For the week ending Friday May 10, 2024, FNArena recorded four ratings upgrades and seven downgrades for ASX-listed companies by brokers monitored daily.
The average FY24 earnings forecast for Sims fell by over -160% as the two divisions which had been driving growth, A&NZ, and SA Recycling (in the US), stumbled. Morgan Stanley pointed out the poor sentiment in global steel markets is flowing through to weakness in scrap markets.
Management had previously guided for underlying earnings growth in the second half of FY24, but now expects a decline versus the first half. Weakness in A&NZ has been driven by impacts from increased China ferrous exports, explained Macquarie, while SA Recycling experienced margin compression from a sudden fall in selling prices, along with unfavourable inventory levels.
More positively, the broker believes EPS recovery potential is high, supported by management’s cost-out program, which remains on track. Citi concurred, suggesting the time is right to pick-up shares in Sims as earnings are currently at cyclical lows and should lift beyond FY24.
UBS also retained a Buy rating, citing upcoming cost-out initiatives and potential for the UK metals business to be sold as part of a strategic review, with proceeds likely to exceed book value.
The next three largest downgrades to average earnings forecasts were directed at Baby Bunting, Tourism Holdings Rentals, and Lindsay Australia. All three unpleasantly surprised with a profit warning. All three feature in the target price table below for the three largest percentage falls.
Ord Minnett downgraded Baby Bunting to Hold from Accumulate and reduced its target to $1.60 from $2.00 after sales activity deteriorated in the second half, with comparable store sales falling by -7.7%. Management attributed weak trading to ongoing cost of living pressures afflicting young families (the company’s core customers), and declining average transaction values as consumers trade down.
The year-to-date gross profit margin contracted to 36.9% from 37.2% in the first half as management invested over March and April to generate higher sales activity, explained the analysts.
The second-hand market has emerged as a temporary headwind to sales, noted Overweight-rated Morgan Stanley, while Citi will need further evidence Baby Bunting’s scale can be leveraged to respond in an effective way to heightened competition in the nursery category before upgrading from a Neutral recommendation.
For Tourism Holdings Rentals, Ord Minnett (Buy) lowered its target to NZ$3.13 from NZ$5.34 following management’s new FY24 guidance for profit of between NZ$50-53m, down from NZ$75m previously.
Weakness in demand and pricing for used recreation vehicles in A&NZ markets was behind the downgrade, explained the broker, which are cyclical (not structural) factors. Based on history, conditions are expected to normalise (for the better).
Morgans, which slashed its target to $1.94 from $4.70, also downgraded to Hold from Add in the belief difficult fourth quarter trading conditions are likely to continue into FY25 and lead to a very weak first half FY25 result. The company has significant leverage to improved economic conditions, but for now the market won’t be in an accommodating mood to give management the benefit of the doubt, predicted the broker.
Wet weather impacts weighed on Lindsay Australia’s operations over the March quarter, leading to a downgrade in FY24 earnings guidance to $88-$94m from $102-$108m.
Ord Minnett explained reasons for the downgrade included: flow on weather impacts in Far North Queensland; rail outages on the key East-West line during March and April; cyclical softness in the rural segment; and subdued volumes post-Easter.
The weather impacts in Queensland and rail outages are largely abnormal events, noted the analyst, and the East-West rail line is now back in operation. This broker reduced its target to $1.31 from $1.52, but maintained a Buy rating, noting potential for a cyclical upswing in industry conditions following the weather impacted year.
Morgans (Add) believed recent negative events for the company are likely one-off factors, yet the analyst chose to be more conservative around the recovery in horticulture volumes and utilisation rates and reduced its target to $1.20 from $1.45.
The average earnings forecast for GrainCorp also fell by around -17% last week after management lowered FY24 earnings guidance to between $250m-$280m from $270m-$310m, and net profit to $60m-$80m from $65m to $95m.
The company’s significant operating leverage can make forecasting difficult, noted UBS. In prior years leverage worked in favour of upside surprises, this time around the pendulum has swung to the other side.
UBS attributed the downgrade to softer grain and oilseed export margins in April, together with the change-in-mix impact from stronger crop volumes out of southern regions. Bell Potter’s best guess/explanation was downward pressure on margins from interest holding costs and weaker oilseed crush margins in recent weeks.
News Corp also featured in both the negative change to average earnings and target price tables below, following third quarter earnings which came in -5% below the consensus forecast. Earnings for News media and subscription video fell by -24% and -3%, respectively, which effectively eliminated the 8% increase in earnings for Dow Jones.
