Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

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 October 26 to Friday October 30, 2015
Total Upgrades: 7
Total Downgrades: 24
Net Ratings Breakdown: Buy 44.83%; Hold 43.10%; Sell 12.07%

The Australian share market is being hit with stockbroker downgrades for individual stocks. No doubt this contributed to the rather lacklustre performance as the end of October approached. For the week ending Friday, 30th October 2015, FNArena registered seven upgrades (including two for OZ Minerals) and 24 downgrades.

Many of the downgrades concern outperforming stocks such as APN Outdoor, BT Investment and REA Group, plus a handful of domestic gold producers, plus companies whose market updates couldn't match analysts' expectations, such as ANZ Bank, Dick Smith and Capitol Health.

Gold producers Evolution Mining and Northern Star both received two downgrades during the week, as did ANZ Bank.

Many of the downgrades in rating were accompanied by upgrades in targets and/or estimates. This signals the rating downgrades are inspired by lofty looking valuations. With major indices still in negative territory for the calendar year, clearly this indicates not all stocks are equal in this market.

BT Investment tops the table of positive revisions to price targets with a 9% gain, followed by BlueScope Steel and APN Outdoor. On the negative side we find Dick Smith, Ten Network and Grange Resources leading the table.

Tables for earnings estimates revisions are, as per usual, heavily dominated by energy stocks and miners. BlueScope Steel, BT Investment, Sirtex Medical, APN Outdoor and Australian Pharmaceutical Industries join the likes of AWE Ltd, OZ Minerals and Western Areas on the positive side. The negative side is being led by gold miner Perseus, followed by Ten Network, South32, Woolworths, Independence Group and Dick Smith. All with heavy downgrades.

Even Drillsearch, on number ten for the week, was subjected to a near 9% downgrade to its forecasts. Luckily for the shareholders, Drillsearch is likely to join forces with Beach Energy, which should see synergies far outweighing short term profit downgrades. Drillseach nevertheless received a downgrade to Neutral during the week, from UBS.

Upgrade

AUSNET SERVICES ((AST)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/6/0

The regulator's draft decision for the Victorian regulated business was better than UBS expected and confirmed the broker's suspicions that market risk is often higher than regulatory risk. Revenues are basically locked in for the next five years.

UBS upgrades Ausnet to Buy from Neutral given the attractive yield on offer. Target is raised to $1.52 from $1.43.

FLEXIGROUP LIMITED ((FXL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0

Flexigroup will acquire Fisher & Paykel's NZ finance business for NZ$315m. F&P is a leading non-bank consumer financier in NZ, Macquarie notes, making it a complementary acquisition.

The price looks a bit full but the broker acknowledges earnings accretion, reasonable synergies and strategic justification. With no organic growth in sight it is an acquisition Flexigroup needed to make. On current valuation and earnings upside form the acquisition Macquarie upgrades to Outperform, but the broker still prefers Pepper Group ((PEP)) in the space.

Target slips to $2.85 from $2.86.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Overweight from Neutral by JP Morgan .B/H/S: 5/1/2

JP Morgan expects the coming year will transform the company, with the commissioning of the ammonia plant in the US marking the end of a period of elevated capital expenditure.

Earnings from the project should generate a significant step up in cash flow, the broker maintains. JP Morgan upgrades to Overweight from Neutral. Target is raised to $4.40 from $3.20.

MOUNT GIBSON IRON LIMITED ((MGX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/1

Mt Gibson's Sep Q report featured much lower than forecast costs at Koolan Island, allowing a Stage 3 mining campaign to go ahead at Acacia East. Shipments were impacted by bad weather at Geraldton but this will be picked up in the Dec Q, Macquarie notes.

While Acacia East increases Macquarie's production forecast the impact on earnings is minimal. The focus for the broker is on the company's cash balance, which will be used to fund opportunities management is on the lookout for. As the stock is trading at a 35% discount to cash, Macquarie upgrades to Outperform.

