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Why has Macquarie downgraded these 2 ASX shares?

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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 Austalshare 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.

Source: Read More

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