Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Andrew Nelson

Brokers were a bit busier with upgrades and downgrades last week, seemingly spurred on by the impending break and determined to make a difference before we all headed off for Easter. The good news for the market is that upgrades again outweighed downgrades. The score by Thursday was twelve up and eight down.

We’ll start off with Billabong ((BBG)), which was upgraded to Hold from Sell by UBS. The broker took the chance to re-evaluate the stock now that final bids for the company are expected this week. UBS does not expect the $1.10 bid to become a binding offer because of the 10% earnings downgrade and $534m in asset impairments taken since the initial bid was made. A lower offer is expected, but the worst case scenario could be the withdrawal of both bids. The upgrade is predicated by the assumption of a 65% probability that a bid will get up, but probably at a lower price. Broker sentiment for the stock in the FNArena Database reads neutral.

BlueScope ((BSL)) was lifted to Buy from Neutral by JP Morgan, who noted the company is now leaner and more focused and thus ready for a recommendation upgrade. The broker cites the fact that Coated & Industrial Products is now close to break even after two years of making losses. Global Building Solutions also looks to be on a strong growth path. Despite a strong rally from the five-year low the shares hit last year, JP Morgan believes there's more upside available based on the aforementioned turnaround. Sentiment is positive for the stock.

Boart Longyear ((BLY)) was upgraded to Hold from Sell by JP Morgan, the broker believing the current share price more than covers current downside. At the same time, JP Morgan also sees little chance its price target will be challenged any time soon given the complete lack of catalysts. Sentiment for the stock is negative. The broker also lifted Fortescue Metals ((FMG)) to Buy from Hold, citing the sharp fall in the share price and the belief selling has been overdone. Despite the headwinds of iron ore price weakness, JP Morgan sees a good chance for some upside once the market returns to focus on the compelling valuation support. Sentiment is positive.

There was one last upgrade from JP Morgan. Tabcorp ((TAH)) was bumped up to Buy from Hold, the broker believing the company is showing some promise after a period of underperformance. The improved regulatory outlook, defensive revenue growth and possible future restriction on wagering advertising all bode well, according to the broker. Sentiment is positive.

Myer ((MYR)) also saw an upgrade to Buy from Hold, with Deutsche Bank lifting its call on the belief the market still has a steady appetite for discretionary retailer stocks. In this case, Myer represents the best opportunity given a reasonable valuation and strong free cash flow. The company is also delivering like-for-like sales growth and is addressing structural issues, said Deutsche. Despite the upgrade, sentiment for the stock is negative.

Analysts at Credit Suisse made two moves higher, lifting both Lend Lease ((LLC)) and Premier Investments ((PMV)) to Buy from Hold over the course of last week. For Lend Lease, Credit Suisse thinks investor concerns such as earnings uncertainty and weak operating cash flow are overstated, noting the stock's price/earnings relative to the ASX has fallen 31% below the 10-year average. For Premier, the first half result not only pipped the broker’s forecasts and consensus, but also told the broker the outlook is finally starting to improve. CS sees growing upside in the group's domestic mature brands, while international growth is also looking promising, earnings are improving and stronger cash flow growth is coming. The broker says the stock also offers a good opportunity for upside from business improvement and some international growth protection from the current domestic economic cycle.

Analysts at Citi disagree, downgrading their recommendation on Premier from Hold to Sell. The broker notes operating costs are building and the performances from various brands remain mixed, with Smiggle and Jay Jays continuing to backtrack. Citi also expects to see limited earnings growth in the second half and through FY14, while the valuation is starting to look stretched. Sentiment for the stock is neutral.

Our last four upgrades are all to Buy from Hold and all come from Macquarie. Qantas ((QAN)) is lifted on an improving capacity outlook, the broker believing earnings margins are moving back to a more normal rate and has more confidence in the industry outlook. Virgin Australia is also upgraded, the broker suspecting Virgin is increasingly challenging Qantas' position in the business class and regional markets. Sentiment is positive for both.

The broker expects the positive earnings momentum from Qube Logistics ((QUB)) will continue into the second half, so the recent pull back in the share price is a nice an opportunity to buy.  Sentiment is positive.

National Australia Bank ((NAB)) had a busier week. Upgraded to Buy by Macquarie, but downgraded to Hold from Sell by CIMB. Macquarie notes institutional and corporate borrowing appears to be improving in the mining states, with signs of improving demand for equipment finance. Macquarie believes access to credit may become easier in the second half of the year, which means higher earnings. Meanwhile, CIMB was taking a look at bank sector net interest margins for FY13-15 and found risks remain skewed to the downside. While NAB’s dividend yield to the Australian government bond yield is supportive, the broker thinks the more fundamental valuations, like NAB’s, look stretched. Sentiment is positive.

JP Morgan downgraded Arrium ((ARI)) to Hold from Buy noting that despite the emergence of mining and mining consumables as key earnings drivers, the stock is still subject to the vagaries of steel and iron ore pricing and the outlook here is far from steady. Balance sheet gearing also remains an impediment to a more positive stance. Sentiment for the stock remains positive despite the downgrade.

Bank of Queensland ((BOQ)) is down to hold from Buy on the books of BA-Merrill Lynch, the broker noting the stock is trading in line with its long-term price/earnings ratio and dividend yield and on par with regional peers. Deutsche Bank dropped DuluxGroup ((DLX)) to Sell from Hold saying that while the company may be strong and well managed, the market is still overestimating the leverage to improved housing activity and thus not worth the current premium. Sentiment remains positive for both stocks.

Orton Group ((ORL)) was cut to Hold from Buy by Credit Suisse. The half year results were below Credit Suisse's forecasts and the outlook appears more challenging than previously expected. The earnings outlook is affected mainly by the loss of the Ralph Lauren licence. Credit Suisse estimates an $18m negative earnings impact in FY14. Sentiment moves to neutral on the downgrade.

Our last two downgrades are both to Hold from Buy and both come from CIMB. The broker thinks Redflow ((RFX)) has done the hard yards on lowering operating costs, although the application of a 60% discount because of delays in securing a strategic partner sees the rating moved lower. Any success with partner negotiations is expected to prompt a review. Sentiment is neutral.

The broker also took a closer look at Whitehaven Coal ((WHC)) and came to the conclusion the issues at Narrabri may end up lasting longer than first anticipated. There are a number of other important hurdles that soon need to be cleared as well such as construction at Maules Creek, which hasn't even started despite off-take commitments already building. The broker now sees little in the way of clear information, while first coal from Maules Creek has been pushed back to 2015. Broker sentiment for the stock remains positive.

There were a handful of significant changes to consensus price targets in the FNArena Database. Kathmandu Holdings’ ((KMD)) price target is up almost 15% after a well received first half report. David Jones’ ((DJS)) target is 13.5% higher and Spark Infrastructure’s ((SKI)) consensus price is up 5.69%. There was only one big mover to the downside, that being Whitehaven, down 8.12%.

There were also a few big changes to consensus earnings forecasts. BlueScope’s numbers were up 129%, helped by the upgrade form JP Morgan. Dulux also enjoyed a better than 5% lift. On the downside, Arrium’s average earnings are down 53%, Nufarm ((NUF))’s numbers are 20.8% lower, Sydney Airports ((SYD)) 13.4% lower and Imdex ((IMD)) was down 6.1%.

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
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