Weekly Recommendation, Target Price, Earnings Forecast Changes

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This story features ASX LIMITED, and other companies.
For more info SHARE ANALYSIS: ASX
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

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, Macquarie, Morgan Stanley, Morgans, Ord Minnett 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 30 to Friday June 3, 2016
Total Upgrades: 2
Total Downgrades: 10
Net Ratings Breakdown: Buy 41.75%; Hold 44.34%; Sell 13.92%

An end to seven weeks of weekly gains for the local share market was only able to illicit two upgrades in broker ratings for individual stocks, but both went to an equivalent of Buy nevertheless. The two lucky ones for the week ending Friday, 3rd June 2016 are ASX and DUET group.

The offset came through ten downgrades, for the likes of 3P Learning, ALS, CSL and Treasury Wine Estates. One quick glance sees a variety of reasons, from yet another profit warning, to a strong rally on the back of take-over interest, to a share price that has simply continued to rise. Flexigroup received two downgrades following yet another disappointing market update.

All in all, things are quiet in stockbroker-land. This is a time when companies have to force analysts do some more work and certainly 3P Learning and Flexigroup did exactly that. If it wasn't for an indicative offer to ALS shareholders, and Flexigroup (sigh), both tables for adjustments to price targets and valuations would show a placid landscape.

There's continued positive momentum on the earnings estimates front where BHP Billiton continues to lead the pack on the positive side, thanks to a very low starting point earlier in the year. The same can be said of Santos, the week's runner-up. Fisher & Paykel Healthcare's solid financial performance put it in third spot.

The negative top three for the week consists of Sirtex Medical (profit warning), New Hope and Flexigroup, but overall, the positive momentum here outweighs any negative adjustments.

Upgrade

ASX LIMITED ((ASX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/5/1

Morgan Stanley upgrades to Overweight from Equal-weight, noting the ASX is a first mover in pioneering the blockchain proof of concept, with a decision to be made on whether to go with the technology to be made by mid 2017.

If successful, the broker believes innovation in the US$77bn post-trade market would increase, with the technology simplifying and potentially disrupting the value chain. For ASX it would reduce market costs, defend the clearing monopoly and grow new revenue streams.

The broker raises the target to $50 form $43. In-Line industry view are maintained.

DUET GROUP ((DUE)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 3/4/1

Morgan Stanley updates its regulated utilities to allow for the regulator's determinations, recent M&A and lower bond yields. The broker expects company strategies and regulation will provide some tactical opportunities.

The final determination of the Australian Energy Regulator provides a valuation uplift of 1-2%, in the broker's calculation.

 Morgan Stanley upgrades Duet to Overweight from Underweight, as the stock becomes the top pick with its highest yield and lower exposure to low RAB indexation. Target is raised to $2.40 from $2.23. Cautious industry view.

Downgrade

3P LEARNING LIMITED ((3PL)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 1/1/1

The trading update signalled underlying earnings for the full FY16 year should be in the range of $11.5-12.5m. This compares with Ord Minnett's prior estimate of $17.8m. The downgrade is largely from weaker-than-expected sales growth.

The broker notes revenue growth has been disappointing in Europe & the Middle East as well as the Americas but in Australasia it is now going backwards. Ord Minnett estimates, on the numbers provided, that revenue in the second half for Australasia is likely to be down 10%.

The broker downgrades to Sell from Hold, believing competitive challenges are having an impact sooner than expected. Target reduces to 55c from $1.45.

ALS LIMITED ((ALQ)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/3/4

Morgan Stanley expects the company's performance to continue to disappoint in the wake of the FY16 results. Revenue may be better diversified now but energy is loss making and minerals margins are under pressure.

At some point the stock is expected to turn around but the broker is increasingly concerned that the company has reached the limit of its ability to cut costs ahead of revenue declines to preserve margins.

The broker expects investors will also increasingly lose patience with the stock. Morgan Stanley acknowledges it has, and downgrades to Underweight from Equal-weight. Cautious industry view and $3.27 target retained.

AUSNET SERVICES ((AST)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 3/4/1

Morgan Stanley updates its regulated utilities to allow for the regulator's determinations, recent M&A and lower bond yields. The broker expects company strategies and regulation will provide some tactical opportunities.

The final determination of the Australian Energy Regulator provides a valuation uplift of 1-2%, in the broker's calculation. Ausnet Services has the highest relative regulatory re-set risk in the broker's coverage and is targeting only modest expenditure reductions.

Morgan Stanley downgrades to Underweight from an Overweight rating. Cautious industry view. Target is raised to $1.53 from $1.51.

CSL LIMITED ((CSL)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/1

CSL will decide shortly whether to commit to a 4-year clinical trial for CSL112, a plasma-derived compound which cleans arteries.

UBS values the product at $4.56 per share, a material component of the R&D valuation. This contributes to an increase in the price target to $126 from $113.

With recent trading, the share price has attained fair value in the broker's view and the rating is downgraded to Neutral from Buy.

FLEXIGROUP LIMITED ((FXL)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Hold from Add by Morgans .B/H/S: 3/3/0

Flexigroup's strategy day featured a slight downgrade to FY16 profit guidance and the announced intention to exit several loss-making and/or non-core businesses. The company's longer term growth target requires big steps up for Certegy and AU leasing, which Macquarie sees as a bit ambitious.

The broker has downgraded to Neutral. Another guidance downgrade highlights a third straight year of low or no organic growth. While a 7% yield may be attractive to some, Macquarie suggests new management has to win over investors with actual earnings growth, and this could take time.

Target falls to $2.08 to $2.59.

Flexigroup will exit three business units, either via divestment or running off the books. The discontinued operations previously contributed around $10-12m in cash profit per annum but have been defined as non core.

Despite strong valuation and yield support, Morgans observes continued pressure on organic growth into FY17. The broker would prefer to obtain more confidence in the return of sustainable growth and downgrades to Hold from Add. Target is reduced to $2.30 from $2.75.

OROCOBRE LIMITED ((ORE)) Downgrade to Reduce from Add by Morgans .B/H/S: 2/0/2

Morgans believes the recent spike in the share price is an opportunity to take profits and downgrades to Reduce from Add.

The achieving of break even, product meeting specification and more market friendly policies of the Argentine government have meant the broker reduces its discount rate to 9.8%.

Applying a reduced discount rate as the Olaroz operation moves through ramp up to full production, and factoring in stronger prices, keeps the valuation and price target at $3.48.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/1

UBS expects FY16 results will be at the lower end of guidance. While the regulatory risk has eased it remains in the background, although the broker notes the company's diversification mitigates the risk somewhat.

UBS flags upside from accretive M&A, given the established footprint in less consolidated markets. FY17 estimates are upgraded by 1.9% and the price target rises to $23.45 from $20.60.

With recent trading the broker considers the share price has attained full value and reduces the rating to Neutral from Buy.

SIGMA PHARMACEUTICALS LIMITED ((SIP)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/5/0

UBS reviews its outlook for the stock, taking into account the inclusion of Hep C vaccine sales. A 50% rally in the stock over the past three months has closed the value gap that existed at the FY16 result.

Hence, UBS downgrades to Neutral from Buy rating and raises the target to $1.23 from $1.07.

The broker expects community pharmacy expenditure will grow at least 1.8% out to FY20 and hospital pharmacy at 5.8%, noting the company has increased its exposure to the hospital pharmacy market, which will result in access to higher top line growth.

TREASURY WINE ESTATES LIMITED ((TWE)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/5/1

Morgan Stanley is attracted to the long-term outlook with increasing penetration in China and a tightening wine cycle. Still, following the recent outperformance the broker believes this outlook is reflected in the share price.

Morgan Stanley reduces earnings estimates by 5-6% and downgrades to Equal-weight from Overweight. Target is steady at $10 and In-Line industry view maintained.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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