Weekly Recommendation, Target Price, Earnings Forecast Changes

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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 17 to Monday February 21, 2013
Total Upgrades: 33
Total Downgrades: 39
Net Ratings Breakdown: Buy 39.11%; Hold 44.55%; Sell 16.34%

Domestic stockbrokers accelerated the pace of ratings upgrades and downgrades for individually listed stocks in the week ending Friday, February 24th. FNArena registered no less than 33 upgrades being outnumbers by 39 downgrades.

Adjustments are a combination of weak stocks becoming too cheap to maintain a negative rating, strong companies proving they still have enough oomph in them but investors seem to have priced it all in already and earnings beats that force analysts to review their previous stance. Things don't exactly get any easier with plenty of stocks receiving both upgrades and downgrades post the release of financial results.

A few observations stand out: AMP shares seem to have fallen too deeply, Ardent Leisure has proved the doubters wrong and the same applies even more to Seek. On the negative side there's now even more doubt about the immediate outlook for Ansell, growing doubt for iiNet and a general negative sentiment building towards Pacific Brands, Mount Gibson and Sims Metal.

A decidedly more positive message seems to come from changes in price targets and earnings forecasts. In terms of targets, McAleese and Perseus Mining are the only ones with sizeable downward adjustments, while there's plenty of opposing moves on the positive side, with the likes of Ardent Leisure, iiNet, Arrium, GWA Group and Aurizon all enjoying upward target adjustments of 7% and more.

A similar picture has emerged in earnings forecast where positive adjustments are clearly better than what is occurring on the negative side where McAleese and various smaller resources companies dominate. Companies enjoying significant upgrades to estimates include Rio Tinto, Woodside Petroleum, Brambles and BHP Billiton and this, fellow investors, is probably the most important observation from the present reporting season.

Upgrades

Adelaide Brighton ((ABC)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 2/4/2

The company is in the best shape it's been for some time according to Credit Suisse. Cash flow is strong, the balance sheet is under-leveraged and the broker thinks the structural concerns about the lime business are overdone. Moreover, the resumption of special dividend after the 2013 result is a positive signal from management that it's comfortable about the outlook.

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

Ansell's first half fell 3% short of expectations. UBS sees history repeating with Ansell's 2012-2013 result, noting the weak first half and strong second half (boosted by acquisition) is unfolding again. UBS notes last year, Ansell shares returned more than 30% after delivering an in-line FY13 result. Ansell posted weak organic sales growth in the first half but UBS expects the "reliable" acquisition of BarrierSafe, delayed contracts and second-quarter momentum will boost the second half. Underlying leverage was strong, the broker noting low commodity prices continue to boost margins. UBS upgrades to Buy from Neutral, noting stock price weakness, but eases the target price to $20.80 from $21.50 to account for lower organic revenue growth and reduced balance sheet capacity for acquisition.

See also Ansell downgrade.

AMP ((AMP)) upgraded to Buy from Neutral by Citi and to Neutral from Sell by UBS. B/H/S: 1/6/1

Citi thinks net flows in wealth management were relatively healthy in the first half and this should position AMP for a turn in sentiment. Citi continues to forecast 20% growth in FY14 underlying profit. Earnings forecasts are not changed much but the broker's confidence has improved such that the rating is upgraded to Buy from Neutral. AMP's 2013 result held few surprises but UBS suspects that, while structural and cyclical challenges persist, the worst is over and the earnings risks are now manageable. The broker upgrades to Neutral from Sell, noting AMP has de-rated to cheaper levels after last year's catalysts and believes equity leverage could be underestimated.

See also AMP downgrade.

APN News & Media ((APN)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 1/4/1

News that APN will buy the 50% balance of its radio business from Clear Channel for $246.5 million, combined with a better-than-expected 2013 result, has triggered a broker upgrade to Outperform from Underperform. Credit Suisse says the acquisition will be funded by a $132 million equity raising; $60 million from the sale of APN Outdoor and $61 million from existing debt facilities. The over-consensus profit was driven by cost management – revenue was steady. Credit Suisse believes APN's strategy is sound, the shift to strong companies in strong industries such as radio likely to boost income to allow repayment.

