Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features APA GROUP, and other companies.
For more info SHARE ANALYSIS: APA
The company is included in ASX50, 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 19 to Friday August 23, 2013

Total Upgrades: 23
Total Downgrades: 34

Net Ratings Breakdown: Buy 37.55%; Hold 44.54%; Sell 17.90%

The local reporting season continues to generate a large number of stockbroker rating changes with downgrades (34) significantly outnumbering upgrades (23) for the week past. One straightforward observation is that resources stocks continue to be largely absent when it comes to recommendation upgrades, which remains largely an industrials affair, but despite receiving a large number of downgrades in the weeks past, resources and banks continue to dominate the downgrades section.

It is no different when we observe changes in price targets with industrials stocks, and some financials, including Challenger, Breville Group and Sonic Healthcare receiving noticeable increases to price targets, whereas resources stocks are represented in full force when it comes to cutting targets, with Paladin Energy, Grange Resources, Macmahon Holdings and Monadelphous all receiving double digit cuts to price targets in the week past.

The picture becomes less black and white when we observe changes occurring to earnings estimates with numerous resources companies (Iluka, Fortescue. PanAust, etc) receiving upgrades to earnings forecasts. This, however, does not remove the fact the sector (including mining services providers) remains well-represented on the negative side for future earnings as well.

Upgrades

APA Group ((APA)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/5/2

The FY13 result was within guidance. APA faces headwinds from both re-contracting risk on the Moomba-Sydney pipeline, as well as expected demand destruction from rising domestic gas prices, in Credit Suisse's view. There is potential upside from additional revenue on the interconnected pipeline but the broker needs to see tangible evidence of execution. The rating has been raised to Neutral from Underperform following the recent share price weakness. The target price is reduced to $6.10 from $6.25 primarily due to higher-than-expected net debt.

Aristocrat Leisure ((ALL)) upgraded to Neutral from Underperform by BA-Merrill Lynch. B/H/S: 2/4/1

The broker thinks it may be time to upgrade the stock, to Neutral from Underperform. Concerns remain about the competitive backdrop and valuation is looking full, but there appears to be some signs of a product portfolio upgrade. Continued Australian dollar depreciation and an under-geared balance sheet are also expected to undermine an Underperform call. The price target is raised to $4.35 from $3.18.

Ansell ((ANN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/4/3

Ansell's result met the low end of guidance on good earnings quality, to some extent overcoming the Comasec acquisition and weakness in Europe, the broker notes. The result highlights management's ability to grow in a low growth world, the broker suggests, with new product launches relatively successful.

APN News & Media ((APN)) upgraded to Neutral from Sell by UBS. B/H/S: 0/5/3

A 7% jump in APN's first-half net profit, thanks to gains in market share and cost execution, has beaten the broker and prompted UBS to boost its earnings estimates by about 15%. It has upgraded its rating to Neutral from Sell but notes debt remains an issue. UBS has increased its share price target to 35c from 25c.

Brambles ((BXB)) upgraded to Outperform from Neutral by CIMB. B/H/S: 4/3/0

The broker suggests Brambles posted a solid FY13 result in tough conditions. The market was disappointed with softer than expected FY14 guidance but the broker believes expectations were overly ambitious in the first place. The subsequent sell-off has thrown up a good buying opportunity, the broker suggests, hence an upgrade to Outperform. A realignment to more realistic expectations means BXB is now offering value.

Challenger Group ((CGF)) upgraded to Buy from Neutral by Citi. B/H/S: 5/2/1

Challenger's result beat the broker leading to forecast earnings increases of 7-8% in FY14-15. CGF has delivered on the promise of improved Life margins and funds management has turned the corner, the broker suggests. CGF has reaffirmed its buyback and increased its payout with higher franking. The stock shot up but the broker has upgraded to Buy anyway, increasing its target to $5.25 from $4.10.

Dexus Property ((DXS)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 6/1/0

The FY13 result confirms deteriorating office fundamentals in Deutsche Bank's view. Despite this, the full benefit of buy-back activity and acquisitions, plus higher trading profits, is expected to underpin guidance for FY14. The broker thinks upside to free funds growth and a further 5% buy-back, as well as a disciplined approach to corporate activity, warrants an upgrade to Buy from Hold. The price target is raised to $1.08 from $1.06.

