Broker Watch

Ord Minnett has downgraded these 5 ASX stocks

Tue 17 Jan 23, 1:14pm (AEST)
Rapid Movers - Business graph with arrows tending downwards

Key Points

  • Chinese headwinds are tipped to impact Alumina
  • Two stocks tied into housing thematic also downgraded
  • Job market normalisation through 2023 expected to impact Seek returns

Ord Minnett is out with its first set of broker moves for 2023, and the news is not all that rosy. Analysts have made downgrades to five constituents of the ASX 200 with no one sector copping most of the brunt.

However, in analysing the reasons for each downgrade, two clear themes do emerge.

Namely, how will the Australian consumer deal with the trickling effects of rising rates and how will China’s reopening play into the global economic downturn narrative that is so dominant at the moment. This article will take a look at those five stocks, their new ratings, and how these two themes have influenced the ratings changes.

Pinning your hopes on one macro indicator: Seek (ASX: SEK)

Seek has been downgraded to HOLD from buy, with analysts arguing that 2023 will be a year for normalisation in the job market. Recent data from the Australian Bureau of Statistics revealed there were more than 440,000 job vacancies at the end of last year. 

While that’s not far off the all-time high of 484,000, it also suggests that central bank rate hikes are starting to bite employers’ ability to hire at the same pace they did when Australia reopened from the depths of COVID-19 lockdowns. 

One metric which could be a saving grace for its balance sheet is net migration. If job listing volumes don’t moderate, it may well be because more backpackers and migrants have returned to our shores. The company also has an Asian business (through Zhaopin in China) that could open doors not available in the domestic market.

Price target: $22.80/share

Earnings outperformance can’t last forever: Super Retail Group (ASX: SUL)

Christmas was supposed to be tougher this year for consumer discretionary stocks and retail in general. Inflation is still high in Australia and an economic recession still can’t be ruled out. Consumer confidence, although rebounding in recent weeks, remains low in Australia and spending data observed by ANZ has suggested all that COVID cash is coming to an end. 

In short, all the theory should have pointed to a tough Christmas for retailers. Unless you were Super Retail Group. SUL’s first-half result was significantly greater than what the broker expected, causing the analysts to hike their full year earnings forecast for the company by nearly 40%. 

But as is with retail, few moats last long. Although Super Retail is the leader in its field, retail is a very competitive space with existing players continuing to make new moves all the time. Inventories have been a big challenge for the company, and profit margins are consistently weighed down by sale events. And if Amazon enters the Australian market, Super Retail’s customers and leadership could also be at risk.

It’s now a LIGHTEN instead of a hold, with a price target of $9.50/share.

The state of SUL's six month charts
The state of SUL's six month charts

Home Improvement: James Hardie (ASX: JHX)

Housing is not an all-Australian story by any stretch of the imagination. In the United States, homebuilding activity is also keenly watched by market participants. The Federal Reserve’s rate hikes have dampened the housing market’s strength which started just after lockdowns ended stateside. Through 2022, 1.6 million new homes were built and it’s here where James Hardie makes most of its money.

But volume weakness, a downturn in activity, and margin compression due to legacy effects from supply chain woes have all made the company’s operating life that much harder.

The company is now rated ACCUMULATE from buy, with a healthy price target of $40/share.

House Rules: REA Group (ASX:REA)

And while we’re on the housing thematic, REA Group and chief rival Domain Group have both been hit by the Australian housing downturn. And in spite of a competitive environment where listings are still happening, both companies continue to increase prices at a rate that is multiple-times inflation.

But in the case of REA, valuations have always been a sticking point. Although a high quality company, you can’t ignore its 50x P/E ratio.

The company’s rating has been cut to LIGHTEN from accumulate, and the price target adjusted to $100/share.

The other two C’s—China and costs: Alumina (ASX: AWC)

Being a commodities firm always puts you on the edge of your seat. But when your company’s whole business model relies on one asset, that’s especially so. Alumina is one of those - it only owns one asset (a partial stake of parent company Alcoa). Luckily for AWC, its parent company also enjoys hefty profits and relatively low production costs.

Having said this, the company does face a slew of headwinds from China. The price target is now $1.20/share and Ord Minnett’s team rate it a SELL. 

A look at AWC's six month charts
A look at AWC's six month charts

 

Written By

Hans Lee

Senior Editor

Hans is one of the Senior Editors at Livewire Markets and Market Index. He created Signal or Noise and leads the team's coverage of the global economy and fixed income markets.

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