Weekly Ratings, Targets, Forecast Changes

This story features BASE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: BSE

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 January 16 to Friday January 20, 2017
Total Upgrades: 10
Total Downgrades: 14
Net Ratings Breakdown: Buy 44.04%; Hold 41.92%; Sell 14.04%

The week ending Friday, 20th January was the first that saw some normalcy returning to the Australian share market. Volumes picked up as stockbrokers returned from their annual holiday.

Share prices were largely indecisive and gradually gave back some of the strong gains made in the post-US election rally. Analysts issued 14 downgrades in ratings for individual stocks against ten upgrades.

Amongst the downgrades, banks featured prominently. National Australia Bank is the only among the Big Four not having received a downgrade during the week. ANZ Bank received two. Bendigo and Adelaide Bank was included too.

Nickel miners were, unsurprisingly, among the stocks receiving downgrades. Sims Metal's profit upgrade was met by two downgrades.

All-Weather, multi-decade star-performer CSL crowned itself to be the week's stand-out receiving three upgrades, of which two went to Buy or an equivalent, thanks to a serious, and unexpected, upgrade to profit guidance.

In terms of target prices, Sims Metal was the clear winner for the week (+11%), followed by insurer Steadfast and biotech CSL. Loser for the week was infant formula trouble child Bellamy's whose consensus target dived by -41%, at a healthy distance followed by AWE Ltd, Western Areas and Asaleo Care.

In terms of positive adjustments to earnings estimates, Sims Metal was handsomely beaten by Whitehaven Coal and South32, while Alacer Gold, Graincorp, Rio Tinto and CSL also enjoyed positive revisions. Not so for Western Areas, Bellamy's and Ardent Leisure who all suffered significant reductions.

Upgrade

BASE RESOURCES LIMITED ((BSE)) Upgrade to Speculative Buy from Hold by Ord Minnett .B/H/S: 1/0/0

Ahead of the release of the December quarter production report, Ord Minnett analysts have upgraded to a Speculative Buy while lifting the price target to 34c from 25c. The view is that balance sheet risk is more than accurately reflected in the weaker share price.

Ord Minnett believes the pricing outlook for ilmenite continues to strengthen and this will assist in debt reduction. The analysts are toying with the idea of accelerated de-leveraging if price momentum builds as they expect it will.

CSL LIMITED ((CSL)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 5/2/0

The company issued an upgrade to previous FY17 guidance and Credit Suisse analysts are suggesting CSL is benefiting from supply issues among competitors. Specialty products and raw plasma in particular are being singled out.

The crux in this story is that CSL has recorded a substantial increase in plasma collection capacity in recent years. This now is enabling the company to meet additional demand requirements and gain market share, point out the analysts.

Upgrade to Outperform from Neutral. Target jumps to $119 from $110. Estimates have lifted.

CSL revising upwards its profit guidance for FY17 has triggered an upgrade to Accumulate from Hold, alongside a boost to the price target to $120 from $100 prior. Ord Minnett analysts admit they were taken by surprise.

The analysts note the company's strategy of "aggressively investing" in collection and fractionation capacity is allowing CSL to again take advantage of a supply issues among competitors. They see further upside to the implied underlying growth rate for H2.

Ord Minnett has now taken the view CSL stands to enjoy above-market growth from its core plasma operations for at least a further 18 months. This prediction has now been reflected in forecasts.

Morgan Stanley's longstanding Underweight rating on CSL was driven by a (correctly) assumed period of downward earnings revisions. Recently the broker has seen earnings risk dissipating, and this has been confirmed by CSL's guidance upgrade, largely due to leaving competitors in the dust.

History suggests it takes a long time for the competition to recover, thus while valuation still looks stretched to the broker, an upgrade to Equal-weight follows. Target rises to $106 from $96. Industry view: In-line.

CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 5/1/0

On Deutsche Bank's observation, Caltex shares have underperformed the broader market in Australia by some 30% over the past twelve months. This now creates an opportunity for investors, say the analysts, as too low expectations ("unrealistically low") have been priced in.

Much easier comp virtually guarantees a return to growth in 2017, suggest the analysts. Price target of $35 suggests the potential for double digit return. Upgrade to Buy from Hold.

