Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ANZ GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

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 February 10 to Monday February 14, 2013
Total Upgrades: 14
Total Downgrades: 13
Net Ratings Breakdown: Buy 39.54%; Hold 43.64%; Sell 16.82%

Stockbroker downgrades and upgrades for individually listed stocks in Australia were pretty much in balance last week, which, considering the strong upward momentum, is quite a positive signal.

Changes in ratings are mostly a reflection of company reports as the local reporting season now really is in full swing. Valuations feature, as per always, both to the up- and downside.

Overall, changes in valuations and price targets remain benign, which would support the notion that for the dogs in the market, at least for most of them, further downside potential should be light on from here. Note: there's always room for exceptions and mining services providers may well be one easy-to-distinguish exception in the wake of Rio Tinto announcing a lighter capex program for the year(s) ahead.

A small matter for concern is the observation that downward adjustments to earnings forecasts seem quite large, while upward adjustments appear much lighter. This could become a genuine matter of concern, albeit that, thus far, the quality of the companies receiving profit forecast upgrades clearly outweighs those receiving downgrades.

With Rio Tinto and two of the Big Four banks receiving upgrades in the week past, that last statement speaks of itself. Others enjoying upward momentum in earnings projections include Brambles, David Jones, Transurban and News Corp. On the negative side we find the likes of Goodman Fielder, Cochlear, OrotonGroup and Bradken.
 

Upgrades

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

The quarterly trading update revealed cash profit of $1.73 billion. Operating trends were solid and the bank now expects bad debt charges to be down around 10% in FY14. UBS notes concerns over emerging markets have led to ANZ underperforming over the past year. Given the fall in the share price the broker considers it's time to upgrade to Buy from Neutral. The price target is raised to $32.50 from $32.00.

Bank of Queensland ((BOQ)) upgraded to Buy from Neutral, Medium Risk by BA-Merrill Lynch. B/H/S: 1/5/2

Bank of Qld has fallen 10% in the past month and underperformed peer Bendigo & Adelaide Bank ((BEN)) by 6%, suggesting an attractive entry point to the broker. The regionals should now benefit from regulatory changes and the broker has removed its return on equity discount for BOQ, leaving a higher forecast than BEN. The regionals should continue to trade at a discount to the majors but the broker expects the gap to narrow. Upgrade to Buy. Target rises to $12.10 from $11.50.

Blackthorn Resources ((BTR)) upgraded to Buy from Neutral by UBS. B/H/S: 1/0/0

Blackthorn has shipped its first zinc concentrate from Perkoa. The company remains in negotiations with its joint venture partner Glencore over an additional $30m in working capital to get the mine to nameplate production. UBS has upgraded to Buy from Neutral on valuation but still thinks investors should be cautious until the results from the Kitumba optimisation are known. Results are expected by April. The price target is raised to 39c from 35c.

Boral ((BLD)) upgraded to Buy from Sell by Citi. B/H/S: 3/1/3

The broker has transferred coverage to another analyst and noted that construction activity has lifted and this is flowing through to earnings estimates. Citi thinks FY14 marks the start of a genuine extended recovery, with particular strength in Sydney construction combined with a slow but inevitable recovery in US earnings. The rating is upgraded to Buy from Sell and the price target is raised to $5.80 from $4.20. FY14 and FY15 profit forecasts have been lifted 14% and 16% respectively.

Carsales.com ((CRZ)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 5/1/2

The first half result was solid, in the broker's opinion. Deutsche Bank is encouraged by the continued investment in sales and marketing and thinks this will provide a sustainable platform for earnings growth. The broker also likes the fact that guidance is set in an environment of low new car inventories such that it captures the risk. The price target is raised to $11.00 from $10.50 and, with earnings forecasts increased and the roll forward of the model the rating is upgraded to Buy from Hold.

Cochlear ((COH)) upgraded to Neutral from Underperform by BA-Merrill Lynch, to Neutral from Underweight by JP Morgan and to Hold from Sell by Deutsche Bank. B/H/S: 0/4/4

The first half result has delivered on the Merrill's Underperform rating so this is now upgraded to Neutral. Merrills thinks, despite concerns regarding the outlook and the FY14 guidance downgrade, the run rate in the second half is improving and this means an uplift in FY15. The stock is not quite a Buy yet for the broker because there are still unanswered questions regarding the industry growth rate. It was another disappointing result for JP Morgan, with guidance cut by 15.6%. The compromised N6 release and the absence of any new product suggests bottom of the cycle earnings. That said, the last quarter featured strong underlying growth, the broker notes, market share aside. JP Morgan feels FY15 could thus be a year of general earnings growth. Deutsche Bank has further reviewed the first half result and, while remaining wary that the rebound in earnings could be short lived, has raised the rating to Hold from Sell.