Ardent Leisure (AAD)) upgraded to Add from Hold by CIMB Securities, to Outperform from Neutral by Macquarie and to Buy from Neutral by UBS. B/H/S: 3/2/0

It appears to CIMB that theme parks Main Event and health clubs have sustained renewed vigor in January, continuing the acceleration in revenue witnessed in the second quarter. Main Event stood out in the first half, recording growth from portfolio expansion and operating leverage. In the broker's view this stands the company in good stead for FY15 and FY16, with six and four Main Event additions planned, respectively. CIMB has decided the time is ripe for an upgrade and has raised the recommendation to Add from Hold. Macquarie liked the momentum seen in Main Event and anticipates almost all the 13-14% earnings growth forecast for FY15 and FY16 will come from Main Event. Main Event provides exposure to a US recovery and translation benefits from a lower Australian dollar. The Gold Coast theme parks are also expected to benefit from a recovery in inbound and/or domestic tourism. The rating is upgraded to Outperform from Neutral. Ardent Leisure's interim outpaced UBS – up 13% on the previous corresponding period – as did the dividend at 6.8c. UBS upgrades to a Buy from Neutral, citing good exposure to the domestic tourism spending cycle upturn.

See also Ardent downgrade.

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

Arrium's result was a lot better than Citi expected on a big jump in mining earnings on a 79% jump in iron ore sales volumes, offsetting weakness in steel and other areas. An improvement in steel earnings is the focus for FY15, driven by improved housing construction, the broker notes. The dividend yield is currently attractive on a prudent 40% payout but capex will diminish that in outer years, the broker warns. UBS has bumped up earnings forecasts a hefty 15%-25% to account for revised global iron-ore price assumptions and a lower $A, also noting stronger housing approvals and capital expenditure intentions suggest a swifter-than-expected recovery. UBS says it sits 20%-25% above consensus, based on its iron ore price view. The broker believes the stars are aligning for Arrium and the broker upgrades the stock to Neutral from Sell and bumps the target price up to $1.70 from $1.40.

Sell also Arrium downgrade.

Asciano ((AIO)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 6/2/0

Macquarie has upgraded the rating to Neutral from Underperform. The business may be challenged on near-term revenue but the broker is happy that the company is creating opportunities. The balance sheet is also solid and the broker expects, once the near-term capex program is completed in FY15, that the pay-out ratio will increase.

See also Asciano downgrade.

Brambles ((BXB)) upgraded to Outperform from Neutral by Credit Suisse and to Buy from Hold by Deutsche Bank. B/H/S: 6/2/0

Credit Suisse has upgraded Brambles to Outperform from Neutral, impressive margin growth in a weak-volume market convincing the broker that Brambles' stars are aligning. The broker believes the $100 million cost-out opportunity identified last year could now be closer than anticipated and points out that organic growth was showing signs of improvement. It says these factors, combined with an increasingly less capital intensive business, suggests Brambles is entering a valuation sweet spot. Brambles' result beat Deutsche Bank and on the strength of an improving earnings outlook and the beginnings of a long awaited cost reduction program the broker has upgraded. Up till now BXB has been very cautious on the outlook, so the broker sees this as an inflection point.

Coca-Cola Amatil ((CCL)) upgraded to Hold from Reduce by CIMB Securities. B/H/S: 2/4/2

CIMB has upgraded to Hold from Reduce to reflect the recent share price fall. However, the interim suggested head winds remain, most notably from Indonesia, pressuring long-term assumptions; and the broker lowers the FY14 earnings per share forecast 5% to 65.5c. The broker suspects the Australian decline should ease in FY14, gleaning hope from the NZ results.

