Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: HVN
The company is included in 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 October 14 to Friday November 1, 2013
Total Upgrades: 9
Total Downgrades: 22
Net Ratings Breakdown: Buy 36.61%; Hold 43.95%; Sell 19.44%

It is not unusual for strong share market gains to be met by a wave of downgrades in ratings for individual stocks by securities analysts and that's exactly what is happening in the wake of the present strong equity market performance.

The main ingredient behind these downgrades is, of course, the market pricing in future growth while analysts are being left with a general feeling that growth is not yet materialising, but share prices continue to lift regardless.

The tension between these two opposing forces is also apparent in responses to local bank results. While price targets for ANZ Bank and National Australia Bank have moved higher, alongside increased estimates, both banks received downgrades in ratings on the back of strong share price gains.

All in all, nine upgrades during the week ending on Friday, November 1 were clearly outnumbered by no less than 22 downgrades and the underlying theme behind the downgrades is a clear "share price too rich".

Amongst the upgrades we find stocks that might have sold off too far, like gold miners and retailers, and Woolworths. The owner of supermarkets and retailer of staple goods surprised to the upside with its Q1 market update and saw price targets and estimates rise, plus two upgrades in ratings as a result. This despite a cracking performance for shareholders over the past twelve months and a valuation considered by many as pushing beyond reasonable limits.

Casino operator Crown also continues enjoying upgrades to estimates and price targets.

Upgrades

Drillsearch ((DLS)) upgraded to Buy from Neutral by UBS. B/H/S: 3/1/0

September quarter production was ahead of the broker's forecasts and showcases another record quarter for the company. The FY14 production guidance has been maintained at 2.3-2.5mmboe. UBS thinks this is conservative and has upgraded forecasts to 2.7mmboe. Following the recent fall in the share price and the positive production the rating is upgraded to Buy from Neutral.

Harvey Norman ((HVN)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/3/2

CS analysts believe the outlook for household goods is improving and this warrants an upgrade for Harvey Norman to Neutral from Underperform. Earnings estimates have been lifted by 7-9% as the anticipated jump in profitability should reduce the need to support franchisees. Price target jumps to $3.40 from $2.15.

Kingsgate Consolidated ((KCN)) upgraded to Neutral from Sell by Citi. B/H/S: 0/1/2

September quarter production was in line with the broker's expectations. FY14 guidance of 190-210,000 ounces implies no growth on FY13 and the broker thinks that getting the Thai IPO away on attractive terms will be hard. Hence, the planned debt restructure and funding for growth at Nueva Esperanza and Bowdens is uncertain. The recommendation is upgraded to Neutral from Sell as reasonable valuation support is seen emerging, despite the target being lowered to $1.70 from $1.90.

ResMed ((RMD)) upgraded to Buy from Neutral by UBS. B/H/S: 7/1/0

ResMed's Q1 update signalled US flow generator growth is slowing, but at the same time the company managed to lift its gross margins underpinning estimates from UBS. The analysts acknowledge the first will continue to hang over the share price, while the second means forecasts can remain unchanged. In UBS' view, the case of ResMed has now become one of shorter term headwinds against longer term value. The analysts have decided to look through the short term, hence why they upgraded to Buy. The price target suggests 30% return on a twelve months horizon.

St Barbara ((SBM)) upgraded to Buy from Neutral by Citi. B/H/S: 1/1/1

Production was in line with expectations in the September quarter. Operational performance at Simberi and Gold Ridge continues to drag while lower commodity prices led to a recent $310m impairment charge. Citi expects a better year is ahead and there is potential for cash flow generation against the outlook for gold prices. The broker considers there's upside to valuation at the current share price and has upgraded the rating to Buy from Neutral. The target price is reduced to 65c from 75c.

