Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ANZ GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

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 June 15 to Friday June 19, 2015
Total Upgrades: 13
Total Downgrades: 12
Net Ratings Breakdown: Buy 39.90%; Hold 43.19%; Sell 16.91%

At face value, it appears stockbroking analysts have been busier than usual during the week ending Friday, 19th June 2015. FNArena registered no less than 25 changes in individual ratings for stocks; 13 upgrades versus 12 downgrades. And both the tables for changes to profit forecasts and to valuations/price targets show some big changes.

Companies affected vary from resources stocks to traditional and online media companies, finance, transport and retailers. Look closer, however, and many of the changes are company or event-specific. BT Investment, Caltex and Insurance Australia Group (IAG) all attracted multiple ratings changes during the week on the back of a sell-down by parent Westpac, share price weakness and a historical deal with Warren Buffett respectively.

Target price changes got a real kick in the week with bad news from the likes of Energy Resources of Australia (ERA), Woolworths and Nine Entertainment triggering sizeable reductions, while on the positive side only CIMIC (formerly Leighton Holdings) enjoyed a noticeable increase on the back of a positive broker note.

On the top of the table for negative revisions to profit forecasts we find Industria REIT, and that's not something we are familiar with given the huge representation by resources stocks that usually populate this list. This time around, however, the list includes many non-resources stocks including Woolworths, Scentre Group, DUET and Qube Logistics. Could this be a signal that, maybe, the downward trend for resources stocks has run its course?

On the positive side of the ledger, we find sizeable increases to profit estimates for Arrium, Metcash, Medusa Mining and Energy Resources of Australia (how ironic). This side too remains largely populated by non-resources stocks. Maybe too early yet to call the turn in the cycle for those beaten down and trampled upon miners and explorers??

Upgrades

ANZ Banking Group ((ANZ)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/2/2

Credit Suisse is upgrading to Outperform from Neutral and reducing the target to $33 from $36. The more positive view reflects improved valuations for both the bank and the sector. The broker believes ANZ offers relative value and growth and is the best sector play on US monetary tightening, Australian dollar depreciation and the recent strength in New Zealand.

Air New Zealand ((AIZ)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/1/0

Qantas ((QAN)) and its partner American Airlines are eyeing New Zealand routes and now Qantas owned Jetstar is launching domestic services in New Zealand from regional hubs in Australia. Clearly, competition is heating up, suggest the analysts. They are not taking these new developments lightly. Earnings estimates for FY17 have been cut by 17%. Given the share price is seen as representing a more sustainable mid-cycle return profile, the analysts have elected to upgrade the rating to Neutral from Underperform. Target falls to NZ$2.25 from NZ$2.30.

Arrium ((ARI)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/6/2

Arrium has announced a further restructuring of its mining operations, in order to reduce capex, a strategic review to reduce debt, and a likely FY15 impairment of around $320m. Iron ore production will be reduced and the broker notes the FY15 debt outcome appears worse than expected. Arrium is under considerable pressure but is trading at around a 20% discount to net tangible assets, the broker notes. Debt is a concern but the company does have asset divestment options, hence the strategic review is worth watching. The broker has upgraded to Neutral from Underperform. Target rises to 19c from 18c.

BT Investment Management ((BTT)) upgraded to Neutral from Underperform by Credit Suisse and to Neutral from Sell by UBS. B/H/S: 0/4/0

Westpac ((WBC)) will sell down up to 28% of BT Investment stock. Following a 15% fall in the share price since April and a positive market update Credit Suisse upgrades to Neutral from Underperform. The target is raised to $9.15 from $9.00. The broker believes the stock is insulated from the earnings downgrades its Australian peers are likely to witness in the next month. UBS had suspected the market was capitalising a level of earnings growth which would prove difficult to maintain over the medium term. While continuing to expect the entrenched cost growth poses a risk, if flow and market tailwinds moderate, the broker now considers the share price has made some allowance for this. Hence rating is upgraded to Neutral from Sell. The $8.70 target is maintained.

Caltex Australia ((CTX)) upgraded to Buy from Neutral by Citi and to Neutral from Underperform by Macquarie. B/H/S: 2/4/1

Citi considers recent share price weakness a function of Chevron's sell down being recycled through the market. The broker considers Caltex a well run business and optimised post the Kurnell shut down. While growth may be challenged longer term the outlook appears positive in the short term and the rating is upgraded to Buy from Neutral. Target is lowered to $36.15 from $37.61. As the first half comes to a close for Caltex, Macquarie anticipates the company's result release will include an outlook highlighting lacklustre underlying marketing growth. However as the management-imposed window for acquisition opportunities closes, the broker believes there is a prospect of capital management. The fall in the Caltex share price since the Chevron exit has brought the stock back to reasonable value, the broker suggests. Upgrade to Neutral. Target rises to $31 from $30.

