Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ADBRI LIMITED, and other companies. For more info SHARE ANALYSIS: ABC

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 September 19 to Friday September 23, 2016
Total Upgrades: 21
Total Downgrades: 6
Net Ratings Breakdown: Buy 40.73%; Hold 44.10%; Sell 15.18%

Last week, the Australian share market finally broke its losing streak, having closed lower at week's end for five weeks in a row. Due to the lagging response from stockbrokers, last week's bounce thus coincided with 21 recommendation upgrades for individual stocks offset by six downgrades for the week ending Friday, 23rd September 2016.

Iluka and Nufarm stand out with two upgrades for the week that also saw BHP Billiton, Boral, Brickworks, Carsales.com, Fortescue and Sydney Airport receive an upgrade. New Hope and South32 received both one upgrade and downgrade. The remaining four that received one downgrade for the week are OzForex, ResMed, Sandfire Resources and TPG Telecom.

Nufarm and South32 also feature at the top of the week's table for positive adjustments to price targets, beating Perseus Mining, Alacer Gold and BHP Billiton. The negative side sees Estia Health and Japara Healthcare on top, followed by Seven West Media, ResMed and Santos.

Overall, positive amendments outweigh reductions and this also applies for changes to earnings forecasts, with lithium producer Orocobre enjoying a 153% increase, followed by Perseus (+57%) and Nufarm (+57%). Showcasing the fact commodities analysts are still in catch-up mode is BHP Billiton on spot number four, enjoying a 22% boost to estimates for the present financial year.

Reductions to forecasts are a lot milder, but remain sizeable nevertheless with Myer suffering a -10% cut, Iluka -9.4%,  Oil Search -7.6% and ResMed -6.2%.

Five weeks of falling share prices, triggering more upgrades than downgrades in individual stock recommendations, have significantly improved the balance between brokers' Buy, Hold and Sell ratings. Total Buy (or equivalent) ratings for the eight stockbrokers monitored daily by FNArena have now risen to 40.73% versus 44.10% in Neutral territory and 15.18% Sells. Three out of the eight stockbrokers now carry more Buy than Neutral ratings with Morgans joining Macquarie and Morgan Stanley.

The calendar for the week ahead locally is predominantly populated with stocks going ex-dividend, with the first AGMs on Wednesday and an investor briefing by Aristocrat Leisure on Thursday.

Upgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/4/1

Macquarie observes the transition to infrastructure from residential building is now smoother and there is also less downside risk in the near term from residential activity.

The better outlook combined with more attractive valuations post August reporting has led to the broker upgrading to Outperform from Neutral. Target rises to $6.00 from $5.50.

ALACER GOLD CORP ((AQG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/2/0

The maiden reserve for the Gediktepe project in western Turkey, which is 50% owned by Alacer Gold, has been released along with the pre-feasibility.

The project de-risks long-term earnings but how it will be funded is the key question for Macquarie. The broker values Alacer's share at $226m.  Rating is upgraded to Neutral from Underperform. Target rises to $3.70 from $3.30.

ALUMINA LIMITED ((AWC)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/1

With the share price correction and potential for upside surprise on the growth front in China Credit Suisse upgrades to Neutral from Underperform.

With reasonable valuation support the broker does not want to be short the sector and does not believe this is the time to be underweight on the miners.  $1.30 target retained.

BHP BILLITON LIMITED ((BHP)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/3/0

With stronger demand and the impact of supply-side reforms in China, Macquarie makes upward adjustments to its forecasts for bulk commodities, with substantial upgrades to coking coal, thermal coal and manganese.

BHP's rating is upgraded to Outperform from Neutral on the back of the improved outlook, with the broker calculating it now offers a superior free cash flow to Rio Tinto ((RIO)). Target is raised to $24 from $20.

BRICKWORKS LIMITED ((BKW)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/0

FY16 results were ahead of expectations. Macquarie expects housing activity to slow over 2017 and weigh on demand in FY18. The negative impact is expected to amplify rising energy costs, for bricks in particular.

Still, the broker believes the current discount in the stock adequately reflects future earnings risk. Rating is upgraded to Neutral from Underperform and the target is reduced to $14.50 from $15.35.

BORAL LIMITED ((BLD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/2/1

Macquarie observes the transition to infrastructure from residential building is now smoother and there is also less downside risk in the near term from residential activity.