Echo Entertainment ((EGP)) upgraded to Buy from Neutral by Citi. B/H/S: 4/2/2

Echo had a mixed result in FY13 according to the broker. Domestic revenue was again outpaced by rapid VIP growth. Effective cost control was evident , which will underpin earnings recovery in FY14. Citi has lowered earnings forecasts by 4% in FY14 but lifts FY15 by 1%. Citi thinks the stock is too cheap to ignore.

Federation Centres ((FDC)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 3/3/1

The rating is upgraded given the attractive valuation after the recent share price weakness. FY14 guidance was above Merrills' estimate and the balance sheet has been restored. Management has guided for FY14 earnings of 16.5-16.8c per share. On the back of the results and the revised guidance the broker has increased FY14 earnings per share forecasts to 16.7c and the distribution to 15.1c.

Fleetwood Corp ((FWD)) upgraded to Neutral from Underweight by JP Morgan and to Neutral from Sell by UBS. B/H/S: 0/3/1

The FY13 profit was above guidance but there was no final dividend and this drove the share price reaction. That, and the higher current debt balance and subdued near-term outlook, according to JP Morgan. Despite this, the broker is upgrading the rating to Neutral from Underweight as weak conditions are factored into the share price. The price target is reduced to $3.70 from $3.75. Fleetwood, while logging a miserable year, managed to outperform UBS' estimates by about 30%. The broker forecasts a slower than expected recovery in earnings and lifts its FY14 estimate 3.5% but has lowered FY15 and FY16 forecasts. The broker believes the near 40% slump in the share price better reflects the stock's risk profile.

GWA ((GWA)) upgraded to Buy from Neutral by UBS and to Neutral from Sell by Citi. B/H/S: 1/3/1

GWA's result met guidance and expectations and UBS notes good business fundamentals, core brands gaining market share and staffing down 14%, allowing a margin recovery. UBS revises core EBIT for FY14, anticipating price rises and continued gains in market share. The broker lifts its rating to Buy from Neutral and increases the target price to $3.10 from $2.55. Citi has upgraded to Neutral from Sell, given quarter-on-quarter improvement in the profitability of the business. Earnings were down in the third quarter but turned positive in the fourth. No formal guidance was given but the company expects dwelling approvals to improve in the second half of FY14 which should translate into first half FY15 sales.

See also GWA downgrade.

iiNet ((IIN)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 2/4/1

Credit Suisse has upgraded pre-amortisation profit by 1.5% in FY14, 4.2% in FY15 and 5.5% in FY16. Around 2% of the upgrades reflects a lower on-going tax rate for TransACT, the balance is operational upgrades. While the FY13 result was broadly in line the broker believes it revealed several important trends that indicate a much stronger earnings and cash flow story ahead.

Iluka Resources ((ILU)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/2/1

Headline first half earnings of $34m beat the broker's estimate because of a non-cash inventory build up of $38m versus the expected $4m. The rating is upgraded to Outperform from Neutral and the target price increased to $13.00 from $12.00 on improved confidence in 2014 zircon sales.

Investa Office ((IOF)) upgraded to Buy from Neutral by UBS. B/H/S: 6/1/0

Broker notes Investa Office Fund marginally outpaced its estimates, turning in a "strong" result. Acknowledging a "difficult" office market, UBS reckons IOF capacity to add value to assets and de-risk its income has been underestimated, and flags positive news over FY14.

Perseus Mining ((PRU)) upgraded to Outperform from Underperform by Macquarie. B/H/S: 3/3/1

Perseus is busy completing a mine life optimisation plan due in September. The broker sees significant upside if the strip ratio is lowered and grades increased and suggests PRU should be able to deliver operationally now that the crusher problems have been resolved. By delaying Sissingue, PRU is also protecting its balance sheet.

Sonic Healthcare ((SHL)) upgraded to Outperform from Neutral by CIMB. B/H/S: 3/5/0

The FY13 result was in line with the broker's expectations with stable margins and solid cash conversion. Cost cutting initiatives and synergy and abating currency headwinds are expected to support stable earnings growth.