G8 EDUCATION LIMITED ((GEM)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/1/0

An apparent stabilisation in margins and a new CEO has Ord Minnett analysts speculating whether this could be the early beginnings of a new chapter for this company? The idea becomes attractive as the current share price doesn't seem to account for any upside, in the analysts' view.

Ord Minnett thinks management's new strategy doesn't require a lot of capital, but if successful, material gains could be made. Not in the share price at present level. A new analyst has resumed coverage and he has upgraded to Accumulate from Hold. Target rises to $3.78 from $3.25 on increased forecasts.

ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/2

Origin is close to full operations at APLNG, a sustainable capital structure, and reduced corporate complexity, Morgan Stanley notes. The company's balance sheet repair process, simplification plans and incremental earnings growth for the Energy Markets division see the broker upgrade to Overweight.

Divestment of conventional gas assets will leave a simpler business more able to weather lower oil prices, Morgan Stanley suggests. Origin remains energy retail leader by customer market share. Target rises to $8.75 from $6.04.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/5/0

Regis' Dec Q production met the broker's forecast and costs were 6% lower. Operations are stable and cash is building from earnings margins nearing 50%.

The broker's Underweight rating had been in place on the basis of the market fully pricing in assumed mine life extensions. The broker concedes mine lives may well be increased and/or gold prices can move higher and as such has upgraded to Equal-weight, while still preferring other junior gold exposures. Target $3.05. 

See also RRL downgrade.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/4/1

The broker has conducted an extensive review of Treasury Wine and as a result has upgraded to Overweight. Having surveyed Chinese consumers, the broker believes the market continues to under-appreciate the company's opportunity in China.

Treasury is also well leveraged to wine price increases which have been underway, and an underperforming Americas business is poised to turn around, the broker believes. Target rises to $13 from $10.

WOODSIDE PETROLEUM LIMITED ((WPL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/4/1

Ord Minnett has turned more positive on the resumption of growth at Woodside Petroleum and has upgraded the stock to Accumulate from Hold, while lifting the price target to $36 from $30.

On a risk-weighted basis, the analysts project attributable production could grow 25% over the next decade to 115–120m barrels of oil equivalent (mmboe) in 2025. One note of caution: Royal Dutch/Shell's 13% equity stake remains an overhang for the stock.

Downgrade

ASALEO CARE LIMITED ((AHY)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/2/0

On Citi's observation, competition remains high in the tissue categories in Australian supermarkets and this should keep the pressure on Asaleo Care. Revised forecasts now assume group earnings to decline in both FY16 and FY17.

The offset is the company is expected to appease shareholders with a high dividend payout (10c, stable), hence why Citi thinks a Neutral rating is more appropriate than moving to Sell. The 7%-plus yield should provide support. Target drops 10c to $1.50.

AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/6/0

Banking analysts at Citi published not one but a few reports on the Australian banking sector today. The bottom line is that share prices have run hard while the analysts remain of the view there is no operational improvement on the horizon to justify the rally.

Citi has downgraded ANZ Bank to Neutral from Buy. Target price lifts to $31.50 from $31.25. The broker's pecking order for the sector remains unchanged: (most to least preferred) ANZ, NAB, WBC, CBA.

Note: DPS estimates have been slightly increased from a previous view they were to remain at 160c for years to come.

The broker has upgraded bank forecast earnings to reflect the rising yield environment sparked by Trump's election, but notes locally the banks continue to operate in a slow growth environment. The risk of capital raisings has diminished, but the market has pushed bank share prices higher on that basis.

The broker has thus downgraded its sector recommendation to Neutral. Incorporating the recent divestment of Shanghai Rural Commercial Bank, ANZ's individual rating has been downgraded to Neutral. Target rises to $31 from $30.

ALACER GOLD CORP ((AQG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/2/0

Alacer enjoyed a heap leach grade breakthrough in the Dec Q having resolved earlier issues, leading to production beating Macquarie by 9%. Revised 2016 guidance was achieved. While 2017 should now see much improved cash flow, it will also see peak capex for the sulphide project, the broker notes.

Macquarie has lifted its target to $2.40 from $2.30 but given strength in the share price, downgrades to Neutral.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/4/2

Aurizon's trading update revealed a strong December, but Citi analysts are quick to point out other months, October and November in particular, were weak if not negative.

