Weekly Ratings, Targets, Forecast Changes

This story features AIR NEW ZEALAND LIMITED, and other companies. For more info SHARE ANALYSIS: AIZ

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 August 21 to Friday August 25, 2017
Total Upgrades: 25
Total Downgrades: 30
Net Ratings Breakdown: Buy 41.59%; Hold 42.26%; Sell 16.15%

It's raining upgrades and downgrades in the Australian share market as corporate performances fail to reignite positive momentum, but as has been the case for many weeks now, downgrades continue to outnumber upgrades.

For the week ending Friday, 25th August 2017, FNArena registered 25 upgrades for individual ASX-listed stocks, but 30 downgrades.

Throughout the deluge in rating changes, we spotted two upgrades for Asaleo Care, two upgrades for Coca-Cola Amatil, two downgrades for Corporate Travel, two for OZ Minerals and two for Qube Holdings. The gap between Neutral/Hold ratings and Buys for the eight stockbrokers FNArena monitors daily continues to widen in favour of the Neutrals; 42.26% versus 41.59%.

As expected, changes to valuations and price targets are large, but a positive observation is that upward adjustments for the week tended to be larger, on average, than downward re-adjustments. Breville saw the largest upward move; +12.80%, followed by ERM Power (+10%) and Smartgroup Corp (+9.5%).

Negative adjustments hit Trade Me Group the hardest (-10.7%), then comes iSentia (-10.3%), followed by QBE Insurance (-8.2%).

The same underlying picture dominates the week's revisions to earnings forecasts. Western Areas, starting off a low base, enjoyed by far the largest upward revision, handsomely beating Village Roadshow, Spotless Group and ERM Power.

Those experiencing reduced estimates were led by Mt Gibson Mining, followed by Fortescue Metals, Resolute Mining, Santos and South32.

The local reporting season marches on to its finale this week. Traditionally, those with a very weak performance think they can hide by releasing their financial update at the very end, preferably after the market close.

Upgrade

ASALEO CARE LIMITED ((AHY)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Neutral from Sell by Citi .B/H/S: 1/2/0

Credit Suisse observes first half results revealed the company is on track for 2017 earnings guidance. The company is diversifying its revenue stream and its two largest customers now account for 29% of sales versus 35% at the time of the IPO in 2014.

The broker expects some accelerated momentum for sales in the second half as weaker retail business lines cycle easier comparables. Rating is upgraded to Outperform from Neutral. Target is reduced to $1.70 from $1.75.

Price target has moved to $1.55 (up 5c) and the rating to Neutral from Sell post the release of H1 financials with the analysts suggesting the share price has fallen deeply enough to adequately reflect the risk profile for this company.

Citi analysts feel encouraged by the outlook, deemed improved, and see a stable earnings outlook for the next three years, with the shares seen trading at fair value.

Increased B2B sales, such as to hospitals and offices, seem to be making the difference with the analysts lifting forecasts by 4%-5%. The company is expected to continue paying out 10c per annum to shareholders.

AIR NEW ZEALAND LIMITED ((AIZ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/2

FY17 results were in line with Macquarie's estimates. The broker upgrades FY18 estimates for earnings per share by 6.2% and FY19 by 0.5%.

The industry is demonstrating more rational behaviour around capacity and the company has come through the period of increased competition stronger than expected.

Hence, Macquarie upgrades to Outperform from Neutral. Target is raised to NZ$3.90 from NZ$3.38.

AUSDRILL LIMITED ((ASL)) Buy by Deutsche Bank .B/H/S: 1/0/0

Ausdrill's FY17 results were better than the broker had expected, highlighting improved conditions, new contract wins and strong cost discipline.

FY18 guidance for NPAT growth of 30% to 40% implies NPAT of $41m to $44m, slightly below Deutsche Bank's estimate. The broker's estimate assumes no new contract wins in Africa, which is a very conservative view in the broker's opinion.

Buy rating retained and target rises to $2.40 from $2.00.

