Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

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 12 to Friday May 16, 2014
Total Upgrades: 5
Total Downgrades: 16
Net Ratings Breakdown: Buy 39.69%; Hold 43.65%; Sell 16.66%

Conflicting signals from the US and Europe and growing concerns about the negative undertone in Chinese property markets have seen the Australian share market struggle to keep positive momentum alive this month. Not helping matters, the underlying trend in stock analysts' assessments appears to now have taken a turn for the worse.

FNArena registered 16 downgrades in ratings for individual listed stocks for the week ending Friday, May 16 against five upgrades only (of which two to Neutral while all three Buys relate to previously out-of-favour stocks).

Also, for the first time this calendar year (according to my memory) the balance in changes to price targets/valuations and earnings estimates appears to now carry a negative skew as well, thanks to disappointing earnings reports from Orica and Incitec Pivot, in addition to downward adjustments for the likes of SingTel, Super Retail and Southern Cross Media.

One positive factor is that companies on the positive side, including Amcor, QBE Insurance and BHP Billiton, seem of higher influence for the Australian share market when compared with stocks like SMS Management and the above mentioned. This doesn't take away the observation that changes for the negative are now outweighing positive adjustments, at least for the week past.

Upgrades

Commonwealth Bank ((CBA)) upgraded to Neutral from Sell by UBS. B/H/S: 2/4/2

UBS found the March quarter trading update repeated prior updates, which is a positive when the business is going well. Cash profit of $2.2 billion was slightly higher than expectations. Consistent with the other banks CBA is reporting low bad debt charges. The broker thinks the stock is very expensive. The Sell rating that was in place was based on stretched absolute valuations but UBS notes the stock continues to outperform and unless there are higher interest rates, an economic shock or a broad based correction, CBA could remain expensive. There's limited upside but it's attractive, so the rating is upgraded to Neutral from Sell. The price target is raised to $80.00 from $70.00.

CSR ((CSR)) upgraded to Hold from Reduce by CIMB Securities. B/H/S:  3/3/2

The FY14 result was in line with the broker's expectations. Going forward, housing activity should boost volume and earnings. CIMB's one concern is valuation and the pace of recovery that's factored into expectations. With the stock coming back to more reasonable levels the broker thinks CSR is now fair value and upgrades the rating to Hold from Reduce. The target is raised to $3.02 from $2.40.

Mount Gibson Iron ((MGX)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/3/0

The broker visited Koolan Island and liked it. Mt Gibson has been oversold, the broker suggests, on iron ore price fears. The broker has lifted its target to 95c from 90c but notes were it to value MGX on spot of US$103/t iron ore and the $A at US94c, valuation would still be 85c or an 11% premium to the last traded price. Upgrade to Buy from Hold.

Seven West Media ((SWM)) upgraded to Buy from Neutral by UBS. B/H/S: 6/2/0

Seven trampled on its TV rivals in April which included the long Easter break. The network scored a 42% share and the broker calculates the market is factoring in an expected 36% average in FY14 based on the SWM price. The shares have underperformed on fears Nine ((NEC)) is trying to fight back, but the broker feels this is leaving SWM undervalued. The broker has upgraded to Buy with the stock trading 14% under the broker's $2.10 target.

Transfield Services ((TSE)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/3/2

Transfield has completed its debt refinancing and reconfirmed second half guidance. The latter is a particular relief for a market concerned about TSE's big second half earnings skew, the broker notes, and confirms contract execution is going reasonably well. TSE needs to confirm more secured revenue going forward but renewed financial flexibility, positive execution and the promise of more private sector infra outsourcing in the budget provide a more positive outlook, the broker suggests. Upgrade to Outperform. Target rises to $1.39 from 86c.

See also TSE downgrade

Downgrades

Dexus Property ((DXS)) downgraded to Neutral from Buy by UBS. B/H/S: 3/4/0

UBS thinks investors will increasingly focus on office fundamentals and Dexus may be stuck, or used as a funding source given the key catalyst, the Commonwealth Property transaction, has passed. UBS also thinks underlying earnings growth may be soft in the FY14 results and has downgraded the rating to Neutral from Buy. To the broker the stock looks to be fair value at current levels and the target is lowered to $1.12 from $1.13.

Flight Centre ((FLT)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 5/2/0

Credit Suisse thinks the Australian retailers are facing elevated income uncertainty ahead of a potential tightening in fiscal policy and has switched to defensive. As Flight Centre has low valuation sensitivity to tighter discretionary spending relative to other discretionary retailers it is one of those stocks likely to present an opportunity to buy on weakness. The rating is downgraded to Neutral from Outperform. The target is steady at $53.00.

Hot Chili ((HCH)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 0/0/1

The heat has gone out of Hot Chili as far as the broker is concerned. Debt is "no way to finance" a pre-feasibility study, the broker suggests, and another US$15-20m beyond the facility HCH has just secured will be required to fund the definitive feasibility study. "We see no reason to hold HCH," says the broker. Downgrade to Underperform. Target falls to 20c from 64c on dilution.

