Tag Archives: Health Care and Biotech

The Short Report

By Andrew Nelson

Significant decreases in short positions outweighed significant increases for the week to August 21. There were six companies that experienced a total short increase of more than 1.0 percentage points, while there were seven instances of shorts decreasing by more than 1.0 percentage point over the course of the week.

Analysts from RBS note that index-weighted short interest across the S&P/ASX 200 is at its lowest level this year. That said, average shorts are significantly higher, at 2.4%, which the broker notes is a sign of elevated short interest in small-cap stocks, on average.

On a sector basis, RBS’s numbers show short positions continue to be covered in the Building Materials and Media sector, while Healthcare stocks have seen a sharp increase in short interest over the past six weeks.

As far as companies reporting this week go, short selling activity remains high in Flight Centre ((FLT)) at 13.3%, Aristocrat ((ALL)) at 4.6%, Perpetual ((PPT)) at 5.5% and Harvey Norman ((HVN)) at 9.9%.

While by no means massively shorted just yet, the broker has noticed an interesting trend developing with Bendigo and Adelaide Bank ((BEN)). Over the past four months short positions have been increasing steadily, up 1.5% over the period to 2.5% right now. The broker thinks this could have something to do with the fact that the PE ratio is too high for the flat FY12-15 EPS outlook.

Whitehaven Coal ((WHC)) finds itself on top of the short increase leader board this week, with total shorts increasing by 2.43 percentage points from 1.58% to 4.10% over the course of the week. News that Nathan Tinkler has withdrawn his bid for the company may well have a further impact next week. The stock remains favourably viewed by brokers, enjoying unanimous Buy ratings in the FNArena database.

Another noteworthy increase in short position was booked by Fortescue Metals ((FMG)), posting a 1 percentage point increase from 5.72% to 6.72%. The stock remains positively regarded, with only one Neutral vs seven Buys in the FNarena database. The company’s FY result was positively regarded, but brokers in general are turning more cautious on the prospects of iron ore plays given the protracted weakness in iron ore prices.

Shorts in APA Group ((APA)) picked up by 1.19 percentage points from 2.20% to 3.39%, while short positions in Wesfarmers ((WES)) rose 1.0 percentage point from 1.98% to 2.98%. Wesfarmers is a neutrally regarded stock in the FNArena universe, seeing an upgrade from RBS and a downgrade from Citi the week before last in the wake of FY earnings.

The Reject Shop ((TRS)) led the list of short position decliners, dropping 2.93 percentage points to a short position of 7.52%, down from 10.45% the previous week. The stock is somewhat favourably rated by brokers, with Credit Suisse upgrading its call to Neutral last week in the wake of an in-line FY report.

Cabcharge ((CAB)) is next off the rank, shedding 2.27 percentage points to 1.69% shorted from 3.96% after reporting in-line FY results last week. Myer ((MYR)) also enjoyed a decline in its overall short position, which came off 2.13 percentage points to being 7.52% shorted from 9.65% despite downgrading its FY guidance last week.

Probably the most notable decline in short position was posted by perennial short market leader JB HiFi ((JBH)). Overall shorts declined 2.08 percentage points to 18.91% from 20.99% after posting an in-line FY result a couple of weeks back. Broker opinion leans to the negative side, but those positive on the stock like the longer term prospects of the company.

Despite improvements in The Reject Shop, Myer’s and JB HiFi’s short positions, discretionary retail plays continue to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi, Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer, which are all in the top 10.

Looking at month on month numbers, stocks on the decrease again far outweighed stocks on the increase, both in terms of the raw numbers and in terms of the magnitude of changes. Twenty two stocks saw short position improve by more than 1 percentage point, while eleven increased by more than 1 percentage points.

Billabong’s short position continued to decrease, with the month on month decline now a whopping 9.3 percentage points to 1.32% short from 10.62% short. The ongoing takeover bid from TPG is driving the stock right now. The Reject Shop and Myer also featured prominently on the monthly decliners list.

Gunns ((GNS)) also saw a marked decrease in month on month terms, with its short position declining by 2.39 percentage points to 6.5% shorted from 8.89%. The stock is negatively viewed by those brokers that cover it and there has been little in the way of newsflow of late.

Wotif ((WTF)) also sits near the top of the monthly increase list, with its short position climbing 2.53 percentage points to 8.19% shorted from 5.66%. Last week’s FY result came in ahead of the market, but those brokers more negative on the stock seem to think the company won’t be able to pull the cost cutting lever too much longer.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20611035	98850643	20.85
2	FLT	13173176	100055135	13.17
3	FXJ	262436783	2351955725	11.16
4	LYC	183808577	1715029131	10.72
5	COH	6072529	56930432	10.67
6	TRS	2772125	26092220	10.62
7	MYR	59728763	583384551	10.24
8	HVN	104080560	1062316784	9.80
9	ILU	40477878	418700517	9.67
10	CSR	47200893	506000315	9.33
11	DJS	48049414	528655600	9.09
12	LNC	44516918	504487631	8.82
13	AWC	205547540	2440196187	8.42
14	CRZ	19209631	233689223	8.22
15	WTF	17368209	211736244	8.20
16	PDN	64717211	835645290	7.74
17	FMG	213132479	3113798659	6.84
18	SGT	10056163	154444714	6.51
19	GNS	55105305	848401559	6.50
20	MSB	18504984	284478361	6.50

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.

