Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features FORTESCUE LIMITED, and other companies.
For more info SHARE ANALYSIS: FMG
The company is included in ASX20, ASX50, 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: 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 December 1 to Friday December 5, 2014
Total Upgrades: 14
Total Downgrades: 13
Net Ratings Breakdown: Buy 42.96%; Hold 39.82%; Sell 17.22%

A resurgent airline sector and continuous positive momentum for healthcare stocks featured heavily in stockbroker research updates during the week ending Friday, 5 December 2014. The reversal in fortune didn't just impact on Qantas and Virgin Australia, but also included Air New Zealand and Corporate Travel (2x acquisitions).

On the negative side remains the fall-out from lower energy prices for local oil and gas stocks, plus specific disappointments in the industrials sector with Japara announcing accountancy error, Metcash not able to meet market expectations and OrotonGroup also failing to please Mr Market.

As the fall-out from the commodities rout continues to weigh heavily on valuations, price targets and profit forecasts, positive moves are concentrated in the industrials sector, the consumers of commodities that have become a lot cheaper these days.

Upgrades

Atlas Iron ((AGO)) upgraded to Neutral from Sell by UBS. B/H/S: 0/4/4

Atlas has responded to the 50% fall in the iron ore price this year by reducing its cost base, but at spot AGO is still cash flow negative, the broker notes. Yet the broker believes at this level larger producers such as Fortescue Metals ((FMG)) and Brazil's Vale are sitting at cash break even, which should elicit some production curtailment. The broker is thus suggesting iron ore may have found a bottom. It has upgraded AGO to Neutral but warns this call is not without risk. Target nevertheless falls to 20c from 40c.

BHP Billiton ((BHP)) upgraded to Buy from Neutral by Citi. B/H/S: 5/3/0

Post a general revision, including the impact of lower priced oil on commodities in general, Citi analysts have taken an axe and cut forecasts for BHP by double digits for the years ahead. The analysts do see support from dividends, which they believe will not be cut, and from initiatives such as the spin-off of non-core assets. As such, Citi has upgraded BHP to Buy from Neutral while cutting the price target to $37 from $38. Citi does believe investors should abandon any hope of capital management initiatives, other than the progressive dividend policy that is to remain intact. DPS estimates have been left unchanged.

Challenger ((CGF)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 3/4/1

The company has been informed its aged care annuities will not receive previous favourable tax treatment. The company will appeal the decision as it is a reversal of a 2012 approval but, because of the consistent underperformance recently, JP Morgan is upgrading to Neutral from Underweight. The broker considers the stock still has offsetting positives likely to come from the financial systems inquiry. Target is reduced to $6.20 from $6.51.

Corporate Travel ((CTD)) upgraded to Add from Hold by Morgans. B/H/S: 3/1/0

The company will acquire Chambers Travel, based in the UK, and Diplomat Travel, based in the US, funded by a $45.5m entitlement offer at $8.80 a share. All are highly accretive and Morgans believes Corporate Travel is now better placed to win more global contracts. The broker upgrades to Add from Hold and recommends shareholders take up their entitlements. The target is raised to $11.20 from $9.62.

Data#3 ((DTL)) upgraded to Add from Hold by Morgans. B/H/S: 1/0/0

Data#3 is the broker's key pick in the IT services sector and the rating is upgraded to Add from Hold. Target is 82c. Guidance for 35% earnings growth in the first half was in line with expectations and indicates the company has returned to delivering organic growth.

Fortescue Metals ((FMG)) upgraded to Hold from Reduce by Morgans. B/H/S: 3/5/0

The company has reduced FY15 capex guidance to US$650m from US$1.3bn. Credit Suisse assumes there will be no dividend in FY15. Outperform rating and $4.50 target retained. For equity to have a materially higher value costs must go lower. High levels of debt make the equity component of the valuation highly variable. The broker considers the only way this can change, in the absence of a robust iron ore price recovery, is to swap a meaningful portion of debt for equity.

