Weekly Ratings, Targets, Forecast Changes

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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 July 17 to Friday July 21, 2017
Total Upgrades: 21
Total Downgrades: 17
Net Ratings Breakdown: Buy 42.53%; Hold 41.39%; Sell 16.08%

Australian stockbrokers are unusually busy ahead of the August reporting season, in particular when viewed against the background of (thus far) a rather quiet confession season for corporate Australia.

One observation can be made and that is many quarterly production reports released by miners and energy producers show up weaknesses and disappointments, mildly eroding the macro strategies that have supported their share prices since mid-June.

One thing that hasn't changed is that total Buy (and equivalent) ratings carried by the eight stockbrokers monitored daily by FNArena is still outnumbering Hold/Neutral ratings, 42.53% versus 41.39%, and this historically tends to point towards a tougher environment for the domestic share market.

Most market observers would agree Australian shares have been running up hill since May and last week was certainly no exception.

For the week ending Friday, 21st July 2017 FNArena registered 21 upgrades in ratings for ASX-listed stocks against 17 downgrades. 17 out of the 21 upgrades moved to Buy. Amongst the stocks involved were bond proxies, banks, property cycle exposures and resources stocks. Clearly, there are a lot of moving elements impacting on the share market in July.

Energy producers stand out amongst those receiving donwgrades during the week, though most downgrades follow-on from share price rises prior.

Some hefty increases to target prices have been recorded, with corporate target Programmed Maintenance unsurprisingly commanding pole position (+54%), followed by WiseTech Global (+10.61%), Cimic Group (+9%) and Karoon Gas (+8.9%). On the negative side we find Baby Bunting (-7%), Perseus Mining (-5%) and Oil Search (-4.4%) receiving the largest reductions.

WiseTech Global leads the table for positive revisions to earnings estimates (+56%), followed by NextDC (+7.5%) and Perseus Mining (+2.79%). On the flipside, Village Roadshow's disappointing market update propelled it to the bottom of the table with earnings estimates sinking by -141%. Next follows AWE Ltd with a reduction of -53%, then comes perennial disappointer Myer (-24%), then follows Oil Search (-24%).

So far, the underlying current remains for more adjustments to the downside than to the upside ahead of the important August reporting season. Australian investors will be keeping their fingers crossed this dynamic can be turned around between now and mid-September.

Upgrade

AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/4/0

APRA has finalised its capital requirements which means the target CET1 ratios were lifted 150 basis points for the major banks and 50 basis points for the regional banks. The new capital targets  come into effect by January 2020.

Citi observes banks are likely to achieve this through organic capital generation and the finalisation of these capital adequacy requirements removes a significant overhang for the sector.

Basel 4 remains on the agenda if global agreement can be reached but the APRA moves were designed not to wait. If agreement is reached Citi continues to expect mortgage risk weights will be affected, although this is unlikely to be cumulative to this announcement.

ANZ's rating is upgraded to Buy from Neutral. Target is raised to $31.50 from $31.00.

CIMIC GROUP LIMITED ((CIM)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/2/2

First half results showed continued growth in work in hand and margins are being maintained. While revenue was below Deutsche Bank's expectations growth is expected to flow through in the future.

The broker had been wary of low margin contracts that might negatively affect earnings but the benefits of economies of scale appear to be offsetting the competitively-priced contracts.

Deutsche Bank upgrades to Hold from Sell. Target is raised to $34.68 from $30.83.

CROWN RESORTS LIMITED ((CWN)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/4/0

Crown has been elevated to Buy at Ord Minnett on more cost savings (opex) to offset weak VIP business, reduced gearing for potential corporate partnership strategies and a better outlook for CrownBet. The analysts throw in a rather cheap looking valuation as well.

All in all, it is Ord Minnett's view the risks are by now well and truly priced in, while management can provide offsets. The analysts turn temporarily into speculators and believe there is increased potential for a joint bid for Tatts’ ((TTS)) wagering and lotteries business.

