Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ALS LIMITED, and other companies. For more info SHARE ANALYSIS: ALQ

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley, Morgans 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 May 11 to Friday May 15, 2015
Total Upgrades: 12
Total Downgrades: 14
Net Ratings Breakdown: Buy 39.83%; Hold 42.79%; Sell 17.38%

The Australian share market puts in one mildly positive performance and instantly FNArena records more downgrades than upgrades for the week ending Friday, 15th May, 2015: 14 down against 12 up.

One look below the surface shows most stockbroker recommendation changes for the week are directly related to the latest good news/bad news updates provided by companies.

Good news providers include Qantas, Singapore Telecom and CSR. Among those who disappointed we find ResMed and The Reject Shop, plus a number of steel and resources stocks on the back of stockbrokers Credit Suisse and Macquarie reiterating their negative views on iron ore and steel and bulk commodities in general.

JP Morgan turned more bearish on TV networks at the beginning of the week which is why Nine Entertainment and Seven West Media feature on the negative side too. Seven West Media does top the table for positive revisions to earnings forecasts with a jump of no less than 300%.

Others enjoying positive revisions include Macquarie Group, Evolution Mining and Scentre Group. Thus far the out-of-season financial reports have mostly disappointed with Macquarie Group one of few standout exceptions.

Upgrades

ALS ((ALQ)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 1/5/2

ALS has suffered earnings declines for the past two years and Deutsche Bank believes the market should now start valuing the company on through-the-cycle earnings. The broker's rating is upgraded to Buy from Hold on this basis. Life Sciences is now the largest division and should provide a stable earnings base. Deutsche Bank increases this division's forecast revenue growth rate for FY16 and revises working capital assumptions. Target is raised to $6.96 from $4.60.

ANZ Banking ((ANZ)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 3/3/2

JP Morgan has upgraded ANZ Bank to Overweight from Neutral, given the current valuation gap to peers, and National Australia Bank ((NAB)) in particular. The broker supports the bank's progressive capital strategy and considers assumptions that ANZ is short of capital relative to peers to be misleading. Target is steady at $35.69.

AusNet Services ((AST)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/7/0

FY15 results were ahead of Deutsche Bank's expectations, with uncertainty around bushfire litigation and disputes with the ATO largely addressed. The broker favours a simplification of the corporate structure and believes AusNet now fairly reflects the uncertainties. A return to distribution growth adds another spoke to the wheel. As a result, the rating is upgraded to Hold from Sell. Target is raised to $1.35 from $1.15.

CSR ((CSR)) upgraded to Buy from Sell by Citi. B/H/S: 5/3/0

Citi finds greater earnings clarity with the FY15 results and suspects the residential property cycle will be extended and aluminium will benefit from lower cost linkage to alumina. As FIRB-imposed balance sheet restrictions roll off by FY17 to potentially reward  shareholders, the broker's target rises with valuation to $4.50 from $3.30. Citi incorporates enhanced opportunities and synergies under the new brick JV with Boral ((BLD)) and, with an elongated construction cycle, upgrades to Buy from Sell.

Flinders Mines ((FMS)) upgraded to Neutral from Underperform by Macquarie.  B/H/S:0/1/0

Macquarie has incorporated new commodity price forecasts, with most of the pain in cuts to coal price expectations. Iron ore price forecast reductions are less severe. The company's asset sale is now incorporated into estimates which means Flinders is upgraded to Neutral from Underperform. Target is raised to 2c from 1c.

GUD Holdings upgraded to Neutral from Sell by Citi and to Buy from Sell by UBS. B/H/S: 3/2/0 

GUD will acquire Brown & Watson for $200m plus an earn-out. In light of the transaction Citi upgrades to Neutral from Sell. FY16 and FY17 forecasts are raised by 37% and 33% respectively and the target to $8.23 from $6.64. The transaction will be funded by equity and debt. GUD plans to raise at least $74.5m. The acquisition will complement GUD's existing automotive business, providing the opportunity to expand existing products into new end markets. GUD's automotive after-market business has been its star performer so UBS considers Brown & Watson as a positive fit, offering around 15% earnings accretion in FY16. The stock seems inexpensive on a price/earnings ratio of 12 and 5.4% yield. The broker upgrades straight to Buy from Sell. Target rises to $9.11 from $6.65.

