Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies. For more info SHARE ANALYSIS: BEN

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 8 to Friday December 12, 2014
Total Upgrades: 13
Total Downgrades: 14
Net Ratings Breakdown: Buy 43.18%; Hold 39.75%; Sell 17.08%

The fall-out from the rout in oil and iron ore continues, with cuts in earnings forecasts and price targets/valuations dominated by both sectors, including companies that are only partially exposed such as Qube Logistics. No surprise thus, stocks linked to holidays and travels and transport stand out on the positive side.

One observation worth highlighting is that while oil and iron ore stocks are still suffering from analysts adjusting their price forecasts, these stocks are now starting to see recommendation upgrades, as well as ongoing downgrades. This might be an indication that some kind of a bottoming process is starting to take shape. At least as far as calculated valuations go for the companies involved. Investor sentiment may not necessarily follow the lead from the research department.

The 81% jump in profit estimate for Qantas can serve as an indication how the national airliner has managed to surprise friend and foe with much better and much quicker improvement which goes beyond simply cheaper fuel. It can hardly be a surprise that Air New Zealand enjoys second spot in the table for positive earnings estimate adjustments.

For the week ending Friday, 12 December 2014, FNArena registered 13 upgrades for individual stock ratings, and 14 downgrades. Banks feature on both sides.

Upgrades

AWE ((AWE)) upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S: 4/2/0

Morgan Stanley has revised Brent oil price forecasts sharply lower, believing the oil price environment will get worse before it gets better. On a positive note AWE has diverse production sources while its capex should reduce from 2016. The broker upgrades to Equal-weight from Underweight and reduces the target to $1.22 from $1.51.

Bendigo & Adelaide Bank ((BEN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/5/1

Following the Murray financial system review Credit Suisse considers the regionals are the winners, with a clearer path to advanced accreditation, greater regulatory capital neutrality and a margin and profitability opportunity to follow the majors on product re-pricing. The broker upgrades BEN to Outperform from Neutral. Target is raised to $15.00 from $12.70.

See also BEN downgrade.

Coca-Cola Amatil ((CCL)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 3/3/2

JP Morgan has upgraded to Overweight from Neutral, believing the risk/return on the stock has become positive. There remains some residual uncertainty about 2014 earnings but the broker believes downside risks are outweighed. Target is steady at $10.40.

See also CCL downgrade.

Commonwealth Bank ((CBA)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 2/5/1

Following the Murray financial system review Credit Suisse is upgrading CBA to Neutral from Underperform, given the bank has an advantage in organic capital generation from its franchise. The broker considers the major banks are the immediate losers from the final report. Credit Suisse expects some form of share issuance, DRP or placement will be forthcoming. CBA's target is raised to $85.00 from $80.00.

Drillsearch Energy ((DLS)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 5/1/0

Macquarie has made material adjustments to medium term oil price assumptions, lowering 2015 and 2016 Brent forecasts by 31% and 23% respectively. The broker upgrades Drillsearch to Outperform from Neutral, with the company's core asset value now discounting oil at US$70/bbl. Target is lowered to $1.15 from $1.50.

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

Pushing through lower iron ore price forecasts and simultaneously cutting capex and operating costs has decreased the broker's valuation of Fortescue. The discount to valuation that was previously in place is unwound and this produces a target of $3.20 versus $2.88 previously. The broker upgrades to Add from Hold.

See also FMG downgrade.

Mount Gibson ((MGX)) upgraded to Neutral from Sell by Citi. B/H/S: 2/4/2

The company has put Koolan Island on care and maintenance, flagging a substantial non-cash impairment as a result of the breach of the sea wall. Citi upgrades to Neutral/High Risk from Sell/High Risk. The prior recommendation was based on the cash burn suspected over the next few years from the pre-strip at Koolan Island and the bearish iron ore price forecast. With the pre-strip averted and a potential insurance pay-out, the broker considers this pressure has eased.Target is lowered to 25c from 35c.

See also MGX downgrade.

Programmed Maintenance ((PRG)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 4/2/1

The company's operations have put in a flat performance and the share price has come under serious selling pressure recently, but JP Morgan analysts believe value has now emerged. They note there's a large valuation gap vis-a-vis the broader market. The balance sheet has plenty of franking credits. Equally important, the analysts point out this company's exposure to lower commodity prices is far less than most in the sector. There are concerns about labour demand in resources projects going forward, but JPM argues it has already taken care of this in forward estimates. All in all, a valuation considered too cheap now triggers a recommendation upgrade to Overweight from Neutral. No change to $2.91 target.