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.

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CSL: True Blood But Fair Price?

- CSL delivers solid profit result
- Further increase in earnings expected in FY13
- Stock regarded as a core defensive holding
- Valuation the issue for some brokers

By Chris Shaw

Full year earnings for biopharmaceutical specialist CSL ((CSL)) of $982.6 million were broadly as the market had expected, the headline number helped by a lower tax rate during the period. The result demonstrated demand for CSL's products remains strong, particularly for immunoglobulins and specialty products such as Riastap and Berinert.

As Bell Potter notes, immunoglobulin sales for CSL grew by 15% in FY12, while strong Asian demand meant albumin sales increased by a similar percentage. The broker doesn't expect any slowing in demand growth for either product in FY13.

Even better was the 18% increase in sale of specialty products, which Bell Potter saw as a result of various product launches in the period and higher awareness of the various uses of CSL's products.

From such a base, Deutsche Bank expects another year of double digit profit growth for CSL in FY13. The market agrees, as consensus earnings per share (EPS) forecasts for CSL according to the FNArena database stand at 226c this year and 257.8c in FY14, which is up from the 189c achieved in FY12.

Earnings per share should receive a boost from management's intention to follow the current $900 million share buyback with another buyback of the same size. Longer-term JP Morgan suggests further capital management initiatives are likely given CSL's cash generating ability and the improvement in working capital achieved during FY12.

Revised earnings forecasts across the market have seen price targets for CSL push higher. The consensus price target according to the FNArena database now stands at $43.15, which is up from around $40.50 prior to the full year profit result.

Targets in the database range from RBS Australia at $38.23 to BA Merrill Lynch at $45.40, while Bell Potter's price target for CSL stands at $49.00. This is up from $36.00 prior to the profit result.

For some in the market, risk to earnings forecasts appears to be to the upside. As Bell Potter points out, CSL's core IVIG product could enjoy a significant boost in demand if it proves to be effective in the treatment of Alzheimer's Disease.

Competitor Baxter is currently preparing for a Phase III trial of IVIG in Alzheimer's and Bell Potter suggests success in this trial would generate benefits for all IVIG suppliers longer-term given the potential size of the market. Chances of success in the Phase II trial are seen as good.

Others are less positive, as BA Merrill Lynch suggests while FY13 should deliver peak earnings, by FY14 increased competition will add to earnings headwinds. This should be at least partially offset by new product launches in the view of BA-ML, but limits potential upside according to Credit Suisse and UBS.

Broker ratings for CSL continue to be weighted towards Neutral, the database showing five Hold ratings and three Buy recommendations. Bell Potter is not in the database but rates CSL as a Buy.

Among those with positive ratings, BA-ML remains attracted to ongoing consistent earnings growth from CSL, while JP Morgan sees the company as a classic defensive story that will continue to attract interest from investors.

Valuation is the main issue for those rating CSL as a Hold, Credit Suisse noting at current levels CSL is trading on a more than 50% premium to the ASX200 ex-financials index based on its revised earnings estimates.

Deutsche points out CSL is also trading at a large premium to international peers at current levels, this despite the likelihood of increased competition from late FY13 as Baxter rebuilds its output. Citi's view is CSL deserves to trade at a premium to peers given solid earnings growth but even allowing for this the stock is fair value around current levels.

Shares in CSL today are higher in a stronger overall market and as at 11.40am the stock was up 33c at $42.33. Over the past year CSL has traded in a range of $26.12 to $43.20, with the current share price implying upside of around 2% 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

As Australian profit reporting season moves into full swing brokers have picked up the pace of ratings changes, the eight brokers in the FNArena database upgrading 18 stocks and downgrading 34 over the past week. The changes mean total Buy ratings have fallen to 48.48%.

Both Goodman Fielder ((GFF)) and SAI Global ((SAI) received two upgrades post profit results, RBS Australia and Credit Suisse lifting ratings for the former and Citi and JP Morgan for the latter. RBS moved to Buy from Hold on Goodman Fielder based on the view earnings have now re-based, which could prompt either the reinstatement of dividends or some corporate interest. Credit Suisse agrees both are possible and lifts its rating to Neutral from Underperform.

SAI Global ((SAI)) again fell short of expectations in its core Compliance division in particular and brokers have consequently cut earnings estimates and price targets. But recent underperformance has improved the value on offer, which drives the upgrades to Buy from Hold ratings for both Citi and JP Morgan. In contrast, Deutsche downgraded to Hold from Buy given its view the stock is fully valued at current levels.

