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The latest ASX recommendation changes by top brokers

Get used to being whiplashed fellow Fools! The market is ding-donging and unlikely to break out to the up or downside until the August reporting season or a black swan event – whichever comes first.

It doesn’t take much to move share prices in this environment, and I think changes to broker recommendations will have an outsized impact on ASX share prices.

While the S&P/ASX 200 Index (Index:^AXJO) slumped by more than 2% in after lunch trade, the 3P Learning Ltd (ASX: 3PL) share price surged by a similar amount to 85 cents for this reason.

Education’s priceless

Morgan Stanley upgraded the online education services group to “overweight” from “equal-weight” after secured a US$10 million ($14.6 million) revenue opportunity.

3PL will supply the ministry of education of a Middle East country with Mathletics licenses and services.

This is a significant deal given that the group posted revenue of $54 million in FY19.

While the agreement is for 12-months, there is scope to extend the term and to increase the number of licenses for the online math program.

Price target upgrade

Morgan Stanley believes the ministry wants 3PL to succeed, but just counting the one-year revenue, the broker’s price target jumps to $1.10 from 86 cents a share.

“Initial evidence of sales execution, uplift in cash from service delivery and positive implications on strength of sales pipeline (with high incremental margins) suggests that 3PL is too cheap at <2x EV/Sales FY20e,” said the broker.

“There are questions that need clarifying, but sales have improved significantly and the risk-reward is much more constructive now in our view.”

Falling star

On the flipside, the Galaxy Resources Limited (ASX: GXY) share price came crashing back to earth after Credit Suisse downgraded it to “neutral” from “outperform”.

Shares in the lithium miner tanked 4.4% to 76 cents at the time of writing as a result.

The broker’s decision comes after it updated its estimates for Galaxy’s Mt Cattlin project, moderating production and the weak outlook for the commodity, which is made worse by the COVID-19 pandemic.

Nearer-term challenges

This is despite Germany and China increasing or extending subsidies for electric vehicles. Lithium is a key component used in the batteries of these automobiles.

But Credit Suisse believes it will take time for these subsidies to make an impact on the demand-supply of the commodity.

“Sustained demand growth will be needed to absorb supply chain inventory and latent production capacity as a precursor to improved pricing,” explained the broker.

“We estimate concentrate inventory held by [Australian] producers at ~130kt, but production utilisation of only ~55%, meaning there is >1.4Mt latent concentrate supply, equivalent to over half of 2019 global lithium production.”

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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