Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 September 7 to Friday September 11, 2015
Total Upgrades: 21
Total Downgrades: 7
Net Ratings Breakdown: Buy 45.54%; Hold 41.76%; Sell 12.70%

Reporting season has officially finished, but volatility hasn’t subsided just yet and thus stockbroking analysts continue to issue more rating upgrades than downgrades. For the week ending Friday, 11th September 2015, FNArena registered yet another 21 upgrades versus seven (7) downgrades.

As one would expect, most of these rating changes, in both directions, are motivated by a rising gap between share price and intrinsic valuations. Eight of the 21 upgrades were to Neutral.

So who’s being upgraded? Sigma Pharmaceuticals, after reporting out-of-season financial results that had most analysts dragging out the “not too bad” label. Graincorp received two upgrades despite El Nino on the horizon. AWE Ltd and GPT also received two upgrades. And Westpac added yet another upgrade too.

All in all, last week had an undertone of “some energy plays might be too cheap by now” (despite further falling expectations) while at least some analysts seem to think the same about some local property and housing exposures. Nearly half of all downgrades are linked to the doomed take-over approach for Oil Search by Woodside.

Both tables for revisions to price targets and profit estimates continue to be dominated by analysts reducing forecasts for the years ahead. It’s a “lower for longer” environment now, and it shows through these tables. Positive profit forecast revisions can be partially explained by analysts revising AUD forecasts.

Upgrade

ASX LIMITED ((ASX)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/5/3

After another strong month of activity, as expected, in August Credit Suisse has maintained earnings forecasts. Still, the share price is down 12% since the FY15 result so the rating is upgraded to Neutral from Underperform.

While the company faces structural headwinds it does have good cash generation and a relatively low risk to dividends and earnings, the broker acknowledges. Target is reduced to $40 from $42.

AWE LIMITED ((AWE)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

Credit Suisse applies new oil price and currency assumptions to oil and gas stocks. The broker upgrades AWE to Outperform from Neutral, given significant share price decline, and reduces the target to 95c from $1.00.

While cognisant of the fact that prices are being lowered at what may be a cycle low, the forward curve is pricing in a more bearish scenario than estimates currently suggest. The broker’s new Brent prices are US$58/bbl for 2016 and US$65/bbl for 2017.

The recent share price slide has been overdone in UBS’ view and the rating is upgraded to Buy from Neutral on valuation grounds.

This comes despite a 14.3% reduction in the price target, to 90c from $1.05 as UBS has reviewed oil price forecasts and lowered the near-term outlook for crude.

Brent forecasts for 2015 and 2016 are lowered to US$55.00 and US$57.50 barrel and West Texas Intermediate to US$49.00 and US$52.50 barrel, respectively.

CHARTER HALL GROUP ((CHC)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/2

UBS is upgrading to Buy from Neutral because of positive earnings revisions after the deployment of equity, while assets under management are increasing ahead of market expectations.

The implied value of the funds management business is considered the cheapest since 2013. The broker downgrades the target to $4.80 from $4.94.

DOWNER EDI LIMITED ((DOW)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 4/2/1

Since the FY15 result the company’s share price has fallen 16% and Deutsche Bank considers this overly bearish.

Deutsche Bank upgrades to Buy from Hold, given a strong management team, 6.0% dividend yield, cheap valuation and the high level of recurring revenue. There is also potential for value-accretive acquisitions.

The target is steady at $4.28.

FEDERATION CENTRES ((FDC)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/3/2

The company has guided to earnings of 18.8-19.1c per security. Credit Suisse retains FY16 forecasts at the top of this range. The broker expects growth will slow into FY17.

Earnings quality remains the variable and the broker also notes the impact of re-defining earnings per security to include ground rents and amortisation.

Rating is upgraded to Neutral from Underperform. Target is lifted to $2.79 from $2.73.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Neutral from Underweight by JP Morgan .B/H/S: 3/3/2

The company has set some aggressive cost cutting targets, aimed at getting net direct cash costs (or C1)  to US$18 a tonne in FY16. JP Morgan analysts have conducted further in-depth analysis on these targets in combination with what it all means for the company’s mountain of debt.

Bottom line: the analysts see potential for better-than-expected performance and hence the risks are now more balanced, in their view. Hence why the rating is lifted to Neutral from Underweight. Price target jumps to $1.95 from $1.30.

Of course, all of the above is supported by the belief that Fortescue management can meet its targets. Plus at current spot price, the company is highly cash flow generative, point out the analysts.