Goodman Fielder ((GFF)) upgraded to Add from Hold by CIMB Securities and to Neutral from Underperform by Macquarie. B/H/S: 3/4/1

CIMB has upgraded the rating to Add from Hold in the wake of the first half results. The broker sees the company delivering on strategic plans while affected by cyclical input cost rises in major categories. CIMB expects the impact from higher milk input costs will ease over the next 12 months and dairy will drive earnings growth in FY15. The price target is raised to 68c from 64c. Goodman Fielder's result missed consensus. Impressive price rises were met by lower volumes, Macquarie notes, and cost savings are being reinvested just to stay in touch with the competition. Guidance risk is to the downside. The broker has pulled its rating up to Neutral ahead of a more thorough review.

See also GFF downgrade.

iiNet ((IIN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/1

Credit Suisse has had a close look at the stock and decided to upgrade profit forecasts by 6.5% and 9.2% for FY15 and FY16 respectively. The broker thinks the company has reached a major turning point in broadband subscriber growth and, moreover, can sustain a higher rate of growth. Revised NBN assumptions result in expectation of broadband market growth of 5-6% for the next five years and iiNet is expected to benefit. The rating is upgraded to Outperform from Neutral and the price target is raised to $8.10 from $6.74.

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

The first half was below the broker's expectations but the order book is now 35% above the last quarterly update in mid January because of multiple contract wins in the past four weeks. The key going forward will be the lifting of production rates and a reduction in plant operating costs in order to improve margins. JP Morgan has upgraded the rating to Neutral from Underweight, noting that, while the company has a history of earnings downgrades over the past 18 months, the improved order book and the benefits of a lower Australian dollar augur well. The price target is lifted to 90c from 77c.

QBE Insurance ((QBE)) upgraded to Buy from Neutral by UBS. B/H/S: 4/3/1

There are still some problems on the horizon but UBS is satisfied these have been factored into expectations. Hence, the rating is upgraded to Buy from Neutral following underperformance in the share price over the past months. The broker still thinks it possible another re-basing is on the cards but the upheaval in the transformation phase should have run its course. Softening commercial rates present a challenge going forward domestically, while the broker thinks the problems in Argentina are a manageable risk. The price target is raised to $13.00 from $12.50.

Skilled Group ((SKE)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/0/0

Skilled's result was weak but nevertheless in line with the broker and showed some stability compared to the previous half. The broker believes the second half will show material improvement given SKE is cutting costs and looking for acquisitions and contract wins where industry improvement is required and has a visible pipeline in the oil & gas space. Any cyclical improvement would be a bonus. Target falls to $3.50 from $3.55 but rating upgraded to Outperform.

Downgrades

Aurora Oil And Gas ((AUT)) downgraded to Sell from Buy by UBS. B/H/S: 2/2/1

Canadian company, Baytex Energy, has made a bid for Aurora at $4.10 a share via a scheme of arrangement. The bid has been recommended by Aurora directors and UBS thinks the premium is justified. Whilst a higher bid cannot be ruled out, UBS is doubtful one will emerge. Shareholders will get to vote on the transaction in late April/early May. The rating has been downgraded to Sell from Buy and the price target is set at the bid price, $4.10 against $3.70 previously.

Commonwealth Bank ((CBA)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/3/4

CBA's result showed stronger trading income provided a buffer against lower credit spreads which allowed the bank to write off software expenses and redundancies, the broker notes. It was nevertheless a solid result featuring balance sheet expansion, albeit a decision not to neutralise the DRP is evidence CBA still needs to build up its tier one ratio. The market typically loses interest in CBA once it goes ex-div so the broker has pulled its rating back to Neutral. Target rises to $76.76 from $76.32.

