Tag Archives: Consumer Discretionary

Weekly Broker Wrap: Lower Commodity Prices And Quarterly Previews

- Commodity prices forecast to weaken in coming year
- Brokers preview resource stocks leading into quarterly reports
- Retailers close to facing margin collapse
- Price deflation to continue to impact on retailers

By Chris Shaw

This week the International Monetary Fund (IMF) has updated its expectations for commodity prices and the eye-catching conclusion was that prices in the sector are expected to weaken during 2012-13.

In the IMF's view, weak global activity and increased downside risk to the near-term economic outlook are likely to pressure commodity prices. This in turn could slow growth amongst commodity exporters, leading the IMF to suggest in times of historically high commodity prices such as the present, commodity exporters should look to lower debt levels and create fiscal room to support a counter-cyclical response if prices do fall.

The issue is complicated by the uncertainty as to the sustainability of commodity price swings. The IMF notes in periods of temporary price moves counter-cyclical policy measures should be the response, but large commodity exporting nations can adopt less of such measures given a spillover economic impact from higher prices.

The IMF's study has found economic conditions tend to be amplified when commodity price cycles last longer or when they include sharper than average price changes. In general, energy and metal exporters have a larger impact on macroeconomic performance given a higher share of total exports and GDP.

In the view of CBA this point is significant for Australia given the two key bulk commodity exports of iron ore and coal. The value of iron ore and coal exports are forecast to reach almost 50% of total commodity exports in 2011-12.

CBA's analysis comes to a similar conclusion to that of the IMF, in that commodity prices are viewed to have peaked and should trend lower in coming months. This should put some downward pressure on Australia's export receipts.

Looking specifically at the outlook for Australia's bulk producers leading into the March quarterly reporting season, UBS notes this quarter is typically the weakest given higher average rainfall across Northern Australia in particular.

The rain should impact on bulk production and shipments for the March quarter, while there is seemingly scope for positive adjustments in the copper space. While zinc should see little variation, nickel producers look more exposed to negative quarterly pricing adjustments.

Among stocks under coverage by UBS, Alacer Gold's (AQG)) update should deliver production of around 108,900 ounces at cash costs of US$586 per ounce for the quarter. This compares to full year production guidance of 420-440,000 ounces.

March quarter production at Aquarius Platinum ((AQP)) should be around 8% better than the December quarter in UBS's view thanks largely to modest improvements at Kroondal and Marikana and something of a rebound at Everest.

The focus of Aston's (AZT)) quarterly is expected to be an update on the Maules Creek project, with UBS suggesting there could be more information with respect to the expected timing of development approvals.

Atlas Iron ((AGO)) is seen as one of the companies particularly impacted by bad weather during the period, UBS expecting production and shipments will be at the lower end of full year guidance. With its two operating coal mines in New Zealand being less impacted by the weather, Bathurst Resources ((BTU)) is expected to deliver production for the quarter of around 70,000 tonnes.

While BC Iron ((BCI)) should achieve production guidance UBS expects this is more likely to happen later in the year, so investors are likely to focus on the timing of when this is achieved. BHP Billiton's ((BHP)) quarter should be weak relative to the December quarter, this attributed primarily to bad weather and some industrial relations issues.

Production from Endeavour Mining ((EVR)) should come in at around 43,700 ounces for the quarter according to UBS, with a cash cost of US$680 per ounce. Fortescue ((FMG)) is likely to fall slightly short of production guidance for the quarter due to cyclones during the period, while UBS suggests costs may also push a little higher.

Gindalbie Metals ((GBG)) should deliver a solid production report and update on progress towards first shipments of concentrate, while UBS anticipates Grange Resources ((GRR)) will deliver production for the period in line with expectations. In contrast, Kagara ((KZL)) is expected to deliver a weak quarter given an operational restructure.

There is scope for Mincor ((MCR)) to improve from the flat production delivered in the December quarter, with UBS suggesting this comes as higher grade ore is accessed and mining efficiency gains are realised.

Results from Mount Gibson ((MGX)) should be mixed due to some rail and port downtime in the period, while UBS expects a slight increase in quarterly production from Newcrest ((NCM)) and some additional details with respect to a ramp-up of operations at Cadia East.

The Oz Minerals ((OZL)) result includes some potential for cash cost variations given increased waste movements, while UBS expects a slight increase in output from Paladin ((PDN)) relative to the December quarter.

Gold and copper output for PanAust ((PNA)) should return to more normal levels in the March quarter, while exploration updates will also be of interest. Few surprises are expected from the Panoramic Resources ((PAN)) quarterly, while UBS suggests the update from Platinum Australia ((PLA)) will be important in assessing the extent of improvement at the Smokey Hills mine.

Perseus ((PRU)) is expected to deliver a review of operational performance with its production numbers, while UBS also expects a seasonally weak quarter from Rio Tinto ((RIO)) given some bad weather during the period.

Along with production numbers Regis Resources ((RRL)) should update on exploration and development at the Garden Well project, while exploration updates from Western Areas ((WSA)) will also be of interest to UBS.

Deutsche Bank has similarly updated its view on mining companies under coverage leading into March quarter reports, in particular those in the copper and nickel sectors. For copper the broker expects prices will strengthen during the year before easing from 2013, meaning the preference is for low cost producers offering some growth potential.

This puts PanAust at the top of Deutsche's list, given an expected step up in production this year as Ban Houayxai comes on line and as operations at Phu Kham expand. From expected full year production this year of 65,000 tonnes of copper and 130,000 ounces of gold, Deutsche expects output will hit close to 100,000 tonnes of copper and 200,000 ounces of gold by 2015.

Also rated a Buy by Deutsche is Oz Minerals, this despite a flat production outlook through to 2018. The attraction for the broker is a cash balance of around US$900 million and US$200 million in undrawn debt, which offers substantial flexibility with respect to growth options going forward.

While the DeGrussa project is economically very attractive Deutsche rates Sandfire Resources ((SFR)) as a Hold, this a reflection of the view the stock is fair value at current levels until exploration success offers a positive catalyst.

With respect to the nickel sector, Deutche notes the current uncertainty in Indonesia given the potential withdrawal of that country's exports and an improving macro environment offer some reasons to be positive on the price outlook. Deutsche still expects prices to ease from next year, which means high grade, low cost assets are preferred.

Deutsche's top pick is Western Areas given it fits the bill in terms of low costs and high grade assets, while newsflow should also be positive in coming months from exploration updates and the integration of the Lounge Lizard project.

Independence Group ((IGO)) is also rated as a Buy, Deutsche attracted to diversified production and the fact issues at the Jaguar project now appear to be behind the company. The partly-owned Tropicana project may also deliver some positives from reserve and resource updates in coming months.

Turning to the industrial side of the market, Citi has analysed results from retail plays across Australia and New Zealand. The broker has concluded retailers are now operating close to the edge of margin collapse given soft sales, increasing operating costs and the potential for price deflation to be a more persistent problem going forward.

For the six months to the end of last December Citi notes discretionary retail sales rose just 1.2% despite a 6.9% increase in household income growth. This disparity is attributed to internet leakage, overseas travel and price deflation.

Citi's review shows despite significant discounting across the sector, 13 of 31 retail companies assessed reported an increase in gross margins. This was due largely to a higher hedged AUD/USD, as both wage and rental cost pressures rose.

Of interest to Citi was around 75% of retailers reported an increase in inventory days, which suggests profit margins will remain under pressure as rising operating costs will coincide with a need to lower prices.

