Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 October 31 to Friday November 4, 2016
Total Upgrades: 13
Total Downgrades: 9
Net Ratings Breakdown: Buy 41.90%; Hold 42.56%; Sell 15.55%

Persistent weakness for the local share market is translating into stockbroking analysts issuing more recommendation upgrades than downgrades for ASX-listed entities. For the week ending Friday, 4th November 2016, FNArena registered 13 upgrades versus nine downgrades. The gap between total Buy ratings and Neutral recommendations for the eight brokers we monitor daily has now narrowed to less than one percentage point (41.90% versus 42.56%).

In most cases any upgrades follow share price weakness with the analysts indicating the gap between share price and their valuation doesn't seem justified. Stocks receiving downgrades have either rallied hard or the companies issued a disappointing market announcement. Stocks receiving downgrades to Sell include Fortescue Metals, Silver Lake Resources, Virgin Australia and Woolworths. Macquarie Group was the sole recipient of two downgrades during the week, both to Neutral.

Whitehaven Coal stole the show with a double digit increase to its consensus price target (+10%), beating Beach Energy (+3.50%) and Woolworths (+2.20%), but otherwise upward changes to price targets and valuations remained rather benign. There was more happening on the negative side, which should be of some concern at least for investors with a medium term outlook.

AMP, having issued yet another disappointing market update, saw its targets being cut by -10.2%, followed by REA Group (weak industry data and Fairfax profit warning) with a fall of -4% and Virgin Australia with a cut of -3.3%. Overall, average reductions for price targets are larger than positive adjustments recorded.

The same diversion in trend is visible in the tables for positive and negative adjustments to earnings forecasts, albeit much more pronounced. Whereas EclipX Group enjoyed an increase of +16%, followed by ANZ Bank (+11.4%), Whitehaven Coal (+8.6%) and Mineral Resources (+4.7%), the negative side has AWE on top with a reduction of no less than -4000%. Next up are Orocobre (-76%), Virrgin Australia (-60%), AMP (-43%)  and Blackmores (-32%). Even the number ten for negative revisions, Qantas, still suffered a blow of -6.39%.

Rather ominously, and as highlighted in prior editions of this weekly update, the underlying negative trend for earnings estimates that is becoming apparent for corporate Australia ex-commodities ever since the AGM season started means not all weakness in the share market is due to a buyer's strike in the lead-in to the US Presidential election.

It also means not all stocks falling will be a great buy once risk appetite returns.

Upgrade

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

AWE's Sep Q production was impacted by divestments but outside the loss of Cliff Head, production increased thanks to Tui, Macquarie notes. AWE continues to eye off east coast gas for ongoing growth.

The impact of not going ahead with Waitsia had Macquarie downgrading to Underperform post result on a lack of earnings growth and balance sheet concerns.

While the balance sheet is still troublesome and near-term earnings growth questionable, the broker believes there is sufficient cash flow from operations to justify an upgrade back to Neutral. Target unchanged at 60c.

BT INVESTMENT MANAGEMENT LIMITED ((BTT)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/1

BT Investment's result came in ahead of Macquarie, and the broker's fund manager criteria of flows, capacity and performance were all met. Fund inflows are now recovering after the initial Brexit drop-off. 

The strong performance and post-Brexit recovery sees Macquarie lift earnings forecasts by 18% and 32% in FY17-18. Target rises to $10.76 from $8.74. Upgrade to Outperform.

CSR LIMITED ((CSR)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/2/2

Ord Minnett notes the building products division benefited from its leverage to the resilient east coast residential cycle in the first half. The broker now expects CSR to maintain its current level of earnings out to FY18.

Building products demand is expected to remain elevated next year. The broker notes management is looking at initiatives to soften the blow when the cycle eventually turns. These initiatives include opportunities to save on costs and a continuation of the search for new cladding products to distribute to the domestic network.

Target is raised to $3.75 from $3.50 and Ord Minnett envisages limited downside to the target, raising its rating to Hold from Lighten.

See also CSR downgrade.

CROWN RESORTS LIMITED ((CWN)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/1/0

The shares have declined around 18% since the company disclosed that 18 staff have been detained in China. UBS suspects this event could lead to lower VIP volumes.

