Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Greg Peel, Acting Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley, Morgans 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 April 13 to Friday April 17, 2015
Total Upgrades: 11
Total Downgrades: 17
Net Ratings Breakdown: Buy 40.02%; Hold 41.81%; Sell 18.17%

Of the 28 total up/downgrades from FNArena brokers last week, 12 came from the resource sector. Several brokers chose last week to review their commodity price and Aussie dollar forecasts, leading to some significant alterations to earnings forecasts and target prices. We could call that 13 if we include logistics company McAleese, which has lost two-thirds of its revenue thanks to Atlas Iron shutting down production.

Changes to Aussie dollar forecasts were to the downside, providing a lift to Aussie dollar resource sector earnings. But net earnings changes reflected a disparity of outlooks for different commodities. UBS lifted its oil prices forecasts, leading to upgrades for Oil Search and Tap Oil. Citi and Credit Suisse both see lower-for-longer iron ore prices, hence downgrades for Arrium, BHP Billiton and Rio Tinto, while Citi’s similar view on coal caught Whitehaven Coal. Less dour views on nickel, coupled with a lower Aussie, meant upgrades for Independence Group and Sirius Resources but US dollar reporter Newcrest Mining copped a downgrade in the gold space on a strong greenback basis. Macquarie’s weaker outlook for mineral sands caught Iluka Resources.

Outside of the resource sector, up/downgrades were fairly even and dispersed across sectors. Notably, brokers are running out of stocks to downgrade simply on the basis of over-valuation, although there were still a couple of candidates this week including high-flying M2 Telecommunications. M2 nevertheless scored the greatest target price upgrade during the week and toll collector Transurban the greatest earnings forecast lift, while resource companies otherwise dominated target and earnings movements.

Upgrades

Atlas Iron ((AGO)) upgraded to Neutral from Sell by Citi. B/H/S: 0/3/4

Citi expects the bear market will continue in iron ore with large scale supply growth set to add pressure to weak demand. The broker expects iron ore prices to fall slightly over the first three quarters of 2015 then slowly rebound. In recognition of its precarious financial position Atlas Iron has entered into a voluntary trading suspension and will progressively cease production. The broker removes its target price to reflect this. Rating is upgraded to Neutral from Sell.

AusNet Services ((AST)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/6/1

FY15 has been tough for the company, with unfavourable tax resolutions and cost over-runs. FY16 should be better, in Macquarie’s view, as AusNet benefits from revenue catch up. The broker notes dividend has only grown with inflation over the last couple of years and this trend is unlikely to change with the higher participation in the reinvestment plan, supporting the current guidance for 8.4c per share. Another note of caution Macquarie sounds is on the opportunity for acquisition provided by NSW privatisation. The challenge is in the size of the acquisition, being $2.2-2.5bn in equity which will need the support of AusNet’s two major shareholders. The broker upgrades to Neutral from Outperform and raises the target to $1.54 from $1.42.

Carsales.com ((CAR)) upgraded to Add from Hold by Morgans. B/H/S: 7/0/1

New car sales data for March shows the recovery in vehicle sales is continuing to gain momentum. Morgans upgrades to Add from Hold because of improving industry conditions. The target rises to $10.44 from $10.15. The broker suspects potential changes to the industry structure could also add value.

Independence Group ((IGO)) upgraded to Outperform from Neutral by Credit Suisse and to Buy from Neutral by Citi. B/H/S: 3/3/1

Credit Suisse upgrades to Outperform from Neutral and raises the target to $6.50 from $5.75. The broker observes, with unchanged gold price forecasts and a significant depreciation in the Australian dollar, Independence is the biggest beneficiary of a revised commodity price outlook. The broker increases earnings estimates by 24% for FY16, and raises the estimated dividend in FY15 and FY16 to 18c and 38c respectively. The broker’s gold forecasts have been trimmed until 2020, with fundamental tightness being outweighed by US dollar strength and macro investment headwinds. Citi considers the Long nickel mine and the 30% equity in Tropicana the predominant drivers of value. The Stockman projects provides growth options within base and precious metals. Rating is upgraded to Buy from Neutral and the target is lowered to $5.83 from $6.00.

Lend Lease ((LLC)) upgraded to Buy from Neutral by UBS. B/H/S: 6/2/0

A growing development pipeline internationally means activity is high for Lend Lease and set to increase. UBS expects continued positive news flow for the rest of 2015, with a particular focus on apartment projects. The broker upgrades to Buy from Neutral and raises the target to $18.80 from $16.80.

Mirvac Group ((MGR)) upgraded to Buy from Neutral by UBS. B/H/S: 3/3/1

UBS is upgrading to Buy from Neutral and raising earnings estimates over the forecast period to 2019. Target is raised to $2.19 from $2.15. Sydney is the strongest residential market by far and critical to Mirvac, comprising around 63% of estimated residential earnings over the next three years.