BAPCOR LIMITED ((BAP)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/0

FY17 results were in line with Macquarie's estimates. The broker believes the result demonstrates the resilience of the company's earnings profile and the strong competitive advantage in trade.

The broker believes the fears of Amazon are overstated. Gearing remains a key short-term overhang but the commentary implies increasing traction  in the divestment process.

Rating is upgraded to Outperform from Neutral. Target is raised to $6.20 from $5.90.

BEACON LIGHTING GROUP LIMITED ((BLX)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

Upgrade to Buy from Neutral as Citi analysts see better times ahead, also because the business is cycling weak numbers from the year past when Masters shut down. Citi has elevated Beacon Lighting to its top pick in the small-cap discretionary retail sector.

The new year has started on "encouraging" footing. Citi analysts anticipate margin expansion. The company is planning a more gradual new stores roll-out. Estimates have been lifted. Target price jumps by 19% to $1.60.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/1

Morgan Stanley believes it's time to get bullish on Beach Energy and upgrades to Overweight from Equal-weight. The broker observes the business is positive on free cash flow out the end of the decade and trades on undemanding valuation metrics.

Reserves have been upgraded across the company's operated oil acreage and the broker believes the stock will become one of the mid-caps of choice in Australia for investors wanting exposure to energy.

Price target is raised to $0.80 from $0.68. Industry view is In-Line.

See also BPT downgrade.

COCA-COLA AMATIL LIMITED ((CCL)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Neutral from Sell by UBS .B/H/S: 2/4/1

First half net profit was lower than Macquarie anticipated. The company has guided to 2017 net profit to be broadly in line with 2016.

The broker believes the combination of the recent sell-off and the strong recovery in earnings growth from Indonesia means the headwinds the company faces are now factored in.

Rating is upgraded to Outperform from Neutral. Price target is reduced to $8.82 from $9.29.

A weak result missed UBS by -3%. Full year guidance was nevertheless reiterated given management has noted improving trends. Australian earnings were weak but Indonesia/PNG outperformed.

UBS' FY forecast sits below guidance and the broker acknowledges the structural trend of a shift away from fizzy drink, but with the share price having fallen substantially and valuation implying a -45% discount to market for beverages, the broker believes the worst is priced in.

Upgrade to Neutral. Target falls to $8.60 from $9.00.

CROMWELL PROPERTY GROUP ((CMW)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/2/3

Ahead of the FY17 result, Credit Suisse upgrades to Neutral from Underperform. Target is reduced to $0.94 from $0.97.

The company has not engaged with the Investa Office ((IOF)) independent directors since completion of due diligence, which suggests its 10% stake may soon be divested, speculates the broker.

While the implications are difficult to quantify, Credit Suisse believes the current share price implies limited value for this segment, regardless. Importantly, divestment would mean gearing reduces by around 550 basis points, with only marginal dilution to earnings per share.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/5/0

Citi has responded to Fortescue's FY17 report by upgrading to Neutral from Sell and pushing up the price target to $5.50 from $4.60.

Higher iron ore prices in combination with higher dividend guidance are both seen as very supportive for the share price, underpinning the upgrade.

The FY17 performance itself seems to have slightly beaten Citi expectations beforehand. Citi points out, at present spot iron ore/FX, the dividend yield would be 13%/15% respectively and the company would be net debt free before end-FY19.

GRAINCORP LIMITED ((GNC)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 1/4/0

Deutsche Bank believes the FY18 east coast winter crop reductions have been excessively discounted in the current share price. Hence, the rating is upgraded to Buy from Hold.

Recent rainfall has provided some reprieve for the FY18 winter crop and the broker retains current estimates. Target is reduced to $10.00 from $10.20.

The broker reduces FY18 earnings forecast by -6% and FY19 by -2% to reflect higher-than-anticipated energy costs that will affect margins in the malt and oil segments.