Legend Corp ((LGD)) upgraded to Add from Hold by Morgans. B/H/S: 1/0/0 

The company has acquired the assets of Systems Control Engineering, which supplies industrial heating, refrigeration and air conditional components. Morgans considers the price of $10.2m fair as it complements the company's existing operations. To reflect the acquisition the broker increases FY16 and FY17 forecasts by 2.1% and 3.9% respectively. Rating is upgraded to Add from Hold. Target is steady at 30c.

M2 Telecommunications ((MTU)) upgraded to Neutral from Sell by UBS. B/H/S: 1/4/0 

The company has reiterated FY15 guidance for 15-20% profit growth. UBS maintains forecasts and continues to envisage robust earnings over the next two years. Forecasts do not incorporate an acquisition of iiNet ((IIN)) given the outcome of the bid is uncertain. The broker upgrades to Neutral from Sell, having originally downgraded on valuation grounds. The company does have a more aggressive gearing profile relative to peers but UBS believes this is offset by a stronger growth outlook. Target is $10.50.

Premier Investments ((PMV)) upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S: 0/6/0 

Premier Investments is in a growth phase, benefitting from the expansion of Smiggle and Peter Alexander and has a favourable currency hedging profile. There are longer-term structural headwinds which the broker believes may hamper core brands. Still, the near-term opportunity and long-term sub-par growth are reflected in the share price. Morgan Stanley upgrades to Equal-weight from Underweight and raises the target to $12.40 from $9.00.

Qantas ((QAN)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 7/0/0

Qantas has provided insight into several initiatives and progress on its cost cutting. Given the outperformance in the stock over the past year, JP Morgan suspects the more positive outlook is now well understood. Still, the stock is cheap relative to other airlines and the broker envisages scope for earnings upgrades over the next 12 months. Hence the rating is upgraded to Overweight from Neutral. Target is raised to $4.08 from $3.18.

Sirtex Medical ((SRX)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/0/1 

Sirtex has revealed data from its SIRFLOX study shows a statistically significant improvement in progression-free survival for the secondary end point in terms of liver cancer, thus the broker believes Sir-Spheres could play large role in the earlier treatment in those patients suffering only from liver cancer. The broker has upgraded to Outperform from Neutral and lifted its target to $30 from $26.

Downgrades

BlueScope Steel ((BSL)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 5/3/0

Macquarie has reviewed the steel sector in the light of commodity price changes. Structural oversupply is being exported and undermining pricing power, in the broker's opinion. The March round of price changes – lower iron ore and coal – favoured steel margins but now the price changes are likely to have the opposite effect, especially in FY16 and Macquarie revises BlueScope's earnings estimates lower. The extent and duration of lower steel prices is now expected to impact the medium term, worsened by the company being a price taker on a high-cost ex-Australian export. Rating is downgraded to Neutral from Outperform and the target to $3.70 from $6.80.

Fantastic Holdings ((FAN)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 0/3/1

While the decline in earnings is behind the company, Morgan Stanley does not envisage a return to historical averages. The main reason is the company is yet to re-establish its brand and ward off the competitive threat. Rating is downgraded to Underweight from Equal-weight. Target is reduced to $1.75 from $2.10.

Fortescue Metals ((FMG)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 0/5/3

Credit Suisse is of the view that Fortescue's share price has run ahead of fundamentals, hence the downgrade to Underperform from Neutral. To further underpin the move, CS analysts believe second half 2015 looks "ominous" as further supply looms. They expect the price of iron ore to fall to US$45/tonne. Target $2.00. Forecasts have been pared back and FY16 is now expected to see a gigantic loss.

Incitec Pivot ((IPL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/4/2

The first half result held few surprises for Credit Suisse. Fertiliser profit was affected by lower urea prices and competition while downstream profitability in Asia Pacific took the hit from lower demand for explosives. The outlook is dominated by US ammonia production and Credit Suisse suspects the contribution of the Australian explosives and fertiliser segments is likely to decline further. The broker downgrades to Underperform from Neutral and target is raised to $3.28 from $3.25.

