Weekly Recommendation, Target Price, Earnings Forecast Changes

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: 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 15 to Friday December 19, 2014
Total Upgrades: 22
Total Downgrades: 14
Net Ratings Breakdown: Buy 43.40%; Hold 39.68%; Sell 16.92%
 

The week ending Friday, 19 December 2014, turned out a busy one with FNArena registering no less than 22 upgrades in ratings for individual stocks and 14 downgrades. No surprise, energy stocks and miners continue to feature prominently as stockbroking analysts are updating price forecasts and incorporating them into their valuation models.

Encouraging, maybe, is that resources stocks feature on both sides of the ledger, with Alumina Ltd prominently enjoying a boost in price forecasts for alumina and aluminium, while Caltex and Newcrest also joined into the positive momentum. For small and medium sized mining stocks, updating the numbers can easily take the shape of yet another sequel to the Texas Chainsaw Massacre.

BC Iron's consensus price target dived by some 52% last week -and that was just for the week- while Fortescue's took a hit of 14%. Iluka's profit forecasts fell by 450%, but then Alumina Ltd's went up by some 186%.

This is the final update for 2014. The next edition will be on Monday, January 19 2015.

Upgrades

Alumina ((AWC)) upgraded to Overweight from Neutral by JP Morgan and to Outperform from Neutral by Credit Suisse. B/H/S: 6/0/2

JP Morgan is upgrading to Overweight from Neutral on lower energy costs, a falling Australian dollar and well supported commodity backdrop. Moreover, there is the potential re-start of dividend payments. The broker's forecasts now show a doubling of AWAC earnings margins in 2015. Target is raised to $2.00 from $1.70. Credit Suisse has revised commodity price forecasts. The company is seen benefitting from both Australian dollar weakness and a sustainable rally in the alumina price. The broker forecasts AWC will move to a net cash position and it will hold around $60-70m on the balance sheet and pay out the rest as dividends. Rating is upgraded to Outperform from Neutral and the target is raised to $2.00 from $1.80.

Arrium ((ARI)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/3/3

It is but a matter of time, suggest analysts at Credit Suisse, but ultimately Arrium will announce the closure of its high cost Southern Iron operation. Favourable oil and FX impacts are only delaying the inevitable. Following recent share price weakness, the rating has been upgraded to Outperform from Neutral. Price target falls to $0.23 from $0.40. Revised forecasts now assume the company will return with profits (instead of losses) in FY16.

Burson Group ((BAP)) upgraded to Buy from Neutral by UBS. B/H/S: 2/0/0

Amidst a plethora of indications that most consumer-exposed companies are doing it tough, UBS analysts stand firm on Burson Group, declaring it should largely remain unaffected. On this basis, recent share price weakness is seen as an opportunity. UBS points out Burson is a trade-focused (i.e. mechanics) distributor of automotive aftermarket parts and this is a relatively resilient place to be. Its main competitor, Repco, is causing some headaches, but thus far the company is tracking ahead of prospectus. UBS remains confident Burson will beat prospectus forecasts. Upgrade to Buy from Neutral. Target remains $2.50.

Challenger ((CGF)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 3/4/1

The Department of Social Services (DSS) has done a backflip and now retained favourable tax treatment for Challenger's CARE annuity retrospectively. Both company and DSS are working together on an alternative for the future. The analysts have made small upgrades to forecasts. They now see downside risks as limited, but risks remain regardless. They specifically point at low free cash flow generation given high capital intensity. Target moves to $6.25 from $6.00.

See also CGF downgrade.

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

To the surprise of Deutsche Bank analysts, the Australian Competition and Consumer Commission (ACCC) has approved the proposed CSR/Boral clay brick JV. The resultant upgrade in earnings forecasts is enough for Deutsche Bank to upgrade the rating for CSR. Apart from taking a favourable view about synergies to be achieved through this JV, the analysts continue to believe as the housing market recovers, CSR should be in a position to benefit from additional pricing power. On top of this, a weaker AUD should benefit glass pricing and this is as yet not incorporated in current forecasts. Upgrade to Buy from Hold. Target lifts to $3.83 from $3.67.

Echo Entertainment ((EGP)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/4/1

Credit Suisse aligns VIP assumptions from FY15 with Crown Resorts’ forecasting single digit growth rates. The broker suspects that VIP weakness in Macau may be catching up with offshore destinations, such as Australia and Las Vegas. Rating is upgraded to Neutral from Underperform. Target is steady at $4.00.