Fairfax Media ((FXJ)) upgraded to Buy from Underperform by BA-Merrill Lynch and to Neutral from Underperform by Credit Suisse. B/H/S: 1/5/1

The first half revealed better-than-expected cost outcomes. Merrills thinks FY15 should produce incremental savings of $60m as metro print facilities are exited and production is accommodated within existing lower-cost capacity at regional facilities. Underlying earnings stabilised in the first half and Credit Suisse found plenty of positive aspects. The company has raised cost reduction targets and Domain revenue growth is strong. Weak regional revenue was the main negative in the result. Credit Suisse thinks the investment story is improving, with the core business stabilising, the dividend being raised and $80m in net cash on the balance sheet. The broker thinks an IPO of Domain would be a significant catalyst.

See also Fairfax downgrade.

Fletcher Building ((FBU)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/4/1

Credit Suisse has upgraded Fletcher Building to Neutral from Underperform, saying historic comparative analysis with Australia and NZ, combined with an improved NZ outlook, suggest upside risks to forecasts.

Gryphon Minerals ((GRY)) upgraded to Outperform by Macquarie. B/H/S: 2/0/0

Macquarie upgrades Gryphon Minerals to Outperform after the publication of an optimisation study on the Banfora gold project in Burkina Faso – a response to a firmer gold price. Based on gold price assumptions, the broker expects Gryphon will be able to expand operations and bring Banfora into production; and that the company is in a financial position to gain funding.

GWA Group ((GWA)) upgraded to Buy from Neutral by Citi. B/H/S: 3/1/1

GWA's result featured a number of headwinds but cost savings reduced the earnings decline to only around 1%, Citi notes. GWA expects a strong second half and the broker suggests AUD hedges and price rises support this view. GWA has a 50% market share in bathrooms and an 88% correlation to housing completions so on expected rising completions, the broker is upgrading to Buy.

Invocare ((IVC)) upgraded to Neutral from Sell by UBS. B/H/S: 1/4/1

Invocare's full-year result outpaced the broker by a nose, declining margins eating into revenue growth to yield a flat year. But UBS notes second-half margins improved materially and operational cash flow beat estimates. Given the improved margin performance in the second half and management's view that revenue will strengthen this year, and an expected 13%-17% fall in net interest expense, UBS upgrades to Neutral from Sell, citing a well-managed business with a favourable industry structure and high earnings visibility, and that the stock is trading at 2% to its discounted cash flow valuation.

Monadelphous ((MND)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/3/4

The result was in line. The company has made good progress on reducing costs and diversifying its business and Deutsche Bank's expectations of earnings declines over the next two years are well priced in by the market. This implies limited downside so the broker has upgraded to Hold. Target rises to $15.64 from $13.96.

Mount Gibson Iron ((MGX)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/6/2

Mt Gibson's price reporting marred the first half result in the broker's opinion. Brokers have queried how US$108/dmt became A$100/dmt when the output of lump, fines and low grade was known. Despite this, Credit Suisse thinks management has done a good job of improving the outlook. The broker is becoming more positive but thinks it requires a large acquisition to add value. The rating is upgraded to Neutral from Underperform on the drop in the share price.

See also Mt Gibson downgrade.

Qantas ((QAN)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/5/1

Qantas will announce its strategic review on February 27. The broker expects specific details on costs and thinks Qantas can save at least $2 billion over three years. Ahead of the review, coverage has transferred to a different analyst and the rating is upgraded to Outperform from Neutral. The broker thinks the time to buy airlines is when things look their worst and this means, for Qantas, now is the time. The target is raised to $1.65 from $1.15.

SAI Global ((SAI)) upgraded to Buy from Neutral by UBS. B/H/S: 4/4/0

SAI Global's net profit fell 10% short of UBS' estimate, although earnings met expectations and margin compression in compliance was better than forecast, suggesting the restructuring plan is on track. SAI maintained FY14 guidance – a plus given its recent weakness in this respect. UBS lifts FY15 to FY16 earnings per share estimates to reflect expectations of improved margins in compliance services and reduced net interest expenses and upgrades the stock to a Buy from Neutral. UBS notes short-term earnings visibility is weak but says the stock is trading at a decent discount to the broker's revised price target of $4.25 (previously $4.20).

