Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features MCLAREN MINERALS LIMITED, and other companies.
For more info SHARE ANALYSIS: MML

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 March 2 to Friday March 6, 2015
Total Upgrades: 6
Total Downgrades: 21
Net Ratings Breakdown: Buy 40.22%; Hold 41.62%; Sell 18.15%

The first week after the February reporting season was still very much dominated by the fall-out from what turned out to be a merely non-exciting corporate confession season. Retailers Harvey Norman (too expensive) and Woolworths (profit warning) both were responsible for multiple downgrades in stockbroker ratings.

For the week ending Friday, 6th March 2015, FNArena registered 21 downgrades for individual stocks and only six upgrades. It has to be noted though, most of these rating changes were issued early in the week. Things toned down considerably as the week matured.

Underlying the general sentiment among stockbroking analysts is that "value" certainly is harder to find these days, despite the local market experiencing its first down-week in two months. Price targets and earnings estimates show big revisions, on both positive and negative sides of the ledger, but negative revisions are mostly dedicated to smaller resources stocks and mining services providers.

On the positive side we find reporters of strong financial numbers, including Qantas, Sydney Airport, Japara Healthcare and Adelaide Brighton. Now that February has once again proven solid growth is not to be taken for granted, while the RBA has revealed itself as being more hesitant than eager, and with US jobs data surprising to the upside, it would not come as a surprise were share prices to take note from the common analysts' view that many stocks are trading beyond fair value.

Upgrades

Caltex Australia ((CTX)) upgraded to Neutral from Sell by Citi. B/H/S:

Citi has taken the view that interest rates are going to stay lower for longer. With investors seeking yield in relatively less risky equities, the analysts believe Caltex in its new format, ex-Kurnell refinery, will come into focus. This has led to a re-assessment of Citi's valuation for the stock. Bottom line: Citi sees longer term challenges, but shorter term the yield and solidity of the growth profile are likely to prevail. Upgrade to Neutral from Sell. Target jumps to $35.95 from $21.81. No changes have been made to forecasts.

Medusa Mining ((MML)) upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S:

Morgan Stanley is broadly Underweight gold equities, reflecting its view on the direction/outlook for gold. The stockbroker finds most Australian gold miners' share price is too high when taking into account the present gold price. Is this premium justified? Morgan Stanley clearly thinks it is not. Most ratings are thus Underweight. An exception is made for Medusa Mining, on the belief that the operational turnaround is now sustainable. Hence the upgrade to Equal-Weight from Underweight. Sector View (which is: Australian Materials) remains at In-Line. Target price jumps to 95c from 70c.

NRW Holdings ((NWH)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S:

First half results disappointed the broker. Credit Suisse has downgraded forecasts for FY15 and assumes no profit is recognised on resolution of the Roy Hill rail contract. The valuation now tempts the broker to become positive but the unknowns pose too much risk. Hence, rating is upgraded to Neutral from Underperform and the target reduced to 30c from $1.03.

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

The first year of LNG production reveals a low-cost, high operating margin environment with free cash flow to deliver the next phase of organic growth for Oil Search. Morgan Stanley expects the share price to continue to perform as projects gain momentum. The rating is upgraded to Overweight from Equal-weight and target to $9.60 from $8.17. Industry view is In-Line.

Pact Group ((PGH)) upgraded to Buy from Hold by Deutsche Bank. B/H/S:

The stock is trading at an 11% discount to Deutsche Bank's valuation. While the first half results were disappointing, this is considered largely the effect of a number of one-off factors. The broker expects the second half will show an improvement, with benefits from the acquisition of Sulo and lower raw material costs. Deutsche Bank upgrades to Buy from Hold. Target is steady at $4.60.

Sydney Airport ((SYD)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S:

Credit Suisse is upgrading to Outperform from Neutral. The company has a strong market position and could create value from renegotiating international aeronautical changes and from the development of the new western Sydney airport. Sydney Airport has first right of refusal in the development of the new airport and the government's need to incentivise the investment reduces regulatory risk at the existing airport, in the broker's view. Target is raised to $5.70 from $5.30.