Target price has been increased to $14 from $13. Earnings estimates have been slightly lowered.

DEXUS PROPERTY GROUP ((DXS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/3

Macquarie believes Dexus will hit its funds from operations guidance at its FY17 result, and expects an update on the office portfolio to be positive given its Sydney focus. 

The outlook for the industrial portfolio remains subdued but the broker suggests improving occupancy will see a return to income growth for the first time since 2014. Dexus remains the broker's preferred office REIT exposure and since the share price fall the market is pricing in no asset value appreciation in the next 12 months. Upgrade to Outperform.

Target unchanged at $10.22.

GPT ((GPT)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/1

Macquarie suggests GPT's result will show retail growth partially dragged down by Dandenong, strong office rents but increased vacancy, and modest industrial growth supplemented by development. There is potential for a minor uplift to guidance.

GPT remains a solid, defensive proposition offering diversity across all of quality retail, office and industrial, Macquarie notes. On a more attractive forecast return and the chance of  a minor upside surprise, the broker upgrades to Outperform. Target unchanged at $5.18.

After considering the Amazon threat in more detail UBS believes the risks are priced in and upgrades to Buy from Neutral on valuation grounds.

The broker believes the market has become too negative on the company's retail portfolio, while at the same time the premium Sydney/Melbourne office portfolio is considered the best way to get exposure to the strong transactions in the market. Target is $5.30.

MANTRA GROUP LIMITED ((MTR)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 5/3/0

Deutsche Bank upgrades to Hold from Sell because the valuation multiples are less onerous, following a -20% de-rating over the past year.

The broker retains concerns about earnings quality and capital allocation but upgrades on valuation grounds and believes there are prospects for improved sentiment in the near term. Target is raised to $3.00 from $2.60.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/3/2

APRA has finalised its capital requirements which means the target CET1 ratios were lifted 150 basis points for the major banks and 50 basis points for the regional banks. The new capital targets come into effect by January 2020.

Basel 4 is still on the agenda, if global agreement can be reached. Citi continues to expect mortgage risk weights will be affected but unlikely to be cumulative to this APRA announcement.

Rating is upgraded to Neutral from Sell and the target is raised to $31.00 from $30.50.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/3/1

Fundamentally, Morgan Stanley is a structural bear on traditional media as the rate of change in technology and consumer behaviour accelerates and the global leakage of advertising spending continues.

Nevertheless, after a substantially better start to the 2017 ratings year, Morgan Stanley flips its assessment of the earnings risk for Nine Entertainment to more upside than downside and upgrades to Equal-weight from Underweight.

Target is lifted to $1.20 from $0.90. Operating earnings estimates are lifted by 12-31% for FY17-19. Attractive industry view.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/0

Production at Edikan in the June Q exceeded Macquarie's forecast but costs remain stubbornly high. Assuming Perseus can achieve its grade and throughput guidance, the broker believes costs will begin to decline in FY18.

The Sissingue project is now 61% complete. Target falls to 34c from 40c but the recent fall in share price has raised Macquarie's total shareholder return valuation to 21%, prompting an upgrade to Outperform.

Edikan is back on track and Morgan Stanley upgrades to Overweight from Equal-weight. The broker observes catalysts exist for three projects in FY18 and the company is fully funded with a US$200/oz all-in sustainable cost margin.

Production at Edikan increased 30% in the June half, after plant upgrades were completed and allowed better throughput. Higher grades and blending ore sources also contributed.

Target is $0.38. Industry view is Attractive.

SCENTRE GROUP ((SCG)) Upgrade to Outperform from Underperform by Macquarie and Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/1

Macquarie forecasts mid single digit funds from operations growth for Scentre in the first half result while underlying portfolio growth should remain subdued. The broker remains cautious on tenant returns in retail.