Oil Search ((OSH)) upgraded to Buy from Neutral by UBS. B/H/S: 7/1/0

UBS is raising 2015 Brent forecasts to US$56.25/bbl from US$52.50/bbl. The broker has also reduced long-term Australian dollar assumptions to US75c from US80c. Oil Search is returned to a Buy rating from Neutral, after recent share price weakness, with near-term catalysts around the Antelope and Taza drilling results. Target is reduced to $8.55 from $8.75.

Sirius Resources ((SIR)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 5/1/0

Credit Suisse is upgrading to Outperform from Underperform given recent share price underperformance, and higher cash flow expectations. The stock benefits from a valuation uplift on the broker’s lower Australian dollar forecasts which offsets lower nickel prices. Credit Suisse raises the target to $3.00 from $2.50.

Suncorp ((SUN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/4/3

While Credit Suisse remains cautious regarding local and global general insurance markets the situation is factored into Suncorp’s share price. The broker believes Suncorp is in a better position than its rivals Insurance Australia Group ((IAG)) and QBE Insurance ((QBE)) to hold onto its margin. In addition, 35% of Suncorp’s earnings are outside of general insurance and there are growth opportunities in the medium term. The broker upgrades to Outperform from Neutral. Target is steady at $14.60.

Tap Oil ((TAP)) upgraded to Neutral from Sell by UBS. B/H/S: 0/2/0

UBS is raising 2015 Brent forecasts to US$56.25/bbl from US$52.50/bbl. The broker has also reduced long-term Australian dollar assumptions to US75c from US80c. UBS moves Tap Oil to Neutral from Sell after a 42% fall in its share price since the start of the year. Target is reduced to 27c from 34c.

Downgrades

Arrium ((ARI)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 0/5/3

There is a translation uplift to Arrium’s US dollar based grinding balls and steel earnings but this is not sufficient to offset the broker’s iron ore and US dollar steel spread downgrades. The broker’s FY16 earnings assumptions suggest covenant stress without management intervention. Further iron ore restructuring is required and potentially achievable, but fixed cost coverage on the elimination of higher average cost tonnage will limit the company’s capacity in Credit Suisse’s opinion. Rating is downgraded to Underperform from Neutral and the target to 15c from 23c.

BHP Billiton ((BHP)) downgraded to Neutral from Buy by Citi. B/H/S: 3/4/1

Citi expects the bear market will continue in iron ore with large scale supply growth set to add pressure to weak demand. The broker expects iron ore prices to fall slightly over the first three quarters of 2015 then slowly rebound. Diversity has previously saved BHP but the broker is now bearish on the three biggest earnings drivers – iron ore, coking coal and oil. With debt rising further after the South32 de-merger Citi expects further cuts to capex may be required. Rating is downgraded to Neutral from Buy and the target reduced to $31 from $35.

Brambles ((BXB)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 2/5/0

Morgan Stanley’s proprietary survey finds small risks to the outlook for pallets. Revenue acceleration is further away than the broker previously assumed and emerging markets may have to contribute more to support near-term growth. The broker lowers Brambles’ earnings forecasts by 7.0% over the forecast period. Rating is downgraded to Equal-weight from Overweight and the target to $11.10 from $11.34. Industry view is Attractive.

Computershare ((CPU)) downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Credit Suisse. B/H/S: 1/6/1

While organic revenue growth has challenged the company for some time UBS was encouraged at the February result by the renewed focus on costs. The US property rationalisation project remains the key structural catalyst for cost cutting, in the broker’s view. UBS downgrades to Neutral from Buy, given a longer lead time is now expected on this project. Target is $12.80. First quarter activity trends were generally positive, Credit Suisse observes, and the company has demonstrated its ability to generate underlying earnings growth in FY15 through a focus on cost savings. The stock is trading at a discount to its historical market premium and with earnings growth reliant on M&A and currency, this is justified in the broker’s view. Rating is downgraded to Neutral from Outperform and the target is raised to $13.60 from $13.40.

Dexus Property ((DXS)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/1/4

Dexus earnings-per-share growth is falling and the stock appears fully priced in Credit Suisse’s view. The broker reviews its model and expects the current price/earnings ratio will become more stretched as growth slows. Rating is downgraded to Underperform from Neutral and the target is increased to $7.36 from $7.21

Drillsearch Energy ((DLS)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/3/0

Drillsearch continues to take proactive measures to adapt to the current oil price environment. Macquarie downgrades to Neutral from Outperform and retains a $1.20 target. Macquarie is encouraged by the cash flow conservation and capital discipline and believes the the company has the ability to deliver material wet gas production over coming years. Production growth is set to benefit from increased transparency potential in east coast gas markets and available third party capacity at Moomba.