Adelaide Brighton ((ABC)) enjoyed an upgrade from UBS to Buy from Hold on valuation grounds following interim earnings this week, while at the same time Credit Suisse downgraded its rating to Neutral from Outperform given some concerns with respect to cement volumes in the current operating environment.

An upgrade for Ansell ((ANN)) to Buy from Hold by Macquarie followed a solid profit result and increases to the broker's earnings estimates and price target. There is value on offer in Macquarie's view given Ansell is trading on a market multiple at present.

A flat result was seen as solid performance from ARB Corporation ((ARP)) given tough operating conditions through the year and Citi expects further solid performance through at least the next nine months. This, and a reasonably attractive valuation, drive an upgrade to a Buy rating.

Carsales.com ((CRZ)) delivered solid results in the face of strong competitive pressures and this was enough for Macquarie to lift earnings forecasts and price target for the stock. The resilience of the business model in a difficult environment has given increased confidence and sees Macquarie move to a Neutral rating from Sell.

Management at Downer EDI ((DOW)) has now addressed some key concerns, so post full year earnings Credit Suisse has lifted its forecasts and price target. A more positive view is now justified and Credit Suisse has upgraded to Buy from Hold.

While full year earnings for GWA ((GWA)) were down significantly relative to FY11, Citi suggests most of the bad news is now behind the company. This is enough to drive an upgrade to Hold from Sell. At the same time both UBS and Deutsche Bank downgraded to Hold ratings from Buy, UBS pointing out while restructuring is being undertaken and there remains leverage to an economic recovery, the timing of any such recovery remains uncertain.

A marking-to-market of Henderson's ((HGG)) investments has boosted UBS's earnings expectations for the stock, enough for the broker to upgrade to Buy from Hold. At the same time UBS concedes an improvement in investment flows will remain a challenge for the company.

iiNet ((IIN)) beat RBS Australia's expectations for full year earnings and factoring in higher margins and cost savings sees the broker lift its price target. This drives an upgrade to a Buy rating from Hold, supported by the broker's view iiNet offers relative earnings certainty at present.

Improving farm margins should be a boost for earnings at Nufarm ((NUF)) and to reflect this BA Merrill Lynch has upgraded to a Buy rating from Hold. Forecasts and price target were lifted post a review of the company.

Paladin ((PDN)) signed a uranium off-take agreement during the week and this was enough for JP Morgan to upgrade to Buy from Hold on the stock. The deal removes balance sheet concerns given a significant up-front payment, while the broker also likes the leverage to underlying uranium prices.

While RBS has trimmed forecasts for Pharmaxis ((PXS)) to reflect a slower than expected ramp-up of sales for Bronchitol, recent share price weakness offers an opportunity and the broker has moved to a Buy rating from Hold.

Sirtex Medical ((SRX)) received positive reviews from FDA trials of its chemotherapy product and this has prompted UBS to upgrade to a Buy rating from Neutral. An increase in price target supports the more positive view.

Following a review JP Morgan has upgraded Spark Infrastructure ((SKI)) to Buy from Hold, the upgrade reflecting a relative valuation discount to peers and potential for improving cash flow to support higher distribution payouts going forward.

There were few surprises in the Wesfarmers ((WES)) profit result but RBS made enough changes to earnings forecasts to lift price target. With consensus forecasts for the stock having fallen by more than for Woolworths ((WOW)) in recent months risks now appear priced in, so RBS upgrades to a Neutral rating. Citi went the other way and downgraded to Sell from Hold on Wesfarmers, this given the expectation the pace of earnings growth for the company will slow.

Among other downgrades, both Citi and UBS cut ratings for ASX Limited ((ASX)), the former to Sell from Hold and the latter to Hold from Buy. For UBS earnings growth has effectively been deferred for a year and this impacts on valuation, while Citi's downgrade also reflects revisions to earnings estimates and price target.

Goodman Group ((GMG)) received multiple downgrades over the week, RBS, Citi and JP Morgan all moving to Neutral ratings from previous Buys. The problem for the stock is recent share price strength limits the upside potential on offer, though RBS did suggest looking to buy the stock on any share price weakness in coming weeks.

A solid profit result from Primary Health Care ((PRY)) was not enough to stop RBS and Deutsche downgrading to Hold ratings from Buy. For RBS an uncertain earnings outlook is the driver of the rating change, while Deutsche's concern is further pathology funding cuts are looming. At the same time Deutsche suggests the stock is trading around fair value.

Most downgraded stock of the week was UGL ((UGL)), with Citi, JP Morgan and Deutsche all cutting ratings to Hold from Buy and Macquarie to Sell from Hold following cuts to earnings estimates post a the full year earnings result. A tougher earnings outlook has driven the reductions in forecasts and price targets, with Macquarie suggesting the result is enough to bring UGL's safe haven status into question.