Downgrades

Aristocrat Leisure ((ALL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 5/1/1

The AGM has raised questions about VGT. Credit Suisse suspects Aristocrat is implying a flat market in Oklahoma where its newly-acquired business derives 90% of earnings. The broker assesses Oklahoma will show modest growth in FY15. There are three casinos due to open in 2015. Credit Suisse downgrades to Underperform from Neutral on share price strength. The investment case remains solid, in the broker's view. Target is raised to $7.60 from $7.30.

ASX ((ASX)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/4/4

Activity in February revealed stronger trends for the cash market but listings activity was reduced. All up, JP Morgan's earnings forecasts are unchanged. In contrast share price performance has been exceptionally strong and leaves the valuation stretched. The broker downgrades to Underweight from Neutral and raises the target to $41.00 from $39.32.

Australian Pharmaceutical ((API)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/3/2

Following a trading update, Credit Suisse has upgraded earnings forecasts by an average 13%. The increased scale of distribution through the Priceline franchise has clear operating leverage benefits. The broker finds the Priceline franchise is resonating as a viable option for both independent pharmacists and banner members at a time when pharmacy earnings are under pressure. Rating is downgraded to Neutral from Outperform and the target raised to $1.35 from $1.02.

Charter Hall ((CHC)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 3/2/1

Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects. Although not running the same feasibility analysis, the broker suspects such an outcome would be similar for other asset classes. In sum, the ramifications of cap rate compression driven entirely by lower return requirements are not all positive. Charter Hall's rating is downgraded to Sell from Hold and target is steady at $4.80.

Cromwell Property ((CMW)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/1/4

Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects. Although not running the same feasibility analysis, the broker suspects such an outcome would be similar for other asset classes. In sum, the ramifications of cap rate compression driven entirely by lower return requirements are not all positive. Cromwell is downgraded to Sell from Hold. Target of $1.02 retained.

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

After reviewing aluminium prices, Deutsche Bank reduces earnings estimates for CSR. Deutsche Bank's forecasts are still ahead of consensus for FY16, relating to a more positive view on the Australian housing market. While the broker continues to believe there is upside in building products this is seen factored into the current share price. The rating is therefore downgraded to Hold from Buy. Target is raised to $3.94 from $3.83.

Dexus Property ((DXS)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 2/2/3

Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects. Although not running the same feasibility analysis, the broker suspects such an outcome would be similar for other asset classes. In sum, the ramifications of cap rate compression driven entirely by lower return requirements are not all positive. Dexus' rating is downgraded to Sell from Hold and target is steady at $6.88.

Fortescue Metals ((FMG)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 2/5/1

It looks like Fortescue Metals has negotiated an extension for part of its debt, with negotiations ongoing for the remainder. Morgan Stanley analysts see this as a positive, but they also note that pushing out the day of reckoning is just that. The basic premise remains in place, they highlight, and that is that on spot prices, FMG makes modest free cash flow. This restricts its ability to repay debt. On Morgan Stanley's calculation, the company needs a mid US$70/t iron ore price to repay all debt by 2021. Price target has fallen to $2.60 from $2.90. Note: the stockbroker has been releasing quite sloppy research reports on the company of late. In that we were hesitant to report a change in rating (given contradicting info inside these reports). Hence why we report the downgrade now.

Graincorp ((GNC)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 0/3/3

The downgrade to FY15 guidance has resulted in Deutsche Bank reducing forecasts by 35% and highlights the continuing challenges in another below-normal season. Despite the improved summer crop the company continues to be affected from low carry in FY15, compounded by weak domestic production. The broker downgrades to Hold from Buy, with the stock trading at a 5.0% premium to the $9.40 target.

Harvey Norman ((HVN)) downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie. B/H/S: 4/1/3

First half results were solid and a little better than Credit Suisse expected. Benefits from the housing market are expected to continue in the medium term. The Australian franchise delivered like-for-like growth of 2.8% in the second quarter. Full year earnings forecasts are upgraded. Credit Suisse observes the pay-out ratio increased to 68% in the first half and there is scope for a moderate increase in the ratio because of low capital investment requirements. The broker downgrades to Neutral from Outperform and raises the target to $4.65 from $4.10. Harvey Norman posted an improved result, Macquarie notes, underpinned by housing market activity. The company has posted a very solid January, boosted by lower petrol prices. The broker has raised earnings forecasts as a result but, despite strong sales and profit growth, is downgrading to Underperform. The stock has run too far in 2015. Target rises to $3.77 from $3.15.

