Weekly Ratings, Targets, Forecast Changes

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This story features AGL ENERGY LIMITED, and other companies.
For more info SHARE ANALYSIS: AGL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

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 October 16 to Friday October 20, 2017
Total Upgrades: 13
Total Downgrades: 18
Net Ratings Breakdown: Buy 42.04%; Hold 41.98%; Sell 15.98%

In Australia, it seems, there always is a reason for stockbroking analysts to issue more downgrades for ASX-listed companies than upgrades. For the week ending Friday, 20th October 2017, FNArena registered 13 upgrades and 18 downgrades.

The result is total Buy and equivalent ratings are nearly on par with total Neutral/Hold ratings for the eight stockbrokers monitored daily; 42.04% versus 41.98%. Still, four of those eight are carrying more Buy ratings for stocks under their coverage.

AGL and IOOF both enjoyed two upgrades during the week but only one went to Buy for IOOF.  Both Lend Lease and Oil Search received two downgrades. All downgrades bar one moved to Hold/Neutral; the sole exception was Western Areas which receive one downgrade to Sell.

The news is positive for average price targets with only Myer receiving a noteworthy cut (-4%). GBST, Galaxy Resources and IOOF all enjoyed double digit percentage increases.

A reverse picture emerges for earnings forecasts where the balance is heavily tipped towards negative revisions, led by Perseus Mining, Galaxy Resources, Oil Search, QBE Insurance and Northern Star. Note IOOF also suffered -7% reduction on the initial dilution from the ANZ Bank wealth division purchase.

The largest gainer for the week, in terms of earnings estimates, is St Barbara, followed by Alumina Ltd, BHP, Bank of Queensland, Whitehaven Coal and Western Areas.

There's a lot happening thus and it is mainly inspired by analysts updating thoughts and projections for commodity prices. The news is neither uniformly good or bad. AGM season is heating up, quarterly production reports are being unleashed and more banks are about to release full year performance numbers.

Meanwhile, the index is holding up above 5900 but facing the strong hurdle at 6000. No shortage in views about how that's going to play out.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/1/0

While the devil may yet reveal itself into the details of the government's new energy policy, labeled the National Energy Guarantee (NEG), Citi analysts have taken the view the end result will likely be to the benefit of AGL Energy.

As they are of the opinion the political risk has now abated, the rating has been upgraded to Buy from Neutral. Target price lifts to $26.88 from $25.52.

The stock, for some time, has offered value with risk around the ACCC review and Victorian regulations, Macquarie observes. The risks have not been eliminated but the ACCC report provides some comfort.

The government's energy proposal, even though there are numerous details to be determined, appears positive for incumbents, the broker adds.

As the risks are diminishing Macquarie lifts its rating to Outperform from Neutral. Target is $25.40.

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

Deutsche Bank observes the company is on track for a strong FY18, driven by the African mining business and a recovery in Australian operations.

While execution is the key risk, positive updates on the three projects which are ramping up and a retracement in the share price since capital was raised lead the broker to upgrade.

Rating is upgraded to Buy from Hold. Target is $2.37.

BELLAMY'S AUSTRALIA LIMITED ((BAL)) Upgrade to Buy from Sell by Citi .B/H/S: 1/1/0

A previously rather sceptical Citi has changed its tune on Bellamy's. Trading momentum is accelerating and the turnaround is occurring faster than expected, the analysts acknowledge.

It is not too late to get on board, say the analysts. Forecasts have been lifted. Double whammy upgrade to Buy/High Risk from Sell/High Risk. Citi also suggests short covering can become an issue with a lack of negative catalysts on the horizon.

Target price jumps to $14.40 from $7.90.

GBST HOLDINGS LIMITED ((GBT)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/1/0

The company has an elevated R&D program with an associated lack of earnings certainty. Deutsche Bank undertakes an analysis of various scenarios in order to generate a value framework.

Given the high level of valuation support, attractive financials and corporate appeal the broker considers the stock  cheap and unloved. Rating is upgraded to Buy from Hold. Target is raised to $2.60 from $1.80.

G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/3/1

Citi analysts observe the share price has weakened by -21% since its peak in June. As they believe this now makes the stock undervalued, they have decided to upgrade to Buy from Neutral.

Target price lifts by 8% to $12.41. Citi continues to anticipate a re-rating for the shares with GUD expected to continue to rationalise its operations via further divestments and use the proceeds to acquire more businesses in the Automotive sector.

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

Macquarie reviews forecasts and upgrades to Neutral from Underperform. The broker envisages reduced downside risks because of the valuation, dividend yield and strong balance sheet that could support another share buyback or strategic acquisition.

A discount to the market is justified given the softening outlook for housing, but Macquarie believes the strong financial position should mean the share price is supported around current levels. Target is increased to $2.77 from $2.60.

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

Credit Suisse observes the acquisition of the ANZ Bank ((ANZ)) wealth management assets provides accretive deal metrics and an opportunity for significant organic growth.

The broker expects the targeted synergies and growth will be achieved in coming years and upgrades to Outperform from Neutral.

