uncertainties” which need to be resolved according to Macquarie, including problems with the Star Sydney license, the AUSTRAC penalty, the debt refinancing for the Queen’s Wharf Brisbane project, and management changes.
The broker noted the recent trading update was substantially below expectations and has resulted in a downward revision in forecast EBITDA earnings of -15% and -16%, for FY24 and FY25, respectively. These forecasts include a -$350m AUSTRAC fine.
The price target is lowered to 50c from 70c, and the rating downgraded to Neutral from Overweight.
TELIX PHARMACEUTICALS LIMITED ((TLX)) was downgraded to Hold from Buy by Bell Potter. B/H/S: 1/1/0
Following an “outstanding” March Q of revenue growth, Bell Potter upgrades its FY24 revenue forecast by 7% to 5% above the top end of the guidance range.
The broker’s FY25 revenue forecast is also upgraded following a revision of key assumptions on pricing for Illuccix.
The short term outlook for revenue growth from the diagnostic assets remains attractive, Bell Potter suggests, nevertheless the major inflection points for TLX591 in the treatment of prostate cancer are close and carry significant clinical risk.
The broker expects a readout on the important efficacy measure of progression free survival within the next 2-3 months. A poor clinical readout has the potential to materially impact the share price and, accordingly, Bell Potter downgrades to Hold from Buy.
Target unchanged at $14.50.
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.