Whitehaven Coal ((WHC)) upgraded to Outperform from Neutral by CIMB Securities. B/H/S: 5/3/0

The quarterly production report surprised to the extent that CIMB's profit projection has now jumped by no less than 83%. Whitehaven is still expected to generate a minor loss (to keep things in perspective). The stockbroker's NPV and price target remain unchanged at $3.48 and $2.10 respectively. The 40% discount is due to CIMB's concerns about meeting debt covenants in 2015. For now, however, the rating is lifted to Outperform from Neutral. Also, the Maules creek mine construction remains at risk of further delays, acknowledges CIMB. This project is an important part in the future upside potential for Whitehaven shareholders.

Woolworths ((WOW)) upgraded to Neutral from Underperform by Credit Suisse and to Overweight from Underweight by JP Morgan. B/H/S: 3/3/2

First quarter sales in food and liquor were solid but Credit Suisse thinks the September result was mixed. Discretionary business was poor, although unlikely to negatively impact FY14. Woolworths is seen juggling a number of challenges and opportunities across the discretionary retail business. The rating is upgraded to Neutral from Underperform after valuation adjustments and the price target is raised to $36.30 from $31.85. Woolies' Sep quarter sales growth fell short of JP Morgan but was of good quality with a solid performance from food & liquor. Issues still remain with weak hotels and Big W, a struggling Masters and competition from Aldi, but F&L momentum is improving and that's 83% of earnings, the broker notes. Throw in falling costs and a multiple no more expensive than peers and the broker has decided to upgrade straight to Overweight from Underweight. Target rises to $37.91 from $32.05.

Downgrades

Arrium ((ARI)) downgraded to Sell from Neutral by UBS. B/H/S: 1/4/3

The broker has raised FY14 earnings forecasts to reflect higher average iron ore price assumptions, incorporating an average price of $128/t (US119/t). That aside, UBS believes current valuations are incorporating a sustained average iron ore price of US$125/t over the next three years.  Arrium is also trading at a premium to its pure iron ore peers. Hence the rating is downgraded to Sell from Neutral. The broker would be more confident if steel earnings were rebounding but doesn't see this happening until FY16.

ANZ Bank ((ANZ)) downgraded to Neutral from Buy by UBS. B/H/S: 4/2/2

The FY13 result was in line with expectations. The bank has provided new targets with 4-5% revenue growth in FY14 amid cost growth around 2%. FY16 targets are cost-to-income less than 43% and return on equity greater than 16%. To achieve these targets UBS believes ANZ will need margin expansion and large growth in cross selling or a reduction in bad debt charges to less than 26 basis points. It's plausible but a big ask, in the broker's opinion. The stock is no longer cheap in the broker's view and the rating is downgraded to Neutral from Buy. The price target is raised to $32.00 from $28.50.

Ardent Leisure ((AAD)) downgraded to Neutral from Outperform by CIMB Securities. B/H/S: 1/4/0

CIMB analysts have shaved off 2% and 1% from EPS estimates for FY14 and FY15 respectively. The stockbroker remains a firm believer in the company's longer term growth story, but from a valuation point of view, and after a strong performance, it is now time for a breather. Downgrade to Neutral from Outperform.

Asciano ((AIO)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 7/0/1

The message Macquarie received from the first quarter update is that there's little sign of an economic recovery. Management did maintain guidance for positive underlying earnings growth but below FY13, implying 0-13%. The weak outlook points to downside risk to expectations. Macquarie believes that given the share price has improved dramatically in the past few months, there is little to justify that change. The rating is downgraded to Underperform from Neutral and the price target lowered to $5.48 from $5.69.

Brickworks ((BKW)) downgraded to Neutral from Buy by Citi. B/H/S: 0/1/0

Perpetual ((PPT)) and MH Carnegie & Co have proposed the unwinding of Brickwork's cross holding with Soul ((SOL)). The proposal paves the way for Brickworks to receive $19.75-22.00 for the shares in Soul. Assuming de-merger success, the deal represents upside risk to the valuation of Brickworks. An EGM has been structured to exclude associated shareholders from voting. The broker's target does not reflect any probability of the de-merger proposal and is lifted to $14.95 from $14.40 on the movement of listed investments. The rating is downgraded to Neutral from Buy after a period of outperformance.

