Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ

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 October 5 to Friday October 9, 2015
Total Upgrades: 11
Total Downgrades: 7
Net Ratings Breakdown: Buy 46.16%; Hold 42.20%; Sell 11.64%

The numbers still look big, but the underlying sentiment appears to have a positive undertone. Post resources stocks apocalypse, on the back of continuous downgrades to commodities prices forecasts, stockbroking analysts are starting to switch focus to financials and industrials again with acquisitions, out-of-season financial reports and AGMs and Investor Days offering plenty of opportunities to do exactly that.

For the week ending Friday, 9 October 2015, FNArena registered no less than eleven upgrades in ratings for individual stocks and seven downgrades. Only four of the upgrades involve a Buy rating.

Bank of Queensland attracted two upgrades after its better-than-expected financial report. Fletcher Building, James Hardie and Japara Healthcare also attracted Buy ratings. Both UXC and Veda Group were downgraded after they received take-over interest from an offshore suitor. DuluxGroup was downgraded to Sell ahead of its FY15 financial report which should be due in the next couple of weeks. Morgan Stanley is decidedly bearish on prospects for the Australian construction industry.

In the absence of further carnage amongst resources stocks, amendments to price targets and valuations show their positive bias with Veda Group and Japara Healthcare (new acquisition) topping the table for positive revisions, while Cabcharge takes top spot on the negative side.

The top two for positive revisions to earnings estimates -AWE Ltd and Air NZ- are both beneficiaries of a bounce in crude oil prices, while News Corp sold a loss-making asset. Japara Healthcare and Macquarie Group both enjoy a rise in forecasts on the back of new acquisitions. The negative side of the earnings ledger still carries a bias towards resources stocks, but wealth managers IOOF and Perpetual are also included as analysts mark-to-market for weaker global equity markets in the September quarter.

Upgrade

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Buy from Neutral by Citi .B/H/S: 3/4/1

FY15 results were ahead of Macquarie's expectations. The broker notes the bank is successfully covering for a core franchise that is struggling for growth with the beat to forecasts largely driven by other income.

The broker is now a little more confident on the outlook but retains some concerns around the core business as well as revenue headwinds from a normalising of non-interest income. This should be more than offset by the benefits of investor mortgage re-pricing in FY16.

Macquarie upgrades to Neutral from Underperform and lowers the target to $13.20 from $13.66.

The FY15 result was better than Citi expected. The broker upgrades to Buy from Neutral, acknowledging the valuation appeal of a stock that has beaten expectations on earnings.

The broker still has questions regarding growth in future earnings without the tailwinds from acquisitions. the implementation of Basel 4 is shaping up as an enabling of regional bank returns and share price outperformance, in Citi's view. Target is $14.50.

COCHLEAR LIMITED ((COH)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/3/4

Given subdued market growth and probable peaking of sales of upgrades in FY16, Deutsche Bank expects only single digit earnings growth from FY17.

Nevertheless, a strong boost from the weaker Australian dollar is now expected to push earnings growth in FY16 into the mid teens.

This in turn leads to a lift in the price target to $82 from $71 and an upgrade in the rating to Hold from Sell.

FLETCHER BUILDING LIMITED ((FBU)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/1/2

Macroprudential regulation is causing a tightening in the Australian housing cycle, argue analysts at Morgan Stanley. They have reduced their projections in response.

A reduction in construction activity, in particular for multi-dwellings, has now been incorporated. Industry view is In-Line. Morgan Stanley has upgraded its rating to Overweight from Equal-Weight on the assumption that "self-help" initiatives will accommodate further growth. Target price lifts to $8.15 from $7.52.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Neutral from Underweight by JP Morgan .B/H/S: 0/8/0

Peter Harmer has been appointed CEO to succeed Mike Wilkins and JP Morgan expects the market will be favourably disposed to the appointment.

Given the share price weakness in recent months the broker takes the opportunity to upgrade to Neutral from Underweight.

Risks from emerging competition in personal business lines appear to be fully priced in, the broker believes. Target is steady at $5.80.

JAPARA HEALTHCARE LIMITED ((JHC)) Upgrade to Add from Hold by Morgans .B/H/S: 3/1/0

Japara Healthcare has announced its second major acquisition since listing and stockbroker Morgans likes it as the price paid is similar to the previous deal and there is immediate accretion to the bottom line. Upgrade to Add from Hold.

Morgans retains a positive view on the aged care sector, noting the industry is estimated to need a further 74,000 beds by 2022. Estimates have been lifted to incorporate this latest deal. Target lifts to $3.06 from $2.78.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/1

Macroprudential regulation is causing a tightening in the Australian housing cycle, argue analysts at Morgan Stanley. They have reduced their projections in response.

A reduction in construction activity, in particular for multi-dwellings, has now been incorporated. Industry view is In-Line. James Hardie, with a relatively larger exposure to US markets, is expected to outperform its peers in such an environment and thus Morgan Stanley has upgraded its rating to Overweight from Equal-Weight. Target lifted to $22.03 from $17.28. No changes to forecasts.

RESMED INC ((RMD)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 4/3/1

The company faces a difficult second half, with a competitor product launch and the roll out of competitive bidding in the US.

Still ResMed is trading closer to Deutsche Bank's valuation after recent share price weakness. The strengthening of the US dollar against the key cost currencies should provide a material boost to earnings.

Rating is upgraded to Hold from Sell. Target is raised to US$56 from US$53.

SPARK NEW ZEALAND LIMITED ((SPK)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/5/0

Deutsche Bank has reviewed its investment thesis and upgraded to Hold from Sell. Broadband competition has not intensified as fast as previously thought. The stock now offers stronger yield support, given a higher pay-out ratio and the recent pull-back in the share price.

The broker also notes Spark NZ's own trading history which suggests there is limited price downside from here at a net dividend yield of around 8.0%, in the absence of heavy regulatory re-sets or changes. The price target is raised to NZ$3.20 from NZ$2.75.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/7/1

UBS has altered its stance on domestic general insurers and upgraded Suncorp to Neutral from Sell. This changes a rating that has been in place for the stock for a year. Target is reduced  to $12.70 from $13.00.

Recent updates from industry contacts suggest to UBS there is more evidence of personal lines claims inflation and modest price increases. Commercial remains soft, but with early signs of recovery.

UBS now believes a healthy margin correction is now reflected in FY16 estimates for Suncorp. With significant underperformance over the past year the broker suspects disappointments will become increasingly tolerated by investors.

XERO LIMITED ((XRO)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/2/1

Since the broker initiated on Xero, subscriber growth in A&NZ has been greater than expected but not as fast as Macquarie's US-UK market forecasts. Xero remains the fastest growing software-as-a-solution business under coverage but following the market pullback, no longer trades at a significant premium.

On that basis, Macquarie has cut its target to NZ$16.50 from NZ$20.00 but upgraded to Neutral.

Downgrade

CSR LIMITED ((CSR)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 5/2/0

Macroprudential regulation is causing a tightening in the Australian housing cycle, argue analysts at Morgan Stanley. They have reduced their projections in response.

A reduction in construction activity, in particular for multi-dwellings, has now been incorporated. Industry view is In-Line. Further downgrades to aluminium price forecasts have further impacted on estimates. Downgrade to Equal-weight from Overweight.

Target falls to $3.25.

DULUX GROUP LIMITED ((DLX)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/4/2

Macroprudential regulation is causing a tightening in the Australian housing cycle, argue analysts at Morgan Stanley. The have reduced their projections in response.

A reduction in construction activity, in particular for multi-dwellings, has now been incorporated. Industry view is In-Line. Morgan Stanley has downgraded Dulux to Underweight from Equal-weight and explains this decision was taken on a relative (to peers) basis.

H2 FY15 should see improved performance from garage doors, suggest the analysts, but overall conditions remain tough for the company.Target drops to $5.48 from $5.57.

GRAINCORP LIMITED ((GNC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/2

Credit Suisse downgrades Graincorp to Neutral from Outperform because of the strong share price appreciation and the advent of hot, dry weather.

A hot, dry spring threatens to take away the upside, in the broker's view. The potential divestment of agricultural assets by Glencore may create an opportunity for Graincorp to expand is activities in both South Australia and Canada, Credit Suisse observes.

Target is steady at $9.70.

SMS MANAGEMENT & TECHNOLOGY LIMITED ((SMX)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/0

The share price has appreciated by 23% since the FY15 result. UBS remains positive on the utilisation recovery story and continues to highlight upside risk to forecasts from a faster recovery, or potential accretive acquisitions.

The broker now considers the current valuation fair and downgrades to Neutral from Buy. Target is raised to $5.10 from $4.70.

UXC Limited ((UXC)) Downgrade to Underweight from Overweight by JP Morgan .B/H/S: 0/1/1

UXC has received a proposal from US-based CSC to acquire its shares at $1.28 each, comprising $1.26 a share with a 2c dividend. JP Morgan has made the proposed price its new target, up from $1.20, and considers a superior bid is unlikely.

Management has support the offer and granted exclusive due diligence. JP Morgan downgrades to Underweight from Overweight.

VEDA GROUP LIMITED ((VED)) Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/0

The company has received a revised proposal from Equifax at $2.825 a share, versus $2.70 initially. The board has granted exclusivity for due diligence and agreed to recommend the offer, if it becomes binding and subject to the usual provisions.

UBS lifts the price target to $2.83 in line with the offer, from $2.43, which supports a downgraded rating to Neutral from Buy.

Equifax has upgraded its offer to $2.825 a share from the initial offer of $2.70. The board has agreed to recommend the revised offer, subject to the independent expert's opinion and assuming it results in a binding offer.

Veda's stock had weakened prior to the offer, Citi observes, because of the collective effects of lower FY16 guidance and an unclear outlook in terms of the path to critical mass.

The broker downgrades to Neutral from Buy. Target is raised to $2.83 from $2.46.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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