Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features CHARTER HALL GROUP, and other companies. For more info SHARE ANALYSIS: CHC

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 April 29 to Friday May 3, 2013
Total Upgrades: 20
Total Downgrades: 34
Net Ratings Breakdown: Buy 37.23%; Hold 44.83%; Sell 17.94%

The sad news, as far as broker ratings go in Australia, is the week past delivered yet another week of more downgrades than upgrades while the share market as a whole seems to have stopped trending. In other words: it's not rising share prices that are doing any of the damage to corporate valuations and to broker ratings. It's all related to disappointing financial performances and/or bloated expectations.

If we dig below the face value numbers for the week past, which saw 34 downgrades outnumbering 27 upgrades, a less negative picture emerges. In terms of companies that received upgrades and downgrades, the tally stands at 20 upgraded versus 24 downgraded. The key difference is perennial disappointers, including Boart Longyear, Kingsgate Consolidated and Billabong, trigger more downgrades than the surprise packages attract upgrades. The latter group includes Charter Hall, Sandfire Resources and Transfield.

A similar picture emerges from the week's changes in targets/valuations and future estimates: a small group of heavy disappointers is responsible for some big negative changes, but all in all most other adjustments remain fairly benign. And let's not miss the fact that the likes of Village Roadshow, Mortgage Choice, BC Iron and various smaller energy companies are contributing to the positive side. In some cases this occurs in quite remarkable fashion.

Upgrades

AGL Energy ((AGK)) upgraded to Buy from Neutral by UBS. B/H/S: 3/4/0

AGL reported broadly in line and, while UBS thought debt ratios were marginal, news that AGL wholesale supply into Queensland from present contracts could rise triggered an upgrade of the stock. The broker revises down its earnings per share forecasts for FY14-16 about 4% to 6% to reflect heavy retail discounting. The estimates do not include the 68c potential inflow from the Queensland supply increases. But the price target valuation includes the windfall and UBS lifts the rating to Buy from Neutral, tipping upside of 20%.

Atlas Iron ((AGO)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/6/0

The company is having growing pains according to Credit Suisse. FY13 underlying earnings were disappointing at $14m versus the broker's estimate of $49m. Differences were lower revenue, higher costs and higher depreciation. Earnings are expected to be negative in FY14, given guidance that depreciation will nearly double as short-life mines close. The reduction in the stock price increases the rating to Outperform from Neutral and the price target is steady at $1.00.

Caltex ((CTX)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/3/3

From an operating point of view it was a tough half given a weak economy, supermarket discounting and the loss of mining demand, Credit Suisse notes. The second half should not be quite so bad. The key to Caltex, nevertheless, is the value of its irreplicable infrastructure, which leads the broker to suggest Caltex is compelling value at this level.

See also Caltex downgrade.

Charter Hall ((CHC)) upgraded to Neutral from Underperform by Credit Suisse, to Hold from Sell by Deutsche Bank, to Buy from Neutral by UBS and to Buy from Neutral by Citi. B/H/S: 4/30

Charter Hall's result beat Credit Suisse by 2%. Despite a strong market position, the broker expects FUM growth to slow after a solid period but CHC still has room to improve its return on equity. CHC has been underperforming the REIT sector of late but a 6.1% yield limits downside. The FY13 result was 2% above Deutsche Bank's estimates, despite being at the top end of guidance. The broker thinks FY14 EPS growth guidance of 7%, coupled with a 3-year CAGR of 5.2% justifies current pricing. Having underperformed the A-REIT sector by 7% and 9% on a monthly and quarterly basis respectively the stock is now seen fairly priced.

UBS cites solid support from capital partners, growth in investment yields of 12%, the redeployment of legacy investment funds, AUM growth, and a steady fall in debt costs. UBS believes Charter Hall's minimal hedging rate relative to peers will work in its favour over FY14 given the low interest rate environment. The FY13 earnings growth of 11.3% was the best in the ASX200 A-REIT sector, in Citi's view and guidance for 7% growth in FY14 is also strong. The broker likes the business and lifts estimates for FY14-16.

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

Credit Suisse has upgraded the target on the back of the FY13 results, to $16.40 from $12.80. The rating is raised to Outperform from Neutral. Earnings forecasts have been upgraded on higher Macau earnings.

See also Crown downgrade.

