Weekly Recommendation, Target Price, Earnings Forecast Changes

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            [7] => IOF
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            [9] => LEI
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This story features ADHERIS HEALTH LIMITED, and other companies.
For more info SHARE ANALYSIS: AHE

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 July 1 to Friday July 05

Total Upgrades: 18
Total Downgrades: 10

Net Ratings Breakdown: Buy 41.39%; Hold 43.07%; Sell 15.54%

Broker recommendation changes picked up pace last week, with 28 revisions being made. The momentum remained positive, upgrades outweighing downgrades by a margin of eighteen to ten.

The upgrade activity was spread across sectors, with the regular litany of miners and related companies increasingly diluted by infrastructure, industrials and even consumer stocks. One of the big drivers on the upgrade side of the ledger was again the falling Aussie. This positive theme is increasingly driving a significant level of upgrade/downgrade activity that is unlikely to slow soon.

While positive revisions may be spreading across sectors, downgrades are still pretty much the domain of mining and mining services stocks. Of last week’s ten recommendation downgrades, three were garnered by Boart Longyear on a disappointing guidance downgrade, while Regis Recourses was slapped with two on the back of the falling gold price.

Upgrades

ARB Corp ((ARP)) upgraded to Neutral from Sell by Citi. B/H/S: 1/2/0

The broker noted that since February, the FY14 PE has dropped to 17x from 20x and the share price has come off by around 8%. This was enough, in conjunction with revised AUD assumptions, to see Citi lift its recommendation, with about 1% added to net profit forecasts going forward.

Automotive Holdings ((AHE)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 5/1/0

The broker reviewed Auto Holdings for year end and expects a solid result for FY13. Strength in new vehicle sales should also provide for a positive FY14. AHE retains the balance sheet capacity for acquisitions and/or expansions, the broker noted. That and the recent share price fall added up to the upgrade.

Caltex ((CTX)) upgraded to Buy from Neutral by Macquarie and to Neutral from Underperform by UBS. B/H/S: 1/4/2

UBS has adjusted down its long-term (post 2015) Brent crude price forecast to US$92/bbl from US$95/bbl. The Australian dollar exchange rate forecast was also adjusted to US92c until the end of 2014. The broker’s outlook for refining in the near term is positive and Caltex is expected to benefit from a lower Australian dollar, with the US dollar denominated refiner margin making up for some of the first half refining losses. Marketing earnings are also expected to grow 3-4% per annum over the next two years. The upgrade was also aided by recent share price weakness.

Caltex issued profit guidance for the first half, with management expecting after-tax profit of $160-175m against the $197m delivered in the prior corresponding half. Macquarie saw the downgrade more a function of operational interruptions which are one-offs, as well as a falling currency. That aside, the broker said Caltex was previously priced at a premium and therefore the market was likely to take a harsh view on any operational misses. The recommendation was none the less upgraded on valuation grounds.

Crown ((CWN)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 5/3/0

Credit Suisse regards the prospect of Crown Sydney as value neutral. The rating was raised to Neutral from Underperform because of the recent stock price weakness. The broker calculates a Crown Sydney earnings/investment yield of 13.2% and after-tax cash yield of 5.3%, acknowledging that to achieve these rates aggressive assumptions need to be made. These include Crown Sydney capturing $1bn in player loss contributing to a tripling of the market in 10 years and selling $300m worth in apartments to bring down capital costs to $1.26bn from $1.46bn. The other assumption is that Crown does not cannibalise VIP revenue from its other casinos.

Downer EDI ((DOW)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 8/0/0

Macquarie has refreshed its outlook on Downer EDI, noting while the outlook is still challenging, much of this is reflected in the current share price. Guidance for FY14 is expected to be flat and assuming good cash flow this should be well received, in Macquarie's view. Potential catalysts include awards on Wheatstone and Ichthys and a go-ahead on Roy Hill. Macquarie emphasised that Downer has a relatively high level of recurring earnings and has a well regarded electrical and instrumentation business, which should stand it in good stead.

DUET Group ((DUE)) upgraded to Neutral from Underperform by Macquarie and to Neutral from Underweight by JP Morgan and to Neutral from Underperform by CIMB. B/H/S: 1/7/0

Macquarie noted DUET had settled its regulatory dispute and while it does not impact much on the valuation, it does improve the quality of dividends, the broker suggested. DUE remains the lowest quality of the regulated utilities, the broker said, given weak dividend coverage, reliance on a DRP and weak 5-year forecast growth. However, the share price had fallen enough to see a 9.3% internal rate of return on offer. This was enough to see the broker upgrade, although a further shift to Outperform would require another yield rally.

