Weekly Recommendation, Target Price, Earnings Forecast Changes

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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: 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 25 to Friday May 29, 2015
Total Upgrades: 7
Total Downgrades: 12
Net Ratings Breakdown: Buy 39.83%; Hold 42.96%; Sell 17.21%

The local share market had worked through a not too bad week by the closing bell on Friday, 29th May 2015 and -how predictable- the number of recommendation downgrades for the week outnumbers the upgrades. We registered 12 downgrades versus seven upgrades. Most were valuation related.

Sirius Resources attracted no less than three downgrades given the share price rally and the fact any movement from here will be takeover driven.

Adjustments in valuations and price targets were rather benign for the week. Sirius (takeover bid) tops the table with a sizeable positive revision and Atlas Iron, back from the graveyard with intentions for a massively dilutive capital raising, tops the list on the negative side.

Adjustments to earnings estimates look strong at face value with the negative list mostly populated by resources stocks. Buru Energy tops the list this week showing a fall by no less than 71% in projected consensus profits for this year. Goldminers and other metals miners are prominently present too.

Ironically, the list for positive profit revisions is also predominantly populated by resources stocks, albeit this side shows plenty of oil and gas stocks. ALS Ltd tops the positive list with a positive revision of 38%.

Upgrades

Alumina ((AWC)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 6/0/1

Morgan Stanley finds potential for margin expansion and upgrades to estimates. With cost savings noted that were not previously factored in, combined with improving alumina price, the broker expects this should carry the stock higher. The rating is upgraded to Overweight from Equal-weight and the target raised to $2.20 from $1.95. Industry view is In-Line.

Coca-Cola Amatil ((CCL)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/4/0

The broker’s channel checks reveal repeat purchases of Coke Life are probably short of expectations. Investors are warned to be cautious about anticipating a positive earnings surprise for either the half or full year. Credit Suisse has a target of $10.60 which can only be achieved as confidence builds around a 2016 earnings growth rate of around 6.0%. Around one quarter of that is from Indonesia and consumer confidence in that country fell sharply in April, although the broker suspects retail sales may have bottomed. Credit Suisse upgrades to Neutral from Underperform, given the fall in the share price recently.

Dexus Property ((DXS)) upgraded to Neutral from Sell by Citi. B/H/S: 1/3/3

Channel checks reveal continued demand for office assets and Citi observes pressure for asset values to rise and cap rates to fall. Following the pull back in the share price the broker considers the stock is more attractively priced and upgrades to Neutral from Sell. Target is raised to $7.54 from $7.39.

Mirvac Group ((MGR)) upgraded to Buy from Neutral by Citi. B/H/S: 4/2/1

Citi believes concerns surrounding macro prudential policy are important but unlikely to slow down developer sales significantly. Moves to curtail investor activity are expected to affect the established house market more than new housing. The broker remains attracted to the high degree of visibility in Mirvac’s future development earnings and believes the stock is attractive at current levels. Rating is upgraded to Buy from Neutral and the target to $2.23 from $2.21.

SAI Global ((SAI)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 1/6/0

SAI Global is suffering from weak revenue growth and the expiry of the Publishing Licence Agreement is looming. The PLA loss is priced in and the currency and cost savings are providing earnings tailwinds, the broker notes. Overall, Credit Suisse envisages a reasonable earnings outlook and notes SAI Global is trading at a discount to the Small Industrials and to its own long-run average price/earnings ratio. With risk to the upside, the broker increases its target to $4.85 from $4.35 and upgrades to Outperform.

Virtus Health ((VRT)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/0/0

IVF volumes were up 6.9% in April and up a robust 4.6% for January-April, compared to a flat first half, the broker notes. Higher price point fresh-cycle growth outpaced frozen for the first time in several months. Industry growth remains modest but appears to be strengthening, the broker suggests. The broker retains an $8.80 target for Virtus but has upgraded to Outperform.

Westpac Banking ((WBC)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 3/2/3

The fall in the share price over the last six weeks is unjustified in Deutsche Bank’s view, given strong fundamentals and a first half that was only slightly weaker than expectations. Regulatory issues appear manageable and over time the broker expects asset/liability re-pricing should protect returns. Rating is upgraded to Buy from Hold and the target is steady at $35.60.

Downgrades

AGL Energy ((AGL)) downgraded to Neutral from Buy by Citi. B/H/S: 3/4/1

The new CEO has defined the future direction for AGL. Citi finds there is a clear focus on process and efficiency and to position the company strategically in order to respond to changes in the marketplace. The recent strong performance means the broker considers the stock fair value. Delivery of earnings expectations and realising targets are now required. If AGL achieves its full cost cutting target then Citi envisages significant additional value. Rating is downgraded to Neutral from Buy and the target is raised to $17.07 from $16.33.

Evolution Mining ((EVN)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 4/1/1

Deutsche Bank believes the Cowal acquisition improves the investment thesis because of better earnings and increased free cash flow and provides greater relevance for global investors. Further details are expected on the upside from the acquisition but, given the stock’s strong run and incorporating the equity dilution, the broker downgrades to Hold from Buy. Target is reduced to $1.00 from $1.05.