Incorporating the acquisition into forecasts leads to an -8% downgrade to FY18 estimates, largely from the dilution from the equity raising ahead of the completion of the transaction. Target is raised to $13.40 from $11.40.

IOOF's acquisition of ANZ Bank's ((ANZ)) wealth operations significantly enhances its scale, UBS notes, and cost synergies provide support. The value implications are less exciting however, given low organic growth prospects for the wealth business, compounding similar issues in IOOF's business.

This does not take away from earnings accretion, which the broker sees as 25%-plus by FY21. Earnings forecasts fall in the near term as IOOF pays for the acquisition but rise in latter years as the benefits accrue.

UBS upgrades to Neutral, lifting its target to $11.40 from $9.50.

OCEANAGOLD CORPORATION ((OGC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

Ord Minnett believes the mid-cap ASX-listed gold sector is in an enviable position, with strong balance sheets & cash operating margins and internal growth options.

The broker also notes a clear discount to global majors and mid-cap peers, believing this stems from the lingering perception of mine-life issues. The counter argument is that these gold companies are discovering reserve ounces around 85% cheaper than suggested by M&A over the past five years. Hence the valuation discount is considered unjustified.

Rating is upgraded to Accumulate from Hold. Target is raised to $4.50 from $3.90.

See also OGC downgrade.

OZ MINERALS LIMITED ((OZL)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 4/2/2

Deutsche Bank is upgrading price forecasts for metallurgical coal, copper, nickel, zinc and mineral sands, and sector earnings by 15% for 2018. The broker notes the sector generally appears fully valued.

Deutsche Bank is more positive on the base metals and envisages deficits persisting and supporting prices.

Rating is upgraded to Hold from Sell. Target is raised to $7.70 from $7.30.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 4/2/2

Ord Minnett envisages risk of an upward turn in the insurance cycle and increases earnings estimates for QBE.

While there have been no benefits sighted from any of the company's targeted improvements in claims or expense ratios, the broker continues to assume some improvement will come through eventually and provide an additional boost to the upward turn in the cycle.

Rating is upgraded to Hold from Lighten. Target is raised to $10.95 from $9.80.

ST BARBARA LIMITED ((SBM)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/0

September quarter production was strong and achieved 27% of unchanged guidance. Credit Suisse expects an upgrade to FY18 guidance will be forthcoming.

The broker upgrades to Outperform from Neutral. Target is $2.95.

Downgrade

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

Adairs has provided a positive update, leading to an earnings guidance upgrade thanks to ongoing strong sales. Morgans has upgraded forecasts in response.

The broker's FY18 sales growth target of 8% looks readily achievable given Adairs is cycling a weak FY17, and earnings risk remains to the upside. On valuation, Morgans downgrades to Hold. Target rises to $1.70 from $1.67.

BEACON LIGHTING GROUP LIMITED ((BLX)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

Beacon's AGM revealed nothing remarkable but Morgans is pleased with commentary regarding top line growth. The broker believes Beacon's market share will continue to benefit over time from the departure of Masters.

Morgans has made no changes to forecasts but after a 20% run-up for the share price, has now pulled back to Hold. Target unchanged at $1.56.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/2

Domino's German JV has acquired its number two rival in the country, Hallo Pizza. The company has not provided any specific guidance but the broker believes it will err on the side of conservatism regarding rebranding, highlighting the speed of the Joey's German store conversion,

The acquisition will be relatively insignificant to earnings to begin with, but Morgans sees a meaningful opportunity to improve Hallo's profitability. Target rises to $48.82 from $47.21. On valuation, the broker pulls back to Hold.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/2/2

Citi analysts remain confident the company can achieve the growth that is currently incorporated in their modeling, it's just that the share price keeps on visiting higher share price levels.

Motivated by valuation, and thus by return constraints at the current share price, the rating has been pulled back to Neutral from Buy. Target price lifts to NZ$12.75 from NZ$12.50.

GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

Citi downgrades to Neutral/High Risk from Buy/High Risk on valuation, following strong share price appreciation. Earnings estimates have been lifted, which pushes up the price target to $3.70.

Increased production, higher prices and lower costs are all responsible for the increase in forecasts. With the lithium market remaining tight, and positive catalysts still on the horizon, the analysts do acknowledge there is potential for further upside.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/5/0

Deutsche Bank is upgrading price forecasts for metallurgical coal, copper, nickel, zinc and mineral sands, and sector earnings by 15% for 2018. The broker notes the sector generally appears fully valued.

Deutsche Bank is more positive on the base metals and envisages deficits persisting and supporting prices.

Independence Group is downgraded to Hold from Buy on valuation. Target is reduced to $3.60 from $3.80.

LEND LEASE CORPORATION LIMITED ((LLC)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/0

The company expects a small number of engineering projects will underperform prior expectations. This will mean first half Australian construction operating earnings are below the prior first half.

Credit Suisse reduces FY18 forecasts for earnings per share by -9%. Around 4% of the reduction reflects a more conservative margin assumption for Australian construction earnings.

The write-down is likely to weigh on investor sentiment, in the broker's opinion, as this is one of the company's key earnings drivers.

