Is Xero in the BUY Zone?

Monday 15 March 2021 Is Xero in the BUY zone?

I don’t think all tech stocks are born equal. What I’m really saying is Apple is very different to Zoom, while Xero is not like Afterpay. They’re lumped in the same tech group and can get sold off when tech loses friends but this sometimes silly sell-off could be creating opportunities. For the last month, tech stocks have been in the twilight zone and Xero has dropped from its highs. Does this mean it’s passed over into the buy zone?

Sincerely,

Peter Switzer

Inside this Issue 02 Is Xero in the buy zone? Is Xero in the buy zone? by Peter Switzer 05 Does environmental, social and corporate governance (ESG) investing stack up? And what’s the best ETF? Does ESG investing stack up? by Paul Rickard 08 5 companies at the forefront of the hydrogen push FMG, HZR, LCK, HXG & PH2 Is Xero in the buy by James Dunn 11 My “HOT” stock: QAN zone? Qantas by Peter Switzer by Maureen Jordan 02 12 Buy, Hold, Sell – What the Brokers Say 12 upgrades, 5 downgrades by Rudi Filapek-Vandyck

Important information: 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. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. Is Xero in the buy zone? by Peter Switzer

I don’t think all tech stocks are born equal. What I’m and 2022, when CFOs and business owners will be really saying is Apple is very different to Zoom, while more keen to spend to innovate to raise productivity Xero is not like Afterpay. They’re lumped in the same and, ultimately, profits. tech group and can get sold off when tech loses friends but this sometimes silly sell-off could be The five-day chart of Xero shows that there has been creating opportunities. new support for the stock since last Tuesday, surging 9.5% in four days, while the overall market was up Last week I told you that Elmo Software (ELO) was only 0.8% for the week. Some of that gain might be seen as a tech stock that benefitted from the because tech stocks did well when the bond market stay-at-home stocks phase of 2020. But the CEO, became less concerned about inflation, but by Friday Danny Lessem disagreed, arguing that many (US time), it started to rekindle its concerns and tech business owners and CFOs were not spending stocks were sold off. money on innovation and new software with all the worries of the Coronavirus last year. XERO (XRO) 5-days

He thinks as business becomes more normalised, his online products will be more in demand. So this business selling HR, payroll and expense reduction solutions should perform better in 2021, compared to 2020.

This is what happened to ELO’s share price last week.

Elmo Software (ELO)

Anyone invested in Xero (like yours truly) has to hope that the market sees the company as a business stock that will benefit from reopening rather than a tech stock that was over hyped.

Certainly, the one-year chart below shows XRO has gone for a big ride in 2020 going from $68 to $157 after the Coronavirus crash.

However, it was an $85 stock before the crash, so if my reopening argument holds, then there has to be On that basis, I’m wondering if Xero is in a similar some real upside with the Australian, US and UK position as ELO? Is Xero a business that will benefit economies bound to boom in the next few years from a more normal business environment in 2021 ahead.

Monday 15 March 2021 02 For interest sake, this is what the analysts think about It does have a pile of debt but CEO Steve Xero’s more near-term prospects. The consensus Vamos says he’s on the acquisition trail. view on FNArena is $105. Macquarie has a $125 Rising interest rates — but that’s a furphy for target and Citi does too. The lowest target share price this company. was UBS with a target of $79.50. It’s seen as a tech stock, being in the WAAAX group of stocks that have gained on Xero one-year the back of the US-based FAANG stocks’ surge in price in recent years. It’s in the MSCI Global Standard Index, which helped its stock price last year but this is now bringing it down as the top 100 tech stocks on the Nasdaq have fallen about 10% in recent times The small business market here and in NZ could be saturated. The UK experiment has been successful but the US could be a harder nut to crack. US small businesses aren’t as solidly into the cloud and that could be a hold back factor for What are some of the supportive views out there for Xero. XRO? Try these: Can’t get this out of my mind The Simply Wall Street view starts with reminding us what a great company Xero has A unnamed but well-known hedge fund short seller been. The share price climbed 691% in five told me (off the record) that he was a big holder of years. In the last 5 years, Xero saw its XRO shares but he’d sold a lot, though he was still a revenue grow at 29% a year. That’s “well big shareholder in the company. In a throwaway line, above most pre-profit companies”. (Simply he said he thought that, over time, “this could be a Wall St.) $600 company!” They also like that company insiders have been buying XRO share over the past 12 He could be wrong. He could be trying to use me to months or more. raise the share price. Or he might be honestly looking The most recent total shareholder return was down the track at a very good company. 58% over one year and “that’s better than the annualised return of 51% over half a A share price rise of about 700% in five years, and a decade, implying that the company is doing chart like this on revenue, tells me that Xero looks like better recently.” (Simply Wall St.) a decent punt at current prices. The company recently announced the acquisition of small business lender, Waddle, for $80 million to accelerate its growth. In the six months to September 2020, Xero announced it had slashed spending on advertising and marketing in response to the pandemic, which would slow growth. Even then, Xero added 168,000 new subscribers during the period and grew free cash flow from NZ$4.8 million to NZ$54.3 million. (Motley Fool)