Credit Suisse cut earnings forecasts for Aurora Oil & Gas ((AUT)) post the group's full year profit result and the changes mean a limited total return on offer. This was enough for the broker to downgrade to Hold from Buy.

Recent share price gains have been enough for Macquarie to downgrade Bendigo and Adelaide Bank ((BEN)) to Neutral from Outperform prior to next week's profit result, while weaker guidance cutting earnings forecasts and so limiting upside potential was enough for RBS to downgrade Brambles ((BXB)) to Hold from Buy.

Cardno ((CDD)) has enjoyed a recent re-rating and this has prompted Macquarie to downgrade to Neutral from Outperform. Full year earnings met expectations and mean only minor changes to the broker's model for the company.

While Commonwealth Bank ((CBA)) delivered a solid enough result UBS has cut its rating to Neutral from Buy, seeing the bank as simply too expensive at current levels despite what remains an attractive dividend payout.

Crown ((CWN)) also delivered a relatively solid result but Credit Suisse has trimmed earnings estimates and price target given increased capex and debt assumptions. Rating is cut to Hold form Buy with the stock trading near the broker's revised price target.

Valuation is the driver of Macquarie's downgrade of Dexus ((DXS)) to Underperform from Neutral, as the share price is trading broadly in line with a revised price target. It is a similar story for Credit Suisse with respect to Domino's Pizza ((DMP)), which delivered a solid profit result but has been downgraded to Hold from Buy given a high relative multiple.

GPT ((GPT)) has suffered a similar fate, as while Macquarie liked the profit result and lifted forecasts and price target on the back of updated guidance the share price is trading in line with the broker's revised target. Rating has been downgraded to Hold from Buy.

A recent run in the share price has seen Credit Suisse downgrade James Hardie ((JHX)) to Hold from Buy, this despite the broker remaining attracted to the company's cyclical growth opportunities. Credit Suisse has also downgraded JB Hi-Fi ((JBH)) to Sell, this given the view profit is likely to remain constrained for the next couple of years given ongoing difficult market conditions.

Results and production guidance from Newcrest ((NCM)) were broadly as Citi had expected, but with gold de-rating and given recent share price strength the broker doesn't see as much value on offer. Rating has been cut to Hold from Buy.

OrotonGroup ((ORL)) has lost an exclusive licence with Ralph Lauren Polo and this has prompted Citi to move to a Sell rating from Hold. For Citi, the news means an Asian store rollout program is going to need to be very successful to restore investor confidence.

Lower cash sees UBS lower earnings forecasts for OZ Minerals ((OZL)) and when combined with a lack of exploration success is enough for the broker to downgrade to a Sell rating from Neutral. Price target has also been reduced.

Solid outperformance year to date has REA Group ((REA)) fully valued on JP Morgan's numbers, this despite a good full year profit result. Rating is cut to Hold from Buy. Valuation is the broker's issue with SingTel ((SGT)), as a high earnings multiple prompts a similar downgrade in rating.

Telstra ((TLS)) has been downgraded by Macquarie to Hold from Buy on valuation grounds post a solid full year profit result, while a similar argument has been presented to justify the same downgrade in Macquarie's rating for Westfield Retail Trust ((WRT)).

Among stocks in the database, the largest increase in price targets for the week was in Goodman Group ((GMG)) and Domino's Pizza, while the most significant cuts were for Oroton, UGL and SAI Global.

For earnings forecasts the results were a little different, Goodman again among the largest increases along with Ansell and SAI Global. The major cuts to forecasts were experienced by Aquarius Platinum ((AQP)), SMS Management and Technology ((SMX)), UGL and Alacer Gold ((AQG)).

