Research notes

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Research Notes

Was that an upgrade or a downgrade?

Karoon Energy
3:27pm
August 25, 2025
KAR lifted CY25 group production guidance, while also announcing a serious issue at a key well at Bauna (SPS-92). CY25 guidance has been lifted to 9.7-10.5mmboe, which falls short of consensus expectations, with current Visible Alpha consensus 10.5mmboe, with the miss no doubt driven by the change at SPS-92. An unexpected outage at SPS-92, Bauna’s largest producing well, will see it operating at roughly a quarter of its usual rate until the ESP can be replaced. Understandably, Karoon still needs to do the work, but in the first instance we estimate the ESP replacement cost at US$40-$50m and likely to happen in Q2 2026. We downgrade Karoon to HOLD (from ACCUMULATE), with a lower 12-month target price of A$1.85 (was A$2.05).

Short term downgrade; Long term upgrade

Guzman y Gomez
3:27pm
August 24, 2025
The FY25 result was slightly softer than expected. A weak 1Q26 trading update and lower than expected FY26 EBITDA margin guidance weighed on the shares and results in material near-term consensus revisions. Comp sales growth is expected to accelerate from the trading update through menu innovation, daypart expansion, operational excellence, marketing and digital initiatives. We also think GYG’s margin guidance will prove conservative. Whilst the negative share price reaction to the weaker than expected guidance and trading update was disappointing, we think it’s a buying opportunity. GYG upgraded its long-term outlook with its FY30 EBITDA margin target ahead of our forecast and consensus. Net net, our near-term forecast downgrades are offset with longer-term upgrades and our DCF valuation is largely changed. Maintain BUY.

Signs of Life, But Still in Recovery Mode

Healius
3:27pm
August 24, 2025
FY25 results were softer than expected with underlying profit improving, but net loss increasing, A$30m+ in NRIs, and a A$495m Pathology impairment. Pathology volumes continue to improve, but operating margins were squeezed on higher spending and ongoing labour headwinds, with Agilex continuing to struggle on geopolitical uncertainties. While we note signs of green shoots and progress on the T27 plan, sustainable earnings growth is still questionable, execution risk is high, and there are plenty of uncertainties, including fair work commission proposals and recent Medicare changes to vitamin B12 and urine testing. We adjust FY26-27 estimates, with our target price decreasing to A$0.87. HOLD.

A slow roast from here

BRG Group
3:27pm
August 24, 2025
BRG delivered a strong FY25 result, hitting the top-end of guidance and delivering ~15% NPAT growth on the pcp. Despite an otherwise positive result, featuring continued strong double digit coffee growth and broad-based region contributions, FY26 represents elevated earnings uncertainty as BRG navigates its US tariff manufacturing transition. While we see long-term value in the name, near-term earnings visibility is relatively low with a reset period ahead (MorgansF FY26F EBIT of -2%). Hold.

Stepping forward

Accent Group
3:27pm
August 24, 2025
AX1’s FY25 result was at the upper end of guidance with EBIT largely flat on the pcp. Sales turned negative in the 2H, and gross margins were weak driven by the highly promotional environment. Sales in the first 7 weeks of FY26 have turned positive and AX1 has provided guidance for FY26, expecting high single digit EBIT growth. AX1 plans to open 30 stores and 4 Sports Direct Stores, the first one opening in November in Melbourne. We have lowered our EBIT FY26 by 2%, with FY27 EBIT largely unchanged. This has been driven by lower store openings, higher gross margins, offset by lower costs. Our valuation reduces to $1.65 (from $1.85). We have upgraded to a BUY.

