Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features FLETCHER BUILDING LIMITED, and other companies.
For more info SHARE ANALYSIS: FBU
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 December 25 to Friday December 29, 2013
Total Upgrades: 10
Total Downgrades: 8
Net Ratings Breakdown: Buy 37.11%; Hold 44.31%; Sell 18.59%

Ten recommendation upgrades outnumbered eight downgrades for the week ending Friday, November 29. The numbers look even better if one considers three companies -Forge Group, Goodman Fielder and Programmed Maintenance- received multiple downgrades during the week.

The underlying message is thus that stockbrokers see more value opening up in the local share market. The reasons behind this are not uniform. Sometimes it's due to falling share prices, other times it's because solid performers prove their intrinsic strength (forcing the upgrades) and in some cases it is the result of a new development, like a spin-off or an acquisition.

Technology One was the absolute star-performer on the positive side after the release of its FY13 report revealed yet another stellar financial performance. Mining services providers continue to feature heavily on the negative side.

Upgrades

Aurora Oil and Gas ((AUT)) upgraded to Neutral from Underperform by BA-Merrill Lynch. B/H/S: 3/3/0

The stock has fallen 6% in the last month and underperformed the market. The Underperform rating has run its course in Merrills' view and, with 10% upside to the price target (steady at $3.31), the recommendation is raised to Neutral. The broker does not anticipate substantial catalysts from the upcoming investor presentation and is still not convinced about the Austin chalk. Nevertheless, Merrills considers there's likely to be incremental positives for the stock ahead.

Fletcher Building ((FBU)) upgraded to Outperform from Neutral by CIMB Securities. B/H/S: 3/2/3

CIMB has surveyed Australian home builders and has become more positive on the housing recovery. Near-term growth forecasts have been moderated for both non-residential and engineering construction. The broker continues to think sector valuations are full and maintains a preference for Fletcher Building. The NZ market remains the strongest across Australasia and, coupled with the US recovery, suggests that materials companies may benefit from the cyclical assistance in key geographies. Fletcher Building has been upgraded to Outperform from Neutral and the price target is raised to NZ$10.01 from NZ$8.98.

Hills Holdings ((HIL)) upgraded to Buy from Neutral by Citi. B/H/S: 2/0/0

Citi has decided an upgrade to Buy from Neutral is in order, giving the company the benefit of the doubt in its ability to continue to execute on growth by acquisition. Earnings forecasts have been increased for FY14-16 by 13-18%. Acquisition of Merlon Health Communications and Hospital Television Rentals will strengthen Hill's position in the growing aged care, retirement living and home care market. The company has growth potential in the health IT sector while the NBN is expected to boost demand for remote health care.

Iluka Resources ((ILU)) upgraded to Buy from Neutral by Citi. B/H/S: 5/2/1

Titanium oxide demand is expected to rise in 2014 after two years of destocking, but increased Chinese pigment production is expected to cap prices. The broker suggests this "arm wrestle" will mean Iluka will likely range-trade between $9-12. On the basis of the recent share price correction, the broker nevertheless upgrades to Buy. Target rises to $10.70 from $10.50.

Independence Group ((IGO)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 3/2/0

The company has announced a revised production target at Tropicana, downgrading it to 90-100,000 ozs from 120,000 ozs. Deutsche Bank is disappointed the ramp up will not be as rapid but this does not change the quality of the asset. The rating is upgraded to Buy from Hold because of the recent fall in the share price and attractive earnings growth. The price target is reduced to $4.05 from $4.15.

Programmed Maintenance ((PRG)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/5/0

The broker believes the outlook for the stock is solid after viewing the first half result  and has raised the recommendation to Outperform from Neutral. Macquarie thinks, with an undemanding valuation and 40% of earnings from the oil and gas business, there is scope for the good performance to continue. The price target is raised to $3.34 from $2.20.

See also PRG downgrades.

SEEK ((SEK)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/2/4

SEEK has upgraded guidance at the AGM, expecting earnings to be slightly ahead of FY13 as opposed to being moderately below. Hence JP Morgan has upgraded growth forecasts. SEEK has also announced the potential floating of IDP, in which it has a 50% stake. The broker thinks SEEK has shown significant resilience in the current market, with leverage to improvement in employment conditions. The rating is upgraded to Neutral from Underweight and the price target is raised to $11.89 from $9.17.

Specialty Fashion ((SFH)) upgraded to Outperform from Underperform. B/H/S: 2/2/0

Specialty has the opportunity to add material value, the broker suggests, provided it can turn the struggling Rivers brand, now acquired, around. From a valuation perspective, the low price paid and the upside potential outweigh inventory and lease liability risk, the broker believes. Rating upgraded to Outperform directly from Underperform. Target rises to $1.00 from 91c.