GRAINCORP LIMITED ((GNC)) Upgrade to Buy from Hold by Deutsche Bank and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/2

The outlook for an improved winter crop along with a depreciation of the Australian dollar signals to Deutsche Bank better prospects are ahead. Winter crop production is expected to be up 8.0%.

Rating is upgraded to Buy from Hold. FY15-17 earnings estimates are revised up 1-5%. The $9.50 target is unchanged.

Crop forecasts for the winter season have been upgraded. East coast production is expected to be up 7.0% on FY15, with most of the increase from NSW where Graincorp has higher market share.

Credit Suisse actually downgrades earnings forecasts to bring this in line with the ABARES forecast. The forecast has reduced the risk associated with the FY16 earnings year and the broker expects additional benefits from Australian dollar depreciation.

Rating is upgraded to Outperform from Neutral. Target is lowered to $9.70 from $10.50.

GPT ((GPT)) Upgrade to Neutral from Sell by UBS and Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 2/5/0

UBS upgrades GPT to Neutral from Sell. Target is steady at $4.61. The broker’s rationale for the upgrade is based on the core portfolio, with office and retail looking better than expected.

There is strong evidence from transactions of growth in hard assets, while earnings are stable and the valuation considered reasonable. The retail segment continues to be driven by strength in the housing market, low interest rates and slowing online growth.

Morgan Stanley upgrades to Overweight from Underweight, because of better growth prospects relative to the sector and the high degree of certainty.

There is also potential to slow cost growth while retaining leverage to higher asset values via the funds management platform, in the broker’s opinion.

Attractive sector view maintained. Target is raised to $4.70 from $4.50.

MIRVAC GROUP ((MGR)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 5/1/1

Morgan Stanley upgrades to Overweight from Underweight, given the price weakness in the security recently.

Mirvac is trading at a discount to net tangible assets despite a positive outlook for commercial asset and inventory values.

Target is lowered to $1.90 from $1.95. Industry view is Attractive.

METCASH LIMITED ((MTS)) Upgrade to Neutral from Underweight by JP Morgan .B/H/S: 1/3/2

JP Morgan notes the balance sheet is being repaired and, with valuation support emerging, upgrades to Hold from Sell. With the fall in the share price and revised earnings forecasts the risks are now better accounted for, in the analysts’ view.

It is too early to be more constructive, the broker maintains, because of the competitive threats in the industry and company-specific risks such as a lack of vertical integration.

There is also a period of time before dividends are likely to be restored. JP Morgan forecasts this to be most likely in the first half of FY17. Target is raised to $1.50 from $1.01.

MYER HOLDINGS LIMITED ((MYR)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/3/3

Deutsche Bank believes the environment for the Australian consumer is the best it has been for some time. Still, execution is crucial and not all categories are equal.

Myer has fallen 25% since its results and the capital raising announcement and, while substantial execution risk remains, the broker believes there is some head room in the balance sheet.

Rating is upgraded to Hold from Sell. Target is $1.00.

PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/5/0

UBS estimates the company direct sources 40-50% of its core brands and may lift this to over 80% in the next three years.

With a positive mix change towards Smiggle/Peter Alexander, the broker forecasts gross margins to rise by 250 basis points over FY15-20.

While there are risks with direct sourcing the broker envisages the company well able to manage these risks.

Rating is upgraded to Buy from Neutral, following recent share price weakness. Target is $13.20.

STOCKLAND ((SGP)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/2

The company is well positioned to grow earnings sustainably and, despite sentiment to residential markets largely unchanged over the past six months, UBS upgrades the stock to Buy from Neutral.

The reasons for the upgrade include a valuation discount that is too large to ignore and the lower risk development business which is not appreciated by the market. Target is reduced to $4.60 from $4.84.

SIGMA PHARMACEUTICALS LIMITED ((SIP)) Upgrade to Neutral from Sell by Citi and Upgrade to Buy from Neutral by UBS and Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/5/0

First half results were mixed, with revenue above forecasts and earnings below. Acquisitions have outperformed Citi’s expectations.

Citi re-bases forecasts to allow for the share buy-back activity. Given the recent decline in the share price the stock is now trading at fair value and the broker upgrades to Neutral from Sell. Price target rises to 71c from 70c.

UBS has lifted forecasts, the rating to Buy (from Neutral), but lowered its price target to 89c from 91c. No doubt, we’ll be receiving more info on Monday about the how and why behind it all.

Morgan Stanley now suspects industry growth is less sluggish, although remains cautious ahead of an update at the first half results.

The stock has de-rated significantly from its highs after the FY15 results and the broker believes the current multiple encompasses known risks.