Nine Entertainment ((NEC)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 7/1/0

The analysts have kept a close watch on free-to-air TV industry trends as they believe the sector is in for a major meltdown, at some point in the years ahead. They now believe the first cracks have started to emerge and have promptly responded by cutting forecasts. Short term advertising trends are likely to show small year-on-year losses, on the analysts' new forecasts. Longer term the growth rate for the industry has been reduced to 1.5% per annum. Because of a more cautious stance vis-a-vis the industry, the rating for Nine Entertainment has been cut to Neutral from Overweight. Estimates have been reduced. Price target falls to $2.25 from $2.49.

PanAust ((PNA)) downgraded to Underperform from Outperform by Credit Suisse and to Neutral from Buy by UBS. B/H/S: 2/5/1

GRAM has increased its cash offer to $1.85 a share, at the lower end of the independent expert's range of $1.84-2.04. The offer has been recommended by the board in the absence of a superior proposal. Credit Suisse is disappointed with the outcome, given the long-term view of the potential of Frieda River. The rating is downgraded to Underperform from Outperform. Target is lowered to $1.85 from $2.10.

Prairie Mining ((PDZ)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/1/0

Macquarie has incorporated new commodity price forecasts, with most of the pain in cuts to coal price expectations. Most Australian coal assets now generate only modest cash flow. Prairie Mining is downgraded to Neutral from Outperform. Target is lowered to 20c from 35c.

ResMed ((RMD)) downgraded to Sell from Buy by Citi and to Neutral from Outperform by Credit Suisse. B/H/S: 3/4/1

ResMed has announced its SERVE_HF Heart Failure trial has failed and this is a major setback given Citi analysts had already accounted for success in their forecasts and valuation for the stock. Making matters worse, the failure will hit some 7% of revenues which is high margin, point out the analysts, plus a one-off impairment charge seems but logical. They have reduced forecasts significantly. Price target drops to $7.67 from $11.01. Credit Suisse has downgraded to Neutral from Outperform following the failure of the SERVE-HF trial. Preliminary analysis shows a statistically significant increase in cardio vascular mortality for those receiving the therapy. The broker notes the bulk of patients within the company's business on sleep apnea are unaffected. No material earnings growth was factored in for congestive heart failure opportunities. Target is lowered to $8.75 from $9.80.

Seven West Media ((SWM)) downgraded to Neutral from Overweight by JP Morgan. B/H/S:

The analysts have kept a close watch on free-to-air TV industry trends as they believe the sector is in for a major meltdown, at some point in the years ahead. They now believe the first cracks have started to emerge and have promptly responded by cutting forecasts. Short term advertising trends are likely to show small year-on-year losses, on the analysts' new forecasts. Longer term the growth rate for the industry has been reduced to 1.5% per annum. Because of a more cautious stance vis-a-vis the industry, the rating for Seven West Media has been cut to Neutral from Overweight. Estimates have been reduced. Price target falls to $1.35 from $1.63.

Silver Chef ((SIV)) downgraded to Hold from Add by Morgans. B/H/S: 0/2/0

The introduction in the federal budget of a tax incentive for small business acquiring equipment up to $20,000 should mean a boost in demand for equipment dealers and finance providers. However, Morgans does not believe Silver Chef's rental product will qualify, which may marginally affect demand in the hospitality segment. This may be immaterial and the company does have other growth drivers but Morgans moves to Hold from Add, given the stock is trading at the target, raised to $9.00 from $8.22.

The Reject Shop ((TRS)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 0/2/2

Morgan Stanley believes structural challenges will mean the company disappoints on earnings. Rating is downgraded to Underweight from Equal-weight. Target is reduced to $5.75 from $6.50. The broker expects the sharp depreciation in the Australian dollar to weigh on margins. Secondly, a shift in market share to Kmart and international competitors is occurring in the discount variety segment.

Whitehaven Coal ((WHC)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 3/4/1

Macquarie has incorporated new commodity price forecasts, with most of the pain in cuts to coal price expectations. Whitehaven's earnings are seen falling 80-100% over the next few years and most Australian coal assets now generate only modest cash flow. Whitehaven's recommendation is therefore downgraded to Underperform from Neutral and the target to $1.00 from $1.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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