Research notes

A solid underlying performance in 3Q24, close to MorgansF/consensus estimates. BMG is now 80% complete, but also expected toward the upper end of guidance range, due to weather and equipment failure causing a week delay. Debottlenecking and upgrading work continues at Orbost, with COE preparing to deploy new nozzles, snowflake packing material, sulphur offtake testing, and the next round of in situ clean trials. The work on BMG is due to be completed by late May, at which point COE transitions into an impressive FCF generator. We maintain an ADD rating, with an unchanged A$0.30ps Target Price.

LGI’s Investor Day included another encouraging update, as the company reaffirmed its FY24 EBITDA guidance; clearly articulated the short-to-medium term development pipeline; set out its growth strategy; and demonstrated its battery energy storage system capabilities. We increase our FY24-26 EPS forecasts by 5%/12%/7%, reflecting increased battery cycling and LGI’s new Bingo contract. We move to a pure DCF valuation and our 12 month price target increase to A$3.12ps. Upgrade to ADD rec. We have confidence in LGI’s ability to execute on its meaningful development pipeline and are encouraged by the highly attractive unit economics of its battery storage capabilities and the viability of a broader battery rollout. In addition to LGI’s compelling medium term growth opportunity, the business provides investors with exposure to the increasingly important decarbonisation thematic.

In line with its strategy to expand and grow beyond blasting, ORI has announced acquisitions in both Mining Chemicals and Digital Solutions. While we agree with the strategic rationale, both acquisitions were purchased off private equity and ORI has paid relatively full multiples. We have incorporated the acquisitions and capital raising (A$465m) into our forecasts. With a number of businesses to integrate, it will all come down to execution, which to date, ORI has excelled at under a new management team. Hold maintained.

Adriatic Metals (ADT) is now ramping up production from its world-class Vares underground polymetallic mine in Bosnia, Central Europe. Rich grades and low capital and operating costs drive excellent project economics, >60% EBITDA margins, rapid payback and compelling cash generation. ADT is protected from potential teething issues by supportive off-takers, debt and equity investors who understand Vares’ compelling returns once optimised. We initiate coverage with an Add rating and a A$5.80/ CDI price target and note ADT looks compelling to both equity and strategic investors alike.

BOQ is scheduled to release its 1H24 result on 17 April. We think cash earnings are likely to fall materially, as is the dividend. REDUCE maintained. Forecast changes immaterial. Target price $5.05 (+3 cps).

Following a challenging 1H24, particularly the 1Q, ELD has provided FY24 EBIT guidance which was materially below consensus estimates. We have revised our FY24 EBIT forecast by 17.7%. The downgrades to consensus will be far greater. However in FY25 and FY26, we have upgraded our forecasts for ELD’s numerous growth projects. Given ELD’s key drivers have improved from the lows and it has a number of growth projects which should underpin solid earnings growth from FY25 onwards, we upgrade to an Add rating following material share price weakness.

QAN has announced one of the biggest ever expansions of its Frequent Flyer program with the launch of a new flight rewards product called Classic Plus. This new program will give Qantas Frequent Flyers access to over 20m more reward seats and is in addition to its current Classic Reward seats which offers 5m seats. Reflecting the launch of Classic Plus Flight Rewards, QAN has downgraded Loyalty’s FY24 guidance and FY25 guidance was also below consensus. We note that overall, the downgrades at a group level are only minor (1-3%). While this move will impact Loyalty earnings in the near term, Classic Plus will address customer pain points with redeeming points on flights which QAN expects will drive a substantial improvement in member engagement and increased member growth. We also view this as an important step in restoring QAN’s brand health. Importantly, Classic Plus will likely see Loyalty growth materially accelerate from FY26 and will also support the future long term growth of Loyalty with QAN targeting to grow EBIT to A$800-1000m by FY30 (10% CAGR).

ANN is acquiring the PPE business of Kimberly-Clark for US$640m in cash, representing a reasonable 9.7x EV/EBIT multiple, with third year synergies/tax benefits improving the attractiveness (7.8x). The transaction is being funded via a A$400m private placement (at A$22.45), US$377m new debt bridging facility and up to A$65m SPP. The acquisition is expected to enhance ANN’s global position in attractive, complementary segments, enrich its service capacity, and generate economies of scale, with mid-to-high single digit EPS accretion (ex -synergies; low-teens post-synergies) from close (1QFY25) and ROIC gains in 3 to 5 years. While the multiple appears reasonable and strategic rationale sound, integration is not without risk, especially on the heels of an organisational re-design and ongoing productivity improvements, despite manufacturing being fully outsourced. We raise FY25-26 EPS estimates up to 10.1%, with our DCF/SOTP PT increasing to A$25.61. Hold.

SUN has announced the sale of its NZ Life insurance business (Asteron Life) to Resolution Life for NZ$410m. Analysing the sale is complicated by the recent change in life insurance accounting standards and its impact on earnings. Broadly we think the sale price on a price-to-book multiple basis (~2x) appears reasonable, whilst the earnings multiple of 11x-14.5x (depending on earnings measure) is arguably less full. Nevertheless we remain fans of the continued simplification of SUN’s business. We make relatively nominal earnings changes on the back of this update with SUN FY25F/FY26F EPS lowered by 1%-2%. Our PT rises to A$17.30 on life sale impacts (lost earnings versus additional capital) and a valuation roll-forward.

ORA’s trading update was disappointing with group FY24 earnings guidance downgraded. The updated guidance mainly reflected continued volume softness and price deflation in North America (particularly in Distribution) and ongoing customer destocking in Saverglass. Updates to earnings forecasts and slight adjustments to FX assumptions see FY24-26F group EBIT decrease by 9-13% and underlying NPAT decline by 13-18%. Our target price falls to $2.30 (from $2.70) and we maintain our Hold rating. While ORA’s trading metrics are undemanding (13.6x FY25F PE and 4.1% yield), the operating outlook remains weak with the timing of any rebound in demand uncertain. In addition, the performance of Saverglass since acquisition has been underwhelming. We hence maintain our cautious stance until management can show an improvement in the group’s underlying performance.