The partial sell down of retirement is also dilutive and the broker downgrades to Neutral from Outperform. Target is reduced to $18.94 from $19.66.

Lend Lease has announced the sale of 25% of its retirement business platform, not 50% as desired, and booked a loss. It has announced a JV with US-based Softbank to build telco towers. But disappointingly for UBS, Aust construction earnings guidance has been lowered due to mispricing, geotech issues and delays.

The guidance downgrade and the loss of retirement earnings lead to lower forecast earnings but the broker's target rises to $18.10 from $17.70. Lend Lease has run 32% while the market has gained 4%, hence UBS downgrades to Neutral.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/4/3

Proposed changes to private health insurance should result in up to $1bn in claims savings across the system over four years, mainly through a reduction in prices paid for medical devices and prostheses.

Deutsche Bank considers this should be a net positive but the strong share price performance in anticipation of the changes has pushed the stock to its target.

Therefore the rating is downgraded to Hold from Buy. Target is raised to $3.20 from $3.10.

MANTRA GROUP LIMITED ((MTR)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/6/0

The company has entered into a binding agreement with Accor SA at $3.96 cash per share. UBS expects earnings tailwinds are likely to be driven by growth and demand in the accommodation industry and new property additions to the portfolio.

The broker sets its target in line with the recommended bid price and downgrades to Neutral from Buy on forecast shareholder return.

MYER HOLDINGS LIMITED ((MYR)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/2

Citi downgrades to Neutral from Buy/High Risk and lowers the target to $0.74 from $0.95. The broker removes the High Risk rating, given a base case scenario that now includes a potential earnings impact from Amazon.

A takeover scenario, with a 20% probability, is incorporated in valuation. Overall, the broker suspects Myer may be insulated from Amazon-related risks given its broad product assortment and willingness to exit unprofitable stores.

In order to become more positive on the stock the broker needs to witness a sustainable top line and sales productivity growth.

OCEANAGOLD CORPORATION ((OGC)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 4/2/0

Deutsche Bank is upgrading price forecasts for metallurgical coal, copper, nickel, zinc and mineral sands, and sector earnings by 15% for 2018. The broker notes the sector generally appears fully valued.

OceanaGold is downgraded to Hold from Buy on valuation. Target is reduced to $3.70 from $4.40.

See also OGC upgrade.

OIL SEARCH LIMITED ((OSH)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/4/1

September quarter production was strong and 2017 guidance has been retained to 29-30.5mmboe, although expected to be at the upper end. Credit Suisse considers the stock fairly valued and downgrades to Neutral from Outperform.

The broker finds the stock very attractive but there are issues to consider such as the structure of financing, which remains uncertain. Corporate activity remains a factor and Total is the most likely, in the broker's opinion.

Credit Suisse suspects the first move in the share price might be down if this plays out. Target is raised to $7.25 from $6.80.

The company has announced another quarterly LNG production record, 4% ahead of Macquarie's expectations.

The broker remains positive on the expansion as well as the base PNG LNG business, but notes the company has significantly increased its expected capital expenditure for 2018.

As a result the broker downgrades to Neutral from Outperform. Until further clarity is provided on the fiscal terms or development concept, the broker considers the stock fully valued. Target is raised to $7.70 from $7.50.

RIO TINTO LIMITED ((RIO)) Downgrade to Neutral from Buy by Citi .B/H/S: 6/2/0

Iron ore shipments from the Pilbara in the September quarter were in line with Citi's expectations. Mined copper disappointed, because of lower head grades.

The main change to 2017 guidance is a lowering of mined copper production because of a delay in the ramp up of the expansion at Escondida.

Citi downgrades to Neutral from Buy. Target is raised to $71 from $66.

SPECIALTY FASHION GROUP LIMITED ((SFH)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/0

Specialty Fashion's market update revealed the company is struggling to boost sales following a weaker winter fashion season in 2017, comment Citi analysts. The profit warning has triggered significant reductions in forecasts.

In addition, the weak trading conditions pull the highly geared balance sheet into focus. Citi thinks this is yet another reason to be more cautious. The company is closing down stores, but the analysts argue there is no visibility on the outlook for sales and earnings.

Downgrade to Neutral/High Risk from Buy/High Risk. Target price declines to 25c from 45c.

SANTOS LIMITED ((STO)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 5/2/1

September quarter production reflected a strong quarter and Ord Minnett unwinds some of the conservatism in its modelling, resulting in an uplift in valuation and a rise in the target to $4.25 from $3.85.

Nevertheless, the broker believes the stock is fully valued and the price is now above the revised valuation. This leads to a downgrade to Hold from Speculative Buy.

WESTERN AREAS NL ((WSA)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/2/4

Deutsche Bank is upgrading price forecasts for metallurgical coal, copper, nickel, zinc and mineral sands, and sector earnings by 15% for 2018. The broker notes the sector generally appears fully valued.

Deutsche Bank is more positive on the base metals and envisages deficits persisting and supporting prices.

Western Areas is downgraded to Sell from Hold on valuation. Target is raised to $2.40 from $2.20.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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