Percentage falls in average earnings forecasts far outweighed rises. For the third week in a row these falls were dominated by stocks in the Resources sector. On the other hand, Industrial stocks were largely behind the positive percentage movements in target prices which were nearly double the size of negative changes.
In the eyes of stockbroking analysts, Zip Co and Coronado Global Resources were polar opposites last week, with Zip appearing atop the positive change to target and earnings tables and Coronado heading up both tables for negative changes.
For Zip Co, Ord Minnett (Buy) raised its target to $3.60 from $2.45 following an “impressive” first quarter performance with group total transaction value (TTV) growth of 23% compared to the previous corresponding period, which included US growth of 39.5% (42.8% in constant currency).
Hold-rated Citi suggested this strong US growth will continue, and with Zip Plus starting to roll-out, this broker also anticipates the A&NZ region will return to growth.
Focusing on the US, Citi noted active customers returned to growth (increasing by around 110,000 in the quarter), yet the key driver of growth continues to be existing customers. Average spend per customer increased by 42% year-on-year to circa US$335 and transactions per customer increased by 36%.
The bad week for Coronado Global Resources included misses against consensus forecasts for third quarter production and sales due to geological/mechanical issues at the Curragh mine in the Bowen Basin, plus a potential delay at the Mammoth underground mine within the Curragh complex.
Given timing risks around the Environmental Authority amendment for Mammoth, Ord Minnett (downgrade to Hold from Accumulate) assumed development will be pushed back, forecasting first coal in the September quarter of 2025 with a ramp-up to 2.0Mt by FY27.
Following Coronado on the earnings downgrade table are lithium-related stocks IGO Ltd, Pilbara Minerals and Mineral Resources.
IGO Ltd’s first quarter revealed a “solid” start for Greenbushes, according to Citi, but this good news was undermined by a lack of cash sweep from Tianqi Lithium Energy Australia (TLEA) and the removal of segment-level disclosures.
Elsewhere, nickel production at Nova missed forecasts by Morgan Stanley and consensus by -18% and -20%, respectively.
These negatives aside, Bell Potter suggested weak lithium prices represent the greatest challenge to IGO, with potential for further share price pressure.
The focus within Pilbara Minerals’ 1Q report was on the two primary processing facilities at its Pilgangoora lithium-tantalum project in Western Australia: The Pilgan and Ngungaju plants.
Management is planning to shut the Ngungaju plant and operate the Pilgan plant standalone due to depressed market conditions, which also resulted in a downgrade to FY25 volume guidance.
Despite lower volumes, the analyst at Ord Minnett pointed to significant upcoming savings in opex and capex, with management also forecasting a cash flow improvement of approximately $200m in FY25. For the quarter, Ord Minnett assessed another strong operational outcome at Pilgangoora, despite weak realised prices.
Overall, the company reported quarterly spodumene concentrate (SC) production of 220kt, beating Bell Potter’s 185kt forecast.
Despite lower average earnings forecasts, the target price for lithium and iron ore producer Mineral Resources has remained stable.
Following tax evasion claims against CEO and founder Chris Ellison in the lead up to quarterly reporting, investors were no doubt relieved to see a “steady” operating result, according to Morgans. Shipments and realised prices were in line with this broker’s forecast, though Mt Marion delivered a production beat due to 20kt of port inventories shipped.
Results were (positively) overshadowed by the announced divestment of -100% of the company’s gas permits for $1.1bn to Hancock Prospecting and a joint venture over the remaining acres as MinRes seeks to alleviate the burden from its debt-laden balance sheet.
Paladin Energy followed these lithium names on the earnings downgrade table and the company’s share price fell sharply after first quarter production disappointed.
Returning to increases in average target prices last week, here Qantas Airways came in second behind Zip Co after management’s AGM trading update implied sustainable growth over the next three-to-five years, Ord Minnett commented.
Citi raised its target to $8.20 from $6.60 on higher earnings forecasts and improving global airline comparatives. Similarly, Morgans went to $8.50 from $7.50 on higher earnings forecasts and higher assumed multiples, but downgraded its rating to Hold from Add after the recent share price rally.
ResMed also featured with an 11% increase in average target price last week after posting Q1 beats across all financial metrics against analysts’ forecasts. The share price has now more than reversed the fall experienced after market fears first began around the impact of weight loss medications GLP-1s on the company’s sleep apnoea devices.