Evolution Mining ((EVN)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 2/2/0

Deutsche Bank's update on commodities has reinforced a preference for base metals over bulks in 2015, with the analysts in particular bullish on nickel, zinc, aluminium and alumina, mostly due to supply side dynamics but also because of robust demand. Evolution sees its rating upgraded to Buy from Hold. Target moves to $0.80 from $0.70.

Fairfax Media ((FXJ)) upgraded to Buy from Neutral by UBS. B/H/S: 2/4/2

The actual report is missing, but UBS has indicated the rating has been upgraded to Buy from Neutral.

Flight Centre ((FLT)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/2/0

CS analysts admit the share price may well weaken further in the short term, as a consequence of Flight Centre issuing a profit warning yesterday. But they nevertheless upgrade the rating to Outperform from Neutral. They label the share price at current level "compelling". Price target drops to $48.50 from $50.00 on reduced forecasts. CS's positive view, longer term, is predicated on the thesis the company is at present simply a victim of sagging consumer confidence in Australia, not because of a structural change in its market or business positioning. As this should prove temporary…(you can fill out the rest). Even if it turns out the company cannot meet its own guidance this year, CS still maintains the current valuation discount is "excessive".

Iluka Resources ((ILU)) upgraded to Overweight from Neutral by Credit Suisse. B/H/S: 6/2/0

The broker's mineral sands price forecasts are unchanged but forecasts for a lower Australian dollar rate provide a significant uplift to earnings in FY15. The company has announced that US operations will be closed next year and it will not look to extend the life of the assets. Credit Suisse assumes Iluka will draw down inventory and this results in improved cash flow forecasts for FY16. Rating is upgraded to Neutral from Underperform and the target is lowered to $6.50 from $8.00.

Leighton Holdings ((LEI)) upgraded to Neutral from Sell by Citi. B/H/S: 0/2/2

The company will sell the John Holland business for $1.15bn. Citi finds there is little to inspire in terms of new work being won but major loss-making projects are no longer bleeding cash and costs being taken out mean future margins can rise on the lowered revenue. Under-claims may still pressure earnings but the broker is increasingly confident the cash bleed is ending. Rating is upgraded to Neutral from Sell and the target to $20.52 from $19.49.

Lynas Corp ((LYC)) upgraded to Neutral from Sell by UBS. B/H/S: 0/3/0

UBS has upgraded Lynas to Neutral from Sell. The stockbroker's target price has fallen to 5c from 8c. Forecast for losses for the present fiscal year have worsened, but the expectation for reaching break-even in FY16 still stands.

Newcrest Mining ((NCM)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 2/3/3

The pre-feasibility study on the Golpu JV suggests a much smaller project than first planned, achieving higher grades. Capital intensity nevertheless remains above average and Newcrest can only afford the project if the PNG govt takes up its option, the broker suggests. Target rises to $8.30 from $8.10 but Sell retained on valuation. In a subsequent mining sector update, Deutsche has upgraded NCM to Hold from Sell. Target has been lifted to $9.30 from $8.30.

Origin Energy ((ORG)) upgraded to Add from Hold by Morgans. B/H/S: 6/1/1

To take account of oil price falls, the broker has reviewed its Origin forecasts business by business and come to the conclusion the sell-off has been overdone. Confidence has been shattered just as it was building with APLNG first gas in sight, the broker notes. Citing a 25% total shareholder return, the broker has upgraded ORG to Add but notes there still remains a risk around exactly where oil prices might bottom. Target falls to $13.40 from $14.52.

OZ Minerals ((OZL)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 6/2/0

Deutsche Bank's update on commodities has reinforced a preference for base metals over bulks in 2015, with the analysts in particular bullish on nickel, zinc, aluminium and alumina, mostly due to supply side dynamics but also because of robust demand. OZ Minerals has been upgraded to Buy from Hold. Price target lifts to $4.70 from $4.40.

Perseus Mining ((PRU)) upgraded to Equal-Weight from Underweight by Morgan Stanley. B/H/S: 3/4/0

Morgan Stanley believes much of the Edikan downside is now priced in. The operations in Ghana have little direct benefit from a lower Australian dollar at an operating level but as the company reports in Australian dollars there is some translation benefit to revenue. The broker's earnings estimates for FY16 and FY17 rise 20% and 17% respectively. As the downside risk is priced in, the rating is upgraded to Equal-weight from Underweight. Target is reduced to 29c from 39c.