Despite the negative sentiment, the broker believes Crown's shares are now factoring in the known risks. In addition, the outlook in Macau has stabilised in recent months.

Rating is upgraded to Buy from Neutral. Target slips to $12.30 from $13.10.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 4/3/0

The company's stock price has declined 11% since the first quarter result, underperforming the broader market benchmark by around 5.9 percentage points, Ord Minnett observes.

The broker attributes the decline in part to headlines associated with the moderation of housing starts growth in the US in recent months. As the share price is now trading in line with the target, the broker upgrades to Hold from Lighten. $18.60 target retained.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/2

Credit Suisse believes it's time to properly evaluate the Stan subscription video-on-demand service.The broker believes Stan is on track for substantial profits in FY19 and investors will increasingly start to attribute value to the venture.

Stan is a strategic asset that the broker believes will attract multiple buyers at a higher valuation if it was ever for sale. Credit Suisse upgrades to Outperform from Neutral, believing there is minimal value for Stan factored into the share price. Target rises to $1.15 from $1.05.

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

Citi analysts note performance in the September quarter was weaker than the previous quarter, but the company should remain in a position to meet production guidance for the full year.

Post share price weakness, they have upgraded to Buy from Neutral. Also, the analysts explain, their positive view is based upon expectation of production growth to at least 600kozpa in FY18. Target drops by 20c to $4.70 on reduced forecasts.

REA GROUP LIMITED ((REA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/1/2

The Fairfax AGM warned of much softer listing volumes for Domain across Sydney and Melbourne, which is clearly a negative, Macquarie suggests. Yet Domain was still able to grow revenues, which highlights growth in yield via mix-shift and price. Fairfax pointed to changes in super caps and the long election campaign as having an impact.

But management also noted a very strong last Spring, which brings into question whether any rebound will be seen. Cyclical pressures will drive slower growth rates for REA, Macquarie believes, but the core asset should still provide strong medium term growth. On the recent sell-off, the broker upgrades REA to Outperform.

Target falls to $56 from $58.

RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/0

The share price has fallen 10.8% since the company delivered its FY16 result. Reliance is now trading with a 9.4% gap to the broker's target, which is considered too wide to ignore.

Hence, Ord Minnett raises its rating to Accumulate from Hold, while $3.15 price target retained.

SCENTRE GROUP ((SCG)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 2/2/2

The pullback in Scentre's share price driven by the global rise in bond yields has taken valuation to 12% below Morgan Stanley's target price. For the broker, this offers an attractive entry point.

Scentre offers the highest quality retail portfolio in the country, defensive earnings offering 4-5% growth, and a 5% yield, Morgan Stanley notes. Upgrade to Overweight. Target unchanged at $4.75. Industry view: Attractive.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/1

The outlook for the scrap price is improving and Ord Minnett observes solid premiums in export markets which are likely to improve EBIT per tonne. The broker believes the company's cost-cutting initiatives are under appreciated.

The rating is upgraded to Accumulate from Hold and the target is raised to $10.90 from $9.90. The stock is now a key sector pick for the broker.

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

Ord Minnett has upgraded to Accumulate from Hold following recent falls in the share price. The broker notes the Coles approach to competition is aggressive, yet remains rational.

While Target's turnaround remains difficult the broker envisages further strong growth in Kmart and this makes for an overall neutral view on discount department stores.

Meanwhile, earnings in resources are expected to increase significantly. Target is $45.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 2/3/3

China is targeting a new range of thermal coal prices. State media has reported the negotiated medium to long-term contract price target is RMB535-540/tonne.This is around 20% lower than current prices, Credit Suisse observes, but well above recent price expectations.

RMB 540/tonne corresponds to a Newcastle export price of around US$75/tonne. The broker acknowledges it is doing an about-face, upgrading to Outperform from  Underperform, as the risks to Whitehaven's valuation from materially higher near-term prices are now too great. Target is lifted to $3.60 from $2.80.

Credit Suisse still believes in the longer term that China's thermal coal imports will decline.

