Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features JAMES HARDIE INDUSTRIES PLC, and other companies.
For more info SHARE ANALYSIS: JHX
The company is included in 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 August 12 to Friday August 16, 2013
Total Upgrades: 16
Total Downgrades: 20
Net Ratings Breakdown: Buy 38.20%; Hold 44.49%; Sell 17.31%

The Australian reporting season is proving better than expected, but stockbroking analysts seem to be struggling with share prices that are already reflective of better than forecast financial performances. The percentage of Neutral ratings in the FNArena database is climbing week after week, now representing 44.49% of all ratings by the eight major stockbrokerages FNArena covers daily. At 17.31%, the number of Sell ratings is also at an elevated high. No surprise thus, the total number of Buy ratings at a little over 38% looks rather skinny for a market many believe should be poised for higher index levels.

Stranger things have happened though and since many smaller and mid-tier resources stocks are still trading well below targets, the immediate outlook for this sector is likely to be key for the performance of Australian indices throughout the August reporting season.

Most changes in ratings are clustered around the growing number of Neutral recommendations and directly related to FY13 reports and anticipated horizons for FY14 and beyond. A noticeable schism is opening up between companies in the mining services industry and analysts covering the sector. Analysts are not buying the companies' mantra that the worst for the sector is now likely behind us. That'll be one interesting development to watch closely in the year ahead.

Big changes are occurring in price targets, though many changes are simply catching up with rallying share prices. Earnings forecasts are seeing big upgrades whereas downgrades dominated in the weeks leading up to reporting season. FKP ((FKP)) tops this week's table with no less than a 13% lift in consensus estimates, while others such as Henderson Group ((HGG)), James Hardie ((JHX)) and Mineral Resources ((MIN)) are also enjoying hefty upgrades.

Upgrades

Brambles ((BXB)) upgraded to Neutral from Underperform by CIMB Securities. B/H/S: 3/3/0

CIMB believes a combination of factors is falling into place for Brambles and combined these factors mean that downside risks are noticeably reducing. The factors of importance are a falling share price, a weakening AUD and an improving macroeconomic backdrop for the company's core markets. Since management has guided the market for FY13 results, CIMB is not expecting any major surprises this month. Price target jumps to $9.47 (was $8.34). Note also, while minor amendments have been made to EPS forecasts, DPS estimates received noticeable upgrades.

CSL ((CSL)) upgraded to Buy from Neutral by UBS. B/H/S: 5/2/1

FY13 net profit was up 19% and beat guidance. R&D is seen easing to 13% growth in FY14. With CSL Behring remaining robust FY14 earnings are expected to grow 14%. Market dynamics are unchanged and UBS continues to see volume and price momentum. The stock is fully priced at current levels but looming milestones in the recombinant portfolio implies upside risk. The broker continues to rate CSL as a core portfolio holding.

Domino's Pizza ((DMP)) upgraded to Overweight from Neutral by JP Morgan and to Buy from Hold by Deutsche Bank. B/H/S: 3/3/0

Domino's result was in line but JP Morgan is salivating over the acquisition of 75% of Domino's Japan, achieved at a 10 times multiple when DMP is trading on 18 times. Australian and NZ sales boosted the result to offset weakness in Europe, but Japan offers up growth. Deutsche Bank thinks the acquisition of the Japanese business will provide the next growth leg. The rating is upgraded to Buy from Hold, given upside to the revised target – raised to $13.85 from $10.25. Deutsche Bank has always liked the company's business model and, particularly, the online strategy. This latest development is considered an opportunity to become more positive.

Envestra ((ENV)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/3/0

APA Group ((APA)) was surprised when Envestra rebuffed its takeover offer, although the shares have traded at a premium to the offer price ever since. The broker does not see a competitor, nevertheless, given APA already owns 33%. The broker does not expect APA to pay a typical control premium of 30%, but does think APA will up the ante. Target rises to $1.14 from 90c.

Goodman Fielder ((GFF)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/4/1

Credit Suisse has upgraded the rating to Neutral from Underperform and the price target to 78c from 75c on the back of the FY13 result. Earnings growth is expected to continue but the broker is aware of how tough it is. The company has surplus cash and an expensive debt structure, legacy of the GFC. Interest is seen too high for the level of net debt. Moreover, the company is paying unfranked dividends while many investors are sitting on capital losses. Further clarification is needed regarding capital management and, in the broker's view, this could be a driver of the share price.

