Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley 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 October 27 to Friday October 31, 2014
Total Upgrades: 15
Total Downgrades: 6
Net Ratings Breakdown: Buy 42.59%; Hold 40.58%; Sell 16.83%

The underlying themes in the Australian share market, viewed from the angle of stockbroker interpretations and expectations, is one of opening up value among beaten down cyclicals, while resource stocks continue to cause havoc for profit forecasts and short to medium term valuations. The week ending Friday, 31st October, registered 15 upgrades for individual stocks while only six stocks received a rating upgrade.

Four of the six upgrades concern stocks that had a good run higher while Vocation has rapidly fallen out of favour in a story unfolding that is likely to see corporate blood shedding and lawyers whetting their appetite.

One observation worth highlighting is that resources stocks, including energy, are providing the lion share of recommendation upgrades, despite the obvious headwinds caused by falling prices and the commensurate falls in profit estimates and valuations.

The negative side of changes to forecasts and targets looks quite heavy, but that can hardly be a surprise given the weakness for commodity prices. Equally unsurprising is the fact that Qantas has re-appeared on the positive side (hint: it's about falling oil prices).

Upgrades

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

AMP continued to enjoy strong funds flows into its North platform during the September quarter, exceeding outflows in legacy platforms. But for the broker, the big news was on the insurance side where lapse experience is matching assumptions and claims experience is performing ahead of assumptions. Given it is this quarter when AMP has typically announced a "life downgrade", the broker sees this as very positive. With AMP now trading in line with the market and below its historical PE, the broker upgrades to Outperform. Target rises to $6.15 from $5.90.

Atlas Iron ((AGO)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/5/3

The broker has reviewed its position on Atlas after a strong quarter of production featuring lower costs and reduced cost guidance. The result is an upgrade to Neutral. This reflects AGO's fall in share price of some 50% but on the other hand the broker has removed South West Creek from its valuation and taken into account AGO's ongoing inability to strike a rail deal in lowering its target to 40c from 55c.

BC Iron ((BCI)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 2/2/0

The first quarter report was soft and the broker notes the Iron Ore Holdings ((IOH)) deal has not attracted market support. Nevertheless, the 60% decline in the share price since early August is overdone in Morgan Stanley's view. The broker finds value in the stock and upgrades to Overweight from Equal-weight, a view that relies on a base case price and volume recovery. Target is lowered to $1.70 from $3.15, reflecting the IOH transaction dilution and revised production and cost assumptions. Industry view is In-Line.

Coca-Cola Amatil ((CCL)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 2/4/2

Credit Suisse notes the investor briefing revealed that some sharp and productive actions were being undertaken. The company has sold 29.4% of the Indonesia franchise back to Coca-Cola. Australian and SPC initiatives appear solid with a marketing campaign aimed at broadening consumption to younger consumers.  The business was not broken but lacked a rudder, in Credit Suisse's view. The rating is upgraded to Neutral from Underperform and the target is lifted to $9.35 from $9.00.

Doray Minerals ((DRM)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/0/0

The company has launched a scrip bid for Mutiny Gold ((MYG)). The one DRM share for every 9.5 MYG shares values Mutiny Gold at 5.4c a share. Both boards have recommended the deal. Macquarie notes the market response has been muted but the move is a logical one in the broker's opinion as it diversifies operations for Doray Minerals while securing the development of Deflector for Mutiny Gold. Doray's rating is upgraded to Outperform from Neutral and the target is raised to 70c from 55c.

Drillsearch Energy ((DLS)) upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S: 3/2/0

The September quarter was solid, in the broker's opinion, albeit slightly below forecasts. Morgan Stanley considers wet gas exploration and appraisal are key to unlocking further value in the company.The company's equity has declined over the past few months in line with oil price movements and other Cooper Basin companies. Morgan Stanley upgrades to Equal-weight from Underweight. Target reduces to $1.28 from $1.30.

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

The sell off in the stock has come to a point at which Credit Suisse believes it is too low. The broker expects the recent improvement in trading conditions to be maintained and the valuation is now compelling. There remains plenty of room for upside to guidance, in the broker's view, and the rating is upgraded to Outperform from Neutral. Target is lifted to $20.00 from $19.30.

See also JBH downgrade.

Oceanagold ((OGC)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 3/2/0

September quarter production was stronger on the back of improvement at Didipio. Further grade and throughput improvement is expected, suggesting to Credit Suisse that Didipio guidance may be exceeded. Rating is upgraded to Outperform from Underperform and the target raised to $2.55 from $2.46.

Oil Search ((OSH)) upgraded to Neutral from Sell by Citi. B/H/S: 5/2/0

Citi upgrades to Neutral from Sell. The stock has underperformed, which means it is now trading below the target of $8.80, raised from $8.78. The company is blessed with a large contingent resource base, which provides the opportunity for high margin production growth but Citi believes the share price factors in much of this value.