Here are the challenges for Xero’s share price:

Monday 15 March 2021 03 Source: Simply Wall Street

I wasn’t saying this when the share price was $157 but now I am. But I’m a long-term investor who buys quality companies when markets are negative on these good operations.

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.

Monday 15 March 2021 04 Does environmental, social and corporate governance (ESG) investing stack up? And what’s the best ETF? by Paul Rickard

Last week, Betashares launched its eighth ‘ethical’ engaged in negative ESG risks. The avoids include exchange traded fund (ETF). To trade on the ASX fossil fuels, gambling, tobacco, uranium, alcohol, junk under the ticker ERTH, the Betashares Climate foods, chemicals of concern, payday lending or who Change Innovation Fund tracks the performance of have a lack of gender diversity at Board level. an index that provides exposure to 100 of the largest global companies that are at the forefront of tackling The index preferences “sustainability leaders” today’s climate and environmental challenges. (companies that have more than 20% of their revenue coming from specified industries), are rated “A” or I was a bit surprised to see that Zoom was its third “B” by a trusted ethical consumer report, and are a biggest holding, with a weighting of 4.2%, not Certified B Corporation (an ESG certification from B because the company is not committed to green Lab). Companies are roughly market weighted, with a initiatives, but rather because its communications maximum weighting in the fund of 4% applied when solution doesn’t appear to have been purposed for annually re-balanced. the task of tackling climate change. But obviously, it met the test of this index, which says that to be The “top 10 “ list of holdings is quite interesting (only eligible, companies must derive 50% of their revenue CSL in the ASX “top 10” qualifies):: from “green revenue”. 1. Resmed 4.2% In an environment where the market for ‘ethical’ or 2. Xero 4.1% ‘ESG’ (environmental, social and corporate 3. Telstra 4.0% governance) investment products is booming, this 4. Fisher & Paykel 3.9% anecdote highlights the importance of “looking under 5. Sonic Healthcare 3.8% the bonnet” before deciding where to invest. But it 6. Brambles 3.8% also raises the question about returns, and whether 7. Goodman 3.7% ESG returns stack up compared to “normal” 8. CSL 3.6% investing. 9. Cochlear 3.5% 10. Suncorp Group 3.5% Let’s look at the four major Australian share ESG focussed ETFs. These are: FAIR from Betashares, By design, regional bank stocks and insurance RARI from Russell, GRNV from VanEck and companies are included, but major banks are Vanguard’s VETH. excluded.

1. FAIR Because of the absence of the major banks and the large resource companies, recent performance for the FAIR, which is the BetaShares Australian ETF has been soft. In the 12 months to 28 February, Sustainability Leaders ETF, is the largest at around its total return was 0.05%. In comparison, the ASX $852m in size. It tracks an index provided by the 200 Accumulation index returned 6.48%. Over 3 NASDAQ of Australian companies that have been years, it has done a lot better (7.28% pa vs the screened to preference companies engaged in accumulation index of 7.39%), and over 5 years, the sustainable business activities and avoids companies index return at 10.50% pa is marginally below the

