Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

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 January 11 to Friday January 15, 2016
Total Upgrades: 9
Total Downgrades: 7
Net Ratings Breakdown: Buy 43.47%; Hold 43.66%; Sell 12.87%

In case you missed it, FNArena has kept its database of stockbroker ratings, price targets and forecasts up to date. Which is why we can report the week ending Friday, 15th January 2016 generated eight upgrades in broker ratings for individual stocks against seven downgrades. Beaten down BHP Billiton received no less than two upgrades as its share price sank below $15 during the week.

The local share market has experienced a horror start in 2016, but most stockbroking analysts are not yet 100% in full action mode with several stockbrokers ramping up rather slowly throughout the second week of the calendar. This might change in the week ahead which may provide a better picture as to whether those analysts are ready to start issuing rating upgrades in the face of relentless selling pressure since the start of the year.

Within this context it might come as a surprise brokers are actually downgrading stocks despite widespread share price weakness (or should this read: carnage?). So which stocks are receiving downgrades?

Gold stocks Doray and Saracen, having enjoyed a boost in investor interest, and resources stocks South32 and Whitehaven Coal on analysts further cutting their commodity prices forecasts. Downgrades were also issued for safe haven yield plays Mirvac and Scentre Group, as well as for retailer Harvey Norman.

Given limited activity to date there probably shouldn't be too many conclusions drawn from relatively small changes in valuations/price targets. Australian Pharmaceutical Industries, iSentia and AGL stand out with positive revisions in targets whereas revisions to commodity prices forecasts have been very unkind to the likes of Whitehaven Coal, Santos and numerous others.

The contrarian observation from the earnings forecasts tables is that the positive side of that ledger is heavily populated by resources stocks, believe it or not. Orocobre, Regis Resources and BlueScope Steel are leading the pack enjoying positive revisions, closely followed by Rio Tinto. The negative side has NextDC on top following late last year's capital raising, followed by a whole bunch of resources stocks. No surprises here.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/3/0

UBS analysts have updated their estimates following new contract insights. They argue that within the current negative sentiment that is dominating global equity markets, AGL should be considered a safe haven.

The analysts do acknowledge there remain negative developments on the horizon, including the prospect for significant new renewable supply and a global focus on carbon reduction.

As investors are believed to be willing to pay a premium for the relative earnings security, UBS has lifted its price target to $19.50 from $16.50 while upgrading the rating to Buy.

ALUMINA LIMITED ((AWC)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/2

Citi's upgrade is premised on the assumption that ongoing production curtailments will pull the alumina market in balance, which should push up the price and make life a lot easier for Alumina Ltd. Price target $1.00 (was $1.15).

BHP BILLITON LIMITED ((BHP)) Upgrade to Buy from Neutral by Citi and Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 6/1/1

Commodity analysts at Citi have lowered their price forecast for iron ore to US$35/tonne from US$40/t for the years (multiple) ahead. In combination with lower price estimates for crude oil, earnings forecasts for BHP Billiton have taken yet another hit.

Regardless, the stockbroker has upgraded the rating to Buy while lowering the price target to $18 from $19.

Amidst widespread debate whether BHP Billiton remains a core holding in investment portfolios, report analysts at Morgan Stanley, a decision has been made to upgrade the rating to Overweight from Equal-Weight.

On the analysts' calculations, even assuming a 40% dividend cut the dividend yield on offer should be 6.6%. In addition, they believe the shares already price in US$8-9bn in lost value related to the Samarco disaster. Further. they predict investments will be reduced to fit available cash and support the balance sheet.

Price target has been lifted to $22.50 (was $21). Earnings estimates have been lifted too. The analysts highlight their view is based on a long term investment horizon. Industry view In-Line.

JB HI-FI LIMITED ((JBH)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/6/0

Credit Suisse is of the view that under a best case scenario, Dick Smith ((DSH)) will arise from receivership in much smaller format/shape and JB Hi-Fi will be the main beneficiary if this assumption proves correct.

As such, target price lifted to 25.05 from $19.05. Rating upgraded to Outperform from Neutral. Earnings estimates have received a boost, in particular from FY17 onwards.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/2/0

December quarter production pretty much met expectations, but cost control proved better. Citi analysts note the share price has weakened in recent weeks and this provides the trigger to upgrade to Neutral from Sell.

STOCKLAND ((SGP)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 5/0/1

A-REITs have outperformed the ASX200 by 10% in 2015 and by 42% in the past 5 years, report analysts at Morgan Stanley. They remain of the view this outperformance is likely to last for longer.

At the same time, divergences are opening up inside the sector. Morgan Stanley has selected 8 stocks to own and 8 stocks to avoid, adding most of its updated research is as yet not reflected in consensus forecasts and/or views on the sector.

Morgan Stanley likes Goodman Group ((GMG)), Lend Lease ((LLC)), Westfield ((WFD)), Vicinity Centres ((VCX)), Arena Reit ((ARF)), National Storage Reit ((NSR)), Stockland and GPT ((GPT)).

Stocks to avoid in the sector, according to Morgan Stanley, are Charter Hall ((CHC)), Cromwell Property ((CMW)), Abacus Property ((ABP)), Scentre Group ((SCG)), Charter Hall Retail ((CQR)), Shopping Centres Australasia ((SCP)), Mirvac ((MGR)) and BWP trust ((BWP)).

Price target for Stockland has lifted to $4.30 from $4.10. The rating receives a double-whammy upgrade to Overweight from Underweight. Industry view is Attractive.

VICINITY CENTRES ((VCX)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/1

Vicinity Centres is current selling off non-core assets and UBS analysts note the securities have been underperfoming of late. The combination of a 10% discount to valuation and the expectation things are likely to turn around later in the year has provided the trigger to upgrade to Buy from Neutral.

Rolling forward the valuation model has pushed up the price target to $3.06 from $3.01 prior.

WESTFIELD CORPORATION ((WFD)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 3/2/1

A-REITs have outperformed the ASX200 by 10% in 2015 and by 42% in the past 5 years, report analysts at Morgan Stanley. They remain of the view this outperformance is likely to last for longer.

At the same time, divergences are opening up inside the sector. Morgan Stanley has selected 8 stocks to own and 8 stocks to avoid, adding most of its updated research is as yet not reflected in consensus forecasts and/or views on the sector.

Morgan Stanley likes Goodman Group ((GMG)), Lend Lease ((LLC)), Westfield, Vicinity Centres ((VCX)), Arena Reit ((ARF)), National Storage Reit ((NSR)), Stockland ((SGP)) and GPT ((GPT)).

Stocks to avoid in the sector, according to Morgan Stanley, are Charter Hall ((CHC)), Cromwell Property ((CMW)), Abacus Property ((ABP)), Scentre Group ((SCG)), Charter Hall Retail ((CQR)), Shopping Centres Australasia ((SCP)), Mirvac ((MGR)) and BWP trust ((BWP)).

Price target for Westfield has lifted to $11.20 from $10.40. The rating receives a double-whammy upgrade to Overweight from Underweight. Industry view is Attractive.

Downgrade

DORAY MINERALS LIMITED ((DRM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Preliminary gold production data for the December quarter were in-line with Macquarie's expectations. In addition, the analysts point out the Deflector gold-copper project is on track for first production in mid-2016.

Macquarie notes a successful completion of Deflector should lift DRM’s annual gold production to 140koz at a forecast AISC (all-in) of $1,000/oz after by-products.

Downgrade to Neutral following strong share price performance. Rolling forward the valuation model generates a 7% jump in price target to $0.65.

HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/1/3

Credit Suisse has downgraded to Neutral from Outperform on a combination of anticipated benefits from the Dick Smith ((DSH)) demise and a negative impact on the sales of household goods from an expected slowing in the domestic housing market from FY17 onwards.

The price target remains unchanged at $4.42. The sector preference has now shifted towards JB Hi-Fi ((JBH)) due to larger leverage to the Dick Smith failure.

MIRVAC GROUP ((MGR)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 4/1/1

Further in-depth analysis has taught Morgan Stanley analysts the stock is now "fully valued". The analysts do believe there are opportunities to "unlock value", including cost reductions and splitting the business, but they also remain of the view these appear a low probability for now.

While price target lifts to $1.95 from $1.90, the rating is being downgraded to Underweight from Overweight. Industry view is Attractive.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Overweight by JP Morgan .B/H/S: 2/5/0

Yet another round of material cuts to coal, alumina and manganese price forecasts has triggered a downgrade to Neutral from Overweight. The new forecasts imply South32 won't be profitable in the years ahead.

Price target drops to $1.30 from $1.75. What this stock needs is a recovery in commodity prices, point out the analysts.

SARACEN MINERAL HOLDINGS LIMITED ((SAR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Saracen's December quarter performance beat Macquarie analysts' expectations by no less than 10%. The analysts suspect it might have been due to better-than-expected grade at Red October.

In addition, the analysts point out Thunderbox is ahead of schedule and under budget with first gold expected in the June quarter. Karari is now in commercial production and Deep South is progressing as planned.

Following the "impressive" performance, Macquarie has lifted expectations, raising the price target to $0.76 from $0.70, but the rating is downgraded on share price performance.

SCENTRE GROUP ((SCG)) Downgrade to Underweight from Neutral by JP Morgan .B/H/S: 1/2/3

JP Morgan analysts note Scentre Group shares have materially outperformed peers in the second half of 2015.

They remain of the view the outlook for Scentre is sound, while current share market turmoil makes the high-quality assets and reliable defensive income even more attractive, but they have nevertheless downgraded to Underweight.

Target price rises to $4.07 from $3.88. The analysts point out the strong trend in sales is likely to moderate.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Overweight by JP Morgan .B/H/S: 5/2/1

JPMorgan commodity analysts have gone through yet another round of material cuts to forecasts, reducing coal price assumptions by 15–25%. The commodities team’s base case is now for thermal and semi-soft prices remaining flat until 2018.

As one would expect, the revised forecasts have a significant impact on modeling for Whitehaven Coal. Price target drops to $0.65 from $1.63. Rating is downgraded to Neutral.

Sharply revised forecasts imply Whitehaven Coal will be loss-making for the foreseeable future.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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