Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features APA GROUP, and other companies. For more info SHARE ANALYSIS: APA

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 December 9 to Friday December 13, 2013
Total Upgrades: 9
Total Downgrades: 6
Net Ratings Breakdown: Buy 36.99%; Hold 44.76%; Sell 18.24%

Overall activity among stockbrokers in Australia is slowing down, and quite rapidly so, as the industry is winding down and preparing for Christmas cheer and the annual break. The number of research reports on individual companies that is being distributed to customers is now at low volume and might have been at zero if it wasn't for industrial companies continuing to issue (unwelcome) profit warnings.

The week past saw profit warnings from QBE, GUD and Silver Chef, amongst others, while OZ Minerals showed there's still plenty of corporate risk inside the resources sector too. Note both JP Morgan and Deutsche Bank reduced their crude oil price forecasts during the week.

The common theme amongst stocks that have been receiving recommendation downgrades is low valuation. Even OZ Minerals and QBE Insurance enjoyed at least one upgrades during the week as investors punished immediately following the companies' surprise disappointments.

Valuation, however, is only part of the investment opportunity for the Australian stock exchange. This is illustrated by the two downgrades for QBE, one for Energy Resources of Australia and one late downgrade for Qantas.

In terms of stockbrokers' price targets, both Qantas and QBE feature dominantly on the negative side of adjustments, both beating several resources stocks. When it comes to adjustments in earnings forecasts, last week there simply was no match for Buru Energy, whose estimates plunged by no less than 179%. Virgin Australia also beat QBE with a fall of 72%. It doesn't happen that often that a downward correction of 38% is only good enough for the third spot for the week.

The biggest adjustment did occur on the positive side where nickel producer Western Areas enjoyed an increase of 211%.

Upgrades

APA Group ((APA)) upgraded to Add from Hold by CIMB Securities. B/H/S: 2/3/3

The company has upgraded FY14 earnings guidance as assets and investments perform. CIMB thinks the company has a sustainable competitive advantage and solid balance sheet. That said, the stock appears fully priced against utility peers but the broker believes the exposure to the emerging gas market, strong growth forecast and expansion projects justify the premium. The rating is upgraded to Add from Hold and the price target is raised to $6.68 from $6.29.

Billabong International ((BBG)) upgraded to Hold from Sell by Deutsche Bank. B/H/S:  0/4/2

The company has updated on the year to date, although resisted giving FY14 guidance. The chairman has suggested the company's performance is steady or slightly improving in most markets except for the Americas. Deutsche Bank notes the comparatives are less demanding in the second half but there will be a number of one-off expenses. The rating is upgraded to Hold from Sell on valuation and the price target is steady at 30c.

Cabcharge Australia ((CAB)) upgraded to Outperform from Neutral by CIMB Securities. B/H/S: 1/1/3

The company has faced numerous headwinds for the past years and the broker suspects these will not be abating soon. Despite this, CIMB has decided to upgrade the rating to Outperform from Neutral. The reason is that, even under a  bear case scenario, the valuation is appealing to the broker, as the stock offers a 7.5% dividend yield and there is potential for up to 16% in upside with a full cyclical recovery. The benefits of moving to cards from cash continues and, according to CIMB, the remaining earnings are of significantly higher quality, given regulatory risk has largely been removed and competition within the payment industry substantially reduced. The target price is reduced to $4.60 from $4.65 and earnings forecasts for FY14 and FY15 have been lowered by 1% and 7% respectively.

Energy Resources of Australia ((ERA)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/2/0

The leach tank failure is not a big deal valuation-wise, JP Morgan suggests. The issue is the concerns from traditional landowners about the dangers of uranium mining, and hence this failure puts underground mine plans at risk. Most of the broker's valuation of ERA comes from assuming that Ranger Deeps goes ahead. Target falls to $1.15 from $1.30 but the share price reaction prompts an upgrade to Neutral on valuation.

There are also opposing views (see below)

Fleetwood Corp ((FWD)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/4/0

The lack of visibility in the company's key markets is a potential problem and the broker thinks there'll be further downgrades to consensus expectations. Nevertheless, Credit Suisse thinks the valuation is finally starting to take these risks into account. The rating is upgraded to Neutral from Underperform on the back of share price weakness. The price target is reduced to $2.40 from $3.40 because of earnings revisions.

Mincor Resources ((MCR)) upgraded to Neutral from Underperform by Macquarie. B//H/S: 0/2/0

The Indonesian government has reiterated plans to ban nickel exports from January 2014. Macquarie's base case does not assume a material ban on nickel ore exports but the announcement underpins the positive long-term view for the metal. Despite this, high levels of both nickel ore inventories in China and finished nickel on the LME are expected to suppress any price recovery in the near term. Mincor offers the lowest leverage to nickel as the cash balance accounts for half of Macquarie's valuation. The stock is offering around 13% upside to the price target so the broker is upgrading to Neutral from Underperform. The price target is 60c.