Incitec Pivot ((IPL)) downgraded to Neutral from Outperform by Citi and to Neutral from Outperform by Credit Suisse. B/H/S: 3/5/0

Citi has tempered its positive view on Incitec in the wake of the interim result, citing a subdued second half outlook from management. Incitec Pivot is beholden to DAP prices and the Australian dollar and it appears the rally in DAP prices has now petered out at the end of the Indian buying season. Delays at Phosphate Hill proved longer than expected, Moranbah surprised with higher than expected D&A charges and management conceded overcapacity is proving a challenge in WA. Incitec Pivot's first half result beat bearish forecasts and Credit Suisse suggests management now has operational challenges under control after a tough period. Despite a slower than expected ramp-up at Moranbah and downgraded production at Phosphate Hill the broker is comfortable with FY14 guidance on the seasonal second half skew. The broker believes the market is looking at FY14 as a transition year and pricing for FY15 earnings. Target unchanged at $3.10 but the broker pulls back to Neutral.

JB Hi-Fi ((JBH)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/3/1

Credit Suisse thinks the Australian retailers are facing elevated income uncertainty ahead of a potential tightening in fiscal policy and has switched to defensive. As JB Hi-Fi has low valuation sensitivity to tighter discretionary spending it is one of those stocks likely to present an opportunity to buy on weakness. The rating is downgraded to Neutral from Outperform and the price target to $20.25 from $23.06.

Orica ((ORI)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/5/0

The first half result was soft but in line with Macquarie's expectations. The company is embarking on further cost cutting and efficiencies and the benefits of the review should be revealed at the FY14 results, according to the broker. Macquarie thinks the valuation is undemanding and the company is a quality name in the mining services space. Still, earnings momentum is negative and there are risks around the second half. Guidance is now more realistic in the broker's opinion – in line with FY13 – and the rating is downgraded to Neutral from Outperform. The target is reduced to $22.00 from $24.37.

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

The cut in the budget to Medicare rebates will be offset by co-payments to some extent and Primary should be able to maintain earnings, but the bulk-billing model is now dead, the broker suggests. Despite changes likely to be required by the Senate, the uncertainty now created is enough to see the broker pull back to Hold. At least initially, there will be an abrupt drop-off in GP visits and thus flow-through to pathology etc, the broker predicts, before things normalise again in about a year. Target falls to $4.50 from $5.05.

Sonic Healthcare ((SHL)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 3/5/0

The cut in the budget to Medicare rebates will be offset by co-payments to some extent but the broker suggests pathology visits could fall further than GP visits, given a reassessment of the need for blood work if it is no longer free. Approximately 50% of SHL earnings is impacted by the budget. The Senate may yet have a say, but on the uncertainty the broker has cut its target to $17.50 from $19.25 and its rating to Hold.

Southern Cross Media ((SXL)) downgraded to Sell from Neutral by Citi. B/H/S: 4/2/2

Kyle and Jackie O did a runner from 2DayFM and Southern Cross has suffered more than expected. Ratings for the group as a whole have fallen 18% and not just in the breakfast slot, the broker notes. SXL's combination of 2Day and TripleM has now lost its number one east coast position for the first time in five years. The broker has cut its FY15 profit forecast by 26% and, given the company wants to pay down debt, slashed its dividend forecast as well. The broker feels the market is yet to appreciate the downside risk and has downgraded to Sell. Target falls to $1.05 from $1.50.

SP AusNet ((SPN)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/3/2

Macquarie has downgraded to Neutral from Outperform. The FY14 results were ahead of Macquarie's forecasts but distribution guidance for FY15 was flat. The broker believes infrastructure valuations are stretched and while SP AusNet's multiples are more modest they carry greater uncertainty regarding tax disputes and litigation. The broker prefers Spark Infrastructure ((SKI)) where the tax issues are nearing resolution. The target is raised to $1.42 from $1.39.

Tabcorp ((TAH)) downgraded to Hold from Buy by Deutsche Bank and to Sell from Neutral by UBS. B/H/S: 3/2/3

Deutsche Bank estimates an increase in the race fields product turnover fees to 2.5% from 2.0% standard and 2.0% from 1.5% premium would cost Tabcorp 8% of earnings and thus reduce valuation by 8%. This is the worst case scenario and the states may not take up the model, or Tabcorp might be able to get something back, the broker notes. The broker has pulled back to Hold on the uncertainty. UBS thinks the Victorian report could be a precursor to further changes in industry funding requirements. This would mean an increased cost for Tabcorp and UBS thinks the company will try and offset this by increasing yields, encouraging betting on local production and reducing operating expenditure. The rating is downgraded to Sell from Neutral, given the presumption of an increase in fees and with the stock now trading at a premium to valuation.

Trade Me ((TME)) downgraded to Sell from Neutral by UBS. B/H/S: 2/2/2

Headwinds have become troublesome in UBS' opinion. Based on the trends that the broker has observed, such as listings volume and audience share, the broker is reducing FY14 earnings by 1% and FY15-16 by 7-8%. If management fails to execute on its property and new goods e-commerce strategy there is material risk to the business, in UBS' view. The rating is downgraded to Sell from Neutral and the price target is reduced to NZ$3.70 from NZ$3.95.

Transfield Services ((TSE)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/3/2

Transfield has completed $745m in debt restructuring and Credit Suisse is upgrading its target to $1.15 from 92c to reflect a lower risk premium. While this refinancing is an incremental positive, the broker finds there's challenges still. The stock appears slightly expensive and Credit Suisse is downgrading the rating to Underperform from Neutral.

See also TSE upgrade

UGL ((UGL)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/4/4

JP Morgan thinks shareholders would be best served by a structural separation of DTZ and engineering but keeping the two businesses under one corporate umbrella. Nevertheless, management seems set on selling DTZ or pursuing a full de-merger in the broker's view. Hence, with UGL trading above valuation, the rating is downgraded to Underweight from Neutral. The target is reduced to $6.68 from $6.84.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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