That said, Scentre continues to offer a relatively defensive income stream from high quality shopping centres and the REIT now offers a more attractive shareholder return following recent material underperformance, Macquarie notes. Upgrade to Outperform from Underperform. Target falls to $4.36 from $4.52.

After considering the Amazon threat in more detail UBS believes the risks are priced in and upgrades to Buy from Neutral on valuation grounds.

The stock is implying a 5.9% cap rate versus the sector at 6.1% and the broker expects it to trade 50-60 basis points tighter through the cycle, given its premium asset quality. Target is $4.42.

SANTOS LIMITED ((STO)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 6/2/0

Ord Minnett continues to recognise the risks associated with Santos, notably the leverage to weak oil prices and the potential impact from the government's gas security mechanism.

Nevertheless, the underperformance over the past year could provide a value opportunity and Ord Minnett lifts its recommendation to Speculative Buy from Hold. Target is lowered to $3.80 from $4.20.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Add from Hold by Morgans .B/H/S: 2/4/1

Strong passenger growth continued into June, driven by high load factors in larger aircraft. Morgans observes international growth is running well above long-term trends. The broker makes minor upgrades to earnings forecasts.

Rating is upgraded to Add from Hold. Target is raised to $7.40 from $7.18.

VICINITY CENTRES ((VCX)) Upgrade to Buy from Neutral by UBS and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/2

After considering the Amazon threat in more detail UBS believes the risks are priced in and upgrades to Buy from Neutral on valuation grounds.

The broker calculates the stock is now trading at a -7% discount to net tangible assets and on a 7.3% free funds from operation yield.

UBS suspects that, at these levels, a buy-back, funded by a combination of selective lower-tier asset sales and finessing the development pipeline, would be well received.  Target is $2.92.

Macquarie expects Vicinity's FY17 result to be in line with guidance, with the potential for a minor beat, while the FY18 outlook should be for a resumption in growth.

Vicinity offers a relatively defensive income stream from a relatively high quality retail portfolio, and while Macquarie remains cautious on tenant returns, an attractive total shareholder return forecast leads the broker to upgrade to Outperform. Target unchanged at $2.91.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Overweight from Equal-weight by Morgan Stanley and Upgrade to Neutral from Sell by Citi .B/H/S: 4/4/0

APRA has finalised its capital requirements which means the target CET1 ratios were lifted 150 basis points for the major banks and 50 basis points for the regional banks. The new capital targets come into effect by January 2020.

Morgan Stanley believes the tail risk relating to bank capital adequacy requirements has now been removed but remains concerned about structural and cyclical headwinds.

Westpac is a beneficiary of re-pricing and has a lower credit risk profile, with the broker believing it offers a better risk/reward at current multiples.

Against this backdrop, the broker upgrades Westpac to Overweight from Equal-weight. Target is raised to $32.70 from $28.80. Industry view is In-Line.

APRA has finalised its capital requirements which means the target CET1 ratios were lifted 150 basis points for the major banks and 50 basis points for the regional banks. The new capital targets come into effect by January 2020.

Basel 4 is still on the agenda, if global agreement can be reached. Citi continues to expect mortgage risk weights will be affected but unlikely to be cumulative to this APRA announcement.

Rating is upgraded to Neutral from Sell and the target lifted to $31.00 from $30.50.

WESTFIELD CORPORATION ((WFD)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 3/2/1

Macquarie expects Westfield's first half growth to be subdued due to Brexit and the uncertain timing of a swap receivable. The full year outlook will likely be unchanged, the broker suspects, with recent GBP strength helping. The key will be any insights onto the trajectory in 2018.

Given the stock has materially de-rated and total shareholder return now looks attractive, Macquarie upgrades to Outperform from Underperform. Target rises to $9.14 from $8.93.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/3/1

Ord Minnett believes the company is well-positioned to pursue numerous avenues for growth in production. The broker notes the capital structure of the business is now transformed, following the significant recovery in coal markets over the last 18 months.

Rating is upgraded to Buy from Accumulate and the target raised to $3.50 from $3.20.