Nufarm ((NUF)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 4/3/0

Following confirmation of weaker market conditions in Australia and Brazil in the first half and with a fall in the share price to levels in line with valuation, JP Morgan upgrades to Neutral from Underweight. Target is raised to $5.00 from $4.80. The broker notes weak demand from the summer crop in Australia could lead to price and margin pressure in the second half, because of an inventory overhang but this has been an issue for the last two years.

See also NUF downgrade.

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

Citi has revised oil price forecasts lower, again. The broker believes at current prices, PNG is sufficiently attractive for stable cash flow. The broker's rating is upgraded to Neutral from Sell but Oil Search remains the broker's least preferred large cap oil stock. Target is raised to $8.26 from $8.18.

Origin Energy ((ORG)) upgraded to Buy from Neutral by Citi. B/H/S: 5/2/1

Citi expects FY14 will be the low point of earnings for Origin, with a step up over the next couple of years from monetising the legacy gas contract position and first production at APLNG. Rating is upgraded to Buy from Neutral and the target is lowered to $14.23 from $14.92.

Qantas ((QAN)) upgraded to Buy from Neutral by Citi. B/H/S: 6/0/0

Citi is upgrading to Buy from Neutral. Target is raised to $2.25 from $1.48. Reason? Yield, load and oil benefits. The broker believes there is further upside on the expectation that all domestic carriers are actively striving for profitability and adequate returns. The oil benefit will be skewed to the second half while domestic yields were positive for the second month in a row.

Ramsay Health Care ((RHC)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/4/1

The market has had its doubts about the investment in France but JP Morgan has recently visited the country to obtain a better understanding of the private hospital sector. Generale de Sante is a well regarded group with a portfolio of 75 hospitals/clinics. The real upside, in the broker's view, comes from the ability to leverage global size for purchasing medical consumables. The broker upgrades to Overweight from Neutral and revises forecasts to reflect consumables savings. Target is raised to $58.72 from $52.52.

Sandfire Resources ((SFR)) upgraded to Add from Hold by Morgans. B/H/S: 6/1/1

The current market may not be conducive to new positions in miners but Morgans finds fundamental value is emerging in Sandfire Resources. After reducing mill throughput and production assumptions for FY15 and FY16, the broker reduces the target to $5.70 from $5.90. With the fall in the share price since October the revised target now implies 31% potential upside from the current share price. Rating is upgraded to Add from Hold.

Sirius Resources ((SIR)) upgraded to Buy from Neutral by Citi. B/H/S: 4/0/0

A lack of exploration success coupled with a declining nickel price has caused a slump in the share price, creating significant value in the broker's opinion. Citi believes the Nova project continues to display compelling economics and upgrades to Buy from Neutral with the target raised to $3.95 from $3.70.

Virgin Australia ((VAH)) upgraded to Neutral from Sell by UBS. B/H/S: 0/3/4

UBS has made a number of changes to forecasts which leave FY15 broadly unchanged with a pre-tax loss of $115m and push FY16 to a profit of $130m. Jet fuel price assumptions have been lowered. UBS upgrades to Neutral from Sell. The broker expects the company to become profitable in FY16, one year behind Qantas ((QAN)). Target is increased to 45c from 35c.

Downgrades

Amcor ((AMC)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/3/1

The broker has adjusted its Amcor forecasts to account for the company's various currency exposures and and a fall in resin prices, although AMC will likely pass most of this on to customers. Target rises to $12.10 from $12.00 but given AMC's share price run, the broker downgrades to Underperform.

CSL ((CSL)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 4/3/1

The company provided news of progress across a number of developments but this was offset in the broker's view by a disappointing result from the fibrinogen trial in aortic surgery. Management intends to keep R&D spending at 8-9% of revenue. Deutsche Bank has raised the target price to $86.75 from $83.35 to reflect a weaker Australian dollar. The rating is downgraded to Hold from Buy to reflect the lack of upside to the revised target price following recent share price outperformance.

Japara Healthcare ((JHC)) downgraded to Hold from Add by Morgans. B/H/S: 2/1/0

Japara has undertaken a review of its payroll system, having identified anomalies such that an external auditor has been engaged. The final impact on profit is negligible according to management and FY15 guidance has been affirmed. Morgans considers fully integrated systems are important and Japara has work to do on this front. No changes to earnings forecasts are made at this stage but the rating is downgraded to Hold from Add. Target is reduced to $2.38 from $2.82.

