Research notes

RIO delivered a healthy 4Q23 operational result that was largely in-line. SP10 (lower grade) iron ore product is likely to remain a feature longer than we originally expected, but the discounts over time have also proven smaller. RIO is in robust shape, but this does appear factored in. We maintain a Hold rating.

At its recent Investor Day, SDR announced that in mid-2024 it is set to launch Version 1 of its new Revenue Management System (RMS) product, Dynamic Revenue Plus (DR+). We explore two potential scenarios for what DR+ could mean for SDR’s revenue, gross profit, unit economics and valuation in FY30. With this report we also make minor revisions to our forecasts reflecting slight adjustments to our FX and OpEx assumptions ahead of SDR’s 2Q24 trading update on 30 January and 1H24 result on 27 February. SDR is currently trading in line with our valuation of A$5.69 per share. However, given we have not included DR+ in our forecasts, we think investors could be getting the potential material upside of DR+ for free. We therefore set our price target at A$6.25 (10% premium to our valuation). ADD maintained.

Since the proposed merger with Chemist Warehouse Group (CWG) was announced in December, the SIG share price has traded well above our previous target price of A$0.85. We have wanted to stay on the front foot and look to build a position. The presentation made on the merged group in December, noted a number of factors which we believe are worth highlighting again and although we have made no changes to our fundamental valuation of A$0.89, we now include a 20% premium to set a new target price of A$1.07. We maintain our Add recommendation and suggest clients look to build a position.

We downgrade our forecasts to reflect trends in monthly APRA data indicating JDO’s loan growth during 1H24 has been below historical levels and our previous assumption. Impact on valuation is less than movement in forecast earnings, as we continue to assume that JDO’s metrics ramp-up towards its at-scale targets (albeit taking longer than previously assumed) which supports its valuation. ADD, $1.39 TP.

HUB reported 2Q24 Platform FUA of A$72.4bn (+11% qoq; and +30% pcp), with a ~A$2.9bn positive market move and net inflows of A$4.5bn. 2Q24 core flows of A$2.7bn were relatively flat on pcp and 1Q24 (A$2.8bn), with an additional ~A$1.8bn large transition finalised. The FY25 FUA target is on track. HUB alluded to short term factors which we expect will soften 1H24 growth; in particular FTE growth skewed to early 1H and FUA growth late in the half. HUB’s product offering continues to lead the market (along with NWL); the runway to secure additional adviser market share remains material; scale benefits should drive margin expansion med-term; and HUB is delivering ‘cleaner’ financials. We continue to see long-term upside in the stock, however retain a Hold on valuation.

We make model adjustments to inflation, interest rate, FX, and DPS assumptions ahead of the Q4 traffic/toll revenue and FY23 result releases in late January and February respectively. HOLD retained. 12-month target price lifted 22 cps to $5.58, mainly driven by an increase in our assumed valuation weighting to an IFM takeover event.

We have updated our assumptions for Bauna and Brent/WTI post calendar year end. A hydrate issue at one of Bauna’s smaller wells has seen Brazil crude production marginally trail our estimates based on ANP data. Stripping this well out, we are not seeing signs of accelerating decline at Bauna. We maintain an Add rating on KAR, with an adjusted A$2.95 TP (was A$3.00).

Super Retail Group performed really well across most of its brands in 1H24. Today’s trading update was a positive surprise, particularly around margins. Profit before tax (PBT) of $200-203m was 14-16% above our forecast, which itself was 1% above consensus. Our expectations for second half earnings haven’t changed materially, but we have taken the first half outperformance into account and increased our full year PBT forecast by 8%. Super Retail has been a key pick of ours for a while but, after a strong run, we think it’s now appropriately valued and we downgrade to HOLD accordingly. We continue to think this business is moving in the right direction and has the right portfolio of brands to succeed, but at 15x FY25F PE, we think it’s now in the price. Our target price increases from $17.00 to $17.50, but there isn’t enough implied TSR to keep us on an Add.

Austco Healthcare (AHC) develops a range of hardware and software products focused on enhancing communication between patients and primary carers within the hospital. Its key products are master call points (nurse call) and real-time location systems (RTLS) along with a growing high margin recurring model for its software packages. AHC generates 80% of revenue through hardware sales and 20% through software sales. Management is transitioning the business to a 50/50 split between hardware and software revenue which should result in higher margins. AHC expects strong organic growth to continue, while augmenting its offering and accelerating its growth strategy through acquiring technologies complementary to its current offering.

ASX has recently released its monthly trading activity report for December 2023. It was a better trading month overall for ASX, in our view, with higher cash markets activity (+13%), an uptick in capital raisings (vs the softer pcp) and stronger Futures volumes. However, for the half, it was more of a mixed outcome. Our FY24-FY26 EPS forecasts are lowered by ~1% factoring in the recent trading activity. Our price target is lowered to A$60.20 (from A$60.70) largely on changes to our 1H24 assumptions post the recent release. Hold maintained.