James Hardie ((JHX)) upgraded to Neutral from Underperform by CIMB. B/H/S: 0/7/1

First quarter profit of US$52m was ahead of forecasts and CIMB has raised FY14 forecast earnings by 4%. The target price has been raised to $9.20 from $8.49. The US housing recovery has been evident for some time and the broker thinks James Hardie is benefiting from operational momentum. The worst may have passed, hence the recommendation is upgraded to Neutral from Underperform.

McMillan Shakespeare ((MMS)) upgraded to Buy from Sell by Citi. B/H/S: 1/0/2

Citi has upgraded the stock to Buy from Sell, banking on a Coalition victory at the upcoming election and the likelihood that the government's changes to the Fringe Benefit Tax will not come to pass. The broker believes that the company's business model would be materially affected by the proposed implementation of Labor's car-related FBT revisions. The target price and valuation are unchanged at $12.60. The broker had assumed that no new novated leases would be written in the first half. As the election date is September 7 this may prove too negative a view and there's a change that industry growth could be above average in the short term, because of heightened awareness of novated leasing.

Prime Media ((PRT)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/0/0

Prime Media has sold its Queensland radio business and will use the proceeds to pay down debt. Prime is now pure TV, and with Seven's ((SWM)) strong pipeline to drive ratings and a better looking balance sheet the broker believes Prime is primed for a takeover.

SAI Global ((SAI)) upgraded to Outperform from Neutral by CIMB, to Buy from Neutral by Citi, to Outperform from Neutral by Credit Suisse and to Buy from Hold by Deutsche Bank. B/H/S: 5/2/1

It has been an excruciating wait for long term, loyal shareholders, but CIMB analysts think the time has arrived to make that big call on SAI Global's fortune: the tide is turning, risks are skewed in favour of positive surprises from now onwards. There are reasons to think the worst has passed and Citi expects FY13 to represent the bottom of the downgrade cycle. This is because there was no downgrade guidance for the first time in 18 months and, while compliance will continue to weigh on margins in FY14, the businesses looks to be stabilising and margins should improve. With 40% of group earnings outside of the Australian dollar the company is also a major beneficiary of the weaker currency.

Support from the currency came just at the right time for SAI Global, in Credit Suisse's view. Operationally the FY13 result was a little weaker than expected. In addition there are still issues around compliance and the below-par performance of assurance. Credit Suisse believes the likely benefit from a weaker Australian dollar in FY14 makes up for forecast risk in other areas and a return to reasonable earnings growth can be expected over the next few years. Deutsche Bank sees the investment case as de-risked and has upgraded to Buy from Hold on risk/reward and valuation. Reasons for the upgrade are improving growth and margin outlook for information & assurance and a stabilising of compliance client issues. A more robust compliance platform is being implemented. On valuation, the stock offers 20% upside potential to the broker's revised target.

Sandfire Resources ((SFR)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/4/2

The broker has looked at a potential merger with OZ Minerals ((OZL)) after increased speculation around that company's acquisition ambitions. JP Morgan thinks the likelihood of a full takeover for Sandfire has increased (OZ has 19.9%) since OZ Minerals missed out on Northparkes. In the broker's view a transaction would fail to address longer-term concerns, given the relatively short projected life at DeGrussa. Takeover speculation, improving copper price sentiment and a declining Australian dollar is seen likely to support Sandfire's share price.

Sydney Airport ((SYD)) upgraded  to Outperform from Neutral by CIMB and to Buy from Hold by Deutsche Bank. B/H/S: 2/1/2

CIMB argues that simplifying the corporate structure and settling the ATO tax dispute has made SYD now a more attractive investment opportunity for potential investors. The broker talks about a "robust" growth outlook. Price target lifts to $3.83 (was $3.49) on slightly higher forecasts. The dividend on offer sits around 6.3% and CIMB has decided to upgrade to Outperform from Neutral. Deutsche Bank notes Sydney Airport will acquire 100% control of Sydney airport and has reached an in principle resolution on the outstanding tax issues. The company is also simplifying the corporate structure, which will lift the foreign ownership limit to 49% from 40%. The stock is now the broker's preferred infrastructure exposure.