See also SAI downgrade.

SEEK ((SEK)) upgraded to Neutral from Underperform by BA-Merrill Lynch and to Neutral from Sell by Citi. B/H/S: 2/5/0

SEEK romped home with its interim net profit, outpacing Merrills by 16%, thanks to lower finance costs, a 17% tax rate and a stellar performance from learning (up 88%) and Brazil (up 49%). For the broker the main news was the acquisition of JobStreet's online business, believing this will allow SEEK to "seek" its glory in Asia and establish clear leadership in Hong Kong, Singapore and most of South-East Asia. The Asian growth story overshadows domestic risks, hence the upgrade to Neutral from Buy. The target price rises to $17 from $9.50. Citi has decided to lift the rating to Neutral from Sell, after subsequent further analysis of the first half results. Earnings growth is expected to support a stretched valuation, while possible corporate activity represents further upside. The price target is raised to $15.45 from $10.10.

Shopping Centres Australasia ((SCP)) upgraded to Buy from Neutral by Citi. B/H/S: 1/1/3

The broker found numerous positive aspects to the first half results. Earnings and distribution guidance have been upgraded and the new buy-back was also a positive surprise. Citi thinks the announcements regarding de-risking future income through lease up also go some way to addressing the issues for the stock. The broker is upgrading to Buy from Neutral, as the improved growth outlook and lower income risk could act as catalysts for investors to view the stock more favourably.

Sims Metal ((SGM)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 3/3/2

Sims Metal's 2013/14 first-half result beat Macquarie's forecast, the broker noting a good performance from Australasian operations and a strong balance sheet. Despite offshore headwinds, Macquarie upgrades to Neutral from Underperform, cautioning that any recovery is likely to be slow and patchy and that new "mid cycle" returns are likely to be lower than previous cycles, given structural changes and cyclical over-capacity. It says investors can be opportunistic around investment points during the second half. FY14 and FY15 earnings per share forecasts fall 2.4% and 8.2% respectively to 43.5c and 63.5c. The target price rises to $10.83 from $9.69.

See also Sims downgrade.

Suncorp ((SUN)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 4/4/0

Suncorp's interim results fell short of consensus and the broker's estimates, the bank and the life business disappointing after copping a bad debt charge and posting higher-than-expected operating expenses. Credit Suisse cuts FY14 net profit forecasts 3.5% and FY15 by 2.7%. The broker lifts its FY14 dividend estimate to allow for a 20c per share special dividend. The broker believes earnings have now been re-based, reducing downside risk, and upgrades the stock to Neutral from Underperform.

Toll Holdings ((TOL)) upgraded to Hold from Reduce by CIMB Securities and to Neutral from Underperform by BA-Merrill Lynch. B/H/S: 1/5/2

The first half reflected the subdued environment and the competitive challenges ahead, in CIMB's view. The broker expects 9% earnings growth into FY15 but acknowledges this will require some improvement in economic activity. Given the share price de-rating, the broker thinks the earnings risk is now priced in and upgrades the rating to Hold from Reduce. Toll's 2014 interim fell 3% short of the broker's expectations but BA-Merrill Lynch upgrades the stock to Neutral from Underperform, regardless, viewing the stock as cheap in an expensive market. The broker says the stock's outlook is uninspiring, noting the cost base is growing faster than inflation and cites margin risk, but doesn't perceive the issues as structural.

Westfield Group ((WDC)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/0

Credit Suisse has upgraded Westfield Group to Outperform from Neutral, believing the stock is about to move from struggle street to easy street as the asset sales and restructure culminate. The broker expects the company will redeploy capital from asset sales into a buyback given the stock is trading at an 11.3% discount to net asset value. Headwinds remain – notably speculation of $1 billion of UK asset sale – but the broker says daylight is breaking.

