Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features AINSWORTH GAME TECHNOLOGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGI

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday May 16 to Friday May 20, 2016
Total Upgrades: 8
Total Downgrades: 12
Net Ratings Breakdown: Buy 42.26%; Hold 44.34%; Sell 13.39%

It should be no surprise: in a share market that remains firmly supported by further RBA rate cut expectations, achieving net gains for six consecutive weeks, stockbroking analysts continue to issue more downgrades than upgrades for individual stocks. For the week ending Friday, 20th May 2016, FNArena registered 12 downgrades against 8 upgrades.

There are no dominating themes amongst broker rating changes, other than that gold producer Alacer Gold and retailer JB Hi-Fi both proved popular on the negative side, each receiving two downgrades during the week.

Aristocrat is still enjoying the tailwind from its recent market update, leading the table for positive revisions to price targets with yet another 22.5% gain, beating Cochlear (+5.8%) and Integral Diagnostics (+4.2%). There was little happening on the negative side with AMP leading (-2.7%).

BHP Billiton leads the table for positive revisions to earnings estimates, with consensus finally pushing into positive territory for the current financial year. BHP is following by some hefty increases for NextDC (+20%), Xero (+20%) and Aristocrat (+15%). There were equally large downward adjustments, though mostly because resources stocks are back in the limelight. AWE Ltd saw consensus pulling back by -22%, followed by Alacer Gold (-20%) and AusNet Services (-19%).

There were noticeable cuts to consensus expectations for Domino's Pizza, AMP and APN News & Media too.

Upgrade

AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/1/0

Subject to approval, Novomatic will acquire Len Ainsworth's 53% stake in Ainsworth Gaming, helping to boost the company's market share and making new pokie titles available, as well as enhancing R&D, Macquarie notes. The broker sees the benefits of the sale as outweighing the negatives.

Having also adjusted for A$ moves, Macquarie has lifted its Ainsworth target to $2.63 from $2.10 and as a result, upgraded to Neutral.

AWE LIMITED ((AWE)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/1

AWE has rejected the bid from Lone Star Japan at 80c a share. This is the right decision in Ord Minnett's view. As share prices of oil & gas companies are depressed, to offer anything other than a substantial premium is not expected to excite shareholders and boards.

Ord Minnett notes the balance sheet is in good shape and, short of an improved offer, believes the company should maintain its current strategy. The broker upgrades to Accumulate from Hold. Target is reduced to 88c from $1.35 on portfolio rationalisation, revisions to commodity prices and schedule changes.

BEACON LIGHTING GROUP LIMITED ((BLX)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Beacon Lighting has signalled softer trading over the past 10 weeks. Morgans suspects irrational competitor pricing contributed as well as consumers trading down in price points within the lighting category, which is related to sentiment.

FY16 earnings guidance is $28.2-29.2m, 11% below the broker's forecasts, which are downgraded accordingly. Still, Morgans believes most of the drivers of weakness will be short lived and the current share price presents an attractive accumulation point for a quality retailer.

Morgans upgrades to Add from Hold. Target is reduced to $1.60 from $2.15.

COCHLEAR LIMITED ((COH)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/5/2

The company's strategies to clear bottlenecks now gives Morgan Stanley more conviction that unit growth of 6.0% can be sustained.

The broker suspects it has been too cautious on the stock and an analysis of the installed bases and upgrade cycles has contributed to a valuation increase.

Hence, the broker upgrades to Equal-weight from Underweight. Target is raised to $114.80 from $85.52. Industry view is In-Line.

INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/0/0

The company will purchase Western District Radiology and the 50% of South West MRI it does not own. Credit Suisse considers it a sensible deal, 2.5% accretive to FY17-18 forecasts.

Credit Suisse believes a short-term valuation gap emerged and upgrades to Outperform from Neutral. Target is raised to $1.70 from $1.52.

MIRVAC GROUP ((MGR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/2/1

On the back of the broker's economics team's reduced interest rates forecasts, Macquarie notes lower rates are a positive for the REIT sector and traditionally lead to sector outperformance against the market.

Mirvac is upgraded to Outperform. Target unchanged at $1.95.

METCASH LIMITED ((MTS)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/2

Credit Suisse speculates that if Metcash buys Home Timber & Hardware and integrates it with Mitre 10, and then divests the business, it would generate $500m in surplus cash and provide the basis for a return of capital.

A divestment would leave a more narrowly focused business and potentially lower costs for the food and liquor operation.

Credit Suisse maintains that Metcash is moderately under priced on an as is basis and significantly under priced if it can acquire Home Timber, acknowledging there is always the possibility of a competing bid or ACCC objections.

The broker upgrades to Outperform from Neutral rating and raises the target to $2.25 from $1.49.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 4/3/1

The Australian government has announced an agreement with Pathology Australia. Legislation will be enacted to improve collection centre rents to counter the removal of the bulk billing incentive.

Credit Suisse previously incorporated the cuts to the bulk billing from the MYEFO and now reduces the rental expense, reversing out the benefits from the patient co-payments. This results in FY18 earnings upgrades.

Credit Suisse has upgraded to Neutral from Underperform and lifted its price target to $21.75 from $18.90.