Downgrades

Arrium ((ARI)) downgraded to Neutral from Buy by UBS. B/H/S: 2/4/1

The steel turnaround is taking longer than expected. UBS has revised earnings forecasts for Arrium down by 20-30% for FY14-15 to reflect this. This is partly offset by lower AUD estimates. Mining earnings are expected to almost double next year and this largely drives earnings growth estimates. While UBS believes Arrium can maintain its current 65% share of the domestic long steel market long term, near term demand pressures and weakening global spreads mean recovery is pushed out, which absorbs any immediate benefit from a lower Australian currency.

Bank of Queensland ((BOQ)) downgraded to Sell from Neutral by Citi. B/H/S: 1/5/2

Bank of Queensland has flagged a $46 million pre-tax legacy item related to overcharging customers. This is taken below the line and does not affect cash profit. Citi has upgraded cash earnings estimate by 5% for FY13 and 3-5% thereafter. The rating is reduced to Sell from Neutral on valuation grounds, with the yield now in line with major bank averages but with materially higher risk and lower returns.

Bradken ((BKN)) downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Credit Suisse. B/H/S: 2/4/1

The FY13 earnings of $214m was ahead of UBS' forecasts. A fully franked final dividend of 18c was declared. The result confirms the broker's view that Bradken is one of the best positioned mining service companies dealing with the cyclical resources sector. Nevertheless, Bradken's updated guidance may need to be tempered over the year, in UBS' opinion. The stock is up 31% since mid June and is not expected to continue its recent rally. Bradken has confounded sceptics by not only defending but increasing margins in FY13. Credit Suisse sees the company better positioned than many in the current environment. Despite this, the broker thinks the company needs a bounce in the second half of FY14 to offset what will be a weak first half.

CFS Retail Property ((CFX)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/3/2

Not a good sign. CFS was to sell four backblock shopping centres to a new Pacific Retail REIT but the REIT's IPO failed. Despite the earnings dilution the broker would have been happy to see the centres go as the sale would have lifted net portfolio quality and reduced gearing. Any new acquisition may now require fresh equity. CFS has outperformed its sector by 7% since this last month, the broker notes, while trading at only a 4% discount to net asset value compared to a sector average 8%.

Energy Developments ((ENE)) downgraded to Neutral from Buy by UBS. B/H/S: 0/1/0

The broker has downgraded the rating because of recent share price outperformance. FY13 earnings estimates are raised by 7% and FY14 by 4%. Assumptions have been updated to reflect the current operating environment. Capacity has been revised up 18MW to reflect the new Moranbah expansion.

Fletcher Building ((FBU)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/4/2

Analysts at Credit Suisse are convinced that consensus expectations are too high for the company, citing activity levels data that don't stack up with what their peers have penciled in for the company. The industry recovery will still take place, but it will be slower and longer dated, suggest the analysts. In anticipation of reduced market forecasts, the analysts have decided to downgrade the stock to Neutral from Outperform. Earnings estimates have been further cut.

Goodman Group ((GMG)) downgraded to Neutral from Buy by Citi. B/H/S: 0/6/1

FY13 delivered 6% earnings growth and expects the same in FY14. The company has said this is a sustainable rate of growth. Citi thinks the market will start to moderate its expectations as it has consistently expected more. Citi's earnings estimates for FY14, have been cut and this lowers the valuation on Goodman to $5.12. The call has been reduced to Neutral from Buy. The brokers finds it is an attractive business with significant upside, but expectations have moderated. The price target is cut to $5.12 from $5.35.

Henderson Group ((HGG)) downgraded to Neutral from Buy by Citi. B/H/S: 2/2/0

In the wake of Henderson's result, the broker has lifted its 2013 earnings forecast by 12% but this is mostly to do with tax and performance fees. Otherwise, despite signs of momentum turning for HGG, fund inflows have been slower than forecast. The stock has rallied strongly on expectation of solid flows, so while increasing its target to $3.10 from $3.00, the broker has downgraded to Neutral.