Westpac Banking ((WBC)) upgraded to Buy from Neutral by Citi. B/H/S: 4/2/2

Yet another update on the bank has triggered small increases to estimates due to expectations of lower credit charges. This sees the price target rise to $35.75 (was $33.10) and the recommendation lift to Buy from Neutral.

Downgrades

AMP ((AMP)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/6/1

In the wake of the 2013 result Macquarie suspects that the market is underestimating the risk of further earnings volatility in wealth protection. The broker thinks, while AMP is fixing the business, there are structural issues beyond the company's control. The outlook for claims and lapse trends remains highly uncertain. As the risks are not adequately accounted for, the broker has decided to downgrade the rating to Underperform from Neutral.

See also AMP upgrade.

Ansell ((ANN)) downgraded to Underperform from Neutral by Credit Suisse and to Underperform from Neutral by Macquarie. B/H/S: 1/3/4

Credit Suisse does not think Ansell is a compelling long-term investment. At least not until the company improves its cash flow conversion and refines its marketing strategy, having acknowledged there were too many product releases for the sales force to manage effectively. After the first half result the broker has adjusted profit forecasts down by 1-4% and lowered the target to $19.00 from $21.00. The rating is downgraded to Underperform from Neutral. Macquarie's main concern is the lack of organic growth and there's no easy solution in sight. As competition is not weakening, a return to growth will most likely be driven by strengthening manufacturing activity, in the broker's opinion. The rating is downgraded to Underperform from Neutral.

See also Ansell upgrade.

Ardent Leisure ((AAD)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 3/2/0

Ardent's result broadly met the broker's forecast. Main Event and Bowling outperformed the broker's numbers but Health Clubs fell short. The issue for the broker is AAD's 34% share price rise over 12 months which brings it in line with valuation. Downgrade to Neutral. Target falls to $2.06 from $2.15.

See also Ardent upgrade.

Arrium ((ARI)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 1/3/4

The mining division accounted for the bulk of the earnings lift in the first half as iron ore sales ramped up towards target. JP Morgan was surprised that mining consumables registered a 6% decline in earnings. The broker thinks there's few positive catalysts on the horizon and this will make it hard for the share price to maintain momentum. Sales, savings and divestments are all well flagged and the broker is now downgrading the stock to a sector-relative Underweight, from Neutral.

See also Arrium upgrade.

Asciano ((AIO)) downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 6/2/0

The broker is downgrading the recommendation to Neutral from Buy. Merrills thinks earnings guidance for FY14 looks difficult to attain and underlying conditions are subdued in the Pacific National rail and terminals. A flat period is envisaged before growth picks up in FY15. The price target is reduced to $6.00 from $6.40.

See also Asciano upgrade.

Australand ((ALZ)) downgraded to Neutral from Buy by Citi. B/H/S: 0/5/2

The broker liked the FY13 result as well as the strong position in contracts at hand in residential. Citi thinks earnings upside is likely curtailed in FY14 by the heavy weighting in residential towards medium and high density projects. The broker continues to favour residential developments in the A-REIT sector. Still, additional future sales strength is likely to translate in FY15 and this implies limited upgrade to FY14 forecasts for the broker. Hence, Citi has pulled the rating down to Neutral from Buy.

Bendigo and Adelaide Bank ((BEN)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/7/1

Macquarie believes the stock's superior rating is based on the view that it has growth potential that's better than its peers. The broker is not so sure, as the interim results raises questions about the outlook, given soft loan and fee growth and growth in costs that's above peers. Until Macquarie sees a return to sustainable top line growth the premium looks unwarranted. The rating is downgraded to Underperform from Neutral.

Challenger ((CGF)) downgraded to Neutral from Buy by Citi and to Hold from Buy by Deutsche Bank. B/H/S: 2/5/1

Challenger posted a strong result featuring strong sales growth in both life and funds management, Citi notes. The problem is such strong results lead to a higher share price, which then means higher amortisation and a higher diluted share count. This prompts the odd situation of the broker downgrading to Neutral while still calling CGF its top pick in diversified financials. Annuity growth provided enough justification for Challenger's 50% rally in 6 months, Deutsche Bank suggests, with record retail sales and an upgrade to FY14 assets under management guidance. But that's where the positive story ends. The broker notes life sales stalled and the second half looks bleak, while increased capital intensity required for increased annuities mean the higher dividend pay-out might prove short-lived, the broker warns. The broker sees dividend risk after FY15.

