Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features KMD BRANDS LIMITED, and other companies. For more info SHARE ANALYSIS: KMD

– Downgrades Outweigh Upgrades 14 to 12
– Third Straight Week Downgrades Beat Upgrades
– Resources Stock Feature Prominently On Both Sides
– Numerous Significant Consensus Price Target Cuts

By Andrew Nelson

Corporate quarterly updates continued last week, giving brokers plenty of fodder from which to adjust their forecasts and recommendations. The final tally was 12 upgrades versus 14 downgrades, making for the third straight week that moves to the downside have outweighed moves upside.

This week’s report leads off with Acrux ((ACR)), upgraded to Hold from Sell by Macquarie. The broker noted Eli Lilly appears to be gaining traction with Axiron and rebates have moved to 54% from 68%. Macquarie did not think rebates would move below what established competitors offer, given the lack of differentiation in the market and that Axiron is a newer arrival. Nevertheless, the reduction in rebate suggested to the broker that Lilly is getting pricing traction with insurers. The broker said is does see some risk of earnings growth slowing given the flat trend recently and the cycling of tough comparatives. Still, FY13 earnings forecasts were raised 23.2%. The FNArena Database show sentiment for the stock is positive.

Credit Suisse upgraded Arrium ((ARI)) to Buy from Hold after noting the recent investor conference highlighted weaker domestic steel demand and prices, although the broker saw some offset via cost cutting initiatives. Recycling was also weaker due to lower commodity prices, while the company has also trimmed iron ore production expectations. Forecasts were cut in response, the broker having noted outer year reductions also factor a slower assumed recovery in the domestic manufacturing business given the currently outlook. Despite the bad news, there was still enough upside to allow the broker to upgrade. Sentiment is positive.

Asciano ((AIO)) made its way up to Hold from Sell from Macquarie, the broker having noted that despite the current tough conditions, reduced capex looks to have provided some scope for an increase in the dividend payout over the next two years. The broker also thinks the strong focus on cost cutting should leave the company well placed longer term. CIMB, at Buy said last week the reduction in capex was also its highlight of the quarterly result. The broker said the company is expected to return to positive free cash flow in FY13. Sentiment is positive on two Holds and six Buys.

Atlas Iron ((AGO)) found its way to Buy from Hold on CIMB’s books, the broker having said the initial exploration results at Corunna Downs are significant because there is now a potential to increase the mine life in the northern Pilbara. The thick intersections that are near surface and within trucking distance to port should lead to favorable economics if a resource is proven, said CIMB. That and a weak share price led to the upgrade. Sentiment for the stock remains positive.

JP Morgan upgraded Ausenco ((AAX)) to Buy from Hold after noting the company has guided to an FY net profit of $37m-$42m, which represents an 8%-19% downgrade to consensus numbers. Increased competition, soft gold and copper prices and the strong AUD all shared the blame. FY13-15 net profit forecasts were cut by 19%, 22% and 24% on the news. On the other hand, the broker noted the stock has continued to underperform the market and peers quite significantly, gearing is low and the valuation now looks very compelling. All this added up to an upgrade. Sentiment is positive.

Kathmandu Holdings ((KMD)) was bumped up to Buy from Hold by CIMB, the broker liking what it saw in the recent trading update, noting the company has been able to put together a strong turnaround after some weather-related weakness. While CIMB admitted there will always be seasonal risk in the stock, the broker feels the company nonetheless remains in an excellent position to deliver some strong earnings growth over the next few years. The broker has assumed a 13.5% earnings growth rate out to 2015, which makes the stock look pretty cheap on its FY14 PE of 10.5x. Sentiment is positive.

Orica ((ORI)) also found its way to Buy, upgraded from Hold by UBS following the company’s 15% relative underperformance since March and its discount to current valuation. UBS also removed Kooragang Island from forecasts because of its diminishing return profile and demand requirements. Imports can fill East Coast needs through to 2020, said UBS. Sentiment is very positive on seven Buys and one Hold.

There were three more from Credit Suisse, with Regis Resources ((RRL)) going up to Buy from Sell, Tigers Realm Coal ((TIG)) up to Buy from Hold, while Sims Metal Management ((SGM)) found its way up to Hold from Sell. The reason for the Regis revision is that the new Garden Well resource revision is expected over the next month and while the broker expects to see the oxide grade fall, total ounces should be increased. Things are otherwise running to plan and there’s been a big drop in the share price, hence the double jump. Sentiment remains positive.

CS reported that Tigers Realm has made good progress with its Amaam HCC project in Far East Russia. The pre-feasibility study work was underway and the mining license was in hand. Credit Suisse thought the pre-feasibility study would support the view of strong project economics. The company's interest in the project has increased from 40% to 60% and will rise to 80% following completion of the Amaam bankable feasibility study, which is scheduled for late 2013. The funding position is also looking better after the first tranche of a share placement and there is 43% potential upside to the broker's price target. Sentiment is positive.

While Credit Suisse was still of the opinion, Sims looks expensive compared to mid-term earnings and that recovery expectations appear too optimistic, recent share price weakness was enough to force a move. Still, the broker remains concerned, noting the company still hasn't figured out a direction regarding a new MD, which leaves its rudderless at a time when markets conditions are quite tough. Broker sentiment is positive.

Our last upgrade comes thanks to Citi, who upgraded its call on Western Areas ((WSA)) to Buy from Hold. Quarterly production and costs were in line with the broker, who thinks the company remained well positioned to deliver FY targets. It's a tough market and the company has managed to remain cash flow positive, which to Citi underscored the global competitiveness of the company's underlying assets. Citi also confirmed it is a fan of the company's high grade, low cost operations and the track record of exploration success. On the other hand, nickel prices are horrible. Were prices to start recovering, the broker sees very significant leverage in Western Areas. All Buys and one Hold makes for very positive sentiment.