Monday 15 March 2021 05 ASX 200 accumulation index return of 10.74% pa. “top 10” looks like something of a cross between Management costs are estimated to be 0.49% pa. FAIR and RARI, with Fortescue the top holding included. ANZ Bank gets a gig, but the other majors 2. RARI are missing:

Russell Investments Australian Responsible 1. Fortescue 7.3% Investment ETF (RARI) tracks the Russell Australia 2. ANZ 6.2% ESG High Dividend index. Companies are selected 3. Telstra 5.2% on the basis of demonstrating positive ESG 4. Goodman 4.6% characteristics, and negatively screened for engaging 5. Transurban 4.4% in activities that are deemed inconsistent with widely 6. CSL 4.4% recognized responsible investment considerations. 7. Newcrest Mining 3.6% The index is also weighted to improve expected 8. Sydney Airport 2.8% income distributions, including franking credits. 9. Brambles 2.7% 10. Xero 2.6% Major banks are eligible for inclusion, so RARI’s “top 10” looks more like the standard ASX “top 10”. Its 1 year return (to end February) is 1.88%, 3 years Some resource companies (such as Fortescue) are is 6.42% pa. also eligible. Its “top 10” is as follows: 4. VETH 1. CBA 9.1% 2. National Australia 5.3% Vanguard’s Ethically Conscious Australian Shares 3. CSL 4.8% ETF (VETH) listed on the ASX in October 2020. It 4. ANZ 4.8% tracks an index from FTSE, the FTSE Australian 300 5. Westpac 4.5% Choice Index. 6. Wesfarmers 4.0% 7. Telstra 3.0% It is essentially a negative screening index, excluding 8. Macquarie 2.8% companies with significant business activities 9. Transurban 2.7% involving fossil fuels, nuclear power, alcohol, tobacco, 10. Fortescue 2.3% gambling, weapons, adult entertainment and a conduct related screen based on severe At $261m in size, it is quite a bit smaller than FAIR. controversies. It weights the constituents and applies Management fees are estimated to be 0.45%. rules to ensure sufficient industry diversification.

On the performance side, its 1 year total return is With 234 constituents (out of a total market of 300 -0.8%, 3 years is 3.86% pa and 5 years is 7.93% pa companies), the index is probably closest to the (an underperformance over this period of 2.81% pa). “normal” market. Its top 10 is as follows: Offsetting this is the high income component of the distribution, which is also potentially tax advantaged. 1. CSL 9.1% 2. CBA 9.1% 3. GRNV 3. Westpac 5.4% 4. National Australia 5.1% The $86m VanEck Vectors MSCI Sustainable Equity 5. ANZ 4.6% ETF (GRNV) uses an index provided by world leading 6. Wesfarmers 4.3% research agency MSCI, applying both positive and 7. Fortescue 3.5% negative screens. The fund has 77 securities, and is 8. Macquarie 2.9% compiled after biasing “high ESG performers”. 9. Telstra 2.8% 10. Transurban 2.7% Interestingly, the largest sector weighting is in materials at 22.2% (above the ASX 200 weight). Its Missing from the “top 10” are BHP, Rio and

Monday 15 March 2021 06 Woolworths

According to FTSE, the index returned 5.0% for the year to end February, 7.1% pa over the last 3 years and 9.8% over the last 5 years. Compared to the Australian benchmark of the S&P/ASX 200, this is an underperformance of 1.5%, 0.3% pa and 0.9% pa respectively.

The management fee ion VETH is a very competitive 0.16% pa.

What’s the bottom line?

The negative screeners line up pretty closely. However, I am amazed by the variations caused by the positive screeners, which suggests that there is more “art” than “science” with ESG. For example, how can one fund have Fortescue as its top holding, while in another fund, there is a zero weighting? Why is community and regional banking “fairer” than the services offered by the major banks?

There also appears to be a bit of a performance gap opening up between ESG investing and market based investing.

While there are some companies I won’t invest in, I have never put ESG considerations at the forefront of my decision making process, and on the basis of this review, I am not inclined to change. If I was going to invest with this objective, Vanguard’s VETH would be my pick.