Drillsearch Energy ((DLS)) downgraded to Underperform by Macquarie. B/H/S: 1/2/1

Interim results were solid but messy, in the broker's opinion, as the quick ramp up in production and ongoing development and exploration added complexity. An upgrade to FY14 capex guidance is expected in coming weeks following an agreement with BG to accelerate unconventional activity. The stock has outperformed the broader market over the last month so the broker downgrades.

Emeco ((EHL)) downgraded to Sell from Neutral by UBS. B/H/S: 1/4/1

Emeco's result fell short of the broker, the overall picture continuing to deteriorate. Weakness was expected given the difficult operating environment but domestic margin pressure and larger losses in Indonesia exacerbated the result. Guidance was lowered and UBS lowers FY14 earnings per share estimates 15%, lifts FY13 estimates 110%, and cuts FY16 estimates 16%. While the gearing has improved, debt remains a concern for UBS, and the broker downgrades the stock to Sell from Neutral. Target price falls to 18c from 26c.

Envestra ((ENV)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/4/0

The first half was above the broker's expectations and guidance has been upgraded. Macquarie notes the stock is no long trading on fundamentals, given the impending takeover by APA ((APA)). The recommendation is downgraded to Neutral from Outperform.

Fairfax Media ((FXJ)) downgraded to Neutral from Outperform by Macquarie and to Neutral from Buy by UBS. B/H/S: 1/5/1

Macquarie observes the first half showed the first period of earnings growth at the EBITDA level since 2010 and demonstrates a shift in momentum. As key parts of the business stabilise, the broker notes investors are moving the focus to the outlook and valuation of Domain. The rating is downgraded to Neutral from Outperform. Fairfax's interim beat UBS by 17%, the company delivering its first period of earnings growth since the first half of FY11. The overshot reflected improved operational expenditure and interest costs thanks to a $10 million windfall on interest rate swaps. Revenue fell 7.4% year on year, marginally disappointing.  Highlights included a 29% jump in Domain digital revenue and digital subscriptions.

See also Fairfax upgrade.

Fleetwood ((FWD)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/3/1

It was a weak result for Fleetwood, the broker suggests, given sales increased 30% but margins halved. Management is confident the second half will see improvement but the broker finds it hard to agree, noting lower occupancy, more cost-conscious resource clients and higher debt. On that basis the broker has downgraded to Underweight, dropping its target to $2.30 from $3.20.

iiNet ((IIN)) downgraded to Underperform from Buy by BA-Merrill Lynch and to Reduce from Hold by CIMB Securities. B/H/S: 2/2/3

The broker is downgrading the stock to Underperform from Buy. Merrills considers the company is coming to the end of its acquisition-led growth strategy with a transition to slower organic growth. The competitive environment is increasingly intense and the broker expects margin compression from the NBN roll out. A period of rapid growth has come to an end, in CIMB's view. Core operations are falling into low growth mode while NBN-related growth won't announce itself until 2016, such is the CIMB view. No surprise the rating shifts to Reduce. Price target lifts to $6.60 from $6.43 prior. Cost out initiatives will assist management in reporting progress in profitability this year and next, flags the broker.

McAleese ((MCS)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/1/0

The company has significantly downgraded FY14 earnings forecasts for Cootes and the specialised transport and lifting businesses. In addition to the loss of the Shell and NSW BP fuel contracts Cootes has terminated the 7-Eleven contracts. Macquarie notes McAleese will have substantial surplus prime mover assets now and the sale of these could match the cash redundancy costs of the Cootes workforce. The broker has lowered the rating to Neutral from Outperform and the price target to 82c from $1.72.