Downgrade

AMP LIMITED ((AMP)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/3/0

Credit Suisse has downgraded AMP to Neutral from Outperform post yet another disappointing market update.The Australian Wealth Protection (WP) business continues to present headaches and the analysts are not convinced management is doing enough to stem the bad news flow.

On ongoing risk for more disappointment, Credit Suisse lowers its target to $5.00 from $5.75. FY16 NPAT estimate goes down by 52% (resulting in a negative EPS), outer years fall by 7-10%.

CSR LIMITED ((CSR)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/2

CSR has acquired Boral's ((BLD)) 40% stake in the east coast brick joint venture. Strategically, Credit Suisse observes this is consistent with a commitment to the building products business and reduces the relative importance of the aluminium business.

The broker notes housing is approaching its peak of the cycle and Tomago electricity costs are about to step higher. In conjunction with the emerging competitive threat in plasterboard, the broker is cautious on the medium-term outlook.

Rating is downgraded to Neutral from Outperform and the target lowered to $3.60 from $3.85.

See also CSR upgrade.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/2/3

Credit Suisse downgrades the stock to Underperform from Neutral on the rally in the share price. Target is steady at $5.

Earnings estimates are unchanged at this stage. The broker envisages the risk to sales guidance for 165-170mt appears to be to the upside, unless the upcoming cyclone season proves less benign than last year.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/5/1

First half profit was slightly ahead of Deutsche Bank's forecasts while full year guidance is maintained. The broker believes while the bank continues to execute well and has levers to drive growth these factors are priced in.

The broker is also concerned about the prospect of rising global rates and removal of stimulus by central banks, suggesting more turbulent markets could on the cards.

Rating is downgraded to Hold from Buy. Target slips to $82.70 from $84.00.

Credit Suisse has implemented minor negative adjustments post Macquarie's interim report. The price target has been left intact at $85. Rating downgraded to Neutral from Outperform.

Macquarie did meet guidance and market expectations but the analysts find the composition of the result rather weak with net revenues buoyed by principal investment gains and lower loan impairment offsets, and there was a tax gain included.

The analysts suggest Macquarie is approaching "peak earnings".

SPEEDCAST INTERNATIONAL LIMITED ((SDA)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/0

The company will acquire Harris Caprock for US$425m. The acquisition will be funded by an equity raising and debt.

UBS observes, at face value, the price is attractive but Harris Caprock revenues have been declining, given 66% sit within a challenged energy vertical.

Nevertheless, these are new revenue opportunities for Speedcast, as well as an opportunity to acquire at the low point in the cycle.

UBS notes, with around 60% of the earnings base now stemming from Harris Caprock, outperformance will be reliant on a recovery in energy markets. Gearing has also become more aggressive.

The broker downgrades to Neutral from Buy. Target falls to $3.80 from $4.50.

SILVER LAKE RESOURCES LIMITED ((SLR)) Downgrade to Sell from Buy by UBS .B/H/S: 0/0/1

Silver Lake reported September quarter production of 32,900 ozs with an AISC of $1,226/oz and ahead of UBS forecasts.

During the quarter, a significant amount of funds were directed to mine development and pre-production capex for new mines.

UBS downgrades to Sell from Buy following appreciation in the share price. Target is reduced to 58c from 59c.

VIRGIN AUSTRALIA HOLDINGS LIMITED ((VAH)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/3/3

Virgin's Sep Q update showed a surprising fall into loss following last year's profit, breaking a consistently improving trend since mid-2014, UBS notes, and despite a lower fuel bill. Domestic revenues must have declined materially, the broker suggests, more so than Qantas' ((QAN)) 3%.

UBS has cut forecasts and notes an ongoing lack of dividend will not help sentiment, albeit a share price floor is provided through the five major shareholders holding a net 89%. Target falls to 19c from 25c. Downgrade to Sell.

WOOLWORTHS LIMITED ((WOW)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/2/4

The highlight in the September quarter was the 0.7% comparable growth in food sales, which Morgans observes is the first positive comparable since the second quarter of 2015. Despite this, the broker believes margins are likely to remain under pressure.

Although there are signs of improvement, Morgans believes the competitive environment will become more difficult. Rating is downgraded to Reduce from Hold. Target is reduced to $21.00 from $24.79.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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