You can also invest “ethically” overseas, which some might argue is more logical because there is a broader array of stocks available. BetaShares Global Sustainability Leaders ETHI (or its hedged currency version, HETH) and Vanguard’s Ethically Conscious International Shares Index ETF (VESG) are listed on the ASX.

Monday 15 March 2021 07 5 companies at the forefront of the hydrogen push by James Dunn

“Hydrogen” is the word on everyone’s lips, as the PV or a wind turbine), the clean hydrogen produced is most abundant of all the elements is tapped as the known as “green” hydrogen. The oxygen is benign clean energy source of the future. waste.

With a global market worth more than US$100 billion It is certainly possible, relatively quickly, to produce ($135 billion), hydrogen is widely used as an green hydrogen in this way. If you use a dedicated industrial chemical – mainly within the petroleum renewable power system and don’t use any industry, and for the production of ammonia, most of additional power from the grid, yes, you’re producing which is used for fertiliser, but it has a wide range of hydrogen with nearly zero emissions (apart from that other uses. Industrial hydrogen is mostly produced which resulted from smelting, building, transporting from natural gas, which generates significant carbon and installing all of the required equipment). emissions – that kind is known as “grey” hydrogen. A cleaner version is “blue” hydrogen, for which the Even if you are using wind or solar to power the carbon emissions are captured and stored, or reused. electrolysis, it is still a hugely expensive and very The cleanest kind is “green” hydrogen, which is energy-intensive process. Then, compression and produced from electrolysis of water, powered by storage of the hydrogen will not be a trivial cost, renewable energy sources, without producing carbon either. emissions in the first place. That is the kind of hydrogen that is being talked-about as the clean On a small scale, local plants may use electrolysis of energy source of the future. water to make hydrogen gas an energy store and fuel. The potential problems start to arise upon It is something of a paradox that hydrogen is the most expanding the scale of production, storage and abundant of all the elements, but it has to be created, transport. using processes that require a lot of energy. Hydrogen gas can be used as an energy store and At the moment, no-one has any real clue about the fuel, but at present, arguably, it is a very difficult costs of green hydrogen. But as in all things involved product to compress, handle and transport; it has a with renewable energy, the conditional tense gets a very wide flammability range, and worse, because its big workout – hydrogen “could” do anything, right molecule is so small, it is very difficult to prevent down to powering our industrial society. leakage. If a few relatively large problems are ironed-out – but It must be stressed, these are very much “live” that’s not to say they will not be. debates – others say hydrogen is quite similar to natural gas from a handling and safety perspective. There are two ASX-listed companies at the forefront of the hydrogen push. To produce hydrogen, water is put through electrolysis – that is, using an electric current to break 1. Fortescue Metals Group (FMG, $21.26) water, H2O, into its component elements of hydrogen Market capitalisation: $65.4 billion and oxygen, both in gas form. If this electric current is Three-year total return: +86.1% a year produced by a renewable source (for example, solar FY22 forecast yield: 8.8% fully franked,

Monday 15 March 2021 08 grossed-up 12.6% renewable projects through FFI – that means $400 Analysts’ consensus valuation: $23.07 (Thomson million to invest from the half-year just gone, but will Reuters), $23.24 (FN Arena) also include whatever profit the company generates in the June half. However, any capital allocated to a Iron ore giant Fortescue Metals Group has told its project will be assessed within Fortescue’s shareholders that the company will also become a “disciplined capital allocation framework.” hydrogen and steel superpower, unveiling plans to build a steel-making industry in Australia, making FMG shareholders can take comfort from the fact that “green” steel – zero-carbon steel, using zero the company is massively profitable at current iron carbon-dioxide-emissions energy – as well as ore prices, and will still be profitable even with a becoming one of the world’s largest clean-energy significant drop in prices. Last month Fortescue companies. Fortescue has formed a new arm, reported a net profit of $US4.1 billion for the Fortescue Future Industries (FFI), which will take December half-year, after sales rose by 44% to oversight of these plans. $US9.3 billion. Shareholders will receive a fully franked interim dividend of $1.47 per share, up 93% Fortescue says it will make green steel by replacing on the interim payout a year ago. coke (made from steelmaking coal) as a reducing agent in the blast furnace with “green” hydrogen, Fortescue’s day job – iron ore – is still pumping out which is made by electrolysing water into its the cash. component elements of hydrogen and oxygen, both in gas form, using renewable energy. 2. Hazer Group (HZR, $1.32) Market capitalisation: $193 million Fortescue plans to start building Australia’s first Three-year total return: +45.7% a year green-steel pilot plant this year, with a commercial FY22 forecast yield: no dividend expected plant in the Pilbara, powered entirely by green Analysts’ consensus valuation: no analyst electricity from wind and solar, in the next few years. coverage