Downgrade

ALACER GOLD CORP ((AQG)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/2/1

The company has approved Copler sulphide project and the larger plant, while a simpler design, will take longer to ramp up. Better grade and recovery, however, lift Deutsche Bank's output estimates over the life of the project.

Whilst Deutsche Bank likes the Copler mine it is wary of the company's investment appeal, as near-term production is declining, and there is an intensive capital build approaching. Rating is downgraded to Hold from Buy on valuation. Target is $3.70.

The Copler sulphide project capex has risen above Morgan Stanley's estimates but so too has overall output. The lower 2017 output from the oxide development creates a larger earnings dip, in the broker's view, but near-term exploration success may fill this.

Attributable gold production was down 30% quarter on quarter in the March quarter, as expected. Morgan Stanley downgrades to Equal-weight from Overweight, now its prior target has been reached and exceeded. Target rises to $3.45 from $3.20.

G.U.D. HOLDINGS LIMITED ((GUD)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/4/0

The stock has appreciated sharply since February as the company moves its focus to the automotive aftermarket. UBS is positive about the higher proportion of earnings coming from this division post the BWI acquisition and encouraged by the recent sale of Sunbeam.

Margins may drift lower but positive industry dynamics should support volumes and prices, the broker maintains.

After the strong run, UBS downgrades to Neutral from Buy, raising the target to $8.80 from $8.55.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/7/0

The stock has been the best performer in the large cap insurers, Credit Suisse observes. Challenges remain but the broker considers the FY16 earnings margin remains attractive and IAG should meet, or exceed, its guidance.

While the positive theme continues and the broker does not consider the stock expensive this is now factored into the share price. Credit Suisse downgrades to Neutral from Outperform while retaining the $5.75 price target.

JB HI-FI LIMITED ((JBH)) Downgrade to Neutral from Buy by UBS and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/6/0

UBS observes the share price has risen 36% from its November lows when the market became concerned about risks associated with discounting at Dick Smith.

Despite the pressure, UBS observes trading has been strong and JB Hi-Fi should benefit from industry consolidation and the continued roll out of Home.

Still, at current levels the stock looks full and the rating is downgraded to Neutral from Buy. Target is raised to $24.20 from $23.60.

Following the recent strong share price performance, Ord Minnett downgrades to Hold from Accumulate. The broker believes the upside from Dick Smith's demise has been well incorporated and the medium-term growth drivers are riskier.

Ord Minnett does not believe the stock offers compelling valuation support at current levels but forecasts strong growth in the near term. Target is steady at $24.50.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Downgrade to Sell from Neutral by Citi .B/H/S: 3/3/1

Citi analysts are not in synch with the generally optimistic mood post the company's full year financials. The analysts welcome the share buyback, and anticipate more of the same in 2017, but they also think US competition is heating up.

In light of their own projections, Citi analysts find James Hardie shares are too expensively priced. Hence why they downgrade to Sell from Neutral. Price target $18.60.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/5/1

Macquarie observes the historical valuation discount to peers has largely unwound in recent months and considers it justified based on the underlying earnings performance.

Earnings growth is expected to be affected by a reduction in insurance earnings and convergence in impairment charges. With limited upside envisaged from current levels the broker downgrades to Neutral from Outperform. Target edges up to $31 from $30.

PACT GROUP HOLDINGS LTD ((PGH)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/3/1

Deutsche Bank considers the company's crate washing and pooling services agreement a positive, as it extends the existing materials handling business and is underpinned by a long-term contract. 

The broker estimates it should be 6.0% accretive in FY18. Deutsche Bank downgrades to Hold from Buy as the stock is trading at a 1.0% premium to its revised valuation. Target is  raised to $5.60 from $5.30.

SEVEN WEST MEDIA LIMITED ((SWM)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 3/1/2

As a result of reducing metropolitan free-to-air TV advertising market forecasts Ord Minnett lowers FY16 and FY17 earnings estimates by 4.1% and 5.8% respectively.

While operationally Seven is considered the best in the business, with highest revenue share and earnings margin, the broker believes it is not immune to the industry and structural trends.

Rating is downgraded to Sell from Hold. Price target is reduced  to 85c from 95c.

TEN NETWORK HOLDINGS LIMITED ((TEN)) Downgrade to Sell from Lighten by Ord Minnett .B/H/S: 1/3/1

Ord Minnett updates forecasts to reflect a reduction in metro free-to-air TV advertising forecasts. Ten Network's revenue share estimates are increased to 24.5% from 24.0%.

FY16 earnings forecasts are unchanged but the broker increases the forecast FY17 loss to $33m from $24m. The broker downgrades to Sell from Lighten and cuts the target to 80c from 90c.

TOX FREE SOLUTIONS LIMITED ((TOX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0

Chevron has started a process for expressions of interest for provision of waste management services at its WA assets. Tox Free has an existing contract until 2020.

Macquarie expects the most likely outcome of the re-tendering is that Tox Free will eventually retain the business, but at lower margins. The broker adjusts FY17 estimates to account for this scenario.

Given the overhang of the contract on the stock Macquarie downgrades to Neutral from Outperform. Target is reduced to $2.91 from $3.45.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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