GREENCROSS LIMITED ((GXL)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/2/0

FY17 results were below Deutsche Bank estimates, driven by margin pressures. Lower gross margins signal an increasingly competitive environment which is expected to weigh on the stock.

The broker believes management is doing a good job in consolidating the network and executing the co-location and online strategy, although comparable sales remain low for a retailer that has undertaken significant store expansion over the last three years.

Deutsche Bank reduces the target to $5.90 from $6.30 and, as the stock is trading closer to the revised target, upgrades to Hold from Sell.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/5/1

FY17 margin was affected by a high incidence of large commercial losses, Citi observes. FY18 is expected to benefit from recent commercial price rises.

Underlying margins are expected to improve from here and, with solid premium momentum, the outlook appears reasonable to Citi.

The significant fall in the share price results in the broker lifting its call while acknowledging the stock still looks somewhat expensive. Rating upgraded to Neutral from Sell. Target $6.30.

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

FY17 results were below the broker's expectations. No guidance or outlook was provided.

The broker believes the recent resignation of the managing director and subsequent write-downs of generic assets does not bode well for FY18 and beyond. Morgans has reduced FY18 forecasts by -23%, FY19 by -143% and FY20 by -122% respectively.

Upgrade to Hold from Reduce and target reduced to 8c from 8.5c.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/1

Link's result was roughly in line with consensus after adjusting for an amortisation change, and featured strong performances from Corporate Markets and IDDS, Morgans notes, offset by weakness in Funds Administration.

Weakness leads to a -4% cut of FY18 forecasts but incorporating the Capita Asset Services acquisition and subsequent capital raising into forecasts results in a 10% increase for FY19. Target rises to $9.04 from $8.29 post incorporation and on that basis Morgans sees sufficient value to upgrade to Add.

MCMILLAN SHAKESPEARE LIMITED ((MMS)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/2/0

FY17 came out below expectation, report the analysts. Divisional results are labeled as "mixed". Retail Financial Services (RFS) profit declined in double digits, driven by lower commissions in light of the ASIC reviews.

Morgan Stanley does find the outlook has now improved, with contract wins and increased take-up in Group Remuneration Services (GRS) underwriting FY18 growth.

Target jumps to $14.65 from $9.60. Rating moves to Equal-weight from Underweight. Sector view is In-Line.

See also MMS downgrade.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/4/1

UBS upgrades to Neutral from Sell, as concerns over mine life have been removed following a larger-than-expected reserve//resource update.

While the outlook appears balanced now, further upside may be difficult to achieve as all of the exploration targets are likely to be needed to underpin the 10-year mine life based on the resource, the broker suggests. Target is raised to $5.00  from $4.49.

PERPETUAL LIMITED ((PPT)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/3/2

FY17 results were ahead of Credit Suisse forecasts. The broker was encouraged by the double-digit growth in Perpetual Private and Corporate Trust divisions in the second half.

The broker finds promise in these other divisions, as the Perpetual Investment strategy appears to be on the back burner and flows from new products are a couple of years away.

Ratings upgraded to Outperform from Neutral. Target is raised to $56.50 from $51.00.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/6/0

Credit Suisse has upgraded Sims Metal Management from Underperform to Neutral, in a preview of FY17 results.

Sims earnings guidance disappointed given the best global scrap markets since 2008, and the broker points to second-half cost-out progress/regression as the culprit. The cash balance is strong at $370m.

Credit Suisse says strong scrap, iron ore and coking coal prices suggest a stronger FY18. After removing the -25% US discount and rolling the model forward, the broker's net present value estimate rises. Target price rises to $13.50 from $11.

SMARTGROUP CORPORATION LTD ((SIQ)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/0

Smartgroup's first half results were pleasing to the broker, with NPATA up 67% on the previous corresponding period. No formal guidance was given.

The company's second half and FY18 growth outlook is supported by an improved run-rate of the Selectus synergy target, solid package growth in the first half and FY18 targeted contribution from AccessPay of $2.5m.

