Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ALS LIMITED, and other companies. For more info SHARE ANALYSIS: ALQ

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 26 to Friday May 30, 2014
Total Upgrades: 9
Total Downgrades: 16
Net Ratings Breakdown: Buy 39.25%; Hold 44.40%; Sell 16.35%

The week past, ending Friday May 30th, saw a significantly larger number of downgrades to ratings for individual stocks, but the finer detail continues to suggest investors should not fret about it as the majority of both downgrades and upgrades ends up in the Neutral/Hold basket. FNArena recorded 16 downgrades during the week against 9 upgrades.

In line with observations made earlier, there seems to be a remarkable resilience in price targets for Australian stocks as the week past again saw only four consensus targets weaken, and only one -Skilled Group- would have genuinely registered among investors paying attention. Both Cochlear and OceanaGold saw target reductions by circa 1%. For the number four, Challenger, the decline registered 0.19%.

All this despite a more mixed picture for earnings estimates where the balance appears to be slightly weighted towards weaker forecasts. The not so good news is this is no longer the result of analysts succumbing to the lower price for iron ore. On the positive side we continue to find companies leveraged to a surging nickel price, as well as ALS Ltd and Technology One, both companies that reported out of season financial results.

Upgrades

ALS Limited ((ALQ)) upgraded to Neutral from Underperform by Credit Suisse and to Hold from Sell by Deutsche Bank. B/H/S: 0/2/4

After an extended downgrade cycle and subsequent share price underperformance, Credit Suisse is upgrading its rating to Neutral from Underperform. The FY14 result revealed management is now more optimistic and the broker thinks a higher degree of earnings predictability warrants a re-rating. The broker thinks the investment appeal is enhanced by strong cash flow and a progressive dividend policy. Deutsche Bank found a number of positive aspects to the FY14 result with conditions seeming to improve. Cash flow generation remains strong. The mining market may be challenging and there are risks to the expectations for a second half FY15 recovery in geochemistry sample flows but the broker thinks the investment risk profile is now balanced. The stock is considered fairly valued so the rating is raised to Hold from Sell.

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

Macquarie has used a general update on the Cooper Basin to raise its rating to Neutral from Underperform, pointing out the company's wet gas strategy seems to be playing out. The analysts point out that, with up to 19 conventional wells anticipated over the next 12 months, successful drilling results could help justify the premium valuation that is currently baked into the share price. Price target has gained 10c to $1.70. Earnings estimates have been pared back a little.

Mincor Resources ((MCR)) upgraded to Neutral from Sell by UBS. B/H/S: 1/1/0

UBS expects tightness in the nickel market to emerge in early 2015, assuming there is no relaxation of the Indonesian export ban. Higher price forecasts for nickel have meant a lift in the broker's rating for Mincor Resources to Neutral from Sell. The target is raised to 90c from 70c. A short mine life does, however, mean Mincor will exhibit extreme volatility via leverage to both the nickel price and exploration success.

New Hope ((NHC)) upgraded to Hold from Reduce by CIMB Securities. B/H/S: 0/2/0

The company has reported quarterly saleable coal production of 1.5mt, 11% ahead of CIMB's estimate. Sales were actually down 17% on the prior corresponding quarter because of the uneven timing of shipments. CIMB upgrades to Hold from Reduce after the fall in the share price but prefers Whitehaven Coal ((WHC)) given its more certain production growth profile. The target is steady at $2.80.

QBE Insurance ((QBE)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 5/3/0

While rattling off all the issues facing QBE going forward – North American uncertainty, premium rate cycle pressure, moderating US reserve trends, macro headwinds and equity dilution drag – the broker has upgraded the stock to Neutral from Underperform. The broker believes the issues are now all more than adequately reflected in the share price. Target rises to $13.50 from $13.10.

Stockland ((SGP)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/0/1

The broker estimates that the revised takeover proposal for Australand ((ALZ)) remains value destructive for Stockland. At least now that the offer is declared final, Stockland has provided some certainty on its position. Deutsche Bank still prefers a sale of Stockland's stake. The stock has underperformed and is now attractively priced, even allowing for  the value erosion, so the broker upgrades to Buy from Hold. The target is raised to $4.40 from $3.83.

Tower ((TWR)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/0/0

The first half results were stronger than the broker expected, with higher catastrophe claims offset by higher investment income. Credit Suisse notes Tower has a simpler and cleaner business now and is in a position to capitalise on growth opportunities in a consolidating market. The FY14 profit forecast is lowered by 6.8% and outer years by 3-4%. The rating is upgraded to Outperform from Neutral and the price target increases to $1.70 from $1.66, as a result of a higher-than-expected excess capital position.

Wesfarmers ((WES)) upgraded to Add from Hold by CIMB Securities. B/H/S: 1/3/4

The past 12 months have been uncertain for the company. CIMB observes unscheduled outages, divestments and a deteriorating coal price. The latest strategy briefing has provided clarity on a number of issues and, as a result, CIMB upgrades to Add from Hold. The price target is raised to $46.30 from $41.70.

Downgrades

Challenger ((CGF)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 3/4/1

Deutsche Bank is downgrading the stock to Sell from Hold. The strong performance over the past year was driven by the growth in lifetime annuities. This may be appealing but the broker believes the company runs the risk of underestimating funding costs and overstating profits. Taking this into account, the spread margins look like continuing to fall and constraining free cash-flow growth as capital intensity rises. Deutsche Bank reduces the target to $6.50 from $6.60.

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

At first glance the CKI consortium's $1.32 indicative non-binding cash offer looks appealing to the broker, compared with APA's ((APA)) majority scrip offer. UBS does not doubt CKI's intent, but notes the requirement for approval from all the consortium directors could be a convenient way out. APA's scheme vote is adjourned until June 13 and it is unclear to UBS in whose court the ball really is. The broker's new price target, raised to $1.32 from $1.25, is based on CKI's offer. To avoid basing a recommendation on potential counter bids the broker reflects current valuation and moves to Neutral from Buy.

Leighton Holdings ((LEI)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/2/6

The broker has been restricted on making a recommendation given its involvement in the Hochtief bid but is now back to downgrade Leighton to Underweight from Neutral. On the one hand, the business faces challenges provided by high gearing in a weakening Aust resources spending environment and on the other, Hochtief control adds uncertainty, the broker suggests. The broker does not believe shareholders are being fairly compensated for the risks at the current share price. Target $17.63, which is actually up on the previous $17.56.

National Australia Bank ((NAB)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 2/4/2

The broker notes NAB's margins have been flat since FY07, shifting from an average above peers of 20bps to an average of 20bps below. While this can to some extent be explained by a greater liquidity ratio than peers, the real problem lies in the bank's business mix and that needs fixing, the broker suggests. This will take quite some time, and in the meantime the broker has downgraded NAB to Underweight on a sector basis. Target retained at $35.35.

OceanaGold ((OGC)) downgraded to Neutral from Buy by Citi. B/H/S: 2/2/1

The broker is transferring coverage to another analyst. The investment view on the stock is positive as Oceana is a low-cost, mid-tier gold producer with copper credits but the broker downgrades to Neutral from Buy after the appreciation in the share price. Citi observes a dividend policy, possibly in FY15, could follow the paying down of debt and an acquisition.The broker has revamped estimates, incorporating March quarter production and FY13 actuals. The target is increased to $2.71 from $2.50.

Programmed Maintenance ((PRG)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/5/0

FY14 profit was below the broker's forecasts. Macquarie notes the outlook is for a similar result in FY15 but a key risk is the outcome of marine enterprise bargaining negotiations in the resource division. The broker reduces FY15 earnings forecasts by 11.4% and downgrades the rating to Neutral from Outperform, while acknowledging the valuation is not demanding and the balance sheet remains strong. The price target is lowered to $2.96 from $3.34.

Regis Resources ((RRL)) downgraded to Neutral from Outperform by Credit Suisse, to Hold from Buy by Deutsche Bank, to Neutral from Overweight by JP Morgan and to Neutral from Buy by UBS. B/H/S: 0/7/0

Credit Suisse found the FY15 guidance disappointing, with production revised down to well below the broker's projections. Moreover, forecasts grades at Garden Well were below the previous "worst case" at 1.0-1.1g/t, suggesting a continuation of the grade reconciliation issues. Rosemont also underwhelmed the broker, and with significant earnings downgrades Credit Suisse has downgraded the rating to Neutral from Outperform. The downgraded production guidance fell well short of Deutsche Bank's forecasts with poor grades at Rosemont now reminiscent of the problems first reported at Garden Well. Deutsche Bank has reduced long-term grades at both assets to capture the inherent risk in the current mine plans. Given the company has had the same problem at Garden Well, JP Morgan feels investor confidence will be further damaged. The broker has thus applied a discount to its valuation, which affects a drop in target to $1.90 from $2.70. A downgrade to Neutral follows. The company's FY15 production and cost guidance has led to a significant downgrade to UBS' forecasts, with production lowered and costs raised. This means the broker's forecast FY15 profit is lowered by 63% to $50m. UBS no longer thinks Regis Resources is the default Australian gold stock and management has to restore confidence again.

SAI Global ((SAI)) downgraded to Reduce from Hold by CIMB Securities. B/H/S: 3/2/1

Pacific Equity Partners has made an indicative proposal for SAI Global at $5.10-25 a share. The company's CEO has also been ousted following differences of opinion with the board. CIMB believes the PEP offer looks appealing on the surface but, given the small upside on offer and the fact that several medium-term earnings risks are still in place, there is large downside if the bid does not proceed. The broker's rating is downgraded to Reduce from Hold and the target is raised to $4.89 from $4.02.

Skilled Group ((SKE)) downgraded to Hold from Add by CIMB Securities. B/H/S: 3/1/0

CIMB has reviewed the drivers of revenue across each of the company's three divisions. Expectations for marine earnings are lowered. Growth appears harder to achieve as the broker thinks the scaling back of the work related to Gorgon will not be fully replaced by a ramp up in the Saipam/Inpex contract. FY15 earnings forecasts are cut by 19%. CIMB downgrades to Hold from Add and lowers the target to $3.05 from $3.97.

Suncorp ((SUN)) downgraded to Neutral from Overweight by JP Morgan and to Neutral from Buy by Citi. B/H/S: 2/6/0

In a third quarter trading update Suncorp signalled a $500m non-cash write down in the life company and favourable claims trends in general insurance. The insurer downgraded growth targets to 4-6% from 7-9%. The positive aspect for JP Morgan was that capital management is still very much likely. On balance, there were more negatives than positives so the broker is downgrading the rating to Neutral from Overweight. The price target is raised to $13.40 from $13.10. Following the market update and the $500m write down in life intangibles Citi downgrades Suncorp to Neutral from Buy. The broker believes the company is finally facing up to the medium term outlook for life insurance. The valuation now looks more reasonable in the broker's view, bringing the enterprise value largely into line with assumptions. FY15 and FY16 earnings forecasts are downgraded by 2% and 3% respectively and the target is maintained at $13.40.

Woodside Petroleum ((WPL)) downgraded to Neutral from Buy by Citi. B/H/S: 0/4/3

Citi believes Woodside is delivering on a good strategy. That said, Citi considers there is a disconnect between the industry's confidence in FLNG technology and market sentiment. The broker envisages the potential upside from further acquisitions or additional special dividends, but will not include these in the target price until announced.The rating is downgraded to Neutral from Buy, based on the price, and the target is raised to $44.28 from $43.70. 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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