Independence Group ((IGO)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/4/1

Independence Group has made an offer of 0.66 shares for each Sirius Resources ((SIR)) share plus cash of 52c a share. Sirius shareholders will keep the non-nickel assets via a spin out. The deal will combine the Sirius development asset, Nova, with Independence’s strong cash flow and create a diversified miner with a market cap around $2.7bn. Credit Suisse believes it is a good deal for Sirius and much less so for independence shareholders. Rating is downgraded to Neutral from Outperform and the target to $5.50 from $6.50.

Oil Search ((OSH)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 6/2/0

Consider it a revolt within the global JP Morgan organisation. Analysts in the UK and in Asia have separated themselves from the Commodities Desk and have adopted lower oil price forecasts for the years ahead. Australia sides with the “revolution”. Apart from lower corporate forecasts across the board, the move only leads to one recommendation downgrade in Australia. Oil Search, downgraded to Neutral from Overweight. Target drops to $7.47 from $8.08. The price forecasts adopted by the break-away group have WTI ranging between US$54-US$59/bbl in the three years ahead, and Brent US$6/bbl higher.

OrotonGroup ((ORL)) downgraded to Sell from Neutral by Citi. B/H/S: 1/2/1

The company has revealed the second half will incorporate a loss with the unwinding of promotions combined with disappointing results at Gap and Brooks Brothers. FY15 earnings guidance is around $4.5m. Citi forecasts a recovery in FY16 to $7.3m, which remains a 26% downgrade to prior forecasts. The broker lowers the rating to Sell from Neutral, given the expensive valuation and lack of visibility on an earnings recovery. Target is reduced to $1.90 from $2.50.

Ramsay Health Care ((RHC)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 2/4/2

Rising lapse rates and growth in low-cost policies signal to the broker a risk from FY17 onwards regarding the rates paid by insurers to hospitals. Accordingly Morgan Stanley downgrades Ramsay Health earnings estimates and reduces the rating to Underweight from Equal-weight. Target is lowered to $52.42 from $56.73. Industry view is In-Line.

REA Group ((REA)) downgraded to Hold from Add by Morgans. B/H/S: 4/3/1

Growth in depth and volumes has fallen, as east coast real estate vendors hold off selling properties in the hope of making a bigger profit. Morgans believes this greed-driven withholding of listings has meant the number of houses and apartments for sale have plummeted and created near-term pressures for REA Group. Rating is downgraded to Hold from Add. The broker reduces earnings forecasts by 9-11% over the FY15-20 period. The changes, coupled with a reduction in terminal growth rates, have reduced valuation. Target is lowered to $42.22 from $53.01.

Sirius Resources ((SIR)) downgraded to Hold from Buy by Deutsche Bank, to Neutral from Outperform by Credit Suisse and to Neutral from Buy by Citi. B/H/S: 2/4/0

Independence Group has made an offer of 0.66 shares for each Sirius share plus cash of 52c a share. Sirius shareholders will keep the non-nickel assets via a spin out. In addition to the scrip/cash offer Sirius shareholders will be entitled to the final Independence Group dividend for FY15. Deutsche Bank believes Independence Group is paying full value for the stock and assumes a very bullish nickel price. As Sirius is now trading near fair value and there is unlikely to be a counter bid the broker downgrades to Hold from Buy. Credit Suisse suggests the market was already pricing in the chance of an offer. The broker raises its target price to $3.25 from $3.00 and downgrades to Neutral. The offer now leaves the Sirius share price linked to Independence and removes some of the fundamental basis for valuation support. Accordingly, Citi downgrades to Neutral, High Risk from Buy. Citi rates the stock as High Risk because of the volatility that could ensue. As the takeover requires shareholder approval, if denied, this could mean a fall in the Sirius share price back to pre-bid levels, the broker maintains.

Technology One ((TNE)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/2/0

Technology One’s result fell short of the broker on weaker than expected first half revenues. A soft economic environment is impacting on the wider IT services sector, the broker notes. The broker nevertheless sees solid opportunities ahead. The pace of customer transition to the cloud is pleasing, although the broker is unclear whether the company can book cloud revenues up front or will have to spread over a longer period, which would impact the P&L. The broker likes the company and its outlook, but believes this is all well captured in the price. Target raised to $3.65 from $3.25 but rating pulled back to Neutral.

Thorn Group ((TGA)) downgraded to Hold from Add by Morgans. B/H/S: 0/3/0

Thorn’s FY15 result beat Morgans’ forecasts. Strong growth in Radio Rentals was supported by a more meaningful contribution from equipment finance. Morgans is comfortable with the outlook, based on a higher receivables/rental asset base and the full year contribution from the CRA acquisition. Radio Rentals has been the core strength but the rate of growth is expected to soften. The broker downgrades to Hold from Add on valuation grounds with the stock trading close to the target, raised to $3.09 from $3.00.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=Citi,CreditSuisse,DeutscheBank,JPMorgan,Macquarie,MorganStanley,Morgans,UBS&b0=78,83,92,74,130,73,166,102&h0=114,108,140,111,109,56,163,124&s0=44,61,17,49,51,46,21,42″ style=”border:1px solid #000000″ />

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