Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

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, 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 July 20 to Friday July 24, 2015
Total Upgrades: 11
Total Downgrades: 12
Net Ratings Breakdown: Buy 41.94%; Hold 41.76%; Sell 16.30%

Broker upgrades and downgrades were pretty much in balance during the week ending Friday, July 24, 2015. FNArena registered 11 upgrades which were slightly outnumbered by 12 downgrades. Fortescue received two upgrades while Energy Developments featured with a double downgrade as a takeover looms.

Banks and infrastructure stocks featured prominently on the positive side, though CommBank and Westpac only received upgrades to Neutral. Most upgrades in recent weeks have lifted ratings to Buy which has now resulted in Buy ratings outweighing Neutral ratings for the eight stockbrokers monitored by FNArena. This has not been seen for a long while.

Total Buy ratings are now 41.94% versus a 41.76% share for Neutral ratings. Only three out the eight stockbrokers currently rate more stocks a Buy than Neutral in their equities universe: Macquarie, Morgan Stanley and Morgans. Not sure whether there's a connection with the 10th letter of the Roman alphabet.

All in all, resources stocks continue to dominate the overall picture with, unsurprisingly; Silver Lake Resources and Regis Resources claiming top spots for adjustments to price targets while Grange Resources and OZ Minerals top the tables for changes to profit estimates. Industrials stocks featuring include Sonic Healthcare (profit warning), Energy Developments (takeover), a2 Milk (also under corporate interest) and Boral who surprised with a better than expected FY15 guidance.

Upgrades

Commonwealth Bank ((CBA)) upgraded to Neutral from Sell by Citi. B/H/S: 1/6/1

APRA's recent announcements on additional regulatory capital requirements have proven less onerous than expected. Accordingly, Citi believes there is little in terms of near-term catalysts for short seller to benefit from an Australian bank trade. Hence, Citi upgrades to Neutral from Sell and raises the target to $86.50 from $80.00.

Computershare ((CPU)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/5/1

Credit Suisse expects FY16 guidance will be broadly flat, which implies 4.0% organic growth in local currency terms. Credit Suisse downgrades FY16 and FY17 forecasts by 4.0%. The broker believes such guidance would be a positive catalyst and upgrades to Outperform from Neutral. Target is reduced to $13.10 from $13.60.

Dexus Property ((DXS)) upgraded to Outperform from Neutral. B/H/S: 2/1/4

Given a marginally better operating environment in office, as incentives are easing albeit still elevated, Macquarie upgrades Dexus Property to Outperform from Neutral. The broker expects office demand is starting to make a come back and this has been helped by better net absorption over the first half. Target is $7.85.

DUET ((DUE)) upgraded to Buy from Neutral by UBS. B/H/S: 3/4/1

The prospect of DUET's acquisition of Energy Developments ((ENE)) are positive in the broker's view. Not just financial synergies but gearing metrics should improve. DUET will inject around $150m in cash, which should lift Energy Developments credit rating to investment grade, in the broker's opinion. UBS lifts distributions to management's guidance and expects cover should improve post the acquisition. Rating is upgraded to Buy from Neutral and the target reduced to $2.30 from $2.55.

Evolution Mining ((EVN)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/0/1

June quarter production was 8.0% ahead of the broker's estimates while cash costs were 10% below. The company will release FY16 forecasts in August once the Cowal and Mungari transactions have closed. The broker considers the company is in a good position to weather the gold price volatility. After recent falls in the US dollar gold price Deutsche Bank upgrades to Buy from Hold. Target is $1.10.

Fortescue Metals ((FMG)) upgraded to Neutral from Sell by UBS and to Outperform from Underperform by Credit Suisse. B/H/S: 1/4/3

The company had a strong finish to FY15, with shipments up 5.0% quarter on quarter. Guidance for FY16 was maintained. The share price has declined with the iron ore price over the past two months and while the market may still question the sustainability of the company's cost base, UBS considers the strategy appropriate. The broker upgrades to Neutral from Sell now the stock is more like fair value. Target is raised to $1.75 from $1.70. Credit Suisse upgrades to Outperform from Underperform given the 25% correction in the share price in the last month. Target is unchanged at $2.00.

Newcrest Mining ((NCM)) upgraded to Buy from Neutral by Citi. B/H/S: 1/2/5

The June quarter production report did not change Citi analysts' view on the company. The fall in share price, however, did. Upgrade to Buy from Neutral. Citi analysts point at the balance sheet de-leveraging and the fact that helped by the weakening AUD, Newcrest is becoming one of the lowest cost, large scale gold producers in the world. Citi analysts believe the all-in production costs can be pulled below US$600/oz. Target price rises to $15.10 from $14.80.

Perseus Mining ((PRU)) upgraded to Buy from Neutral by Citi. B/H/S: 5/2/1

Clearly, Citi analysts suspect a turnaround is announcing itself at Perseus Mining. They believe the performance during the June quarter was "successful"; reliability improved at Edikan and production and costs beat guidance for the half. Citi upgrades to Buy/High Risk from Neutral. The analysts explain the addition of "High Risk" attached to the rating is for gold price volatility and expectation of break-even or a loss in FY16 and FY17 due to capex. Target improves to 59c from 52c prior. Short term estimates have been boosted.

Regis Resources ((RRL)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 6/2/0

Regis Resources delivered a June quarter production report in-line with expectations and its FY16 guidance fell short of the stockbroker's projections, but the major surprise came in the form of capital management initiatives. The analysts still think the operational side of the business continues to harbour more downside risks, but capital management is suggesting a more stable outlook, overriding ongoing concerns. Upgrade to Overweight from Neutral. Price target gained 10c to $1.65.

