Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features NATIONAL AUSTRALIA BANK LIMITED.
For more info SHARE ANALYSIS: NAB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

Upgrade and downgrade activity by Australia’s major international brokers picked up a little bit last week. The FNArena Database shows that there were six upgrades made last week versus nine downgrades and while there were more significant upward EPS forecast revisions than downward, significant consensus price target cuts outnumbered the increases.

Atlas Iron ((AGO)) was upgraded to Buy from Sell by Credit Suisse on the back of a strong December quarter production report that saw the broker lift its FY13-14 EPS forecasts by 66% and 18% and price target to $5.40 from $5.20. Sentiment in the FNArena Database is positive, with more than 17% upside to the consensus price target.

Aurizon Holdings ((AZJ)) was lifted to Buy from Hold by JP Morgan. Shares were trading at an 8% discount to the broker's valuation and it notes the company has limited exposure to domestic macro conditions. Recent rail contract wins have also added to the valuation picture. The broker also upgraded Aurora Oil & Gas ((AUT)) to Hold from Sell on news the company plans to raise debt to fund its recent acquisitions, rather than equity. The broker notes the planned US$250m note issue will fill the funding gap and give the company a buffer to accelerate field development or make further acquisitions. Broker sentiment for both stocks is positive.

JP Morgan’s final upgrade last week was on Australand Property ((ALZ)), which went to Hold from Sell, the broker noting the share price has underperformed residential developer peers by around 15%. At the same time, JP Morgan also reduced the valuation discount it applies for the residential business. Broker sentiment is positive.

Credit Suisse boosted Fortescue Metals ((FMG)) to Buy from Hold. The broker re-modelled its case after the sell down of the minority stake in the port and rail infrastructure, assuming the company will attract $3.3 billion for a 35% stake. CS reasons earnings will improve slightly, but the major benefit is the lower gearing ratio, which Credit Suisse foresees reaching 49% by end of FY14. This should enable Fortescue to be re-rated investment grade, thinks the broker. Broker sentiment remains positive.

Our last upgrade was enjoyed by OZ Minerals ((OZL)), which was lifted to Buy from Hold by CIMB, who cited strong cash flow and recent share price underperformance. The broker believes the company should generate strong operating cash flow from Prominent Hill over the remainder of the mine life, despite being a bit sceptical of the plans to extend underground given the volume of ore required to justify it.

Of the downgrades, CIMB dropped its call on CSR ((CSR)) to Hold from Buy. The company put out an update last week and guided for a net profit of $32m-$34m, 30% below the broker's previous estimates, which were pretty much in line with consensus. The damage was done by an underperforming Viridian glass business, which is unsurprisingly being restructured yet again. Weaker than expected numbers for property and aluminium also didn't help. The call was ultimately made on valuation grounds, the broker looking for some more clarity and a better entry price before taking a more positive stance. The Sentiment Indicator in the FNArena Database shows a negative read.

David Jones ((DJS)) was cut to Sell from Hold by Deutsche Bank, the broker pointing out the share price has run better than 26% so far this year and is now looking way too expensive on a 12-month PER of 16.8x, which is a 10% premium to the broader market. Sentiment for the stock is negative ahead of the company's interim profit report this week.

Fletcher Building ((FBU)) was downgraded to Sell from Hold by Citi after a new analyst took the reins. Citi’s new man pointed out that while the share price seems reasonable versus peers, it is still expensive given shares trade at a better than 10% premium to the broker's valuation. Sentiment for the stock is still positive post the downgrade.

Citi also lowered Karoon Gas ((KAR)) to Hold from Buy after adjusting its valuation to account for a changed view of risk in the company's exploration portfolio. Karoon's Browse, Brazil and Peru prospects are now seen as speculative by the broker.

Myer ((MYR)) had a busy week last week, downgraded to Sell from Hold by Citi and to Hold from Buy by both UBS and Credit Suisse. Citi liked the focus on costs and noted there was some sales growth on offer, but the broker is concerned the improvement has come on the back of more discounting and a lower-margin sales mix. A lower margin outlook and the fact the shares have run 42% this year are what tipped the broker to Sell. Both UBS and CS also liked the look of the result and are reasonably optimistic on the outlook, but like Citi, they think shares have run too far too fast. Sentiment has moved into negative territory on the downgrades.

National Australia Bank ((NAB)) was dropped to Hold from Buy by Citi, the broker concerned about the recent rally in the share price. BA-Merrill Lynch downgraded Premier Investments ((PMV)) to Sell from Hold, noting the stock is overvalued at current levels after having significantly outperformed peers since the FY result last September, while offering a yield of only 4.8% versus a peer average of 5.9%.

Lastly, Credit Suisse downgraded Sigma Pharmaceuticals ((SIP)) to Hold from Buy, noting the 1H result fell a bit short and that the rising costs of goods is concerning. Operating cash flow was strong and given the broker sees the company as being in a state of significant internal change, this is definitely a good thing and should help support the share price. But a merely supported share price doesn't warrant an Outperform call, said CS.

There was only one greater than 5% revision to consensus price targets and that was seen by Aquarius Platinum ((AQP)), whose average target was boosted by 18.3% last week. CSR’s average target price was boosted by 4.9%, while Karoon Gas’ average target is 4.4% lower.

There were a number of significant revisions to consensus EPS forecasts, the largest of which was seen by CSR, with forecasts down by 34.6%. Discovery Metals ((DML)) earnings estimates were dropped by 31.9%, with Citi panning the February production report. Macquarie Atlas Roads estimates were down more than 28%, Perseus Mining ((PRU)) is 13% lower and Qantas ((QAN)) is down by 12.3%.

There was only one significant earnings increase of note and that was a 17% increase enjoyed by Silver Lake Resources ((SLR)). CIMB initiated coverage with a Buy call last week, saying that since the merger with Integra and the commissioning of Murchison, the company is now set to produce around 170-190koz of gold in FY13 with a goal of taking output to 400kozpa.

Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables below are based on data analysis from the week past concerning these eight equity market experts. The eight experts in casu are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (formerly RBS) and UBS.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup Securities,Citi,Credit<*br*>Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,UBS&b0=99,151,82,81,89,70,112,96&h0=79,152,119,105,137,107,124,138&s0=64,24,38,46,16,49,38,27″ style=”border:1px solid #000000;” />

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