Why has Macquarie downgraded these 2 ASX shares?

It’s a mixed trading day for two ASX shares today.

| More on:
Person with thumbs down and a red sad face poster covering the face.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The ASX All Ordinaries is rebounding from morning losses but there’s bad news for two ASX shares
  • These shares just got hit by a recommendation downgrade from Macquarie
  • Seek and Austal are the two ASX shares downgraded to neutral by the broker

Many ASX shares have managed to claw their way back from morning losses but two entities have to contend with being hit by a broker downgrade.

One in the firing line is online job ads group Seek Limited (ASX: SEK). The Seek share price has slumped 2.8% to $29.49 at the time of writing even as the All Ordinaries Index (ASX: XAO) rebounded 0.12% higher.

The other is shipbuilder Austal Limited (ASX: ASB). Let’s take a closer look at the pair.

Seek at risk of earnings disappointment

What might be weighing on the Seek share price is broker Macquarie’s decision to cut its recommendation on the shares from outperform to neutral.

This is despite Seek posting a solid set of results with strong revenue growth over the last 12 months.

Australia’s severe labour shortage can likely be credited for the increase in revenue. Businesses that are desperate to hire are not only advertising more on the site, but they are paying for premium services to attract workers.

Downgrade risk for this ASX share

While the current environment provides a positive backdrop for the Seek share price, the good times may not last as long as the market may expect.

Macquarie noted that the market had incorrectly assumed depth revenue (sales of its premium services) as a structural event. This in turn is elevating earnings through to FY23.

But as the labour market normalises, the broker questions if this assumption is too bullish, saying:

SEEK remains a high-quality business with a favourable labour market backdrop. The price-to-value strategy may offer upside in the longer term as well.

However, this is offset by near term downside risk to earnings; limited valuation support; and longer-term upside already expected (price-to-value captured in forecasts).

Macquarie’s 12-month price target on the Seek share price is $32 a share.

Austal share price recovery offers little comfort

Meanwhile, the broker has also hit the Austal share price with a downgrade. It cut its rating on the shipbuilder to neutral too, with a 12-month target of $1.91 a share.

The bad news hasn’t seemed to sink the Austal share price today though. It’s up 1.24% to $1.80 in early afternoon trade.

However, this comes off the back of an 11% plunge for Austal yesterday when the Philippines Navy decided not to award the ASX company with a contract.

Fog of war clouds its ASX share price

It appears the market was assuming that the contract to build offshore patrol vessels was a given. Austal management said it would look for new customers and pursue commercial ferry work for its Philippine shipyard.

But the loss is making investors nervous and puts extra focus on Austal’s upcoming US contract. A decision is expected in late May or June this year.

Austal needs the new US contract to replace its current LCS program, which will finish by FY24.

The lack of visibility on its order book is the key reason why Macquarie decided to downgrade the Austal share price.

Motley Fool contributor Brendon Lau owns Austal Limited and Macquarie Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Austal Limited. The Motley Fool Australia has recommended Macquarie Group Limited and SEEK Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

Young woman using computer laptop with hand on chin thinking about question, pensive expression.
Broker Notes

Is the Beach Energy share price a buy following its post-reporting sell-off?

Are brokers still optimistic after slamming the company's earnings and guidance? We take a look.

Read more »

A man in his office leans back in his chair with his hands behind his head looking out his window at the city, sitting back and relaxed, confident in his ASX share investments for the long term.
Broker Notes

Why this broker sees plenty of upside for the ResMed share price

ResMed shares could be in the buy zone...

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

Is the Westpac share price a buy following the bank’s latest update?

Are Westpac shares a buy after its latest update?

Read more »

A mle runner is in an awkward pose as the approaches an unever part of a running track through a forest with tall trees and sunlight shining through them.
Investing Strategies

‘Strong growth’: Expert names 2 ASX shares to buy for the long run

In a turbulent year like 2022, sometimes you just have to take a step back to find companies that have…

Read more »

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.
Broker Notes

Why one broker is bullish on this ‘unloved and undervalued’ ASX 200 share

The company has not had a good time of it this year.

Read more »

ASX shares Business man marking buy on board and underlining it
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers rate these ASX shares as buys...

Read more »

Four businessmen in suits pose together in a martial arts style pose as if ready to engage in competition or spring into a fight.
Broker Notes

Is this ASX bank share a better buy than the big four banks?

One alternative bank share might be looking too cheap to ignore.

Read more »

A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.
Resources Shares

Is the Santos share price a buy following the energy giant’s latest acquisition?

Santos has slipped, should investors seize the opportunity?

Read more »