This chicken needs some gravy

Inghams
3:27pm
August 24, 2025
ING’s FY25 result came in at the lower end of guidance and missed consensus estimates after a challenging 4Q25. FY25 was impacted by one less trading week vs the pcp, weakness in all channels given cost of living pressures and the new Woolworths (WOW) contract. The Wholesale price was also extremely weak. FY26 guidance was materially weaker than expected. ING expects a challenging 1H26, followed by solid growth in the 2H26. More normalised operating conditions should eventuate in FY27. We have made significant revisions to our forecasts. After the severe share price reaction, we upgrade to a Hold rating. With a weak 1H26 result, ING is lacking near term catalysts, however we have seen the company recover from these issues in the past. ING’s attractive fully franked dividend yield will also likely provide some degree of share price support.

Continuing to truck along

AMA Group
3:27pm
August 24, 2025
AMA reported a positive FY25 result, beating the top-end of guidance, delivering ongoing FCF generation and continuing to rebound strongly. We continue to view value in the name as the business continues to meaningfully execute on the business turnaround and progress towards its aspirational ~10% medium-term EBITDA margin target. We are encouraged by the operational progress and continue to see good value in the name in-light of the strong near-term growth profile. Accumulate maintained.

Multiple levers to pull for growth

Brambles
3:27pm
August 24, 2025
BXB delivered a solid FY25 result despite a challenging macroeconomic environment, particularly in the US. Margin improvement, driven by continued gains in asset efficiency and productivity, was once again a key highlight. While like-for-like (LFL) volumes were 1% lower, this was more than offset by net new business wins with momentum improving through the year. Management is targeting further margin improvement in FY26 with guidance for constant FX sales growth of 3-5% and underlying EBIT growth of 8-11%. The company has also upgraded its FY28 margin improvement target (vs FY24 levels) to 300bp vs 200bp previously, supported by supply chain productivity, asset efficiency and overhead productivity. We increase FY26-28F underlying EBIT by between 5-7%. We raise our target price to $25.70 (from $19.75), reflecting updated earnings forecasts and a higher PE-based valuation multiple of 24x (up from 19.5x). This uplift reflects our increased confidence in management’s ability to drive sales growth through new business wins and continued margin improvement via efficiency gains. With a 12-month forecast TSR of 2%, we move to a HOLD rating (from TRIM). We may adopt a more positive stance should the share price pull back.

Delivering to plan

Vysarn
3:27pm
August 24, 2025
FY25 was pre-released so contained no real surprises. Earnings were in line with expectations and financials were similarly there or thereabouts. The qualitative divisional outlook commentary is upbeat. Importantly, the Industrial division, which was plagued by chronic underutilisation in 1H, is off to a strong start in FY26. Our forecast changes are de minimis, with our PBT estimates for FY26-27 unchanged. We forecast +30% organic EPS growth in FY26, though the company has significant balance sheet and management bandwidth to make further acquisitions. Additionally, given VAM has been further de-risked, we increase our risk-weighting to 75% (from 50%). This sees our target price rise to $A0.64 (from $A0.58).

Momentum building in Defence

VEEM
3:27pm
August 24, 2025
VEE’s FY25 result was largely in line with guidance (revenue, EBITDA and NPAT) provided last week. The one surprise however was the dividend with no 2H25 dividend declared. This looks to be in anticipation of future growth with VEE investing in additional robotics and other capital equipment in FY25. The company also increased its borrowing capacity so holding back the dividend will give it extra capacity to gear up for FY26. VEE has made two significant announcements related to its Defence business over the past week: 1) Renewed contract with Australian Submarine Corp (ASC) for a further 6 years, valued at $65m; and 2) Received approved supplier status for the Huntington Ingalls Industries Newport News Shipbuilding (HII-NNS) Australian Submarine Supplier Qualification (AUSSQ) program that will allow VEE to enter the US submarine shipbuilding supply chain. We see these developments as positive for VEE’s future growth potential in the Defence sector. We have revised down our FY26-28 EBITDA forecasts by between 14-23%, reflecting lower assumed sales growth for gyros (which are likely to remain volatile) and propellers (given limited progress with the Sharrow partnership to date). We have also reduced our margin assumptions accordingly. Our target price declines to $1.30 (from $1.50) and we maintain our BUY rating. We continue to believe in VEE’s long-term growth potential, supported by sizeable addressable markets in propellers (US$2.7bn) and gyros (US$14.6bn), as well as an increasingly positive outlook in Defence - a sector VEE has served since 1988.