Target rises to 26c from 25c.

OZ MINERALS LIMITED ((OZL)) Upgrade to Buy from Neutral by UBS and Upgrade to Neutral from Underweight by JP Morgan .B/H/S: 6/2/0

September quarter production delivered on consistency, UBS observes. The broker expects the company to achieve the upper end of guidance for 2015 of 126-131,000 tonnes copper, or even beat that.

The broker returns the rating to Buy from Neutral after the recent pull-back in the share price, noting its balance sheet strength, cash flow and liquidity. Target is raised to $4.56 from $4.30.

September quarter production was strong and, after making favourable adjustments to the cost profile over the medium term, JP Morgan's valuation is up significantly.

Based on the attractive outlook for the balance sheet and potential for increased shareholder returns the broker upgrades to Neutral from Underweight. Target is raised to $4.05 from $3.00, despite a bearish view on copper prices.

TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Add from Hold by Morgans .B/H/S: 1/5/2

After the investor briefing Morgans considers most of the bad news is now priced in and the outlook has stabilised. Any investment in a joint venture in the Philippines is not expected to be as much as previously feared.

The company suggests less than US$1bn would be needed to put the JV in a positive position for cash flow. Morgans believes the risk/reward is positively skewed for Telstra and upgrades to Add from Hold. Target is steady at $5.93.

Downgrade

AIR NEW ZEALAND LIMITED ((AIZ)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/0/1

Credit Suisse updates forecasts following the release of September quarter passenger data. The airline's trans Tasman performance has lagged that of the Pacific island network. Short haul yield was flat versus the previous corresponding quarter.

With the stock trading at a premium to the broker's assessment of fundamental value the rating is downgraded to Underperform from Neutral. Target is raised to NZ$2.50 from NZ$2.40.

AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Overweight by JP Morgan .B/H/S: 3/4/1

FY15 results were modestly disappointing to Credit Suisse. The broker downgrades estimates by 1.0% and moves its rating to Neutral from Outperform. Target is lowered to $30 from $31.

Credit Suisse now prefers the domestic and consumer oriented major banks, being Commonwealth Bank ((CBA)) and Westpac ((WBC)), particularly for their Australian mortgage re-pricing leverage.

The FY15 result suggested to JP Morgan it is time to downgrade to Neutral from Overweight. FY16 forecasts are downgraded by 3.0%. The broker supports the decisions to prioritise profitability over growth but expects it will take time to turn around.

The broker is positive on the margin stability exhibited in the second half but suspects recent divestments, difficult trading conditions and elevated cost growth have taken a toll on returns.

Target is lowered to $31.59 from $33.82.

APN OUTDOOR GROUP LIMITED ((APO)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/0

Morgans upgrades forecasts after feedback from industry players which indicates demand for both static and digital billboards is running near record levels.

The broker upgrades 2015 and 2016 earnings estimates by 3.0% and 4.0% respectively and acknowledges there is potential for further upside in both yield and capacity utilisation.

Yet, the rating is downgraded to Hold from Add after the recent strong share price performance. Target is raised to $4.46 from $4.04.

ALACER GOLD CORP ((AQG)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/1

Alacer's Sep Q production was in line with Macquarie's forecast. The broker has nevertheless cut its Dec Q forecast given lower grades at Copler, and it will also be a quarter in which capex is ramped up.

Delivery of the sulphide project offers risk and Macquarie believes Alacer is being over-valued against its gold junior peer group. Downgrade to Underperform. Target falls to $2.55 from $2.60.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/1/0

UBS is downgrading to Neutral from Buy as the stock has outperformed since it announced a review of its steel making operations and now factors in a potential turnaround in earnings from Port Kembla.

Any further re-rating potential from an exit of raw steel production in Australia is unlikely in the near term, in the broker's view, despite the challenges. Target is raised to $4.90 from $4.60.