The better outlook combined with more attractive valuations post August reporting has led to the broker upgrading to Outperform from Neutral. Target rises to $7.10 from $6.60.

CARSALES.COM LIMITED ((CAR)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1

The company continues to innovate and improve monetisation, Credit Suisse observes. The broker considers the offshore opportunity is long term and does not factor in significant upside in valuation.

The stock is upgraded to Outperform from Neutral, given the pull back in the share price. Target is steady at $12.50.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/1

Credit Suisse upgrades iron ore forecasts modestly and, in conjunction with the company's US$700m repayment of a portion of a term loan, revises FY17 EBITDA up 16%.

The broker expects cash flow will be strong enough to mean net debt falls to $3.6bn at the end of FY18. Rating is upgraded to Neutral from Underperform. Target is raised to $4.65 from $4.50.

GPT ((GPT)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/4/2

The result of Macquarie's attendance at a breakfast hosted by GPT is an upgrade to Neutral. However it's not about the Eggs Benedict.

GPT shares fell 10% in the June quarter when the REIT sector fell 2.5%, Macquarie notes. While the growth profile is still expected to slow in FY17, the stock is now offering an 11% total shareholder return on the broker's numbers. Hence the upgrade. Target unchanged at $5.16.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Buy from Neutral by UBS and Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/2/2

The share price has declined around 18% since the interim results but UBS believes much of the bad news should have been known and/or has subsequently reversed.

The broker believes both zircon and titanium dioxide feedstock prices will start rising over the next couple of years and upgrades to Buy from Neutral. Target rises to $7.50 from $6.80.

With the share price correction and potential for upside surprise on the growth front in China Credit Suisse upgrades to Neutral from Underperform.

With reasonable valuation support the broker does not want to be short the sector and does not believe this is the time to be underweight on the miners. Target is reduced to $6.40 from $6.70.

NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 1/2/0

The FY16 loss was worse than Macquarie expected. Impairments continue and Queensland oil and coal were unprofitable.

Nevertheless, with thermal coal prices expected to average 25% higher in the first half of FY17, the broker expects Acland can return to profitability and Bengalla will obtain even greater benefit.

With stronger demand and the impact of supply-side reforms in China, Macquarie upgrades to Outperform from Underperform. Target slips to $1.70 from $1.80.

See also NHC downgrade.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/2

Macquarie continues to favour nickel and gold in metals and upgrades Northern Star to Outperform from Neutral on the back of recent share price weakness.

The $5.00 target is retained.

NUFARM LIMITED ((NUF)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans .B/H/S: 4/2/1

FY16 results surpassed expectations with cost savings ahead of schedule. Credit Suisse upgrades earnings estimates and believes the stock's growth profile now supports an upgrade in rating to Outperform from Neutral.

Industry consolidation is also expected to create an opportunity for Nufarm. The broker adds $1 a share of value and assumes Nufarm can acquire an asset at good value, with management expecting a deal could take 12-18 months. Target rises to $9.70 from $8.20.

FY16 results were ahead of estimates but the Australian result disappointed Morgans. The broker expects the company will benefit from the first decent summer cropping season in Australia for four years and South America is set for a bigger season.

The broker believes the stock now has a much stronger growth profile and through internal improvements is intent on lifting returns to shareholders over time.

The broker considers the stock attractively priced for its growth profile and upgrades to Add from Hold. Target rises to $9.65 from $8.60.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/0

Morgan Stanley believes it is now time to focus on the events that will cause the stock to re-rate over the next 12 months including falling costs, project construction and a definitive feasibility study.

With operational issues now passing the broker considers it timely to upgrade to Overweight from Equal-weight. Target is raised to 80c from 70c. Industry view: In-Line.

QUBE HOLDINGS LIMITED ((QUB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Patrick has lost the contract with the Asia Australia consortium (A3). While the contract is not material to Qube in FY17 Macquarie suspects this is not the case with Patrick. The broker attributes the contract loss to the prioritisation of the Asciano sale process.

Macquarie believes the growth potential for Qube is substantial with longer term upside arising from Moorebank and, with the stock having fallen significantly, believes this negates further downside risk. Rating is upgraded to Outperform from Neutral. Target falls to $2.74 from $2.82.