The first downgrade is for Alacer Gold ((AQG)), which was pruned to sell from Hold by JP Morgan. The broker noted that while March quarter production was affected by weather related interruptions, there are still some areas of concern. Low recoveries persisted at Copler despite the solid result achieved through high grades. There were continued declines in grade at Higginsville and unit costs escalated across all assets. The broker says it is cautious about delivery of the $60m in savings the company plans and the medium-term operational turnaround, noting the profitable Copler is subsidising the Australian assets. Sentiment remains positive post the downgrade.

Next is Amcor ((AMC)), which was dropped to Hold from Buy by Citi. Post a three-day domestic site tour, the broker said it sees a pretty clear and consistent message: Australian manufacturing is not in a great place given a flat industry volume growth expectation, rising energy costs and low labour productivity. On the other hand, the broker is impressed by the company's solid leadership position in the space, the quality of the management team and a strategy that seems focused on value adding innovation, cost savings and capital discipline. Sentiment is positive.

Ausenco ((AAX)) was downgraded to Hold from Buy by Deutsche Bank, the broker viewing the risk/reward as balanced. Deutsche Bank said  Ausenco is a well managed and diversified company but, as confirmed by the profit warning, the near-term outlook for the core minerals & metals business is uncertain. The company has said it will miss prior guidance, citing margin pressure and client hesitation. The broker also said it expects negative investor sentiment to continue to weigh on the stock until medium-term earnings visibility improves. Sentiment for the shares is positive.

JP Morgan lowered Coca Cola Amatil ((CCL)) to Hold from Buy on a combination of a softer then expected Australian beverages market and falling valuation support. FY13-15 EPS forecasts were trimmed by 1.6%, 1.2% and 1.1%, which pulled the price target lower. The broker said it remains positive on the longer term, having noted strong growth prospects in Indonesia, accelerating free cash flow and a normalisation in input costs. Sentiment has shifted to neutral post the downgrade.

Data#3 ((DTL)) was downgraded to Hold from Buy by, the broker saying it sees short-term headwinds for the IT sector. Data#3 is not immune, despite the news it is confirmed as exclusive HP supplier for the whole Queensland government panel for the provision of computer hardware and associated services. DTL was the incumbent so being awarded the larger panel underpins existing earnings and is a strong endorsement, in CIMB's view. However, the broker still had to reduce forecasts for FY13 by 7% and expects a cyclical recovery in the second half of FY14. Sentiment is neutral.

Gindalbie Metals ((GBG)) was the unlucky recipient of two downgrades; JP Morgan cutting to Sell from Hold and UBS going to Hold from Buy. JP Morgan didn’t like the fact the production ramp up at Karara is proceeding slower than planned, with only 283,000 tonnes of magnetite concentrate sales in the March 2013 quarter. What was of more concern was the joint venture partners have had to contribute $160m in additional funds to provide for working capital. Gindalbie also had to borrow $30m from Ansteel to maintain liquidity. With too much financial and operating risk, the broker downgraded. UBS is also concerned about the liquidity position of the Karara JV, at least until nameplate capacity is achieved on the magnetite project. Sentiment on the stock is negative.

UBS downgraded GPT Group ((GPT)) to Sell from Hold, seeing better value elsewhere. The broker says that while yield is offering some share price support, investors are being way too optimistic in pricing in the company hitting its goals sooner and with more upside than likely. Sentiment is negative. The broker also cropped Graincorp ((GNC)) to Hold from Buy now that Archer Daniels Midland has completed its due diligence and plans to go ahead with its $13.20 per share takeover offer. The broker thought this latest offer looks fair and noted that regulatory approvals are about the only potential risk for shareholders. Sentiment for Graincorp is neutral.

There is just one more downgrade left from UBS, with Telstra ((TLS)) dropped to Sell from Hold on valuation grounds. The broker noted the stock was trading at a 25% premium to the $4.00 discounted cash flow valuation, propped up by the yield "bubble". Operating fundamentals were viewed as robust and NBN uncertainty has been removed following the Coalition's assurance, should they win government, that Telstra shareholders will be kept whole. It's just that the broker views Telstra as expensive compared with global peers and finds it difficult to justify a $5.00 price with bottom-up methodologies. Sentiment for Telstra is negative.

BA-Merrill Lynch double-downgraded Super Retail ((SUL)) to Sell from Buy, liking the company, but not the share price. Sentiment is negative. Telecom NZ ((TEL)) is out last mention, lowered to Sell from Hold by Credit Suisse on recent share price strength.

There were a few significant changes to consensus price targets, mostly to the downside. The two biggest revisions were worn by Alacer Gold and Regis Resources, down 12.5% and 9% respectively. On the earnings front, Drillsearch ((DLS)) saw its consensus EPS increased by 353%, Air New Zealand ((AIZ)) up 11.2%.

There were simply too many significant negative revisions to give a mention to each one. Suffice it to say the leaders were Sims, Tap Oil ((TAP)), Horizon Oil ((HZN)) and Alacer, down 68.6%, 55.6%, 31.6%and 22.5% respectively. For more detail please see the table at the bottom of this report.

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=97,153,85,86,91,77,121,91&h0=79,154,114,100,136,101,115,143&s0=66,23,41,47,15,50,38,27″ style=”border:1px solid #000000;” />

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