While the final tariff profile is yet to be determined by the regulator, JP Morgan noted any allocation to FY14/15 would ease the strain on Multinet's credit metrics. This view saw the recommendation upgraded and the price target lifted to $2.10 from $2.05.

CIMB thought it was a big regulatory win and sees Multinet’s allowed revenue lift by about $45m over the 2013-2017 period. The extra revenue saw the broker’s earnings lift by a percent or so and a few cents added to the price target. Given the stock had come off by around 17% since mid-May, the broker also thought the time was also right to lift its recommendation.

Energy Resources of Australia ((ERA)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 3/1/0

BA-Merrill Lynch upgraded the stock, having said downside risks are significantly reduced. At current price levels risks were seen to be skewed to the upside, with the potential for positive drilling results in the second half, higher pricing, approvals for the underground mine and lease extension. ERA is also expected to proceed with the R3D project and seek to extend the lease beyond 2021, which Merrils said would add $1.03 per share to net present value.

Investa Office Fund ((IOF)) upgraded to Buy from Neutral by UBS. B/H/S: 5/1/1

UBS noted the stock has been the worst performing AREIT over the past quarter. Acknowledging a difficult leasing environment, UBS said the recent track record of leasing success with minimal downtime, as well as acquisitions, would provide comfortable growth of 3%.

Kingsgate Consolidated ((KCN)) upgraded to Buy from Neutral by Citi. B/H/S: 1/1/1

Citi said the company is surely not alone in feeling the pressure of a depressed gold price. A revised mine plan at Challenger and an impairment accounting for most of its value, along with a investigations into a new hedging program are testament to this. The Thai IPO probably won’t get up either in the current environment and it will be tough to find funds for Neuva Esperanza and Bowdens. This all added up to a significantly lower price target and forecasts. It seemed like a pretty negative preamble for an upgrade, but the valuation was more than Citi could pass up.

Leighton Holdings ((LEI)) upgraded to Neutral from Sell by Citi. B/H/S: 0/5/3

The broker noted the company has sold down its Nextgen, Metronode and Infloplex telco assets by 70%, with the broker guessing $628m was paid by the Ontario Teachers’ Plan. Cash proceeds should total around $500m, which in turn should pull down gearing by 10%. Otherwise, the deal was expected to be 3.8% EPS dilutive. There weren’t any changes to forecasts to speak of given the broker had already been pricing in the deal. A lower price target was due to decreasing peer multiples. The fact that Hotchief increased its stake by 1.2% to 54.96% and said it is looking for more should also help provide some near-term share price support, said Citi. With the share price off some 12% since the end of May and the Hotchief news supportive, Citi saw enough to upgrade.

Navitas ((NVT)) upgraded to Neutral from Sell by Citi. B/H/S: 1/4/2

Second term Northern Hemisphere enrolments were a bit softer than hoped for, with Canada and the UK in line and the US falling short. The broker trimmed its FY14 and beyond earnings a little, but that was the extent of it. Citi continued to feel confident, noting FY14 earnings are now very visible, with FY14 not just expected to be a strong year for Navitas in the US, but for the entire International Student Education market. The very low level of earnings risk saw the valuation lifted, pushing up the price target and giving Citi the confidence to lift its recommendation.

New Hope Corp ((NHC)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/2/0

Near-term thermal coal prices may well be heading downhill, but this is currently being more than offset by the faltering AUD. So much so that FY13-15 EPS was lifted by 6%, 32% and 21%. There was no change to the price target. The broker noted the company enjoys a significantly lower cash cost than most at $70/t, while also sitting on a $1.3bn net cash balance. The latter ensures the company will continue to generate positive cash flow and earnings throughout the cycle. With shares off 6% over the last month, Credit Suisse saw the room to upgrade.

Newcrest Mining ((NCM)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 5/1/2

The broker factored in new gold and FX assumptions and this lead to lower earnings and a lower price target. Yet despite the cuts, Credit Suisse noted the share price had come off more than enough to offset the revisions. It was the fall in the share price that saw the recommendation upgraded.

Resolute Mining ((RSG)) upgraded to Buy from Hold by Citi. B/H/S: 1/0/0

Citi said the lower gold price has undoubtedly put some pressure on expansion plans at Syama in Mali, with a review of the US$266m expansion pushed back by up to 18 months. That didn’t stop Citi from upgrading, the broker pointing out a compelling valuation.

Tap Oil ((TAP)) upgraded to Buy from Neutral by UBS. B/H/S: 2/1/0

UBS adjusted long-term Brent crude price (post 2015) forecast to US$92/bbl from US$95/bbl as well as the Australian dollar rate to US92c to the end of 2014 (from US$1.04). The broker said the recently spudded Starfish well in Ghana has a material prospective resource of 431 mmbbls. While UBS considered this to be a high risk target, success could be worth up to $2.75/bbl net to Tap. The upgrade was partly for potential exploration upside.

