Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, 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.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday November 4 to Friday November 8, 2013
Total Upgrades: 11
Total Downgrades: 8
Net Ratings Breakdown: Buy 36.66%; Hold 44.32%; Sell 19.02%

Stockbroker upgrades and downgrades are pretty much in balance during this quiet period. The past week saw a general re-assessment of David Jones, which led to no less than three brokers upgrading their rating to Neutral for the stock. This has pushed the face value numbers in favour of more upgrades. As such, FNArena recorded 11 upgrades and 8 downgrades.

Note also: one of the recorded upgrades in the table below is a phantom upgrade for Flight Centre by Deutsche Bank. The broker reiterated its Buy rating for the shares last week, but our system has erroneously picked this up as an upgrade. Please ignore the inclusion of Flight Centre in our table of ratings changes this week.

All in all, changes in stockbroker ratings seem devoid of any strong themes. Most are simple responses to profit warnings or to re-appraisals as share prices rise on low volumes.

More price targets are rising than falling, but in most cases this resembles nothing more than a catch-up to share price action that has preceded. In terms of earnings forecasts, banks and energy companies dominate on the positive side, while there's some real damage kicking in on the negative side following profit warnings by Qantas (EPS estimate this year down by 58%), by Ausdrill (-27%) and by GUD Holdings (-12.5%).

Others on the receiving side of sizable cuts to forecasts include Alacer Gold, Aurora Oil and Gas, Coca-Cola Amatil and OrotonGroup.

Upgrades

Billabong International ((BBG)) upgraded to Neutral from Sell by Citi. B/H/S: 0/3/3

Billabong has secured a $360 million term loan from Centrebridge and Oaktree. The company has also sold West 49. While this is progress, Citi notes the proposed change to the capital structure will not be put to shareholders until January 2014. The sales feedback from some customers is mixed, with weaker trends in the Americas. Citi raises the rating to Neutral/High Risk from Sell/High Risk. Billabong is not expected to generate meaningful earnings until FY16 given the proposed recapitalisation.

Commonwealth Bank ((CBA)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/3/2

CBA's quarterly earnings beat the broker on lower provisioning expense and the result was compositionally solid, the broker suggests. Margins declined slightly but FUM growth was strong. Business loan growth was absent but mortgage growth was above system for the first time in three years. Importantly, CBA was able to generate capital in a low earnings growth environment, leading the broker to increase its dividend forecast. With peers going ex-div, CBA is well positioned for upside, the broker suggests. Upgrade to Overweight. Target rises to $76.32 from $74.34.

David  Jones ((DJS)) upgraded to Neutral from Underperform by CIMB Securities, to Neutral from Underperform by Credit Suisse and to Hold from Sell by Deutsche Bank. B/H/S: 0/5/3

The company delivered improved sales in the first quarter and CIMB has upgraded expectations by 4% in FY14 and 1% in FY15. The improvement was assisted by a warm start to Spring. The broker noted sector discounting was aggressive with excess winter inventory still at large. The stock's valuation is considered excessive relative to the discretionary stocks but CIMB has taken the opportunity to raise the rating to Neutral from Underperform. Credit Suisse analysts seem pleased with the company's Q1 update, citing "solid sequential improvement in like-for-like sales". CS believes the risks associated with owning equity in the upmarket retailer have shifted into neutral territory, hence the upgrade in rating. The analysts point out the clothing market is cycling particularly poor seasonal conditions from summer 2012/13 and winter 2013, suggesting the weaker reference points might play to David Jones' benefit in the quarters ahead. First quarter sales showed some signs of life and Deutsche Bank was even more pleased with the cycling of the most demanding base comparatives in two years. The broker thinks trading was better than management expected and this could result in reduced promotion. With the stock trading at a 10% premium to the All Industrials and above valuation the improvement is seen reflected in the share price.

Downer EDI ((DOW)) upgraded to Buy from Neutral by UBS. B/H/S: 8/0/0

UBS has upgraded earnings forecasts and the recommendation to Buy from Neutral. The increase of 6-8% in FY14-16 estimates is largely a result of upward revisions to mining margin estimates, and incorporating the $400m contract at Wheatstone LNG as well as some small road maintenance contracts. The broker finds the stock compelling value at its current FY14 price/earnings of 10 times. The strength of the balance sheet poses a risk to management's 45% dividend pay-out ratio and the broker believes this is a potential catalyst towards the price target – raised to $5.90 from $4.70.

Fortescue Metals ((FMG)) upgraded to Buy from Neutral by UBS. B/H/S: 6/1/1

Fortescue hosted a site visit. While market confidence in China is high the broker notes the company sees near-term iron ore price risks. UBS also took from the visit the expectation that depreciation costs will rise above market forecasts when Kings comes on line. Earnings are expected to eased by 4% in FY14 and 13% in FY15 as a result of higher depreciation and amortisation. Despite this, UBS expects iron ore prices to average above US$100/dmt for the next 18-24 months. This underpins cash flow and should enable de-gearing. The rating is upgraded to Buy from Neutral and the price target is revised to $6.50 from $5.60.