News & insights

Michael Knox, Chief Economist explains how the RBA sets interest rates to achieve its 2.5% inflation target, predicting a cash rate reduction to 3.35% by November when inflation is expected to reach 2.5%, based on a historical average real rate of 0.85%.

Today, we’re diving into how the Reserve Bank of Australia (RBA) sets interest rates as it nears its target of 2.5% inflation, and what happens when that target is reached. Back in 1898, Swedish economist Knut Wicksell  published *Money, Interest and Commodity Prices*, introducing the concept of the natural rate of interest. This is the real interest rate that maintains price stability. Unlike Wicksell’s time, modern central banks, including the RBA, focus on stabilising the rate of inflation rather than the price level itself.

In Australia, the RBA aims to keep inflation at 2.5%. To achieve this, it sets a real interest rate, known as the neutral rate, which can only be determined in practice by observing what rate stabilises inflation at 2.5%. Looking at data from January 2000, we see significant fluctuations in Australia’s real cash rate, but over the long term, the average real rate has been 0.85%. This suggests that the RBA can maintain its 2.5% inflation target with an average real cash rate of 0.85%. This is a valuable insight as the RBA approaches this target.

Australian Real Cash Rate -July 2025

As inflation nears 2.5%, we can estimate that the cash rate will settle at 2.5% (the inflation target) plus the long-term real rate of 0.85%, resulting in a cash rate of 3.35%. At the RBA meeting on Tuesday, 12 August, when the trimmed mean inflation rate for June had already  dropped to 2.7%, the RBA reduced the real cash rate to 0.9%, resulting in a cash rate of 3.6%.

We anticipate that when the trimmed mean inflation for September falls to 2.5%, as expected, the cash rate will adjust to 2.5% plus the long-term real rate of 0.85%, bringing it to 3.35%. The September quarter trimmed mean will be published at the end of October, just before the RBA’s November meeting. We expect the RBA to hold the cash rate steady at its September meeting, but when it meets in November, with the trimmed mean likely at 2.5%, the cash rate is projected to fall to 3.35%.

Australian Real Cash Rate - August 2025
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Michael Knox, Chief Economist looks at what might have happened in January 2026 if the cuts in corporate tax rates in Trumps first term were not renewed and extended in the One Big Beautiful Bill

In recent weeks, a number of media commentators have criticized Donald Trump's " One big Beautiful Bill " on the basis of a statement by the Congressional Budget Office that under existing legislation the bill adds $US 3.4 trillion to the US Budget deficit. They tend not to mention that this is because the existing law assumes that all the tax cuts made in 2017 by the first Trump Administration expire at the end of this year.

Let’s us look at what might have happened in January 2026 if the cuts in US corporate tax rates in Trumps first term were not renewed and extended in the One Big Beautiful Bill.

Back in 2016 before the first Trump administration came to office in his first term, the US corporate tax rate was then 35%. In 2017 the Tax Cut and Jobs Act reduced the corporate tax rate to 21%. Because this bill was passed as a "Reconciliation Bill “, This meant it required only a simple majority of Senate votes to pass. This tax rate of 21% was due to expire in January 2026.

The One Big Beautiful Bill has made the expiring tax cuts permanent; this bill was signed into law on 4 July 2025. Now of course the same legislation also made a large number of individual tax cuts in the original 2017 bill permanent.

What would have happened if the bill had not passed. Let us construct what economists call a "Counterfactual"

Let’s just restrict ourselves to the case of what have happened in 2026 if the US corporate tax had risen to the prior rate of 35%.

This is an increase in the corporate tax rate of 14%. This increase would generate a sudden fall in US corporate after-tax earnings in January 2026 of 14%. What effect would that have on the level of the S&P 500?