Citi is of the view the performance does not justify the current share price. Downgrade to Sell from Neutral. Price target moves to $4.75 from $4.60.

BENDIGO AND ADELAIDE BANK LIMITED ((BEN)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/2/3

While acknowledging the bank's prospects have improved in recent quarters, Deutsche Bank analysts are simply of the view the share price has run way too hard. Downgrade to Sell from Hold. Price target lifts to $11.40 from $10.70, still well below the share price.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/5/2

Banking analysts at Citi published not one but a few reports on the Australian banking sector today. The bottom line is that share prices have run hard while the analysts remain of the view there is no operational improvement on the horizon to justify the rally.

Citi has downgraded CommBank to Sell from Hold. Target price remains $75. The broker's pecking order for the sector remains unchanged: (most to least preferred) ANZ, NAB, WBC, CBA.

Note: CBA is still expected to cut its dividend to 357c in FY18.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/1

The lifting of the Indonesian nickel export ban has come as a surprise to the broker, who notes recent government rhetoric has been to the contrary. Given the lift extends only to those producers who can demonstrate plans to develop downstream processing facilities, it is uncertain as to what the impact will be.

The broker has thus left nickel price forecasts unchanged for the time being, while noting substantial downside risk. Independence is downgraded to Neutral. Target falls to $4.40 from $5.00. Earnings forecasts unchanged for the time being.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/5/0

Regis' Dec Q numbers were broadly in line with Macquarie's expectation, with higher grades at Duketon providing a production boost. First ore from Gloster and Erlistoun will further boost grades.

Strong cash generation is ongoing and exploration remains in focus. While Macquarie believes Regis' consistent delivery justifies a premium to peers, the share price has run ahead of valuation. Downgrade to Neutral. Target rises to $3.00 from $2.90.

See also RRL upgrade.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/2

The company has upgraded its guidance for FY17 and Credit Suisse analysts have been forced to upwardly adjust their forecasts. Yet, they remain of the view the only way forward for the iron ore price is down, and this means prices for scrap will follow.

On this basis, downgrade to Underperform from Neutral. Target price remains $9.90. A second factor underpinning the downgrade is the fact the share price is trading well above target.

On Citi's observation, the share market had already anticipated the improvement in market dynamics for scrap steel collector and seller, Sims Metal. The analysts have updated forecasts and lifted the price target to $13.70 from $11.20.

As the revised price target is only marginally above the share price, the rating is downgraded to Neutral from Buy. Note: Citi's estimates are some 23% ahead of 
consensus EPS estimates for FY17.

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

UBS has lowered its 2018-20 oil price forecasts by 6-7%. While 2017 will see OPEC/non-OPEC production cuts have their effect, this will quickly be offset and surpassed by an aggressive US shale response, supported by falling costs, the broker believes. Forecasts nevertheless remain above consensus.

A US$60/bbl (Brent) forecast remains in place for 2017. A fall in LNG storage levels leads to an increase in natgas price forecasts. The broker has adjusted for Santos' surprise raising and suggests a clear focus on cost reduction provides for few catalysts in 2017.

Target falls to $4.60 from $4.90. Downgrade to Neutral.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Sell from Neutral by Citi .B/H/S: 4/3/1

Banking analysts at Citi published not one but a few reports on the Australian banking sector today. The bottom line is that share prices have run hard while the analysts remain of the view there is no operational improvement on the horizon to justify the rally.

Citi has downgraded Westpac to Sell from Neutral. Target price loses 50c to $30.50. The broker's pecking order for the sector remains unchanged: (most to least preferred) ANZ, NAB, WBC, CBA.

Note: Citi still expects the dividend to be cut to 160c in FY18.

WESTERN AREAS NL ((WSA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/3

The lifting of the Indonesian nickel export ban has come as a surprise to the broker, who notes recent government rhetoric has been to the contrary. Given the lift extends only to those producers who can demonstrate plans to develop downstream processing facilities, it is uncertain as to what the impact will be.

The broker has thus left nickel price forecasts unchanged for the time being, while noting substantial downside risk. Western Areas is downgraded to Neutral. Target falls to $3.00 from $3.60. Earnings forecasts unchanged for the time being.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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