Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

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 November 16 to Friday November 20, 2015
Total Upgrades: 6
Total Downgrades: 14
Net Ratings Breakdown: Buy 44.42%; Hold 43.66%; Sell 11.92%

Normal programming was resumed last week with rallying share prices triggering more stockbroker downgrades than upgrades. For the week ending Friday, 20 November 2015, FNArena registered six upgrades for individual stocks and 14 downgrades. If it wasn't for Deutsche Bank upgrading three gold miners during the week, the numbers would have looked even more polarised.

So who are the lucky few to still receive recommendation upgrades in the present environment? Laggard Cover-More is one, James Hardie received one upgrade too despite issuing yet another profit warning (it's a long term confidence thing), plus well-managed, but still weathering a commodities downturn Mineral Resources received one upgrade as well. Deutsche Bank lifted Alacer Gold, Evolution Mining and Newcrest.

There was definitely more happening on the negative side with profit warnings and negative admissions from the likes of ALS Ltd, James Hardie, Monadelphous, QBE Insurance, Simonds Group, Sims Metal and SMS Management and Technology all triggering downgrades. Pact Group did not warn, but somehow investors had anticipated better. It received two downgrades to Neutral post its market update.

With the exception of Mineral Resources (+4%), all positive revisions to price targets/valuations remained minor, but this wasn't to be on the negative side as companies are guiding towards lesser momentum inside their businesses. Sims Metal tops the list (-27%), followed by Monadelphous, ALS ltd and Cover-More. The good news here is the list for the week ends with only seven inclusions. QBE Insurance, following yet another disappointing market update, claims position seven with a fall in consensus price target of 2.35%.

No surprise as we find the same names in the table for negative estimates revisions, with Orica, Fletcher Building and Programmed Maintenance also present. In terms of positive revisions, Graincorp is topping the table with a gain of no less than 45% (commodities!) just for the week, followed by a number of industrial commodities stocks such as Mineral Resources, South32 and Fortescue Metals. SG Fleet, Macquarie Atlas Roads Group and Mesoblast managed to squeeze in at the bottom.

Upgrade

ALACER GOLD CORP ((AQG)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/2/1

Deutsche Bank observes the gold sector remains volatile and, with a US rate hike imminent, both US and Australian dollar priced gold have retreated. Hence, valuations for equities are more interesting.

On the other hand, the broker notes cost reductions are largely done and dusted and higher all-in costs will be emerging in 2016.

Alacer Gold is upgraded to Buy from Hold on valuation. Target is raised to $3.40 from $3.30.

COVER-MORE GROUP LIMITED ((CVO)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/0/0

The AGM signalled gross written premium was up 10.2% in the first quarter and the current run rate is expected to be maintained through FY16. UBS observes the company continues to outperform domestically and the growth outlook is encouraging in the UK and India.

The additional detail provided on international expansion is a major positive, in the broker's view, with a letter of intent signed with a global player in North America. Deployment of Global Direct is on track for the fourth quarter.

The broker believes the company now needs to strike a balance between margin recovery and maintenance of market share. UBS upgrades to Buy from Neutral. Target is lowered to $2.37 from $2.49.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/4/0

Deutsche Bank observes the gold sector remains volatile and, with a US rate hike imminent, both US and Australian dollar priced gold have retreated. Hence, valuations for equities are more interesting.

On the other hand, the broker notes cost reductions are largely done and dusted and higher all-in costs will be emerging in 2016.

Evolution Mining's rating is upgraded to Buy from Hold on valuation. Target is $1.50.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/1

The company has issued a profit warning and Citi analysts are happy because they see a chance to (finally) raise their recommendation to Buy. Price target has been raised to $18.70 from $18.40 (incorporating latest AUD forecasts) suggesting a total investment return in excess of 15% for the year ahead, hence the upgrade.

Citi analysts explain, the US housing market is operating at circa 1m housing starts, some 30% below mid cycle levels. Plus company management is focused on restoring PDG growth to trend. The combination provides the analysts with enough confidence yesterday's share price weakness provides investors with a buying opportunity.

See also JHX downgrade.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/0

Mineral Resources' AGM delivered FY16 profit guidance of $250-290m, ahead of Macqurie's $224.5m forecast. The broker concurs with the assumptions management is making with regard average iron ore prices and the A$, forecast exports and crushing.

Macquarie is a little sceptical of a cost forecast of US$40/t, which would put Mineral Resources on par with its much larger peer Fortescue Metals ((FMG)), but does have great faith in an innovative management team. The company also remains committed to capital management, and Macquarie upgrades to Outperform. Target rises to $5.29 from $5.07.

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

Deutsche Bank observes the gold sector remains volatile and, with a US rate hike imminent, both US and Australian dollar priced gold have retreated. Hence, valuations for equities are more interesting.

On the other hand, the broker notes cost reductions are largely done and dusted and higher all-in costs will be emerging in 2016.

Newcrest Mining's rating is upgraded to Hold from Sell on valuation.Target is $11.40.

Downgrade

ALS LIMITED ((ALQ)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/6/2

Recent trading updates from minerals drilling companies reveals conditions have deteriorated in the September quarter and, consequently, Deutsche Bank does not expect ALS will re-rate until minerals conditions stabilise.

The broker remains attracted to the long-term fundamentals and acknowledges the life sciences division has a positive outlook, but downgrades the stock to Hold from Buy given the uncertain outlook for the next 12 months. Target is reduced to $5.10 from $7.13.

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/4/0

Challenger has outperformed the market by 37% over twelve months and 28% over the last quarter but the earnings outlook has not changed over that period from steady, high single-digit growth, Macquarie notes. While the removal of legislative barriers should prove supportive and Challenger is beginning to expand its product suite, strength has come more from a positive theme than the numbers themselves.

Therefore Macquarie is downgrading to Neutral given an expanded PE unsupported by E, notwithstanding the broker has lifted its target to $9.03 from $7.97.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/5/1

Morgan Stanley has come away from a trip to the mine sites with greater confidence in the cost cutting benefits already achieved as well as the potential for more to come.

The broker does allow for an escalation in the cost structure from FY23, to allow for an end of mine life at Firetail. The broker downgrades to Equal-weight from Overweight, given the recent price rally. Industry view is In-Line. Target is raised to $2.50 from $2.30.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Downgrade to Neutral from Overweight by JP Morgan .B/H/S: 4/2/1

JP Morgan is clearly disappointed that James Hardie had to issue a profit warning. Moreover, the analysts suspect it's going to take longer to fix, hence why they decided to downgrade to Neutral from Overweight. Price target tumbles to $17.30 from $18.70.

The hiatus in Primary Demand Growth (PDG) is a concern to the analysts who also note the newly constructed plant at Carole Park, Qld suffered from startup issues. Estimates have been reduced.

See also JHX upgrade.

MONADELPHOUS GROUP LIMITED ((MND)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/5

Another market update, another soft guidance from the company who once was the absolute champion, and market darling, from the China related Commodities Super Cycle boom. One can almost hear a big sigh from the analysts at Citi. Where exactly is that bottom?

It's not in sight just yet is the analysts' conclusion. They have become even more cautious on contracts and on margins. The direct result is yet another chainsaw treatment for estimates. Price target falls to $6.13 from $7.33.

Rating goes back to Sell from Neutral. At this point in the cycle, explain the analysts, it is often the length as much as the depth of the correction that influences the share price. In layman's language: cheap for a very good reason.

PACT GROUP HOLDINGS LTD ((PGH)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/4/0

Deutsche Bank considers the trading update to be consistent with expectations, albeit subdued, with full-year guidance maintained. Still, the company does expect lower demand from agriculture in Australasia and global dairy.

The broker downgrades to Hold from Buy as the stock is now trading at a 4.0% premium to valuation. Target is $4.95.

The AGM signalled trading conditions remain tough although the company has re-iterated guidance for higher underlying earnings in FY16. Credit Suisse upgrades forecasts by 2-3% on the back of a stronger NZD/AUD rate.

Credit Suisse downgrades to Neutral from Outperform, as the share price has rallied over the past few months. Target is raised to $4.90 from $4.80.

PROGRAMMED MAINTENANCE SERVICES LIMITED ((PRG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0

First half profit was below Credit Suisse's forecasts. The property & infrastructure and workforce divisions offset a weak resources division while management noted the outlook for marine is very weak.

Credit Suisse downgrades FY16 forecasts by 16.8% and FY17 by 9.8%. The broker believes the stock is fairly valued until visibility on the marine segment improves and downgrades to Neutral from Outperform. Target is steady at $3.03.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Underweight from Neutral by JP Morgan .B/H/S: 6/1/1

JP Morgan has downgraded QBE to Underweight from Neutral and the target to $12.30 from $13.40 as the company faces a challenging margin outlook because of soft conditions and headwinds in the mortgage insurance business.

The broker believes this scenario limits the chances of achieving double digit margins, despite the likelihood of interest rate rises and cost savings.

SPEEDCAST INTERNATIONAL LIMITED ((SDA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

SpeedCast has made its fifth acquisition in 2015, acquiring Singapore-based ST Teleport for S$18.5m. It provides SpeedCast with a large teleport and data centre in an important hub for maritime and oil & gas movements, Macquarie notes.

The deal stretches the balance sheet somewhat but debt is expected to quickly reduce over 12-18 months. Macquarie continues to be a fan of the underlying theme of growing demand for bandwidth, but sees near term growth now captured in the share price, hence the broker pulls back to Neutral.

Target rises to $4.70 from $3.91.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/0

Citi has taken a two-tier approach to updating on Sims' AGM profit warning. This is the second response with the price target tumbling to $8.30 from $12.20. Rating is downgraded to Neutral from Buy.

Earnings estimates have been slashed (not an exaggeration). A resumption in growth back to the EPS level of FY15 is anticipated in FY17.

SIMONDS GROUP LIMITED ((SIO)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The company will buy Western Australian home builder, Gemmill Homes, for $6m and will also undertake a review of the Madisson Projects, which have experienced a continuing weakening of margins.

Morgans queries the entry into WA at this point in the cycle but suspects Simonds will leverage its existing supply agreements to drive improved margins while trade labour will become more accessible as the cycle softens.

While the stock offers value and medium-term structural growth, the broker downgrades to Hold from Add until greater certainty can be achieved. Target falls to $1.36 from $1.85.

SMS MANAGEMENT & TECHNOLOGY LIMITED ((SMX)) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Hold from Add by Morgans .B/H/S: 0/4/0

Morgan Stanley analysts lament the absence of organic growth post yet another profit warning from the company. The analysts do believe the balance sheet keeps the company in a good position to benefit through M&A, but the absence of organic growth has triggered a downgrade to Equal-Weight.

Estimates have received the chainsaw treatment. This pulls back the price target to $4.30 from $5.50. The analysts remain supportive of the company's new direction, but also cite a lack of certainty around what exactly FY17 is going to offer.

The company has downgraded expectations at the AGM, with earnings in the first half likely to be down 15-20%. To Morgans this is a largely turnaround from the August update when positive momentum was expected to continue into FY16.

It also suggests to the broker, given peers have been reporting strong trading, that the issues are specific to the company. The downgrade is attributed to a slowdown in project-based work, delays, and the restructure of the organisation.

Morgans reduces FY16 forecasts by 33% and FY17 by 38% and downgrades to Hold from Add. Target is reduced to $3.36 from $4.75.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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