Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features APA GROUP, and other companies.
For more info SHARE ANALYSIS: APA
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

Quarterly reporting season began in earnest last week and dominated broker focus when it came to the upgrading and downgrading of stocks. With production reports comprising the bulk of the news flow, materials and resources companies wore most of the recommendation changes.

While the number of ratings changes last week was well down on the week prior, the one thing that did change was the bias, which shifted to the downside. All up, there were fifteen downgrades, not nearly offset by eight upgrades.

Credit Suisse upgraded APA Group ((APA)) to Hold from Sell now that the Moomba Adelaide Pipeline System sale process has closed and APA is in possession of an extra $423m. The price was a bit below the broker's expectation, but good enough. A mark to market and a few other changes to the valuation model caused a lift in the target price, which gave CS enough room to upgrade the recommendation. The FNArena Database shows a neutral sentiment for the stock.

Arrium ((ARI)) comes next, lifted to Hold from Sell by BA-Merrill Lynch on the belief most of the possible downside is now in the price. Sure, iron ore prices could drop again, but the broker said there's a large enough discount to valuation to absorb the risk of a drop in short term prices, which means debt levels look pretty secure for now. Sentiment for the stock is positive.

Australian Pharmaceutical Industries ((API)) also made its way to Hold from Sell, with UBS doing the upgrading. The broker liked the look of the 1H report, calling it the first positive sign of operational leverage that it has seen from the company in the past two years. The problem is, the result wasn't really broken down, so UBS really couldn’t make much of it. Improving leverage and better margins saw forecasts lifted, while share price underperformance did the rest. Sentiment is positive.

Boral ((BLD)) was upped to Hold from Sell thanks to CIMB, the broker having cited recent share price weakness. The broker believes Australia's residential construction cycle has likely found a floor and with the US recovery well underway, CIMB favours the company's exposure profile and significant leverage to mid-cycle underlying activity. Sentiment for Boral is positive on four Buys, two Sell and two Holds.

Goodman Group ((GMG)) was upgraded to Buy from Hold by Citi after the broker took a new look at the company’s development book. Development earnings, assets under management and funds management fee income assumptions were lifted, while cap rate assumptions for the Australian assets were also increased. This helped push the price target higher and with 15% upside to the broker's new target, the recommendation was upgraded. Sentiment moved to neutral on the upgrade.

Citi also upgraded Incitec Pivot ((IPL)), but in this case the bump was to Hold from Buy. The broker noted the company is planning to build an ammonium nitrate plant in the US. Citi said the economics stack up, at least for now given historically low gas prices and rising ammonia demand. The problem is the company has not locked-in long term gas supply or sales prices, which adds to earnings volatility and risk. Yet with the share price running some 15% below the market since January, the recommendation was lifted, although Citi noted there are still a number of earnings risks like currency headwinds and domestic AN and fertiliser volumes that could impact short-term performance. Sentiment for the stock is positive.

It was a good week for Woodside ((WPL)), with Macquarie upgrading its call to Hold from Sell, while Citi moved to Buy from Hold. Macquarie was thinking about the chances of capital management after Woodside deferred the James Price Point LNG facility plans and confirmed that expansion at Pluto is taking a back seat. The broker believes an off-market buy-back is the most efficient means of returning cash, as this would drive the greatest valuation and earnings accretion. Citi cited recent share price weakness and the numerous growth options not priced into the stock, long-dated though they are. Sentiment is positive.

The downgrades are led off by Ausdrill ((ASL)), with Citi cutting its call to Hold from Buy given the view the company is struggling at the moment, carrying a heavy load of high AUD weight and an increase in bad debts following the recent collapse of Navigator Resources. FY13 reported earnings were cut by 21% and FY14 EPS was cut by 20%, although the broker does expect some margin recovery coming though in FY15 on the back of current cost cutting work. And that doesn't even mention the weakness in the gold price, which Citi thinks will continue to weigh heavily on sentiment. The stock may trade at attractive multiples, but given the volatility in the gold sector, Citi's confidence in its FY14 numbers is not strong.  Sentiment remains positive.

Calibre Group ((CGH)) was lowered to Hold from Buy by UBS, the broker also lowering FY13 earnings estimates by around 56% because of the continued deferral of capital and maintenance spending in the resources sector. The industry challenges are not new, but they do present a major difficulty for Calibre. The price target was slashed to 55c from $2.00. Sentiment shifts to neutral on the downgrade.