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	ADELAIDE BRIGHTON LIMITED	Neutral	Buy	UBS
2	ANSELL LIMITED	Neutral	Buy	Macquarie
3	ARB CORPORATION LIMITED	Neutral	Buy	Citi
4	CARSALES.COM LIMITED	Sell	Neutral	Macquarie
5	DOWNER EDI LIMITED	Neutral	Buy	Credit Suisse
6	GOODMAN FIELDER LIMITED	Neutral	Buy	RBS Australia
7	GOODMAN FIELDER LIMITED	Sell	Neutral	Credit Suisse
8	GWA GROUP LIMITED	Sell	Neutral	Citi
9	HENDERSON GROUP PLC.	Neutral	Buy	UBS
10	IINET LIMITED	Neutral	Buy	RBS Australia
11	NUFARM LIMITED	Neutral	Buy	BA-Merrill Lynch
12	PALADIN ENERGY LTD	Neutral	Buy	JP Morgan
13	Pharmaxis Ltd	Neutral	Buy	RBS Australia
14	SAI GLOBAL LIMITED	Neutral	Buy	Citi
15	SAI GLOBAL LIMITED	Neutral	Buy	JP Morgan
16	SIRTEX MEDICAL LIMITED	Buy	Buy	UBS
17	SPARK INFRASTRUCTURE GROUP	Neutral	Buy	JP Morgan
18	WESFARMERS LIMITED	Sell	Neutral	RBS Australia
Downgrade
19	ADELAIDE BRIGHTON LIMITED	Buy	Neutral	Credit Suisse
20	ASX LIMITED	Neutral	Sell	Citi
21	ASX LIMITED	Buy	Neutral	UBS
22	AURORA OIL AND GAS LIMITED	Buy	Neutral	Credit Suisse
23	BENDIGO AND ADELAIDE BANK LIMITED	Buy	Neutral	Macquarie
24	BRAMBLES LIMITED	Buy	Neutral	RBS Australia
25	CARDNO LIMITED	Buy	Neutral	Macquarie
26	COMMONWEALTH BANK OF AUSTRALIA	Buy	Neutral	UBS
27	CROWN LIMITED	Buy	Neutral	Credit Suisse
28	DEXUS PROPERTY GROUP	Neutral	Sell	Macquarie
29	Domino's Pizza Enterprises Limited	Buy	Neutral	Credit Suisse
30	GOODMAN GROUP	Buy	Neutral	RBS Australia
31	GOODMAN GROUP	Buy	Neutral	Citi
32	GOODMAN GROUP	Buy	Neutral	JP Morgan
33	GPT	Buy	Neutral	Macquarie
34	GWA GROUP LIMITED	Buy	Neutral	UBS
35	GWA GROUP LIMITED	Buy	Neutral	Deutsche Bank
36	JAMES HARDIE INDUSTRIES N.V.	Buy	Neutral	Credit Suisse
37	JB HI-FI LIMITED	Sell	Sell	Credit Suisse
38	NEWCREST MINING LIMITED	Buy	Neutral	Citi
39	OROTONGROUP LIMITED	Neutral	Sell	Citi
40	OZ MINERALS LIMITED	Neutral	Sell	UBS
41	PRIMARY HEALTH CARE LIMITED	Buy	Neutral	RBS Australia
42	PRIMARY HEALTH CARE LIMITED	Buy	Neutral	Deutsche Bank
43	REA GROUP LIMITED	Buy	Neutral	JP Morgan
44	SAI GLOBAL LIMITED	Buy	Neutral	Deutsche Bank
45	SINGAPORE TELECOMMUNICATIONS LIMITED	Buy	Neutral	JP Morgan
46	TELSTRA CORPORATION LIMITED	Buy	Neutral	Macquarie
47	UGL LIMITED	Neutral	Sell	Macquarie
48	UGL LIMITED	Buy	Neutral	Citi
49	UGL LIMITED	Buy	Neutral	JP Morgan
50	UGL LIMITED	Buy	Neutral	Deutsche Bank
51	WESFARMERS LIMITED	Neutral	Sell	Citi
52	WESTFIELD RETAIL TRUST	Buy	Neutral	Macquarie

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	PXS	50.0%	75.0%	25.0%	4
2	ARP	20.0%	40.0%	20.0%	5
3	IIN	50.0%	67.0%	17.0%	6
4	ANN	14.0%	29.0%	15.0%	7
5	DOW	71.0%	86.0%	15.0%	7
6	SKI	57.0%	71.0%	14.0%	7
7	PDN	29.0%	43.0%	14.0%	7
8	DJS	- 38.0%	- 25.0%	13.0%	8
9	SAI	63.0%	75.0%	12.0%	8
10	HGG	50.0%	60.0%	10.0%	5

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	UGL	71.0%	14.0%	- 57.0%	7
2	GMG	63.0%	25.0%	- 38.0%	8
3	TLS	13.0%	- 13.0%	- 26.0%	8
4	CDD	50.0%	25.0%	- 25.0%	4
5	PRY	50.0%	25.0%	- 25.0%	8
6	ORL	40.0%	20.0%	- 20.0%	5
7	DMP	33.0%	17.0%	- 16.0%	6
8	WRT	43.0%	29.0%	- 14.0%	7
9	REA	43.0%	29.0%	- 14.0%	7
10	BXB	100.0%	86.0%	- 14.0%	7

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	GMG	3.109	3.973	27.79%	8
2	DMP	8.675	10.240	18.04%	6
3	PRY	3.290	3.604	9.54%	8
4	IIN	3.383	3.643	7.69%	6
5	REA	14.156	15.187	7.28%	7
6	TLS	3.579	3.725	4.08%	8
7	ANN	14.629	15.060	2.95%	7
8	DJS	2.263	2.325	2.74%	8
9	WRT	3.006	3.086	2.66%	7
10	ARP	9.066	9.298	2.56%	5

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	ORL	8.830	7.636	- 13.52%	5
2	UGL	14.031	12.369	- 11.85%	7
3	SAI	5.253	4.675	- 11.00%	8
4	OZL	9.439	8.951	- 5.17%	8
5	HGG	2.063	1.970	- 4.51%	5
6	NCM	31.761	30.576	- 3.73%	8
7	BXB	7.350	7.183	- 2.27%	7
8	CWN	10.118	9.935	- 1.81%	8
9	PXS	1.658	1.640	- 1.09%	4
10	AGK	16.460	16.375	- 0.52%	8

