Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 22 to Friday September 26, 2014
Total Upgrades: 19
Total Downgrades: 3
Net Ratings Breakdown: Buy 39.31%; Hold 42.56%; Sell 18.13%

Stockbrokers are using the quiet post-August reporting season time to revisit price forecasts for bulk commodities and industrial metals and the results are clearly on display with the week ending Friday, September 26 recording no less than 19 upgrades for individual stock ratings and but three downgrades. Most changes, on both sides, affect resources stocks.

There's no reason to get too excited about a resources come-back just yet as most changes in ratings represent a switch from negative to neutral, but regardless one would have to assume that at the very least a platform is being put in place for the next wave of buying interest; exact timing unknown.

The picture turns decidedly more positive when overlooking the changes that have been occurring in consensus price targets and earnings estimates. Again, both sides of the ledger are being dominated by resources stocks, but the positive side seems to have a clear win over the negative adjustments.

In the background of all these changes a few turnaround stories in investor sentiment are taking place. Last week it was the turn of Nufarm and OrotonGroup, while underlying sentiment for Cochlear seems to be improving too. Headwinds continue building for Metcash, Crown and ALS Ltd.?

Upgrades

Alumina ((AWC)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/1/3

The broker assumes higher aluminium and alumina prices in 2015 and that AWAC cash generation and earnings will rise materially. Hence, the broker's FY15 profit forecasts are raised by 39%. Credit Suisse upgrades to Neutral from Underperform and raises the target to $1.80 from $1.60.

Cochlear ((COH)) upgraded to Outperform from Underperform by Macquarie. B/H/S: 1/2/5

Although Cochlear's sales growth has eased in recent years the size of its installed base has continued to grow strongly. Thus the broker believes N6 upgrades from the installed base, as aside to new sales, will provide an upside earnings surprise for COH in FY15. Upgrade growth in the double-digits should override concerns over sluggish CI growth, hence while the broker notes COH is not particularly cheap at 21.4x FY15 forecasts, the investment equation now looks attractive. Attractive enough for an upgrade straight to Outperform from Underperform. Target leaps to $72 from $55.

Fortescue Metals ((FMG)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/2/1

The shares have now priced in a very bearish iron ore outlook and Credit Suisse now assumes Fortescue will not pay a dividend in FY15. As the bad news is now in the price and the stock is trading on a FY16 cash/earnings ratio of 4.6 times the broker upgrades to Outperform from Neutral. Target is unchanged at $5.00.

Independence Group ((IGO)) upgraded to Outperform from Neutral by Credit Suisse and to Buy from Neutral by Citi. B/H/S: 4/3/0

Independence Group is lagging other nickel producers in the rally over the last six months but has robust valuation metrics, in Credit Suisse's view. The broker upgrades to Outperform from Neutral and retains a $5.10 target. The commodities team has made minor downgrades to nickel price forecasts. Independence Group's domestic focus is paying off, in Citi's view. The broker upgrades to Buy from Neutral and raises the target to $5.40 from $4.80. That said, the broker retains a preference for Western Areas ((WSA)) in nickel exposure.

Iluka Resources ((ILU)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/2/0

Macquarie is upgrading to Neutral from Underperform. Target is steady at $7.50. Near-term risk has abated, with positive pricing momentum in key markets. Typhoon Rammasun has affected around 20% of Chinese zircon supply. At least two months will be needed to restore full production at some plants. Moreover, the ebola outbreak could also affect key mineral sands producing regions such as Sierra Leone and Senegal. Longer term, Iluka is facing headwinds as a number of emerging producers threaten market share and Macquarie believes the company's current portfolio is poorly positioned in the face of changing markets.

Medusa Mining (MML)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/2/0

Medusa's long awaited update on reserves and resources at the Co-O mine sees a 22% fall in the former and 36% in the latter, which is actually a better result than the broker had forecast. Meanwhile, MML's production remains on track with guidance. The release of the update has now removed a major negative for the stock, the broker suggests, which has fallen 57% in FY15 to date. Achieving production guidance will be critical but with the share price having accounted for the fears, the broker now upgrades to Neutral. Target falls to 90c from $1.00.

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

The latest exploration results from Cassini and Voyce impressed the broker. The share price has fallen 22% since mid August and is now flat year to date, despite nickel prices rising 23% over the year. Macquarie also notes the company is set to deliver solid production and these results suggest further upgrades to reserves and resources are likely. Rating is upgraded to Outperform from Neutral and the 80c target is unchanged.

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

FY14 profit was below the broker's estimates. Weak coal prices and a high Australian dollar resulted in the coal mining and marketing & logistics segments contributing only 26% of underlying profit. The company has provided further clarity regarding the timing of the approvals and construction of the New Acland expansion, to commence a year later than CIMB had expected. Rolling forward valuation has more than offset the impact of the revised New Acland time line and as a result the broker's target is raised to $2.60 from $2.50. As the share price has fallen by 12% over the past two weeks the broker is upgrading to Hold from Reduce.