Whether “green” steel really has a commercial Perth-based Hazer Group is the only pure-play future, certainly in the near future, will depend very exposure to green hydrogen on the ASX – only not much on significantly reducing the cost of generating through electrolysis. Hazer, which was founded in the hydrogen. At this stage, the cost is simply too 2010 to commercialise technology developed at the high to allow green steel to compete with traditional University of Western Australia, and listed on the ASX blast-furnace steel-making. Also, the major markets in December 2015, committed in July to build a are far away: Australia is of course an expert shipper commercial demonstration plant (CDP) to prove that of LNG, but it should not be simply assumed that it its Hazer process works. The process uses iron ore can do the same with hydrogen, which is a very as a catalyst to produce hydrogen and graphite – different kettle of fish. rather than carbon dioxide – from methane. The process decomposes methane into hydrogen Fortescue says it will invest at least $400 million into molecules and solid graphitic carbon. renewable energy technologies such as wind, solar and green hydrogen, as it ramps up its push to be Hazer’s CDP will be built at Perth’s Woodman Point one of the world’s biggest clean energy companies. wastewater treatment facility. The feedstock will be The company says hydrogen is the ultimate focus of biogas produced from sewage waste, which will be FFI, but it will need to invest in wind and solar will be converted into green hydrogen. Woodman Point necessary to manufacture it in a clean way, and it already has bio-digestor facilities on site, which allow also wants to run its mines solely on renewable for methane gas to be produced and captured from energy. the sewage waste received at the plant, and will serve as a ready-made supply of green biogas for the Fortescue CEO Elizabeth Gaines said last month that Hazer hydrogen project. The project will use about the company would put aside 10% of net profit into two million standard cubic metres of biogas that is

Monday 15 March 2021 09 currently being flared-off, for environmental focusing on “grey” hydrogen, made through in-situ mitigation. gasification (ISG) of the old Leigh Creek coalfield, with urea (for fertiliser) produced on-site. The The plant will produce 100 tonnes a year of hydrogen company says the Leigh Creek Energy Project at fuel-cell grade, meaning it will be capable of use as (LCEP) is a $2.6 billion project. a low-emission transport fuel, in heavy-duty applications such as passenger vehicles, buses, 4. Hexagon Energy Materials (HXG) trucks, rubbish collection vehicles and long-haul road transport – or for power generation, or as a “cleaner” The former rare earths-gold explorer acquired the source, in terms of carbon-dioxide emissions, for Pedirka hydrogen project in the Northern Territory in industrial applications. 2020 – the project will use an underground thermal coal resource and a surface gasification plant to The project will also produce about 370 tonnes a year produce “blue” hydrogen from coal for export and of high-quality synthetic graphite, which could be domestic markets with zero carbon emissions. The used for energy storage and other large global carbon dioxide given off by the coal will be captured graphite applications – the CDP will provide the first as the process separates the hydrogen, and larger-scale example of Hazer graphite available to sequestered back into the ground. market. Hazer says its graphite is highly crystalline and has excellent comparison to high-end 5. Pure Hydrogen Corporation Limited (PH2) commercial forms of graphite used in lithium-ion batteries – but with less environmental impact, as The newly merged (this week) entity Pure Hydrogen Hazer does not need to excavate mass areas of land Corporation, created from the merger of Real Energy like natural graphite extraction and does not need to and the former Strata-X Energy, will hold gas assets use harsh chemicals like petroleum coke, which is in the Surat and Cooper basins, and is also planning used to create current synthetic graphite. a renewable-energy powered electrolysis operation at Port Anthony in Victoria to produce hydrogen for The $17 million plant will also feature a stationary export, manufacturing input and powering of hydrogen fuel cell power-generation system, allowing hydrogen fuel-cell vehicles. The company is also Hazer to use some of the hydrogen it produces to proposing a hydrogen plant at Miles in Central generate its own renewable power, thereby offsetting Queensland, which could access both coal seam gas power purchased from utility providers and reducing (CSG) and gas from the company’s own gas fields. operating costs. The installation of the hydrogen fuel cell will be one of the first larger-scale installations in Important: This content has been prepared without Australia and the company says it will demonstrate taking account of the objectives, financial situation or the technology’s ability to be integrated with the needs of any particular individual. It does not Australian grid. constitute formal advice. Consider the appropriateness of the information in regard to your Hazer is targeting commissioning in October 2021, circumstances. with the CDP intended to operate for up to three years or until the end of 2023.

