Weekly reports | 10:00 AM
Weekly update on stockbroker recommendation, target price and earnings forecast changes.
By Mark Woodruff
The FNArena database collects the opinions of seven major Australian and international stockbrokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
For the purposes of correlating broker ratings, the Overperformance and Overweight ratings are grouped together as Buy, Neutral is grouped with Maintain and Underperformance and Underweight are grouped together as Sell to provide a Buy / Hold / Sell ratio (B / H / S).
The ratings, consensus target price, and earnings forecast tables are published at the bottom of this report.
Period: from Monday June 28 to Friday July 2, 2021
Total upgrades: 3
Total downgrades: 13
Breakdown of net ratings: Buy 54.08%; Hold 38.92%; Sell ââ7.00%
For the week ending Friday, July 2, there were three upgrades and thirteen downgrades of ASX-listed companies by brokers in the FNArena database.
Two separate brokers downgraded Collins Foods’ rating. UBS continues to love the story, although it has downgraded the rating to Neutral against Buy, due to a few concerns, including the recent rise in the share price and current lockdowns during the school holidays.
With the stock price trading below 10% of Morgans’ newly lowered target price (at $ 12.82 from $ 13.38), the broker also decided to downgrade the rating to Hold D’Add. Management’s expectations of an increase in depreciation and administration costs contributed to the decommissioning. Additionally, the broker estimates that KFC Australia’s growth in FY 22 will be more modest, having effectively recorded two years of growth in FY 21.
During a big week of news for AGL Energy, the company recorded the largest percentage drop in the target price predicted by brokers in the FNArena database last week. Management provided an update on the segregation of its assets and also indicated that FY21 earnings will be in the lower end of the benchmark range.
Morgan Stanley believes that the “new AGL”, the proposed energy retailer, has attractive re-rating potential on financial grounds with exposure to the growth of renewables. On the other hand, the other party, called Accel, can be excluded from many institutional mandates given its carbon intensity. There is uncertainty and, as with many splits, the benefit to investors is difficult to quantify, says the broker.
During this time, IGO achieved the largest percentage increase in the target price expected by brokers. It came as Credit Suisse lifted its near-term lithium price forecast, incorporating exponential demand for lithium for electric vehicle batteries. An increase by the broker in expected earnings also reflected the divestiture of Tropicana, accounting adjustments and changes to the deemed capital structure.
Credit Suisse’s increase in lithium price forecasts also led Pilbara Minerals and Orocobre to the top of the table for the largest percentage increase in brokerage earnings estimates in the FNArena database last week.
The broker notes that lithium prices have risen sharply since February and does not believe this is temporary. Pilbara Minerals remains Credit Suisse’s top choice in the industry for many reasons, including management’s track record and a simpler hard rock resource.
In addition to Credit Suisse’s new lithium price forecast, Orocobre has benefited from the agreed merger with Galaxy Resources, whose broker sees large value on the rise.
Nanosonics recorded the largest percentage decline in earnings guidance. Notice that only one broker from Morgans updated his research, and even then he seemed slightly upbeat. The broker believes that the company’s investment in R&D is paying off, after the launch of a new digital platform, AuditPro. The analyst had already cleared a second instrument disinfection product in the FY 23 forecast, so he’s not making any adjustments. However, the FY21 forecast has been lowered to reflect an exchange rate adjustment on consumables.
Finally, Lendlease was next in terms of percentage decline in profits per broker in the FNArena database. Management has told long-suffering shareholders that FY21 profit estimates will be -13% to 20% lower than consensus estimates, due to project delays and profit takeovers in London.
Morgan Stanley describes short-term profitability as looking murky and suspects that current consensus estimates will need to drop significantly, to reflect uncertain short-term earnings. Credit Suisse is more optimistic. Pending further details, the broker does not believe the Construction and Investment segments of the business will be materially worse than expected.
Total buy recommendations represent 54.08% of the total, compared to 38.92% on Neutral / Hold, while sell scores represent the remaining 7%.
AMCOR PLC ((AMC)) Upgrade to Overcome Neutral by Macquarie .B / H / S: 5/2/0
Macquarie expects a strong FY21 result for Amcor, with the company moving towards an increase in earnings per share of 14-15%.
The broker believes the growth cycle has reached its peak, which means the company will face increased volatility and lower stock returns in a downturn. Despite this, Macquarie notes that Amcor has generally performed well in a volatile market and continues to point towards a strong result for FY22.
Macquarie also pointed out that Amcor has improved the management of raw materials and attributes this to the company being more proactive towards emerging markets.
The rating is increased to Outperform and the target price increases to $ 16.56 from $ 16.42.
PENDAL GROUP LIMITED ((PDL)) Upgrade to outperform neutral by Credit Suisse .B / H / S: 4/1/0
As an industry, Credit Suisse estimates that asset managers trade at a -20% discount (almost historic lows) to the market and improve their profits by 1-2% on average. Sector flows have improved and are now less negative, but the price-earnings discount has persisted.
The broker is upgrading Pendal Group to outperform neutral, as it trades at a P / E discount to three leading peers, but its flows follow better than all three.
There is a possibility of both a P / E re-rate and upside risk to earnings if flows accelerate further from this point, the analyst explains. The target price is raised to $ 8.90 from $ 7.90, and the stock is now Credit Suisse’s most preferred in the industry.
TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to add holdback by Morgans .B / H / S: 4/1/0
Telstra surprised Morgans with the early divestiture of a 49% stake in its InfraCo tower business. The offers were due in December 2021 but the deal will be concluded in 1 hour 22 minutes. This is seen as a good deal for the shareholders as Telstra retains control and a high price has been met.
It also shows that management is serious about taking action to continue releasing value, the broker stresses. The rating changes to Add from Hold and the target price drops from $ 3.33 to $ 4.19.
The company will use about 50% of the proceeds to pay off the debt. The balance (around 11 cps) will be returned to the shareholders. The analyst has always said that stocks are worth around $ 4.50 per share if the sum of the parts can be achieved.
See also TLS derating.
AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Downgrading to sell neutral by UBS .B / H / S: 1/3/1
In light of the return in enterprise value of Auckland International Airport to pre-COVID-19 levels and the unlikely return of unrestricted international travel before FY24, 12 months above the expectations of the market, UBS downgraded the company’s rating to Sell from Neutral.
The broker has pushed back the start of the New Zealand border reopening by 3 months to mid-2022, reflecting a slower-than-expected vaccine rollout.
To reflect a slower-than-expected recovery in international passenger numbers, UBS lowered its net profit forecast by -54% and -17% in FY23 and FY24, well below market consensus.
UBS incorporated an extended period of rebates for retail leases, the postponement of the aerospace PSE4 reset until fiscal year 24 and a substantial reduction in capital expenditure resulting from the setback of the new domestic terminal and second runway .
The price target is lowered to NZ $ 6.65 from NZ $ 7.30.
AUTOSPORTS GROUP LIMITED ((ASG)) Downgrade to Neutral from Outperform by Macquarie .B / H / S: 1/1/0
The company delivered strong operating margins in FY21 as demand continues to exceed supply. Despite some production limitations, the offering worked as expected.
Autosports also acquired an 80% stake in John Newell Mazda, in Alexandria. The purchase price is $ 12 million of goodwill and $ 4 million of net interest, to be financed from existing cash.
Macquarie expects operating margins to remain high for most of FY22, but after recent declines in Outperform’s Neutral share price performance. The target is increased to $ 2.50 from $ 2.15.
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