Investa Office ((IOF)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/3/2

Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects. Although not running the same feasibility analysis, the broker suspects such an outcome would be similar for other asset classes. In sum, the ramifications of cap rate compression driven entirely by lower return requirements are not all positive. Investa's rating is downgraded to Sell from Hold and target is steady at $3.35.

Mantra Group ((MTR)) downgraded to Neutral from Buy by UBS. B/H/S: 2/2/0

First half results were ahead of the broker's forecasts. Still, UBS believes most of the cyclical upside for the next 12 months is factored into the share price. Rating is downgraded to Neutral from Buy on valuation. Upside risks include further Australian dollar depreciation and greater new property conversion opportunity. Target is raised to $3.20 from $2.90.

Myer ((MYR)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/5/2

Bernie Brookes has stepped down as CEO and Richard Umbers will replace him. CFO Mark Ashby will also leave in May. The timing, two weeks prior to the first half results, has raised some eyebrows at Credit Suisse. The broker acknowledges the chairman has reiterated that the company's performance is in line with consensus, which suggests that any underperformance, if it exists, is not material. Still, Credit Suisse believes shareholders should consider the potential for a capital raising to support restructuring endeavours and downgrades to Neutral from Outperform. Target is raised to $1.70 from $1.65.

Novion Property ((NVN)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/2/4

Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects. Although not running the same feasibility analysis, the broker suspects such an outcome would be similar for other asset classes. In sum, the ramifications of cap rate compression driven entirely by lower return requirements are not all positive. Novion's rating is downgraded to Sell from Hold and target is steady at $2.16.

Prime Media ((PRT)) downgraded to Underweight from Overweight by Morgan Stanley. B/H/S: 2/1/1

In a post-post results analysis, Morgan Stanley has come to the conclusion that Prime Media's market share has peaked at a moment when ad sales are weak. The conclusion is that market consensus expectations will prove too optimistic. In addition, the analysts suggest cost pressures are likely to come through on increasing affiliate fees. Morgan Stanley effectively declares the company ex-growth for the years ahead. Double whammy downgrade to Underweight from Overweight. Price target tumbles to 75c from $1.10.

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

Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects. Although not running the same feasibility analysis, the broker suspects such an outcome would be similar for other asset classes. In sum, the ramifications of cap rate compression driven entirely by lower return requirements are not all positive. Stockland's rating is downgraded to Hold from Buy and $4.50 target is retained.

Woolworths ((WOW)) downgraded to Neutral from Outperform by Credit Suisse, to Hold from Buy by Deutsche Bank, to Underperform from Outperform by Macquarie and to Hold from Add by Morgans. B/H/S: 0/3/5

Comparing the Coles ((WES)) and Woolworths results indicates Woolies is underperforming both Coles and Aldi and Credit Suisse has no doubts this is why management announced a major investment program for food & liquor, albeit without providing any detail at this stage. A change in strategy and guidance downgrades to the low end of consensus forecasts signals to the broker that the main issue is just how much profit decline Woolworths will endure to improve its market position. All up, the broker is downgrading to Neutral from Outperform and the target to $32.70 from $42.60. First half results were above Deutsche Bank's forecasts but low in quality, with weak sales and cash flow dominating. In any case, the broker considers the results a sideshow, given reductions in guidance and plans for heavy investment. The broker observes Woolworths may find it hard to turn around without spending more than forecast to improve the value perception. Rating is downgraded to Hold from Buy and the target to $30.00 from $37.50. Macquarie is downgrading straight to Underperform from Outperform, suggesting the share price will not recover until a detailed investment strategy is clearly outlined. Target falls to $32.94 from $35.84. It appears to Morgans that the company has decided to sacrifice second half earnings in order to restructure parts of the business. In this broker's view, investors should wait for the outcome of the May strategic update. Rating is downgraded to Hold from Add and the target lowered to $32.20 from $35.20.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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