Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Chris Shaw

The tide appears to have well and truly turned in favour of ratings downgrades on the Australian market, as over the past week brokers in the FNArena database have pushed through 18 cuts in ratings compared to just four upgrades. This brings total Buy ratings to 57.6%, down from 58.2% previously.

A resilient interim earnings result from Macquarie Bank ((MQG)) was enough for BA Merrill Lynch to upgrade to a Buy rating, the change also a reflection of what the broker sees as strong valuation support at current levels. 

As BA-ML points out, if current funding sources prove sustainable the value available from annuity-style income alone is enough to justify most of the current market value of the bank. This implies upside when an improvement in market conditions boosts earnings in other divisions. Others in the market have adjusted forecasts and price target for Macquarie post its profit result.

QR National ((QRN)) was also upgraded, Deutsche Bank moving to a Buy rating from the potential for upside to volumes, which should translate into increased earnings. Further justifying the upgrade in rating was Deutsche's new numbers translate to an increase in price target.

BA-ML also upgraded Santos (STO)) to Buy during the week, this following a review of its model resulting in a revaluation of the group's assets. While the value of the GLNG assets were reduced, this has been offset by increases to the value of the Cooper gas assets.

Expected price tension in gas markets in the coming year should be a further positive and support BA-ML's upgrade. Price target has also been increased modestly. Credit Suisse went the other way, downgrading Santos to Neutral on the back of recent share price outperformance.

A restructuring of debt and a capital raising by Transpacific Industries ((TPI)) has seen both RBS Australia and Credit Suisse upgrade to Buy ratings from Hold previously. The improved balance sheet removes some headwinds in the view of RBS, while management will be able to focus on operational rather than financial issues and this should boost the company's financial performance according to Credit Suisse.

On the downgrades side, OneSteel's ((OST)) revision to earnings guidance on the back of lower iron ore prices saw brokers cut earnings forecasts and price targets significantly. Both Deutsche Bank and RBS Australia downgraded ratings to Sell and Hold respectively, reflecting concerns over debt covenants and ongoing tough market conditions.

While quarterly production for Aquila Resources ((AQA)) was solid, RBS Australia has still downgraded to a Sell rating, this reflecting the broker's concern over the company's ability to raise sufficient cash to meet its development ambitions. This implies a capital raising is a possibility in coming months.

A similarly disappointing production report from Kingsgate ((KCN)) saw both Deutsche and Citi downgrade the stock to Hold from Buy previously, with targets and earnings estimates cut accordingly. A disappointing quarterly from Paladin ((PDN)) was also enough for RBS to downgrade to Hold from Buy, with earnings and price target also reduced.

Australian Pipeline Trust ((APA)) has been downgraded on valuation grounds by Macquarie following recent share price gains, while valuation has seen Credit Suisse make the same shift to Hold from Buy on Australian Worldwide Exploration ((AWE)) while RBS Australia issued a similar downgrade for Consolidated Media ((CMJ)).

UBS also downgraded Mirvac ((MGR)) to a Hold following a review of sector valuations, while Citi resumed coverage on Spotless ((SPT)) with a downgrade to a Neutral rating as tough market conditions have caused the broker to lower earnings expectations. Price target was also reduced.

Ongoing increases to the N5 implant failure rate have Credit Suisse concerned enough about Cochlear ((COH)) to downgrade to an Underperform rating on the stock, with the broker also cutting its price target.

Ongoing tough market conditions are behind Deutsche Bank downgrading to Hold from Buy on CSR ((CSR)), the broker also lowering earnings estimates and price target leading into the company's interim profit result. James Hardie ((JHX)) was downgraded by both Credit Suisse and JP Morgan, in both cases the rating moving to Underperform from Neutral.

Harvey Norman ((HVN)) copped two ratings downgrades to Neutral from Outperform post a 1Q sales result that showed the company has had to sacrifice margins to defend market share. Brokers across the market also lowered earnings estimates and price targets for the stock on the back of the report.

For Iron Road ((IRD)) it was a review of magnetite projects and changes to foreign exchange assumptions that saw RBS Australia downgrade to a Hold rating from Buy, the broker's price target also being reduced.

Tatts ((TTS)), GPT ((GPT)) and Blackmores ((BKL)) were also downgraded during the week, with valuation the key factor in the decisions of brokers to lower ratings for the three stocks, while tough ad market conditions saw forecasts, price target and rating for Ten Network ((TEN)) lowered by RBS.

Earnings and price targets for AMP ((AMP)) were trimmed to reflect weak fund flows in the September quarter, while construction delays have pushed out earnings expectations for Lynas ((LYC)) and this has resulted in Deutsche Bank also trimming its price target for the stock.

A mixed quarterly result has seen earnings estimates and price targets revised for Independence Group ((IGO)), while earnings expectations for Qantas ((QAN)) have come down to account for the impact of the grounding of the group's fleet and the industrial action of recent weeks.

Slightly lower than expected production for OceanaGold ((OGC)) has seen a trimming of earnings estimates and price targets, while it has been a similar story for earnings expectations for Horizon Oil ((HZN)) post its quarterly.

On a more positive note, earnings expectations for Campbell Brothers ((CPB)) have been lifted slightly following two bolt-on acquisitions by the company, while National Australia Bank's ((NAB)) result was enough to see minor increases to earnings estimates. Forecasts for Miclyn Offshore ((MIO)) have also moved higher as the company is to acquire the balance of Samson Marine it doesn't already own.

 

Total Recommendations	Recommendation Changes
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