On the flipside, the average target price for Talga Resources fell by just under -10% last week after Bell Potter lowered its target to $1.90 from $2.35 on adjustments to dilution forecasts and timing for production at the company’s Nunasvaara natural graphite project in Sweden.
More importantly, good news was received last week, as appeals lodged to the Supreme Court were dismissed in relation to the project’s Natura 2000 (Environmental Permit), resulting in a share price rally of around 50%.
In the good books: upgrades
A2 MILK COMPANY LIMITED ((A2M)) was upgraded to Hold from Sell by Bell Potter. B/H/S: 3/4/0
Bell Potter upgrades its rating for a2 Milk Co to Hold from Sell after a recent share price slide. The broker also cautions year-to-date trade flows for China label products have been tracking below expectations, with September China destined shipments at a 24-month low.
Further, management is in discussions regarding a potential acquisition of a manufacturing facility in New Zealand, which the broker estimates could initially be high-single digit to low double-digit EPS dilutive on a pro forma basis.
The $6.10 target price is unchanged.
BLUESCOPE STEEL LIMITED ((BSL)) was upgraded to Equal weight from Underweight by Morgan Stanley. B/H/S: 3/2/0
Evoking a Superman analogy, Morgan Stanley’s snappy title for BlueScope Steel’s 1H25 guidance downgrade is “Tough as steel”.
The analyst explains while the lower guidance for 1H25 earnings is a fall of -25% at the midpoint, and disappointing, the new earnings expectations reflect a trough with the stock’s risk/reward “more balanced”.
The weakness in operations is across the board. Uncertainty around US election and China stimulus creates a softer macro backdrop.
Management announced a $200m cost out with little details, the broker notes. Morgan Stanley lowers EPS estimates by -10% for FY25 and -8% for FY26.
The stock is upgraded to Equal weight with a lift in target price to $22 from $18. Industry View: In-Line.
COCHLEAR LIMITED ((COH)) was upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/4/1
Macquarie raises its target for Cochlear to $289 from $283 and upgrades to Neutral from Underperform.
After a -16% share price slump since FY24 results on weaker-than-expected FY25 guidance, the current share price implies market-share gains and a NPAT margin in line with the broker’s forecasts.
Macquarie still sees greater appeal in other healthcare names CSL ((CSL)) and ResMed ((RMD)).
COLES GROUP LIMITED ((COL)) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S: 5/2/0
Ord Minnett raises its target for Coles Group to $19.50 from $19.00 and upgrades to Accumulate from Hold following evidence of strong management execution with “healthy” Q1 sales and clear cost discipline.
Further, the analyst anticipates healthy free cash flow (FCF) and dividends given tightly managed capex spending. A focus on the core food business while maintaining cost control is proving successful, in Ord Minnett’s view.
On the broker’s numbers, Coles is now trading at a -16% valuation discount to Woolworths Group ((WOW)).
DRONESHIELD LIMITED ((DRO)) was upgraded to Buy from Hold by Bell Potter. B/H/S: 2/0/0
Bell Potter explains DroneShield reported a disappointing 3Q2024 investor update, which failed to meet elevated market expectations.
The company’s Sept quarter revenues of $31.1m fell -20% on the previous year, but Q32023 included a one-off $33m contract.
Assessing management’s 2024 contracted revenue guidance, the broker downgrades full year revenue estimates by -20% with less material downgrades for 2025/2026.
Bell Potter lowers EPS estimates by -57% and -28% for 2024/2025.At current share price levels, the analyst believes this is an attractive entry point and upgrades DroneShield to a Buy from Hold.
Target price is lowered to $1.20 as a result of the earnings forecast changes.
WESFARMERS LIMITED ((WES)) was upgraded to Lighten from Sell by Ord Minnett. B/H/S: 0/2/3
Following Wesfarmers’ AGM trading update, Ord Minnett lowers its target to $59 from $60 and upgrades to Lighten from Sell.
Management provided insights on Bunnings and Kmart which matched the broker’s expectations. Business customer weakness was noted for Officeworks, while the Wesfarmers Industrial and Safety (WIS) division is experiencing softer trading, notes the broker.