Mount Gibson Iron ((MGX)) downgraded to Hold from Add by CIMB Securities, to Neutral from Outperform by Macquarie and to Sell from Neutral by Citi. B/H/S: 0/6/2

Incorporating the interim result and higher freight rates as well as impurity discount assumptions, CIMB has downgraded FY14 and FY15 earnings forecasts by 34% and 50% respectively. The company's net cash position makes it one of the safest ways to play the junior iron ore sector but the broker considers it fairly valued at the current share price. Mt Gibson's revenue, earnings and profit all fell short of Macquarie in a weak result, based on lower achieved prices. As expected there was no dividend. The broker has adjusted forecasts to reflect wider discounts in pricing and notes a lack of clarity around MGX's cash deployment and the loss of the independent chairman add to uncertainty. The interim result was below Citi's estimates. With sales peaking in FY14 Citi thinks the stock needs a catalyst and returning a significant part of the cash at hand could help. Still, this is not considered likely and so Citi thinks concerns over the fading iron ore price will take precedence.

See also Mt Gibson upgrade.

Pacific Brands ((PBG)) downgraded to Neutral from Buy by Citi, to Underperform from Neutral by Credit Suisse and to Neutral from Buy by UBS. B/H/S: 0/4/3

Pacific Brands reported an earnings decline of 14% in the half but sales growth was encouraging. The problem is weakness in work wear will likely mean a similar decline in the second half and this segment could become an issue for management in the next few years, the broker warns. Bonds and Sheridan are providing support as is a 6.8% yield, so the broker expects PBG to hang around these levels. Credit Suisse has downgraded the rating to Underperform from Neutral. The broker suspects, with headwinds set to continue, that stabilising earnings is looking more like an FY16 proposition. The broker is happy with the strategy on Bonds and Sheridan but thinks the outlook for work wear is more uncertain. UBS says Pacific Brands' headline sales were very strong but came at a price, the return for every dollar spent in sales and marketing returning just a dollar in incremental revenues. The broker sees risks rising for Pacific Brands and says marketing support made it difficult to determine the company's sustainable earnings-before-interest-and-tax margin.

PanAust ((PNA)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 5/1/1

The 2013 result was in line with the broker's expectations. No changes were made to guidance but the rating has been downgraded to Neutral from Outperform given the recent strength in the share price. The price target is raised to $2.10 from $2.00.

Perseus Mining ((PRU)) downgraded to Underperform from Outperform by Credit Suisse. B/H/S: 4/2/1

Perseus Mining's first-half loss was better than the broker's $14 million estimated loss but largely reflected an FX windfall not included in forecast calculations. Credit Suisse says the negatives were piling up with an uncertain liquidity outlook reliant on operational stability and gold price. On the upside, the company is expected to report improved ore grades and cash generation and cost cuts but the broker says a lot has to go right for Perseus to prosper. Credit Suisse downgrades the stock to Underperform from Outperform given a recent rally.

Recall Holdings ((REC)) downgraded to Neutral from Buy by UBS. B/H/S: 1/5/1

The first half profit outcome was weaker than UBS expected, the business impacted by a 13% decline in the more cyclical secure destruction business. Importantly, physical storage experienced 8% growth off 3% carton growth. The broker has adjusted full year estimates down 5-6%, in line with the company's guidance for mid single digit revenue growth in FY14. The broker's valuation has decreased slightly and, combined with the recent share price performance, means a downgrade to Neutral from Buy.

SAI Global ((SAI)) downgraded to Hold from Add by CIMB Securities and to Neutral from Outperform by Credit Suisse. B/H/S: 4/4/0

SAI Global's interim beat the broker by about 3%, thanks to a windfall derived from the weak AUD. Despite the solid result, CIMB downgrades the stock to Add from Hold, to reflect growing risk, citing cultural change; potential slippage of the IT fix for compliance; and the future for property services given the move to electronic conveyancing. CIMB lowers earnings per share forecasts 7% across FY14-15. The first half result was in line but Credit Suisse has become more unsure of the timing and extent of the recovery and the risk profile, and needs to have more conviction to retain a positive investment outlook.  The broker is not significantly more negative but thinks valuation is appropriate at present and downgrades the rating to Neutral from Outperform.