Sandfire Resources ((SFR)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 7/1/0

Credit Suisse has revised copper price forecasts upwardly for FY15-17. All the broker's Australian operating copper producers also have exposure to gold, where prices are revised down near term, influenced by a perceived recovery in the US and stronger US dollar. Longer term, gold price forecasts are revised up. The broker upgrades Sandfire to Outperform from Underperform on share price weakness. Target is lowered to $5.15 from $5.72.

Treasury Wine Estates ((TWE)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/4/4

Today's upgrade is AUD-inspired. While JP Morgan believes the wine industry remains a tough industry to be in, the weaker AUD is going to make TWE's challenges a little easier to deal with. In addition, the stockbroker believes execution risk for the new MD's strategy has reduced. As an illustration of the tough dynamics in the sector, JP Morgan assumes one third of the benefits from a weaker AUD will be competed away. But there's enough left to assume a more balanced risk-reward proposition, argue the analysts. Hence the upgrade to Neutral. Estimates have been lifted post FY15. Target rises to $4.60 from $4.25.

Wesfarmers ((WES)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/5/2

The broker has lowered its coal price forecasts and thus its earnings forecasts for Wesfarmers' coal division and the group. Target falls to $44.00 from $45.25. Recent share price weakness is enough for the broker to upgrade to Neutral from Underperform, but given WES still trades at a 20% premium to the index, above its long term average, the broker does not consider the stock a compelling proposition.

Western Areas ((WSA)) upgraded to Overweight from Equal-Weight by Morgan Stanley. B/H/S:

Morgan Stanley prefers base metals over bulks in 2015. Nickel is the top pick in terms of price and FX headwinds. Western Areas is upgraded to Overweight from Equal-weight. Target is unchanged at $5.30.

Whitehaven Coal ((WHC)) upgraded to Overweight from Underweight by Morgan Stanley. B/H/S: 6/2/0

Morgan Stanley's commodity price deck has been re-based, which has affected ratings for large cap and bulk miners. The broker believes the industry is not out of favour and cautions against ignoring those miners able to ride out the cycle. Whitehaven's debt refinancing remains a risk but, with a focus on positive cash flow through the cycle, the broker upgrades to Overweight from Underweight. Target is raised to $1.75 from $1.50.

Downgrades

Alacer Gold ((AQG)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 4/2/0

Deutsche Bank's update on commodities has reinforced a preference for base metals over bulks in 2015, with the analysts in particular bullish on nickel, zinc, aluminium and alumina, mostly due to supply side dynamics but also because of robust demand. Alacer sees its target being pulled back to Hold from Buy and the broker is now refraining from setting a price target.

Amcom ((AMM)) downgraded to Neutral from Buy by Citi. B/H/S: 1/2/1

Amcom Telecom and Vocus Communications ((VOC)) have entered into a Scheme Implementation Agreement under which AMM will combine with VOC. Citi has lifted its price target in line with the implied valuation and downgraded the rating to Neutral from Buy.

Amcor ((AMC)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/4/1

Amcor will continue to benefit from strong earnings growth, a sound balance sheet, increasing free cash flow and a strong position in an improving industry, the broker suggests. It will also benefit from a lower A$ and falling raw material costs but only temporarily, as the benefit will likely be passed onto customers. The broker has increased its target to $12.80 from $11.95 but given the share price is already above this new target, the broker pulls back to Hold.

BC Iron ((BCI)) downgraded to Equal-Weight from Overweight by Morgan Stanley. B/H/S: 1/3/0

Morgan Stanley's commodity price deck has been re-based, which has affected ratings for large cap and bulk miners. The broker believes the industry is not out of favour and cautions against ignoring those miners able to ride out the cycle. The broker reduces BC Iron's rating to Equal-weight from Overweight as growth options are less certain at current prices and recent cost cutting only allows the company to break even at spot prices. Target is lowered to 47c from $1.70.

Challenger downgraded to Underweight from Neutral by JP Morgan. B/H/S: 2/4/1

The company has now been informed the favourable tax treatment for its care annuities will not be revoked retrospectively and since this had been the cause of share price weakness, the market responded with an 8% rally on the day. JP Morgan points out it appears the favourable tax treatment won't hold up for future products and Challenger won't be selling any new ones. Thus, say the analysts, the market's response was a bit too quick, too easy, and probably unwarranted. JP Morgan sees sufficient reasons to be concerned and to adopt a more cautious stance. Downgrade to Underweight from Neutral. Price target drops to $6.00 from $6.20.

See also CGF upgrade.