WESTGOLD RESOURCES LIMITED ((WGX)) was upgraded to Buy from Accumulate by Ord Minnett. B/H/S: 2/0/0
After reviewing an uneventful 1Q operational update, the broker upgrades its rating for Westgold Resources to Buy from Accumulate based on materially less cash flow risks post the merger with Karora Resources ((KRR)).
Management maintained FY25 production guidance. The $3.85 target is unchanged.
In the not so good books: downgrades
AGL ENERGY LIMITED ((AGL)) was downgraded to Accumulate from Buy by Ord Minnett. B/H/S: 2/2/0
After reducing earnings forecasts for AGL Energy and lowering the assumed multiple, Ord Minnett’s target falls by -19% to $11.20 and the rating is downgraded to Accumulate from Buy.
These changes result from the broker’s review of medium-term earnings risk from the expiry of cheap coal and gas supply contracts.
The analyst believes consensus is only allowing for one third of the potential -$300m hit to earnings (EBITDA) over FY27-30 from the upcoming expiries of the Queensland Gas Company’s gas supply contract and the Wilpinjong coal supply contract.
Ord Minnett sees better relative value in Origin Energy ((ORG)) and APA Group ((APA)).
CORONADO GLOBAL RESOURCES INC ((CRN)) was downgraded to Hold from Accumulate by Ord Minnett. B/H/S: 4/1/0
Ord Minnett lowers its target for Coronado Global Resources to $1.10 from $1.25 after 3Q saleable production missed the broker’s forecast by -8% due to Curragh geological/mechanical issues. A potential delay at the Mammoth underground mine also weighed.
The broker notes timing risks around the Environmental Authority amendment for Mammoth and now assumes development will be delayed, with first coal forecast for the 2025 September quarter.
Due to these permitting issues and a stretched valuation, Ord Minnett downgrades its rating for Coronado to Hold from Accumulate.
CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) was downgraded to Hold from Add by Morgans. B/H/S: 3/4/0
For what management could control, Morgans deems the AGM trading update by Corporate Travel Management was positive, but a recent UK government announcement is set to weigh.
The downside cannot as yet be quantified for the company’s largest contract after the UK government announced its intention to reduce spending, including on travel, explains the broker.
Given this announcement creates uncertainty around the company’s Europe near-term earnings, the analysts downgrade to Hold from Add. The target also falls to $13.50 from $15.95.
Elsewhere, the trading updated showed North America and the A&NZ region have started the year strongly, according to Morgans.
CETTIRE LIMITED ((CTT)) was downgraded to Hold from Buy by Bell Potter. B/H/S: 0/1/0
Bell Potter still believes Cettire will continue to outperform its peer group despite evidence of a 2Q slowdown in sales revealed during the release of 1Q results.
During Q1, revenue beat the broker’s forecast, but adjusted earnings (EBITDA) were a miss. While the margin trends appear healthy at 5% exiting Q1, the analysts will wait to see delivered margins in the seasonally largest 2Q.
The $2.00 target is kept despite the broker’s lower earnings forecast as the assumed risk-free rate falls as the upcoming easing cycle is factored in. The rating is downgraded to Hold from Buy on valuation.
IGO LIMITED ((IGO)) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/2/3
IGO Ltd reported 1Q25 production up 15% with sales up 10% and costs down -23%, Macquarie notes, with opacity on nickel and group costs impacting the result.
Greenbushes performed stronger than expected, however, management confirmed FY25 guidance at 1350-1550t despite the quarter achieving 28% of FY25 production. Cost guidance is unchanged at $320-$380/t.
The broker drops FY25 EPS estimate by -46% because of Cosmos losses, higher exploration/corporate costs and write downs in equity investments.
Macquarie downgrades IGO Ltd to Neutral from Outperform with an unchanged target price of $5.60.
JB HI-FI LIMITED ((JBH)) was downgraded to Lighten from Hold by Ord Minnett. B/H/S: 3/1/2
Ord Minnett assesses an “impressive” 1Q trading update by JB Hi-Fi with 5% like-for-like sales growth for JB Hi-Fi Australia and The Good Guys exceeding consensus expectations.
The broker raises its EPS forecasts across FY25-27, underpinning a target price rise to $71 from $68. Following recent share price strength, the broker downgrades its rating to Lighten from Hold.