The broker upgrades to Add from Hold and target raised to $8.35 from $7.40.

See also SIQ downgrade.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/4/1

Ord Minnett has upgraded the stock to Accumulate from Hold, with value now on offer following recent share price weakness.

The move to a more positive view is premised on a return to profitability in commercial business lines post increases in market premium rates, and the expense base normalising by FY19. 

Target price remains $13.75.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/4/1

For the six months to June aeronautical revenue grew by 9% off 3.6% growth in traffic, because of the favourable shift in mix to international versus domestic. UBS now forecasts cash flow growth of 14% in 2017 and EBITDA growth of 10%.

The broker believes the stock is looking more attractive and upgrades to Buy from Neutral. Target is raised to $7.60 from $7.30.

See also SYD downgrade.

TRADE ME GROUP LIMITED ((TME)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/2/2

FY17 results were in line with expectations. The main news for Credit Suisse was that the company will invest in a range of platform–centred initiatives, and costs are expected to outgrow revenue in FY18 with a further step up in capitalised development.

The broker remains supportive of the company's strategies but believes caution is required as to what upside to valuation they ultimately produce.

Rating is upgraded to Neutral from Underperform. Price target is reduced to NZ$4.40 from NZ$4.50.

WELLCOM GROUP LIMITED ((WLL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

FY17 results were ahead of expectations, but could have been worse given the loss of three major clients.

Morgans has revised its FY18 EPS forecast down to 29.5c from 33.5c and FY19 forecast down to 31.3c from 35.6c. The broker notes Wellcom offers investors exposure to the global advertising cycle, with revenues directly linked to customer activity levels.

With an improved outlook for media spending, and the stock trading at a significant discount to the broker's valuation, the stock is upgraded to Add from Hold and target raised to $5.66 from $5.11.

Downgrade

APN OUTDOOR GROUP LIMITED ((APO)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/2/0

APN Outdoor's full-year result was in-line – much to UBS's surprise. The market had been bracing itself for a miss given the failed oOh!media merger, churn in sales staff and the resignation of the CEO. Guidance also met consensus, albeit a touch shy of the broker.

UBS expects FY18 may be more subdued, expecting growth to be driven by smaller digital boards, and anticipating growing re-contracting risk and rising depreciation and amortisation.

The broker cuts FY18-FY19 earnings per share by -9% and -12%. UBS downgrades the stock to Neutral from Buy and cuts the target price to $5.25 from $6.

ALUMINA LIMITED ((AWC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/3

Alumina Ltd's strong result was in line with consensus as was the dividend, albeit below Macquarie's forecast. Higher corporate costs meant cash flow was softer.

The broker believes illegal capacity cuts in China will not impact on alumina to the same extent as they have for aluminium, removing a potential key catalyst for alumina prices. Add in a stronger A$ and rising caustic soda prices and Macquarie downgrades to Neutral, retaining a $2.10 target.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/1

Beach Energy's full-year result was in line with the broker, save for a big beat on tax that put the net profit 10% ahead of forecast. 

Citi notes all the ducks are lining up for Beach: it delivered on cost cutting, and reserves growth, and the outlook is rosy.

But the broker downgrades core net profit forecasts for FY8 and FY9  by -13% to -16%, expecting higher depreciation and amortisation and higher corporate costs.

Rating is downgraded to Neutral from Buy after a 10% share-price jump post the the result. Target price eases to 76c from 80c.

See also BPT upgrade.

BREVILLE GROUP LIMITED ((BRG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/0

FY17 net profit met expectations and Macquarie considers the outlook attractive.  Nevertheless, the broker believes current multiples capture the upside and downgrades to Neutral from Outperform.

The broker downgrades earnings per share estimates by -2.9% for FY18 and by -3.6% for FY19. Target is raised to $10.70 from $9.50.

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Downgrade to Accumulate from Buy by Ord Minnett and Downgrade to Hold from Add by Morgans .B/H/S: 2/3/0

FY17 results were slightly below Ord Minnett estimates. The broker considers the margins in the Australasian business the highlight of the results and likely to prove sustainable.