Challenger Financial ((CGF)) was downgraded to Hold from Buy by CIMB who suspected the stock is approaching full value. Sentiment for the stock is positive and even CIMB continues to like the look of the way things are going. Envestra ((ENV)) is also down to Hold from Buy, but at the hands of UBS in this instance. The broker took a closer look at Envestra's recent capital raising and believes the raising was all to do with improving the S&P credit metrics and BBB rating feasibility. The broker explained S&P does not include future ongoing dividend reinvestment plans (DRP) in modelling the rating and UBS thinks this leads to a material variance in credit metrics. What this translates to is that Envestra has effectively brought forward future DRP to firm up its credit rating. Sentiment for the stock is negative.

James Hardie ((JHX)) was also cut to Hold from Buy, with Deutsche Bank doing the work on news the New Zealand Ministry of Education has commenced litigation against the company. James Hardie and a few other parties were named in relation to defects in 300 schools. Based on numbers published by NZ Education, the total repair cost is estimated at NZ$1.5bn. If James Hardie's fibre cement siding product is found defective, the liability could be up to $2.80/share in, the broker's view. Still, the case will likely take years to be resolved. Despite the intangible nature, the broker thinks management will now not pay the US35c final dividend mentioned at the third quarter result. Sentiment is negative.

The next two are both gold miners and they were downgraded to Hold from Buy by Citi. Kingsgate Consolidated ((KCN)) and Newcrest Mining ((NCM)) both found their recommendations cut after the broker lowered its gold price forecasts. Kingsgate moves deeper into negative sentiment territory, while sentiment for Newcrest remains strong. Both Deutsche Bank and JP Morgan upgraded to Buy last week, the latter saying Newcrest is well placed to weather short-term fluctuations in gold prices, given more than 60% of production comes off long life and relatively low-cost assets.

JP Morgan dropped Norfolk Group ((NKF)) to Hold from Buy on news the company’s board had recommended a lower cash offer of 48c from RCR Tomlinson ((RCR)) under a Scheme of Arrangement. The revised offer was substantially lower than the 62-68c that was implied through Norfolk's estimation of recoverable working capital only three weeks ago. The broker thinks it’s a done deal given no alternative offer is emerging. Sentiment moves to neutral on the change.

The broker also cut Senex Energy ((SXY)) to Sell from Hold with shares trading some 7% below the broker’s target. The stock has been on a strong run, having benefited from positive sector news about tightness in the east coast gas market from 2014 and now it’s time to take a breather. JP Morgan still believes the company has strong potential to grow its base oil business, but the timeframe is weighted beyond FY15. On a relative basis the broker’s preference is for Buru Energy ((BRU)), AWE ((AWE)) or Aurora Oil and Gas ((AUT)) for upside potential. Sentiment is now neutral.

There are three more miners to come from Citi, with Regis Resources ((RRL)) and Whitehaven Coal ((WCH)) going to Hold from Buy, while PanAust ((PNA)) is cut to Sell from Hold. All three are victims of the commodity price downgrades pushed through by the broker, the same cuts that claimed Kingsgate and Newcrest as mentioned above. Sentiment for Regis, Whitehaven and PanAust remains positive.

Credit Suisse downgraded Tabcorp Holdings ((TAH)) to Hold from Buy on recent share price outperformance. Stockland ((SGP)) went to Sell from Hold on BA-Merrill Lynch’s books given the fact the share price has run past the broker’s target, while the prospect of a new CEO also increases uncertainty. Our last downgrade was on Wesfarmers ((WES)), CIMB acknowledging the March quarter update was pretty good, but saying it sees a number of stocks with better leverage to an upswing in retail conditions. Sentiment for these stocks is neutral, negative and negative respectively.

There were only a few dramatic changes to consensus price targets recorded over the week. Ausdrill’s price was down 21.4% and Whitehaven Coal was 6% lower. Everything else was moves in the 2% or less range. There were a few more significant consensus earnings revisions. Fortescue’s ((FMG)) forecasts were up 17.1%, Bank of Queensland was 13.3% higher, Mount Gibson ((MGX)) added 7.8% and Aus Pharma picked up 5.1%. On the downside, Beadell Resources ((BDR)) lost 22.4%, Ausdrill 11.4%, both Boral and Challenger were down better than 10%, while consensus earnings forecasts for Rio Tinto ((RIO)) were trimmed by 7.5%.

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. 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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