Downgrades

ALS ((ALQ)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 1/3/4

The broker noted the rapid downturn in gold prices is heaping extra risks on service sector earnings and valuation. After conducting a sector review, ALS was one of two stocks that were downgraded.

Boart Longyear ((BLY)) downgraded to Neutral from Outperform by CIMB, to Sell from Neutral by Citi and to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 2/3/2

CIMB noted a new guidance was issued and it was for an FY result below the bottom of the current consensus range. The last downgrade was six weeks ago at the AGM, leaving the broker to wonder whether things have really become that much worse in a month and a half. Earnings and dividend forecasts were cut to bring them in line, the price target was slashed and the recommendation pulled back. The broker admitted it may nave been a bit late to the party, but it said it sees a real risk of a capital raising if things get any worse. The broker also saw almost no chance for upside in the near term, predicting conditions will remain just as tough well into FY14.

Two years of losses and no dividend is what Citi pencilled in for FY13-14 post the update. There were no numbers with the guidance downgrade, just “below the bottom end of consensus”, and this had Citi bemoaning the continued lack of earnings visibility. The company has managed to restructure its bank debt, so at least there is increased covenant headroom, but Citi said that with demand still deteriorating, balance sheet risk remains high. FY13-15 earnings forecasts were cut between 30%-37% to better reflect the weaker demand outlook. And with demand still worsening, balance sheet risk elevated, and little in the way of near-term catalysts, Citi said it was time to downgrade.

Merrills also downgraded on the reduced FY13 guidance, citing deteriorating end markets. The relaxing of bank covenants should provide some relief in the short term, but BA-Merrill Lynch said it expects earnings to remain under pressure more than the market is envisaging.

Brambles ((BXB)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/3/1

The broker noted Recall will be spun off to become a listed entity by December 2013. There wasn’t much in the way of numbers, but the broker guessed it could be worth up to $1.26 per share. Credit Suisse said sees this as being a good move, noting it will provide respective management teams with much less distraction, meaning more focus on capital and core activities. The price target was increased on the news, but the recommendation was downgraded after a strong run in the share price. The broker still thought Brambles was highest quality stock in the Australian transport space, it’s just a little too expensive.

Emeco Holdings ((EHL)) downgraded to Downgrade to Neutral from Buy by BA-Merrill Lynch. B/H/S: 1/4/0

The broker noted the rapid downturn in gold prices is heaping extra risks on service sector earnings and valuation. After conducting a sector review, EHL was one of two stocks that were downgraded.

Macquarie Atlas Roads ((MQA)) downgraded to Underperform from Neutral by CIMB. B/H/S: 3/0/3

The broker was in a bit of a quandary over Macquarie Atlas, on one hand it does not like this stock given it offers the lowest yield in the space and the expectation of ongoing traffic weakness from the group’s core asset, the APRR in France. On the other hand, the falling AUD has provided a significant valuation tailwind over the past few months, with the stock outperforming the S&P/ASX 200 by 28% since the beginning of April. The former has trumped the latter seeing the recommendation cut.

Regis Resources ((RRL)) downgraded to Sell from Neutral by Citi and to Hold from Buy by Deutsche Bank. B/H/S: 3/1/1

Citi analysts like Regis Resources, a lot. It's just they cannot see value at present share price level. Hence the decision was made to downgrade to Sell. They seemed disappointed by the recent production performance at Garden Well. The operational disappointment filtered through to a cut in the price target, EPS and DPS estimates.

Deutsche Bank noted June production was affected by wet weather, resulting in poor ore availability and lower grades. The Garden Well resource/reserve update delivered a 30% increase to resource ounces, but the reserve grade was reduced to 1.27g/t. Regis has responded to the gold price fall with a reduced dividend of 15c against prior expectations of 20c. On Deutsche Bank's estimates, the company can maintain forward year guidance of a 60% of earnings pay-out ratio. Regis was said to otherwise stand out among peers for its cash generation.

Whitehaven Coal ((WHC)) downgraded to Underperform from Neutral by CIMB. B/H/S: 6/1/1

Whitehaven has received final approval for Maules Creek construction. The broker said there is value in the stock on longer-term assumptions for coal prices, but near-term risks around funding and the coal outlook were expected to place further downward pressure on the share price. As a result of this, the rating was downgraded and the price target reduced to $1.80 from $2.30.

Significant consensus target price and earnings forecast changes tabled below.

Total Recommendations	Recommendation Changes
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