Management intends to increase marketing and product development spending for Move, which is a negative development, according to Macquarie, due to increasing competition from a new entrant. Ord Minnett is not complimentary of Move, describing the asset as “the digital real estate poor cousin” to the 61%-owned REA Group in Australia.
Management is currently reviewing the company’s corporate structure with the aim of maximising shareholder value. This includes the possibility for a sum-of-the-parts value realisation, which Macquarie listed as a potential positive share price catalyst in the next year, along with the signing of new AI contracts.
Buy-rated UBS highlighted management’s strategic focus on digital transformation, which remains a key growth driver for News Corp. An improved performance in digital assets is expected to drive long-term margin expansion.
Brokers’ earnings forecasts for Macquarie Group generally rose last week following “solid” FY24 results, according to Morgans, in a year that has seen multiple guidance downgrades from management.
Morgan Stanley reduced its FY25 EPS forecast by -7.5% largely due to weaker margins in Banking & Financial Services (BFS), and in the expectation of a slower investment gains recovery in the MacCap division. However, the broker still forecast 22% profit growth for FY25 and suggested there could be an upside surprise from operating leverage due to a capital markets-led revenue recovery.
UBS raised its earnings forecasts for the group and highlighted significant cost reductions and ongoing capital management. On the other hand, Citi, which has the lowest ($176) target in the FNArena database, felt management’s outlook commentary implied downgrades to FY25 expectations, and noted a more muted recovery for green investments.
In the good books: upgrades
ARB CORPORATION LIMITED ((ARB)) was upgraded to Buy from Accumulate by Ord Minnett. B/H/S: 2/2/1
ARB Corp reported a 6.4% rise in 3Q24 sales with 9-month sales up 2.1%.
Breaking down the divisions, Ord Minnett notes domestic aftermarket sales lifted 6.8% in the 3Q and export sales fell -8.8%, with OEM up 25.5% over the quarter.
New vehicle sales underpinned growth in aftermarket sales, according to the analyst, and the company is expected to benefit from the investment in its network.
Target lifts to $44 from $42.50 and the rating is upgraded to Buy from Accumulate.
BRAMBLES LIMITED ((BXB)) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S: 3/2/1
Ord Minnett raises its target for Brambles by 36% to $19.00 and upgrades the rating to Accumulate from Hold.
A new analyst at Ord Minnett takes over the research on the company and expects a higher mid-cycle operating margin of 21%, up from the 16% previously forecast.
The broker now assumes prices are increased broadly with inflation and volume gains will occur due to rising consumer spending, leading to market share gains in both existing and new markets.
For the firm’s largest segment in the US, Ord Minnett predicts average volume growth of 2% (up from 1%) over the forecast period.
REA GROUP LIMITED ((REA)) was upgraded to Buy from Neutral by UBS. B/H/S: 2/4/1
Following the March quarter release, UBS upgrades REA Group to Buy from Neutral, with a new price target of $214, up from $184.40.
The upgrade reflects stronger than expected residential yield growth and a positive outlook on volume growth.
REA Group’s strategic pricing and product enhancements are expected to sustain double-digit yield growth, supporting margin expansion over the medium term.
Estimates have been upgraded.
SUPER RETAIL GROUP LIMITED ((SUL)) was upgraded to Neutral from Sell by UBS. B/H/S: 2/2/1
UBS upgrades Super Retail Group to Neutral from Sell with a new price target of $13, down from $13.75 following the release of March quarter trading numbers.
The broker states the adjustment reflects a balanced risk/reward scenario after a significant share price decline. Earnings estimates have been reduced.
In the not so good books: downgrades
AUSSIE BROADBAND LIMITED ((ABB)) was downgraded to Accumulate from Buy by Ord Minnett. B/H/S: 2/0/0
Aussie Broadband reconfirmed FY24 earnings guidance at the March quarter trading update where 33,159 subscribers were added, which is marginally below the Ord Minnett forecast of 34,704.
Around 132,000 customers are expected to migrate from the Origin White ((ORG)) label by October 2024, while the NBN market share lifted to 6.8% with 14,788 subscribers added over the quarter. Singapore results from Symbio should be earnings positive.
Ord Minnett forecasts EBITDA at $118.8m at the midpoint of management’s EBITDA guidance of $118m-$121m. The rating is downgraded to Accumulate from Buy, and the target is lifted marginally to $4.19 from $4.16.