Citi also notes there has been a divergence in sales trends, as luxury brands and leisure-driven retail categories continue to do well, while fashion apparel continues to underperform. This may reflect the lack of a clear trend in global fashion, speculates Citi.

Given the importance of price inflation for retailers, Deutsche's newly created Supermarket Inflation Index is of interest. The index is a leading indicator of price inflation, which is important given a reasonable level of price inflation provides a boost to revenues and margins across the sector.

The index follows the prices of seven discrete baskets of around 100 goods across Australia's major supermarket formats and the initial finding is supermarket prices have been broadly flat over the past seven weeks. This has been the case for both branded and private label goods.

Deutsche suggests of the major retailers Woolworths (WOW)) has the most leverage to a recovery given the size of its supermarket operations and high fixed cost leverage. This is enough for the broker to rate the stock as a Buy.

Both Metash (MTS)) and Wesfarmers ((WES)) are rated as Hold, the latter less exposed to supermarket operations given Coles accounts for only about 40% of group earnings and Metcash largely given the expectation of increased competition from the major players in the sector.

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The Short Report

By Chris Shaw

The Australian market saw more significant increases than decreases in short positions for the week from March 23, though in total only five companies experienced changes in total shorts of more than two percentage points.

Among the increases the largest was in Beach Energy ((BPT)), where total shorts rose from 0.64% to 5.43% during the week. The change comes after Beach announced it would raise $345 million through a rights and convertible notes issue, the money flagged for Cooper Basin capex in coming years and to top up general working capital.

Shorts in Bathurst Resources ((BTU)) rose to 4.0% from 1.23% the week prior, this coming after what was viewed as something of a sub par result from the company. As Credit Suisse noted, earnings are likely to be lower in coming periods than had been expected given delays to the appeals process relating to the Escarpment project. Unrealised forex losses and revaluations also impacted on the earnings result.

Independence Group ((IGO)) experienced an increase in shorts to 3.2% from 0.96% as the company moves closer to the first gold pour from the Tropicana project, while shorts in Singtel ((SGT)) increased to 5.4% from 3.38% at the same time as Macquarie revised its estimates to account for changes to forex assumptions and contributions from the Singapore and Indian businesses.

In terms of reductions in short positions, the largest during the week from March 23 was in Billabong ((BBG)), where total shorts fell to 8.67% from 11.3% previously. The market in Billabong retains some uncertainty stemming from tough trading conditions, balance sheet concerns and private equity interest in the company.

While Billabong's shorts fell the consumer discretionary sector continues to dominate the list of largest short positions on the Australian market. JB Hi-Fi ((JBH)) continues to dominate with total shorts of 21.76%, while others in the sector among the top 20 short positions include Myer ((MYR)) and David Jones ((DJS)) at more than 10% respectively and Harvey Norman ((HVN)) and The Reject Shop ((TRS)). Shorts in Myer have risen in the month from February 29 to 13.2% from around 10% the month prior.

Others associated with consumer discretionary spending with large short positions include Flight Centre ((FLT)), Carsales.com ((CRZ)), Wotif.com ((WTF)), while others with large short positions include Cochlear ((COH)), Lynas ((LYC)) and Perpetual ((PPT)).

As with weekly changes, the more pronounced among the monthly changes were increases, with seven companies seeing increases of more than two percentage points. In contrast, only one company, Alkane ((ALK)), saw shorts fall more than two percentage points to 2.0% for the month from February 29.

The largest monthly increase was in Echo Entertainment ((EGP)), where shorts rose to 7.4% from 0.77% previously as the share price continues to position for potential corporate activity involving the company.

Shorts in Carsales.com increased to 10.7% from 8.9% in the week from March 23 and have essentially doubled over the month to 10.7% as the market digests the move away from its traditional classifieds business via the taking of a stake on Torpedo7 in New Zealand, while shorts in Elders ((ELD)) increased to 4.45% from 0.69% despite no major news from the company in recent weeks.

Past research conducted by analysts at RBS suggests shorts data can be successfully used to predict underperformance for equities on a twelve month horizon.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21508373	98850643	21.76
2	MYR	77164400	583384551	13.22
3	ISO	721259	5703165	12.65
4	FXJ	266808705	2351955725	11.37
5	COH	6200900	56929432	10.90
6	DJS	56781241	524940325	10.82
7	CRZ	25055951	233674223	10.70
8	FLT	9425372	100017679	9.41
9	LYC	150007389	1714496913	8.75
10	BBG	22124924	255102103	8.67
11	HVN	79375909	1062316784	7.46
12	EGP	51084803	688019737	7.41
13	ILU	27209453	418700517	6.49
14	GNS	54998318	848401559	6.47
15	WTF	13184931	211736244	6.24
16	TRS	1551686	26071170	5.95
17	TEN	60463055	1045236720	5.78
18	BPT	60698815	1115960668	5.43
19	SGT	9559694	176974336	5.40
20	PPT	2230045	41980678	5.31

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Downgrades to stock broker ratings for individual stocks continue far outweighing upgrades and the past week proved once again no exception. The eight brokers in the FNArena database lifted recommendations on just four companies while downgrading 24 stocks. Total Buy ratings now stand at just 50.56%, the lowest level for some time despite the share market effectively moving sideways.

Among the upgrades was Aurora Oil and Gas ((AUT)), where JP Morgan lifted its rating to Neutral from Sell. While full year earnings saw both UBS and Credit Suisse downgrade to Neutral ratings from Buy previously, JP Morgan factored in its findings from a recent site visit and lifted its valuation and price target. This was enough for the broker to lift its rating to the same level as UBS and CS.

OM Holdings ((OMH)) was also upgraded to Neutral from Sell by RBS Australia, a valuation call as downside risks to earnings from lower manganese prices now appears priced into the stock following a share price fall of around 70% over the past year.

Deutsche Bank has upgraded Oz Minerals ((OZL)) to Buy from Hold following changes to commodity price and foreign exchange assumptions. While the changes meant a trimming in price target, the broker sees improved value at current levels and upgrades accordingly.

The final upgrade of the week was Telstra ((TLS)), where BA Merrill Lynch has lifted its rating to Neutral from Underperform. There is increased scope for capital management and a more stable earnings outlook in general in the broker's view, which justifies the upgrade.

So to recap: only four upgrades were issued and only one out of these four led to a Buy rating.

Among the 24 downgrades Aurora was not the only stock where ratings were lowered by more than one broker, as Leighton Holdings ((LEI)), QBE Insurance ((QBE)) and Transfield Services ((TSE)) also received multiple downgrades.

Both Deutsche Bank and Macquarie Moved to Sell ratings on Leighton from Hold previously, this given further credibility issues arising from further write-downs to problem contracts. The other issues according to Deutsche is the potential for balance sheet issues and a weak medium-term growth outlook.

Valuation is the issue for QBE, as both Citi and JP Morgan have moved to Neutral ratings on the back of recent share price strength. The insurer's AGM this week showed earnings drivers for the company have turned more positive in recent months.

With respect to Transfield, the downgrades from JP Morgan, RBS Australia and Macquarie reflect concerns over problem contracts that go beyond April's profit warning.

Post management's revised guidance, earnings estimates and price targets for Transfield have been adjusted across the market.

Elsewhere, Macquarie downgraded Boral ((BLD)) to Neutral from Buy as earnings revisions meant a cut in price target, while UBS moved to neutral from Buy on CSL ((CSL)) on valuation grounds after factoring in some changes to forex assumptions.

The changes to forecasts that saw Deutsche upgrade Oz Minerals have also seen the broker downgrade Fortescue ((FMG)), Iluka ((ILU)), Paladin ((PDN)) and Sandfire ((SFR)), as revised earnings estimates have impacted on total return expectations.