Technology One ((TNE)) upgraded to Buy, Medium Risk from Neutral by BA-Merrill Lynch. B/H/S: 3/0/0

The FY13 results were in line with the broker's expectations. Merrills has upgraded the stock to Buy from Neutral. The outlook commentary was reassuring and Technology One is considered well placed to deliver growth from strong license sales and margin improvement. The cloud could develop into a material driver of earnings. The price target is raised to $2.50 from $2.14.

Telstra ((TLS)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/5/1

Telstra has a real opportunity in Asia, in the broker's opinion. Telstra Global is considered well positioned with a strong network and product but below scale in terms of revenue. This could change through partnerships and acquisitions. There are smaller opportunities too, and these all add up to an upgrade to Outperform from Neutral for the broker. Credit Suisse lists lower-cost growth, higher long-term mobile market growth and earlier NBN migration payments to support the argument. The price target is raised to $5.70 from $5.13.

Downgrades

Forge Group ((FGE)) downgraded to Neutral, High Risk from Buy by Citi and to Underperform from Neutral by Macquarie. B/H/S: 1/1/1

The company will take a $127m write-down on the Diamantina and West Angeles power projects after costs blew out. The company has obtained increased funding from ANZ ((ANZ)), but Citi notes this has been at a cost whereby the bank has an effective 13% interest in the company via a warrant. Citi is asking where has all the cash gone? The broker is concerned that the project economics deteriorated to such an extent so quickly and, while management has undertaken a restructuring, it has has not instilled confidence. This is particularly worrisome to the broker because of the significant size of the contract won at Roy Hill amid a background of falling margins. The rating is downgraded to Neutral, High Risk from Buy and the price target to 83c from $6.60. Macquarie became a little wary last month on contract timing slippages before downgrading Forge to Neutral from Buy. Slippages have become major contract write-downs for the company to the tune of $127m, which sees the broker swing its FY14 forecast earnings to a sizeable loss and reduce FY15 earnings by 87%. History suggests first estimates of contract losses are rarely the last, the broker warns. Target cut to 50% of net tangible asset value, to 43c from $5.34. FGE will need equity, the broker insists. Downgrade to Underperform.

Goodman Fielder ((GFF)) downgraded to Neutral from Outperform by CIMB Securities and to Underperform from Neutral by Macquarie. B/H/S: 2/3/2

Goodman Fielder sells about 100m litres of fresh milk into the NZ market per half year. CIMB understands the company achieved a price increase of 10c a litre but this has not fully offset the 20c/litre increase in farm-gate pricing. The company has not provided guidance for FY14 but did confirm that first half earnings will be affected by this milk discrepancy. CIMB has reduced first half earnings forecasts by 11% and downgraded the rating to Neutral from Outperform. At the AGM management has signalled a risk to earnings in the NZ dairy business as milk price increases have not offset the increase in farm-gate pricing. This highly competitive market prevents the company from passing on significant increases, in Macquarie's view, as Goodman Fielder is caught between having to spend more on promoting brands and defending market share while at the same time being pressured by increasing retailer private label promotion.

Metcash ((MTS)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/2/3

Ahead of the first result under a new CEO on December 2, Credit Suisse thinks there is a modest risk of an earnings downgrade and reduction in dividend pay-out emerging from strategic initiatives in the review that's underway. There is also a risk of a capital raising. The rating is downgraded to Underperform from Neutral and the price target is reduced to $3.10 from $3.50.

Programmed Maintenance ((PRG)) downgraded to Neutral from Buy by Citi and to Neutral from Buy by UBS. B/H/S: 2/5/0

Programmed reported a first half result largely in line with the first half last year. WA revenues were down but due to contract completions, while new contracts at Wheatstone and Ichthys will buffer the second half and FY15, the broker suggests. FY14 will nevertheless be flat on FY13, management suggested. Citi has left FY14 forecasts unchanged but has increased FY15-16 by 3%. Improvement in Property & Infrastructure earnings met a decline in resource earnings in the half and saw Programmed's result fall short of UBS' expectations. The broker has made minor forecast revisions. The broker suggests the merger with Integrated in 2007 has forced significant restructuring which is now beginning to bear fruit in terms of returns.  On a 58% share price rise in 2013, the broker has downgraded to Neutral from Buy.

See also PRG upgrade.

Telecom Corp of New Zealand ((TEL)) downgraded to Neutral from Outperform. B/H/S: 0/6/2

The broker has dropped its rating on Telecom NZ to Neutral while retaining an NZ$2.40 target. The broker believes TEL can hold earnings flat ahead by reducing costs and increasing revenues in mobile, leading to stronger cash flow, de-leveraging and dividend support.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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