Weekly Ratings, Targets, Forecast Changes

This story features AINSWORTH GAME TECHNOLOGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGI

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 February 13 to Friday February 17, 2017
Total Upgrades: 8
Total Downgrades: 15
Net Ratings Breakdown: Buy 43.54%; Hold 42.36%; Sell 14.10%

The local reporting season is heating up and so are the number of downgrades issued by stockbroking analysts. The latter is less a reflection of disappointing results as it is a reflection of the fact share prices are a lot higher than where they were in 2016, and this means companies have to do better than projected to justify further upside.

For the week ending Friday, 17th February 2017, FNArena registered 15 downgrades for individual ASX-listed stocks against eight upgrades. Magellan Financial was the only one receiving two upgrades during the week. Aurizon Holdings was downgraded three times. JB Hi-Fi and IOOF Holdings each received two downgrades.

CSL tops the week's list for positive adjustments to price targets, followed by OZ Minerals, Sims Metal and AMP. On the flipside, IPH Ltd (-16%) takes the wooden spoon, followed by IOOF, Telstra and Tatts.

The week's table for upgrades to earnings estimates shows some gigantic increases, with Alacer Gold in pole position with a gain of +302%. AMP, with a gain of +159% comes second, followed by Mt Gibson (+101%). The negative side looks a lot more benign with Boral leading the week's losers (so to speak), seeing market expectations retreating by -16%. Next up are Ten Network (-11.5%), Sydney Airport (-9%) and Domino's Pizza (-7%).

The February reporting season will really get into swing this week.

Upgrade

AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0

Macquarie upgrades to Outperform from Neutral. Target is raised to $2.10 from $1.80.

The broker notes Australian ship-share shows positive trends and, while not the largest contributor to earnings, will be positive for sentiment and should be a lead indicator for the US market.

BLUE SKY ALTERNATIVE INVESTMENTS LIMITED ((BLA)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/0/0

First net profit was supported by an uptick in the contribution from the New York-based Cove and higher investments income. Ord Minnett notes the institutional investor base continues to expand.

After upgrading growth expectations and factoring in a lower revenue margin, option issue and higher costs, the broker's forecasts for earnings per share are downgraded -6% and -7% for FY17 and FY18 respectively.

Rating is upgraded to Buy from Hold. Target is raised to $7.87 from $7.60.

CSL LIMITED ((CSL)) Upgrade to Buy from Neutral by Citi .B/H/S: 6/1/0

Post the formal release of CSL's interim financials, Citi analysts have become a lot more comfortable with the growth outlook. Their projections now imply 21% EPS CAGR for FY16-FY19.

Citi believes this outlook, in combination with the reliability that continues to be on display, warrants a premium valuation. The analysts have increased their price target to $136.40 (was $113.75). Upgrade to Buy from Neutral.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Add from Hold by Morgans and Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 5/1/0

Magellan's -20% drop in first half profit on lower performance fees was in line with Morgans. The broker expects strong net inflows into both retail and institutional to taper in the second half but to remain solid.

Morgans sees a long term opportunity in the announcement of three new US low carbon funds, but doesn't expect meaningful inflows for two-three years. Target falls to $26.80 from $27.47 but that suggests a 15% total shareholder return. Hence an upgrade to Add.

Magellan's retail inflows slowed in the first half but Morgan Stanley is expecting a modest recovery, while institutional flows bounced back.  Magellan pays out 75-80% of earnings to dividends but given peers pay 85-90% and Magellan's balance sheet has been strengthened, the broker expects a stronger dividend.

Morgan Stanley upgrades to Equal-weight. The broker might be more positive but for pressure on retail fees and Magellan's limited product mix compared to peers. Target rises to $25.00 from $21.50. Industry view: In-Line.

SOUTH32 LIMITED ((S32)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/2/0

First half results were slightly better than the broker's estimates, FY17 guidance for D&A has been revised upward by $40m to $$760m.

FY17 production guidance remains unchanged, but cost guidance has been increased across most divisions, reflecting FX moves and price linked royalty payments. The broker forecasts cash of $1.6bn at the end of FY17 and assumes $800m of buy-backs in each of FY18 and FY19.

The broker upgrades the stock to Outperform from Neutral and raises the target price to $2.95 from $2.80.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 4/2/1

First half results were in the middle of the guidance range. Macquarie finds the market environment far from clear but believes the company has done well to mitigate downside risks.

The company believes further self-help could add more than 50% to EBIT. On the strength of such potential, Macquarie upgrades to Outperform from Underperform. Target is raised to $13.60 from $11.20.

VICINITY CENTRES ((VCX)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/0/2

At face value, the H1 financial performance was in-line, but Citi analysts highlight the result also put the limelight on the broader benefits of capital recycling.

Upgrade to Buy from Neutral. Target price loses 2c to $3.22. The analysts point out the shares are now offering circa 6% yield plus 10% upside to the price target for the year ahead.

Estimates have changed little. Citi analysts encourage investors to look through the earnings impact of asset sales. They expect growth to accelerate from FY18.

Downgrade

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie and Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/5/3

One-off items boosted the first half result. Credit Suisse notes the focus of the company is on cost control and more rigorous capital allocation.

The intermodal freight review will be completed mid year and, while the company could achieve its targets by retaining the challenged division, the broker believes it would take until FY19 to achieve.

Credit Suisse believes the shares are fully valued and downgrades to Underperform from Neutral. Target is raised to $5.00 from $4.75.