While OrotonGroup ((ORL)) remains a retail favourite of Credit Suisse, the broker has downgraded to Neutral from Buy on valuation grounds. Primary Health Care ((PRY)) has similarly been downgraded by the broker on the same basis.

Valuation has also been behind RBS Australia downgrading Pharmaxis ((PXS)) to Hold from Buy, while JP Morgan has downgraded Qantas ((QAN)) to Neutral from Overweight given the in-house view consensus earnings estimates for the airline remain too high.

A stretched valuation and some concerns over domestic ad volumes have seen BA-ML downgrade Seek to Sell from Hold, while recent share price gains have been enough for Citi to downgrade Sonic Health ((SHL)) to Neutral from Buy.

The risk of earnings and sentiment downside from current levels has prompted UBS to move to a Neutral rating on Virgin Australia ((VAH)), while Macquarie has moved to a Sell rating on Westfield Group ((WDC)) from Neutral previously as the group's shopping mall property assets business re-positioning is expected to take some time.

Price target adjustments during the week have not resulted in any changes of more than 10%, while earnings adjustments during the period were most significant in terms of increases for Macquarie Bank ((MQG)) and James Hardie ((JHX)) and cuts for Alumina Ltd ((AWC)), Leighton and Bank of Queensland ((BOQ)).

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	AURORA OIL AND GAS LIMITED	Sell	Neutral	JP Morgan
2	OM HOLDINGS LIMITED	Sell	Neutral	RBS Australia
3	OZ MINERALS LIMITED	Neutral	Buy	Deutsche Bank
4	TELSTRA CORPORATION LIMITED	Sell	Neutral	BA-Merrill Lynch
Downgrade
5	AURORA OIL AND GAS LIMITED	Buy	Neutral	UBS
6	AURORA OIL AND GAS LIMITED	Buy	Neutral	Credit Suisse
7	BORAL LIMITED	Buy	Neutral	Macquarie
8	CSL LIMITED	Buy	Neutral	UBS
9	FORTESCUE METALS GROUP LTD	Buy	Neutral	Deutsche Bank
10	ILUKA RESOURCES LIMITED	Buy	Neutral	Deutsche Bank
11	LEIGHTON HOLDINGS LIMITED	Buy	Sell	Macquarie
12	LEIGHTON HOLDINGS LIMITED	Neutral	Sell	Deutsche Bank
13	Metcash Limited	Buy	Neutral	Credit Suisse
14	OROTONGROUP LIMITED	Buy	Neutral	Credit Suisse
15	PALADIN ENERGY LTD	Buy	Neutral	Deutsche Bank
16	Pharmaxis Ltd	Buy	Neutral	RBS Australia
17	PRIMARY HEALTH CARE LIMITED	Buy	Neutral	Credit Suisse
18	QANTAS AIRWAYS LIMITED	Buy	Neutral	JP Morgan
19	QBE INSURANCE GROUP LIMITED	Buy	Neutral	Citi
20	QBE INSURANCE GROUP LIMITED	Buy	Neutral	JP Morgan
21	SANDFIRE RESOURCES NL	Buy	Neutral	Deutsche Bank
22	SEEK LIMITED	Neutral	Sell	BA-Merrill Lynch
23	SONIC HEALTHCARE LIMITED	Buy	Neutral	Citi
24	TRANSFIELD SERVICES LIMITED	Neutral	Sell	RBS Australia
25	TRANSFIELD SERVICES LIMITED	Buy	Neutral	Macquarie
26	TRANSFIELD SERVICES LIMITED	Buy	Neutral	JP Morgan
27	VIRGIN AUSTRALIA HOLDINGS LIMITED	Buy	Neutral	UBS
28	WESTFIELD GROUP	Neutral	Sell	Macquarie

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	CER	50.0%	67.0%	17.0%	3
2	RRL	33.0%	50.0%	17.0%	4
3	OZL	25.0%	38.0%	13.0%	8
4	PNA	50.0%	63.0%	13.0%	8
5	TLS	38.0%	50.0%	12.0%	8
6	SKI	50.0%	57.0%	7.0%	7
7	IFN	57.0%	60.0%	3.0%	5

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	LEI	25.0%	- 13.0%	- 38.0%	8
2	PXS	100.0%	67.0%	- 33.0%	3
3	QBE	63.0%	38.0%	- 25.0%	8
4	ORL	40.0%	20.0%	- 20.0%	5
5	AUT	- 20.0%	- 40.0%	- 20.0%	5
6	VAH	60.0%	40.0%	- 20.0%	5
7	CGF	86.0%	71.0%	- 15.0%	7
8	PDN	43.0%	29.0%	- 14.0%	7
9	MQG	43.0%	29.0%	- 14.0%	7
10	SEK	57.0%	43.0%	- 14.0%	7

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	AUT	3.430	3.758	9.56%	5
2	QBE	13.351	14.443	8.18%	8
3	PXS	1.700	1.800	5.88%	3
4	SKI	1.405	1.449	3.13%	7
5	SEK	6.970	7.134	2.35%	7
6	SHL	13.098	13.281	1.40%	8
7	TLS	3.398	3.435	1.09%	8
8	RRL	4.413	4.460	1.07%	4
9	ORL	8.856	8.936	0.90%	5
10	CSL	35.998	36.273	0.76%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	LEI	23.633	21.998	- 6.92%	8
2	PNA	4.206	4.095	- 2.64%	8
3	CGF	5.039	4.953	- 1.71%	7
4	BLD	4.425	4.364	- 1.38%	8
5	OZL	12.406	12.236	- 1.37%	8
6	BOQ	8.150	8.069	- 0.99%	8
7	FMG	7.101	7.064	- 0.52%	8
8	VAH	0.480	0.478	- 0.42%	5
9	MQA	1.858	1.854	- 0.22%	5
10	PRY	3.289	3.283	- 0.18%	8

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	MQG	211.229	291.229	37.87%	7
2	JHX	30.803	39.009	26.64%	8
3	PRG	25.414	30.386	19.56%	7
4	SGT	18.750	21.297	13.58%	6
5	CSR	15.750	17.800	13.02%	8
6	PRU	14.350	15.940	11.08%	5
7	QBE	132.729	137.164	3.34%	8
8	TGA	19.867	20.400	2.68%	3
9	BPT	8.660	8.860	2.31%	5
10	IAG	23.700	24.013	1.32%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	AWC	0.143	- 0.096	- 167.13%	8
2	LEI	187.550	128.550	- 31.46%	8
3	BOQ	39.450	28.938	- 26.65%	8
4	WHC	17.217	14.383	- 16.46%	6
5	VAH	3.300	2.940	- 10.91%	5
6	QAN	13.775	12.363	- 10.25%	8
7	BCI	55.000	49.567	- 9.88%	3
8	IGO	4.080	3.740	- 8.33%	5
9	ROC	4.977	4.577	- 8.04%	5
10	SBM	38.300	35.800	- 6.53%	3

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Weekly Broker Wrap: Getting Better, With Ongoing Headwinds

By Chris Shaw

Global equity markets have risen by nearly 20% over the past four months, UBS attributing the gains to a combination of positive developments to the economic backdrop and some relief the European debt crisis has not worsened.

While the improvements are encouraging UBS continues to see headwinds to growth and returns, enough to warrant the continuation of a balanced investment approach. As cyclical earnings growth slows, and UBS expects earnings growth in the low single digit range this year, yield and valuation will become more meaningful as drivers of total returns.