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	YAL	11.800	95.233	707.06%	3
2	GMG	29.538	32.838	11.17%	8
3	SAI	24.500	26.838	9.54%	8
4	IIN	31.900	34.333	7.63%	6
5	DOW	45.429	47.560	4.69%	7
6	PDN	1.990	2.074	4.22%	7
7	PRY	26.938	28.000	3.94%	8
8	REA	72.757	75.086	3.20%	7
9	DMP	43.100	44.433	3.09%	6
10	QUB	8.475	8.650	2.06%	4

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	BSL	3.557	2.514	- 29.32%	7
2	AQP	3.598	2.606	- 27.57%	5
3	SMX	47.520	38.680	- 18.60%	5
4	AQG	54.439	47.216	- 13.27%	7
5	UGL	114.900	100.486	- 12.54%	7
6	NCM	163.900	148.175	- 9.59%	8
7	ORL	70.780	64.204	- 9.29%	5
8	JHX	38.030	34.967	- 8.05%	8
9	SGM	97.300	90.743	- 6.74%	7
10	QBE	140.892	133.038	- 5.57%	8

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The Short Report

By Andrew Nelson

Decreases in short positions again outweighed increases for the week from August 9. There were 12 companies experiencing a total short decrease of more than 1.0 percentage point, while there were just three instances of shorts increasing by more than 1.0 percentage point. Although one of those increases was quite significant.

Shorts in SingTel ((SGT)) increased by a substantial 2.34 percentage points, with total short positions moving from 5.64% to 7.98% over the course of the week. Yesterday, subsidiary Optus posted a 1Q decline in earnings and revenue, while the broader group also missed analyst estimates on currency moves and the lower result from Optus.

There were several other noteworthy climbers including Silver Lake Resources ((SLR)), whose short position increased by 1.81 percentage points,to 2.2%. This is up from a mere 0.41% a week prior. Last week the company announced it would buy Integra Mining ((IGR)) for $426 million in shares.

It is estimated the move may as much as double Silver Lake’s annual output and make it one of Australia’s largest gold producers. Nonetheless, shares have back-tracked significantly since last week’s announcement.

Bathurst Resources ((BTU)) also saw a better than one percentage point rise in its short position, with the share price having run up strongly since the beginning of the month.

Shorts also rose in Cochlear ((COH)) by 0.57 percentage points, or from 9.48% to 10.05%. The stock is quite negatively reviewed by Australian brokers and received a downgrade to Sell last week from JP Morgan on the heels of its FY results. UBS, Citi and Deutsche Bank also maintain Sell calls on the stock.

CSR ((CSR)) lead the list of short position decliners, dropping 2.04 percentage points to a short position of 7.31%, down from 9.35% the previous week. The stock dropped 6 position on the Top 20 list from number 10 to number 16. Last week saw the company host its AGM and commentary was fairly well received by most.

Shorts in Downer EDI ((DOW)) also pulled back over the week to 0.41% from 1.89%, with help likely coming from a fairly well received FY effort.

Discretionary retail exposures continue to dominate the top 20 list, with significant short positions in JB Hi-Fi ((JBH)), Flight Centre ((FLT)), The Reject Shop ((TRS)), Harvey Norman ((HVN)), Myer ((MYR)) and David Jones ((DJS)).

Resource companies also hold prominent position among the largest shorts in the market as aside from Alumina ((AWC) and Iluka ((ILU)), the top 20 also includes Fortescue Metals ((FMG)), Paladin ((PDN)) and Lynas Corporation ((LYC)).

In terms of month on month numbers, the main players from last week were the same from the week before. The Reject Shop ((TRS)) has seen its shorts increase to 10.4% from 6.3% ahead of an earnings report which may reflect the weak consumer backdrop. Or maybe there's some consumer sector pairs trading going on, with takeover target Billabong ((BBG)) seeing its shorts down to 1.9% from 9.0% after a long period at the top of the short table.

Alumina ((AWC)) is yet to individually report but shorts have increased to 7.9% from 5.5% month on month following JV partner Alcoa's result, while Gunns ((GNS)) is a company devoid of any good news for some time and its shorts have increased to 6.5% from 3.6%. Another takeover possible -- Echo Entertainment ((EGP)) -- has seen its shorts reduced to 1.2% from 4.4% month on month.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20823851	98850643	21.07
2	FLT	13451283	100055135	13.44
3	FXJ	270619144	2351955725	11.51
4	LYC	194368103	1715029131	11.33
5	TRS	2730779	26092220	10.47
6	CRZ	23900272	233689223	10.23
7	COH	5625114	56929432	9.88
8	ILU	38082082	418700517	9.10
9	MYR	51759790	583384551	8.87
10	HVN	93150742	1062316784	8.77
11	LNC	44085298	504487631	8.74
12	PDN	69288439	835645290	8.29
13	WTF	17453975	211736244	8.24
14	AWC	184241731	2440196187	7.55
15	DJS	39144286	528655600	7.40
16	CSR	36487572	506000315	7.21
17	MSB	18603211	284478361	6.54
18	GNS	55013785	848401559	6.48
19	SGT	9476843	154444714	6.14
20	FMG	176054508	3113798659	5.65

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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Ansell Has It Covered

- Ansell delivers solid result
- New products and emerging markets support growth
- Upside risk from additional acquisitions
- Macquarie upgrades to a Buy rating

By Chris Shaw

Consensus earnings per share (EPS) forecasts for latex healthcare and safety product manufacturer Ansell ((ANN)) for FY12 were around US103c, so a result of US101.4c was generally regarded as good enough given tough operating conditions in the period in Europe in particular.

For Deutsche Bank the highlight of Ansell's result was stronger group margins, as these were achieved despite the company having some issues and unexpected costs stemming from the implementation of a new system designed to replace numerous legacy systems being used. As noted by Bell Potter, the new enterprise resource planning (ERP) system from Oracle forms a key part of Project Fusion, which aims to improve Ansell's ability to respond to customer needs.

Management at Ansell has guided to EPS in FY13 of US107-112c, which would represent growth of 5-10% from FY12. Driving the increase will be new product launches, along with further synergies stemming from the recent acquisition of Comasec.

As Deutsche notes, Ansell is set to launch more than 40 new products across all divisions in FY13. This level of new product launches is expected to become the norm as Ansell attempts to stay ahead of competitors.

New products should underpin earnings growth expectations in the view of BA Merrill Lynch, especially given Ansell will be cycling weak comparable revenue numbers for the key industrial division in particular in the first half of FY13.

Bell Potter agrees, noting Ansell typically generates around 20% of revenues from products less than three years old. A new global business unit structure should help in this regard, as it will allow for greater innovation and marketing attention for neglected products and customer groups.

The Specialty Markets division offers an example of this, as improved focus has lifted margins and sales in this division over the past year.

Another positive to Ansell's earnings growth outlook is increasing penetration in emerging markets. As Macquarie points out, emerging market sales grew by 18% in FY12 compared to no growth in developed markets, with emerging markets now accounting for almost one-quarter of Ansell's total sales.

Following the Comasec acquisition, Deutsche estimates Ansell has around US$200 million available for further acquisitions without exceeding the group's gearing target of 30%.

Earnings per share forecasts for Ansell suggest solid growth, as consensus forecasts according to the FNArena database stand at US110.1c in FY13 and US126.3c in FY14. In most cases brokers have made minor revisions to earnings estimates.

Aside from still difficult economic conditions in some major market such as Europe, a possible constraint to earnings growth noted by JP Morgan is latex prices. While Ansell was a beneficiary of significant price rises in FY11 as compensation for rising Natural Rubber Latex prices, latex prices are now falling.

This is likely to pressure Ansell to pass on some of these price falls to customers, something management has acknowledged is already occurring on bigger contracts. At present the plan is to pass through less than 50% of the benefit, which JP Morgan suggests offers scope for some market share losses.

With FY12 earnings demonstrating resilience in the face of tough market conditions, Macquarie suggests market concerns with respect to Ansell's potential exposure to current global economic conditions have been addressed.

This is enough for Macquarie to upgrade to an Outperform rating, based on expectations of Ansell's earnings multiple returning to a premium more appropriate for a higher growth defensive company. Such a multiple expansion appears justified to the broker given Ansell's superior earnings growth profile relative to peers. Citi agrees, pointing out there is some upside risk to Ansell's earnings outlook if latex prices maintain current levels through the coming year.

As a counter argument, BA-ML suggests Ansell's reliance on new products to drive margin and earnings growth in coming years carries some risk. As well, UBS suggests Ansell will need make some further acquisitions to deliver on earnings growth guidance for FY13.

Both BA-ML and UBS rate Ansell as Hold, while the FNArena database shows a total of two Buy ratings and five Hold recommendations. Bell Potter is not in the FNArena database but also rates Ansell as a Buy.

Price targets for Ansell range from Deutsche Bank at $14.25 to Citi at $16.65, while Bell Potter's target is unchanged at $17.00. The consensus price target of $15.06, up from $14.88 prior to the result, implies limited upside relative to the current share price.

Shares in Ansell today are higher in a weaker overall market and as at 11.50am the stock was up 56c or nearly 4% at $14.80.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Changes in broker ratings were weighted to the downside over the past week, brokers in the FNArena database making 11 downgrades in ratings compared to just five upgrades. Total Buy ratings have again dipped under the 50% level and now stand at 49.9%.

