Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

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 22 to Friday July 27

Total Upgrades: 6

Total Downgrades: 42

Net Ratings Breakdown: Buy 39.38%; Hold 43.65%; Sell 16.97%

The run of downgrades that started the week before last turned into a veritable flood last week. Some forty two stocks were downgraded, with only six positive revisions being recorded. The few upgrades that occurred were in favour of property plays, Telstra ((TLS)) and Westpac ((WBC)) and that was it.

Last week saw a number of fourth quarter and half year results from the materials space and analysts were not only met with below expectation reports, but also the need to rebase estimates in the face of still falling prices for most commodities. Thus, the long list of downgrades reads like a who’s who of the materials sector, with a number of consumer stocks thrown in for good measure.

Upgrades

CFS Retail Property Trust ((CFX)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 3/3/1

Commonwealth Bank ((CBA)) has a proposal, incomplete, to internalise the management of both CFS Retail and Commonwealth Property ((CPA)). There's no word on the obvious question of price, but the broker estimates the entire platform generates $70m in annual earnings and could sell for $650m. JP Morgan said this is step one. Step two would be for CBA to sell out of the real estate investment trusts. For the broker, this is game-changing news. M&A activity is not seen likely for CFX, given four interested parties control 34%.

Commonwealth Property Office Fund ((CPA)) upgraded to Neutral from Underperform by Macquarie and to Overweight from Underweight by JP Morgan. B/H/S: 1/6/0

Macquarie noted Dexus Property ((DXS)) has acquired a 14.9% interest in CPA by way of a forward contract. This revealed corporate appetite for CPA sooner than expected, after the announcement of a planned internalisation of management. The broker said that, whilst it could be difficult for competing bidders to enter the playing field and generate pricing tension, Dexus won't necessarily be limited to paying the value of net tangible assets for CPA if it has the backing of a wholesale capital provider. Dexus could seek to only acquire the management rights and keep CPA as a listed trust, in which case value would not be realised.

JP Morgan noted CPA seems a target for listed competitors. The register looks more accessible and an alternative proposal directly to CPA unit holders could be possible. An aggressive competitor could justify a 5.25% gross assets premium just from the stamp duty and gain synergy benefits from additional scale, in JP Morgan's opinion.

Stockland ((SGP)) upgraded to Buy from Neutral by UBS. B/H/S: 3/2/2

The broker is expecting 8% EPS growth in FY14, which should flow through to an improving DPS payout ratio. The broker also noted low interest rates are starting to feed housing activity, and a resilient retail portfolio. Non-discretionary retail and residential are now preferred by the broker going into reporting season, with SGP seen as a key pick in the AREIT sector.

Telstra ((TLS)) upgraded to Buy from Underperform by BA-Merrill Lynch. B/H/S: 1/5/2

BA-Merrill Lynch raised earnings estimates for FY14 and FY15 by 7% and 11% respectively. Despite the fibre roll-out, Telstra is expected to be able to post firm earnings growth as mobile contributes an additional $1 billion to earnings. The broker is of the view that trading multiples will be supported or bettered, with ongoing earnings upgrades in mobiles and an improving medium term outlook as well as a dividend step up in FY14. The broker also raised dividend expectations to 30c for FY14, after seven years of no growth.

Westpac Banking Corporation ((WBC)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/4/2

Westpac has underperformed peers in the past 3-4 months and Macquarie suspects this is because the market thinks management will sacrifice margin in pursuit of system growth in mortgages. Macquarie discounts this view and expects Westpac to take a more subtle approach. The attractiveness of the stock is expected to grow later this year as the economy slows.

Upgrades

Alacer Gold ((AQG)) downgraded to Neutral from Outperform by Macquarie and to Underweight from Neutral by JP Morgan. B/H/S: 4/1/1

While the stock continues to demonstrate significant valuation upside, the broker said that to develop the Copler resource, Alacer would be required to spend around US$300m of capital. The balance sheet appears formidable, but Macquarie sees this as being fully depleted as a further US$150m of debt is required in the June quarter of 2014 to fund the development of the Copler sulphide project.

JP Morgan downgraded on relative valuation grounds. The decision to divest the Australian assets was otherwise viewed as a positive, but the broker suspected that in the current gold price environment, finding a buyer will be challenging.

AMP ((AMP)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/6/2

Reinsurance Group of America has seen a deterioration in claims and announced a $184 million after-tax charge to increase claims liabilities in Australia, saying there appears to be a number of environmental factors in the current Australian market leading to a significant rise in claim levels. Macquarie noted this is the first time the group has adjusted for future periods. As Australia's largest life insurer, AMP will be affected by these industry trends, but Macquarie said AMP is well focused on the causes of these elevated claims. Hence, ongoing experience losses are factored into forecasts. The risks of elevated claims and lapse experience is no longer adequately reflected in the share price after a 9% rally since late June and Macquarie therefore downgraded the rating.

Ampella Mining ((AMX)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/0/2

Macquarie noted that as of June 30 Ampella had a cash burn of $8 million for the six months to June. The company will require capital to develop Batie West, but the broker does not believe it will require additional capital in the next 12 months. The company has a clear plan to reduce costs and cease non-essential work and, as such, Macquarie said it sees the cash burn being slowed to $3m/quarter.

Ansell ((ANN)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/6/2

Credit Suisse updated its model to account for lower near-term latex/butadiene prices and for FX forward rates. Earnings changes for Ansell were less than 1% over the forecast period. While the US dollar valuation was unchanged, the Australian dollar valuation was upgraded. The broker noted there is now a lower margin of safety between the share price and valuation.

Aquila Resources ((ANN)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 1/0/1

The June quarter was pretty much in line with expectations as far as JP Morgan was concerned. Even better, given the current state of progress at Eagle Downs, the broker also expects lower cash outflows, at least in the near-term. Here's the problem: the company seems to be getting nowhere with the sale of a stake and given the stock has been trading above the broker’s valuation, it holds little optimism for the near term.

ARB Corp ((ARP)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/3/0

The downgrade was made on valuation grounds. The broker is expecting another strong result in FY13 as sales for the first nine months were up 9.6%. Into FY14, there are two changes in the operating environment. The first is a slowdown in demand from resources and related sectors and the second is the potential for short-term margin pressure from the weaker Australian dollar. Medium term, the outlook is good and the broker stressed the issue is one of valuation rather than execution or outlook.

Atlas Iron ((AGO)) downgraded to Neutral from Overweight by JP Morgan and to Neutral from Outperform by Credit Suisse. B/H/S: 3/5/0

Sales and production were in line with guidance in the final quarter of FY13. The broker found guidance for FY14 underwhelming, as it reflects reduced reserves and a shortened mine life at Pardoo. There is also significant uncertainty about how Atlas will unlock the value of its port allocation beyond Horizon 1. In the current risk averse environment the broker believes the market is not likely to pay full value for large-scale development projects. The reducing contribution from these projects lowered the price target to $1.00 from $1.30 and the rating was downgraded.

Ausenco ((AAX)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/4/0

The broker noted the company has guided to below the bottom of FY13 consensus estimates, or about a 30% downgrade to the net profit guidance on the broker’s numbers. JP Morgan was surprised by both the size and quick arrival of this downgrade, noting we just had a guidance update in May. The broker cut its estimates and price target aggressively, with the recommendation also pulled back. While the strategy of re-jigging the business to suit current market conditions is probably the right one, JP Morgan said it was worried about volatility in end markets and the visibility of work-in-hand.

Boart Longyear ((BLY)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/4/3

The company announced another earnings downgrade and a revised bank facility. Credit Suisse downgraded earnings forecasts by an average 27%. With no imminent sign of a recovery in minerals exploration spending, the broker did not think this looked good for the stock, but then the company is not expected to breach debt covenants.