PanAust ((PNA)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 6/0/1

Analysts at Credit Suisse believe PanAust has negotiated a good deal, purchasing the Frieda River deposit in PNG from Glencore Xstrata. CS suggests the price to be paid is low given Xstrata already spent $270m on feasibility studies. Most importantly, however, the analysts believe the new project will be competing with Inca de Oro in Chile for capital which is likely to result in the latter project being put on hold. CS believes putting the Chilean project on hold will be received positively by investors. The analysts do point out it remains likely PanAust might have to issue new capital at some stage in the years ahead, and yes, that includes funding requirements for the newly purchased Frieda River deposit. For now, rating upgraded to Outperform from Neutral. Price target gains 20c to $2.60.

QBE Insurance ((QBE)) upgraded to Outperform from Neutral by CIMB Securities. B/H/S: 4/3/1

The upgrade is only indirectly related to QBE with CIMB analysts taking the view the Q3 reporting season in the US implies a positive read-through for QBE from what general insurers have reported to the US market. QBE is by no means without risk, acknowledge the analysts, (they describe QBE as "a company in transition") but they see it as having the clearest upside potential among insurers in Australia as well as carrying the lowest hurdle for a re-rating. Thus far, the 2013 hurricane season is tracking well, the analysts point out. Upgrade to Outperform from Neutral. Price target remains unchanged at $16.11.

Tatts Group ((TTS)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/5/2

The broker is upgrading to Neutral from Underweight because the stock has underperformed this year. The recent trading update suggests lotteries are doing well and the investment in the brand and marketing and wagering technology should deliver benefits. Forecasts for FY14 have been increased and the target price is raised to $2.95 from $2.80.

Downgrades

Adelaide Brighton ((ABC)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/4/2

Adelaide Brighton has secured a contract with a Western Australian lime customer for 10 years. Deutsche Bank suspects it likely included higher prices. The impact of the contract re-negotiation was well flagged with management expecting $5m from mid 2014 from higher prices and $4-8m in earnings from potential volume growth of 5% in 2013 and 2014. Deutsche Bank expects lime earnings to account for 35% of group earnings in 2014. As the stock is now trading in line with the target – unchanged at $3.70 – the recommendation is downgraded to Hold from Buy.

Ausdrill ((ASL)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 2/4/1

JP Morgan has downgraded the rating to Neutral from Overweight. The price target is reduced to 97c from $2.28. The broker considers the company's strong link to mine production increases is broken. Ausdrill is required to make major changes to reset earnings and reduce gearing. After a trading halt, the company has provided initial quantitative guidance and now expects normalised profit to be down 60% in FY14. Management has stated the weakness is widespread, including its core drilling and blasting services in Australia and Africa. JP Morgan suspects the need to lower gearing will make the process of rebuilding challenging.

Harvey Norman ((HVN)) downgraded to Neutral from Buy by UBS. B/H/S: 2/4/2

First quarter sales were up 2.7% and in line with the broker's expectations. Franchisees slowed as did like-for-like sales in New Zealand. This confirms the challenging environment is still in place. The broker has lowered first half profit forecasts by 10.2% and FY14 by 7%. The stock has outperformed over the quarter and is now trading in line with the broker's price target (lowered to $3.20 from $3.30) so the rating is downgraded to Neutral from Buy.

Orica ((ORI)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 3/4/1

Volume growth is softening but what has caught JP Morgan by surprise is the impact of the shift in the mix towards lower margin regions. This has resulted in reduced profit per tonne for mining services. The broker thinks consensus earnings estimates for FY14 are optimistic and the fundamental valuation is no longer supportive. FY13, FY14 and FY15 earnings forecasts have been downgraded by 0.2%, 6.2% and 4.7% respectively. The rating is downgraded to Neutral from Overweight and the price target remains at $21.20.

Investa Office Fund ((IOF)) downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS. B/H/S: 4/3/0

The trust has sold its minority interest in DOF and CS analysts believe the price achieved is disappointing. The main positive, in their view, remains that IOF is transforming itself into an Aussie-only office REIT. Price target falls to $3.33 from $3.37 prior. Rating has been downgraded to Neutral from Outperform. The Dutch Office Fund has finally been sold to a consortium of existing investors. The sale price of EUR155m reflects a discount to the net asset value of 24% and a 15% discount to the carrying value. Pricing was below UBS' expectations and the sale has come earlier than expected. Ultimately it will be what the company does with the proceeds that will be of interest. Acquisitions of $400m in Australian assets could offset the earnings dilution, in UBS' estimates. The broker is downgrading to Neutral from Buy, reflecting the valuation change and recent price performance. The price target is reduced to $3.13 from $3.15.

Macquarie Group ((MQG)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 1/6/0

Deutsche Bank thinks that while earnings growth and returns will increase significantly over the medium term, the share price will take a breather. The first half showed strong growth in all franchises with both annuity and market-leveraged business contributing. The next upside leg is seen in FY15 and the valuation is looking full on FY14 earnings expectations, amidst the potential for negative sentiment around the tapering of QE in the US. The broker does stress that this is a valuation and timing call rather than revealing concerns around the business model and growth. The rating is downgraded to Hold from Buy and the price target is steady at $56.20.

Westpac Banking Corp ((WBC)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 3/3/2

The FY13 result was solid but Deutsche Bank, looking into FY14, finds it difficult to envisage the bank delivering top growth among peers. initiatives are likely to take some time to show. Further special dividends are expected but valuation now looks challenging following a 26% increase in the share price since June. Hence, the rating is downgraded to Hold from Buy. The target price is raised to $35.90 from $34.80.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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