BT Investment Management ((BTT)) downgraded to Neutral from Buy by UBS. B/H/S: 0/4/0

The FY13 result showed the strong growth trajectory and UBS expects the breadth and quality of the fund offering should support flow and FUM momentum. This is now factored into forecasts so there's little room for disappointment. The broker has reduced the rating to Neutral from Buy. The price target is raised to $5.25 from $3.95.

Carsales.com ((CRZ)) downgraded to Underperform from Outperform by Credit Suisse. B/H/S: 0/2/3

The trading update from the AGM pointed to slowing growth in a number of areas. Nevertheless, management is comfortable with FY14 consensus forecast and Credit Suisse thinks there is flexibility in the cost area to help offset a weaker revenue environment. The broker believes the stock is a high quality business with a strong market position but Carsales.com needs to deliver consistently high revenue growth to justify the P/E multiple of 25 times FY14 forecast earnings. Credit Suisse suspects a period of share price underperformance is looming. The rating is downgraded to Underperform from Outperform and the price target is reduced to $10.00 from $12.22.

Evolution Mining ((EVN)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/3/2

The company has made a solid start to FY14 with production broadly in line with expectations. Following the recent rally JP Morgan has downgraded the recommendation to Underweight from Neutral as the stock is considered expensive versus its peers. Evolution has disclosed that capex in FY15 will be similar to FY14. The broker now envisages minimal balance sheet reprieve in terms of debt repayments on the current AUD spot price.

Fortescue Metals ((FMG)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 4/2/1

The broker has undertaken a comparison of Pilbara iron ore majors Fortescue, BHP Billiton ((BHP)) and Rio Tinto ((RIO)). Using numerous financial metrics, the broker concludes FMG is expensive on a net present value basis given long-run earnings margin expectations. FMG is de-gearing rapidly but financial risks remain, the broker suggests. Target retained at $4.20. Downgrade to Sell.

Independence Group ((IGO)) downgraded to Neutral from Buy by UBS. B/H/S: 1/4/0

Production in the September quarter exceeded management's budget by 16% and puts it ahead of FY14 guidance. The Bentley reserves have been reduced by 48% after depletion and lower metal price assumptions. The modelled mine life is reduced by two years to 2018. The broker has downgraded the rating to Neutral from Buy based on valuation. The stock is performing well but UBS finds limited upside with subdued metal price forecasts. Despite this, with a new gold mine to ramp up and two producing  base metals mines, the company has a solid earnings base and remains one of the broker's preferred base metal stocks.

Lend Lease ((LLC)) downgraded to Neutral form Outperform by CIMB Securities and to Neutral from Buy by UBS. B/H/S: 5/3/0

First up: CIMB agrees with peers elsewhere and with management at Lend Lease that the future looks bright and solid growth should be on the horizon. Unfortunately, the sale of its stake in the Bluewater Project is likely going to be deferred to FY15, which triggers an adjustment in forecasts. CIMB has come to the conclusion that investors are likely going to remain cautious until a clearer picture emerges on what FY16 is going to look like. This, say the analysts, is likely going to translate into a drifting share price, hence the downgrade to Neutral. UBS expects Lend Lease to benefit from the improving macro environment but it will take some time. The recommendation has been downgraded to Neutral from Buy because of the strong share price performance. Upside is still expected closer to FY16 but cash flow and earnings quality at results in the near term may produce weakness in the share price and therefore better buying opportunities.