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

The broker has lifted earnings forecasts and, as a result of the slight price fall, returned the rating to Buy from Neutral. The target price is unchanged at $13.75. The group's strong capital position is a key attraction for the broker. Gross written premium growth slowed in the second half and Citi thinks FY14's target of 6-8% could be a challenge. Underlying margin improvement is slowing too.

Tatts ((TTS)) upgraded to Neutral from Sell by UBS. B/H/S: 0/5/3

Tatts' full-year result beat the broker, thanks to surprisingly low net interest and tax. UBS notes online is a bigger focus but a lot of catch-up needs to be done. Broker upgrades Tatts to Neutral from Sell on the basis of valuation and retains a $3.15 price target. 

Trade Me ((TME)) upgraded to Outperform from Neutral by CIMB and to Neutral from Sell by UBS. B/H/S: 1/3/1

Investors clearly didn't like the FY13 report, but CIMB retains a positive outlook for the company, in particular for the classifieds operations. Share price weakness is seen as offering an attractive entry point. Supporting the broker's view, earnings estimates have been increased. DCF-based price target increases 13% to NZ$4.88. UBS notes weakness in the composition. Management announced a few investments which the broker believes will take a while to yield a return. UBS expects revenue to rise 11% in FY14 but downgrades earnings estimates to account for higher capex, depreciation and financing.

Downgrades

Alumina ((AWC)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 2/2/4

While regulating US banks out of commodity warehousing will prove beneficial in the long run, the broker suggests, the short term impact on aluminium should be significant as increased supply forces prices lower. The broker has cut Alumina forecast earnings, dropped its target to 80c from $1.10 and downgraded to Underperform.

ANZ Banking Group ((ANZ)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 6/1/1

ANZ has outperformed peers other than CBA ((CBA)) by 5% in the lead-in to results season, the broker notes, with the lower A$ providing a boost. ANZ's quarterly profit figure matched the broker but featured a 2bps decline in group margins as falling margins in Institutional banking begin to bite. Insto margins are expected to fall some 20bps in the second half to September. The broker is looking to exporter client improvement to help offset margin decline, but has downgraded to Underweight based on share price performance. Target falls to $31.26 from $32.13.

Arrium ((ARI)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/5/1

Arrium's underlying result beat consensus and pleased the broker, albeit debt remains high and the steel outlook remains challenged. Stronger second half iron ore volumes and prices were a highlight. Target rises to $1.20 from $1.10 but the broker has downgraded on the stronger share price.

Atlas Iron ((AGO)) downgraded to Neutral from Outperform by CIMB and to Neutral from Buy by Citi. B/H/S: 1/7/0

As far as misses go, CIMB notes this was a whopper, some 67% below consensus on rising costs and exploration expenses. Atlas burnt cash in the period. AGO has provided FY14 production guidance but nothing beyond, and the timing of Mt Webber stage 2 remains uncertain. FY13 results were disappointing and Citi has made earnings downgrades. Valuation has also fallen because of lower earnings and higher capex for projects, and despite reduced Mt Weber stage 2 capex. The combination of lower earnings and NPV has driven the broker to downgrade the recommendation to Neutral from Buy.

Aurizon ((AZJ)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/4/0

Aurizon's result beat the broker on the headline but fell short at the underlying level. The dividend exceeded expectations. Looking over the 'aurizon, the broker sees growth now coming from asset efficiency growth rather than capital investment given the shift in mining's fortunes but AZJ has an under-utilised balance sheet nevertheless. The broker sees around 14% earnings growth over the next three years with the capacity for upside surprise. The problem is the market is excited as well, pushing AZJ to full value. Target increases to $4.80 from $4.71 but the broker has pulled back to Neutral.

Ausenco ((AAX)) downgraded to Neutral from Buy by UBS. B/H/S: 0/5/0

First-half profit was at the top of guidance but earnings were hit by sluggish contract growth and underperforming contracts. UBS slashes its FY13 earnings per share forecast 49%, FY14 21% and FY15 9%, to reflect lowered guidance. The broker downgrades its rating to Neutral from Buy citing continued cyclical headwinds for the sector but a solid balance sheet.

