Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features ARIKA RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: ARI

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 May 5 to Friday May 9, 2014
Total Upgrades: 14
Total Downgrades: 6
Net Ratings Breakdown: Buy 40.13%; Hold 43.32%; Sell 16.55%

On face value, it appears the pause in the Australian share market's uptrend is meeting a rapidly growing numbers of rating upgrades for individual stocks but most of last week's activity in stockbroker analysis was centred around two commodity segments. Take out iron ore and nickel and what is left is nothing much to get overly excited about.

Analysts are increasingly succumbing to the fact that Indonesian export bans, even without any potential impact from the territorial conflict between Russia and the Ukraine, are going to fundamentally reshape the world's nickel sector in years to come. In addition, Citi analysts believe the sell-off in local iron ore stocks is overdue a relief rally in the short term, while maintaining a bearish view for the years ahead.

Outside of the mining and minerals space, analysts have been preparing for a tough government budget, which explains some of the downgrades during the week ending Friday, 9 March. This also makes upgrades for Myer, OrotonGroup, Super Retail and Primary Healthcare even more of a stand-out.

The few downgrades FNArena registered for the week (only six against 14 upgrades) largely involved industrial stocks that have run a little too hard in the short term (at least according to the brokers involved in the action).

An interesting observation relates to the banks post interim results which triggered an increase in the consensus target for ANZ bank and a push towards higher estimates for Macquarie Group, but National Australia Bank features with a 1% decline in earnings estimate and a minor decline in consensus target. Westpac's target hardly budged from its current $35.04.?

Upgrades

Aquila Resources ((AQA)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/3/0

JP Morgan believes the offer for Aquila is full and does not expect a counter bid, suggesting that on some points, the bid is quite generous. The broker estimates the investors are paying $350 million for Aquila's stake in the western Pilbara iron ore project, for which the broker had assigned no value, given the development challenges. Therefore, while management has yet to endorse the bid, the odds are on. Rating is upgraded to Neutral from Underweight and the target price rises to $3.40 from $2.20.

Arrium ((ARI)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 2/4/2

March quarter mining production was solid but the broker finds it overshadowed by a weak second half earnings outlook. Spreads, commodity prices and the currency are likely to undermine earnings more than Credit Suisse had expected. Mining consumables in the domestic business are weak and the company is restructuring operations at Waratah and cutting 120 positions. The broker is upgrading the rating to Neutral from Underperform and reducing the target to $1.25 from $1.43.

Atlas Iron ((AGO)) upgraded to Neutral from Sell by Citi. B/H/S: 2/4/2

The broker downgraded its iron ore price forecast in March. While remaining bearish, the broker is now taking a more positive cyclical view on the miners and notes stock prices have fallen significantly. Upgrade to Neutral from Sell and 90c target retained.

Lynas Corp ((LYC)) upgraded to Neutral from Sell by UBS. B/H/S: 0/4/0

Lynas will undertake a $30m share purchase plan and a placement "top up" of $10m. The company is also restructuring its debt to improve short term cash flow. UBS estimates the company will now have sufficient cash to last until the end of FY16, assuming the debt restructure is successful. The broker is upgrading its rating to Neutral from Sell based on valuation. The latest news has bought some additional time for the company and the broker is hopeful REO prices will lift. The price target is lowered to 19c from 20c.

Fortescue Metals ((FMG)) upgraded to Outperform from Neutral by Citi. B/H/S: 7/1/0

The broker downgraded its iron ore price forecast in March. While remaining bearish, the broker is now taking a more positive cyclical view on the miners and notes stock prices have fallen significantly. Upgrade to Outperform from Neutral and $5.50 target retained.

Independence Group ((IGO)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 2/4/0

Deutsche Bank analysts have come to the conclusion that Indonesia will not change its metals export ban and this will have serious ramifications for nickel in particular. Upgrades to previous price forecasts are significant, in particular post 2015, with increases of 50% for 2016 (US$10.89/lb) and of 64% for 2017 (US$12.25/lb). Price target for Independence Group jumps to $4.65 from $4.25. Rating lifts to Buy from Hold. Future EPS estimates (post FY14) have received a boost from the price forecast changes.

Mount Gibson Iron ((MGX)) upgraded to Neutral from Sell by Citi. B/H/S: 3/4/0

The broker downgraded its iron ore price forecast in March. While remaining bearish, the broker is now taking a more positive cyclical view on the miners and notes stock prices have fallen significantly. Upgrade to Neutral from Sell and 75c target retained.

Myer ((MYR)) upgraded to Add from Hold by CIMB Securities. B/H/S: 2/4/1

The company produced like-for-like sales growth in the March quarter, despite less promotional activity and inventory shortages. CIMB thinks the near-term risk is in the federal budget on May 13, if it dampens discretionary retail behaviour. The target of $2.40 is maintained. The rating is upgraded to Add from Hold, with a view to buy on weakness leading into the budget.

National Australia Bank ((NAB)) upgraded to Add from Hold by CIMB Securities. B/H/S: 2/5/1

The first half result was marred by sliding revenue at the Australian bank in CIMB's opinion, and cash earnings were below forecasts. Still, bad debts and life insurance revenue were better than expected. CIMB has reduced earnings forecasts by 1.5% and 0.5% for FY14 and FY15 respectively. The broker thinks the discount to peers is excessive and upgrades to Add from Hold. UK profitability is expected to improve further and Australian business lending should benefit from improving confidence. The target is raised to $37.08 from $36.31.

See also NAB downgrade.

