Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Chris Shaw

In a change from the recent pattern, the last week has seen broker downgrades outnumber upgrades by a score of seven to three based on recommendations by the eight brokers in the FNArena database. This brings total Buy ratings to 59.3%, down slightly from 59.5% last week.

Fund manager Henderson Group ((HGG)) enjoyed one of the upgrades courtesy of Macquarie, the broker moving to Neutral from Underperform to reflect improved value following recent share price weakness. This has offset ongoing weakness in fund flows thanks to still tough equity market conditions. Macquarie is also attracted to the yield of 6%.

Macquarie also upgraded Tabcorp ((TAH)) to Neutral from Underperform following a trading update that supports the view the stock offers value around current levels. A move to a more positive rating is not justified in the broker's view given overhanging uncertainty of compensation relating to claims in the Victorian market. Earnings estimates have been trimmed as part of the review.

Among resource stocks Credit Suisse has upgraded to an Outperform rating on Western Areas ((WSA)) from Neutral, this due to revisions to earnings and price target on the back of changes to nickel price expectations.

Credit Suisse has also upgraded CSL to Outperform from Neutral following changes to foreign exchange assumptions. Again, there have been related changes to earnings forecasts and price target. Charter Hall Office ((CQO)) has been upgraded by UBS to Buy from Neutral, as while a consortium bidding for the stock has lifted its offer there remains scope for a revised offer closer to net tangible asset backing.

On the downgrade side, Credit Suisse has lowered its rating on Navitas ((NVT)) to Neutral from Outperform to reflect a full valuation. While the Knight Review offered some positives the broker notes earnings are unlikely to be impacted prior to FY13. This suggests a full short-term valuation.

A rights issue announced by Energy Resources of Australia ((ERA)) has prompted Deutsche Bank to downgrade the stock to Hold from Buy. Not only was the issue a surprise but Deutsche notes even if the key Ranger 3 Deeps project goes ahead, it will be one of the world's most expensive uranium mines.

Deutsche has sliced its price target as well on the news, while other brokers in the market similarly lowered both targets and earnings forecasts to reflect the dilution to earnings per share from the capital raising.

A downgrade to earnings guidance by Fletcher Building ((FBU)) given ongoing difficult operating conditions has seen brokers lower earnings forecasts and price targets. Macquarie has gone a step further, downgrading to Neutral from Outperform on valuation grounds, as any recovery in earnings appears set to take some time.

James Hardie ((JHX)) is another building materials group to suffer a downgrade, JP Morgan moving to an Underweight rating from Neutral on the back of lower earnings forecasts. Price target also comes down as the broker sees little chance of strong performance relative to the sector in the current market.

Brokers ceasing coverage have also been a feature this week, with both Macquarie and JP Morgan stopping coverage on ConnectEast ((CEU)) given shareholder approval of a takeover offer. Macquarie has also dropped coverage on Minara ((MRE)).

With respect to earnings, an increase to long-term iron ore price assumptions by Credit Suisse has had a positive impact on expectations for Gindalbie ((GBG)). Forecasts for Paladin ((PDN)) have been adjusted to reflect an equity issue that has also meant changes in price targets, while changes to gold price assumptions have impacted on earnings estimates for Newcrest ((NCM)). 

BA Merrill Lynch rolled forward its model for Caltex ((CTX)) and this has prompted some increases in estimates, while higher margin assumptions saw Citi also lift its numbers for the stock. Virgin Blue ((VBA)) also saw an upgrade to forecasts from Macquarie as the company is seen as a beneficiary of the issues at Qantas ((QAN)).

Forecasts for Alumina ((AWC)) have come down slightly thanks to a lower than expected 3Q earnings result from Alcoa, while a slower project ramp up has contributed to Macquarie trimming its numbers for Beach ((BPT)). 

For Perpetual ((PPT)), a move to outsource some back office functions will impact on earnings in the medium-term, prompting JP Morgan to lower its forecasts and price target. Others have similarly adjusted estimates to reflect weak market conditions. 

Conditions also remain tough for Oakton ((OKN)) and brokers have reacted to AGM commentary by trimming earnings estimates, which has also brought about a trimming in price targets.  

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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