National Australia Bank ((NAB)) downgraded to Neutral from Outperform by CIMB Securities. B/H/S: 3/5/0

CIMB was positioned above consensus and thus NAB's FY13 report fell short. Making matters worse is that the analysts see limited scope for upside surprises and/or further re-rating for the shares. CIMB has cut EPS forecasts by 3.2% in FY14 and 4.0% in FY15. The stockbroker's "blended target" falls 3.7% to $34.40. CIMB thinks the market will start focusing on the "worries" again, including life insurance in Australia. On the other hand, NAB's growth should outpace the peers in Oz this year, predicts the broker. ANZ Bank is preferred in the sector.

OrotonGroup ((ORL)) downgraded to Sell from Neutral by Citi. B/H/S: 0/1/3

Oroton has signed a franchise agreement with Gap to distribute the productions in Australia. Citi had expected the company would replace the Polo licence with a more significant brand. Earnings forecasts have been lowered by 17% for FY14 and by 15% for FY15. Citi thinks Oroton has effectively replaced $23m in earnings with $2.5m in earnings. The rating is downgraded to Sell from Neutral and the price target is reduced to $4.60 from $5.20.

Regis Resources ((RRL)) downgraded to Underperform from Neutral by BA-Merrill Lynch and to Neutral from Outperform by Macquarie. B/H/S: 1/3/2

Merrills is downgrading the stock to Underperform from Neutral after weaker-than-expected September quarter production and revised guidance at Garden Well. Despite the grade issues, Garden Well is not high on the global cost curve and still generating strong cash flow but Merrills no longer thinks a premium to NPV is justified. Until there is further evidence of grade stability the broker remains cautious and, in the absence of stronger gold prices, there is limited upside. The September quarter production report highlights the ongoing reserve grade reconciliation at Garden Well. Macquarie likes Regis for its strong balance sheet and cash generation but expects softness in the medium term. The broker would look to re-enter the stock once the Rosemont stage two development has been completed in the first half of 2014 and the risk to that development has abated.

Resource Equipment (RQL)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/0/1

Resource Equipment's quarterly revenues looked good at first glance, the broker notes, but the strength lay in the lower margin business. Things are still tough for dewatering. Utilisation in rental is now below 50%. The broker has cut forecast earnings. Despite trading at a steep discount to net tangible asset value, RQL is facing low earnings and low interest cover. The broker thus downgrades to Underperform. Target falls to 17c from 18c.

Specialty Fashion ((SFH)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/3/0

The AGM update revealed soft trading and other headwinds affecting FY14. The company said it had seen no positive influence on consumer confidence since the federal election and expects first half profit will be below the prior corresponding half if sales do not significantly improve. The broker has reduced FY14 estimates and forecasts a 2% decline in first half sales. The target price is reduced to 91c from 97c and the rating is downgraded to Underperform from Neutral.

Stockland ((SGP)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 3/1/2

The AGM commentary confirmed further residential volume improvement in the September quarter. Deutsche Bank believes the company is on track to slightly exceed the top of the guidance range of 4-6% earnings growth in FY14.The rate of growth is considered priced into the shares and the rating is downgraded to Hold from Buy. The price target is raised to $3.90 from $3.85.

Suncorp ((SUN)) downgraded to Neutral from Outperform by CIMB Securities. B/H/S: 3/4/1

Suncorp has indicated that losses from the NSW bushfires should be around $60-70m, which is expected to be manageable against the full year allowance. CIMB has downgraded FY14 and FY15 earnings forecasts by 3% and 2% respectively, reflecting more conservative forecasts for bad debts and margin. The broker expects a solid FY14 result and another $300m special dividend in the second half. The rating is reduced to Neutral form Outperform as the stock is considered to be fully valued. The target is reduced to $13.21 from $13.52.

Transfield Services ((TSE)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/4/1

Transfield has had a good run in the last two months and Macquarie thinks some profit taking might be in order. The company reiterated guidance at the AGM for profit of $65-70m and the broker believes a big second half is required even more so this year because of the timing of restructuring costs. The rating is downgraded to Neutral from Outperform and the price target is raised to $1.58 from $1.16.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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