ANZ GROUP HOLDINGS LIMITED ((ANZ)) was downgraded to Equal weight from Overweight by Morgan Stanley. B/H/S: 0/4/2
ANZ Bank served up a mixed 1H24 earnings report with higher expenses offsetting a slightly better than forecast cash profit according to Morgan Stanley, although this met consensus expectations as a result of lower loan loss provisions.
Notably, the dividend at 83c per share was 2 cents better than forecast and the $2bn on-market buyback $0.5bn above the analyst’s estimate.
Headline margin declined by -9 basis points with a -7 basis point impact from markets.
Expenses were greater by 0.5%, 2% above consensus, due to what appears to be higher restructuring costs and ‘strategic investments’ ANZ Plus and the cloud.
Management didn’t offer guidance. The broker’s FY25 EPS forecasts are raised by 2% for FY24, due to lower loan losses and FY25 EPS lowered by -3%.
The rating is downgraded to Equal Weight from Overweight, due to the strategic challenges for the bank, which makes earnings upgrades challenging, says the broker.
Target price is lowered to $27.70 from $27.90. Industry view: In-Line.
BABY BUNTING GROUP LIMITED ((BBN)) was downgraded to Hold from Accumulate by Ord Minnett. B/H/S: 2/3/0
Ord Minnett downgrades its rating for Baby Bunting to Hold from Accumulate and reduces the target to $1.60 from $2.00 after sales activity deteriorated in the 2H, with comparable store sales falling by -7.7%.
Management attributed weak trading to ongoing cost of living pressures afflicting young families (Baby Bunting’s core customers), and declining average transaction values as consumers trade down.
The year-to-date gross profit margin contracted to 36.9% from 37.2% in the 1H as management invested over March and April to generate higher sales activity, explain the analysts.
Ord Minnett expects household expenditure will remain under pressure in the near-term.
IMDEX LIMITED ((IMD)) was downgraded to Neutral from Buy by Citi. B/H/S: 2/2/0
Citi analysts have downgraded to Neutral from Buy in response to Imdex shares rallying by some 30% since the release of interim financials.
Citi suspects rising prices for gold and copper are responsible as they feed into expectations of progressive improvement in exploration activity levels.
Citi, however, has seen no evidence that step-up in exploration is actually occurring. With typical lead time of 6-9 months between junior fund raisings and exploration, the broker believes could still be in excess of 12 months before such a meaningful contribution from juniors can be witnessed. Target price has lost -5c to $2.20.
JUMBO INTERACTIVE LIMITED ((JIN)) was downgraded to Neutral from Buy by Macquarie. B/H/S: 2/1/0
Jumbo Interactive’s trading update at the Macquarie conference revealed a 38% rise in Lottery retailing year-to-date against the broker’s forecast of 29% for FY24.
The Macquarie analyst, however, retains a cautious outlook for May/June and the forecasts are retained.
Management highlighted that participation rates are high in the lower jackpots with 50% of players in the $200m jackpot having played again.
Strategically, Managed Services remains a priority for Jumbo Interactive with three acquisitions of -$50m already in hand. Looking ahead, expansion will be disciplined, and a special dividend in lieu of no corporate activity is seen as unlikely.
Neutral rating and $17.15 target.
PSC INSURANCE GROUP LIMITED ((PSI)) was downgraded to Hold from Buy by Ord Minnett. B/H/S: 4/1/0
In what Ord Minnett considers a “strong offer” and an excellent outcome for shareholders, global insurance broking platform, Ardonagh, has proposed to acquire PSC Insurance for $6.19/share in cash.
The broker’s rating is downgraded by two notches to Hold from Buy, and the target clipped by -1c to $6.19, to align with the offer price.
TOURISM HOLDINGS LIMITED ((THL)) Downgrade to Hold from Add by Morgans. B/H/S: 2/1/0
Tourism Holdings Rentals issued a nasty profit warning and the share price got pummelled in response. Morgans has lowered its rating to Hold from Add.
The broker believes the difficult 4Q trading conditions are likely to continue into FY25 and lead to a very weak 1H25 result.
Tourism Holdings Rentals has significant leverage to improved economic conditions, the broker highlights, but for now the market won’t be in a mood to give management the benefit of the doubt. The broker’s price target has fallen to $1.94 from $4.70.
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.