Crown Resorts ((CWN)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 6/1/1

Credit Suisse is toying with the idea of a prolonged slow down for VIP gambling, pointing out this segment of high rollers is very important to Crown, in and outside Australia. While we will have to await further developments, the analysts are anxiously watching developments in Vegas and Macau for further insights into how deep and how long the current slowdown for VIP revenues might turn out to be. In the meantime, and because of the abovementioned risk, CS has decided to pull back its rating to Underperform from Neutral. Target price cut to $11.40 from $15.20. Note the revised forecasts essentially imply Crown is ex-growth for the years ahead, with a declining DPS profile.

Fortescue Metals ((FMG)) downgraded to Equal-Weight from Overweight by Morgan Stanley. B/H/S: 2/6/0

Morgan Stanley's commodity price deck has been re-based, which has affected ratings for large cap and bulk miners. The broker believes the industry is not out of favour and cautions against ignoring those miners able to ride out the cycle. That said, Fortescue's rating returns to Equal-weight from Overweight as margins are now modest and debt repayments uncertain. Target is reduced to $2.70 from $4.30.

Medusa Mining ((MML)) downgraded to Underweight from Equal-Weight by Morgan Stanley. B/H/S: 2/1/1

Morgan Stanley has reduced fourth quarter gold prices, partly offset by an unchanged 2015 estimate. Australian dollar forecasts are lowered. The impact on Medusa Mining's earnings is a minimal negative. Morgan Stanley downgrades to Underweight from Equal-weight as there is too much operational risk. Target is reduced to 70c from 85c.

Mount Gibson Iron ((MGX)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 1/5/2

Mt Gibson has suspended operations at Koolan Island due to a collapse of the seas wall. MGX is assessing its options, but for now the broker is assuming Koolan will not restart. Even if MGX decides to try, it would take at least two years, the broker suggests, and costing is uncertain at this point. Target falls to 30c from 68c. Downgrade to Hold.

OrotonGroup ((ORL)) downgraded to Hold from Add by Morgans. B/H/S: 3/1/0

Oroton's AGM highlighted an intention to stop discounting and start pursuing higher price points to improve margins. This has led to negative sales growth off the bat but the broker believes getting it right is a fine balance and adjustments will be made going forward. The broker sees ORL as an interesting growth versus valuation proposition but given headwinds from fragile consumer sentiment, a lower A$ and losses in Asia, the broker pulls back to Hold. Target falls to $4.20 from $4.62.

Recall Holdings ((REC)) downgraded to Reduce from Hold by Morgans. B/H/S: 2/3/2

Recall has rejected a non-binding take over approach by its larger US competitor Iron Mountain. Morgans believes in the absence of a bidding contest, there may not be a higher bid forthcoming. On this basis, the stockbroker believes shareholders are probably better off taking profits. Hence, the rating has been downgraded to Reduce. Target has been bumped up to $5.52 from $4.84 prior.

Regis Resources ((RRL)) downgraded to Underweight from Equal-Weight by Morgan Stanley. B/H/S: 3/3/1

Morgan Stanley has tweaked gold prices for the fourth quarter and lowered Australian dollar forecasts. This results in a 10% lift in FY15 earnings forecasts. The broker has revised up cost estimates and revised down production forecasts for Garden Well. Rating is downgraded to Underweight from Equal-weight on price strength and production risks. Target is lowered to $1.55.

Resolute Mining ((RSG)) downgraded to Underweight from Equal-Weight by Morgan Stanley. B/H/S: 1/0/1

Morgan Stanley has reduced fourth quarter gold prices, partly offset by an unchanged 2015 estimate. Australian dollar forecasts are lowered and this is the key driver behind increases of 5% and 13% respectively in FY16 and FY17 earnings estimates. Rating is downgraded to Underweight from Equal-weight and the target lowered to 25c from 27c.

Transpacific Industries ((TPI)) downgraded to Sell from Buy by UBS. B/H/S: 3/2/1

At face value, the landfill acquisition from Boral should offer synergies to the tune of some $10m per annum, thus this deal looks like a positive. However, Transpacific has exposure to oil and a weakening oil price is providing more than negative offset for the deal with Boral, UBS analysts highlight. On the basis of negative implications from falling oil prices, the rating has been pulled back to Sell from Buy (double whammy). Target drops to $0.75 from $1.05. The analysts suggest consensus estimates have to come down to reflect weaker oil price impact before the share price can start performing again. Note DPS estimates have been lowered too.

Total Recommendations	Recommendation Changes
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