Rating is upgraded to Equal-weight from Underweight.  In-Line sector view retained. Target is raised to 76c from 64c.

SENEX ENERGY LIMITED ((SXY)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/0

Credit Suisse applies new oil price and currency assumptions to oil and gas stocks. The broker upgrades Senex Energy to Outperform from Neutral but maintains that, to be a buyer, one needs to believe in the western Surat opportunity.

Target is reduced to 30c from 45c. While cognisant of the fact that prices are being lowered at what may be a cycle low, the forward curve is pricing in a more bearish scenario than estimates currently suggest.

The broker’s new Brent prices are US$58/bbl for 2016 and US$65/bbl for 2017.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/1

Westpac reaffirmed its customer focus at its strategy update. The bank aims to reduce its cost-to-income ratio to under 40% over the next three years.

Morgans believes the stock is starting to look like better value with the recent pull back in the shares but the bank should go harder on costs as the target will be challenging.

The broker upgrades to Add from Hold and raises the target to $36.75 from $35.88.

Downgrade

GWA GROUP LIMITED ((GWA)) Downgrade to Underperform from Outperform by Credit Suisse .B/H/S: 0/5/1

Credit Suisse is downgrading to Underperform from Outperform. This follows the recent share price appreciation.

The broker’s fundamental thesis is unchanged but, at this point in the cycle, a market multiple is seen as warranted. Target of $2.40 retained.

MACQUARIE ATLAS ROADS GROUP ((MQA)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/3/0

Following a change of analyst, UBS downgrades to Neutral from Buy. Near-term distribution forecasts have increased slightly, to reflect upside in APRR’s recent concession amendments.

UBS, taking a different approach to modelling, has also pushed back the timing of the expected step up in Eiffarie cash payments to 2017 and 2018.

A distribution of 16c and 18c is forecast for 2015 and 2016 respectively. Target of $3.50 is retained.

OIL SEARCH LIMITED ((OSH)) Downgrade to Sell from Neutral by Citi and Downgrade to Neutral from Buy by UBS .B/H/S: 5/2/1

Woodside ((WPL)) has made an approach to Oil Search with an opportunistic scrip offer of 0.25 Woodside shares for each Oil Search share. Based on last close this implies an effective offer of $7.65 a share.

The non-binding offer is conditional on a period of exclusivity and agreement from the PNG government.

Citi considers the deal full value and continues to envisage uncertainty for LNG growth in PNG because of marketing, appraisal and execution risk.

The broker downgrades to Sell from Neutral. Target is steady at $6.42.

UBS downgrades to Neutral from Buy in the wake of the proposal from Woodside ((WPL)) to acquire the stock in a 1-for-4 scrip bid. This values Oil Search at around $7.65 a share.

UBS believes Oil Search will reject the offer and Woodside would need to offer at least $8.50 to make the deal attractive. A rival bid is possible, but unlikely in the broker’s view. Target is raised to $8.25 from $7.50.

PACIFIC BRANDS LIMITED ((PBG)) Downgrade to Neutral from Overweight by JP Morgan .B/H/S: 1/5/0

Following a re-positioning of the brands in the portfolio after divestments, JP Morgan notes the company is more reliant on Bonds and Sheridan, with a growing direct-to-consumer channel now 36% of sales.

Revenue growth has been achieved despite a weak wholesale performance. As the share price has rallied recently the broker downgrades to Neutral from Overweight. Target is raised to 60c from 50c.

VIRGIN AUSTRALIA HOLDINGS LIMITED ((VAH)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/4/1

Morgan Stanley continues to envisage a stable operating outlook but, relative to Qantas ((QAN)), the valuation looks full, particularly with signs that Jetstar is taking non-peak share.

Rating is downgraded to Underweight from Equal-weight on relative expectations. Target is 46c. The broker’s sector view is Attractive.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/3

Woodside has made an approach to Oil Search ((OSH)) with an opportunistic scrip offer of 0.25 Woodside shares for each Oil Search share. Based on last close this implies an effective offer of $7.64 a share.

For Woodside, Citi estimates the transaction would be 8-9% dilutive to earnings in 2016-18. The broker suspects a counter offer would be hard as there are few high quality operators likely to gain approval from the PNG government.

The bid brings into question the premium investors have been willing to pay for Woodside’s capital discipline and the broker downgrades to Neutral from Buy. Target is lowered to $32.65 from $36.33.

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=91,95,96,66,142,83,167,112&h0=107,111,130,109,96,58,133,116&s0=27,32,15,45,44,39,15,32″ style=”border:1px solid #000000″ />

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