Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features ALUMINA LIMITED, and other companies.
For more info SHARE ANALYSIS: AWC

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 September 30 to Friday October 4, 2013
Total Upgrades: 4
Total Downgrades: 7
Net Ratings Breakdown: Buy 37.62%; Hold 43.53%; Sell 18.84%

If this is truly a new bull market then someone forgot to tell the stockbrokers as research on individual companies has pretty much dried up. As overall volumes on the ASX remain paper-thin, clearly the incentive to entertain clients with additional Buy and Sell ideas remains absent, which might explain the low activity on display from stockbrokers in Australia.

The week past nevertheless saw four rating upgrades and seven downgrades while local equities have proved remarkably resilient in the face of ongoing international uncertainties. Noteworthy is that BHP Billiton received an upgrade, as did Alumina Ltd, CSL and Retail Food Group. On the other side of the ledger, ResMed's strong share price performance led to a downgrade as was the case for Oil Search.

Other downgrades involved company specific problems such as an unexpected profit warning from K&S Corp and renewed bribery allegations hitting Leighton Holdings.

Perhaps the most important news from the week past is that upgrades to earnings forecasts have become larger with all companies mentioned in the past week's Top Ten receiving upgrades of at least 6%. This includes two major banks which will be reporting full year financials in the weeks ahead.

Upgrades

Alumina ((AWC)) upgraded to Outperform from Neutral by CIMB. B/H/S: 2/1/4

CIMB analysts have conducted an in-depth study into structural cost increases across the world's mining sector. For Australian investors, the key conclusions are: new supply for most commodities is operating at relatively high costs, providing support for existing producers and, in Australia production, costs in coal and iron ore are poised to surprise to the downside. For Alumina Ltd, the result has been a boost to valuation/price target to $1.40 from $1.21 and this has triggered an upgrade in rating too; to Outperform from Neutral.

BHP Billiton ((BHP)) ugraded to Outperform from Neutral by CIMB. B/H/S: 5/3/0

CIMB analysts have conducted an in-depth study into structural cost increases across the world's mining sector. For Australian investors, the key conclusions are: new supply for most commodities is operating at relatively high costs, providing support for existing producers and, in Australia production, costs in coal and iron ore are poised to surprise to the downside. The end result is a boost to the stockbroker's valuation/price target for BHP Billiton, which subsequently has triggered an upgrade in rating; to Outperform instead of Neutral. Price target now sits at $43.10.

CSL ((CSL)) upgraded to Buy from Neutral by UBS. B/H/S: 4/2/1

CSL has forgone any US price increase for 2013. The company's Privigen IVIG is priced 9% lower than the US peers but higher than the rest of the world. UBS estimates the company is planning around 12% FY14 volume growth but, if it grows US volumes faster, a 40% price arbitrage can be achieved. On the basis of gaining price and mix, UBS has upgraded profit growth forecasts for FY14. The rating is upgraded to Buy from Neutral and the price target is raised to $75.00 from $70.00.

Retail Food Group ((RFG)) upgraded to Buy from Neutral by UBS. B/H/S: 1/0/1

UBS has lifted earnings forecasts for coming years. This has led to an increase in the stockbroker's price target, to $4.70 from $4.40, and triggered an upgrade in rating to Buy from Neutral. UBS analysts have taken a favourable view on the growth profile, arguing the profile has transitioned from "average growth at discount value" to "above average growth at average value". Bottom line: shareholders should see further rewards even after the re-rating that has already taken place. The company is generating enough cash to maintain the current 5% yield in dividends, state the analysts. On top of this, the broker sees further bolt-on acquisitions on the horizon.

Downgrades

K&S Corp ((KSC)) downgraded to Sell from Buy by Deutsche Bank and to Neutral from Outperform by Macquarie. B/H/S: 0/1/1

K&S has issued a warning, suggesting first half profits could be down 55% on the previous first half. Deutsche Bank had expected a 10% fall. Weakness on the eastern seaboard is the issue, with WA also slowing down after a strong performance. With little exposure to retail, K&S is not set to benefit from any post-election bounce, the broker notes. The trading update, and downgrading of forecasts, surprised Macquarie. July and August are typically weaker months ahead of a traditionally stronger October-December period. This can only mean that the company envisages challenging operations across its business. Management is still on the hustings for bolt-on acquisitions but Macquarie thinks more attention is required on securing volume in core divisions.

Leighton Holdings ((LEI)) downgraded to Sell from Neutral by Citi. B/H/S: 0/4/3

The potential implications of allegations of impropriety in the company's international business are unclear. Leighton has made improvements to risk management and governance but investor concerns remain heightened. Hence, the broker has lowered the target price to $15.35 from $18.97, applying a 10% discount to valuation on the increased risk to offshore earnings and cash collection. The rating is downgraded to Sell from Neutral as the expected total return is negative 7%.

Matrix Composites & Engineering ((MCE)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/0/1

The broker is downgrading to Underweight from Neutral because there are too many near-term risks in the order book. The company's order book was at historical lows at the FY13 result and there's been no major contracts announced since August. Earnings forecasts have been cut to reflect the difficulties building the order book in the near term without sacrificing margin. The price target is reduced to 65c from 95c.

Oil Search (OSH)) downgraded to Sell from Neutral by Citi. B/H/S: 4/1/2

Citi sees limited upside for Oil Search. Elk/Antelope appears large enough to underpin an expansion train, and the broker suspects the PNG government prefers Elk/Antelope to be developed at PNG LNG rather than as a greenfield project. Assuming T3 is underpinned by 2.5tcf from Hides and 2.5tcf from P’nyang, and T4 is  underpinned by 4.5tcf from Elk/Antelope, the broker estimates Oil Search's unitised share would be reduced to 24.6% of T1-4 from 29%. A T3/4 expansion could lift the valuation to $9.02, unrisked, but Citi envisages significant appraisal risk, timing risk, and commercial risk. The rating is downgraded to Sell from Neutral rating and the price target is raised to $8.75 from $8.74.

Qantas ((QAN)) downgraded to Neutral from Outperform by CIMB. B/H/S: 4/2/2

August traffic numbers show domestic market capacity growth is moderating and Virgin Australia ((VAH)) is gaining ground on Qantas in the domestic market. For Qantas, CIMB believes the earnings risk is shifting to the international segment, as capacity in that area is accelerating from a number of foreign carriers. Hence, the rating is downgraded to Neutral from Outperform and the price target is reduced to $1.49 from $1.73. No earnings changes are made at this stage and the broker continues to prefer Qantas over Virgin on valuation. It's just that in the short term concerns over the competitive landscape are overshadowing the positives.

ResMed ((RMD)) downgraded to Neutral from Buy by UBS. B/H/S: 5/2/0

The 3-year re-bidding of Round 1 of the US Medicare pricing has been completed and there's been a bounce in price expectations. UBS re-bid price estimates are about 11% higher. UBS notes the nine major cities that took part in the competitive bidding process three years ago affect about 1% of ResMed's revenue. For UBS, the direction of the price signal is most important and indicates a more rational stance on pricing. There's been change in valuation assumptions but, with the recent rally in the stock price, the rating moves down to Neutral from Buy. The price target is raised to US$53.01 from US$50.50. In Australian dollar terms this is raised to $5.64 from $5.52.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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