Flight Centre ((FLT)) upgraded to Buy from Neutral by UBS. B/H/S: 5/3/0

UBS was forced to initiate an upgrade of Flight Centre's target price after another glowing result at the upper end of guidance. Flight Centre's model continues to defy the naysayers and improved process lent support to margins. The broker notes earnings diversification has improved, the percentage of corporate traffic rising steadily and expects dividends to flow. UBS notes the company is trading at a full multiple for a cyclical but upgrades the rating to Buy from Neutral, noting strong earnings momentum. The target price rises to $53.10 from $38.70 – the higher end of the broker's valuation range.

Horizon Oil ((HZN)) upgraded to Buy from Neutral by UBS. B/H/S: 3/0/1

Horizon reported in line with UBS and above consensus. UBS upgrades to Buy from Neutral after recent share price weakness, citing discussions on a deal involving Elk/Antelope gas and Exxon Mobile's stake in a permit near Stanley in PNG; and expecting news on the Tingu exploration well.

Insurance Australia Group ((IAG)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/4/4

Insurance Australia Group outpaced consensus and beat the broker, JPMorgan citing a "strong result" and confirmation NSW CTP reforms had been withdrawn from Parliament. JPMorgan believe fundamentals remain supportive and trends point to momentum on premium rates into the 2014 first half.

IOOF Holdings ((IFL)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/4/0

IOOF's profit fell slightly short of the broker but JPMorgan notes strong cost control should support a continuation of the healthy dividend payout ration of roughly 90%. The broker lifts its rating to Neutral from Underweight and bumps up the price target to $8.33 from $8.05.

See also IOOF downgrade.

Metcash ((MTS)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 3/3/2

The CEO's FY14 guidance at the AGM sparked a sell-off in the shares. Ian Morrice needed to convey a solution for raising profits quickly and building long-term value: not easy, Macquarie admits. Instead he delivered a 10% downgrade to FY14 earnings expectations. Macquarie thinks the stock looks cheap but the story could be a tragedy. The rating is upgraded to Outperform from Neutral on valuation grounds. Macquarie notes the stock has lost a quarter of its value since May but has shown a tendency to bounce off the low $3.00 levels. The price target is reduced to $3.33 from $3.66.

Perpetual ((PPT)) upgraded to Neutral from Sell by Citi and to Outperform from Neutral by Macquarie. B/H/S: 1/5/1

In the wake of the FY13 results Citi has lifted FY14 earnings expectations by 2% and made only compositional changes to FY14. No changes are made to the $38.00 price target but, as the stock has fallen below that level, the rating is raised to Neutral from Sell. The broker thinks the stock looks fully valued but the Trust Company ((TRU)) transaction would be significantly accretive if Perpetual is allowed to carry it off. Perpertual delivered on Macquarie's expectations in the FY13 results, with the major cost cutting program and increased operating leverage to improved equity markets. The share price is now materially below the broker's unchanged $40.00 price target and the rating is upgraded to Outperform from Neutral.

Ramsay Health Care ((RHC)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/4/2

FY13 results were in line with Macquarie's expectations. The industry outlook has improved and the stock, while Macquarie concedes it's not cheap, is supported by earnings certainty and growth. The company's high multiple may be too rich for many investors, especially those predicting a recovery in the broader economy, but Macquarie believes the certainty and outlook should drive continued outperformance. The rating is upgraded to Outperform from Neutral and the price target is raised to $42.00 from $34.09.

Reece Australia ((REH)) upgraded to Buy from Neutral by Citi. B/H/S: 1/0/0

The FY13 result was similar to the other building product companies, lower sales because of a slow down in construction and weak consumer confidence. Where Reece differed, according to Citi, was it refurbished stores and continued to invest in its branch network. The broker has upgraded the stock to Buy from Neutral and increased FY14 and FY15 profit forecasts by 4% and 7% respectively to reflect the likely margin expansion in the business as a result of improved volumes in FY14. The target price is raised to $28.76 from $24.93 on the more favourable assumptions

Sandfire Resources ((SFR)) upgraded to Neutral from Sell by Citi. B/H/S: 2/5/1

The company's high-grade project in Western Australia offers a clean story for Citi, with M&A options and exploration potential a cause for optimism. Profit was below the broker's expectations for FY13 because of lower-than-expected sale revenue. The broker sees reasonable valuation support and upgrades the rating to Neutral from Sell.

Shopping Centres Australasia ((SCP)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/2/3

The FY13 result was ahead of prospectus forecasts due to interest cost savings, offset in part by higher corporate costs and a bad debt provision. The company remains confident of reaching its stabilised specialty occupancy target of 95% prior to the roll-off of 2-year rent guarantees. The stock has underperformed the sector  by 7% on a rolling quarterly basis and to Deutsche Bank it now looks fairly valued. The rating is upgraded to Hold from Sell and the price target of $1.53 is retained.