First half results were better than Macquarie expected. Nevertheless, there were numerous favourable and non-sustainable items above the line.

The broker notes no clarity around any fundamental change in strategy will be heard until mid-year but the company will start executing on items such as reducing capital expenditure and re-pricing bulk contracts.

Macquarie downgrades to Neutral from Outperform. Target is reduced to $4.98 from $5.16.

The first half was stronger than Deutsche Bank forecast. However,  a large proportion of the variance was one off items which are unlikely to be repeated.

The company continues to generate cash flow  which enabled it to maintain its dividend pay-out ratio. Capital expenditure is expected to fall further, given the limited growth projects.

The broker makes minor changes to earnings forecasts but downgrades to Hold from Buy, given the shares are trading at a premium to its price target. Target is raised to $5.10 from $4.95.

BENDIGO AND ADELAIDE BANK LIMITED ((BEN)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/0/6

First-half results disappointed Credit Suisse and earnings estimates are downgraded by -2-4%.The broker liked the cost control and improvement in asset quality but did not like the softer net interest margin.

The result highlights the heightened earnings risks from dilution and bad debts. Credit Suisse downgrades to Underperform from Neutral. Target is reduced to $11.90 from $12.50.

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/1

Computershare's growth outlook has changed dramatically, and for the better, comment analysts at Citi. They have made only small positive adjustments to estimates.

However, the analysts also note the share price has rallied hard. On this basis, they downgrade to Neutral from Buy. Target jumps to $13.80 from $11.

DWS LIMITED ((DWS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

DWS reported first half results that were better than expected by Ord Minnett. The broker was a little surprised at the reduction in contractor headcount and sees DWS as having to try harder in the second half to deliver organic revenue growth.

The broker has downgraded the stock to Hold from Buy and reduces price target to $1.60 from $1.63.

HENDERSON GROUP PLC. ((HGG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/5/0

2016 results beat Credit Suisse forecasts. The short-term operating outlook is expected to remain challenging for longer than previously expected.

The broker continues to envisage value in the merger and medium-term story but finds further negative catalysts on the horizon for the short term.

Rating is downgraded to Neutral from Outperform. Target falls to $3.80 from $4.30.

IOOF HOLDINGS LIMITED ((IFL)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/4/1

First half underlying profit missed Macquarie's expectations. Gross margin pressure flowed through to net margins. The dividend pay-out of 98% was ahead of forecasts, backed by strong cash flow, but the broker expects this to return to 90%.

Macquarie downgrades to Neutral from Outperform as operating headwinds are expected to remain despite the prospect of some moderation in the second half. Target is reduced to $8.50 from $9.60.

First half earnings were disappointing for the broker, despite a small increase in net profit. Credit Suisse has downgraded FY17 forecasts by -6%, primarily driven by business divestments. 

The broker notes cost savings have largely come through, but the unexpected divestments raise questions around the earnings outlook. The broker has downgraded the stock to Neutral from Outperform and reduced the target price to $8.60 from $9.50.

IPH LIMITED ((IPH)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/2/0

Adjusting for unrealised FX gains, first half results were broadly in line with Deutsche Bank forecasts. The broker downgrades to Hold from Buy on valuation grounds.

Medium-term earnings estimates are reduced to better capture the risks around national phase entries being conducted electronically and potential margin compression from increasing competition.

Target is reduced to $5.40 from $6.60.

JB HI-FI LIMITED ((JBH)) Downgrade to Hold from Add by Morgans and Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/4/1

JB Hi-Fi's first half results were better than Morgans had expected. The strong sales growth has continued into the second half and management has guided to full year earnings of $5.58bn.

The broker believes sales growth may moderate as the group cycles the exit of Dick Smith from the market. The broker downgrades the stock to Hold from Add and target price rises to $31.80 from $30.94.

JB HiFi's first half results were better than the broker had expected. The impact of Dick Smith's exit from the market should be finished in the second half and management has guided to slowing sales growth in the period.

Credit Suisse has downgraded the stock to Underperform from Neutral and raised the target price to $26.49 from $26.43.

OZ MINERALS LIMITED ((OZL)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/4

OZ Minerals' share price has risen 130% in 12 months, compared to 55% for the ASX200 resources index. Copper price strength, and expectation for more strength, as well as updated mine plans for Prominent Hill and Carrapateena have driven the move, Morgan Stanley concludes.

The broker has revised forecasts to account for these factors but cannot arrive at a valuation to match market enthusiasm. Downgrade to Underweight. Target rises to $8.50 from $5.80. Industry view: Attractive.

PRAEMIUM LIMITED ((PPS)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Praemium's first half results were well below the broker's expectations, mainly due to rising costs associated with increased sales and IT development. Morgans has reduced FY17 forecasts by -51.5%, FY18 by -14.3% and FY19 by -9.7%

As the company trades close to the broker's revised valuation, Morgans downgrades the stock to Hold from Add. Target is reduced to 43c from 61c.

TELSTRA CORPORATION LIMITED ((TLS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/5/3

Ord Minnett has downgraded to Hold from Accumulate upon Telstra's release of what turned out a weak interim report. The analysts highlight both top line and bottom line were well off what the market was expecting.

There's sector dominance and an attractive looking yield, but Ord Minnett is taking a medium term view and sees potential structural changes and downward pressure. Target falls to $5.35 from $5.45.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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