Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features AURIZON HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: AZJ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

– Downgrades outpace upgrades for sixth straight week
– AUD drop not felt yet
– Miners and servicers still drawing activity
– Retailers, industrials and property also featuring
 

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday May 13 to Friday May 18

Total Upgrades: 7
Total Downgrades: 14

Net Ratings Breakdown: Buy 40.19%; Hold 43.13%; Sell 11.68%

Downgrades have outnumbered upgrades for six straight weeks now. The start of this trend coincided with the beginning of quarterly reporting season and has continued on as analysts continue to adjust forecasts for the difficult conditions generally reported.

Over the first few weeks of this downgrade run the action was mostly centred on miners and mining-related stocks, the brokers using production and earnings reports as a trigger to move forecasts and recommendations lower on the still high AUD and still weak commodity prices. The past few weeks have seen discretionary retailers, industrials, property and still a few more miners and mining services stocks suffering.

Upgrades

Asciano Group ((AIO)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 7/1/0

The broker is starting to think the company is going to be able to book some market share gains over the next year. BA-Merrill Lynch noted Aurizon ((AZJ)) is also set to review its unprofitable Intermodal business in FY14, which could even spell more market share gains for Asciano. The broker thinks the stock offers an attractive valuation case and while the market is inarguably unfavourable, the downside is already in the price. Forecasts were lifted a little on planned cost savings, which saw the recommendation upgraded.

AWE ((AWE)) upgraded to Buy from Neutral by BA-Merrill Lynch and to Buy from Neutral by UBS. B/H/S: 5/2/0

BA-Merrill Lynch noted AWE has reported an increase in the reserves at Ande Ande Lumut to 101mmbbl. The 33% increase improves the economics and increases the chances of AWE completing a sell-down of the asset by mid-year, said the broker. The broker also suggested a sell-down will be a key catalyst for the stock. The price target was raised to $1.64 from $1.51.

UBS also noted the increase at Ande Ande Lumut and said the company expects to sell oil from the field at or around the Brent crude price, which was better than UBS had been expecting. The broker said it continued to see a number of challenges ahead for the development, but the reserve increase was a definite positive and should help the company achieve a value above the original acquisition price. Recent share price weakness was also cited as a reason for the upgrade.

CFS Retail Property Trust ((CFX)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/4/2

The broker noted CFS Retail' s portfolio boasts 42% exposure to "super regional" malls and that’s good. The problem for Credit Suisse is that the remainder of the portfolio is less compelling. Still, rolling through the asset-weighted cap rate compression has benefited the stock's valuation by 48 basis points. Hence the target price was raised to $2.36 from $2.08 and the rating was upgraded.

Myer Holdings ((MYR)) upgraded to Outperform from Neutral by Credit Suisse and downgraded to Neutral from Outperform by CIMB. B/H/S: 2/4/2

Third quarter sales were better than Credit Suisse expected. Warm autumn weather did not have the impact that had been feared and there was relatively stronger sale growth in cosmetics and clothing. Myer indicated there was no price inflation in the quarter and there appeared to be no company-specific inventory issues. Adjustments were made to the broker's FY14 estimates because of the timing of refurbishments, which has resulted in pushing out some earnings to FY15. Nevertheless, the stock is expected to benefit from improving confidence after the federal budget.

CIMB has moderated its viewpoint, seeing a risk that full year expectations will not be met. The company believes the industry is slightly overstocked, specifically in heavy winter apparel. Myer has planned an up-weighted stock take clearance to counteract this. Myer still remains one of the broker's preferred cyclical exposures and a more positive stance is likely when confidence in the trading environment improves.

Westfield ((WDC)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 3/3/1

JP Morgan's view on Westfield has changed as capital management is now seen favouring investors over the next 12 months. A further $2bn at least is expected to be returned. The weaker Australian dollar will also help the valuation and earnings. The broker also thinks the stock is the cheapest among the ASX 20 in terms of global comparatives, its high impact developments are more prospective than ever and the company is benefiting from the interest rate environment.

Worley Parsons ((WOR)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 4/3/1

The broker reported management has cut the FY13 net profit guidance to $320m-$340m, the mid-point representing a 4.5% downgrade. Weaker than expected activity in Western Australia and Canada were blamed for the softness. Deutsche Bank's FY13-14 EPS forecasts were lowered by 9% and 8%, which pulled the price target lower. Given the recent trend of project deferrals, the broker thinks risks are increasing and lower margins, at least over the short term, are more than likely. With the stock now in line with the broker's target and in the same multiple neighbourhood as peers, a Hold call was deemed more appropriate.

Upgrades

Adelaide Brighton ((ABC)) downgraded to Neutral from Buy by Citi. B/H/S: 4/2/2

The company has said it expects 1H net profit to come in below last year's 1H. The broker noted lower demand (especially in Victoria), the carbon tax and and earlier than expected planned maintenance shutdown were to blame. With the downgrade taking a chunk out of the broker's total return expectations, Citi thought it was time to downgrade the recommendation. While short to mid-term headwinds abound, the company is expected to remain a premium pure-play on Australian construction.