Estimates are downgraded by -3% for FY18 and -4% for FY19 because of currency changes, increasing capital expenditure and higher margins in Australasia.

The broker downgrades to Accumulate from Buy and recommends buying on weakness. Target is raised to $22.98 from $18.60 as the model is rolled forward, amid higher long-term revenue and margin assumptions as well as a change of analyst.

The company's FY17 results were slightly better than the broker had forecast. Morgans believes currency will be a headwind in FY18, but expects the company to deliver 20% to 25% EBITDA growth.

Further acquisitions, rising airfares and increasing client spend are the key upside risks in the broker's opinion. FY18 earnings forecast has dropped -3.2%, while FY19 and FY20 forecasts rise slightly.

With the stock trading close to valuation, Morgans downgrades to Hold from Add and raises the target price to $23 from $22.

CEDAR WOODS PROPERTIES LIMITED ((CWP)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

FY17 results were in line with the broker's forecasts. No formal FY18 guidance was forthcoming, given the heavy skew of settlements in the fourth quarter.

A weaker FY18 based on project timing presents a risk, but pre-sales are robust at $260m, up 41% on the previous corresponding period. Morgans believes the company's development pipeline and embedded value within the WLTC project provide a visible level of earnings delivery out to FY21.

Stock is downgraded to Hold from Add and target is reduced to $5.76 from $5.80.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/5/0

FY17 operating earnings were broadly in line with Ord Minnett forecasts. The broker expects earnings to accelerate further into FY19 on the back of contract wins and growth in free cash flow.

In order to become more positive on the stock at the current share price the broker needs to factor in additional value-accretive wins or acquisitions. This leads to a reduction in the recommendation to Hold from Accumulate. Target is $1.36.

ERM POWER LIMITED ((EPW)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0

ERM's result beat Macquarie, thanks to an operational rebound in the core Aust business. The opaque nature of the hedge book makes it difficult for the broker to identify improvement in the last quarter, but rising electricity prices are assumed to have provided gains.

The US business was soft and Likewise in Aust is still three years from breakeven. Uncertainty over the US business and the headwind of a working capital unwind see the broker downgrade to Neutral. Target rises to $1.43 from $1.30.

GROWTHPOINT PROPERTIES AUSTRALIA ((GOZ)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/0/2

Growthpoint's result was in line with Macquarie and recent FY18 guidance was reaffirmed. The dividend is nevertheless some 4% in excess of free cash flow which is why, the broker suggests, the payout ratio declined to 84% from 89% in FY16.

A payout ratio of 85%-plus has been indicated for the medium term, but Macquarie sees limited upside to distributions. Despite being defensive and high yielding, Growthpoint's above-sector gearing and the fact the stock is trading above net asset valuation prompts the broker to downgrade to Underperform.

Target rises to $3.19 from $3.05.

GWA GROUP LIMITED ((GWA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/4

FY17 results were in line with Credit Suisse. The broker observes the balance sheet is in good shape and management is to be commended for its execution.

Nevertheless, most of the low hanging fruit appears to have been picked and the broker suspects it will be difficult to grow in FY18-19. Subsequently, rating is downgraded to Underperform from Neutral following a strong share price performance. Target is $2.90.

ISENTIA GROUP LIMITED ((ISD)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0

FY17 net profit was slightly ahead of Macquarie's estimates while EBITDA was pre-announced. Macquarie believes long-term value exists but it will take time to materialise.

After three successive downgrades and reduced disclosure, the broker believes it will take time to re-build investor confidence. The broker continues to believe the company should close or sell King Content if the performance does not improve soon.

Rating is downgraded to Neutral from Outperform. Target is reduced to $1.66 from $2.00.

LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/0

The broker was impressed by the company's FY17 results, well above the top end of recent guidance. Management commented that FY18 had a 'pleasing start' with LFL sales tracking above target.