Telecom NZ ((TEL)) upgraded to Neutral from Underweight by JP Morgan and to Neutral from Sell by UBS. B/H/S: 1/5/2

JPMorgan says the key elements of Telecom's result met expectations. The broker notes conditions remain tough but believes margin re-basing risk is falling. It upgrades the stock to Neutral from Underweight, citing a low market valuation, strong prospective yield and receding risk. UBS says strategy looks to be on track but tinkers with estimates to reflect the good and bad of lower mobile services growth, improved labour costs, lower depreciation and stronger capital expenditure. UBS lifts earnings estimates in FY14 and FY15 4% and 2% respectively.

See also Telecom NZ downgrade.

Transfield Services ((TSE)) upgraded to Buy from Hold by Deutsche Bank and to Outperform from Neutral by Macquarie. B/H/S: 2/3/0

The FY13 result revealed strong cash flow generation and debt reduction, which has lowered the risk of the company breaching debt covenants. Deutsche Bank likes the low exposure to the resource construction market, the overweight position in the recurring infrastructure, property and hydrocarbon maintenance markets. Macquarie upgrades the rating to Outperform from Neutral, with balance sheet concerns allayed in the short term. Cost cutting and a more conservative approach to setting guidance should help the company deliver on expectations in FY14.

Treasury Wine Estates ((TWE)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/2/4

JP Morgan had retained an Underweight rating post Treasury's result given ongoing underlying weakness and a stretched valuation, but the market has now had its say and Treasury Wine's share price has taken a dive. The broker suggests another 5% fall in the Australian dollar would be needed to justify such a price, hence an upgrade to Neutral.

Whitehaven Coal ((WHC)) upgraded to Neutral from Underperform by CIMB. B/H/S: 4/4/0

The highlight of Whitehaven's result was a decrease in cash costs, giving CIMB more confidence the company can retain positive operating cash flow in FY14 despite a subdued coal market. But 50% of the valuation relates to Maules Creek, the broker notes, and any further delays in the face of ongoing low coal prices could put the balance sheet under pressure.Target rises to $2.10 from $1.70.

Downgrades

Air New Zealand ((AIZ)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/1/0

Air NZ's result was in line. Operating cash flow provided a positive surprise and gearing is reduced, while the dividend payout ratio was increased. All good, except that Credit Suisse feels earnings have now peaked. Pressure on yields from increased domestic competition and increased capacity is expected from here on.

Austbrokers ((AUB)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/0/1

The FY13 result was 1% above the broker's forecast. As a result of earnings changes and model roll the target price increases to $10.41 from $9.55. Credit Suisse supports the strategy being adopted by management and the track record but with near-term earnings facing some headwinds and a full valuation the rating is lowered to Underperform from Neutral.

Billabong International ((BBG)) downgraded to Sell from Buy by Citi and to Underperform from Neutral by UBS. B/H/S: 0/3/4

It was a huge loss for Billabong and Citi is forecasting further reduction in FY14. The important factor for Billabong is that it has avoided insolvency and private equity interest is testament to value in its brands, the broker suggests. However any further refinancing will be highly earnings dilutive. UBS notes that, while financing has been obtained, working capital is a problem for the company given inventory days have risen. The broker notes improving costs and global trends as positives and lifts first-half earnings estimates. Negatives including interest costs, a "high level of uncertainty" and a run in the share price which has left the stock trading well above the broker's valuation.

Boart Longyear ((BLY)) downgraded to Underperform from Neutral by CIMB, to Underperform from Neutral by Credit Suisse and to Neutral from Outperform by Macquarie. B/H/S: 0/3/5

Boart Longyear disappointed CIMB as the company's "financial positions looks eerily similar to that of 2009". The broker sees an equity dilution as the company moves to repair the capital position and, noting high debt and depreciation and a long cyclical winter, forecasts further losses into FY14. Following a weak interim result the company has downgraded full year guidance to 20% below prior consensus. The company is moving to refinance its debt facility in the US high yield market so as not to breach debt covenants by year end. Credit Suisse has downgraded forecast earnings by 15-20% in FY14-15.