Bendigo & Adelaide Bank ((BEN)) downgraded to Neutral from Buy by UBS. B/H/S: 0/6/2

Bendigo and Adelaide Bank's full-year result failed to meet UBS's recommendations – falling short of the mark by about 2.5%. The bank's cost-to-income ratio fell slightly and deposits were weak at the expense of loan growth, leaving the broker to conclude that provisioning was too thin and the bank's biggest risk, given provisioning fell 6.5% to 26.5% in the first half. The broker was surprised by the dividend after the headline result failed to meet expectations. It downgraded earnings estimates between 3%-4% across FY14-16. The broker downgraded its rating to Neutral from Buy to account for the recent rally in the share price and lifted its target price to $10.50 from $10.00 to bring it in line with the post-rally market.

Boral ((BLD)) downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie. B/H/S: 2/2/4

The FY13 profit came in at the top end of the previously announced guidance range. While the result was impaired by various one-off impairment charges, Credit Suisse thinks a number of operational and financial initiatives should start to bear fruit in a stronger FY14. The broker is less willing to capitalise the cyclical leverage, which has to date been somewhat elusive. Macquarie has cut Boral's forecast earnings following its result. While debt reduction was encouraging, earnings were mixed across divisions and the outlook commentary was guarded. Management is trying to turn things around and look through the cycle, but conditions in Australia remain weak and a return to profitability in the US remains elusive.

Breville Group ((BRG)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/0/1

Breville's result beat guidance, featuring accelerating growth in the second half. The broker continues to see many positives for the company and doesn't really have a bad word to say other than the share price has run up too far. On that basis the broker downgrades to Underperform, increasing its target to $7.75 from $6.15.

CFS Retail Property ((CFX))  downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 1/5/1

The FY13 report (in-line) and guidance for FY14 have triggered cuts to forecasts and a downgrade in rating to Neutral from Buy. Price target has fallen to $2.15 from $2.22 prior. BA-ML notes the trust is cautious on retail sales given a high discretionary component. Estimates have been lowered.

Clough ((CLO)) downgraded to Neutral from Buy by UBS. B/H/S: 1/2/0

Clough delivered on positively revised guidance and in line with the broker's estimates. The key takeout was a net cash balance of $441 million, a good 25% above UBS's estimate, as well as an 11% jump in secured revenues. UBS lifts earnings per share estimates 7% in FY14 and 6% for FY15-16. Broker says the good news is priced in and downgrades its rating to Neutral from Buy, and lifts the target price to $1.47 to $1.36 to account for the rally.

Commonwealth Property Office ((CPA)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/5/1

Comm Property's result was in line but FY14 distribution guidance is underwhelming, the broker suggests. Noting recent takeover speculation, the broker suggests no more than the current price will be paid and possibly no full bid will be forthcoming, rather a pitch for the rights. Given sector outperformance the broker downgrades. Target retained at $1.17.

Crowe Horwarth ((CRH)) downgraded to Sell from Neutral by UBS. B/H/S: 0/1/1

Crowe Horwarth delivered in line with lower guidance but it turned out there was more bad news in the metrics. Broker notes cash earnings slumped 23%, net debt rocketed 29% and the dividend fell short of UBS's estimate (2c vs 2.5c). UBS notes dividend support is weakening and doesn't see any improvement in fundamentals or operating environment. The broker has downgraded Crowe Horwarth to Sell and has slashed its price target to 56c from 75c.

Fantastic Holdings ((FAN)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/3/0

The company appears to the broker to be straining under the increased competition from Ikea and Super Amart. Profit for FY13 was down 36% and 8% below Credit Suisse forecasts. The target price is reduced to $2.25 from $2.55 and the rating downgraded to Neutral from Outperform.

Fletcher Building ((FBU)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/3/3

The second half was better than expected and Credit Suisse has raised FY14-16 profit forecasts by 1-3%. On the back of the share price response the broker is downgrading the rating to Underperform from Neutral. The target is reduced to NZ$9.00 from NZ$9.20. At this stage the broker thinks the stock has run ahead of the rate of recovery and execution on cost savings.