Downgrade

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

Deutsche Bank considers the outlook for the sector is mixed, with growth in infrastructure expenditure, declining Australian LNG construction and some signs of recovery in global oil & gas capital expenditure.

The broker assesses these stocks are trading at the upper end of historical ranges and there are minimal buying opportunities.

Deutsche Bank still likes the company's exposure to the recovering minerals exploration market and structural growth in life sciences but believes this is now fully reflected in the share price. Rating is downgraded to Hold from Buy on valuation. Target is $7.41.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/3/5

Changes in bond markets will reduce core return over the next four years, unless there is a material change by the regulators, point out Macquarie analysts. With funding savings partially offsetting, they estimate a potential impact of -$9m on net profit.

The company had a tough year in terms of volumes, but Macquarie sees a bounce back on the horizon for FY18. So far, there is little evidence of a catch up, they note.

All in all, minor adjustments have been made, but the analysts find the share price valuation rich for a low growth company providing relatively attractive yield. Hence why the downgrade to Underperform from Neutral. Target remains $4.98.

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/0

The Baby Bunting share price has bounced hard over the month past. Citi analysts have decided it's time to pull back to Neutral. Longer term, they see Amazon as a real and genuine threat, but the company should have multiple levers to offset.

BHP BILLITON LIMITED ((BHP)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/3/0

Citi downgrades to Neutral from Buy, because of share price appreciation and a reduction in the target price to $25.50 from $26.50.

This target reduction has been driven by FY18 earnings downgrades because of lower production and a reduction in net present value from a lower long-term oil price estimate.

While the company is set to reverse a two-year trend of declining production in FY18 it is still facing price headwinds and the broker prefers Rio Tinto ((RIO)).

CREDIT CORP GROUP LIMITED ((CCP)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

Morgans expects FY17 net profit to be 22% above FY16. FY18 growth is expected to be driven by the lending division as the US division moves into profitability. The broker tempers expectations for domestic PDL acquisitions as strong competition continues.

Rating is downgraded to Hold from Add. While positive on the earnings certainty and medium-term growth profile, Morgans would prefer to see greater upside before returning to a more positive stance. Target is reduced to $19.35 from $19.90.

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/5/1

The stock is now trading at a market multiple on FY20 estimated earnings which is appropriate, UBS believes, as the key growth drivers are going to fade beyond this point.

The value risks now appear more evenly balanced and the broker downgrades to Neutral from Buy. Target is raised to $15.25 from $14.95.

INSTITUTE OF DRUG TECHNOLOGY AUSTRALIA LIMITED ((IDT)) Downgrade to Reduce from Add by Morgans .B/H/S: 0/0/1

Dr Paul MacLeman joined IDT in 2013 to turn around the business and acquired a portfolio of 23 generic drugs planned for manufacture and US distribution. Little progress left investors frustrated and now MacLeman has resigned.

His resignation leaves the company's generic drug strategy under a cloud, the broker suggests. The broker has de-weighted the value of the portfolio and on the basis of uncertainty over leadership and strategy can not now recommend the stock to investors.

Downgrade to Reduce from Add. Target falls to 8.5c from 22c.

JB HI-FI LIMITED ((JBH)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/4/2

UBS has downgraded the stock to Neutral from Buy, lowering the target to $25.80 from $32.50.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/4/0

Citi's oil and gas analysts have bitten the bullet and succumbed to the realisation that the past is just that and the future holds more limitations to how high oil prices might realistically be able to rise.

Apart from lowering near term forecasts, by on average US$5/bbl, of more importance is the team has now cut the long term oil price forecast to US$55/bbl real (from US$65/bbl). This becomes a real problem when many a share price for oil and gas producers is still reflecting a higher price.

On Citi's calculations, Origin Energy's share price is already projecting US$55/bbl, hence the downgrade to Neutral. New target price of $7.34 compares with $8.59 prior.