BT INVESTMENT MANAGEMENT LIMITED ((BTT)) Downgrade to Sell from Neutral by UBS .B/H/S: 3/2/1

The company is seen executing well with FY15 cash profit ahead of UBS forecasts. With equity markets up 5-10% in the year to date the broker acknowledges the near-term trends could remain positive.

Still, UBS does not believe the current elevated level of earnings should be capitalised on peak multiples. Hence, the rating is downgraded to Sell from Neutral. Target is raised to $9.75 from $8.50.

CAPITOL HEALTH LIMITED ((CAJ)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

The company has signalled that recent changes in referral patterns means FY16 revenue will be 4-6% below previous expectations. A further update will be provided at the AGM in November.

Morgans is not sure how widespread the issue is or how long the softness will last and remains cautious ahead of the Medicare review, expected in December.

In other news, the company has entered into a MoU to commercialise artificial intelligence protocols in radiology, which the broker believes has longer-term positive implications.

Rating is downgraded to Hold from Add. Target is lowered to 66c from 94c.

DRILLSEARCH ENERGY LIMITED ((DLS)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/0

Drillsearch Energy and Beach Energy ((BPT)) have announced a merger agreement. Drillsearch shareholders will receive 1.25 Beach shares for each share they own and will own 30% of the merged entity.

UBS notes Seven Group ((SVW)), which has a 19.9% stake in both companies, has signalled it supports the merger.

The broker downgrades to Neutral from Buy on the news and increases its target to 81c from 80c.

DORAY MINERALS LIMITED ((DRM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Doray has already pre-released production numbers but the official report confirmed costs were in line with expectation. The Deflector project is on track, Macquarie notes, and mining has commenced at Judy Lode.

It was a solid quarter but Doray has rallied strongly in recent weeks to catch up to its peer group. Hence the broker pulls back to Neutral. Target unchanged at 60c.

DICK SMITH HOLDINGS LIMITED ((DSH)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/1

Deutsche Bank struggles to understand how weakness in one month, October, can explain the company's sharp FY16 downgrade. Deeper issues must be prevailing.

First quarter sales grew 1.3% in like-for-like but the company had to discount materially to get there and this weighed on margins. FY16 guidance is reduced by 14%.

The broker suspects the format is struggling to deliver like-for-like growth from organic traffic without aggressive discounts and help from lower margin online sales. An inventory issue may also exist that requires deeper discounting to rectify.

The broker reduces earnings estimates substantially and downgrades to Hold from Buy. Target is reduced to $1.00 from $2.30.

Dick saw solid sales growth through the September quarter but suddenly in October, the wheels fell off, the AGM revealed. Management is blaming poor marketing decisions, Macquarie notes.

Dick will quickly try to address the issues heading into Christmas but in the meantime has downgraded FY16 profit guidance by 15-20%. Macquarie has slashed earnings forecasts as a result and dropped its target to $1.00 from $2.10. A downgrade of such magnitude so close to Christmas is a worry, the broker suggests.

Downgrade to Neutral. Dick's PE is undemanding, but the market will stay away until Dick can deliver some more promising results.

DUET GROUP ((DUE)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/5/1

The regulator's draft decision for the Victorian regulated business was better than UBS expected and confirmed the broker's suspicions that market risk is often higher than regulatory risk. Revenues are basically locked in for the next five years.

The broker downgrades DUET to Neutral from Buy following recent moves in the security price. Target is raised to $2.41 from $2.39.

ERM POWER LIMITED ((EPW)) Downgrade to Hold from Add by Morgans .B/H/S: 0/3/0

The mid point of guidance for FY16 provided at the AGM is around 8.0% below FY15, Morgans observes. The broker notes financing costs are also expected to rise.

Morgans reduces earnings estimates to align with guidance. Rating is downgraded to Hold from Add. Target is reduced to $1.96 from $2.64.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/5/0

September quarter production was up 35%, largely because of the recently acquired Mungari and Cowal operations, Morgans observes.