In defining quality, UBS looks for strong returns on capital, the appropriate use of leverage, strength and sustainability of a company's earnings, strong dividend policies and valuation.

Among Australian stocks under coverage by UBS, only CSL ((CSL)) and BHP Billiton ((BHP)) make the broker's global equity strategy high quality stock list. UBS rates BHP as a Buy and CSL as Neutral, having downgraded from a Buy this week on valuation grounds.

Having assessed the outlook for Australian equities relative to bonds, Goldman Sachs argues equity prices are currently discounting unrealistically low growth rates into the future, valuations remain attractive across equities as determined by a number of valuation metrics and annualised four-year returns are currently cycling the worst period for equities since the early to mid 1970s.

This follows an extended period of outperformance by Australian bonds, a trend that has been consistent with other markets around the world. This has meant the bond yield to equities earnings yield has moved to an extreme level.

This leads Goldman Sachs to suggest the prospects for future returns in equities relative to bonds are as good as they have been for many years (echoing similar sentiment as expressed by colleagues in Europe). Favoured stocks are those with low earnings volatility given strong operational strategies. Goldman Sachs also recommends investors increase their US dollar exposure across portfolios.

Key picks in terms of solid earnings profiles are Wesfarmers ((WES)), Brambles ((BXB)), News Corporation ((NWS)) and CSL. Among mining stocks preferred exposure is companies exposed to increases in volumes and those with low risk LNG expansion opportunities. For Goldman Sachs these include Orica ((ORI)), Asciano ((AIO)), Oil Search ((OSH)), Woodside ((WPL)) and WorleyParsons ((WOR)).

Among the deep-value plays Goldman Sachs suggest cyclical stocks offer the greatest upside leverage to improving markets. In this category the broker's key picks are Qantas ((QAN)), Lend Lease ((LLC)), Suncorp ((SUN)) and OneSteel ((OST)).

Goldman Sachs continues to favour banks over resources at present, this reflecting the increasing risk profile for resource stocks as earnings growth drivers move from price to volumes. Preferred major bank exposures for Goldman Sachs are National Australia Bank ((NAB)) and ANZ Banking Group ((ANZ).

In the view of JP Morgan, the US GDP story is starting to wane in terms of being a positive story for equity markets as the good news is now well known and fiscal policy continues to limit the potential for upside surprises.

At the same time, JP Morgan's view is investors should not assume US corporate returns offer further upside, especially given corporate margins are already quite high. This implies US exposure in an Australian portfolio should be more selective going forward, especially given the still strong Australian dollar (even despite last week's sell-off).

JP Morgan suggests investors focus on companies that stand to gain in profit terms from an improvement in US activity and where this is not priced into the stock at present. Examples of this scenario include Sims Metal ((SGM)), Aristocrat Leisure ((ALL) and Computershare ((CPU)).

At the other end of the spectrum, JP Morgan suggests a cautious view on James Hardie ((JHX)), as despite the recovery potential of the US housing market the broker sees risks from cost and capital intensity increases and higher levels of competition going forward.

JP Morgan has Overweight ratings on Sims, Aristocrat and Computershare and rates James Hardie as Underweight, these ratings are equivalents respectively of "Buy" and "Sell".

As part of an update on the Small Cap end of the market, Credit Suisse listed its top five picks as rated by expected total shareholder return. The top five are Alliance Aviation ((AQZ)), Mermaid Marine ((MRM)), SAI Global ((SAI)), Carsales.com ((CRZ)) and Flexigroup ((FXL)).

Oroton ((ORL)) has been rated a Buy but Credit Suisse recently downgraded to a Neutral rating on the back of share price outperformance. While a strong brand and management should deliver superior earnings and returns, the stock now appears fair value in the broker's view. The analysts do advise investors should look to buy into dips as the good news story is likely to continue.

Citi notes Australian LNG exports are expected to increase from around 20 million tonnes per year last year to more than 80 million tonnes annually by 2018 as measured by approved projects only. This will make Australia one of the world's major LNG exporters.

Citi estimates the direct contribution of approved LNG capex to GDP growth in the first four years of this decade at around two percentage points or 0.5% per year, but could add as much as 3.5 percentage points in 2015-2019. This equates to around 20% of economic growth over these five years.

Capex and exports associated with LNG projects will put a floor under Australia's economic outlook according to Citi, increasing the likelihood the 20-year expansion of the economy can continue through the end of the decade.

PNG projects shifting from the capex phase to the export phase should be reflected in faster productivity growth in the mining and energy sectors, which should benefit the economy overall. As Citi suggests, if other sectors can also lift their productivity in coming years, the impact of any prospective loss of national income as commodity prices and the terms of trade normalise can be moderated.

Assessing the market overall, Deutsche Bank notes the ASX200 index is 10% lower than its level both one year and two years ago. Fortunately for investors looking to re-enter, further gains are expected this year. Deutsche is forecasting a year end level for the index of 4,700.

This is despite earnings still being under pressure, which is not a major issues in Deutsche's view. The reason is a lack of earnings momentum hasn't impacted on equity markets globally, as gains over the past six months have come entirely from PE re-ratings as forward earnings have fallen.

As well, Deutsche notes equity market rallies driven by PE re-ratings have been the historical norm for Australia, as in 1993, 2003 and 2009 a rising earnings multiple has delivered 75% of the market gains in the first six months of the rally. In the resource sector this impact is even more pronounced as a rising multiple has delivered around 95% of the gains over the first six months.

The underperformance in Australia of late can likely be explained by a lack of conviction earnings will recover anytime soon in Deutsche's view. This negative view is likely overstating the case, as Deutsche notes industrial earnings have been impacted by factors such as natural disasters and falling financial markets, which are not permanent factors.

As well, Deutsche notes a range of indicators suggest Chinese and global economies should accelerate in coming months, which should see commodity prices edge higher. This would be a further boost for Australian equities.

With earnings multiples across the market being compressed, Deutsche suggests the market overall is on the cheap side, which means it won't require the cheapest sectors to do all the work in terms of lifting the index.

Given an optimistic view of the market outlook and applying this to its model portfolio, Deutsche Bank is most overweight the Energy, Mining and Contractors sectors, while underweight positions are largest in the Telcos, property and food retailing sectors.

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The Short Report

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By Chris Shaw

The Australian market saw some significant shifts in short positions in the week from March 20, the moves reflecting both increases and decreases in total positions.

Among the increases for the week, the largest was in Carsales.com ((CRZ)), where total positions increased to 10.29% from 6.43%. The increase came after Carsales.com acquired a stake in Torpedo7 in New Zealand, a business outside the traditional focus on classifieds businesses. The other issue for Carsales.com is emerging competition from the News Limited supported Carsguide joint venture.

The next largest increase in shorts for the week was in Bathurst Resources ((BTU)), where positions increased to 4.15% from 1.51% the week before. The increase came post a profit result that disappointed some in the market and included news of some project delays.

Shorts in Iluka ((ILU)) rose to 6.99% from 4.58% in the week as the market remains concerned about the outlook for the Chinese property market. If the market was to weaken significantly the fear is zircon demand would also fall, potentially impacting on earnings for Iluka.

Among the falls in short positions for the week from March 20 the largest was in Beach Energy ((BPT)), where positions declined to 0.74% from 5.09% previously. The company has been cum a capital raising for some time and this has now come to fruition, as Beach has moved to raise $335 million to fund capex at the Cooper Basin in coming years.

The next largest fall in shorts was in Billabong ((BBG), where positions declined to 8.8% from 11.13% previously. While an approach from TPG was rejected last month private equity continues to see value in the stock around current levels.

The fall in shorts for Billabong was not the only significant change in positions for consumer discretionary stocks, as shorts also declined for the week in The Reject Shop ((TRS)). Short positions here now stand at 5.89% against 7.49% previously, though the fall doesn't change the fact consumer discretionary stocks continue to dominate the top short positions on the Australian market.

Among the top 20 short positions are a number of companies exposed to consumer spending, including JB Hi-Fi ((JBH)) at more than 22%, Myer ((MYR)) at more than 13%, David Jones ((DJS)) at more than 11% and Flight Centre ((FLT)) at more than 9%.

With respect to monthly changes from February 27, Echo Entertainment ((EGP)) posted the highest increase as positions rose to 7.39% from 0.95% previously, while the trend of adjusting positions in Wesfarmers ((WESN)) partly protected shares has also continued, shorts rising over the month to 2.67% from 0.07% previously.

Shorts in Rialto Energy ((RIA)) declined over the month to 0.37% from 4.96%, while OneSteel's ((OST)) shorts fell to 2.53% from 5.84% following an update that highlighted some growth potential in the group's iron ore business. (Since management has indicated it is keen on developing the non-steel divisions the stock's nickname in the market has been changed to "NoneSteel").

For Goodman Fielder ((GFF)) the move by Wilmar to take a stake has caused investors to adjust positions, the result being shorts have fallen over the month to 1.86% from 4.82%, while shorts in both Linc Energy ((LNC)) and Alkane Exploration ((ALK)) also declined over the month by better than two percentage points.

Elsewhere, RBS Australia notes short positions in Macquarie Bank ((MQG)) have risen over the past few weeks and now stand at 2.3%. Last week RBS downgraded Macquarie to a Hold rating on valuation grounds, supported by downside risks to current earnings projections from difficult market conditions.

Today, in what may prove yet another case of perfect timing (at least from FNArena's point of view), RBS analysts released yet another research report suggesting shorts data can be successfully used to predict underperformance for equities on a twelve month horizon. Investors take note?

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21960959	98850643	22.22
2	MYR	76041030	583384551	13.02
3	ISO	719559	5703165	12.62
4	DJS	60984596	524940325	11.60
5	FXJ	255585182	2351955725	10.88
6	COH	5864093	56929432	10.30
7	CRZ	24099701	233674223	10.29
8	LYC	166380039	1714496913	9.72
9	FLT	9426545	100017679	9.43
10	BBG	22529271	255102103	8.80
11	EGP	50942948	688019737	7.39
12	HVN	76344159	1062316784	7.18
13	ILU	29281544	418700517	6.99
14	WTF	14481817	211736244	6.82
15	GNS	55046810	848401559	6.48
16	TRS	1533455	26071170	5.89
17	RIO	25145004	435758720	5.74
18	TEN	59808683	1045236720	5.71
19	PPT	2291863	41980678	5.47
20	CSR	26905803	506000315	5.29

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

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Deutsche Predicts Earnings Boost For Ardent Leisure

- Expansions to boost earnings for Ardent Leisure
- Theme Park returns also improving according to Deutsche Bank
- Stock attractively priced, dividend yield another positive
- Deutsche reiterates a Buy rating on Ardent

By Chris Shaw

While poor weather has impacted on theme park earnings for Ardent Leisure ((AAD)), the group's expansion plans for its bowling, gym and Main Event businesses continue to offer earnings growth potential, reports Deutsche Bank.

As the stockboker notes, three new bowling centres, three Laser Skirmish spaces and one bowling centre refurbishment are planned between now and the end of FY13, along with four additional gyms and two Main Event centres.

This pipeline suggests an incremental $5.6 million in EBITDA (earnings before interest, tax, depreciation and amortisation) terms, which would represent 7% growth in FY13. In earnings per share (EPS) terms this should translate to growth of 9% on Deutsche's estimates.

Given relatively conservative underlying organic earnings growth guidance, Deutsche Bank sees scope for Ardent Leisure to achieve as much as 16% growth in EPS in FY13. The broker's forecasts reflect this, as its estimates at present assume 18% growth in EPS in FY13.

Even if growth were to fall short of this forecast and come in at 16%, Deutche estimates Ardent Leisure is trading on an earnings multiple for FY12 of just 7.3 times, which equates to 9.7 times on a tax adjusted basis. This is based on EPS forecasts for Deutsche of 13c in FY12 and 15c in FY13, while consensus estimates according to the FNArena database stand at 11.8c this year and 12.7c in FY13.

Funding for this growth appears achievable, as Deutsche expects expanding by two gyms, two bowling centres and two Main Event centres each year for the next few years would require $24 million in growth capex.

Of this, around $15 million would come from the dividend reinvestment plan and some from retained earnings, leaving only around $9 million in debt funding required. This level of debt would only lift gearing to 30%, which is within Ardent Leisure's target range of 30-35%.

With respect to the theme park operations, Deutsche is equally positive on the outlook, as Easter will see the opening of the DreamWorks Animation precinct, while the recently opened SkyPoint Climb should continue to boost both revenues and earnings.

January performance for the theme parks was up 8.7% on the prior period and heading into the key Easter period Deutsche sees some upside risk to earnings for the theme park division.

Adding to the earnings growth potential identified by Deutsche is an attractive dividend yield, estimated by the broker to be 12.3% on a headline basis and 8.6% in tax adjusted terms. The "adjustment" reflects the fact the dividend is not franked.

With valuation undemanding Deutsche retains a Buy rating on Ardent, one matched by both RBS Australia and UBS among brokers in the FNArena database to cover the stock. As with Deutsche, UBS and RBS both see value at current levels, especially with the second quarter of FY12 showing what the latter viewed as a sustainable pick up in earnings performance.

Three brokers in the database rate Ardent Leisure as a Hold, JP Morgan given ongoing concerns over the outlook for theme park, bowling and health club earnings and Macquarie given the view a re-rating is unlikely in the current operating environment.

The FNArena database shows a consensus price target for Ardent Leisure of $1.30, with targets ranging from Macquarie at $1.10 to UBS at $1.45.

Shares in Ardent Leisure have traded within a range of $1.005 to $1.59 over the past 12 months. Yesterday's closing price implies upside of around 16% relative to the consensus price target in the FNArena database.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Out of 14 changes to ratings from brokers in the FNArena database over the past week only three were upgrades, which continues the recent trend of downgrades outweighing increases in ratings. Two of the three stocks upgraded were also downgraded by brokers elsewhere in the market. Total Buy recommendations now stand at 51.30%.

Among the upgrades was Aurora Oil and Gas ((AUT)), where JP Morgan has moved to a Neutral rating from Underweight previously. The upgrade reflects the broker factoring in lower risk assumptions for enhanced recoveries from the group's shale assets and an associated increase in valuation and price target.

At the same time as JP Morgan upgraded Aurora both UBS and Credit Suisse downgraded the stock to Neutral ratings from Buy previously. The change in both cases is a valuation call as Aurora's share price has risen more than 30% over the past two months. Price targets and earnings estimates for Aurora have also been adjusted across the market post the group's full year profit result.

News of a capital raising from Bank of Queensland ((BOQ)) has been followed by Deutsche Bank upgrading the stock to Buy from Neutral. In Deutsche's view new management has cleared the decks with respect to bad debts and moved to address balance sheet issues, so the stock offers value at current levels.

Again this is not a universal view as Macquarie has reacted to news of the raising by downgrading Bank of Queensland to Sell from Neutral. Macquarie continues to see a challenge for the regional lender in earning its cost of equity going forward, so the current premium to peers implies limited value in the broker's view.

The final upgrade during the week was Macquarie moving to Buy from Neutral on Tabcorp ((TAH)). The lift in rating is another valuation call, as recent share price weakness has the stock trading below the broker's valuation estimate.

Among stocks downgraded was Nufarm ((NUF)), with both Macquarie and BA Merrill Lynch lowering ratings to Neutral from Buy previously. A mixed interim result was enough for Macquarie to pull back earnings estimates and its price target, the changes enough to prompt the cut in rating. BA-ML's downgrade was a valuation call as the broker sees limited upside in the stock at current levels.

Forge Group ((FGE)) has also suffered a downgrade to Neutral from Buy, this coming from Citi. Forge shares have risen almost 40% year-to-date, which limits the valuation appeal in the broker's view. This is despite a new contract causing Citi to lift its earnings estimates and price target.

Having previously rated Leighton Holdings ((LEI)) as Outperform, Macquarie has shifted to an Underperform rating post a further write-down on problem contracts as part of yet another profit warning from management.

The issue for Macquarie is management credibility, particularly as the update comes only a couple of months after the last update. While there is value at current levels market scepticism is likely to limit share price performance shorter-term in Macquarie's view.

As with Leighton, Stockland ((SGP)) has also lowered earnings guidance and the market has reacted by adjusting earnings forecasts and price targets. For BA-ML this is enough to justify a downgrade to Neutral from Buy, especially given few obvious catalysts to drive the share price in the shorter-term.

While Oroton ((ORL)) delivered a good profit result, Credit Suisse has downgraded to Neutral from Buy. The price target has been increased and good earnings growth should continue, but the broker simply sees less upside following recent share price gains.

With respect to changes in earnings forecasts, Sigma ((SIP)) enjoyed the largest increases following what was generally regarded as a solid full year profit result. Among the larger cuts in forecasts were those associated with brokers factoring in Bank of Queensland's capital raising, while estimates for both David Jones ((DJS)) and Kathmandu ((KMD)) were cut post interim profit results.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	AURORA OIL AND GAS LIMITED	Sell	Neutral	JP Morgan
2	BANK OF QUEENSLAND LIMITED	Neutral	Buy	Deutsche Bank
3	TABCORP HOLDINGS LIMITED	Neutral	Buy	Macquarie
Downgrade
4	AURORA OIL AND GAS LIMITED	Buy	Neutral	UBS
5	AURORA OIL AND GAS LIMITED	Buy	Neutral	Credit Suisse
6	BANK OF QUEENSLAND LIMITED	Neutral	Sell	Macquarie
7	FORGE GROUP LIMITED	Buy	Neutral	Citi
8	LEIGHTON HOLDINGS LIMITED	Buy	Sell	Macquarie
9	MACQUARIE GROUP LIMITED	Buy	Neutral	RBS Australia
10	NUFARM LIMITED	Buy	Neutral	Macquarie
11	NUFARM LIMITED	Buy	Neutral	BA-Merrill Lynch
12	OROTONGROUP LIMITED	Buy	Neutral	Credit Suisse
13	STOCKLAND	Buy	Neutral	BA-Merrill Lynch

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	CER	50.0%	67.0%	17.0%	3
2	TAH	25.0%	38.0%	13.0%	8
3	ALS	40.0%	50.0%	10.0%	6
4	SKI	50.0%	57.0%	7.0%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	AUT	- 20.0%	- 40.0%	- 20.0%	5
2	ORL	40.0%	20.0%	- 20.0%	5
3	BTT	50.0%	33.0%	- 17.0%	3
4	CFX	71.0%	57.0%	- 14.0%	7
5	MQG	43.0%	29.0%	- 14.0%	7
6	SGP	71.0%	57.0%	- 14.0%	7
7	MAP	33.0%	20.0%	- 13.0%	5
8	PRU	33.0%	20.0%	- 13.0%	5
9	QRN	- 13.0%	- 25.0%	- 12.0%	8
10	MYR	25.0%	13.0%	- 12.0%	8

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	AUT	3.430	3.758	9.56%	5
2	SKI	1.405	1.449	3.13%	7
3	ALS	1.656	1.705	2.96%	6
4	ORL	8.856	8.936	0.90%	5
5	TAH	3.264	3.283	0.58%	8
6	MQG	29.437	29.523	0.29%	7
7	CFX	1.959	1.964	0.26%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	FKP	0.760	0.726	- 4.47%	5
2	PRU	3.628	3.494	- 3.69%	5
3	SGP	3.639	3.507	- 3.63%	7
4	MYR	2.441	2.368	- 2.99%	8
5	MAP	3.225	3.134	- 2.82%	5
6	BTT	2.230	2.170	- 2.69%	3
7	CMJ	2.710	2.672	- 1.40%	6
8	TOL	5.783	5.723	- 1.04%	7
9	SEK	7.184	7.156	- 0.39%	7
10	EHL	1.283	1.280	- 0.23%	5

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	SIP	3.886	4.686	20.59%	7
2	IGO	4.080	4.340	6.37%	5
3	RRL	16.375	16.800	2.60%	4
4	NVT	20.457	20.614	0.77%	6
5	QBE	131.820	132.719	0.68%	8
6	SEK	36.125	36.325	0.55%	7
7	NCM	174.000	174.750	0.43%	8
8	AAX	34.140	34.260	0.35%	5
9	BWP	13.225	13.250	0.19%	4
10	MIO	22.586	22.621	0.15%	4

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	BOQ	95.513	28.938	- 69.70%	8
2	DJS	22.538	20.263	- 10.09%	8
3	KMD	13.266	12.005	- 9.51%	5
4	ROC	4.979	4.577	- 8.07%	5
5	QAN	14.625	13.575	- 7.18%	8
6	BPT	9.440	8.860	- 6.14%	5
7	ALS	17.850	16.871	- 5.48%	6
8	AQG	75.548	72.146	- 4.50%	7
9	SGP	31.886	30.771	- 3.50%	7
10	QRN	16.138	15.663	- 2.94%	8

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Weekly Broker Wrap: Double Digit Returns, Plus Dividend Opportunities

By Chris Shaw

With the first quarter of 2012 drawing to a close, Macquarie has updated its expectations for the Australian equity market for the coming year. A total shareholder return for the S&P/ASX200 of 12.7% for the coming 12 month period is forecast, which implies fair value for the index of 4,593.

This return forecast comprises a capital return of 7.4% and a dividend yield of 5.3%. Within this, Macquarie expects the resources sector to deliver a total return of 12.5%, against a 12.8% return for the industrials sector.

At the Small Ords end of the market a total shareholder return of 12.5% is forecast, the split being a capital return of 7.7% and a dividend yield of 4.8%. Small industrials are forecast to deliver a return of 12.1%, while small resources are forecast to deliver a 13.2% return.

Macquarie's total shareholder return forecast for the broader market has fallen from the 14% forecast of last October, the broker attributing this to the lack of any sustained earnings per share (EPS) growth. As Macquarie notes, delivery of EPS growth remains the main factor for any reasonable capital return as valuation-driven market returns remain limited without any prospect of sustained EPS growth.

According to Macquarie, the recent reporting season in Australia reinforced the ongoing downside risk to EPS growth. This reflects both ongoing headwinds to earnings such as relatively high interest rates and negative productivity that continue to impact on margins.

Without some actual earnings growth across the next year Macquarie sees limited prospects for any expansion in earnings multiples. The market's benchmark multiple is likely to be reset to a lower level of around 12.5 times as a result.

While UBS is forecasting a prospective dividend yield for the market lower than Macquarie at 5.1% and 5.9% ex resources, the broker suggests the Australian market appears cheap on a dividend yield basis. This is because the yield is well above the 20-year average yield of 4.5%.

In terms of stock specifics when looking at attractive yield plays, UBS has identified two types. The first are defensive, low-beta and high yield plays such as telcos, utilities, toll roads, airports and REITs, as well as the banks. The second group are the value plays where the market has sold down the stock on concerns earnings and dividends are not sustainable. At present this category includes discretionary retail, media and insurance.

Assessing these categories, UBS suggests stocks such as Seven West Media ((SWM)), David Jones ((DJS)), AMP ((AMP)), QBE Insurance ((QBE)) and Myer ((MYR)) appear relatively risky on the broker's model.

Stocks appearing to offer both a high yield and some growth with reasonable risk include Telstra ((TLS)), Mirvac ((MGR)), Stockland ((SGP)), Westpac ((WBC)), National Australia Bank ((NAB)) and Spark Infrastructure ((SKI)).

With respect to the Australian residential sector, BA Merrill Lynch is now less confident in the consensus view housing starts will bottom out around 135,000 in annualised terms before recovering to around 160,000 starts by 2014.

With the consumer and credit environments remaining tough for longer than has been expected, this leads BA-ML to suggest lower than trend housing starts could be the new norm. This is due to still weak consumer confidence, some caution on lending on the part of the banks, recent negative commentary from building industry participants and the fact house prices continue to fall.

To reflect this and lower than expected guidance from Stockland, BA-ML has lowered its forecasts for Australian residential developers. The changes have led to an average cut in price targets of 3.7%.

Both Peet ((PPC)) and Stockland have been downgraded to Neutral ratings from Buy previously. Stockland's downgrade reflects the fact the company is the most leveraged to macro trends in residential markets, while contributing to the downgrade for Peet was the existence of some near-term funding uncertainty.

Among other stocks under coverage, BA-ML retains Buy ratings on FKP Property ((FKP)) and Mirvac, while Neutral ratings are retained on Lend Lease ((LLC)) and Australand ((ALZ)).

Citi has considered the impact on Australian building materials stocks from not only the weak housing starts data but also activity levels in the non-residential sector and materials pricing. The conclusion is a mixed 2012 can be expected as there are no near-term triggers to drive improved performance.

There are some positives in Citi's view, including the potential for a rate cut in May to boost confidence levels in the short-term, which could also deliver some positive growth in first home buyer numbers. As well, Citi expects engineering construction should remain solid given resilience and leverage to the mining and resource sectors.

Among the building products plays Adelaide Brighton ((ABC)) is Citi's top call as more than 50% of profits come from the mining and engineering sectors. Most preferred among the building materials stocks is Fletcher Building ((FBU)), this given earnings growth appears underpinned by rebuilding following the Christchurch earthquake and committed infrastructure spending in both Australia and New Zealand.

Both James Hardie ((JHX)) and CSR ((CSR)) are rated as Neutral on valuation grounds, while Citi rates Boral ((BLD)) as a Sell given the likelihood earnings are weighed down by wet weather and the soft outlook for the domestic residential market.

Among engineering and construction plays Citi prefers Downer EDI ((DOW)) as the Waratah project should continue to de-risk and core operations should deliver strong growth in coming years. Elsewhere, Citi rates Alesco ((ALS)), Boart Longyear ((BLY)), Lend Lease, Peet, Stockland and UGL ((UGL)) as Buy, while DuluxGroup ((DLX)), GUD Holdings ((GUD)), Hills Holdings ((HIL)), Leighton ((LEI)) and WorleyParsons ((WOR)) are rated as Neutral. A Sell rating is also ascribed to GWA Group ((GWA)).

Following a series of visits with US clients, Citi notes the view of these investors is the Australian economic outlook is now more subdued than on the broker's previous trip. Risk to the outlook is regarded as being to the downside at present, especially given a more modest growth outlook in China.

While most clients don't expect a hard landing for the Chinese economy there are still enough issues for some caution on the outlook for Australia, especially given the view the Australian economy was fairly hollow between the two ends of mining and trade-exposed manufacturing and tourism.

House prices remain an issue for US investors as the concern is the impact on the broader economy of any further declines in prices. Despite this, clients had no consensus view on the outlook for Australian interest rates. Some took the view rates may be cut further to better align the currency with fundamentals.

In other general comments, Citi notes a majority of clients believe the recent improvement in US economic data was solely weather related and a retracement in the second quarter would likely surprise the market.

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The Short Report

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By Chris Shaw

When David Jones ((DJS)) reported interim earnings last week and the result included weak guidance for the full year the market was prepared, as short positions in the stock in the week from March 13 had risen to 11.67% from 10.07% previously.

The market's caution with respect to retail stocks didn't stop there, as in the same week shorts in Myer ((MYR)) rose to 12.25% from 10.02%, in The Reject Shop ((TRS)) to 7.49% from 6.04% and in Billabong ((BBG)) to 11.13% from 10.29% the week before.

Retail plays and stocks exposed to consumer spending continue to dominate in terms of the largest short positions on the ASX. Along with those companies recording significant increases for the week from March 13, the top 20 largest short positions include JB Hi-FI ((JBH)) at more than 20%, Flight Centre ((FLT)), Harvey Norman ((HVN)) and Wofit.com ((WTF)).

Also in the top 20 was Beach Energy ((BPT)), where shorts increased to 5.09% from less than 1% in a significant daily change. The increase came despite Beach the week before indicating production at a project in Egypt would commence earlier than the market had expected.

A significant increase in short positions for the week from March 13 was also seen in Southern Cross Media ((SXL)). Shorts here rose to 1.95% from less than 0.4% previously, this despite no major news from the company since what had been a generally well received interim earnings result in February.

With regards to declining short positions, the most significant in the week from March 13 was in Rialto Energy ((RIA)). Short positions for the company declined to just 0.16% from 4.5% the week before, this occurring prior to the company updating both on exploration drilling and the receipt of US$20 million in funds via a private placement to a group headed by International Finance Corporation.

The only other falls in short positions of more than one percentage point were in SingTel ((SGT)) and the partly protected shares of Wesfarmers ((WESN)). Shorts in Singtel have fallen to 5.81%, while for WESN short positions now stand at 1.59%. This is still well up from total short positions of around 0.05% in late January.

Among the monthly changes from February 20, shorts in Echo Entertainment Group ((EGP)) rose the most, increasing to 7.51% from 0.89% the month prior. This likely reflects some doubts in the market in relation to the stock being a corporate target for Crown ((CWN)) in particular.

Aside from Rialto Energy ((RIA)) the most substantial fall in monthly short positions from February 20 was in OneSteel ((OST)), where positioned declined to 2.53% from nearly 6% the month before. An equity raising by the company remains a possibility but a recent briefing left brokers with the view there is some upside from the group's iron ore operations.

Elsewhere, RBS Australia notes short positions have continued to increase in both Metcash ((MTS)) and Alumina Ltd ((AWC)), to 4.8% and 2.6% respectively. With respect to Metcash, RBS notes poor recent trading from the Franklins business is impacting on valuation, while the weak alumina market and a strong Australian dollar continue to pressure margins for Alumina.

Unlike a number of internet business peers, Seek ((SEK)) has seen short positions trend lower in recent weeks, declining to 4.51% from 6.66% in the month from February 20. Such a decline makes sense in the view of RBS, as Seek enjoys a dominant market position that should allow further yield growth and the stock is offering better value than its online classified peers at current levels.

Traders and investors should note past analysis suggests that increasing and decreasing short positions can be associated with underperformance and outperformance in the following weeks, all else being equal.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20632949	98850643	20.86
2	MYR	71503784	583384551	12.25
3	DJS	61361240	524940325	11.67
4	BBG	28482505	255102103	11.13
5	ISO	634909	5703165	11.13
6	FXJ	257854099	2351955725	11.00
7	FLT	9150409	100017679	9.14
8	LYC	152970216	1714496913	8.94
9	COH	5026954	56929432	8.81
10	EGP	51722091	688019737	7.51
11	TRS	1947770	26071170	7.49
12	GNS	63258152	848401559	7.44
13	HVN	78149190	1062316784	7.36
14	WTF	14751981	211736244	6.96
15	CRZ	15039186	233674223	6.43
16	TEN	62463217	1045236720	5.97
17	SGT	10331967	176974336	5.81
18	PPT	2413030	41980678	5.77
19	CSR	26711472	506000315	5.28
20	BPT	56421021	1113497051	5.09

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

Technical limitations

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Over the past week brokers in the FNArena database have upgraded three ratings while downgrading seven stocks. Total Buy ratings now stand at 51.66%.

Among the upgrades were David Jones ((DJS)), where Macquarie moved to a Buy rating from Neutral previously. This reflects the view a relief rally is possible as the downgraded earnings outlook is now in the price and issues on the credit card side of the business have now become exposed. This has driven down the share price and leaves scope for a bounce in the broker's view.

Others in the market reacted to the interim profit result and weak guidance far more harshly, with UBS, Deutsche Bank and RBS Australia all downgrading to Sell recommendations from Neutral ratings previously.

UBS continues to see downside earnings risk and suggests there is limited value at current levels given this risk. Deutsche Bank also sees some execution risk as David Jones attempts to restructure its operations, while RBS Australia suggests the re-basing of earnings over the next few years is not fully priced into the stock at present.

Macquarie also upgraded News Corporation ((NWS)) during the week, lifting its rating to Neutral from Sell as the sale of NDS was factored into its model. For Macquarie the sale is a positive for the valuation of News, which when added to the removal of a discount for regulatory uncertainty sees the broker move to a less negative view.

Sigma Pharmaceuticals ((SIP)) reported full year earnings this week and while metrics improved, the consensus view is the industry outlook remains difficult. Deutsche is the only broker in the database to rate Sigma as a Buy, seeing scope for additional earnings growth and capital management in coming periods.

Neutral and Sell ratings continue to dominate for Sigma, with brokers adjusting forecasts and price target post the full year result.

Among the other downgrades over the past week was RBS Australia cutting its recommendation on Graincorp ((GNC)) to Neutral from Buy. Potential for the company to be involved in corporate activity given consolidation in the sector is a potential positive for valuation, but in RBS's view this is priced in at current levels. The downgrade in rating is therefore a valuation call.

RBS also lowered its rating on Nexus Energy ((NXS)) to Neutral from Buy post the group's Longtom field review. The downgrade in reserves creates uncertainty, while the downgrade is also a valuation call given the impact on value and price target resulting from the reduction in reserves at the project.

While Reckon ((RKN)) will save some royalties from the ending of its relationship with international (ex) partner Intuit, the flip side in Macquarie's view is Reckon will need to spend more on R&D going forward to compete with peers. There is also the risk of some customer leakage from the decision, which reinforces the broker's downgrade to a Sell rating from Neutral previously.

For UBS, the de-merger of Telecom New Zealand ((TEL)) being completed means the market should now focus on the growth outlook, which is not overly positive in the broker's view. While mobiles are performing well, this won't be enough to offset broader declines. This implies the market is overpaying for growth at current levels. This has seen UBS downgrade to a Sell rating from Neutral previously.

Significant changes in price targets were limited to the downside over the past week, with targets for David Jones falling significantly as brokers adjusted their models to reflect lower earnings guidance. Fellow retailer Kathmandu ((KMD)) suffered a similar fate, as again brokers lowered forecasts and price targets to reflect a weak interim profit result.

Aside from Kathmandu and David Jones, the most significant cuts in earnings estimates were seem in Atlas Iron ((AGO)), the changes reflecting lost production due to Cyclone Lau causing operations to be shut down.

Beach Energy ((BPT)) enjoyed the most significant increases in earnings estimates, this as brokers adjusted their models to reflect the group's Egypt project commencing production earlier than had been expected.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	DAVID JONES LIMITED	Neutral	Buy	Macquarie
2	NEWS CORPORATION	Sell	Neutral	Macquarie
3	Sigma Pharmaceuticals Ltd	Buy	Buy	Deutsche Bank
Downgrade
4	DAVID JONES LIMITED	Neutral	Sell	UBS
5	DAVID JONES LIMITED	Neutral	Sell	Deutsche Bank
6	DAVID JONES LIMITED	Neutral	Sell	RBS Australia
7	GRAINCORP LIMITED	Buy	Neutral	RBS Australia
8	NEXUS ENERGY LIMITED	Buy	Neutral	RBS Australia
9	RECKON LIMITED	Neutral	Sell	Macquarie
10	TELECOM CORPORATION OF NEW ZEALAND LIMITED	Neutral	Sell	UBS

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	NWS	43.0%	57.0%	14.0%	7
2	CSR	13.0%	25.0%	12.0%	8
3	ALS	40.0%	50.0%	10.0%	6
4	TNE	67.0%	75.0%	8.0%	4

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	DJS	- 38.0%	- 75.0%	- 37.0%	8
2	KMD	60.0%	40.0%	- 20.0%	5
3	RRL	50.0%	33.0%	- 17.0%	3
4	GNC	67.0%	50.0%	- 17.0%	6
5	PRU	33.0%	20.0%	- 13.0%	5
6	PRY	63.0%	50.0%	- 13.0%	8
7	GMG	75.0%	63.0%	- 12.0%	8
8	SGT	57.0%	50.0%	- 7.0%	6

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	NWS	20.547	21.663	5.43%	7
2	RRL	4.210	4.413	4.82%	3
3	ALS	1.656	1.705	2.96%	6
4	TNE	1.220	1.240	1.64%	4

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	KMD	1.920	1.357	- 29.32%	5
2	DJS	2.604	2.248	- 13.67%	8
3	PRU	3.628	3.494	- 3.69%	5
4	CSR	2.435	2.379	- 2.30%	8
5	PRY	3.314	3.289	- 0.75%	8

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	BPT	8.060	9.440	17.12%	5
2	ROC	4.713	4.978	5.62%	5
3	HZN	1.147	1.194	4.10%	4
4	STO	66.138	67.250	1.68%	8
5	OSH	11.677	11.845	1.44%	8
6	TOX	18.133	18.367	1.29%	3
7	FMG	48.489	49.091	1.24%	8
8	SIP	3.886	3.929	1.11%	7
9	TNE	7.200	7.275	1.04%	4
10	AUT	31.681	31.944	0.83%	5

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	KMD	16.591	11.990	- 27.73%	5
2	DJS	26.813	20.950	- 21.87%	8
3	AGO	7.300	5.863	- 19.68%	8
4	ALS	17.850	16.871	- 5.48%	6
5	ORL	66.420	64.300	- 3.19%	5
6	SYD	7.082	6.885	- 2.78%	6
7	AQG	75.592	73.544	- 2.71%	7
8	GMG	6.200	6.125	- 1.21%	8
9	MYR	24.525	24.288	- 0.97%	8
10	RIO	750.659	745.251	- 0.72%	8

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.