Lovisa has guided to 20 to 30 store openings in FY18, with a first pilot store in Spain. Morgans has raised FY18 earnings estimates by 13.2% and FY19 estimates by 10.8%.

Downgrade to Hold from Add and target increased to $4.84 from $4.48.

MCMILLAN SHAKESPEARE LIMITED ((MMS)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0

FY17 results were in line with estimates. Credit Suisse believes the results confirm that positive earnings momentum has returned. The broker considers, in the light of recent share price appreciation, that the valuation is fair at this point.

Rating downgraded to Neutral from Outperform. Target rises to $15.75 from $12.50.

See also MMS upgrade.

MORTGAGE CHOICE LIMITED ((MOC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/0/1

Mortgage Choice's result was in line but core commissions fell short, suggesting lower quality. While Macquarie notes stabilisation of commission rates, brokers' share of settlements is stagnating and market share of applications is falling.

Throw in an expected slowing in the housing market and the broker sees constrained earnings, and given further uncertainty around commission structures, little chance of a re-rate. Downgrade to Underperform.

Target falls to $2.30 from $2.55.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/2/2

It is unclear how Nine's result stacked up against Macquarie's forecast but the broker does note modest earnings growth thanks to cost controls and licence fee relief. Better ratings meant market share gains in TV ads but that market continues to decline.

Market share gains still remain key to FY18 performance, Macquarie suggests, but cash conversion will remain weak due to a number of factors including the timing of sports rights payments and licence fee cuts and onerous contract provisions.

While Nine's ratings and profits are improving, the share price is up 50% this year and that's enough for the broker to downgrade to Underperform. Target rises to $1.40 from $1.35.

NIB HOLDINGS LIMITED ((NHF)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/3

Morgan Stanley believes cyclical lows in claims inflation, sub-zero systems growth, the gradual breakdown in community ratings and the 2018 election present headwinds.

The broker believes margin risks are elevated in the form of higher costs of acquisition, rising costs for retention and upside risk to hospital and ancillary claims.

Given the risks and trading multiples, the broker downgrades to Underweight from Equal-weight. Target is raised to $4.95 from $4.85. In-Line industry view.

OZ MINERALS LIMITED ((OZL)) Downgrade to Hold from Add by Morgans and Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 3/2/3

The company's first half results were in line with the broker's expectations. Production guidance for CY17 is on track.

Approval of Carrapateena was no surprise to Morgans. The broker believes the company will develop the project before considering increases to dividend policy or capital management through a buy-back. 

Downgrade to Hold from Add and target raised to $8.95 from $8.30.

The company's first half results were better than the broker had expected. The 6c dividend was well ahead of Deutsche Bank's expectations.

Management has approved the Carrapateena project following an updated feasibility study, and management believes it can fund construction from free cash flow while maintaining some level of dividend. The broker finds this decision somewhat confusing as the project could consume most of the cash balance. 

Deutsche Bank downgrades the stock to Sell from Hold and target price rises to $7.30 from $7.10.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 4/1/2

Deutsche Bank downgrades to Sell from Hold. The broker believes the company has become, operationally, too complex. Returns on equity of just 7.0% have been achieved over the last five profitable years, well below the cost of capital.

The unpredictability of earnings makes the broker believe the risk/return metrics are not attractive at the current share price. Target is reduced to $10.00 from $12.70.

QUBE HOLDINGS LIMITED ((QUB)) Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/5/1

Qube's result fell -5% short of the broker, leading to a -12% downgrade to forecast earnings in FY18. Consolidated divisions and the Patrick JV met expectations but the broker sees lower Patrick earnings ahead, along with higher corporate costs and interest charges.

It was a consolidation year for the company, the broker notes, hampered by the cost of establishing the Patrick JV and closing on Moorebank. FY18 should see the trough in earnings before these investments underpin earnings growth thereafter. The stock has nonetheless outperformed the market, hence the broker sees valuation as fair.