Boral ((BLD)) downgraded to Underperform from Neutral by CIMB. B/H/S: 3/2/3

To CIMB, it has become clear that the asset values for building products and the Asian plasterboard business warrant scrutiny. Asset writedowns are likely to continue to be a feature for Boral. CIMB said building products will deliver a return of just 2.5% at mid cycle levels and this is below what is considered adequate. With material downside risk to FY14 earnings and 12% downside to the $3.84 price target, the broker downgraded.

Echo Entertainment Group ((EGP)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 3/3/2

The broker downgraded the rating following changes to capex and return assumptions. The ramp-up in earnings over the next two years is also expected to be slower than previously anticipated. The overhang of negotiations in Queensland will likely remain in place for the next few months and the broker said it sees better value elsewhere in the sector.

Evolution Mining ((EVN)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/4/0

The broker notes that Evolution's assets are at the higher end of the cost curve, but it suspects the company has now passed the hump in its capital profile. Coupled with a suite of productivity and efficiency improvements, Macquarie said this will mean further debt draw-down is unlikely over the coming 12 months. The rating was still downgraded.

GUD Holdings ((GUD)) downgraded to Underperform from Neutral by Macquarie, Underperform from Neutral by Credit Suisse and to Sell from Neutral by Citi. B/H/S: 0/2/3

Macquarie found the FY13 results disappointing, particularly the consumer and industrials divisions. Consumer division reported the fourth successive year of sales declines. Success with new domestic and international initiatives to increase scale were viewed as critical, if current lower margins are to be maintained. While the Asian business is reported to have grown, the commercial business was considered loss making and margins in the Australian racking business remain under pressure. There was little improvement in the operating environment expected in FY14.

Credit Suisse noted that the FY result was in line with recently lowered guidance, so no surprises there. The broker said the company would continue to struggle with extremely competitive conditions across all of its markets in the year ahead and throw in the weaker AUD and the consumer outlook becomes even less clear as well. The broker said the yield would continue to provide some support, but CS saw increasing downside risk to earnings estimates.

It’s not that it was a terrible FY result, but Citi did see an emerging problem. Group contribution from the flagship consumer business has fallen from 43% of group earnings in FY12 to 36% in FY13. At the same time, Automotive has gone from 31% to 44%. Given the Automotive arm has been able to better maintain margins, it is becoming increasingly important given the structural and cyclical headwinds at present. But can it fill the gap? There was no formal guidance, only talk of tough conditions, although the broker did confirm Automotive and Water would be “solid”. Still, FY14-15 EPS was trimmed and the recommendation downgraded.

Gryphon Minerals ((GRY)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 3/0/1

Gryphon will require capital to develop Banfora, but Macquarie did not think it would require additional capital in the next 12 months. Gryphon has received indicative proposals from a significant number of international banks and financial institutions to provide project debt, as part of the overall financing package for the development of the Banfora project. As well, the company is evaluating funding options from export credit agencies and multi-lateral parties.

Kingsgate Consolidated ((KCN)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/1/2

The broker noted Kingsgate recently announced a new mine plan for its Challenger mine and a focus on higher grades. Macquarie downgraded the production profile by around 20,000 ozs per annum to 73,000 ozs, observing that, at current prices, the mine is not cash flow positive.

McMillan Shakespeare ((MMS)) downgraded to Sell from Neutral by Citi and to Underperform from Buy by BA-Merrill Lynch. B/H/S: 0/0/3

The company pre-announced its unaudited FY13 result, reporting revenue of $331m to bring in a $62m net profit. The company also said it was not in a position to provide guidance for the 2H13 dividend. The problem, proposed changes to fringe benefit taxes on autos. FY13-15 EPS forecasts were cut by 4%, 37% and 38% on the FBT ambiguity, which served to pull the price target lower. Brokers opted to get ahead of the swing, downgrading their recommendations.

Mount Gibson Iron ((MGX)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/4/1

June quarter production numbers revealed a strong cash balance. Net debt was not reported, so actual cash flow could not be assessed. Credit Suisse said it expects the high grade inventory draw of 1.3 million tonnes for the June half will suppress profits, despite assisting with cash flow.