OrotonGroup ((ORL)) upgraded to Buy from Neutral by UBS. B/H/S: 3/0/0

Oroton has responded to the local invasion of international brands and subsequent market share loss by launching a global marketing assault and investing in store refurbishments and openings in Singapore and China. The broker believes ORL can enter another longer term growth phase and is forecasting a 19.7% compound annual growth rate out to FY17, which makes a forecast FY15 PE of 13.3 times look pretty cheap. The new analyst for UBS has lowered near term earnings on the cost of the above but lifted longer term numbers on expectations of success. Target rises to $5.20 from $4.15. Upgrade to Buy from Neutral.

Primary Health ((PRY)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/3/1

Deutsche Bank has come to the conclusion that investor angst for negative repercussions stemming from the upcoming Abbott-Hockey budget has been overblown and the immediate response has been an upgrade in rating, to Buy from Hold.

Rio Tinto ((RIO)) upgraded to Outperform from Neutral by Citi. B/H/S: 7/1/0

The broker downgraded its iron ore price forecast in March. While remaining bearish, the broker is now taking a more positive cyclical view on the miners and notes stock prices have fallen significantly. Upgrade to Outperform from Neutral and the $71 target retained.

Santos ((STO)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 5/1/1

JP Morgan has upgraded Santos to Overweight from Neutral, saying the stock's recent underperformance has propelled it into value territory. The broker says LNG sales are set to flow from PNG LNG mid year and there is greater clarity around third-party gas purchases at Gladstone LNG. JP Morgan reduces its free cash flow yield forecasts but still expects this to outpace Woodside ((WPL)) and Oil Search ((OSH)). The price target rises to $14.41 from $13.70.

Super Retail ((SUL)) upgraded to Buy from Neutral by Citi. B/H/S: 6/1/1

After the March quarter update Citi is forecasting a FY14 earnings decline of 1%, reflecting weaker sales and gross margin compression in leisure and sports. The stock is being upgraded to Buy from Neutral because the broker thinks the current weakness is a one-off event. The company is well managed and still has double digit earnings growth ahead, in Citi's view, with sales expected to show sequential improvement which should be a share price catalyst. The target is revised down to $10.80 from $11.40.

Western Areas ((WSA)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 4/3/0

Deutsche Bank analysts have come to the conclusion that Indonesia will not change its metals export ban and this will have serious ramifications for nickel in particular. Upgrades to previous price forecasts are significant, in particular post 2015, with increases of 50% for 2016 (US$10.89/lb) and of 64% for 2017 (US$12.25/lb). Price target for Western Areas jumps to $4.15 from $3.15. Rating lifts to Hold from Sell. EPS estimates have received a boost from the price forecast changes.

Downgrades

Ardent Leisure ((AAD)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/2/0

Main Event revenue growth was the highlight of the March quarter for Macquarie. Ardent Leisure has announced an additional site in Chicago, taking the new sites for FY15 to seven. The broker notes Ardent Leisure has outperformed the ASX Small Industrials by 24% and the medium term growth outlook is now reflected in valuation. Hence, the rating is downgraded to Neutral from Outperform and the target is raised to $2.41 from $2.30.

CFS Retail ((CFX)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 0/6/1

The broker is downgrading to Underperform from Neutral, envisaging downside risk to the yield of 6.8% on FY15 earnings forecasts, given potential non-core asset sales and the high pay-out ratio. The price target is steady at $1.95. The company confirmed 13.6c distribution guidance in its quarterly update. Merrills sees few catalysts for outperformance, with retail sales struggling to maintain momentum amid expectations of a tough federal budget.

Crown Resorts ((CWN)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 6/1/1

The broker thinks the share price correlation with MPEL has de-coupled and Crown is precariously positioned now that MPEL has fallen over 20% in recent months. The rating is downgraded to Underperform from Neutral and the target reduced to $15.00 from $18.50 to reflect a short-term potential trading opportunity. Credit Suisse sees no justification for the expansion of the domestic casino multiple and notes domestic sentiment is soft.

Fletcher Building ((FBU)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/4/1

Deutsche Bank has reduced FY15-17 earnings estimates to factor in a revised trajectory for the Canterbury rebuilding as well as a slower recovery in Australian earnings. The recommendation is reduced to Hold from Buy. The target price is lowered to NZ$9.95 from NZ$10.77. Some of the company's Australian businesses have structural problems and Deutsche Bank thinks earnings growth may be more muted than previously expected.

GPT ((GPT)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/6/0

GPT has bounced back after its share price was depressed because of fears it was paying too much for acquisitions but Credit Suisse, while believing the company's funds overpaid for some assets, the company has managed to do business as usual. The broker expects 4.7% growth into 2015 and thinks current multiples are priced into the stock. The rating is downgraded to Neutral from Outperform. The target is steady at $4.00.

Kathmandu ((KMD)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/0/1

Kathmandu's sales performed well during the key Easter period and the company remains confident of a strong FY14. Nevertheless, Credit Suisse does not see this as implying an upgrade to expectations. In order to hit consensus earnings forecasts the broker notes the company has to realise second half growth near 13%. This is not impossible but Credit Suisse thinks it will be a challenge. The rating is downgraded to Underperform from Neutral, given the current share price relative to the broker's valuation metrics. The company may be getting traction in Australia but the broker thinks the current multiples are stretched. The target is NZ$3.75.

National Australia Bank ((NAB)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/5/1

In the wake of the interim result, which Deutsche Bank thought was poor, the rating is downgraded to Hold from Buy. The target is reduced to $35.50 from $37.80. The broker thinks the Australian banking arm's poor performance is likely to continue, given low volume growth driven by market share losses, tightening risk settings and margin pressure from competition in business banking. Improved performances in the UK and New Zealand provide some offset but these businesses are not big enough to bridge the gap.

See also NAB upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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