Weekly Recommendation, Target Price, Earnings Forecast Changes

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

By Rudi Filapek-Vandyck, Editor FNArena

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 August 5 to Friday August 9, 2013

Total Upgrades: 12
Total Downgrades: 12

Net Ratings Breakdown: Buy 38.43%; Hold 44.36%; Sell 17.21%

Investors will be heartened by the observation that stockbroking analysts are no longer en masse issuing rating downgrades. The week past recorded equally 12 downgrades and upgrades, but both sides contain multiple ratings changes for ResMed (2x) and Iress (2x) on the positive side, and iiNet (2x), Paladin Energy (2x) and Virgin Australia (4x) on the negative side. If we focus on the number of companies involved, instead of on the number of rating changes, than a more positive story emerges with ten stocks receiving upgrades but only eight receiving downgrades.

As is not unusual at the start of the August reporting season, most rating changes are directly correlated with specific company news and developments. ResMed surprised with yet another strong financial result. Iress announced a UK acquisition. Paladin Energy was forced to abandon an attempt to sell asset stakes and returned cap in hand to the market and Virgin Australia shocked transport analysts with a much larger loss than even the most pessimistic estimates available. iiNet grabbed ISP Adam after Telstra ran into ACCC obstruction.

Most of the single rating changes also have a direct link to company news with Amcor intending to spin-off the Australasian operations and Henderson Group's financial report stronger than expected, et cetera.

In terms of changes to earnings estimates, not surprisingly the severity of downgrades post capital placements for the likes of Karoon Gas and Paladin Energy, and heavy profit warnings from the likes of Ausenco and Virgin Australia, throws a dark shadow over the rather tepid looking increases for companies including Horizon Oil, Henderson Group, Amcor and ResMed. Resources stocks are still responsible for the lion share of heavy cuts to earnings estimates.

Upgrades

Amcor ((AMC)) upgraded to Buy from Neutral by Citi. B/H/S: 3/4/1

The broker is positive on Amcor's decision to spin off AAPD. Despite the costs involved, two entities should provide a more positive earnings outlook and premium multiples, the broker suggests, with the core business unshackled from the AAPD drag and AAPD management able to focus more closely. The broker has lifted forecast earnings by 10% in FY14-15 which includes a currency adjustment. Target rises to $12.16 from $9.25.

ASX ((ASX)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 1/3/4

JP Morgan has looked at the revenue potential from the central clearing of  OTC interest rate derivatives and thinks the market will be worth $47 million by FY15. ASX may gain up to 50% market share. At this stage JP Morgan expects profit to grow by 11.7% in FY14 and 8.3% in FY15. Given the robust growth profile and relatively low earnings risk as well as potential 8% upside to the price target the rating is raised to Overweight. The price target is raised to $37.60 from $33.30.

Challenger Diversified ((CDI)) upgraded to Buy from Neutral by UBS. B/H/S: 2/2/0

The FY13 result was slightly higher than UBS estimates. The result was driven by significantly reduced operational expenses, because of a release of a litigation provision for one of the European properties, along with buy-back accretion and underlying portfolio growth. The broker has upgraded the stock to Buy from Neutral given the discount to valuation and NTA as well as a 7.3% dividend yield. The stock is seen having a good track record of meeting or exceeding guidance despite difficult operating conditions.

Henderson Group ((HGG)) upgraded to Buy from Neutral by UBS. B/H/S: 5/3/0

Henderson's operating momentum has outperformed peers as second quarter retail net flows accelerate. Although institutional flows were down in the second quarter this was squared up in July. The outcomes reflect improving macro, regulatory and equity backdrop and UBS has raised the recommendation to Buy.

IRESS ((IRE)) upgraded to Neutral from Underperform by Credit Suisse and to Neutral from Underperform by Macquarie. B/H/S: 0/8/0

IRESS has acquired UK technology provider, Avelo Financial Services. Credit Suisse thinks the acquisition will provide greater diversification of earnings, both geographically and by product offering. Despite difficult operating conditions in certain business segments the broker believes the company's growth trajectory is significantly enhanced. First half results were slightly ahead of estimates. Forecasts now imply a smaller 3% decline in FY13 earnings compared with the 6% decline in FY12. This is an exciting opportunity in Macquarie's view. Avelo offers an extensive blue chip customer base to achieve immediate scale. Macquarie thinks transition to the XPLAN platform will take time but a key positive is that competition in next-generation wealth products appears limited. Avelo is expected to be 10% accretive in FY14, post a 2-for-9 rights issue. Macquarie thinks the stock is fully valued in the short term but warms to the potential in the UK.

James Hardie ((JHX)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/6/2

After a series of weak quarters JP Morgan's attention for the first quarter of FY14 will be on whether James Hardie's performance has improved sufficiently to support management's FY14 earnings margin target of 20%. As the stock is now trading in line with the broker's target price the recommendation has been upgraded to Neutral from Underweight.

Karoon Gas ((KAR)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/1/0

The $150 million placement was a surprise for Credit Suisse as Karoon Gas had around $205m in cash already. The company is strengthening its balance sheet to improve the bargaining position ahead of farm-out negotiations. Credit Suisse thinks the farming out of interests in the Browse Basin may take longer than previously expected. The share price has declined 18% since the broker downgraded the stock three weeks ago and, with 25% potential return, the rating is now raised to Outperform.