Computershare ((CPU)) downgraded to Underweight from Neutral by JP Morgan and to Neutral from Outperform by Credit Suisse. B/H/S: 2/4/2

Computershare's result beat JP Morgan's but the company admitted a one-off jump in US registries before increasing guidance. One-offs aside, the broker sees earnings growth as constrained over the next 12-18 months given hedge roll-offs and an increasing number of contract losses. The broker has cut its target to $10.61 from $11.12 and on recent share price strength has downgraded to Underweight. Computershare's result beat Credit Suisse by 9% on stronger margins and lower costs. The broker has lifted forecast earnings and increased its PE valuation as a result. The revenue growth outlook nevertheless still looks soft and the stock has rallied 15% recently. Target rises to $12.60 from $11.50 but rating pulled back to Neutral.

Domino's Pizza ((DMP)) downgraded to Sell from Neutral by UBS. B/H/S: 1/3/1

The first half result was solid, in the broker's opinion. Japan was the highlight, again. Europe was held back by known issues, again. UBS does not expect any significant improvement in Europe until at least the first half of 2015. UBS finds the share price increasingly hard to justify. The rating is downgraded to Sell from Neutral. The price target is raised to $17.50 from $13.55.

Goodman Fielder ((GFF)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/4/1

Following a weak result the broker suggests guidance to a flat full year result is ambitious and, while Goodman Fielder is worth buying when inexpensive, it is not yet inexpensive. Indeed, Credit Suisse believes GFF is trading at value unworthy of investor interest at present and has downgraded to Underperform, noting the company is working off a pre-GFC capital structure. Target falls to 50c from 72c.

Srr also GFF upgrade.

Oz Minerals ((OZL)) downgraded to Underperform from Outperform by Credit Suisse and to Neutral from Buy by Citi. B/H/S: 2/5/1

OZ Minerals' result was slightly less than Credit Suisse forecast but the decision to again buck supposed policy and pay out a 10c dividend left the broker agog. So much so that the stock was downgraded for a second time in a week – Underperform from Neutral. M&A opportunities diminish as the board appears intent on shrinking rather than growing the company and diminishing the Carrapateena option. A change of CEO also leaves the company corporately vulnerable, the broker suggests. Ahead of the result, Credit Suisse, hoping the analysis proved wrong, had expected material escalation in mining costs over the next four years. The saving grace was expected to be a transaction on Carrapateena, crystallising value where none is currently attributed. This heralded the first downgrade, to Neutral from Outperform. Citi thinks the company has turned the corner in 2013 and now looks for more disciplined decisions in order to regain confidence in capital allocation and close the valuation gap. Following the recent share price appreciation the broker is downgrading the rating to Neutral from Buy. Citi is forecasting weak copper prices in its outlook but the weaker Australian dollar could provide a positive. The broker expects improving fundamentals should drive a reversal of recent trends.

Primary Health Care ((PRY)) downgraded to Neutral from Buy by UBS. B/H/S: 2/5/1

The first half was broadly in line with expectations. UBS has now changed the methodology for forecasts. Underlying FY14 earnings forecasts are increased by 0.4% and FY15 reduced by 0.5%. The broker suspects the new recommendations from the Audit Commission will probably include co-payments for GP visits. This may be well flagged but the debate is not helping the share price. Until there's more certainty the broker is reducing the rating to Neutral from Buy. The price target is reduced to $5.25 from $6.00.

Rio Tinto ((RIO)) downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 7/1/0

Merrills is downgrading Rio Tinto to Neutral from Buy in the wake of the 2013 results. The shares have performed strongly and, while the valuation is undemanding, the broker cannot find any catalysts on the near-term horizon. Merrills emphasises that the shares are not considered that expensive as such. It's more a case of the stock moving in the opposite direction to the iron ore price recently, a situation the broker does not think is sustainable. The price target is reduced to $69.00 from $82.00.

Southern Cross Media ((SXL)) downgraded to Neutral from Buy by Citi. B/H/S: 3/3/1

Format changes at 2DayFM increase the potential earnings risk on the metro radio business and Citi is downgrading forecasts as a result. Near-term operational trends may be negative, particularly in radio, but the broker thinks there's still material upside in a deal with Nine Entertainment ((NEC)), although timing and legislative changes remain key hurdles. The rating is downgraded to Neutral from Buy and the price target is reduced to $1.60 from $1.75.

Ten Network Holdings ((TEN)) downgraded to Neutral from Buy by Citi. B/H/S: 0/2/6

Citi welcomes the fact that Ten has stabilised its revenue share and adjusts forecast to reflect modest growth. Still the broker is awaiting confirmation that management's efforts to restore the network are going result in profits. Execution risk is high and the valuation is stretched so Citi is downgrading the rating to Neutral from Buy.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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