There is no evidence the bottom of the cycle has been reached yet. If successful, a potential debt restructure in the coming months could see the stock rebound. There's no guarantee of this, Macquarie warns, and balance sheets metrics are likely to remain uncomfortably high for the next 12-18 months. Given the risk the company will breach covenants, a further deterioration in market conditions and no earnings rebound in sight, Macquarie has reduced the recommendation to Neutral from Outperform.

Caltex ((CTX)) downgraded to Underperform from Neutral by Macquarie and to Neutral from Buy by UBS. B/H/S: 1/3/3

While there were no surprises in the result, Macquarie thinks the outlook is growing more challenging in light of weaker regional refining markets, tougher domestic economic conditions and competition in marketing. Caltex's first half neatly met guidance and the company maintained second-half guidance for the marketing business, although UBS questions whether a slowing economy will allow this. The broker downgrades Caltex to Neutral from a Buy, noting the company has outperformed the energy sector, rising 22.3% in a year, and the share price is nearly fully valued.

See also Caltex upgrade.

Crown ((CWN)) downgraded to Neutral from Buy by Citi. B/H/S: 5/3/0

Crown reported a strong FY13 result. Citi has upgraded earnings forecasts by 11% in FY14 and 5% in FY15, mainly because of lower interest costs and Australian dollar forecasts. Following the recent strong share price run, the rating is lowered to Neutral from Buy. The price target is raised to $15.50 from $13.80.

See also Crown upgrade.

David Jones ((DJS)) downgraded to Underperform from Neutral by BA-Merrill Lynch and to Underweight from Neutral by JP Morgan. B/H/S: 0/2/6

The company reported a 2.9% decline in like-for-like sales growth for the fourth quarter, weaker than Merrills expected. The rating is downgraded to Underperform from Neutral and the price target is lowered to $2.50 from $2.60. JP Morgan says softer-than-expected fourth quarter sales from David Jones suggest FY14 risk; competition activity and weak consumer traffic outweighing sentiment around an improved margin mix. JPMorgan cuts FY13, FY14 and FY15 earnings per share forecasts 1.4%, 6.6% 7.2% respectively. The broker notes risks outweighs rewards and downgrades to Underweight from Neutral.

Drillsearch ((DLS)) downgraded to Neutral from Outperform by Macquarie and to Neutral from Buy by UBS. B/H/S: 2/2/0

FY13 results were messy, in Macquarie's opinion. Adjusted earnings were 33% ahead of forecasts with the major reason being the lower depreciation and low effective tax rate. The stock has rallied 50% from the June lows and is now trading at a 20% premium to core net asset value. The rating is downgraded to Neutral from Outperform and the price target is reduced to $1.55 from $1.60. Drillsearch massively outpaced UBS and consensus thanks to a $27.3 million tax benefit. The company's guidance was in line but it conceded there was room for outperformance from the oil and gas assets. The broker is awaiting Acer results before factoring in full value and downgrades the stock to Neutral from Buy to account for the recent share price rally.

Independence Group ((IGO)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/4/0

The result was in line. The highlight was the rapid ramp-up of Tropicana, from which first production is due any day. The problem for Credit Suisse is the share price has run up 65% from its low only two months ago. Target rises to $4.00 from $3.75 but downgrade to Neutral.

IOOF Holdings ((IFL)) downgraded to Neutral from Buy by Citi. B/H/S: 2/4/0

Revenue pressures were evident in the FY13 result according to Citi. The earnings forecasts for FY14 are reduced by 2% and FY15 is reduced by 1%. With roll-forward and these earnings changes spot valuation rises slightly and the target is lifted to $9.00 from $8.95.

See also IOOF upgrade.

Mayne Pharma ((MYX)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/1/0

The FY13 result was essentially in line with guidance and Credit Suisse's forecasts. As the DCF model is rolled the target price increases to 61c from 52c. However, based on recent relative share price performance the broker's rating moves to Neutral from Outperform.

Metcash ((MTS)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 3/3/2

Aggressive competition from the major chains is not a new theme for Metcash and Deutsche Bank thinks, while the group has some ability to compete on price, it has not been able to match the deep petrol discounts which have drawn customers away from the independents it services. Petrol discounting may subside but Coles ((WES)) and Woolworths ((WOW)) are likely to allocate the promotional spending elsewhere, which the broker thinks Metcash will find similarly difficult to match given its lack of customer data. Difficult trading is expected to compound the tight cash position and result in a sharp fall in the dividend.

Mirvac Group ((MGR)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/4/0

The FY13 result was a little ahead of the broker and the strong growth outlook into FY14, while positive, was expected. Macquarie remains attracted to the leverage to an improving residential market but considers the strong share price over recent months has resulted in a diminished value proposition.