The Price /Earnings Ratio of the S&P500 in July 2025 was 26.1.

Still the ten-year average Price/ Earnings Ratio for the S&P500 is only 18.99. Let’s say 19 times.

Should earnings per share have suddenly fallen by 14%, then the S&P 500 might have fallen by 14% multiplied by the short-term Price/ Earnings ratio.

This means a likely fall in the S&P500 of 37%.

As the market recovered to long term Price Earnings ratio of 19 this fall might then have ben be reduced to 27%.

Put simply, had the One Big, beautiful Bill not been passed, then in 2026 the US stock market might suddenly have fallen by 37% before then recovering to a fall of 27% .

The devastating effect on the US and indeed World economy might plausibly have caused a major recession.

On 9 June Kevin Hassert the Director of the National Economic Council said in a CBS interview with Margaret Brennan that if the bill did not pass US GDP would fall by 4% and 6-7 million Americans would lose their jobs.

The Passage of the One Big Beautiful Bill on 4 July thus avoided One Big Ugly Disaster.

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On 7 July the AFR published a list of 37 Economists who had answered a poll on when the RBA would next cut rates. 32 of them thought that the RBA would cut on 8 July. Only 5 of them did not believe the RBA would cut, Michael Knox being one of them.

On 7 July the AFR published a list of 37 Economists who had answered a poll on when the RBA would next cut rates. 32 of them thought that the RBA would cut on 8 July. Only 5 of them did not believe the RBA would cut on 8 July. I was one of them. The RBA did not cut.

So today I will talk about how I came to that decision. First, lets look at our model of official interest rates. Back in January 2015 I went to a presentation in San Franciso by Stan Fishcer . Stan was a celebrated economist who at that time was Ben Bernanke's deputy at the Federal Reserve. Stan gave a talk about how the Fed thought about interest rates.

Stan presented a model of R*. This is the real short rate of the Fed Funds Rate at which monetary policy is at equilibrium. Unemployment was shown as a most important variable. So was inflationary expectations.

This then logically lead to a model where the nominal level of the Fed funds rate was driven by Inflation, Inflationary expectations and unemployment. Unemployment was important because of its effect on future inflation. The lower the level of unemployment the higher the level of future inflation and the higher the level of the Fed funds rate. I tried the model and it worked. It worked not just for the Fed funds rate. It also worked in Australia for Australian cash rate.

Recently though I have found that while the model has continued to work to work for the Fed funds rate It has been not quite as good in modelling that Australian Cash Rate. I found the answer to this in a model of Australian inflation published by the RBA. The model showed Australian Inflation was not just caused by low unemployment, It was also caused by high import price rises. Import price inflation was more important in Australia because imports were a higher level of Australian GDP than was the case in the US.

This was important in Australia than in the US because Australian import price inflation was close to zero for the 2 years up to the end of 2024. Import prices rose sharply in the first quarter of 2025. What would happen in the second quarter of 2025 and how would it effect inflation I could not tell. The only thing I could do is wait for the Q2 inflation numbers to come out for Australia.

I thought that for this reason and other reasons the RBA would also wait for the Q2 inflation numbers to come out. There were other reasons as well. The Quarterly CPI was a more reliable measure of the CPI and was a better measure of services inflation than the monthly CPI. The result was that RBA did not move and voiced a preference for quarterly measure of inflation over monthly version.

Lets look again at R* or the real level of the Cash rate for Australia .When we look at the average real Cash rate since January 2000 we find an average number of 0.85%. At an inflation target of 2.5 % this suggests this suggest an equilibrium Cash rate of 3.35%

Model of the Australian Cash Rate.
Model of the Australian Cash Rate


What will happen next? We think that the after the RBA meeting of 11 and 12 August the RBA will cut the Cash rate to 3.6%

We think that after the RBA meeting of 8 and 9 December the RBA will cut the Cash rate to 3.35%

Unless Quarterly inflation falls below 2.5% , the Cash rate will remain at 3.35% .

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