See also NHC downgrade

Nufarm ((NUF)) upgraded to Outperform from Neutral by Credit Suisse, to Buy from Hold by Deutsche Bank and to Buy from Neutral by UBS. B/H/S: 5/2/0

Credit Suisse believes the company could generate enough free cash by FY16 to lift its dividend to a yield of 6%. The broker upgrades to Outperform from Neutral and raises the target to $5.20 from $4.90. Nufarm's result fell short of Deutsche Bank's forecast, but cash flow well exceeded on better than expected reductions in working capital and debt. Guidance suggests improved earnings ahead on a normalisation of seasonal conditions in North America and Australia. The broker has increased earnings forecasts by 6-12%. Target rises to $4.85 from $4.30 which is enough to prompt an upgrade to Buy. The turnaround in cash flow stood out for UBS. Nufarm's FY14 earnings were above the broker's forecasts. UBS raises FY15-16 earnings forecasts by 6%, reflecting a higher base and positive FX impact. Nufarm is in a much better position to manage its funding needs and actions are underway to continue to improve cash flow, which makes the broker even more confident. Rating is upgraded to Buy from Neutral and the target is raised to $5.30 from $4.45.

OZ Minerals ((OZL)) upgraded to Buy from Neutral by Citi. B/H/S: 3/3/2

Citi's commodity team has lowered gold and silver price forecasts but a softer Australian dollar forecast helps OZ Minerals, especially in the context of robust copper prices. Citi has left copper prices relatively unchanged and bullish. The rating is upgraded to Buy from Neutral and the target is raised to $5.85 from $4.52.

PanAust ((PNA)) Upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/2/0

Credit Suisse has updated commodity price forecasts and raises FY15 and FY16 earnings forecasts on account of higher copper price assumptions. No updates have been forthcoming on the indicative takeover offer by GRAM and this suggests to Credit Suisse its commitment is low. Either that or an uncompelling valuation or funding challenge, or all of the above. The target is raised to $2.46 from $2.44 and the broker upgrades to Outperform from Neutral, largely reflecting share price weakness rather than a more positive view on the company.

Regis Resources ((RRL)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/6/0

The underlying profit in FY14 was in line with the broker. FY15 guidance for 305-355,000 ozs at a $835-915/oz cash cost is unchanged. The broker believes conservative grade and throughput guidance offers upside for the stock. Rating is upgraded to Neutral from Underperform following an underperforming share price. Target is reduced to $1.77 from $1.85.

Sandfire Resources ((SFR)) upgraded to Buy from Neutral by Citi. B/H/S: 4/3/1

Softer Australian dollar estimates will be of great benefit to a domestic producer such as Sandfire, especially in the context of robust copper prices, and Citi upgrades to Buy from Neutral. Target is increased to $7.83 from $7.14.

Sirius Resources ((SIR)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 3/1/0

The update on drilling at Nova disappointed the broker, as the discovery of a massive sulphide deposit could have had a material impact on the value of the Nova mine. Macquarie observes the share price has effectively removed any value for nickel exploration upside, while the Nova project is world class and retains strong corporate appeal. The broker upgrades to Outperform from Neutral and reduces the target to $3.95 from $4.00 to reflect the removal of regional exploration value. Valuation now only reflects the value of the Nova development.

Whitehaven Coal ((WHC)) upgraded to Outperform from Neutral by Credit Suisse and to Buy from Neutral by Citi. B/H/S: 5/3/0

The stock is a tricky one for Credit Suisse, given high quality production growth at a time of low coal prices. The company is expected to be loss making until FY17 and thereafter debt should fall quickly as Maules Creek ramps up. The broker suspects coal prices are at cyclical lows and will move higher in the next 12 months. Rating is returned to Outperform from Neutral and the target is raised to $2.30 from $2.10. Citi's commodity team has reviewed price forecasts and made more downgrades than upgrades with thermal coal one of the biggest losers in the pack. The impact has been offset by a significantly lower Australian dollar forecast. The broker upgrades to Buy from Neutral and raises the target to $2.30 from $2.00.

Downgrades

Metcash ((MTS)) downgraded to Sell from Neutral by UBS. B/H/S: 2/0/6

UBS has reviewed the discounter model among supermarkets, noting Aldi and Costco are highly efficient and offer compelling value, making it very hard for the major chains to compete – particularly the independent supermarkets supplied by Metcash. The broker reduces Metcash forecasts to assume ongoing market share decline, downgrading FY16-19 earnings forecasts by 3-8% and reducing the target price to $2.60 from $2.75. As a result the rating is downgraded to Sell from Neutral.

New Hope ((NHC)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/2/0

New Hope is most negatively affected by Credit Suisse's coal price forecast revisions, with FY15 profit expected to be down 39%. The broker downgrades to Neutral from Outperform and reduces the target to $2.80 from $3.00.

See also NHC upgrade

Western Areas ((WSA)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/4/0

Given the share price appreciation over the past six months – Western Areas is up 46% – Credit Suisse is downgrading to Neutral from Outperform. The broker applies a modest discount to the target price, reducing it to $5.20 from $5.40, given a 24% fall in FY15 profit estimates as the assumed nickel price peak is pushed out by six months.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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