JB Hi-Fi ((JBH)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/3/3

JB Hi-Fi's 11.2% profit increase came in slightly ahead of the broker. Traditional lines continue to underperform but the broker is enthusiastic over growth in digital lines and the new Home business is also performing, with both yet to hit their straps. The broker finds the JBH story compelling but the share price has recovered two years of underperformance in the past few months, the broker notes, meaning it's all in the price.

Mineral Resources ((MIN)) downgraded to Neutral from Buy by UBS. B/H/S: 1/2/0

FY13 results were marginally ahead of UBS estimates. The second half was strong, contributing 65% of earnings. The broker has made minor revisions to short term estimates, increased FY14 by 4.4% and reduced FY15-16 by 2-3%. The rating has been downgraded to Neutral from Buy as the share price has appreciated 33% since the start of July. The price target is raised to $10.70 from $9.75.

Newcrest Mining ((NCM)) downgraded to Neutral from Outperform by Macquarie, to Underperform from Neutral by Credit Suisse, to Neutral from Overweight by JP Morgan and to Sell from Hold by Deutsche Bank. B/H/S: 0/4/4

Following Newcrest's result Macquarie expects gearing to remain above the 15% target range until FY17. Increased production at Lihir and Cadia is critical to provide cash flow and while Cadia has ramped up, there are still risks surrounding Lihir's production increase requirements. There is also a risk the gold price could take another tumble when the Fed actually does announce tapering, Macquarie believes. The result beat Credit Suisse's estimates but disclosed FY14 guidance on Lihir is "inadequate and confusing", the broker suggests. NCM should manage no worse than cash break even in FY14 in a lower gold price environment. Recent share price strength and a lack of visibility lead to the downgrade.

The result was largely in line with JP Morgan. FY14 production guidance was maintained but Lihir milling guidance disappointed the broker. Gearing remains a concern but the broker thinks refinancing risk is low at a lower spot gold price. The company still requires gold priced at $1,450/oz for a cash flow neutral outcome after $1bn capex in FY14. Deutsche Bank is not too enthusiastic, noting the change in strategy to focus on higher margin ounces in FY14 is likely to generate negligible benefits. On top of all this, there are too many unanswered questions. The rapid recovery in the share price now triggers a downgrade to Sell.

OZ Minerals ((OZL)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/5/1

It was always going to be a weak half for OZ given waste movements, but the loss was not quite as bad as the broker had expected. The dividend was indeed a surprise, given it flies against stated policy. M&A is an option but cash burn is a concern as it will continue through 2014, the broker notes.

Skilled Group ((SKE)) downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Outperform by CIMB. B/H/S: 2/1/1

The FY13 result was solid in Credit Suisse's view. The broker continues to identify positive attributes for the stock which has material exposure to fast-growing industries such as oil and gas. The downside is that the employment outlook is particularly challenging in mining, a key growth driver in recent years. As risks are skewed to the downside the rating is downgraded to Underperform from Neutral. The management team has an excellent track record in taking costs out of the business, remind analysts at CIMB. However, offsetting this are negative underlying trends which marked the financial performance in the past six months and these trends are expected to persist in the six months ahead. CIMB believes it's better to turn a little more cautious. EPS forecasts have been lifted by 4-10% across FY14-15, but the share price has rallied too.

UGL ((UGL)) downgraded to Underperform from Neutral by Citi. B/H/S: 1/4/3

Underlying earnings for FY13 was in line with the guidance. CIMB has lowered FY14 forecasts and is more bearish on the cycle than UGL management. The broker does not agree that this is the bottom for resource-related activity and thinks the down cycle will run on for several years. The rating has been lowered to Underperform from Neutral partly for this reason and partly because CIMB thinks other names offer better value. The price target falls to $7.43 from $10.09 because of lower earnings forecasts. As for separating property and engineering, the broker can see the point of this in order to pursue different objectives but this is a long-term view. In the shorter term CIMB thinks other issues will affect the share price.

WorleyParsons ((WOR)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/5/1

The FY13 underlying profit was 3% below the broker's forecasts and at the lower end of guidance. Credit Suisse has downgraded earnings by an average of 8% over the forecast period. The rating is downgraded to Neutral from Outperform. The price target moves to $23.70 from $23.30. The broker likes the stock from a medium-term perspective owing to its weighted exposure to hydrocarbons, dominant market position and solid acquisition track record. Nevertheless, execution risk has increased following recent cost over-runs.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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