Newcrest Mining ((NCM)) downgraded to Neutral from Outperform by CIMB and to Neutral from Outperform by Credit Suisse. B/H/S: 3/3/2

CIMB was happy to see such a strong finish to what wasn’t a great year for the company. June quarter production came in within the updated guidance range and 16% above the broker, although admittedly below initial guidance that was set 11 months back. FY14 net profit was trimmed 3% to account for some minor revisions to the production profile, while the $13.20 price target was maintained. The recommendation, on the other hand, was dropped, CIMB of the view that the 38% recovery in Newcrest’s share price since the end of June now had the stock looking pretty fairly priced.

June quarter production came in just as CS expected, as it should have done given the recent issue of a new guidance. Production was up 25% on the previous quarter, driven by the ongoing expansion at Lihir and the ramping up of higher grades at Cadia East where underground production displaced lower grade stockpile ore. Otherwise, the broker noted the Cadia East and Lihir MOPU projects are progressing in line with, or even ahead of expectations, with FY14 guidance reiterated. The price target was lifted on a roll forward of the valuation.

Oil Search ((OSH)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 5/3/0

Second quarter production was slightly below the broker's expectations at 1.63mmboe against 1.68mmboe. Credit Suisse's earnings estimates for 2013 were still up 11% on higher sales volumes. The PNG project is on track for first LNG sales in 2014 and ExxonMobil has advised that if it is successful in acquiring 4.6TCF gas from Elk/Antelope fields it will establish an additional train. In the broker's view, Oil Search will benefit from any expansion, but would prefer to contribute equity gas. The rating was downgraded because of the share price appreciation over the past six to 12 months.

Orica ((ORI)) downgraded to Neutral from Outperform by Macquarie, to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS. B/H/S: 4/4/0

Orica said it expects a 10% fall in FY13 profit on last year's $650m. The downgrade occurred despite positive volumes in Australia and margins/ammonium nitrate pricing are said to be relatively stable. Macquarie considers the stock cheap, but said it is likely to remain so until there is evidence of a bottoming in Minova. Moreover, there is risk of further deterioration in the Australian explosives/cyanide business, should volumes weaken and coal/gold production cuts occur. Macquarie prefers Incitec Pivot ((IPL)) given strong forecast earnings growth from Moranbah, although fertiliser prices remain weak and a drag on FY13 earnings there too.

Credit Suisse pushed through a 21% average reduction to FY13-15 forecasts and was concerned about potential structural issues emerging across the Asia Pacific ammonium ntirate market which could impair forecasts in outer years. The greatest importance is the Indonesian market, where Orica has 60%. Credit Suisse sees the Indonesian coal market deteriorating and import competition increasing. Orica is looking to increase its 60,000 tonne ammonium nitrate export licence out of Indonesia and this is what is capturing the broker's attention.

UBS noted the company has lowered guidance and the numbers imply a 20% decline in 2H earnings. UBS said this is somewhat due to higher restructuring costs in the Minova business, but more so because of general weakness across the group. UBS reduced its forecasts by 10% in FY13, with FY14-16 down by around 15% on the back of a weakening outlook for the explosives businesses and worse than expected decline in Sodium Cyanide earnings from next year.

OZ Minerals ((OZL)) downgraded to Neutral from Buy by Citi. B/H/S: 3/5/0

June quarter production fell short of the broker because of the elevated waste stripping and remediation work going on in the South pit. This saw lower grade ore through fed through the mill and thus lower recoveries. Gold production was lowered to 120-130koz from130-150koz, the company now preferring a higher margin copper blend for the mill. Rising cash costs, lower production and uncertainty about the long-term strategy have the broker feeling jumpy.

Perseus Mining ((PRU)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/3/2

Macquarie said the current gold price environment has brought into question Perseus' ability to fund the development of Sissingue. The broker did not expect Perseus to draw down debt while the project is on hold. Nevertheless, the decision indefinitely defers the growth profile for the company.

Regis Resources ((RRL)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 2/4/1

While recognising the attractive qualities, JP Morgan said creeping all-in costs and stretched valuation, along with the revised gold price forecast makes Regis a risk-hedge for investors that are less positive on gold prices.

