Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 September 15 to Friday September 19, 2014
Total Upgrades: 11
Total Downgrades: 10
Net Ratings Breakdown: Buy 38.49%; Hold 42.92%; Sell 18.59%

The underlying picture for the Australian share market, as seen through the prism of stockbroker ratings and projections, continues to show ongoing improvement. The negative side of the ledger continues to be dominated by companies that release disappointing market updates and during the week ending on Friday, 19 September 2014, those disappointments were released by Arrium, Myer and SAI Global. Ongoing weakness for resources stocks triggered more upgrades than downgrades for the sector.

On the positive side we find OceanaGold and Premier Investments, both attracting multiple upgrades in ratings, while OrotonGroup features on the positive side of revaluation and earnings forecasts. Remarkable, in a broader context of falling iron ore price forecasts, is that both Rio Tinto and BHP Billiton find themselves on the positive side for earnings estimates revisions, albeit just. Investors should look no further than the weakening Aussie dollar if they want an explanation.

All in all, upgrades and downgrades to ratings for individual stocks were more or less evenly balanced throughout the week, but underlying trends in valuations/targets and earnings forecasts continue to provide support for the local share market.

Upgrades

AGL Energy ((AGK)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/6/0

AGL continues to face challenges with regard to electricity price recovery, the broker notes, and there is also uncertainty about the Tomago aluminium smelter contract with CSR ((CSR)), since AGL acquired MacGen. There is nevertheless upside potential from the sale of Queensland gas assets and the stock is now trading at a 14% discount to the broker's valuation. Upgrade to Neutral. Target rises to $15.28 from $15.22.

Alumina ((AWC)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 3/0/4

Things are simply falling into the right place and at the right time, suggest analysts at Deutsche Bank. They believe alumina prices are set for a run when capex is coming to an end for Alumina Ltd. There's no shortage of bauxite but the stockbroker speculates it will take some time before additional supply might spoil this party. A general review of metals prices has led to an increase in the long term assumption to US$390/t for alumina. Earnings forecasts have risen. Valuation/target goes up to $2.25 from $1.55. Upgrade to Buy from Hold. On the stockbroker's current projections, this stock is about to turn into a yield stock with dividends projected to make a come-back next year.

AWE ((AWE)) upgraded to Buy from Neutral by UBS. B/H/S: 4/1/0

AWE has announced up to 1.2tcf of deeper gas potential at Senecio in the Perth Basin. The company will flow test by year-end and appraisal drill early in 2015. The broker has increased its risked valuation for the Perth Basin. This results in a target price increase to $2.05 from $1.95. Combine this with a 5% fall in the AWE price since its result last month and the broker has upgraded to Buy.

Charter Hall ((CHC)) upgraded to Buy from Neutral by Citi. B/H/S: 4/3/0

Citi remains keen on property fund managers and, after residential developers, believes they offer the greatest potential for earnings upside. The pull back in Charter Hall's share price is an opportunity to buy the stock, in the broker's opinion. FY15 is expected to be another strong year and the company is well positioned to take advantage of the strong appetite for Australian real estate. The rating is upgraded to Buy from Neutral. A $4.63 target is maintained.

CSR ((CSR)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/4/2

CSR is facing uncertainty over its electricity supply contract at its Tomago smelter now that AGL has acquired MacGen. But there are a number of scenarios which could mitigate some of the 2017 step up in power costs, the broker suggests. Meanwhile aluminium prices are improving, although the broker envisages the residential building cycle easing in 2016. On a shorter term call, the broker upgrades to Outperform. Target rises to $3.84 from $3.63.

Mirvac ((MGR)) upgraded to Buy from Neutral by Citi. B/H/S: 2/4/1

Citi views the current pull back in the stock as an opportunity to buy and consequently upgrades the rating to Buy from Neutral. Target of $1.96 is maintained. The company has been improving the quality of its commercial portfolio, which should, over the longer term, provide more robust earnings. Citi also notes, Mirvac has made significant progress in clearing impaired inventory.

OceanaGold ((OGC)) upgraded to Overweight from Neutral by JP Morgan, to Neutral from Sell by Citi and to Buy from Hold by Deutsche Bank. B/H/S: 2/2/1

Preliminary results from the Didipio underground optimisation study are positive and JP Morgan has slightly lifted valuation. The stock was sold off after the June quarter production report, despite management previously flagging production would likely be weaker. Full year guidance was maintained. Production is expected to improve this quarter and the stock is now trading well below the broker's target. JP Morgan upgrades to Overweight from Neutral. Citi downgraded OceanaGold to Sell at the beginning of August but is now upgrading in the wake of Didipio optimisation study. The results are very positive, the broker notes, suggesting a one-year mine life extension, a 33% underground output increase and pit waste reduction. The broker has adjusted earnings forecasts to account for the development upside but also the capex it will require. Deutsche Bank notes the underground operation will start one year earlier than originally planned and first ore will be two years earlier. The revised mine plan will increase output from 2017 and ensure the asset remains in the lowest cost quartile. Deutsche Bank upgrades to a Buy from Hold on valuation.

Sirius Resources ((SIR)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 2/2/0

Deutsche Bank has updated its long term price projections for base metals and copper, nickel and zinc have been the major beneficiaries, all enjoying upgrades to long term price projections. To justify these moves, Deutsche Bank analysts report capital intensity and real costs are expected to rise throughout the industry over the next 10-15 years. Price target has jumped to $4.20 from $3.85. Recommendation went up to Buy from Hold as a direct result.

