The ASX 200 stocks attracting the biggest broker upgrades: Reece, NextDC

Brokers have flocked in to upgrade their targets for Reece Australia (ASX: REH), after the company reported a clean sweep of better-than-expected numbers for the first-half of FY24.

Adjusted earnings rose 5.0% to $367 million or 18% ahead of consensus expectations. Both Australia, New Zealand and US segments outperformed estimates, with ANZ showing 15% growth and the US posting a 44% increase in earnings. Gross margins rose by an unexpected 60 bps compared to management's prior guidance. The stock finished the results session 18.4% higher to a fresh all-time high of $28.50.

Despite the strong first-half performance, analysts were quite cautious on the outlook for Reece, which goes against the stock's reaction to its earnings. Valuation was also flagged as a key concern as the stock is trading at expensive levels relative to peers.

Brokers universally hiked their share price targets to acknowledge the bumper result. But most retained a Sell or Neutral rating due to valuation concerns and a slowing housing market.

Biggest ASX 200 Upgrades

'Target price' is an aggregate of Refinitiv broker target prices. % Dif compares target prices between 23 February 2024 and 1 March 2024

NextDC experienced a similar share price response in response to a first-half result which exceeded expectations and showcased a surge in cloud/AI related demand. Some of the key numbers include:

• Total revenue up 31% to $49.4 million or 4% ahead of Goldman estimates

• Underlying EBITDA up 5% to $102 million or 12% ahead of Goldman estimates

• Invested $220 million to progress capital development projects

• Liquidity (cash and undrawn debt facilities) of $2.1 billion at 31 December 2023

• Reaffirmed full-year guidance of $400-415 million revenue and underlying EBITDA of $190.200 million

• Reaffirmed full-year capex guidance of $850-900 million

Management noted a substantial forward order book, signally a potential doubling of NextDC's business in the coming years. AI demand was also viewed as potentially being 3-5 times bigger than cloud demand.

NextDC 12-month price chart (Source: Market Index)

Altium received a $9.1 billion takeover offer from Japan's Renesas in mid-February, a move that overshadowed the company's recent set of results. Nonetheless, its first-half numbers were rather lackluster, with earnings up 3.2% year-on-year to $44.7 million or 13% below Macquarie estimates. This was driven by reinvestment across the board to support growth in mid-market, cloud and enterprise segments.

Polynovo delivered a record first-half result, with sales up 54.9% to $42.2 million and net profit of $2.7 million (up from a $3.8 million loss a year ago). Management said its flagship NovoSorb BTM product has become the preferred choice for clinicians dealing with difficult burns due to its robust nature and consistent patient outcomes. Polynovo shares finished the result session (28 Feb) up 7.3% to all-time highs.

"A strong result, with sales growth ~66% and NPAT well ahead of forecasts. We see continued strength in sales, with entry into new geographies differentiating sales mix outside the US," Macquarie analysts said in a note dated 27 February.

Polynovo 12-month price chart (Source: Market Index)