While the stock has performed well over the last year the broker suspects the share price is now looking stretched. Hence the rating is downgraded to Hold from Add.

Morgans revises up FY16 production forecasts and suspects guidance may be revised for the second half. Target is raised to $1.51 from $1.36.

Evolution had already pre-released better than expected Sep Q production numbers, so no surprises from the official release. The company will review production guidance in January, at which point Macquarie believes cost forecasts will be lowered.

Exploration continues to impress but given the stock's 70% rally in two months on an unchanged A$ gold price, Macquarie is downgrading to Neutral. Target rises to $1.60 from $1.50.

G.U.D. HOLDINGS LIMITED ((GUD)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0

Credit Suisse is of the view that the company's initiatives to date have been impressive and there are further gains to be made.

The broker is also positive about the fact the business, post the BWI acquisition, will have over 65% exposure in earnings to the automotive after-market but growth in this division will really only start to ramp up in late FY16.

Credit Suisse consider the risk/reward balanced at this point and downgrades to Neutral from Outperform. Target is lowered to $9.05 from $9.85.

MEDUSA MINING LIMITED ((MML)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/0/2

Medusa's Sep Q production was in line with Macquarie's forecast and FY16 guidance was maintained. Cash remains steady.

The problem for the broker is Medusa's strong share price run over the past couple of weeks despite an unmoved USD gold price. With the stock trading at a premium to valuation and peer group PE, Macquarie downgrades to Underperform. Target unchanged at 40c.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Underperform from Outperform by Macquarie and Downgrade to Sell from Neutral by Citi .B/H/S: 0/0/2

Northern Star's Sep Q production, revenues and costs were all in line with Macquarie's forecasts. The company is on track to meet guidance and exploration offers upside potential.

But after a 60% share price rally in a couple of months, without any movement in the A$ gold price, Macquarie has downgraded to Underperform from Outperform. Target rises to $3.00 from $2.80.

It's a valuation call. The share price has appreciated by some 40% and Citi analysts think it's now too high for comfort. The September quarter saw lower production at a higher cost, but the analysts suggest this was as expected.

The company is on track to meet the FY16 output guidance of 535-570koz, note the analysts. They also note Northern Star proposes increasing production to 700kozpa through FY18. Citi analysts stick to 570kozpa in FY16-19 for the time being.

REA GROUP LIMITED ((REA)) Downgrade to Hold from Add by Morgans .B/H/S: 5/3/0

Ahead of the quarter result, Morgans downgrades to Hold from Add given the recent out-performance of the share price.

The quarterly report is considered pivotal, as it should reveal whether or not yields were sacrificed to secure the recent surge in depth ad volumes.

Morgans accepts there is some risk of a substantial upgrade to forecasts. Target is steady at $48.32.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/4/1

Citi analysts report DeGrussa's operational performance in the September quarter proved better than expected. The analysts believe the company is en route to meeting its own guidance for the year.

Equally important, Citi analysts see potential for "significant" additional copper-gold discoveries in the Doolgunna area. They have pulled back the rating to Neutral from Buy, but this is purely valuation-based, the analysts explain.

TABCORP HOLDINGS LIMITED ((TAH)) Downgrade to Underweight from Neutral by JP Morgan .B/H/S: 3/1/3

The company may be performing well and making sound strategic decisions but revenue growth in the first quarter was below JP Morgan's expectations.

The broker suspects the stock may pause after outperforming the market in the year to date. Rating is downgraded to Underweight from Neutral. Target is reduced to $4.29 from $4.51.

TEN NETWORK HOLDINGS LIMITED ((TEN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/3/3

The FY15 loss was larger than Credit Suisse expected as TV costs fell less than expected. The company expects first quarter advertising revenue to be up 10% but the broker suspects the upside could be offset by a material step up in costs.

Credit Suisse reduces its rating to Neutral from Outperform. Target is lowered to 20c from 28c.

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