Challenger ((CGF)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 5/3/0

Challenger's investor briefing included a downgrade to retail annuity growth guidance in FY15, with the company suggesting this will be 9.0% instead of 11-13% as previously targeted. Higher margins offset the impact on FY16, Citi observes. A Buy rating and $8.10 target are retained.

Incitec Pivot ((IPL)) upgraded to Buy from Neutral by Citi. B/H/S: 3/2/2

Citi believes the quality of the cash flow should not be underestimated. Conversion is expected to average over 95% from FY15-18, enabling a capital return that could come earlier and be larger than expected. The broker makes some minor negative adjustments to forecasts centred on domestic fertiliser volumes but moves back to Buy from a Neutral rating. Target is raised to $4.45 from $3.80.

New Hope Corp ((NHC)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/0/0

With diverging share price performance, valuation differentials now suggest to Credit Suisse it is time to swap New Hope for Whitehaven Coal ((WHC)) as preferred exposure for coal. World money supply continues to shrink, suggesting further downside to come for commodity prices, and the broker considers earnings numbers for big cap stocks still appear to be too high. Credit Suisse would want to see a turn around in money supply before re-weighting the mining sector in a broad-based manner. The broker upgrades to Outperform from Neutral and reduces the target to $2.40 from $2.50.

Orora ((ORA)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 5/2/0

The broker reviews the key themes in the packaging industry. The company is expected to achieve meaningful earnings growth through cost cutting from the B9 manufacturing facility and other recent rationalisation activities. In the longer term, the company's participation in the highly fragmented North American distribution market provides significant ability to scale up operations in the region. Rating is upgraded to Overweight from Neutral and target is raised to $2.35 from $2.05.

Qube Holdings ((QUB)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 5/2/1

The company has struck a deal with the government to develop the Moorebank terminal. Credit Suisse believes Qube has unfettered pricing power and can capture a large portion of the efficiency gains in the import/export container supply chain. The broker was bearish about the company's iron ore exposure but, after the earnings downgrade, more downside risk has now been priced in. Upside at Moorebank now outweighs the resource exposure risk, in Credit Suisse's view. Rating is upgraded to Outperform from Underperform. Target is lifted to $3.35 from $2.50.

REA Group ((REA)) upgraded to Add from Hold by Morgans. B/H/S: 6/1/1

Morgans believes the recent sell off is over done and the stock is now trading at a significant discount to valuation. As the dominant player the broker expects REA Group to enjoy strong revenue growth for the next 3-5 years. The broker believes upside is based on a stabilisation of listing volumes and market acceptance of the new subscription packages. Rating is upgraded to Add from Hold. Target is steady at $42.22.

Downgrades

Alumina Ltd ((AWC)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 6/1/1

Australian alumina prices are moving lower but Chinese prices have fallen even faster, Credit Suisse observes. The driver is re-sales of contracted Australian cargoes into the Pacific market. Supply is ample and buyers are scarce. Credit Suisse does not expect the market to absorb the supply pressure and downgrades to Neutral from Outperform. The target is revised down to 1.65 from $2.10.

Energy Resources of Australia ((ERA)) downgraded to Sell from Neutral by UBS. B/H/S: 0/0/3

Ranger 3 Deeps will not proceed to final feasibility in the current environment. The company's decision is based on the lack of progress in the uranium market and the economics, which require operation beyond the current mining lease that expires in 2021. UBS has lowered the probability of the underground proceeding to 20% from 50%. The broker makes no changes to earnings estimates. Provided uranium price forecasts are achieved the broker envisages no need for additional funding to rehabilitate Ranger, should the underground be shelved indefinitely. Rating is downgraded to Sell from Neutral. Target is lowered to 70c from $1.45.

Industria REIT ((IDR)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/2/1

Industria has provided a much weaker trading update than the broker expected, and declared a final dividend of 7.84cps, below the broker's 8.28cps and 3% below the prospectus. Of most concern is a downgrade to FY16 dividend guidance to 6.3% below forecast. The bottom line is Industria has not been able to lease as much office space as hoped, nor will it positively revalue its portfolio at year-end. A difficult office market offers significant earnings risk, the broker suggests. Downgrade to Underperform. Target falls to $1.94 from $2.01.

Insurance Australia Group ((IAG)) downgraded to Underweight from Neutral by JP Morgan and to Underperform from Neutral by Macquarie. B/H/S: 0/6/2

The share price reaction (positive) to the deal with Berkshire Hathaway, which includes a 10-year quota share, surprised JP Morgan, given the dilution it suggests. Perhaps because the $500m scrip purchase is interpreted as a desire to eventually increase the stake. The broker estimates the revised guidance implies a 6.5% dilution to earnings for FY16 from the deal alone. The prospects for the stock centre on the use of the capital that was raised. Until that is clear the broker believes downside risk for the share price prevails. Rating is downgraded to Underweight from Neutral. Target drops to $5.60 from $6.03. The deal will boost IAG's insurance margins and potentially its return on equity if accretive investments are now sought, Macquarie suggests. Current insurance market conditions remain challenged, the broker notes, and premiums under pressure. The broker is looking for more capital management clarity and in the meantime, has downgraded to Underperform. Target falls to $5.40 from $5.70 on the raising.

Nine Entertainment Corp ((NEC)) downgraded to Neutral from Buy by Citi. B/H/S: 4/3/1

Operational issues appear company specific and not caused by the TV advertising market and Citi finds it hard to ignore the potential downside risk to earnings. Given no recovery is in sight the broker downgrades to Neutral from Buy. Target is reduced to $1.70 from $2.21. The broker still envisages scope for earnings upside from cost initiatives but fears this could be swallowed up by revenue downgrades.

Sonic Healthcare ((SHL)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 4/4/0

Sonic Healthcare will acquire Medisupport and become the largest lab company in Switzerland. The acquisition is to be funded by both debt and equity. Deutsche Bank suspects the consensus numbers are too high and finds few positive catalysts in the near term. The broker expects the acquisition will boost earnings by 8.0% in FY16. Reimbursement pressure is likely to remain the case in most markets. Given the limited upside the broker reduces the rating to Hold from Buy and raises the target to $22.00 from $21.60.

Ten Network Holdings ((TEN)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/2/4

The company will raise up to $154m with the issue of $77m in new equity to Foxtel and a $77m entitlement offer at the same price of 15c a share. Foxtel is expected to hold a 14.2% stake subsequently. The deal removes immediate funding pressure and improves the ability to maintain ratings in the broker's view. Credit Suisse downgrades to Underperform from Neutral because of the dilutive impact of the capital raising. Target is reduced to 20c from 22c.

Trade Me ((TME)) downgraded to Sell from Neutral by Citi. B/H/S: 1/2/3

The business is in transition and Citi believes more investment is needed in the platform. The broker reduces earnings forecasts by 6.0% for FY16. With only modest growth and potential competitive risks the broker downgrades to Sell from Neutral. Citi believes the shares are trading at an unwarranted valuation premium. Target is reduced to $2.96 from $3.61.

TZ Ltd ((TZL)) downgraded to Hold from Add by Morgans. B/H/S: 0/1/0

FY15 revenue is now expected to be $15-16m against prior guidance of $18-20m. The downgrade is because of timing with orders that are unable to be delivered before June 30. While the timing is unfortunate Morgans is optimistic that the company will have a strong start to FY16 as a result. Rating is downgraded to Hold from Add rating as the broker suspects investors will be more cautious until there is confidence the runs are on the board. Target is lowered to 11c from 17c.

Whitehaven Coal ((WHC)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/5/1

Credit Suisse has decided its time to swap Whitehaven Coal for New Hope Corp ((NHC)) as its preferred coal exposure. The rating is downgraded to Neutral from Outperform and the target to $1.60 from $2.00. World money supply continues to shrink, suggesting further downside to come for commodity prices, and the broker considers consensus earnings numbers for big cap stocks are still too high. Credit Suisse would want to see a turn around in money supply before re-weighting the mining sector in a broad-based manner.

Woolworths ((WOW)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/3/5

JP Morgan analysts have cut their target to $24 (was $28.25) and pulled back their rating to Underweight from Neutral. Direct catalyst is the premature departure of the CEO, news that came with yet another profit warning. The analysts now believe the turnaround strategy comes with a lot of risk and uncertainty and consensus expectations are heading south yet again. Is there valuation support for the shares? JP Morgan is uncertain. A new CEO, yet to be found, further adds to uncertainty. Interestingly, EPS estimates have been cut while annual dividends are now anticipated to remain at 137c for the foreseeable future (as far as the eye stretches for JP Morgan's outlook).

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms