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 January 29 to Friday February 2, 2018
Total Upgrades: 21
Total Downgrades: 15
Net Ratings Breakdown: Buy 41.83%; Hold 41.50%; Sell 16.67%

Last week the Australian share market's resilience in the face of Wall Street weakness was supported by stockbroking analysts issuing a high number of upgrades for ASX-listed stocks. Among the 21 upgrades registered by FNArena for the week ending Friday 2 February, 2018 we find a number of bond proxies, early reporters of corporate results, and even two banks.

Pipeline operator, and bond proxy, APA Group was the sole recipient of two upgrades for the week, both went to Neutral from Sell.

Among the 15 downgrades registered for the week, six ended with a Sell recommendation; Medibank Private, Northern Star, Sandfire Resources, South32, TPG Telecom and Village Roadshow. The latter was forced to, again, issue a profit warning.

The mix between Buy/Hold/Sell ratings for the eight stockbrokers monitored daily by FNArena has now shifted in that Buy and equivalent ratings have become the largest contingent with 41.83% of all recommendations, beating the Neutral/Holds with 41.50% and the Sells at 16.67%.

Macquarie, Morgans and Morgan Stanley remain the only three brokers, out of the eight, who carry more Buy ratings than Hold/Neutrals.

Positive revisions to valuations and price targets for the week are dominated by resources stocks, led by Beach Energy, but with jewellery retailer Lovisa on second spot. The negative side carries much lower numbers with Village Roadshow the biggest loser, followed by Viva Energy and Fortescue Metals.

A noticeable switch from previous weeks has taken place in earnings estimates with the balance for the week firmly favouring negative adjustments. Amongst the heaviest hit, we find QBE Insurance, Perseus Mining and Independence Group, as well as Virgin Australia, Fortescue Metals and 3P Learning.

Among those enjoying positive revisions, we find Beach Energy, Platinum Asset Management, Treasury Wine Estates and Lovisa Holdings.

The week ahead will see the local reporting season gather steam, with FNArena preparing to launch its permanent Reporting Season Monitor (which we expect will add even more value to the service), but with Wall Street unable to fight gravity on the back of rising bond yields, macro movements will feature large for the Australian share market this week.

Upgrade

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

Credit Suisse observes diverging operating trends. Improving yield and stronger domestic load factors have been offset by an increase in the Singapore jet fuel price.

Given the hedging profile, the broker expects limited impact on the current year but the outlook and potential quantum of downgrades for FY19 and FY20 are considered more uncertain.

Credit Suisse now believes the stock presents a more balanced risk/reward and upgrades to Neutral from Underperform. Target is raised to NZ$2.96 from NZ$2.90.

APA GROUP ((APA)) Upgrade to Neutral from Sell by Citi and Upgrade to Add from Hold by Morgans .B/H/S: 3/2/2

Citi is cautious about Australian utilities because of macro and competitive headwinds that create uncertainty. These include any remaining political intervention risk, interest rates, the entry of Alinta into the market as well as commodity markets.

For the regulated utilities, given the outlook is relatively benign and Citi is not materially bearish on interest rates, value appears to have emerged and APA is upgraded to Neutral from Sell. Target is raised to $8.18 from $8.01.

Morgans forecasts around 1% growth in operating earnings at the first half, with growth hampered by lower CPI, re-contracting and no substantial incremental earnings from growth projects.

Nevertheless, the recent decline in the share price back to the lower end of recent ranges provides a buying opportunity in the broker's opinion.

Rating is upgraded to Add from Hold. Target is reduced to $8.58 from $8.67.

AP EAGERS LIMITED ((APE)) Upgrade to Add from Hold by Morgans .B/H/S: 1/2/1

While trading remains difficult, Morgans believes AP Eagers is now better placed to grow earnings in 2018 thanks to a restructured base business and likely increase in acquisitions, among other factors. Rating upgraded to Add ahead of results season.

Target unchanged at $9.10.

ASX LIMITED ((ASX)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/4/4

Citi observes strong secondary capital raisings have nudged up earnings per share. The first half recorded total capital raisings of $44.8m, up 22%.

The cash market has been lacklustre in the first half and the broker notes exit momentum has been similarly weak.

Citi lifts FY18 estimates for earnings per share by 0.5% and the target to $55.30 from $54.90. Rating is upgraded to Neutral from Sell.

BEACON LIGHTING GROUP LIMITED ((BLX)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Morgans believes FY18 will mark a return to strong earnings growth for Beacon following a year impacted by the demise of Masters and subsequent stock clearance. It is of no surprise Beacon has stepped up its store rollout following what may be a once in a lifetime opportunity.

Upgrade to Add. Target rises to $1.77 from $1.56.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Add from Hold by Morgans .B/H/S: 1/5/2

Morgans believes earnings risk is to the upside for the majors over the next twelve months as regulatory risk subsides, bad debts remain benign and strong balance sheets present capital return opportunities. The broker has an Add rating now on all four majors, having upgraded CBA.

Target rises to $81.50 from $80.00.

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

First half net profit grew 18.2% and full year guidance is confirmed at $62-64m, up 12-16%. Morgans considers the company's growth strategies provide a solid and visible earnings outlook over FY18-21.

Moreover, the group should be able to sustain a premium to historical PE given the growth profile as well as a substantial opportunity via the US business. Morgans upgrades to Add from Hold. Target is reduced to $23.60 from $23.80.

See also CCP downgrade.

GDI PROPERTY GROUP ((GDI)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/0/0

The company has the highest portfolio exposure among the A-REITs to the Perth office market. Credit Suisse believes this makes the stock a counter-cyclical play on a recovery in what is the most challenging of the major CBD office markets in Australia.

The broker believes Perth may be on the road to recovery, expecting stronger leasing conditions going forward. The current valuation differential to the major east coast markets is also expected to narrow.

Rating is upgraded to Outperform from Neutral. Target is raised to $1.31 from $1.15.

G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/1

GUD's result beat Macquarie by 12% on earnings and 11% on revenue, thanks to a strong auto result and lower interest expense. Debt reduction is ongoing.

GUD is well positioned to leverage its scale and leading position in auto, the broker suggests, and a large pipeline of acquisition targets supports earnings forecasts. A 5% discount to FY19 market PE is unjustified, Macquarie suggests. Upgrade to Outperform.

Target rises to $13.50 from $11.36.

INVESTA OFFICE FUND ((IOF)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/1

With Cromwell Property ((CMW)) now off the register, that overhang on Investa's share price is gone. Weak cash flow and earnings expectations for FY19 have also been priced in, UBS suggests, and indeed recent leasing success sees the broker move to a flat FY19 forecast.

UBS therefore upgrades to Neutral, retaining a $4.44 target, while recognising that rising global bond yields will weigh.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/4/0

Credit Suisse suspects the story for Incitec Pivot could become more interesting mid year with more certainty on Gibson Island and Australian explosives contract losses, as well as a more realistic assessment of fertiliser prices.

Nevertheless, the broker finds the growth options not nearly as visible.

Rating is upgraded to Neutral from Underperform on share price weakness. Target is raised to $3.67 from $3.49.

JB HI-FI LIMITED ((JBH)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/2

Ord Minnett reviews JB Hi-Fi following the strong performance of the stock, noting Australia's consumer sector has been stronger than expected and the launch of Amazon has been underwhelming thus far.

JB Hi-Fi has also responded to the competitive threat of Amazon better than expected. Rating is upgraded to Accumulate from Hold and the target to $31.50 from $23.00.

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

Morgans has rolled forward its earnings forecasts for Lovisa ahead of results season, leading to a target increase to $7.84 from $7.82.

The recent share price pullback leads to an upgrade to Add.

MONADELPHOUS GROUP LIMITED ((MND)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 1/1/3

Macquarie believes the environment is getting better for contractors, with a synchronised resources and infrastructure recovery underway. Significant tender opportunities await the company in the resources sector and the broker suggests it is well-placed to capture share.

Monadelphous revenues tend to outperform the sector in strong market conditions, Macquarie observes. Rating is upgraded to Outperform from Underperform.

Target is raised to $19.45 from $17.35. The broker includes the potential for accretive acquisitions in its outlook.

NUFARM LIMITED ((NUF)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/1

Credit Suisse considers the macro backdrop for crop chemicals will remain sluggish in 2018 amid mixed regional conditions and persistently weak soft commodity prices.

While the contribution from cost reductions beyond FY18 is reduced, and will lead to slower earnings growth, the broker believes the market is under appreciating the long-term benefits that the transformation program will deliver.

Moreover, there appears to be no expectation factored in for a successful development of Omega 3 canola. Credit Suisse upgrades to Outperform from Neutral. Target is reduced to $9.21 from $9.23.

SPARK INFRASTRUCTURE GROUP ((SKI)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/3/1

Citi is cautious about Australian utilities because of macro and competitive headwinds that create uncertainty. These include any remaining political intervention risk, interest rates, the entry of Alinta into the market as well as commodity markets.

For the regulated utilities, given the outlook is relatively benign and Citi is not materially bearish on interest rates, value appears to have emerged. The broker prefers Spark Infrastructure in this segment and upgrades to Buy from Neutral. Target is reduced to $2.55 from $2.60.

VOCUS COMMUNICATIONS LIMITED ((VOC)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/5/1

Citi believes the stock has become too cheap to ignore and upgrades to Buy from Neutral. Nevertheless, the call comes with some large caveats.

Citi assumes the company will deliver half of the $90m earnings growth that management is targeting over the next three years and there is scope for upside if it can deliver.

However, debt levels are stretched and a successful sale of the NZ business is required to relieve pressure ahead of the final payment of the Australia-Singapore cable in the first half  of FY19. Target is raised to $3.55 from $2.85.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/3/0

Capital management is an emerging theme and this should assist Ord Minnett's preferred banking stocks – Westpac and ANZ ((ANZ)). Westpac is upgraded to Accumulate from Hold.

The sector faces challenges, such as competitive threats and stretched households, but the broker believes a strong market structure and improving economic environment will allow the banks to manage the pressures. Target is raised to $33.10 from $33.00.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/4/1

An extended rally in coal prices has led to significant de-gearing, creating valuation support, Morgan Stanley observes. The broker considers the stock fairly valued and generating significant cash flow even on bear-case coal prices.

This leads the broker to upgrade to Equal-weight from Underweight. The upside risk comes from an expanded Vickery project.

Target rises to $5.05 from $3.75. Industry view: Attractive.

WOOLWORTHS LIMITED ((WOW)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/3

Citi expects Woolworths to maintain its lead on sales growth in grocery over the next two years. Superior execution is the primary driver of stronger sales growth and the broker upgrades to Buy from Neutral. Target is raised to $30.50 from $28.50.

The broker does not expect a repeat of FY18's stark improvement in execution in FY19 but does suggest the refurbishment program and online growth will support sales growth ahead of rival Coles ((WES)).

Downgrade

AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Downgrade to Hold from Add by Morgans .B/H/S: 5/2/0

Auto Holdings' outlook is centered around the divestment of its cold logistics business, Morgans suggests, Given there is a risk the divestment will not proceed, the broker has moved to Hold and applied a valuation discount.

Target falls to $3.84 from $4.04.

AWE LIMITED ((AWE)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/3/2

The company has received its third takeover bid, this time from Mitsui at $0.95 a share. The bid is conditional on the termination of the scheme with Mineral Resources ((MIN)). AWE is still evaluating the bid but Credit Suisse assumes it will move to a recommendation.

The broker considers Mitsui the most credible and credentialled player to have bid for AWE at this stage. The broker believes AWE shareholders have now been handsomely rewarded for their patience and more value could be added by redeploying the money, rather than awaiting an improved or counter bid.

The broker believes Senex Energy ((SXY)) offers this sort of value and has been surprised at the lack of reaction in the Senex share price to the heightened bid activity at AWE.

Credit Suisse downgrades to Neutral from Outperform. Target is set at 95c.

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

First half net profit was slightly below Ord Minnett's forecast. The company has retained guidance for net profit in FY18 of $62-64m, representing 12-16% growth.

Ord Minnett is impressed by management's positioning of the company as well as the diversity of the business and notes, while the earnings outlook is robust, the recent strength in the share price means the stock is now trading much closer to a market multiple.

The broker downgrades to Hold from Accumulate. Target is raised to $22 from $21.

See also CCP upgrade.

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

Ord Minnett found the December quarter production sound but considers the rise in the stock of more than 14% over the past three weeks excessive.

Rating is downgraded to Hold from Buy. Target is $2.80.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/3/1

Ord Minnett believes the company's significant change in marketing strategy incorporates a view that low-grade ore discounts are partly structural.

Hence, the broker raises expectations for the long-term iron ore price discount to -20% from -17%, which lowers the valuation and target to $5.50 from $6.35.

In theory, this suggests a potential premium gain for the company from the new higher specification product may be more than offset by a greater penalty for the remaining product.

Given the uncertainty, Ord Minnett downgrades the rating to Hold from Accumulate.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/2

The company had a strong December quarter at Tropicana and made improvements at Nova, maintaining FY18 guidance. Citi observes strong base metal prices have lifted that share price by 25% and downgrades to Neutral from Buy on valuation.

The broker rolls forward multiples to FY19 to reflect a full year of Nova production. Target rises to $5.00 from $4.50.

MINERAL DEPOSITS LIMITED ((MDL)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Given a continuation of the strong performance of Grand Cote operations and successful ramp up of the Tyssedal furnace, Morgans now eliminates the discount to valuation and raises the target to $1.18 from $0.94.

As the share price is now close to valuation, the broker suggests investors should consider taking some profits, although the commodity cycle remains favourable for the business. Rating is downgraded to Hold from Add.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/4/2

Ord Minnett believes the health insurance industry is facing reduced penetration and affordability concerns and Medibank Private is losing share. The broker believes the efforts to address this issue through retention and customer service initiatives is being thwarted by the company only partially embracing the fast-growing aggregator channel.

While top-line trends could weaken with falling participation rates, Ord Minnett also believes low premium increases will pressure gross margins in FY19. Rating is downgraded to Lighten from Hold. Target rises to $3.16 from $3.05.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/4/3

Credit Suisse found the December quarter results uninspiring as there were no exploration results and production was within guidance.

Rating is downgraded to Underperform from Neutral on share price strength. Target is $4.55.

SOUTH32 LIMITED ((S32)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/4/3

Citi has taken a negative view on the medium to longer term outlook for manganese prices and this has triggered a downgrade to Sell from Neutral, with the target price tumbling to $3.50 from $3.75.

Today's update also includes some balance sheet criticism (company accused of hugging too much cash, being too conservative post spin-off) plus the analysts have updated for currency movements, with the differential between SAR and AUD blowing out to the company's detriment.

Manganese supply is anticipated to increase into a flat demand environment later in the year. Earnings estimates have been reduced.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/6/1

Sandfire's Dec Q was solid, featuring an increase in copper production. This result and a grade increase in the second half should ensure guidance is met, Citi suggests. However the market is factoring in too much exploration success for the broker's liking.

With DeGrussa upside already priced in, Citi downgrades to Sell. Target falls to $6.80 from $7.10.

SUPER RETAIL GROUP LIMITED ((SUL)) Downgrade to Hold from Add by Morgans .B/H/S: 5/2/1

Morgans has rolled forward its earnings forecasts for Super Retail ahead of results season, leading to a target increase to $9.58 from $9.00.

The recent rally in the stock following Christmas leads the broker to pull back to Hold.

TPG TELECOM LIMITED ((TPM)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/4/2

Citi observes price deflation has been a key theme for the telecommunications industry.

The broker forecasts three years of earnings declines for TPG and believes the stock will be a more attractive prospect once it gets past the peak of mobile capital expenditure in FY18/19.

The broker reduces estimates for earnings per share in FY19 by -15%. Rating is downgraded to Sell from Neutral. Target is reduced to $5.20 from $6.05.

VIRGIN AUSTRALIA HOLDINGS LIMITED ((VAH)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/1/2

Credit Suisse expects a strong first half when the company reports on February 28. The broker notes yields on HNA bonds spiked to 18% and share trading in seven of its 16 subsidiaries is suspended. As the company owns 19.8% of Virgin Australia, it could be a seller, Credit Suisse suggests.

The broker downgrades to Neutral from Outperform and reduces the target to $0.25 from $0.26. Previously, Credit Suisse included a 33% probability the major holders of stock would take the company private at 29.5c per share but given the financial challenges at HNA, and at other major stakeholders, this appears less likely.

VILLAGE ROADSHOW LIMITED ((VRL)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/1/2

The latest trading update disappointed Ord Minnett. Theme parks continue to be affected by the Dreamworld tragedy in October 2016, despite improved ticket revenues in January 2018.

The company has recently completed the sale and lease back of the Gold Coast land, which follows a sale of the Singapore exhibition business in November. Proceeds from both transactions were used to repay debt.

Ord Minnett believes the sale of these assets, while necessary, comes at a significant cost. Estimates are downgraded by -38% for FY18 and -32% for FY19. Rating is downgraded to Lighten from Hold. Target is reduced to $3.25 from $3.76.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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