SOUTH32 LIMITED ((S32)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 3/4/1

With stronger demand and the impact of supply-side reforms in China, the outlook for most bulk commodities has improved, Macquarie observes. The broker substantially upgrades forecasts for coking coal, thermal coal and manganese.

Macquarie believes the earnings outlook for South32 has been transformed, given it has exposure to all three of these commodities. The broker upgrades to Outperform from Underperform and raises the target to $2.70 from $1.50.

See also S32 downgrade.

ST BARBARA LIMITED ((SBM)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/0

Macquarie continues to favour nickel and gold in metals and upgrades St Barbara to Outperform from Neutral on the back of recent share price weakness.

Target is raised to $3.70 from $3.50.

SANTOS LIMITED ((STO)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

The share price has significantly underperformed the oil price and peers since the results.

UBS attributes this to a lack of firm guidance on cost reductions, concerns around GLNG and reserves as well as disclosure by the company's largest shareholder that it has been asked by the Shanghai Stock Exchange to justify its investment.

The broker's analysis downgrades the value of GLNG on risks around reserves and notes the credit rating is in the spotlight. UBS believes Santos will fall short of the multiples needed to justify an investment grade credit rating.

The stock remains one of the most leveraged to the oil price movement and, after the recent share price decline, the broker upgrades to Buy from Neutral. Target falls to $4.50 from $4.90.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/1

August traffic revealed total passenger growth of 4.5% and international up 7.6%. Macquarie believes the stock now provides value to investors, with the recent fall in the share price.

Moreover, Sydney's growth outlook is strengthening with opportunities to develop and creating a growth path which should last 10-15 years.

Macquarie upgrades to Outperform from Neutral. Target rises to $7.45 from $7.41.

Downgrade

NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/0

Morgans revises forecasts slightly to account for higher coal prices ahead of the results. Uncertainty around Acland stage 3 is the main sticking point for investors, the broker observes.

Rating is downgraded to Hold from Add rating, given the uncertainty and the potential valuation impact should approval not be secured. Target is reduced to $1.60 from $1.68.

See also NHC upgrade.

OZFOREX GROUP LIMITED ((OFX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Macquarie still sees Ozforex' "Accelerate" target of doubling revenues by 2019 as ambitious and offering risk, while offering significant upside if achieved. The problem is that outside of GBP, volatility has been subsiding in currency markets, the broker notes, and this will make the job more difficult.

On that basis Macquarie has cut its target to $2.30 from $2.60 and downgraded to Neutral.

RESMED INC ((RMD)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 5/3/0

Ord Minnett’s analysis of the latest competitive bidding rates in the US market indicates cuts in FY17 will be greater than those implemented in FY14 and for ResMed this means a tough year lays ahead.

The stockbroker lowers its rating to Hold from Accumulate while reducing its price target to $8.65 from $9.40. The analysts do add current integration of health IT group Brightree provides a potential bright spot. Estimates have been lowered implying no growth is on the horizon.

SOUTH32 LIMITED ((S32)) Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1

The stock is leveraged to rising coal and manganese prices which support estimates and Morgans increases forecasts but considers the upside for the stock is reduced because of the surge in the share price.

Morgans downgrades to Hold from Add and lifts the target to $2.52 from $2.42, preferring to wait to accumulate on weakness.

See also S32 upgrade.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Hold from Add by Morgans .B/H/S: 2/5/1

Higher long-term gold prices have partly offset lower near-term copper price assumptions, resulting in a slight reduction in  the valuation and this forces Morgans to downgrade to Hold from Add.

The broker prefers to sit out any volatility in US dollar commodities post the upcoming US Federal Reserve decision on rates on September 21. Target is reduced to $5.91 from $6.05.

TPG TELECOM LIMITED ((TPM)) Downgrade to Reduce from Hold by Morgans .B/H/S: 3/2/2

Morgans was impressed by TPG's FY16 result despite it hitting only the lower end of guidance, but FY17 guidance came in lower 7% than forecast, reflecting the reality of the NBN becoming a material part of earnings and margin pressure now being applied.

The headwinds can no longer be ignored and hence Morgans has cut its FY17 earnings forecast by 11% to the midpoint of guidance, and downgraded its rating to Reduce. Target falls to $7.49 from $11.79 as the broker cuts its enterprise multiple to 10x from 12x, noting five years ago telcos traded on 6x.

Hence there is further downside risk if interest rates rise, the broker warns.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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