Qantas Airways ((QAN)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 6/0/0

Morgan Stanley considers Qantas has shown capacity discipline over the last six months. The broker concedes, with yield recovery and fuel upside, it may have underestimated the company's rebound potential. With few foreseeable hurdles over the near term the broker moves to Overweight from Equal-weight, retaining an Attractive sector view. Target is raised to $2.90 from $1.42.

Qube Logistics ((QUB)) upgraded to Buy from Neutral by Citi. B/H/S: 2/4/1

The company has acquired a New Zealand stevedore, ISO, for NZ$80m, its second material acquisition this financial year. Citi notes management has also reached agreement to develop the Moorebank terminal in Sydney. Citi upgrades to Buy from Neutral, following the recent weakness in the share price. The broker considers the concerns over iron ore are excessive. Target is unchanged at $2.62.

Sonic Healthcare ((SHL)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 5/2/1

The government has reworked its GP co-payment proposal and, with the threat of pathology co-payments now gone and a falling Australian dollar, Macquarie believes it is timely to upgrade Sonic Healthcare to Outperform from Neutral. Target is increased to $18.80 from $18.00.

The Reject Shop ((TRS)) upgraded to Neutral from Sell by UBS. B/H/S: 0/3/1

A number of retail/consumer companies have provided weak trading updates at their recent AGMs, the broker notes, and it's now crunch time for Reject. The broker estimates 99% of TRS' profit is generated in the December half and most of that in the last six weeks of the year. The new CEO has retained the 400-plus store target but has complained of high rents in major centres. The broker will not rule out store closures and restructuring costs. Target falls to $6.60 from $7.90, but at its current share price TRS is offering a positive shareholder return, so the broker upgrades to Neutral.

Webjet ((WEB)) upgraded to Buy from Neutral by UBS. B/H/S: 2/3/0

Given all of Webjet's structural changes and acquisitions over the past four years, the broker was pleased with an articulation of WEB's existing business mix and growth plans at its investor day. The broker estimates WEB is aiming for about 10% underlying growth over the next five years. Based on current valuation, an expected recovery in B2C and a "leap of faith" for B2B, the broker upgrades to Buy. Target rises to $3.70 from $3.15.

Downgrades

ANZ Banking ((ANZ)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/2/3

Following the Murray financial system review Credit Suisse considers the major banks are the immediate losers. ANZ will need to raise equity to address what the broker suspects is a substantial tier 1 capital requirement. The broker downgrades to Neutral from Outperform. Credit Suisse remains supportive of the bank's business strategy and would look to review the rating if ANZ were to quickly address its capital position. Target is lowered to $34.50 from $37.50.

Atlas Iron ((AGO)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/3/5

JP Morgan analysts have come to the conclusion that the issues dogging iron ore this year are not going to be resolved anytime soon. As a result, they have lowered the long-term iron ore price forecast from US$80/t to US$75/t. Price forecasts for the three years ahead are below this level, starting with a 6. For mid-cap producers in Australia, JP Morgan sees no re-rating potential on the horizon. "Profitability" from now onwards is a target that may not be reached and this also applies to "free cash flow". Atlas Iron has been downgraded to Underweight. The target drops to 10c from 50c. Estimates have been slashed.

Bank of Queensland ((BOQ)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/6/1

The regional banks and business banks appear to be the losers in the Murray financial systems review, in Macquarie's opinion. Capital targets are in the same quartile measure as the major banks and this is viewed as a constraint. In Macquarie's analysis the regional banks would need to raise $300-800m, diluting by 9-12%. BOQ's rating is downgraded to Underperform from Neutral. Target is maintained at $12.88.

Bendigo & Adelaide Bank ((BEN)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/5/1

The regional banks and business banks appear to be the losers in the Murray financial systems review, in Macquarie's opinion. Capital targets are in the same quartile measure as the major banks and this is viewed as a constraint. In Macquarie's analysis the regional banks would need to raise $300-800m, diluting by 9-12%. Rating is downgraded to Neutral from Outperform. Target is steady at $13.18.

See also BEN upgrade.

Bradken ((BKN)) downgraded to Hold from Add by Morgans. B/H/S: 3/4/0

A private equity consortium has made an indicative bid at $5.10 a share, having originally made an offer at $6.00 in August. Separately, Bradken has announced the acquisition of an Indian foundry. Assessing the risk/reward balance in the near term and the rally in the share price, Morgans downgrades to Hold from Add. The broker considers the balance sheet capacity is more limited than previously envisaged and comments regarding a potential capital raising are a negative surprise and warrant caution. Price target is reduced to $4.50 from $4.60.

