Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

Carrying on with the previous week’s momentum, last week once again saw more stocks upgraded than downgraded on the Australian share market. There were six stocks downgraded, while ten were upgraded. The overall tally now indicates 42.66% of ASX listed shares are rated as Buy, 43.88% as Hold and 13.46% as Sell.

In a funny little bit of coincidence, every single upgrade reported last week was a move up to Buy from Neutral except one, which was an upgrade to Buy from Sell. Almost every downgrade was similarly uniform, with all cut to Neutral from Buy except one, which was a drop from Neutral to Sell.

NRW Holdings ((NWH)) was the one stock downgraded from Neutral to Sell, a move made by Credit Suisse after an earnings downgrade at the AGM last week on the back of lower revenues and ongoing margin pressure. It’s interesting to note that CIMB (when it was still RBS) downgraded the stock to Hold back in September, predicting an emerging softness in earnings. Six other brokers in the FNArena database are at Buy, most lamenting current earnings softness as well, but hanging in there on valuation and the longer term upside seen to be on offer once the cycle turns.

Regis Resources ((RRL)) finds itself next mention on the downgrade list, cut from Buy to Neutral by BA-Merrill Lynch on concerns the December quarter won't provide enough to see the company hit its FY production guidance, as well as a bit of creeping execution risk. While the broker remains a fan of the company, it believes the market may be assuming an event free ramp-up at Garden Well, which may not pan out.

Next we move on to Rex Minerals ((RXM)), which was downgraded from Buy to Neutral by JPMorgan after a trip out to the company’s Hillside project. While the broker is positive on the project, citing a long mine life and solid margins, it is growing increasingly concerned about the amount of capex that will be required to bring the project on line. A bit of clarity on funding would likely turn the broker back to positive, it said.

Mirvac ((MGR)) was another to be downgraded from Buy to Neutral last week, in this case the decision being made by Macquarie. The broker is torn between what looks to be the start of a patchy residential recovery and the increasing potential for write-downs in the company's business. In the end, it was a valuation call, with shares now trading too close to the broker’s target. The FNArena Database reads like a downgrade history for Mirvac, with Citi making the same cut in August, while Credit Suisse and JPMorgan made the same move to Neutral at the end of October. In all cases, the moves were made on the back of continued short terms earnings softness, with fairly positive views all around on post cycle prospects.

The next downgrade from Buy to Neutral was worn by Harvey Norman ((HVN)), with yet another previous supporter buckling under the pressure of a darkening outlook for the company. Last week saw Deutsche Bank move lower, citing the threat of increased competition from JB HiFi ((JBH)), who is planning a small move into whitegoods and kitchen appliances. The interesting thing is that brokers almost unanimously panned JB HiFi for making the move in the first place, with few expecting any sort of success.

The last downgrade we’ll cover was that of Fleetwood Corp. ((FWD)), which was also dropped from Buy to Neutral. Macquarie made the move on the back of AGM commentary, with earnings forecasts also lowered to reflect lower occupancy rates and a pause in iron ore orders. JPMorgan and CIMB made the same moves back in October, both citing the prospect of weakening earnings in FY13, although CIMB sees big things in FY14-15.

We’ll start off coverage of the upgrade side with the only stock boosted to Buy from Sell, Aristocrat Leisure ((ALL)). There was plenty of commentary post last week’s release of FY results and most of it was positive given a fairly solid earnings beat and good performances from all regions. On top of the better than expected FY performance, Credit Suisse also sees the potential for share repurchases given strong cash flows, hence the double upgrade.

We’ll start the run of upgrades from Neutral to Buy, with CSL ((CSL)), with brokers reacting positively to an earnings upgrade from 12% expected FY net profit growth to 20% net profit growth. BA-Merrill Lynch pushed through the recommendation upgrade, citing both the higher earnings and an expected multiple expansion across FY13 and FY14.

Analysts at JPMorgan upgraded AGL ((AGK)) from Neutral to Buy, citing the passing of the regulatory cloud that has been an overhang for a while now. With the broker thinking too much downside is now being factored in, it feels there is now a decent value proposition on offer.

BA-Merrill Lynch upgraded ALS ((ALQ)) from Neutral to Buy, noting the recent FY guidance issued by management goes a long way to de-risking the outlook for the company. Increases to earnings forecasts through FY15 were also made by the broker, who sees a number of value creation opportunities via both organic growth and M&A options.

Aurora Oil & Gas ((AUT)) was lifted to Buy from Neutral by Credit Suisse, the broker noting its view narrower down-spacing and HiWay technology is not being priced into the stock at current levels. Solid production growth through 2016 also supports the broker’s call.

Cabcharge ((CAB)) also saw an upgrade to Buy from Neutral over the course of last week, with CIMB seeing recent share price weakness as providing a nice valuation boost. The broker believes an overly bearish outcome has been priced in to the stock, although it does admit the prospect of Visa and Mastercard 5% surcharge caps does increase earnings risk. The week prior, JPMorgan downgraded its recommendation to Sell from Neutral on the aforementioned surcharge risks.

Challenger Financial ((CGF)) was another of the stocks upgraded from Neutral to Buy, with JPMorgan believing concerns over capital, margins and earnings transparency are now more than factored into the share price. AGM commentary was fairly well received by other brokers as well, especially news LAGIC capital requirements over the next three years will likely come in at the lower end of the forecast range. Management backed its newly found capital confidence by announcing a $50m buyback that is expected by most to be instantly EPS accretive.

Toll Holdings ((TOL)) also won an upgrade to Buy from Neutral, with BA-Merrill Lynch noting decent trading volumes over the past couple of months and expectations for reasonable conditions through Christmas paint a much nicer holiday valuation picture.

Norfolk Group ((NFK)) was also upgraded to Buy, with JPMorgan upbeat about a number of non-binding and conditional takeover proposals being received by the company. While the quality of the bids is yet unknown, the broker still thinks this is a good sign about the perception of the group's assets. CIMB stayed at Neutral, however, noting investor sentiment would need to improve before it considers lifting. JPMorgan also upgraded Macquarie Atlas ((MQA)) to Buy from Neutral, citing an improved view on cashflow metrics and the fact the stock is now trading at a 22% discount to valuation.

In terms of changes to average target prices, there were no increases of more than 10% posted last week. The biggest price upgrades were an 8.23% lift in Aristocrat post a solid FY result and a 6.86% boost to Treasury Wine Estates ((TWE)).

Conversely, there were two very big cuts to consensus price target over the course of last week, with Ausdrill ((ADL)) down a whopping 31.97% after putting out a lowered earnings guidance a couple of weeks back. NRW Holdings’ average price target dropped 18.93% last week on the issues outlined above.

There were some sizable changes to consensus earnings forecasts, with Sydney Airport ((SYD)) lifted by 27.38% and Senex Energy ((SNX)) boosted by 22.12%. SYD found itself higher on a continuation of improving yields, while JP Morgan noted last week that Senex’s Spitfire-2 well has been successful, which flows through to a slight earnings and valuation lift for the stock.

Meanwhile, consensus earnings for Ten ((TEN)) were cut by more than 122%, although the monthly action from a broker perspective was the initiation of coverage by Credit Suisse. Macquarie Atlas also featured prominently on the earnings downgrade side, its earnings numbers cut by 66.69% last week.
 

Total Recommendations	Recommendation Changes
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