Westpac Banking ((WBC)) upgraded to Neutral from Sell by Citi. B/H/S: 3/4/1

APRA's recent announcements on additional regulatory capital requirements have proven less onerous than expected. Accordingly, Citi believes there is little in terms of near-term catalysts for short seller to benefit from an Australian bank trade. Hence, Westpac's rating is upgraded to Neutral from Sell and the target to $33.50 from $33.00.

Downgrades

Air New Zealand ((AIZ)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/0/1

Passenger data suggests stronger volumes in the second half while short-haul benefited from a 6.0% lift in domestic and trans Tasman revenue, improved load factors and yield. Credit Suisse revises forecasts to take the data into account but, on the back of recent share price strength, believes the stock is already ahead of fair value. Rating is downgraded to Underperform from Neutral and the target is steady at NZ$2.30.

AWE ((AWE)) downgraded to Neutral from Buy by UBS. B/H/S: 3/3/0

Preliminary reassessment of the reserves at Yolla signal a downgrade of 30% and as a result AWE's share will decline. AWE expects to recognise a non-cash impairment of the carrying value for the asset in which it has a 35% interest. UBS reduces valuation for the asset which more than offsets the increase associated with the reserves at Sugarloaf. As the stock is now trading close to valuation the rating is downgraded to Neutral from Buy. Target is lowered to $1.35 from $1.45.

BC Iron ((BCI)) downgraded to Sell from Neutral by UBS. B/H/S: 0/2/1

June quarter sales and realised prices disappointed the broker, missing estimates because of the deferral of a shipment to the following quarter. Costs were higher by the cross over of a mining contractor in the quarter which resulted in higher operating costs. The broker downgrades to Sell from Neutral to reflect heightened risk from a persistently low iron ore price. Target is lowered to 25c from 30c.

Coca-Cola Amatil ((CCL)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 3/3/1

Ahead of next month's interim result, the broker sees both volume and price headwinds in Coke's key categories. The company is improving efficiency and investing in marketing and new products but the broker expects the headwinds to outweigh over the next 12 months. Pressure will remain as Woolworths ((WOW)) addresses its pricing and all up the broker has decided to downgrade to Underperform. Target falls to $9.43 from $9.70.

Drillsearch ((DLS)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/4/0

Drillsearch posted solid production and in-line revenues in the June Q. While the company's cash position remains comfortable, this could be tested next year when a put option in the company's convertible bond is up for exercise. The stock is trading well below the conversion rate. This could put pressure on liquidity available for reinvestment, the broker notes. A change in leadership also means the company's growth strategy remains unclear at this point. The broker has thus decided to pull back to Neutral, lowering its target to $1.20 from $1.30.

Energy Developments ((ENE)) downgraded to Neutral from Outperform by Credit Suisse and to Hold from Buy by Deutsche Bank. B/H/S: 3/3/0

DUET ((DUE)) has offered $8 a share and entered into a scheme of arrangement. Credit Suisse considers the bid is a good price after a strong 12 months and there is a high probability of it succeeding. Credit Suisse downgrades to Neutral from Outperform rating. Despite the lack of significant control premium Deutsche Bank expects the bid to proceed in the absence of a superior offer, given 86% of the register supports the deal. Rating is downgraded to Hold from Buy. Target is raised to $8.00 from $7.70.

ISentia ((ISD)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/2/0

The broker expects iSentia to beat its FY15 prospectus forecast through a strong performance in A&NZ, with Asian earnings remaining in line. Strong cash flow will reduce net debt and the broker expects a final dividend increase above the interim. iSentia has nevertheless strongly outperformed the ASX Small Industrials over the past 12 months so while raising its target to $3.81 from $3.50, the broker pulls back to Neutral.

Mirvac Group ((MGR)) downgraded to Underweight from Overweight by Morgan Stanley. B/H/S: 3/2/2

The broker expects residential A-REITs to continue underperforming as moderating house price growth drives de-rating, while consensus earnings estimates also appear optimistic. Morgan Stanley downgrades Mirvac to Underweight from Overweight given the downside risk to FY16 expectations, continued de-rating, slowing in investor volumes and increased re-stocking risk. Target is lowered to $1.95 from $2.15. Industry view is Attractive.

Sonic Healthcare ((SHL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/3/1

We completely missed this one last Friday – for which our apologies. A general sector update on diagnostic services in Australia has led to the conclusion that weak growth has been an issue for the industry today and likely to remain an issue for the time being. Mild earnings downgrades have been implemented for Sonic, but the target falls to $21.80 (was $22.60) and the rating has been pulled back to Underperform. Note DPS estimates have been cut too.

Sydney Airport ((SYD)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 3/4/0

Data digging by JP Morgan analysts has led to the observation that adjusting for one-off events such as the Cricket World Cup, underlying traffic growth for Sydney Airport is now 1.8% YTD, below the long term trend of 2.7%. This, combined with recent share price appreciation has triggered a downgrade to Neutral from Overweight. Target remains at $5.60.

Transfield Services ((TSE)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 1/4/1

Deutsche Bank continues to believe in the company's transformation and expects a strong FY15 result but downgrades its recommendation to Hold from Buy. Target is lowered to $1.56 from $2.03. Downside risks are envisaged to FY16-18 forecasts and the broker is concerned the amount of cost savings that will fall to the profit line. FY16-18 forecasts are downgraded 1-4%.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms