Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

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 November 7 to Friday November 11, 2016
Total Upgrades: 23
Total Downgrades: 6
Net Ratings Breakdown: Buy 42.67%; Hold 42.27%; Sell 15.06%

It had to happen eventually… total Buy ratings for the eight stockbrokers under daily monitoring by FNArena has now surpassed total Neutral ratings. This is a rather rare occurrence and the result of extreme market volatility and portfolio rebalancing post August, while positive investor attention only goes out to a limited group of ASX-listed companies as the world tries to figure out what exactly will be the impact from a Trump Presidency.

By the close of trading on Friday, 12th November, total Buy ratings registered by FNArena stood at 42.67% versus 42.27% Neutral ratings, with the remaining 15.06% on Sell ratings.

For the week ending on Friday, FNArena registered 23 upgrades in recommendations for individual stocks against six downgrades. There are no clear-cut trends, but banks are back receiving upgrades, and so are out-of-fashion prior market darlings like REA Group, Domino's Pizza and a2 Milk.

A similar observation dominates the negative side where Westpac is amongst the receivers of a downgrade, alongside DuluxGroup, Xero, AWE Ltd, UGL and Orica.

The positive trend in valuations/price targets is led by AGL Energy (+6.5%), Sims Metal (+6%) and Western Areas (+5%) while the flipside sees reductions for the likes of AWE Ltd (-7%), Speedcast International (-3.5%) and McMillan Shakespeare (-3.2%).

Contrary to recent weeks, the underlying trend turned positive as the banks mostly enjoyed minor increases to market estimates. ANZ Bank proved the biggest winner for the week (+14%), followed by AWE ltd (+11%) and Incitec Pivot (+8.9%). On the negative side, the largest reduction was felt by Xero (-9%), Speedcast International (-6%) and Evolution Mining (-3.5%).

Note also only three out of the eight stockbrokers in the daily FNArena universe are carrying more Buy ratings than they have stocks under Neutral.

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 1/2/1

Credit Suisse's assessment of A2's Sep Q numbers is that the company is handling the challenges much better than its peers. Revenue has stood out in the face of online issues in China and weaker sales in A&NZ.

A2 is proving more agile in its ability to expand channels locally and direct to China/HK, the broker suggests. The broker has increased its target to NZ$2.28 from NZ$1.87. This results in an upgrade to Outperform from Underperform.

ADAIRS LIMITED ((ADH)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

The company issued a very soft trading update,  with flat like-for-like sales growth in the first four months of FY17. The company has guided for EBIT and earnings per share declines of around 15% for FY17.

Morgans finds the company's key competitive advantage of developing its own brands and quick response to changes in demand mean a miss on a product trend is of concern.

Still, while it will take time for investor confidence to be restored, Morgans believes the stock is attractive and upgrades to Add from Hold. Target falls to $1.85 from $2.88.

AGL ENERGY LIMITED ((AGL)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 5/1/0

The closure of Hazelwood has meant Victorian base load forward contract prices have squeezed higher for FY18, boosting Morgan Stanley's earnings estimates for AGL.

The broker expects pool prices to stay high on more frequent gas-fired price setting. Morgan Stanley upgrades to Equal-weight from Underweight. Target is raised to $21.02 from $18.80. Industry view: Cautious.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

BlueScope has raised its first half earnings guidance, citing cost reductions, improved productivity, higher steel prices, higher US spreads and better organic growth as offsetting the soaring cost of coking coal. UBS notes Asian steel spreads are weak but appear to be bottoming.

As spreads normalise, the broker sees higher steel prices as likely in the face of the coal price. BlueScope is trading at a 25% discount to global steelmakers, which leads UBS to ask, is this the cheapest stock in the world? Upgrade to Buy. Target rises to $9.60 from $9.55.

BWP TRUST ((BWP)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/1/2

The stock has been the second worst performing A-REIT in the year to date and UBS believes the valuation can no longer justify a Sell rating, upgrading to Neutral.

The stock remains expensive versus the rest of the sector, the broker acknowledges, with the lowest growth in the sector after taking into account the potential down time as leases expire. Over the next three years 20% of the portfolio is expiring, reflecting 17 leases.

The broker's earnings estimates from FY20 take a vacancy factor into account. Target is revised down to $2.95 from $3.06.

BRAMBLES LIMITED ((BXB)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/0

It beggars belief why no one thought of it earlier, but Brambles' initiative to use clinch nails to stop pallets falling apart with use appears to be working, reducing the capex requirement of pallet repair.

This addresses one of three issues Credit Suisse sees facing the company, the other two being mean reversion in emerging market pallets and a rebasing of earnings by new management.

On balance, the broker believes the fall in the share price has brought Brambles closer to risk/reward fair value. Upgrade to Neutral. Target unchanged at $11.30.

CARSALES.COM LIMITED ((CAR)) Upgrade to Add from Hold by Morgans .B/H/S: 4/2/1

Stockbroker Morgans has come to the view the recently reported margin crunch being felt by the Stratton Finance division is but a temporary phenomenon. Morgans believes finance profits should stage a solid recovery from FY18 onwards.

On the principle this particular part of the operations is currently bruised, not broken, earnings estimates have been slightly lowered. This pulls back the price target to $12.03 from $13.01. Upgrade to Add from Hold on recent weakness.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Add from Hold by Morgans .B/H/S: 2/5/1

September quarter cash profits at $2.4bn were unchanged from the prior comparable quarter. Morgans observes life insurance claims continue to be a drag on income growth.

The broker expects the life insurance business will disadvantage CBA's financial performance in FY17 relative to other major banks.

Morgans upgrades to Add from Hold as a result of recent share price weakness. Target is reduced to $75.80 from $77.40.

CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/3/0

Having announced it may miss out on acquiring Woolworths' ((WOW)) petrol assets, Caltex has acquired Vic-based reseller Milemaker Petroleum. Macquarie considers the acquisition defensive as it defends volumes rather than expends scale.

Macquarie did not see value at $35 but at $30, having dropped on the Woolworths news, the stock's value credentials have improved, the broker suggests, and not winning the business is not the end of the world for Caltex. Upgrade to Outperform. Target unchanged at $32.97.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Following a strong start to the year, Domino's has delivered upgraded FY17 earnings guidance. Macquarie's forecast remains 5% above. A&NZ stores booked their largest ever sales growth in October.

European integration is ahead of schedule and while Japan is subdued, it's performing in line with expectations. Put it all together and the broker feels a 49x forward PE can be justified if long term targets are met. Upgrade to Outperform. Target rises to $75.00 from $70.16.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/3/2

Credit Suisse considers the balance of risks is improving fast and demand is better than expected. Given the broker is already an iron ore bear, and envisages only modest downside to base case prices, there is a positive risk skew for Fortescue.

Credit Suisse upgrades to Neutral from Underperform and now considers it risk to be underweight the stock, acknowledging another about face on its recommendation. Target is raised to $5.30 from $5.00.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/3/1

Net profit was ahead of expectations but EBIT was in line. UBS reduces FY17 forecasts for earnings per share by 7%, which reflects lower average fertiliser price assumptions. This is partly offset by the realisation of additional cost reductions.

The broker upgrades to Buy from Neutral because fertiliser prices are forecast to bottom. Also, the company's cash flow outlook suggests a moderation of gearing metrics. Target is raised to $3.40 from $2.95.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0

History shows James Hardie shares are more likely to outperform the ASX200 in the year post the election of a new US President, report analysts at Citi. They also note the share price has weakened recently. Two reasons to upgrade to Buy from Hold. Target $20.50.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/4/1

Macquarie continues to believe that a convergence in credit charges and the impact of higher amortisation expenses will be a drag on the bank's FY17 earnings growth. Yet, the market appears to be aware of the issues which the broker believes are captured in the share price.

Given underlying trends and a simpler business model, the broker envisages scope for the discount to peers to close and upgrades to Outperform from Neutral. Target is steady at $30.00.

OZ MINERALS LIMITED ((OZL)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/6/1

Macquarie has long dismissed Carrapateena as not offering a sufficient potential return on the investment required. However the pre-feasibility study has delivered a materially better outcome than the broker had assumed, suggesting slightly higher operating costs but a larger initial reserve.

The broker still believes a copper price of $3/lb is needed to justify the project but outside of a copper price plunge, the broker can no longer see a near term negative catalyst for OZ. Upgrade to Neutral. Target rises to $7.20 from $5.00.

REA GROUP LIMITED ((REA)) Upgrade to Hold from Sell by Deutsche Bank and Upgrade to Neutral from Sell by UBS .B/H/S: 4/3/0

First quarter results were solid with revenue growth of 16% and EBITDA growth of 9%, Deutsche Bank observes.

Guidance for the remainder of the first half is viewed as somewhat subdued, as management indicates it does not expect an improvement in the listings environment.

Operating expenditure growth is expected to continue at a similar rate in the second quarter, leading to minor downgrades to the broker's forecast.

In the absence of any near-term negative catalysts Deutsche Bank upgrades to Hold from Sell. Target is $49.50.

UBS believes the growth trajectories for the three main Australian revenue drivers are unlikely to change materially in the second quarter. The company flagged the fact that the lower listing volume environment is expected to continue over the first half.

Assuming both commercial and developer revenue growth is robust, this suggests that Australian revenue growth in aggregate is likely in the range of 12-14%.

UBS upgrades to Neutral from Sell after the recent underperformance in the price. Target is steady at $52.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/1

The company will acquire the Staber Laboratory group in Germany for EUR120m. The purchase will be funded from existing cash/debt facilities. Credit Suisse believes the acquisition is strategically sound, expanding the company's presence in certain regions where it had limited exposure.

Broker upgrades FY18 earnings estimates by around 3.5%. The rating is upgraded to Neutral from Underperform. Target rises to $21.75 from $20.90.

The company will acquire Germany's Staber Laboratory for EUR120m. Morgan Stanley expects the acquisition to be 3-4% accretive to earnings per share in year one, with further synergies over a three-year period.

The pull back in the share price and the accretive nature of the acquisition provide an opportunity, in the broker's view.The rating is upgraded to Overweight from Underweight. Target is steady at $24.05. In-Line industry view retained.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/1

Suncorp does not offer compelling earnings growth, Credit Suisse acknowledges, but it does have a relatively simple strategy which offers less earnings risk. The broker believes the current share price is attractive as an entry point.

The main risks are a deterioration in the insurance pricing market, reserving issues and bad debts in the bank. The broker upgrades to Outperform from Neutral. Target is $13.60.

WESTFIELD CORPORATION ((WFD)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/0/2

Westfield has underperformed A-REITs by 8% and the market by 14% over the last six months, UBS notes. Volatile forex markets, Brexit, rising bond yields, slower US spending and the shift to e-commerce have all conspired to weigh upon the shopping mall REIT story.

While e-commerce is a structural issue,  a high quality portfolio, unparalleled development pipeline and proactive approach to in-mall technology should see Westfield outperform, the broker believes. The headwinds lead to a cut in target to $9.60 from $11.00 but this does not prevent an upgrade to Buy.

WOOLWORTHS LIMITED ((WOW)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/3

Macquarie assesses the divestment of the petrol business and estimates a potential transaction value of $1.35bn. The transaction is complicated and could take time to finalise, particularly in relation to gaining approval from the ACCC.

The broker anticipates the divestment could be a catalyst and enable greater flexibility in the balance sheet. The main point from Macquarie's perspective is the company's ability to fund an accelerated store refurbishment program.

Rating is upgraded to Neutral from Underperform. Target rises to $22.23 from $20.56.

WESTERN AREAS NL ((WSA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/3

The business offers the greatest leverage to nickel in Macquarie's coverage, as a 10% rise in nickel prices would drive around 30% increases to forward earnings estimates and 20% increases in valuation.

The broker observes a strong history of exploration success as the company has developed its core operating assets, Flying Fox and Spotted Quoll. The exploration potential at Cosmos is also significant for extending known resources and also for the region.

Macquarie upgrades to Outperform from Neutral. Target rises to $3.50 from $2.60.

Downgrade

AWE LIMITED ((AWE)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 2/3/2

While only envisaging modest downside, Morgan Stanley downgrades to Underweight from Overweight, a relative call to its sector coverage.

The company's value is becoming increasingly concentrated in undeveloped assets. This increases the risk profile as these have uncertain timeframes and ramp-up profiles, the broker asserts. Morgan Stanley believes long-term value continues to exist in the portfolio.

In-Line sector view retained. Target is reduced to 50c from 89c.

DULUX GROUP LIMITED ((DLX)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/3

Citi analysts saw yet another solid and resilient performance, as has become the company's habit, and they point out leading indicators remain positive and existing housing resilient.

Yet, they have downgraded to Neutral from Buy on slightly lowered estimates, which pulls back the price target by -4% to $6.68. The Masters ((WOW)) stock liquidation could impact the market in 1H17, say the analysts, but otherwise no disasters expected.

ORICA LIMITED ((ORI)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/5/2

Citi analysts have been riding the theme of a cyclical and self-help transformation at Orica for a while. Post the FY16 report, their view is one of: you aint seen nothing yet. They have, however, made small (negative) changes to forecasts.

As the target price only rises to $17.50 from $17.00 (for now, we presume), the rating is being pulled back to Neutral from Buy. But don't be fooled by these moves: Citi is expecting many positives from this company's future.

UGL LIMITED ((UGL)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/3/1

The majority of the board has recommended shareholders accept the offer from Cimic ((CIM)) at $3.15 a share.

Deutsche Bank observes the offer represents an attractive premium to the historical trading price and acquisition multiples, and provides relative certainty given no superior proposal has emerged.

The broker downgrades to Hold from Buy. Target is raised to $2.40 from $2.36.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/4/0

Following the FY16 result, Credit Suisse downgrades estimates by 3-4%. The result was compositionally softer than expected, but the analysts note there was no reduction to the dividend.

The broker downgrades to Neutral from Outperform and reduces the target to $31.50 from $33.00. The downgraded rating reflects the fact the broker believes the stock to be fair value and the cost out story to be less compelling.

XERO LIMITED ((XRO)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/3/0

First half results were in line with forecasts. Ord Minnett continues to envisage considerable opportunities for the company, especially in the US and UK markets where cloud penetration remains relatively low.

The broker expects the restructuring of the North American business, combined with its migration to Amazon Web Services, to ease cost pressures.

Ord Minnett downgrades to Accumulate from Buy as the share price has had a strong run. Target is lowered to $17.50 from $18.00.

Total Recommendations	Recommendation Changes
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