For the week ending Friday September 20, 2024, FNArena recorded twelve rating upgrades and seven downgrades for ASX-listed companies by brokers monitored daily.
Several brokers updated commodity price forecasts during the week resulting in material percentage downgrades to earnings forecasts for related companies with nine of the ten positions on the negative earnings change table below filled by resource stocks.
Changes to target prices were slightly more negative than positive, and again, negative changes were dominated by mining companies.
Mineral Resources received the largest percentage downgrade to average earnings forecasts by brokers. Clobbered by weak lithium and iron ore prices, management has been forced into production curtailments and deferral of expansion plans.
Adding to the company’s woes, the mining services business has also been negatively impacted by the broader industry pullback.
More positively, management has announced an infrastructure sale to strengthen the company’s heavily geared balance sheet and brokers also like the initial resources estimates for the Lockyer Gas and Erregulla oil projects in the Perth Basin.
The three largest falls in average target price in the table below were received by Talga Group, Syrah Resources and Arcadium Lithium.
For both Talga Group and Syrah Resources, graphite and anode material pricing present the key risks to earnings forecasts by brokers. Last week, Macquarie lowered its forecasts materially for Talga (Outperform) on lower graphite prices and weaker macroeconomic projection, resulting in a -70% fall in the broker’s target to 60 cents.
The broker’s target for Outperform-rated Syrah Resources was also slashed by -60% to 80 cents, having lowered EPS forecasts by between -32%-100% across FY25-FY30.
By contrast -though starting from a lower target- Morgan Stanley (Equal-weight) raised its target for Syrah Resources to 30 cents form 25 cents on changes to corporate cost forecasts.
Noting the Balama graphite deposit is a world-class reserve, this broker reiterated Syrah’s move to develop active anode material at its Vidalia production facility in Louisiana is a sensible strategy to capture margin gains.
Arcadium Lithium’s average target in the FNArena database also fell by nearly -12% last week after Macquarie lowered its 2024 and 2025 price forecasts for spodumene and lithium carbonate by around -10% on average. The broker’s long-term spodumene price estimate also fell by -13% to US$1,300/t.
As a result of these new forecasts, Macquarie’s target for Arcadium fell by -24% to $5.00 on the back of earnings downgrades of between -13% and greater than -100% (off a low relative base) across 2024-2028 earnings.
For stocks under coverage in the sector, Macquarie retained an Overweight rating for both Arcadium Lithium and IGO Ltd.
Earnings forecasts also fell for Pilbara Minerals and Whitehaven Coal last week following updates to commodity forecasts by Macquarie and Morgan Stanley.
More positively, Morgan Stanley raised its target for Pilbara Minerals to $2.95 from $2.70 (despite near-term recovery risks) and upgraded to Equal-weight from Underweight.
Macquarie also upgraded Whitehaven Coal to Outperform from Neutral (despite lower EPS forecasts) on valuation grounds following a post-results season sell-off.
Morgan Stanley also likes Whitehaven Coal given shares carry an attractive free cash flow yield and have underperformed the metallurgical coal price.
Champion Iron owes its position on the earnings downgrade table below to both new research coverage by Bell Potter and a lower earnings forecast by Macquarie – resulting in a $7.00 target, down from $7.50.
Bell Potter began with a $7.15 target and Buy rating, which compares to the two other Buy ratings of Macquarie and Citi in the FNArena database where the average target is now $7.12.
The analysts at Bell Potter highlighted the high-grade iron concentrates produced at the Bloom Lake mine in northern Quebec trade at material premiums to the 62% iron ore index. These higher grades reduce steel making carbon emissions by around -10% compared with typical hematite ore. It’s felt government policy will be increasingly supportive of processes which assist decarbonising the hard-to-abate steel sector.
UBS raised its target price for Buy-rated, large cap gold miner Newmont Corp to $100 from $75 after incorporating the recently announced sale of Telfer and aligning the company’s valuation with North American mining peers.
Divestments of between -$2-4bn over the next year are set to accelerate deleveraging and cash returns, in the broker’s view. Assuming management can rebuild investor confidence, the analyst suggested Newmont could recapture a valuation premium and suggested the company is well positioned to deliver upon medium-term targets.
UBS recently upgraded Newmont to a Buy rating, and the stock remains this broker’s preferred large cap gold miner. In the analyst’s view, the company is set to have one of the best portfolios in the industry consisting of predominantly large long-life assets in low-risk jurisdictions, along with possessing attractive brownfield growth projects.
In the good books
Upgrades
BHP GROUP LIMITED ((BHP)) was upgraded to Overweight from Equal-weight by Morgan Stanley .B/H/S: 5/1/0
While risks remain around Chinese growth, Morgan Stanley notes resource stocks have already corrected and sees potential gains heading into peak season.
The iron ore price will stabilise and show some upside, suggests the broker, while copper pricing will likely benefit from the return of price-elastic demand. Metallurgical coal is trading close to cost support, with India and China entering a stronger steel production period.
The analysts raise the target for BHP Group to $47.50 from $46.30 and upgrade to Overweight from Equal-weight as company-specific growth and capex risks are now more fully appreciated. Industry view: Attractive.
The analysts continue to prefer Rio Tinto over BHP Group for its better growth prospects while Mineral Resources remains the key pick in the space.
BWP TRUST ((BWP)) was upgraded to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/2/1
Noting declining rates and favourable macroeconomic conditions should help all property stocks, Morgan Stanley prefers Charter Hall Retail REIT and HomeCo Daily Needs REIT from among ex-ASX100 Retail REITs under coverage.
For BWP Trust, the broker upgrades its rating to Equal-weight from Underweight in the expectation dividends should be fully funded via operating earnings from FY26.
The analysts also feel the worst may have passed for the REIT after Bunnings vacated 14 sites across FY18-23 and management may now be able to drive positive EPS/DPS growth after a seven-year period of stagnancy.
The target rises to $4.00 from $3.80. Underweight. Industry View: In-Line.
DETERRA ROYALTIES LIMITED ((DRR)) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 3/2/0
Macquarie updates forecasts for the latest commodity price outlook from Macquarie Economics and Commodities Strategy.
The broker believes there is ongoing iron ore oversupply, concluding the market will remain weak for the next six to twelve months as Onslow ramps up and Chinese steel mills reduce pig iron.
Macquarie prefers met coal and views that prices are starting to bottom. Regarding manganese, the broker highlights disappointing demand on recent price performance and headwinds to be sustained over the rest of 2024.
Deterra Royalties is upgraded to Outperform from Neutral. Target price lifts 8% to $4.20.
FORTESCUE LIMITED ((FMG)) was upgraded to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/3/2
While risks remain around Chinese growth, Morgan Stanley notes resource stocks have already corrected and sees potential gains heading into peak season (see BHP above).
Morgan Stanley’s target for Fortescue rises to $17.45 from $16.65 the rating is upgraded to Equal-weight from Underweight. Industry view: Attractive.
MINERAL RESOURCES LIMITED ((MIN)) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 5/1/1
Macquarie updates forecasts for the latest commodity price outlook from Macquarie Economics and Commodities Strategy.
The broker cuts spodumene prices by -10%, -11% and -33% for 2024, 2025 and 2026, respectively. Macquarie highlights in-house lithium forecasts are below consensus. With the market already discounting lower prices, the broker is constructive on lithium stocks trading in a range.
Mineral Resources is upgraded to Outperform from Neutral. Target price is reduced to $40 from $48.
NATIONAL AUSTRALIA BANK LIMITED ((NAB)) was upgraded to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/1/3
Morgan Stanley raises target prices for the majority of Australian banks under coverage. Investors have been willing to pay more for banks’ lower risk profile and stronger balance sheets, and their ‘safe haven’ status within the Australian market, explain the analysts.
While acknowledging incorrect caution on the banks previously, the broker still retains a negative stance given share prices imply nothing goes wrong in 2025. The higher targets reflect more emphasis by Morgan Stanley on balance sheet strength and risk profile.
For the preferred major bank -National Australia Bank- the broker raises the target to $38 from $34.20 and upgrades to Overweight from Equal-weight. Industry View In-Line.
NEW HOPE CORPORATION LIMITED ((NHC)) was upgraded to Add from Hold by Morgans .B/H/S: 2/3/0
New Hope reported a “solid” FY24 result with no surprises according to Morgans.
The company ended FY24 with net cash of $566m or over 15% of its market capitalisation, which was better than the broker’s forecasts. The final 22c dividend was 1c above the analyst’s estimate.
Management’s FY24 guidance infers higher volumes at Acland with higher costs. Bengalla production/costs outlook appears to meet the broker’s expectations.
Morgans assesses New Hope has outperformed its met coal peers because of its low-cost structure. The stock is believed to be “genuinely” cheap and is upgraded to Buy from Hold. Target price falls to $5.20 from $5.45.
ORIGIN ENERGY LIMITED ((ORG)) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 4/0/1
Macquarie raises its target for Origin Energy to $10.43 from $10.12 and upgrades to Outperform from Neutral. It’s believed forward electricity prices will be higher in FY26 while the cost of coal is likely to fall back to FY24 levels.
In further positives, the broker cites an attractive dividend yield and the formal announcement of a new customer win by Kraken involving 8m accounts.
Origin Energy has a 20% stake in Octopus Energy, which includes a license to use the Kraken platform in Australia.
PILBARA MINERALS LIMITED ((PLS)) was upgraded to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/4/1
While risks remain around Chinese growth, Morgan Stanley notes resource stocks have already corrected and sees potential gains heading into peak season.
Lithium supply ramp-up and weak demand will likely keep the market in surplus in 2024/25, yet the broker sees equities already reflecting these headwinds.
The target for Pilbara Minerals rises to $2.95 from $2.70 and the rating is upgraded to Equal-weight from Underweight. Industry View: Attractive.