Spark Infrastructure ((SKI)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 3/3/1

JP Morgan is upgrading to Overweight from Neutral following a period of relative underperformance amid expectations that distribution revenue will be higher this year because of cooler weather in South Australia and Victoria. Target is raised to $1.90 from $1.85.

Downgrades

Arrium ((ARI)) downgraded to Reduce from Hold by CIMB Securities and to Sell from Neutral by Citi. B/H/S: 1/2/4

Arrium's $754m capital raising has reduced concerns regarding the debt burden in the near term, with one proviso in CIMB's opinion – as long as the iron ore price does not deteriorate further. CIMB has adopted changes to iron ore forecasts and updated earnings to reflect the higher number of shares on issue. The broker considers the business has leverage to both better and worse conditions. Nevertheless, unless there is a specific reason to be bullish on iron ore pricing the broker does not consider the mix is positive at present. Rating is downgraded to Reduce from Hold and the target is lowered to 30c from 87c. At last month's result, Arrium suggested cost cuts and working capital management would overcome gearing issues, and the balance sheet was well within debt covenants, Citi notes. But suddenly ARI has revised its FY15 guidance to below FY14 and announced a surprise capital raising. It's not just about iron ore, as the steel division has seen a surprise downgrade. The broker suggests investors may choose to shift to lower cost iron ore names or less diversified steel names leveraged to an improving domestic construction market, eg Bluescope ((BSL)). Downgrade to Sell. Target falls to 52c from 90c.

AusNet Services ((AST)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 0/3/2

AusNet Services, formerly SP AusNet ((SPN)), has outperformed recently and traded through the broker's $1.40 price target. Hence, JP Morgan is downgrading to Neutral from Overweight.

Charter Hall Retail ((CQR)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/2/4

Deutsche Bank analysts have come to the view that rising bond yields are going to highlight the rather soft EPS growth profile for retail oriented property trusts and this will erode the perceived safe haven status for such securities.They have pulled back their rating to Sell from Hold. Target revised to $3.65 from $3.72.

Macquarie Atlas Roads ((MQA)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/3/0

Macquarie has revised EUR and GBP and CPI forecasts. Macquarie Atlas Roads is unhedged and has all cash flow coming from Europe. Earnings estimates are lowered by 4-9% and dividends by 11-12% over the next three years. Rating is downgraded to Neutral from Outperform. With lower currency forecasts both the dividend and its growth rate will be lower. The broker's valuation also slips but not as much as the near-term dividend changes as the stock benefits from lower long-term bond rate expectations. Target is reduced to $3.24 from $3.36.

Myer Holdings ((MYR)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/2/4

FY15 was supposed to be a "good" year, lament analysts at Deutsche Bank. Now that Myer management has acknowledged more investments need to be made this year, the stockbroker sees all benefits from new stores and refurbishments evaporate even before the new financial year has well and truly started. The analysts believe costs will continue rising and that remains a serious problem. Downgrade to Hold from Buy. Price target cut to $2.00 from $2.50. The analysts do see support coming from dividend yield and from potential corporate interest.

Premier Investments ((PMV)) downgraded to Sell from Neutral by Citi and to Neutral from Buy by UBS. B/H/S: 1/3/2

FY14 results were "good" in the broker's opinion. Forecasts for FY15 are largely unchanged. Citi expects like-for-like sales growth to slow to 1.8% in FY15, from 4.7% in FY14, because there is no New Zealand translation benefit and fashion trends are weaker. The broker then factors in better growth for FY16 and FY17. Investor sentiment remains heavily focused on the Smiggle expansion and Citi believes turnover in the mid-tier centres in the UK will be the true test of success. The broker lowers the rating to Sell from Neutral, believing the share price has overshot while slower sales will result in a lower PE ratio. The target is raised to $9.40 from $9.00. FY14 results were strong and UBS upgrades estimates marginally for the near term and by around 10% over the longer term, adding in 40 offshore Peter Alexander stores. All the Just Group brands showed like-for-like growth in the second half, which is the first time this occurred since Premier Investments acquired the business in 2008. Following the strong share price performance and limited shareholder returns expected, the rating is downgraded to Neutral from Buy. Target is raised to $10.50 from $9.60.

Shopping Centres Australasia ((SCP)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/1/4

Deutsche Bank analysts have come to the view that rising bond yields are going to highlight the rather soft EPS growth profile for retail oriented property trusts and this will erode the perceived safe haven status for such securities. The analysts have downgraded their rating to Sell from Hold. Price target has lifted to $1.62 from $1.57 on a remodeling.

Westpac Banking ((WBC)) downgraded to Neutral from Outperform by Macquarie. B/H/S:1/5/2

Macquarie's cooperation with RFI, a global provider of customer and business intelligence focusing exclusively on financial services, has led to the publication of an in-depth study into banks in Australia, titled "Quality and Quantity". It also led to the downgrade of Westpac to Neutral from Outperform. Macquarie's price target tumbles to $36.32 from $39.28. Apparently, the data analysis has revealed Westpac has a lower quality customer base, in that it has less of the higher value loyal customers in comparison with CommBank ((CBA)) which is once again being confirmed as the highest quality franchise in Australia. Macquarie has slightly lowered forecasts post the current financial year (which ends this month). Also Macquarie's current projections imply Westpac is poised to cut its dividend in FY16 following another increase this year and next.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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