METCASH LIMITED ((MTS)) was downgraded to Underperform from Outperform by Macquarie. B/H/S: 2/2/1
Metcash reported below expectations and with 1H25 net guidance some -11% lower than Macquarie’s forecasts with weaker sales in hardware, which typically generates higher margins. The “de-leverage” of the division is attributed to weakness in housing.
Management is seeking cost-out initiatives and market share expansion, with the broker highlighting “subdued” chances of a recovery in hardware with rising construction insolvencies and construction at cyclical lows.
Macquarie lowers EPS estimates by -11% to -12% for FY25 through to FY28 largely due to weakness in hardware. The stock is downgraded to Neutral from Outperform with a decline in target price of -18% to $3.45.
PREMIER INVESTMENTS LIMITED ((PMV)) was downgraded to Neutral from Buy by Citi. B/H/S: 2/3/0
Post the binding bid from Myer Holdings ((MYR)) for Premier Investments’ apparel brands, Citi believes much of the good news is backed into the share price with a risk Premier’s shareholders divest Myer shares.
No pickup in trading conditions is anticipated for Premier in near-term, but there is a potential incremental boost to Premier from improved Myer performance.
Citi estimates every 1ppt rise in gross margin for Myer equals around a $5m lift in Myer’s earnings which benefits Premier shareholders.
The analyst lowers EPS forecasts by -7.1% and -9.8% for FY25 and FY26. Target price of $36 retained. Stock downgraded to Neutral from Buy.
QANTAS AIRWAYS LIMITED ((QAN)) was downgraded to Hold from Add by Morgans. B/H/S: 4/2/0
Morgans raises its target for Qantas Airways to $8.50 from $7.50 on higher earnings forecasts and higher assumed multiples, and downgrades to Hold from Add after the recent share price rally.
While the company’s 1H trading update was in line with expectations, the broker raises underlying profit (NPBT) forecasts. The analysts incorporate into these forecasts management’s updated guidance for fuel costs, capacity, Domestic unit revenues and the employee thankyou payment.
SANDFIRE RESOURCES LIMITED ((SFR)) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/5/0
Macquarie describes a “mixed” 1Q result for Sandfire Resources. When compared to consensus forecasts, production of copper, zinc and silver was in line, a -5% miss, and a -12% miss, respectively.
The broker downgrades its rating to Neutral from Outperform after a 44% share price rally so far in 2024. Management reiterated FY25 production guidance. The target rises by 2% to $10.20.
UNIVERSAL STORE HOLDINGS LIMITED ((UNI)) was downgraded to Accumulate from Buy by Ord Minnett. B/H/S: 6/0/0
Ord Minnett raises its target for Universal Store to $8.20 from $7.50 and downgrades to Accumulate from Buy after recent share price strength. Accelerating like-for-like sales and an improving gross margin were noted from the recent trading update.
The analyst believes 1H EBIT is tracking broadly in line with consensus, but a higher cost-of doing-business (CODB) outcome could provide a full offset.
The broker reels of a list of positives for Universal Store including high single-digit EPS growth over the next three years, net cash optionality, and potential for index inclusion.
WOOLWORTHS GROUP LIMITED ((WOW)) was downgraded to Neutral from Buy by Citi. B/H/S: 1/5/0
Citi’s analyst admits the pressure on Woolworths Group’s Australian food business was “underappreciated” in term of margin pressures to reach sales targets which has continued from August.
The broker believes there is more work to improve the image around brand and price perceptions. The view is that further earnings downgrades remain possible.
Citi lowers EBIT forecasts by -8% for FY25/FY26. Target price cut to $34 from $38.56. The stock is downgraded to Neutral from Buy.
ZIP CO LIMITED ((ZIP)) was downgraded to Neutral from Buy by Citi. B/H/S: 2/1/0
US total transaction value (TTV) beat Citi’s forecast by 5% after rising to 43% year-on-year from 42%. Also, revenue yield in the US increased to 7.1%, reflecting higher usage of the Zip app, in the broker’s view.
Considering Zip Plus has not been actively promoted as yet (and is higher yielding), Citi is impressed by a 19.2% increase in revenue yield.
In a further positive, funding costs continue to fall, with the weighted average margin of 2.13% on the latest note issuance, down from 2.65% previously. The broker raises its target to $2.90 from $1.90 and downgrades to Neutral from Buy 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.