ResMed ((RMD)) upgraded to Outperform from Neutral by CIMB Securities and to Buy from Hold by Deutsche Bank. B/H/S: 6/2/0

The fourth quarter showed continued margin expansion and gains to the bottom line – all pleasing for CIMB. Although shares are up more than 10% from the lows last month the broker sees more upside potential as trading levels do not appear too demanding. The rating is upgraded to Outperform. Deutsche Bank was encouraged by the solid Q4, although the impact of competitive bidding in the US won't be clear for some time. Deutsche Bank liked new developments and new product launches as well as the tailwind from the falling Australian dollar. As there is upside earnings risk the broker has raised the rating to Buy from Hold.

Sigma Pharmaceutical ((SIP)) upgraded to Neutral from Sell by Citi. B/H/S: 0/5/2

Sigma as been suffering from a weak consumer, competition and an interfering government, the broker notes. Nothing much is about to change and government policy remains a risk, but the broker believes SIP can manage. After underperforming the market by 30% and the sector by 25% since the beginning of June, the broker believes at 13 times the PE looks reasonable now.

Southern Cross Media ((SXL)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/3/1

Positive momentum is returning to the radio industry, reports Deutsche Bank. This is one key factor behind the decision to increase the target and lift the rating to Buy. Another reason is the stockbroker believes TEN's ((TEN)) new strategy will benefit regional viewers and help improve revenue share. The company is due to report on August 14 and the analysts are not expecting much, cutting estimates ahead of the event. This is all about FY14 thus, and beyond.

Downgrades

CFS Property Office ((CFX)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 3/3/2

The broker has changed its mind on CFS with regard to the proposed internalisation by CommBank ((CBA)). Last week the broker upgraded to Neutral but now has downgraded back to Underweight, suggesting that while CFS' portfolio is attractive it might be hard to find a buyer given CBA's entrenched management rights. Modelling planned asset sales and acquisition of rights and mandates leaves the broker with an unchanged NPV but a 10% reduction in net tangible assets. Target retained at $2.12 but rating downgraded.

iiNet ((IIN)) downgraded to Neutral from Buy by Citi and to Underperform from Neutral by Credit Suisse. B/H/S: 2/3/2

iiNet has acquired independent SA broadband provider Adam Internet at a fair price ($60m) in the brokers' view, with earnings accretion available in year one and synergies in year two to provide positive rationale. The deal was financed from existing facilities and Adam carries no debt. Citi's ratings are downgraded to neutral given IIN has run ahead of fair value. Telstra ((TLS)) was recently blocked by the ACCC from acquiring Adam. Credit Suisse estimates the deal to be around 3% cash earnings accretive in FY14 and 7% accretive in FY15. Forecasts have been upgraded as a result. Credit Suisse's target price has been raised to $6.15 from $5.20, of which 7% relates to the acquisition, 1% to DCF roll forward and 10% following a revision of weighted average cost of capital (WACC) parameters. The rating is downgraded to Underperform from Neutral in line with Credit Suisse's rating system for a 3.5% return.

Paladin Energy ((PDN)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/3/2

Paladin has announced the termination of its asset sale process, suggesting weak uranium prices are not leading to the full value of Langer Heinrich being appreciated. PDN will look to raise US$80m in equity instead but the broker notes that while this amount will relieve immediate balance sheet issues, it will not prevent the company's ongoing cash burn ahead of debt refinancing due from 2015. The broker is positive long term on uranium prices and notes PDN offers high leverage to prices, but has downgraded to Neutral post the disappointing asset sale news. Target falls to 95c from $1.30.

Silver Lake Resources ((SLR)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 1/2/1

Silver Lake produced 56,000 ounces in the June quarter and reached 151,000 ozs attributable to FY13. Cash costs at Mount Monger were higher than the broker expected with around 35% of mill feed coming from low-cost stockpiles. With development still required at Mount Monger and Murchison consuming cash the broker thinks there is significant balance sheet risk. FY14 expectations have been reduced and the rating has been downgraded.

Virgin Australia ((VAH)) downgraded to Sell from Neutral by Citi, to Underweight from Neutral by JP Morgan, to Neutral from Outperform by Macquarie and to Neutral from Buy by UBS. B/H/S: 2/3/3

Virgin has issued a profit warning, guiding to an FY13 loss due to problems with the Sabre bookings system and subsequent lost business. Skywest has also contributed to the loss having being acquired two months ago. Management has painted a rosier picture for FY14, but brokers are cautious. JP Morgan had forecast an FY13 loss for Virgin of $2.4m and now a profit warning from the company suggests a loss of $95-110m. That's a very big deterioration in a very short period of time, making the broker rather nervous about the outlook. The trading environment remains difficult and AUD hedges are soon to roll off.

The more sober growth outlook in FY14 means the stock is no longer cheap on earnings metrics. Macquarie thinks Etihad's on-market purchases are supporting the share price but the stock's free float is also falling to below 30%, leaving it less relevant for index and other active fund managers. Macquarie sees the question being whether all the legacy issues have been dealt with and has downgraded the rating to Neutral from Outperform. UBS has cut forecasts in line with FY13 guidance and cut future years by 20%. The downgrade will wipe 10% off book value but of greater concern to the broker is the cash liquidity, which is likely to fall to $250m from $430m, representing a slim 6% of forward revenue. Still, UBS expects unit revenue to expand at a far greater pace than costs in FY14, contributing to a material turnaround in profit.

Woodside Petroleum ((WPL)) downgraded to Neutral from Buy by Citi. B/H/S: 2/5/1

Citi thinks Woodside will make progress, particularly on the Browse FLNG, and while growth for the stock is long dated the dividend yield is supportive at current levels. The broker thinks the pay-out ratio of 80% is sustainable to 2020, given the project delays. The projected effective tax rate is now under 15% so the rating is downgraded to Neutral from Buy.

Significant consensus target price and earnings forecast changes tabled below.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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