GWA International ((GWA)) downgraded to Neutral from Outperform by CIMB. B/H/S: 1/3/1

While GWA's result was in line, it confirmed the broker's positive thesis and shows the company's transformational business plan is paying off. The FY14 growth profile looks strong, the broker suggests, with volume increases expected in the second half. Ongoing transformation will impact in FY15-16. Target jumps to $3.03 from $2.55 but the market is all over it, hence the broker is forced to downgrade to Neutral on valuation.

See also GWA upgrades.

Hills Holdings ((HIL)) downgraded to Neutral from Buy by Citi. B/H/S: 1/1/0

After further scrutiny of the results, Citi has decided to downgrade Hills to Neutral from Buy. FY14-15 earnings forecasts are increased 1-4% and the target price is raised to $1.58 from $1.28, largely because of margin expansion and improved profitability.

Insurance Australia Group ((IAG)) downgraded to Underperform from Neutral by CIMB. B/H/S: 0/3/4

IAG had pre-released and the result hit the top end of that guidance range. It was very strong across the board, the broker suggests. So strong, in fact, that broker doubts it could ever happen again. FY13 was assisted by numerous tailwinds and things will get tougher from here, the broker believes.

Macmahon Holdings ((MAH)) downgraded to Neutral from Buy by UBS. B/H/S: 1/3/0

McMahon Holdings full-year result fell well short of expectations and turned in a "messy" result, says UBS. The broker sees no relief in margin pressure or operating conditions and downgrades its FY14,FY15 and FY16 earnings per share estimates 56%, 55% and 43% respectively. Little love lost here as broker cuts rating from a Buy to Neutral and slashes the target price from 31c to 14c.

Monadelphous ((MND)) downgraded to Neutral from Outperform by CIMB. B/H/S: 0/2/5

In the wake of the FY13 result the broker has lowered FY14 profit forecasts by 15.1%. CIMB does not believe growth is over but thinks there will be a lull in second half FY14 revenue that may concern investors. Although reduced activity should reverse in FY15-16, given a strong tender pipeline, CIMB does not expect investors to look through short-term revenue and profit declines.

Paladin Energy ((PDN)) downgraded to Neutral from Buy by UBS. B/H/S: 0/3/2

UBS has downgraded its rating of Paladin Energy to Neutral from Buy to account for the dilution of the share price arising from its announcement to raise 15% of its capital in an issuance. The full valuation of Paladin drops 10% to $2 per share.The broker has slashed its price target to 70c from $1.20 – a 30% discount to net present value – believing a rise in uranium demand will be needed before the company stages a turnaround.

SMS Management & Technology ((SMX)) downgraded to Underperform from Neutral by CIMB and to Underperform from Neutral by Macquarie.  B/H/S: 0/1/3

The title above today's research update says it all: The trough is yet to come. A margin squeeze is happening and CIMB analysts fear the exact consequences for the company and its shareholders. On top of this, the stockbroker suggests the company's outlook has deteriorated, with contracts signed in 2H13 down 18% yoy. Earnings estimates have been cut by 20% and 16% for FY14 and FY15, but, says the broker, these numbers would be double if the acquisition of Indicium had not been included. Macquarie downgrades as SMS posted a weak result, down 31% in the year and featuring a lower dividend. Falling Hong Kong demand was the issue, with first half FY14 earnings expected to be lower than second half FY13 with the inclusion of the Indicium acquisition.

St Barbara ((SBM)) downgraded to Sell from Buy by Citi. B/H/S: 0/1/2

Operational performance at Simberi and Gold Ridge continues to drag on St Barbara, in the broker's view. This, in conjunction with lower commodity prices has driven a $310m impairment charge only 12 months after closing the deal. Citi looks for better operational delivery in the year ahead but does see marginal value in the company's operations against the commodity price outlook.

Webjet ((WEB)) downgrade to Neutral from Buy by UBS. B/H/S: 0/4/0

Broker says Webjet's underlying result appears in line but given a different accounting model for Lots of Hotels start-up costs, it fell short. On the positive, UBS notes margins were up; better agreements with airlines; Zuji is on track and Lots of Hotels is outperforming.The big negative though is a tough-operating-conditions forecast for FY14 in the core air business, and UBS revises down its rating to Neutral from Buy and cuts the target price to $4.45 from $5.00.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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