Metcash ((MTS)) downgraded to Hold from Add by Morgans. B/H/S: 1/2/5

Metcash's turnaround strategy is only at an early stage, the broker concedes, but the first half result indicated few tangible signs of improvement. Delays highlight the complexity of the strategy. Even management admits earnings visibility is low in the near term, making it difficult for the broker to provide forecasts. The broker was not impressed MTS signalled "no issues" with the balance sheet while cutting the div payout ratio and increasing the DRP underwriting ratio. Downgrade to Hold, target falls to $2.40 from $3.30.

Nufarm ((NUF)) downgraded to Neutral from Buy by UBS. B/H/S: 4/3/0

UBS is reducing earnings forecasts by 5-10% for FY15-16. The reasons behind the more cautious outlook comprise revisions to growth expectations within the Australian, South American and European businesses. The broker is downgrading to Neutral from Buy following the changes to earnings forecasts. Target is reduced to $4.85 from $5.30.

See also NUF upgrade.

OceanaGold ((OGC)) downgraded to Neutral from Buy by Citi. B/H/S: 4/2/0

Citi maintains the view the company is a high quality gold producer with low cash costs but believes it is close to fair value after a strong recovery. Earnings forecasts are lowered in FY15/16 to adjust for lower copper and gold price forecasts. The rating is downgraded to Neutral from Buy and the target is raised to $2.64 from $2.43.

Pact Group ((PGH)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/0/1

A recent sharp fall in the Australian dollar plastic resin price could be a plus in the December 2015 half year. In the meantime, the broker suspects strong output price increases in the June half can protect margins. The valuation seems full to Credit Suisse so the rating is downgraded to Underperform from Neutral. Target falls to $4.05 from $4.15.

Regis Resources ((RRL)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 3/4/0

The broker is downgrading the rating to Hold from Buy on valuation. Target is steady at $1.60.

Santos ((STO)) downgraded to Neutral from Buy by UBS. B/H/S: 4/2/1

In the wake of the OPEC decision not to cut production UBS has reduced oil price forecasts and expects there is more pain to come for investors, with a bottom yet to be sighted for the oil price. Santos is the most affected of the major stocks and the broker suspects high debt plus low oil prices means its credit rating will probably come under pressure. Rating is downgraded to Neutral from Buy and target is reduced to $9.60 from $15.50.

Tabcorp ((TAH)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 3/3/2

The dismissal of Tabcorp's appeal against the Supreme Court of Victoria's judgment in favour of the state government is a minor negative but the broker believes the equity market was only pricing in small prospect of success. The broker expects Tabcorp to seek leave to appeal. Deutsche Bank downgrades to Hold from Buy as the stock is trading at a 7% premium to valuation and the $3.90 target.

Tap Oil ((TAP)) downgraded to Neutral from Buy by UBS. B/H/S: 0/2/0

In the wake of the OPEC decision not to cut production UBS has reduced oil price forecasts and expects there is more pain to come for investors, with a bottom yet to be sighted for the oil price. Tap Oil's rating is downgraded to Neutral from Buy and the target reduced to 45c from 75c.

Vocation ((VET)) downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS. B/H/S: 0/3/0

It has dawned upon CS analysts that the fall-out from the Victorian licence disaster is far worse than just brand damage for Vocation. The analysts concede downgrading the stock now looks like closing the gate after the horse has bolted, since the share price has fallen so dramatically, but they explain the move is to highlight the fact that uncertainty remains. Target price tumbles to 20c from $1.55. Downgrade to Neutral from Outperform. CS bluntly asks the question whether this business still has a viable future? UBS has critical concerns about the company's operations going forward, including a deterioration in student enrolments, downside risk to FY15 guidance and balance sheet leverage. The broker downgrades to Neutral from Buy. Vocation has reduced FY15 guidance to $25-30m from the $53-57m provided at the end of October. UBS has revised valuation methodology and reduces the target to 22c from $2.70.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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