Santos ((STO)) downgraded to Neutral from Buy by UBS and to Underperform from Neutral by Credit Suisse. B/H/S: 5/2/1

June quarter production may have come in 2% higher than the March quarter, but it still fell well short of UBS’ expectations. Sales revenue missed by 13%. The broker noted a planned increase in Cooper gas production never came about, while Fletcher and Finucane problems in late June also hurt both production and sales. The 2013 production guidance was cut by 3% due to production issues in Vietnam, Bangladesh and the Carnarvon Basin. On the other hand, the broker did note PNG LNG is almost 90% complete and ready for commissioning gas in the next few months, while the drilling rate at GLNG was increased. It wasn’t enough to stop the recommendation from being cut, especially after the 24% run in the share price since the start of 2013.

Credit Suisse also noted the production guidance was lowered. Multiple reasons were given such as Chim Sao power constraints, natural field decline at Sangu and deferred Carnarvon oil because of weather and workovers. The next two years will be exciting for Santos in Credit Suisse's view, as it ramps up LNG projects. The stock was viewed as fully valued, especially given the risk that remains for further cost overruns.

Silver Lake Resources ((SLR)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/3/0

The company has delayed the development of the Causton underground at its Murchison project by about a year and will continue to process ore from open pits and existing stockpiles. The resulting decrease in grade saw Macquarie reduce annual forecasts by around 30,000 ozs. Deferral of capital in the short term was seen as a positive, but to justify investment in Murchison the capital will be required in coming years.

St Barbara ((SBM)) downgraded to Hold from Buy by Deutsche Bank and to Underperform from Neutral by Macquarie. B/H/S: 1/1/1

St Barbara had released fourth quarter results and provided FY14 guidance. Management said it anticipates that with the fall in the gold price and its market capitalisation, an impairment will be necessary at the FY13 result. The broker said it sees a $400m write-down coming. The rating was downgraded on the combination of the current gold price, high cost nature of the Pacific operations and the leveraged balance sheet present a heightened risk for investors.

Deutsche Bank noted Gwalia may have had a record quarter in June, but said the Pacific assets are taking too long to generate cash. Following the fall in the gold price and slower turnaround at the acquired assets St Barbara has indicated a write down is likely. Deutsche Bank said it now expects negative free cash flow in FY14 on gold price estimates.

Virgin Australia ((VAH)) downgraded to Underperform from Neutral by CIMB and to Neutral from Overweight by JP Morgan. B/H/S: 4/3/1

TigerAir Australia's June quarter earnings were below expectations. Combine this with a weaker Australian dollar and load factor and CIMB said it expects ongoing pressure for Virgin Australia. Earnings forecasts for FY14 were downgraded 24%. The broker said it sees more fundamental downside risk to the share price in the absence of corporate buying activity.

Given the recent 10% drop in AUD, which JP Morgan noted will negatively impact fuel costs, the broker said it is expecting a downbeat FY14 guidance when the company reports its FY results. With the stock now trading above the broker’s revised price target of 42cps, it was time to take profits.

Western Areas ((WSA)) downgraded to Neutral from Buy by UBS. B/H/S: 3/4/0

June quarter production fell a bit short of UBS, while costs managed to come in lower. Citing a tough nickel market, management have taken a pay cut and frozen salaries into FY14 .The plant expansion from 550ktpa to 750ktpa has also been deferred, with the plan to review it again later this year. UBS said it is still expecting a September 2015 start up. No guidance was provided for FY14, leaving the broker to cut its FY14 nickel in concentrate production estimates by 7%. Combined with a recent downgrade to nickel price assumptions, FY14 net profit estimates were slashed by 89% and the FY14 dividend was cut from 11c to 2c per share. The lower estimates lead to a lower price target, which was also enough to see the broker downgrade on valuation grounds. UBS said it just couldn’t see any positive catalysts over the next 6-12 months.

Significant consensus target price and earnings forecast changes tabled below.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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