Research notes

Struggling to contain costs within contingencies following multiple delays, STO increased its development capex budget for Barossa by US$200-$300m to US$4.5-$4.6bn. STO delivered an otherwise in-line 4Q23 result across production and revenue. Capex trailed following delays to Barossa. Net debt stood at US$4.3bn at the end of December. We maintain our Hold rating, viewing STO as having already been rewarded for perceived corporate appeal given current merger talks with peer WDS.

2Q results were above expectations, with double-digit top line and bottom line growth, improving operating leverage and strong cash flow. Devices grew above market (+11%), on strong demand and ex-US could-connected availability, while masks (+9%) tracked expectations, driven by resupply and new patient setups despite softer ex-US (+4% cc on a tough comp +14%). Operating margin expanded 190bp on pcp (first time in 11 quarters) and sequentially (+250bp) on improving gross profit margin and good cost control, with further gains expected. Management presented real-world data from 529k OSA patients prescribed GLP-1s showing an increased likelihood of not only starting PAP therapy, but also improving re-supply rates over time vs OSA patients not prescribed GLP-1s. We adjust FY24-26 forecasts modestly, with our target price rising to $32.82. Add.

FMG reported a healthy 2Q’FY24 operating performance in its core iron ore segment, while confirming it would not rush its green energy developments. Of some concern, FMG reported a big issue at Iron Bridge’s water pipeline necessitating replacement of a 65km section, to take 18 months. We maintain a Hold rating, viewing FMG as trading near fair value.

We upgrade our investment rating on WDS to an Add recommendation, with an upgraded 12-month Target Price of A$34.30ps (was A$33.50). WDS posted a strong finish to the year with a largely in-line 4Q’CY23, although CY24 guidance came in below our estimates/consensus. Importantly subsea work at Scarborough is back underway, with the key offshore project now 55% complete. WDS and STO continue to mutually explore a potential merger. It remains early in the process, but both sides appear motivated.

4Q cash flow was again disappointing due to both execution and markets. The reasons driving further sales deferrals – possibly losses – again concern. CRN trades cheaply at (0.87x P/NPV reflecting higher operating risks in recent years and higher balance sheet leverage vs peers. CRN’s appeal for leverage to upside risks in coking coal pricing currently looks challenged by tepid steel markets which pose risks to lower rank met coals around realization and potentially incremental volume in our view.

M7T has provided a trading update, highlighting an acceleration of trend toward subscription style contracts and away from upfront capital sales. Being paid in installments comes at a near-term cost however, with recognition of these revenues shifting over the life of the contract which is often five years versus the one-and-done upfront sugar hit. A hit this year, but reap the rewards for the next five years. We have long viewed this as a necessary move which will result in a more sustainable and investor friendly business model which more closely resembles that of market darling Pro Medicus. While optically this would appear as a downgrade, the shift supports the valuation over the medium to long term. As a result of our recurring/capital sales weighting changes, our DCF valuation rises marginally to A$1.56ps from A$1.54ps. Add recommendation maintained.

We got this one wrong. We thought it possible that Domino’s would snap its streak of missing estimates in 1H24 and deliver a return to growth as sales momentum continued to recover. Domino’s issued a trading update that indicated same store sales have gapped down in Japan, weighing on group earnings and calling into question the strength of the consumer proposition in that market. 1H24 PBT will be $87-90m, below our forecast of $100m and consensus of $103m. We still believe Domino’s will get back to steady same store sales growth and network expansion in time, but it’s taking longer than we expected and the shares are likely to underperform for a while until the company has regained investor confidence. We downgrade from Add to Hold with a $50.00 target price (was $61.00).

Canada has announced a two-year cap on new International student visas, expecting to reduce CY24 approvals by ~35% vs CY23. In isolation, earnings impacts from tightening migration and international student policy settings across the major destinations; and visa changes impacting IELTs volumes are manageable. In aggregate, we expect a lower med-term growth profile. The UK election (2HCY24) arguably increases policy risk in the UK. We expect IEL to report a strong 1H24 result, driven by the strength in Student Placement (SP), partially offset with weaker IELTs volume. This composition is arguably weaker, forward looking, given the softening SP growth outlook. IEL continues to offer strong long-term growth. However, we expect uncertainty on announced (and potential) policy change impacts to weigh on the stock. Despite a strong upcoming result, we move to Hold, preferring to have increased confidence in med-term (FY25) earnings at this stage.

4Q production again proved strong but we’re cautious re approaching wet weather. We make several adjustments, trimming our valuation/ target slightly to $4.20ps. Introduction of dividends strongly builds SMR’s appeal to a wider investor base. We maintain an Add, but do note upside has narrowed on SMR’s re-rating. 1H Sales disruption and tepid steel markets could easily uncover better value.

NAN released a negative trading update, citing hospital budgetary pressures deferring purchasing decisions around new and replacement Trophon units. The timing of the update was surprising to us, and while market trust has clearly diminished following the announcement, we expect management to navigate and adjust as needed. The key will be more detailed guidance at the February result, and while we see the stock as deserving of a de-rate, we continue to see significant value in the install base, superiority over competitors, and Coris potential. Our target price reduces to A$3.88 and we retain our Add recommendation.