Downgrade to Neutral. Target falls to $2.80 from $2.90.

FY17 results were broadly in line with expectations. Macquarie notes, while no specific guidance was provided, the FY18 outlook is consistent with a challenging operating backdrop.

The company has reached agreement with Target Australia for warehousing on initial lease term of 10 years. As well, a new five-year logistics services contract has been agreed covering freight from Port Botany to Moorebank. This supports a long-term investment view in the broker's opinion but will not materially benefit earnings until FY19.

Macquarie downgrades to Neutral from Outperform as the stock has risen 23% over the past year and there is limited upside in the short term. Target is raised to $2.89 from $2.81.

REA GROUP LIMITED ((REA)) Downgrade to Hold from Add by Morgans .B/H/S: 3/5/0

Morgans has downgraded the stock to Hold from Add. As the price has increased 6% since the Add recommendation, the stock is now near to fully valued.

There are no changes to forecasts and price target remains $68.75

ST BARBARA LIMITED ((SBM)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

FY17  revenue was in line with Citi but underlying earnings missed estimates. The FY17 reserve/resource update increases Gwalia ounces by 18% although the grade drops to 7.8g/t from 8.3g/t.

The company has completed a turnaround both in operations and financially but Citi believes this is incorporated by the market and the stock is close to fair value.

Rating is downgraded to Neutral from Buy as a result. Target is raised to $3.00 from $2.93.

SMARTGROUP CORPORATION LTD ((SIQ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/1/0

First half results were well ahead of Credit Suisse expectations. The broker does not rule out the upgrade cycle continuing for a while longer.

Nevertheless, on the back of share price appreciation valuation is considered fair and the rating is downgraded to Neutral from Outperform. Target is raised to $8.00 from $7.45.

See also SIQ upgrade.

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

Sydney Airport's first half results were slightly better than the broker's estimates. Full year dividend guidance has been upgraded by 1cps to 34.5cps.

Morgans has raised FY17 forecasts by 1%, but downgrades longer term forecasts slightly. 

The broker has downgraded the stock to Hold from Add and lowered the target price to $7.0 from $7.40.

See also SYD upgrade.

VOCUS COMMUNICATIONS LIMITED ((VOC)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/7/1

FY17 results were no surprise to the broker, having been pre-released. The main interest for Morgans was the expectation that net debt would stay at current levels, or a touch higher, over the next twelve months, suggesting no free cash flow and most likely no dividend.

FY18 guidance suggested earnings would be flat at best and -5% lower at worse. The broker expected lower capex and increased cash flow to de-lever the balance sheet. However, with debt levels unchanged, the broker sees little reason for investors to get excited.

Morgans downgrades the stock to Reduce from Hold and cuts the target price to $2.22 from $3.50.

WORLEYPARSONS LIMITED ((WOR)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/0/1

FY17 results were a little soft, in Credit Suisse's view. The broker observes the cycle is turning slowly but not without risks.

While the worst may be behind the company from a macro perspective, the high level of gearing and lower quality underlying earnings mean the broker struggles to justify the price/earnings ratio at over 21x on FY18 forecasts.

Rating is downgraded to Underperform from Neutral as the broker believes the potential for a renewed bid from Dar Group is inflating the price, undeservedly. Target is raised to $9.50 from $8.50.

WESTERN AREAS NL ((WSA)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/4/3

Underlying, point out Citi analysts, hides an operational loss for FY17, below expectations. Making matters worse; guidance for FY18 is seen as soft as well.

The realised nickel price turned out weaker than expected. Citi's nickel price forecasts do not allow for further dividend payments. Estimates have been cut. Price target loses 10c to $2.10. Downgrade to Sell from Neutral.

WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/2/1

FY17 results beat estimates. Credit Suisse retains a positive view on the company's scalable business model, the large addressable market and impressive execution to date.

The broker downgrades to Underperform from Neutral on valuation grounds. Target is raised to $6.00 from $4.80.

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