Other players

There are several highly speculative smaller companies with plans at varying stages to enter the hydrogen market.

3. Leigh Creek Energy (LCK)

The South Australia-based Leigh Creek Energy is

Monday 15 March 2021 10 My “HOT” stock: QAN by Maureen Jordan

“Travel demand is like a coiled spring, with appropriateness of the information in regard to your household savings in good shape,” says Julia. circumstances.

“Add on the Federal government stimulus, and domestic travel is set to shoot upwards of pre-Covid levels.

“With a travel bubble for international destinations a possibility, together with the vaccine rollout, international travel should improve faster than anticipated.

“Qantas has come out of the pandemic in good shape.

“It’s set to benefit from the reopening of borders, security around borders staying open and the vaccine rollout.

“Additionally Qantas is targeting $1 billion in restructuring benefits over the next three years,” Julia says.

Her final words?

“BUY QANTAS.”

Source: Google

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

Monday 15 March 2021 11 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

For the week ending Friday 12 March, there were 12 outlook triggered 9-10% upgrades to earnings upgrades and 5 downgrades to ASX-listed companies forecasts for the company over FY21-FY25. covered by brokers in the FNArena database. As mentioned last week, earnings upgrades for CSL and Qantas received two upgrades apiece to Karoon Energy flowed from solid production and cash ratings by separate brokers, while Treasury Wine metrics which are expected to continue in FY21. Estates had two downgrades. In a business update last week, Eclipx Both Morgans and Citi homed in on the Group signalled a surge in end-of-lease income. extended share price underperformance for CSL and Macquarie notes used car market conditions remain identified the decline in plasma collections as the strong and higher prices have driven forecast central concern to date. Citi believes this will earnings upgrades by more than 20% for normalise after the vaccine rollout while Morgans FY21. However, three other brokers temper sees upside for Seqirus from the potential for a bad Macquarie’s enthusiasm by noting prevailing northern hemisphere flu season. conditions are unsustainable and a reversion to mean is nigh. While both brokers agree that one billion of cost-out for Qantas is a distinct positive, Ord Minnett upgrades Japara Healthcare suffered the largest percentage fall on the basis of a global recovery and Citi due to the in forecast earnings for the week. In a review of the increased border certainty from the Australian final report from the Royal Commission, UBS was government’s targeted stimulus package. underwhelmed by potential delays to much needed regulatory clarity until the FY22 Budget. Recent share price outperformance was integral to broker downgrades for Treasury Wine Estates. In Zip Co was next on the table for forecast earnings addition, Credit Suisse cautions competition will downgrades after UBS reduced the rating to Sell from intensify in Australia and Europe as grape supply Neutral. While the broker remains positive about the previously destined for China competes in short-term growth profile there are significant these markets. execution risks and capital requirements will continue to increase. In addition, higher bond rates may affect Galaxy Resources was atop the table for the largest the cost of funding and valuation. percentage increase in earnings forecasts by brokers for the week, after an update on the James Bay After six brokers assessed Western Areas in the lithium mine project in northern Quebec. The mine is wake of a $100m capital raise at $2.15 per share, the expected to have a life of 18 years based on an net result was a fall in forecast earnings. Morgans average production rate of 330,000tpa. downgraded its rating to Hold from Add and now predicts more risk attached to production volumes at Oceanagold was next after one broker, Macquarie, Forrestania than previously forecast. On the other updated copper price forecasts in the short-term by hand, Credit Suisse considered the raise was prudent 20% and 30% in the medium-term to incorporate and upgraded the rating to Outperform from Neutral. energy transition-related demand. This improved