PanAust ((PNA)) upgraded to Buy from Neutral by Citi. B/H/S: 6/1/0

Citi analysts observe the GRAM bid seems to be fading away, but they see enough long term value in PanAust to lift their rating to Buy from Neutral. Price target has been reset at $2.20 (was $2.40). Citi has now incorporated KTL in its model but assumed start date in late 2016. This weighs on shorter term projections.

Panoramic Resources ((PAN)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 3/1/0

Panoramic Resources has started FY15 well with production in line with the broker's expectations. Given the relative underperformance versus peers, Morgan Stanley finds value in the stock, particularly if nickel moves to the base case scenario. Rating is upgraded to Overweight from Equal-weight. Industry view is In-Line. Target is 85c.

Qantas ((QAN)) upgraded to Buy from Neutral by UBS. B/H/S: 4/2/0

The stock has retraced despite evidence of positive earnings momentum. Jet fuel prices in Australian dollar terms have fallen and a domestic market recovery is underway. UBS calculates a net $270m annualised benefit from fuel and currency moves over the past two months will be spread across FY15 and FY16. Free cash flow generation should drive a reduction in capital employed and improve the balance sheet and gearing. Rating is upgraded to Buy from Neutral. Price target is raised to $2.00 from $1.50.

Retail Food Group ((RFG)) upgraded to Buy from Neutral by UBS. B/H/S: 1/0/1

The company has acquired Gloria Jean's Coffee network which the broker believes will be transformational. The acquisition price of $163.5m is to be funded by equity and debt. Retail Food now expects FY15 profit growth, ex Gloria Jean's, to be up 18.5% from up 15%. UBS lifts FY16-17 earnings forecasts by 20-29% to incorporate guidance on Gloria Jean's. The rating is upgraded to Buy from Neutral as, on balance, the broker envisages a number of scale and network benefits from the deal. Target is raised to $5.85 from $5.00.

Southern Cross Media ((SXL)) upgraded to Buy from Sell by Citi. B/H/S: 3/3/1

Citi is upgrading to Buy from Sell and reducing the target to $1.00 from $1.05. The share price now reflects the broker's concerns about the operations outlook. The risk of an equity raising is still there but the underlying valuation remains intact.

UGL ((UGL)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/2/3

The DTZ sale process is on track and the medium term engineering outlook remains favourable, the broker notes. UGL has maintained FY15 engineering revenue guidance. The new CEO starts next month. The broker has now removed DTZ from its numbers, leading to a halving of earnings forecasts and the expectation of a capital return. The outlook for infrastructure is positive and the broker suggests there are now fewer reasons to be negative on UGL. Upgrade to Neutral, target rises to $7.00 from $6.70.

Downgrades

Ardent Leisure ((AAD)) downgraded to Neutral from Overweight by JP Morgan and to Neutral from Buy by UBS. B/H/S: 2/3/0

The first quarter was weaker than JP Morgan expected although there was strong growth at Main Event and health clubs. JP Morgan adds all factors in but only comes up with the current price as a valuation. Hence, rating is downgraded to Neutral from Overweight. Target is raised to $3.39 from $3.11. A solid increase in revenue was not matched by earnings in the September quarter given ongoing investment in various areas including new MainEvent centres, UBS notes. MainEvent has been well-received by the market, the broker points out, but further upside for Ardent will depend on more confidence in Aust growth, particularly for bowling and theme parks. The broker believes AAD's strategy is sound but will take time to pay off. Target rises to $3.60 from $3.25 but rating downgraded to Neutral for now.

Dexus Property ((DXS)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/3/2

Credit Suisse has reviewed the company's recent commentary and notes a distinct optimism for Sydney office. The broker considers the stock is now fully priced and, with a prospective total return of 5.4%, downgrades to Underperform from Neutral. Target is steady at $1.20.

Goodman Group ((GMG)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/2/2

The broker believes the stock is priced for perfection. There are three key themes for Credit Suisse. One is that asset pricing is exceeding operational realities and Goodman, along with partners, is trimming exposure to assets that are subject to medium term over-renting. Meanwhile, development profit is under pressure as volume growth slows and super-normal margin product rolls off. Ambitious execution is also required in the US and Brazil. Rating is downgraded to Underperform from Neutral. Price target of $5.48 retained.

JB Hi-Fi ((JBH)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 4/3/1

Trading is ahead so far in FY15 and the company has reiterated guidance at its AGM. Nevertheless, JP Morgan downgrades to Neutral from Overweight, noting operating costs and capex are likely to rise and gross margins remain in line rather than expand. JP Morgan would become more constructive on the stock when the costs growth is clearer. Target is lowered to $16.12 from $20.09.

See also JBH upgrade.

Vocation ((VET)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/1/0

Following a Department of Education review, Vocation has agreed to a series of measures to improve operations in its Solution business, which the review found to have significant shortcomings. Funding has been withheld. It's a negative financially and for its reputation, the broker suggests, and while VET is structurally well positioned longer term, it will take a while to restore market confidence. Target falls to $2.18 from $3.60. Downgrade to Neutral.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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