OIL SEARCH LIMITED ((OSH)) Downgrade to Sell from Neutral by Citi .B/H/S: 5/2/1

Citi's oil and gas analysts have bitten the bullet and succumbed to the realisation that the past is just that and the future holds more limitations to how high oil prices might realistically be able to rise.

Apart from lowering near term forecasts, by on average US$5/bbl, of more importance is the team has now cut the long term oil price forecast to US$55/bbl real (from US$65/bbl). This becomes a real problem when many a share price for oil and gas producers is still reflecting a higher price.

On Citi's calculations, Oil Search's share price is projecting US$68/bbl, hence there is no other option than to downgrade; to Sell from Neutral. New target price of $5.72 compares with $7.47 prior.

PERPETUAL LIMITED ((PPT)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/5/2

Citi notes the fourth quarter should have been a strong one for super flows, with investors moving ahead of regulatory changes, but this was not in evidence.

The broker reduces estimates for FY17 earnings by -0.2% and FY18-19 by -3%. Citi believes the company may need to accelerate its transition and targeted growth strategies if its recent run of relatively poor investment performances continues.

Rating is downgraded to Sell from Neutral. Target is reduced to $50.25 from $50.80.

PROGRAMMED MAINTENANCE SERVICES LIMITED ((PRG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

Persol Holdings has made a cash offer of $3.02 for the company by way of a scheme of arrangement. Ord Minnett observes the offer represents an FY17 enterprise value to operating earnings multiple of 10.3x.

The broker envisages a higher competing offer is unlikely, given some structural concerns in the staffing division, although other companies might be interested in the company's maintenance contracts.

There is now just 4% potential upside to the broker's estimates so the rating is downgraded to Hold from Accumulate. Target is raised to $3.08 from $2.07, which reflects the additional upside from franking credits on top of the cash offer.

RCG CORPORATION LIMITED ((RCG)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/2/0

Now that the share price has bounced, a lot, since Citi decided to upgrade to Buy in late May, the decision has been made to downgrade back to Neutral.

Citi analysts note, with regards to the upcoming reporting season, RCG Corp has disappointed investors at each of its last financial reporting releases.

The analysts also highlight they remain concerned about elevated levels of discounting throughout the industry.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Add by Morgans .B/H/S: 7/1/0

It was another soft quarter for Rio in the Pilbara although 2018 still looks to be as expected in volume terms, according to Morgans. The miner nevertheless benefitted from solid iron ore and coal prices in the quarter and a strong rebound for aluminium.

Ongoing strong cash flows support a robust balance sheet but a lack of capex plans suggests to Morgans low business confidence among global miners persists. The share price has run up ahead of result season and has reached the broker's target of $62.30, down from $66.57.

Downgrade to Hold.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/3/0

Operational challenges that have affected the company in FY17 have rolled into FY18 and Citi also retains a bearish outlook on the coal price.

Citi has downgraded coal-nickel and silver prices but upgraded aluminium prices. The target is reduced to $2.70 from $2.95 and as a result the broker downgrades to Neutral from Buy.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Sell from Neutral by Citi and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/2

Citi's oil and gas analysts have bitten the bullet and succumbed to the realisation that the past is just that and the future holds more limitations to how high oil prices might realistically be able to rise.

Apart from lowering near term forecasts, by on average US$5/bbl, of more importance is the team has now cut the long term oil price forecast to US$55/bbl real (from US$65/bbl). This becomes a real problem when many a share price for oil and gas producers is still reflecting a higher price.

On Citi's calculations, Woodside's share price is projecting US$68/bbl, hence there is no other option than to downgrade; to Sell from Neutral. New target price of $27.50 compares with $32.41 prior.

Ord Minnett's previous positive view was based on the growth outlook but sustained low oil prices have had the effect of not only lowering the estimated value but also potentially delaying or deferring growth projects.

Rating is downgraded to Hold from Accumulate and the target to $30 from $36.

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