Aristocrat Leisure ((ALL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/2/3

Credit Suisse said it had downgraded the recommendation on Aristocrat because of recent share price appreciation. The broker said it expects earnings should fall by about 30% in the first half compared with the prior corresponding half (results reported on May 29). Major game releases were not scheduled in Japan in the first half whereas key release dates occurred in the first half of FY12. A weaker yen has also offset a weaker Australian/US dollar translation rate, noted Credit Suisse.

Cardno ((CDD)) downgraded to Neutral from Buy by UBS. B/H/S: 3/2/0

The company said it expects an FY net profit of $73-$77m, with a final dividend of 18c. The broker noted that delays to both private and government infrastructure spending and quickly tailing off in work from the US Gulf of Mexico have impacted margins. FY13-14 net profit forecasts were cut by 8% and 11% on the falling margins and a weakening outlook for the non-oil and gas sectors. The recommendation was also downgraded, but the broker said it continues to see value for investors patient enough to wait for it.

Dexus ((DXS)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/3/2

Credit Suisse reviewed the office sector and rolled forward net asset valuations. Subsequently, that rating for Dexus has been downgraded despite the target price lifting to $1.19 from $1.08. The broker said it retains a preference for premium portfolios amid what are challenging operating conditions.

Echo Entertainment Group ((EGP)) downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 2/4/2

BA-Merrill Lynch finds strategic value in Echo Entertainment seems to have been materially reduced with Crown ((CWN)) selling its 10% stake. The prospect of Crown getting a green light on a second VIP casino from 2019 onwards and some uncertainty on the Queensland re-development encouraged the broker to downgrade its recommendation. Risks to forecast have also increased and BA-Merrill Lynch believes Echo should now trade at a discount to domestic peers.

Fantastic Holdings ((FAN)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/1/2

The latest trading update has seen the company cut its FY net profit guidance to $13.5-$15.5m on higher costs and weak sales from March 2013 onwards. The broker noted this implies a downgrade to consensus of around 36%-44% for FY13. Gross margin compression is also likely, said JP Morgan. The news spooked the broker enough to see it downgrade not only its forecasts, but also its recommendation given the distinct lack of valuation support from the new numbers. The broker continues to see plenty of scope for further improvement, but execution risks remain.

Fleetwood Corporation ((FWD)) downgraded to Sell from Neutral by UBS. B/H/S: 1/1/3

Fleetwood has become the latest resources services company to provide weaker guidance for FY13. Fleetwood expects the second half will be marginally below the first half earnings. UBS has reduced earnings estimates by 57% for FY13, by 11% for FY14 and by 36% for FY15. Besides the weakness in the resources sector, UBS is also concerned about the degree of structural weakness in Fleetwood's operations. The rating has been downgraded and the price target was lowered to $4.55 from $9.00.

Investa Office Fund ((IOF)) downgraded to Underperform from Neutral by Credit Suisse.B/H/S: 2/3/2

The broker reviewed the office sector and net asset valuations and decided to downgrade Investa despite having raised its target price to $3.37 from $3.10. Credit Suisse said it retains a preference for premium portfolios in the challenging market conditions.

James Hardie Industries ((JHX)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/4/4

The FY13 results underwhelmed JP Morgan. Earnings forecasts were lowered, as the broker believes that operating challenges and elevated trading multiples will take their toll at some point. The broker also lowered its recommendation, albeit with some trepidation given the last time this was done it was a "painful" experience. The uncertainty is caused by the falling Australian dollar and recovering US housing market. The challenges outweigh the positives at this juncture, said JP Morgan.

Pacific Brands ((PBG)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/3/2

Credit Suisse noted difficult winter trading, a negative outlook for work wear and adverse currency movements are expected to outweigh company-specific improvements under the new CEO. The broker said it believes there is the likelihood of a more material fall in the Australian dollar. Hedging will provide a buffer for FY14, but earnings in FY15 are expected to be adversely affected under a scenario of a 10% or greater decline in the Australian dollar versus the US dollar. Geographical expansion is a logical strategy, but Credit Suisse does not incorporate any of that strategy into valuations.

Programmed Maintenance Services ((PRG)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 4/3/0

Over the past month or so most of the company's peers in the contractor space have reported deteriorating market conditions and earnings. On average, shares prices are down around 30% in the space. Thus while the broker is expecting a decent result and the stock looks to be well priced, the recommendation was downgraded, the broker concerned about the outlook and market expectations given recent share price strength.

QBE Insurance Group ((QBE)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/7/0

QBE's share price is up 40% year to date and up over 50% from its low six months ago. While there are significant earnings upside to a falling Australian dollar and rising US interest rates Credit Suisse said it believes this is already reflected in the share price. The rating saw the rating downgraded, although no earnings changes were made, as the broker is waiting for further clarity on the debt. QBE otherwise remains the broker's preferred pick in the sector.

REA Group ((REA)) downgraded to Neutral from Buy by BA-Merrill Lynch.B/H/S: 0/7/0

REA is trading at a FY14 estimated price earnings ratio of 30 times, which is a 30% premium to its online classified peers. The broker said that the growth outlook justifies a substantial premium, but at current levels and in the current environment, the stock is fully valued. Merrills upgraded FY13 earnings estimates by 2% and FY14-15 by 5-7%, but this was to account for the fact that more advertisers are shifting to higher-value listings.

Significant consensus target price and earnings forecast changes tabled below.

Total Recommendations	Recommendation Changes
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