Newcrest Mining ((NCM)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/3/3

The broker has assessed operating and capex scenarios in FY15 for Newcrest and assumes savings of $120-150m plus another $100m odd from production stripping. NCM intends to pursue other cost saving measures but these are yet to be identified. Further liquidity should not be required if gold stays over US$1150/oz and at present the broker's forecast exceeds this level. All up the broker sees NCM's break even falling by $115-125/oz versus FY14. Adjusting to spot gold and A$ assumptions sees the target fall to $8.75 from $12.60 but this still allows the broker to upgrade to Outperform.

OZ Minerals ((OZL)) upgraded to Buy from Sell by Citi. B/H/S: 3/4/1

Prominent Hill has seen a 12% depletion in contained copper, the broker notes. Inventory is nevertheless supportive of OZ Minerals' strategic plans, and the new mine plan is largely in line with the broker's expectations. While the Malu extension offers slim margins, it will extend the life of the Hill to 2024, the broker notes, and costs should also decline. After the fall in the share price, OZL now offers compelling value, the broker suggests, despite a weak outlook for copper. Rating upgraded to Buy from Sell and $3.50 target retained.

QBE Insurance ((QBE)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/5/1

Following QBE's profit warning the broker has cut forecast earnings by 19% and dropped its target to $11.94 from $14.50. But with the share price having fallen 30% in two days, the question is as to whether the stock is now showing value. And the answer is yes. The broker believes QBE's new 10% margin guidance for 2014 is feasible, notes the stock is now trading at an attractive PE compared to peers, and still offers upside as a play on lower interest rates and a weaker A$. The main risk is a new CFO is about to come on board and may make further reviews, leading to further write-downs. Nevertheless, upgrade to Neutral.

There are also opposing views (see below)

Downgrades

Ampella Mining ((AMX)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/1/1

Ampella and Centamin have entered into a merger deal whereby Ampella shareholders will receive one Centamin share for every five Ampella shares they own. Credit Suisse observes that, while the resource was metallurgically challenging and not commercially mineable at this stage, the transaction's pricing sets an unfortunate precedent for valuing other juniors. The broker does not have a view on Centamin so downgrades the rating to Neutral from Outperform. The price target is steady at 19c.

Energy Resources of Australia ((ERA)) downgraded to Neutral from Buy by UBS. B/H/S: 2/2/0

The company has confirmed there's been no impact on 2013 production with the failure of the leach tank at Ranger. The impact on 2014 production is being assessed. The broker's Buy case was based on the underground mine going ahead but traditional owner support is needed. The rating is downgraded to Neutral from Buy to reflect the need to restore credibility to support Ranger 3 going ahead. The price target is reduced to $1.25 from $1.75. Spot uranium prices are also reduced and the earnings forecasts fall 12% and 17% for 2013 and 2014 respectively.

Mount Gibson Iron ((MGX)) downgraded to Underperform from Neutral. B/H/S: 2/2/3

Mt Gibson will buy Gindalbie's ((GBG)) Shine hematite prospect for $12m plus royalties. The broker finds Shine is a little further from the rail sidings than it would have liked but is a reasonably advanced project. It's small, has a short mine life and can't support much capex, but it's cheap, in Credit Suisse's opinion. The broker has updated the iron ore price as well as adding Shine to the model. Mount Gibson has three iron ore mines with limited lives and, despite the cash backing, Credit Suisse is wary of acquisition risk, given the company's plans to buy substantial coal or iron ore projects. The share price has advanced beyond valuation so Credit Suisse downgrades to Underperform from Neutral. The price target rises to 95c from 90c.

Qantas Airways ((QAN)) downgraded to Neutral from Buy by Citi. B/H/S: 0/6/2

The first half loss has revealed the ongoing stresses of weak demand and heightened competition for Qantas. Citi thinks, while there are parts of the business which hold significant value, there has to be a plan to unlock value. Without such a plan the market will not be inclined to attribute fair value to these businesses. Following the material downgrades to earnings forecasts, the broker has reduced the valuation and downgraded to Neutral from Buy. The price target is lowered to $1.16 from $1.72.

QBE Insurance ((QBE)) downgraded to Underperform from Outperform by Macquarie and to Neutral from Buy by CIMB. B/H/S: 2/5/1

North American portfolio problems see QBE downgrade its margin guidance and the broker reduced its earnings forecasts by 26-28% for 2013-15. The chance of "material" variation from current forecasts is high, the broker warns, due to poor visibility. Despite macro conditions seemingly going QBE's way, and despite the share price response, the broker downgrades to Underperform from Outperform. Target falls to $13.20 from $17.10. Earlier in the week, CIMB downgraded to Hold from Buy as the stockbroker is not convinced the insurer has now issued its final disappointment. CIMB's price target tumbled to $13.00 from $17.65.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms