Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features AURIZON HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: AZJ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

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 July 28 to Friday August 1, 2014
Total Upgrades: 9
Total Downgrades: 19
Net Ratings Breakdown: Buy 39.09%; Hold 43.56%; Sell 17.35%

The week ending Friday, August 1st, saw twice as many rating downgrades being issued as upgrades, but this shouldn't surprise as major indices in Australia hit six year highs during the week. History shows there's usually a direct correlation between rising share prices and rating downgrades as apparent valuation shrinks with higher price levels.

Of course, one important factor in determining how much valuation actually is out there is by relying on profit estimates and here too the story is more about downgrades than about upgrades. This then has a similar flow-on effect on price targets.

Looking closer into what last week offered investors, the good news is probably that most of the bad news relates to smaller bulk commodity stocks, which are victim to falling prices, and to companies that issued disappointing market updates, including QBE Insurance, GUD Holdings and OceanaGold.

On the positive side of the ledger, we find companies such as Genworth Mortgage Insurance Australia and Insurance Australia Group; companies that issued well-received market updates. But admittedly, the overall picture last week leans more to the negative.

One other observation to share is that five out of the eight stockbrokers that make up the daily research universe at FNArena now have more Neutral (or equivalent) ratings than Buy ratings. This too should not surprise, given where share price indices are.?

Upgrades

Amcom Telecom ((AMM)) upgraded to Add from Hold by CIMB Securities. B/H/S: 2/1/1

Amcom has a contract with the University of Melbourne to deploy ACC telephony and communications. CIMB notes significant expenditure has gone into establishing the company's cloud communication (ACC) service and this has likely pressured FY14. Still, the broker expects better growth in FY15, noting Amcom is one of the more reliable earners in the small cap telco sector. The broker is upgrading to Add from Hold as the stock has fallen below fair value after the recent equity raising. The target is steady at $2.25.

Aurizon Holdings ((AZJ)) upgraded to Buy from Neutral by UBS. B/H/S: 3/4/0

The broker has returned from restriction on Aurizon and upgraded a prior Neutral rating to Buy and a prior target to $5.80 from $5.50. AZJ has traded back to Dec 2013 levels despite general strength in infrastructure stocks, recent coal price recovery and evidence of cost reduction momentum. The market has been concerned over the drag from AZJ's potential West Pilbara investment but the broker sees it as an opportunity to recycle capital out of Queensland coal into higher returning WA iron ore without jeopardising dividends.

Evolution Mining ((EVN)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/4/0

Credit Suisse notes Evolution's FY15 production and cost outlook are similar to FY14. Mt Carlton started up in FY14 while Cracow was strong and Mt Rawdon stable. The weaker performers were Edna May and Pajingo, which were beset by grade and reliability issues. The broker is increasing the target to 86c from 77c and its rating to Neutral from Underperform.

G.U.D. Holdings ((GUD)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 2/3/1

Improvement in the second half meant GUD's 44% FY14 profit decline still beat the broker. Guidance suggested substantial cost cutting and performance improvement targets with underperformers Sunbeam and Dexion expected to contribute to a better FY15. FY14 was a year of transition so FY15-16 must deliver, the broker suggests. The broker upgrades to Neutral but remains cautious, with upgraded earnings forecasts still below guidance. Target rises to $6.80 from $5.50.

Programmed Maintenance ((PRG)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/6/0

The company's update, three months into the new financial year, was a mixed bag and suggests operationally things look flat in comparison with last year, argue the analysts. They have nevertheless decided to upgrade to Outperform from Neutral based on tender pipeline, balance sheet opportunities and supportive dividend yield and view the current valuation as undemanding. Target price has lost 10c to $3.00. Estimates have received a serious haircut.

Northern Star ((NST)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/0/0

Northern Star's June quarter production was solid and the broker suggests guidance seems conservative. Reserves and resources at Jundee have been increased and the broker suggests both Jundee and Kundana have the potential for significant further upgrades, and the potential to beat FY15 production guidance. NST's aggressive acquisition strategy has seen it grow from a one asset miner to a five asset miner in six months, the broker notes, with the key assets quickly bedded down. Upgrade to Outperform. Target rises to $1.95 from $1.38.

Recall Holdings ((REC)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/6/1

JP Morgan continues to emphasise the long-term risks of migration to digital document storage. Nevertheless, the broker has factored in recent initiatives, which have increased medium term forecasts, acknowledging that the short to medium term opportunities lie with increased asset utilisation and small tuck-in acquisitions.

See also REC downgrade.

Regis Resources ((RRL)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/5/1

Regis Resources' quarterly suggests production is showing signs of recovery, the broker notes, but impairments will be taken on Duketon and McPhillamys and write-downs to Garden Well and Rosemont. The broker has responded with an upgrade to Outperform, suggesting expectations have now been reset and material issues affecting Duketon have been worked through. The broker has confidence in management extracting all possible upside. Target rises to $1.98 from $1.80.

Trade Me ((TME)) upgraded to Neutral from Sell by UBS. B/H/S: 1/3/2

Trade Me has announced new property price plans to address its decline in volumes and audience. The net result should not impact on the bottom line but the broker suggests downside risk to revenues is still prevalent if the price cuts fail to lead to volume increases. That said, on the 17% correction in TME's share price over the last three months the broker upgrades to Neutral. Target falls to NZ$3.45 from NZ$3.70.

See also TME downgrade.

Downgrades

Alumina ((AWC)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 2/2/4

Alumina has been one of the best performing stocks in the mining sector this year but JP Morgan notes margins in the AWAC business have fallen. The broker recognises there is a lack of identifiable catalysts to drive a share price de-rating but considers an Underweight recommendation, reduced from Neutral, is now justified, based on stretched metrics versus mining sector peers. The price target is raised to $1.50 from $1.40.

Beadell Resources ((BDR)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/2/0

Beadell's June quarter production was substantially lower than forecast due to wet weather. The broker has remodelled its valuation to account for lower wet season movements and cut FY15 forecast earnings by 15%. There is now more pressure on Duckhead to provide cash flow for the remainder of the year and the broker has also lowered its longer term expectations for Tucano, leading to a net fall in target to 54c from 77c. All up, the broker has downgraded to Neutral.

Boart Longyear ((BLY)) downgraded to underweight from Neutral by JP Morgan and to Sell from Neutral by Citi. B/H/S: 0/1/6

The June quarter update highlights the continued pressure on the business from persistent weakness in global mineral exploration and a stretched balance sheet. JP Morgan believes these factors raise the risks for investors from a highly diluting recapitalisation and this is not reflected in the share price. JP Morgan's rating is downgraded to Underweight from Neutral and the target is reduced to 13c from 21c. Earnings are a little shy of Citi's forecasts. The broker thinks operating metrics suggest demand has reached its low point but assumes a gradual upturn in profitability. Earnings forecasts have been reduced by 27% for 2014 and 12% for 2015. The company believes it should be able to implement a recapitalisation prior to the end of the year but the broker suspects shareholders may bear the brunt. A downgrade to Sell/High Risk from Neutral/High Risk is considered appropriate for the time being and the target is cut to 19c from 28c to reflect changes in forecasts.

Cape Lambert ((CFE)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 0/0/1

Cape Lambert has reached a settlement on the dispute with Macarthur Coal ((MCC)) and on the receipt of those funds CFE's market cap is almost entirely cash-backed, the broker notes. Given low iron ore prices, CFE has not been able to find a buyer/partner for its Marampa project in Sierra Leone. In that case the broker struggles to see another catalyst and has thus downgraded to Underperform from Outperform. Target retained at 10c.

Cochlear ((COH)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/2/6

In previewing Cochlear's FY14 result JP Morgan assesses the stock is now trading on a price/earnings of around 32 times FY14 expectations and, despite factoring a rebound in volumes, FY15 remains high at 25 times. With potential downside to the target – raised to $56.72 from $55.76 – the broker downgrades to Underweight from Neutral on valuation grounds, recognising the risk around low quality earnings when the stock is priced to perfection.

Independence Group ((IGO)) downgraded to Neutral from Buy by Citi. B/H/S: 2/5/0

Production was ahead of guidance in FY14 and the pre-released financials show weaker profits because of write downs. Earnings were in line with the broker's estimates. Citi is downgrading to Neutral from Buy because of the strong performance in the share price recently. The target is steady at $4.90.

Indophil Resources ((IRN)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/1/0

Indophil had nothing new to report on Tampakan at its quarterly, with the approval process and community engagement progressing. The broker is perplexed that IRN believes Glencore is in a position to participate in the project now it has sold Las Bambas when Glencore has indicated it is moving away from greenfields projects. Perhaps Glencore sees more value than the broker does, the broker speculates. Target retained at 22c but share price appreciation brings the price in line, hence a downgrade to Neutral.

Leighton Holdings ((LEI)) downgraded to Sell from Neutral by UBS. B/H/S: 0/1/5

Leighton's profit beat the broker but D&A, tax and other factors masked a miss on underlying earnings. Full year guidance was reiterated but cash flow was weak and gearing remains above target, the broker notes. LEI's high level of outstanding receivables remains an issue for the broker against weak cash flow and management has suggested they will remain high until current LNG projects are completed. With the stock trading at a significant premium to the broker's unchanged $18 target, the broker downgrades to Sell.

Lynas Corp ((LYC)) downgraded to Sell from Neutral by UBS. B/H/S: 0/3/1

Lynas' production and sales were in line with guidance but realised price fell short due to a high proportion of lower priced cerium in the basket. Cash flow was negative, LYC has $38m in the bank but needs to make a $35m debt repayment in the Sep Q, the broker notes. LYC is moving to cut costs but it's too late, the broker suggests. With cash still burning the company will have to secure more funding assuming it can't refinance existing debt. Downgrade to Sell. Target falls to 15c from 19c.

Monadelphous ((MND)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/1/6

Deutsche Bank downgrades to Sell from Hold and reduces the target to $13.65 from $15.75. The changes reflect a weak outlook for engineering construction in the resources sector, with the broker's analysis suggesting there are few large construction projects for the company to work on.

OceanaGold ((OGC)) downgraded to Reduce from Hold by CIMB Securities, to Sell from Neutral by Citi and to Neutral from Overweight by JP Morgan. B/H/S: 1/2/3

June quarter numbers were softer, as suspected after a strong first quarter, but CIMB believes increased throughput and higher grades at Didipio will offset a weaker performance from the New Zealand operations. Outperformance has stretched the broker's valuation and, in combination with a revised outlook for 2014, lowers the target to $2.90 from $2.70. The rating is downgraded to Reduce from Hold. The first half was in line but Citi notes the NZ operations are starting to look more costly. A lower rate of production in NZ is expected to continue. While retaining a positive view of the company as a low-cost gold producer, Citi considers the current share price is a stretch, and the NZ assets are looking tired on a net present value basis. Forecasts are lowered for the second half and the broker downgrades to Sell from Neutral. Production at Didipio was below JP Morgan's estimates, resulting in higher-than-expected costs and reduced free cash flow. Despite this, the company maintains full year guidance. As the share price is up 96% in the year to date and now trading in line with the target, JP Morgan is downgrading to Neutral from Overweight.

QBE Insurance ((QBE)) downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie. B/H/S: 5/2/1

QBE has strengthened reserves, largely because of a rise in claims in Argentina. While the balance sheet continues to improve – funded by a lack of dividends in Credit Suisse's opinion – reserving issues continue to hold back recovery. The broker is concerned that the turnaround has taken too long. Moving into a soft cycle the risk is to the downside. The broker concedes there is value at current levels but needs more comfort around the underlying book and downgrades to Neutral from Outperform. First half guidance was lowered to 22% below Macquarie's forecast. It's all to do with Argentinian workers' compensation, although management further noted operating conditions remain tough and premium growth has disappointed, while the broker notes gearing remains elevated. The upcoming strategic review may provide for upside, as would favourable interest rate/currency movements, but the broker has cut forecasts and decided to downgrade to Underperform for now.

Recall Holdings ((REC)) downgraded to Hold from Add by CIMB Securities. B/H/S: 0/6/1

CIMB notes the stock has performed well since its de-merger and remains an attractive long-term investment opportunity. Nonetheless, the broker is taking a tactical position heading into the FY14 results because of the earnings risks from currency and costs. With the stock now on 17 times price/earnings after a strong six-month performance CIMB struggles to find a strong catalyst. Hence, the rating is downgraded to Hold from Add and the target is raised to $5.20 from $5.06.

See also REC upgrade.

SEEK ((SEK)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 2/3/3

The broker is downgrading to Underperform from Neutral, citing a subdued Australian employment outlook and education earnings set to peak in FY16 as Swinburne matures. Meanwhile, competition is also holding back growth at Zhaopin and there is regulatory risk from Singapore on the Jobstreet acquisition. The broker envisages Singapore will contribute around 25% of the value of the combined business and there is up to $1/share at risk if the transaction fails to complete.  The new $14.50 target, revised from $17.00, reflects the softer outlook.

Trade Me ((TME)) downgraded to Underperform from Buy by BA-Merrill Lynch. B/H/S: 1/3/2

Trade Me has reversed pricing model changes for real estate agents that were implemented in September 2013. This caps price increases at 40% for metro agents and keeps prices flat in regional areas. The broker downgrades to Underperform from Buy, as the underpinnings of the buy thesis have been removed. The target is lowered to NZ$3.30 from NZ$5.50. Merrills points out that, while a 40% price rise sounds impressive, the fact is that it remains cheaper to advertise a house for sale on Trade Me than to sell a car. The broker is concerned about the company's ability to push through price rises in other classifieds.

See also TME upgrade.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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