Echo Entertainment ((EGP)) downgraded to Underperform from Outperform by Credit Suisse. B/H/S: 5/2/1

The south-east Queensland gaming machine market remains buoyant, with the broker noting 7-8% growth in the March quarter. Credit Suisse notes consumer confidence, spurred by rising house prices, has also been an important factor. Lower end players are driving the growth too, the broker observes. Based on share price strength the broker downgrades to Underperform from Outperform. Target is raised to $4.70 from $4.65.

Iluka Resources ((ILU)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 5/1/2

Incorporating lower mineral sands forecasts Macquarie downgrades to Underperform from Neutral. Weak demand, particularly from China is weighing. Supply discipline for zircon has kept prices buoyant but the broker believes the latent overcapacity will suppress any material price increases as demand recovers. Target is reduced to $6.50 from $7.50.

M2 Telecommunications ((MTU)) downgraded to Sell from Neutral by UBS. B/H/S: 2/3/1

M2 Telecom has acquired Call Plus and 2Talk, New Zealand’s third largest fixed broadband and voice provider. The transaction will be funded by debt. UBS factors in the acquisition which lifts underlying earnings estimates by 15-16% for FY16-17. The broker considers the company’s near-term growth profile is unchanged but the valuation is becoming stretched. The rating is downgraded to Sell from Neutral and the target is raised to $10.50 from $9.10.

McAleese ((MCS)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 0/3/0

Atlas Iron ((AGO)) has announced it will cease mining progressively with Mt Webber to stop production from mid this month. The bulk haulage contract for this site represents two thirds of McAleese’s resource revenue. This has resulted in significant earnings downgrade to the broker’s forecasts. Deutsche Bank also assumes the company will sell assets from the project to maintain debt covenants. With no near-term catalyst to offset the loss, the broker downgrades to Hold from Buy. Target is lowered to 20c from 68c.

Newcrest ((NCM)) downgraded to Neutral from Buy by Citi. B/H/S: 0/4/4

The broker’s gold forecasts have been trimmed until 2020, with fundamental tightness being outweighed by US dollar strength and macro investment headwinds. Citi downgrades Newcrest to Neutral from Buy after a strong re-rating in the share price. Target is lowered to $15.60 from $16.00.

Rio Tinto ((RIO)) downgraded to Neutral from Buy by Citi. B/H/S: 4/4/0

Citi expects the bear market will continue in iron ore with large scale supply growth set to add pressure to weak demand. The broker expects iron ore prices to fall slightly over the first three quarters of 2015 then slowly rebound. With Rio Tinto the question for Citi is whether a yield above 5.0% is enough to offset iron ore price headwinds and a lack of cash flow generation. The rating is downgraded to Neutral from Buy and the target to $55 from $71.

Tower ((TWR)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/0/1

The company has announced a NZ$50m adverse development cover for the February 2011 earthquake. Credit Suisse observes, while this appears prudent, close to a full year of earnings are at risk before the reinsurance provides cover. This is a clear reminder to the broker of the earnings downside risk and, therefore, dividend risk. With the share price up 50% in the last 12 months and these risks elevated, Credit Suisse downgrades to Underperform from Neutral. Target is raised to $2.15 from $1.84.

Treasury Wine Estates ((TWE)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/3/5

Macquarie has reviewed the latest data on the Australian wine industry in the light of ongoing currency weakness. Total wine consumption has been flat since FY10 but recent trends suggest to the broker the category may be in decline. Bucking the weaker trend is luxury wine, where continuing growth is driving pricing gains. The announcement of the closure and sale of several wineries is the correct strategy in Macquarie’s view but does reflect ongoing over-capacity and quality challenges in the Australian industry. The broker downgrades to Underperform from Neutral, as it struggles with the current multiples. Target is lowered to $4.50 from 4.70.

Whitehaven Coal ((WHC)) downgraded to Neutral from Buy by Citi and to Hold from Add by Morgans. B/H/S: 3/5/0

The broker’s commodity team has upgraded near-term coal prices but downgraded 2016-18 prices. This drives earnings downgrades for Whitehaven from FY17. Citi downgrades to Neutral from Buy and reduces the target to $1.60 from $1.70. Although the new debt facility provides funding certainty the broker expects only modest cash generation. Morgans revises valuation on adjustments to the coal price and currency outlook. Provided costs and production are on track the broker’s view on the stock is almost entirely based on whether the coal price can recover in the next 2-3 years. Morgans downgrades to Hold from Add because of share price strength. Target is reduced to $1.62 from $1.66.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=Citi,CreditSuisse,DeutscheBank,JPMorgan,Macquarie,MorganStanley,Morgans,UBS&b0=80,80,91,74,131,70,166,99&h0=107,105,137,107,105,60,157,122&s0=48,64,19,51,54,41,22,45″ style=”border:1px solid #000000″ />

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