SELECT HARVESTS LIMITED ((SHV)) was upgraded to Buy from Hold by Bell Potter .B/H/S: 3/0/0
Bell Potter raises its target for Select Harvests to $4.95 from $4.40 and upgrades to Buy from Hold after noting current consensus forecasts are underestimating the rise in almond prices.
Following the July USDA crop forecast, almond prices have rallied to between $8.00-8.50/kg, placing the broker’s FY25 earnings (EBITDA) forecast around 17% ahead of the consensus estimate.
WESTPAC BANKING CORPORATION ((WBC)) was upgraded to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/4/2
Morgan Stanley raises target prices for the majority of Australian banks under coverage (see NAB above).
For Westpac, the broker increases the target to $29.70 from $26.50 and upgrades to Equal-weight from Underweight. Industry View In-Line.
WHITEHAVEN COAL LIMITED ((WHC)) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 5/1/0
Macquarie updates forecasts for the latest commodity price outlook from Macquarie Economics and Commodities Strategy.
Macquarie prefers met coal and views that prices are starting to bottom. Regarding manganese, the broker highlights disappointing demand on recent price performance and headwinds to be sustained over the rest of 2024.
Whitehaven Coal is upgraded to Outperform from Neutral. Target price unchanged at $7.50.
In the not so good books
Downgrades
COMPUTERSHARE LIMITED ((CPU)) was downgraded to Equal-weight from Overweight by Morgan Stanley .B/H/S: 5/1/0
Due to the backdrop of falling interest rates, Morgan Stanley lowers its target for Computershare to $27.70 from $30.00 and downgrades to Equal-weight from Overweight. Industry view is In-Line.
The broker also anticipates downside risks to consensus forecasts for the company due to a delay in the recovery of corporate activity, as evidenced by a falling number of deals.
One way to deliver EPS growth is via an acquisition, suggest the analysts, given around US$2.6bn of balance sheet capacity.
EVOLUTION MINING LIMITED ((EVN)) was downgraded to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/2/0
While the broker anticipates the gold price will perform well near-term, this outcome is already priced into Australian gold equities.
The target for Evolution Mining rises to $4.25 from $4.15, but the rating is downgraded to Equal-weight from Overweight. Industry View: Attractive.
HEALTHCO HEALTHCARE & WELLNESS REIT ((HCW)) was downgraded to Underweight from Equal-weight by Morgan Stanley .B/H/S: 3/0/1
Noting declining rates and favourable macroeconomic conditions should help all property stocks, Morgan Stanley prefers Charter Hall Retail REIT and HomeCo Daily Needs REIT from among ex-ASX100 Retail REITs under coverage.
For HealthCo Healthcare & Wellness REIT, the broker downgrades its rating to Underweight from Equal-weight as the profitability of major tenant Healthscope and the evolution of surgery preferences are likely to remain an overhang.
Also, a medium-term concern for Morgan Stanley is the rolling-off of a cheap hedge for the Unlisted Health Fund, which could result in cash flow headwinds, unless the RBA cuts rates by -300bps over the next two years.
Equal-weight rating. Target falls to $1.30 from $1.41. Industry view: In-Line.
NORTHERN STAR RESOURCES LIMITED ((NST)) was downgraded to Underweight from Equal-weight by Morgan Stanley .B/H/S: 5/1/1
While the broker anticipates the gold price will perform well near-term, this outcome is already priced into Australian gold equities.
The target for Northern Star Resources falls to $14.35 from $15.05 and the rating is downgraded to Underweight from Equal-weight. Industry View: Attractive.
REGION GROUP ((RGN)) was downgraded to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/1/0
Region Group’s net operating income (NOI) could be affected for between 1-2 years, and be lower than historical trend, because of management’s plans to reposition its malls after years of acquisition focus.
FY25 is the first year when capital works begin across five key assets, resulting in potential earnings dilution, predicts the broker. The analysts also expect an around 50bps lift in the group’s hedge rate across its debt book in FY26 will delay a rebound in earnings.
The rating is downgraded by two notches to Underweight from Overweight. The target falls to $2.44 from $2.50. Industry view: In-Line.
REGIS RESOURCES LIMITED ((RRL)) was downgraded to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/3/1
While the broker anticipates the gold price will perform well near-term, this outcome is already priced into Australian gold equities.
The target for Regis Resources rises to $2.05 from $2.00, but the rating is downgraded to Equal-weight from Overweight. Industry View: Attractive.
SIMS LIMITED ((SGM)) was downgraded to Neutral from Buy by UBS .B/H/S: 2/1/0
While UBS keeps its $13.50 target for Sims, the rating is downgraded to Neutral from Buy following recent share price strength and yesterday’s trading update by management.
The update showed the NAM strategy is gaining traction though weakness in A&NZ is providing an offset, explains the analyst.
The broker comments initial improvements from the North America Metals (NAM) strategy are priced in, while end markets will likely remain tough for the remainder of FY25.
A Buy rating and $13.50 target price are retained.
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.