Monday 15 March 2021 12 In the good books QANTAS AIRWAYS LIMITED (QAN) was upgraded to Buy from Neutral by Citi B/H/S: 4/1/1 CSL LIMITED (CSL) was upgraded to Add from Hold by Morgans B/H/S: 3/4/0 With the increased border certainty from the government stimulus package, Citi upgrades to Buy With underperformance in the shares, no structural from Neutral and increases the target to $6.14 from concerns and technicals being supportive, Morgans $5.47. However, a leisure led recovery is considered believes the risk/reward is more attractive for CSL negative for mix, with only negligible impacts on and upgrades the rating to Add from Hold. While profitability. Separately, the broker feels a -$1bn identifying plasma collection as the main concern, the dollar cost out should be a key upside catalyst though broker sees upside in Seqirus, on the potential for a previous transformation programs show the bad northern hemisphere flu season. The recent flu company struggled to hold onto past benefits. respite may leave the population more vulnerable to more severe flu outbreaks over the medium/long WESTERN AREAS NL (WSA) was upgraded to term. Morgans makes no changes to forecasts or the Outperform from Neutral by Credit Suisse B/H/S: price target of $301.10. 4/3/0

Western Areas will raise $85-100m in new equity to support Odysseus. This consists of a fully underwritten placement and up to $15m in a share purchase plan. The capital raising has been motivated by balance sheet considerations, Credit Suisse notes, in order to have Odysseus fully funded from cash and debt and eliminating any future funding requirement from “at risk” cash flow from IRESS LIMITED (IRE) was upgraded to Forrestania. The broker considers the capital raising Outperform from Neutral by Credit Suisse B/H/S: prudent and upgrades to Outperform from Neutral. 2/2/0 Target is reduced to $2.45 from $2.60.

The share price has dropped to a level Credit Suisse In the not-so-good books considers compelling, upgrading to Outperform from Neutral. The broker concludes Iress has a defensible TREASURY WINE ESTATES LIMITED (TWE) was and recurring revenue base and there are several downgraded to Hold from Accumulate by Ord opportunities to drive modest earnings growth over Minnett and to Neutral from Outperform by Credit time. The share price now offers a 2021 dividend Suisse B/H/S: 0/6/1 yield of 5%, the broker notes, attractive in the current environment amid limited downside. Target is steady Ord Minnett downgrades Treasury Wine Estates to at $11. As the OneVue integration progresses, Credit Hold from Accumulate following strong share price Suisse believes the opportunity becomes even more outperformance since the first-half result, with the attractive to investors. target price rising to $11.50 from $11. Treasury Wine Estates has entered into a long-term deal with The LINK ADMINISTRATION HOLDINGS LIMITED Wine Group to license some of Treasury’s (LNK) was upgraded to Buy by Citi B/H/S: 1/2/0 commercial US wine brands, namely Beringer Main & Vine, Beringer Founders’ Estate, Coastal and Link Administration has been “re-initiated” at Citi, Meridian for $100 million. Ord Minnett notes these hidden in a post-February sector report, and involving form part of the more than -$300m identified by an upgrade to Buy from No Rating with a $5.70 price Treasury Wine in 2020 to be sold as the company target. On their own admission, Citi’s Buy rating is a refocuses on premium US wine brands from its non-consensus call and a lot seems to revolve cheaper offerings. around realised value from the equity stake in PEXA.

Monday 15 March 2021 13 Treasury Wine has divested around -4.5m cases of commercial wine for around $100m, in line with its strategy of concentrating on premium wine. Credit Suisse points out the earnings changes are not material across the forecast horizon. The broker notes the share price has largely closed the valuation gap to peers and downgrades to Neutral from Outperform. Target is $11.30. Credit Suisse also assumes competition will intensify in Australia and Europe as grape supply previously destined for China competes in these markets.

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.

Monday 15 March 2021 14