See also SAI upgrade.

Sandfire Resources ((SFR)) downgraded to Reduce from Hold by CIMB Securities. B/H/S: 3/3/2

The latest downgrade is at odds with the FNArena archive that shows the rating was downgraded to Reduce in late January. Anyhow, CIMB reports it is responding to recent share price strength, indicating this is simply a matter of valuation. The analysts saw another strong result. They have left their estimates unchanged.

Sims Metal ((SGM)) downgraded to Reduce from Hold by CIMB Securities and to Neutral from Buy by BA-Merrill Lynch. B/H/S: 3/3/2

The company beat CIMB's estimate by 30% but the broker queries the treatment of significant items and downgrades the stock to Reduce from Hold. Broker retains its 2014 forecast but lowers FY15 and FY16 earnings estimates 24% and 27% respectively, expecting a decline in trading conditions. While CIMB detects a cyclical up-kick in the wings, it is taking a cautious approach, expecting any recovery will be hampered by weakness in Turkey and over-capacity in the US. A lot needs to go right from here, according to Merrills. Concerns about rationalisation in the US scrap industry and the upcoming strategic review weigh on the broker's outlook. There's also the near-term pricing of scrap relative to pig iron. Assuming Sims should trade in line with the market at around 10 times earnings, upside requires 78% improvement in earnings from the first half report. The broker has decided it's a big ask and downgraded the rating to Neutral from Buy.

See also Sims upgrade.

Sirtex Medical ((SRX)) downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Macquarie. B/H/S: 0/2/1

Sirtex's interim missed the mark as higher costs hacked into an otherwise solid result. UBS downgrades FY14/15 earnings per share forecasts 9.6% and 7.3% to account for higher cost assumptions but says overall, the result augurs well for growth, particularly given the potential upside to be derived from the SIRFLOX Study results. Sirtex is downgraded to Neutral from Buy, given the stock is approaching UBS' full valuation. Target price rises to $15.50 from $15. Sirtex posted a small miss against Macquarie's forecast due to higher than expected marketing spend. The result was otherwise solid, with recruitment for trials continuing rapidly, geographical spread growing and further opportunities being investigated. The broker feels SRX is now well valued post a decent rally.

Sonic Healthcare ((SHL)) downgraded to Neutral from Buy by UBS. B/H/S: 3/5/0

The first half result was in line with the broker but Credit Suisse has become more unsure of the timing and extent of the recovery and the risk profile and needs to have more conviction to retain a positive investment outlook. The broker is not significantly more negative but thinks valuation is appropriate at present and downgrades the rating to Neutral from Outperform.

Super Retail ((SUL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/2/1

The first half result was pre-announced but the broker has re-set expectations lower. The rating is downgraded to Underperform from Neutral. It is the first result in some years where the company has missed expectations. Credit Suisse expects sales and profit growth to be negatively affected by costs over the next 12 months, ahead of the benefits from supply chain restructuring. The broker's FY14 forecast, and hence the catalyst, is boosted by the cycling of several one-off factors.

Western Areas ((WSA)) downgraded to Underperform from Neutral by Credit Suisse and to Hold from Buy by Deutsche Bank. B/H/S: 3/2/1

The broker has lowered the rating to Underperform from Neutral as the company announced a $104m capital raising along with the first half results. The broker sees this as opportunistic, given the bounce in nickel equity prices. It does not meaningfully change the value proposition, in Credit Suisse's view, although, if fully subscribed, will eliminate balance sheet concerns. With a recovery in nickel prices forecast, Western Areas has undertaken an opportunistic capital raising, Deutsche Bank suggests, to repay convertibles and avoid the need for further debt drawdowns. This leaves more flexibility for exploration activities. The market is already pricing in a nickel recovery so the broker pulls back to Hold.

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