Coca-Cola Amatil ((CCL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/3/2

The company provided a subdued trading update, prompting Credit Suisse to nudge its forecasts to the lower end of guidance. Australia is yet to realise improvements in the company's grocery accounts while Indonesian profitability is being affected by competition and rising costs. Rating is downgraded to Underperform from Neutral and the target is reduced to $9.00 from $9.35.

See also CCL upgrade.

ERM Power ((EPW)) downgraded to Hold from Add. B/H/S: 1/2/0

ERM Power has acquired Texas-based electricity retailer, Source Power and Gas for US$7.8m, highlighting the company's decision to enter the US electricity retail market. Morgans treats the transaction positively but concedes forecasting growth will be difficult. Following the run up in the share price the broker downgrades to Hold from Add, finding the dividend a good reason to hold the stock. Target is reduced to $2.18 from $2.54.

Fortescue Metals ((FMG)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 3/5/0

JP Morgan analysts have come to the conclusion that the issues dogging iron ore this year are not going to be resolved anytime soon. As a result, they have lowered the long-term iron ore price forecast from US$80/t to US$75/t. Price forecasts for the three years ahead are below this level, starting with a 6. JP Morgan previously rated Fortescue Overweight on the basis of relatively bullish prospects for iron ore further out. Now that this outlook has changed, the rating has been pulled back to Neutral. Price target tumbles to $2.20 from $4.35. Dividends are to be scrapped from this year onwards. On JPM's projections, Fortescue will not remain profitable in FY16.

See also FMG upgrade.

Mount Gibson ((MGX)) downgraded to Underweight from Neutral by JP Morgan and to Neutral from Outperform by Macquarie. B/H/S: 2/4/2

JP Morgan analysts have come to the conclusion that the issues dogging iron ore this year are not going to be resolved any time soon. As a result, they have lowered the long-term iron ore price forecast from US$80/t to US$75/t. Price forecasts for the three years ahead are below this level, starting with a 6. For mid-cap producers in Australia, JP Morgan sees no re-rating potential on the horizon. "Profitability" from now onwards is a target that may not be reached and this also applies to "free cash flow". Mt Gibson has been downgraded to Underweight. The target drops to 20c from 47c. Macquarie suspects a decision to start remedial work will be dependent on a recovery in iron ore prices, while the company has signalled it will update the market in mid 2015. The broker has made material reductions to earnings forecasts and downgrades to Neutral from Outperform. The removal of Koolan Island from forecasts has translated to a target reduction to 30c from 55c.

See also MGX upgrade.

Myer ((MYR)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 1/4/3

Cosmetics and beauty products have long been the preserve of the department stores, as anyone who's ever walked in the front door of one would attest. But Sephora, a large, global, vertically integrated player with a strong brand, low costs and a well developed online offering has just opened a store in Pitt St Mall, right between the Myer and DJs Sydney CBD flagship stores. Cosmetics are critical to Myer's comparable sales numbers, particularly at the Sydney CBD store, the broker notes. Sephora's entry will "comprehensively" impact, the broker warns. Downgrade to Underperform from Outperform. Target falls to $1.60 from $2.22.

Oil Search ((OSH)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 4/3/0

Morgan Stanley has revised Brent oil price forecasts sharply lower, believing the oil price environment will get worse before it gets better. Oil Search is downgraded to Equal-weight from Overweight not because of any detriment to its investment appeal but relative to peers as it offers less upside against the more heavily discounted stocks. Target is lowered to $7.75 from $9.70.

Skilled Group ((SKE)) downgraded to Neutral from Buy by UBS. B/H/S: 3/2/0

The broker suggests Australia's rising unemployment rate, muted wage growth and falling global oil prices are creating headwinds for Skilled across all divisions. The broker has cut forecast earnings by 13%-31% in FY15-16, mostly reflecting reduced activity in oil & gas. This leads to a target price cut to $1.64 from $3.00. SKE is a well managed company, the broker attests, but for now the broker has downgraded to Neutral.

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

Deutsche Bank has reduced earnings forecasts to reflect the sharp decline in oil prices amid the expectation that market conditions will remain challenging for the next few years. The broker does not expect a significant amount of FY15 revenue will be cancelled or deferred but envisages greater risk in FY16-17. Given the uncertainty and the likelihood of a weak performance, Deutsche Bank downgrade to Hold from Buy. Target is reduced to $12.66 from $18.20.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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