Mount Gibson Iron ((MGX)) downgraded to Underperform from Neutral by Credit Suisse and to Underweight from Neutral by JP Morgan. B/H/S: 3/2/3

Credit Suisse's has raised the target price to 70c from 65c following the FY13 results. The share price has staged a 75% rally since late June on the back of the iron ore price to reach 72c, ahead of the target price, and the broker thinks it's overdone. The rating is downgraded to Underperform from Neutral. Mount Gibson's profit fell short of expectation but JP Morgan noted a few bright spots: EBITDA rose 26% in the second half and cash flow was healthy. JP Morgan notes the stock has rallied 40% in three months, outpacing its peer by a healthy clip and cuts the rating to Underweight from Neutral.

M2 Telecommunications ((MTU)) downgraded to Neutral from Buy by Citi. B/H/S: 0/2/1

Citi has decided to downgrade to Neutral from Buy because the recent appreciation in the stock price limits valuation upside. Strong growth in FY13 revenue came on the back of 11 months contribution from the acquisition of Primus and two months from the collective Dodo and Eftel acquisitions. The broker thinks calculating the underlying organic growth rate for FY14-FY15 is difficult. Earnings forecasts are cut by up to 2% and, accordingly, the target price is lowered to $6.85 from $6.98.

Qantas ((QAN)) downgraded to Underperform from Neutral by Credit Suisse and to Underweight from Neutral by JP Morgan. B/H/S: 5/1/2

Qantas' result missed consensus. International still has a long road to profitability, Credit Suisse suggests, but cash flow has improved so a possible return to dividend payments could provide stock support. In the meantime, competition, higher oil and weaker A$ are all providing headwinds. JP Morgan found little to impress in Qantas's result, noting strong headwinds and excess domestic capacity, taking little heart from improvements in the international business. The broker downgrades the airline to Underweight from Neutral in line with valuation, expecting a recovery is still a way out – after FY14 when the broker flags rosier gearing, cash flow and coverage metrics.

QRX Pharma ((QRX)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 2/1/0

JP Morgan loses patience as the FDA's second Complete Response Letter flags another six month delay to QRxPharma's MoxDuo-IR launch, which the broker believes, after cash burn, will create a funding gap. JPMorgan now assumes a lower probability of success for the project given FDA has queried the accuracy of one aspect of the data, which the broker says raised questions about the integrity of all the data. The target price falls to 95c from $1.15 and the stock is downgraded from Overweight to Neutral.

Resolute Mining ((RSG)) downgraded to Sell from Neutral by Citi. B/H/S: 0/0/1

Resolute's result missed Cit's expectations on lower-than-expected gold sales. Resolute has revised its mine plans, deferred expansion and revised down reserves in the wake of the lower gold price, the broker notes, although cash generation in FY14 should provide a tailwind.

ROC Oil ((ROC)) downgraded to Neutral from Buy by UBS. B/H/S: 2/2/0

Roc's interim matched UBS' expectations and reports that projects are on track. UBS says Roc is "entering a period of significant cash generation" as projects ramp up and expects acquisitions may feature. The broker downgrades to Neutral from Buy to reflect the recent share rally. The target price is unchanged at 60c.

Sims Metal ((SGM)) downgraded to Neutral from Outperform by CIMB. B/H/S: 4/2/1

Sims posted a big miss and Citi has reduced forecast FY14 profit by 28%. The broker believes the market remains supportive of SGM on a cycle look-through basis when realistically greater caution is required. FY14 is about cost savings, the broker suggests, rather than actual earnings growth.

Telecom NZ ((TEL)) downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 1/5/2

Telecom NZ's result was ahead of consensus on lower D&A and tax, but guidance to flat dividend growth in FY14 disappointed Merrills. Rising subscriber levels are being offset by competitive pricing, and cost cuts will be a material drive in FY15-16. Meanwhile, FY14 is unlikely to provide outperformance until revenues stabilise, the broker suggests.

See also Telecom NZ upgrade.

Western Areas ((WSA)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 3/3/1

After a recent site visit Deutsche Bank has made changes to forecasts. While the company can continue to mine above the average nickel reserve grade of 4.1%, maintaining 5% from FY13 is considered to be a stretch, which may see production come back over the next few years. The price target is reduced to $2.80 from $2.90, but given the strong recent share price performance the rating is downgraded to Sell from Hold.
 

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