AWE Limited ((AWE)) enjoyed an upgrade from BA Merrill Lynch, the broker moving to a Neutral rating from Sell previously given the upcoming catalyst of drilling at some of the company's shale oil prospects. The price target was trimmed at the same time.

BA-ML was also active on the industrial side of the market, upgrading ratings for Cochlear ((COH)), DuluxGroup ((DLX)) and Stockland ((SGP)). For Cochlear the move to a Neutral rating from Sell previously is based on the view negatives such as volume weakness are now factored into the market, meaning no new catalyst to drive further underperformance.

Increased top line growth expectations for Dulux are enough for BA-ML to lift earnings forecasts and its price target for the stock. The changes suggest a good enough outlook to justify a move to a Buy rating.

Reduced risk assumptions for the Australian REIT sector has boosted BA-ML's valuations and price targets, while on company specific news the confirmation residential lot sales are holding up in a tough market was also viewed positively. BA-ML upgrades Stockland to Buy from Neutral.

Back on the resources side, UBS has upgraded Mincor ((MCR)) to Neutral from Sell given a positive view on management's ability to deliver some upside for the stock. Minor changes to forecasts follow Mincor's quarterly production report.

On the downgrade side, Deutsche Bank has lowered its rating on Commonwealth Bank ((CBA)) to Neutral from Buy given the view value is no longer compelling at current levels. As well, Deutsche suggests while CBA's upcoming profit result should be solid there is unlikely to be enough upside to justify the current premium to peers.

CBA was not the only bank to be downgraded, as Citi cut its rating on National Australia Bank ((NAB)) to Hold from Buy. The call is a valuation one as the share price has moved beyond Citi's target, leading the broker to suggest there is better relative value in Westpac ((WBC)) at present.

Property-related stocks also saw a number of downgrades, with Credit Suisse cutting its rating on both Commonwealth Property Office ((CPA)) and Investa Office ((IOF)) to Underperform ratings from Neutral previously.

The changes reflect the fact office REITs have enjoyed strong gains over the past two years, so closing the gap between valuation and book value. An exit from European assets remains a catalyst for Investa but in both cases Credit Suisse suggests there is not enough total return on offer to justify a higher rating.

BA-ML has also been active in downgrading ratings in the property sector, cutting GPT ((GPT)), Goodman Group ((GMG)) and Lend Lease ((LLC)) to Sell ratings from Hold previously. While its adjusted risk assumptions generate price target increases in each case, relative valuations drive the changes in ratings.

Citi has also gotten in on the act, downgrading Westfield Retail Trust ((WRT)) to Hold from Buy. The change reflects recent share price gains, while the broker makes no changes to earnings forecasts or price target.

Telstra ((TLS)) has also been downgraded by BA-ML to Sell from Hold, as the broker sees limited valuation upside following a recent share price rally. Once differences in earnings per share payout ratios have been factored in, the broker also suggests the yield on Telstra is in-line with the All Industrials average.

Among resource stocks, Macquarie has downgraded Northern Iron ((NFE)) to Neutral from Outperform post the company's quarterly production report. The report itself led to modest cuts to earnings forecasts, while recent share price gains have the stock within 10% of the broker's price target.

Saracen Minerals ((SAR)) was downgraded by BA-ML to Hold from Buy given lowered full year production guidance accompanying the June quarter production report. With the Red October development now likely to take longer than previously expected, earnings forecasts and price target have also been cut.

In terms of changes to price targets the only significant increase over the week was in Investa Office, While the largest cuts in targets were in Pharmaxis ((PXS)) and Boart Longyear ((BLY)). Changes to earnings forecasts on the upside were led by Investa and Australian Infrastructure ((AIX)), while TPG Telecom ((TPM)) and Kathmandu ((KMD)) enjoyed solid increases.

Cuts to earnings forecasts were largest for Lynas ((LYC)) and Brandrill ((BDR)), while estimates for Newcrest ((NCM)) and Beach ((BPT)) were also lowered significantly over the week.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup Suisse,Deutsche<br>Bank,JP<br>Morgan,Macquarie,RBS<br>Australia,UBS&b0=119,104,122,100,82,141,149,132&h0=73,106,78,125,92,88,143,109&s0=47,22,32,4,39,35,10,14" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	AWE LIMITED	Neutral	Neutral	BA-Merrill Lynch
2	COCHLEAR LIMITED	Sell	Neutral	BA-Merrill Lynch
3	DULUX GROUP LIMITED	Neutral	Buy	BA-Merrill Lynch
4	MINCOR RESOURCES NL	Sell	Neutral	UBS
5	STOCKLAND	Neutral	Buy	BA-Merrill Lynch
Downgrade
6	COMMONWEALTH BANK OF AUSTRALIA	Buy	Neutral	Deutsche Bank
7	COMMONWEALTH PROPERTY OFFICE FUND	Neutral	Sell	Credit Suisse
8	GOODMAN GROUP	Neutral	Sell	BA-Merrill Lynch
9	GPT	Neutral	Sell	BA-Merrill Lynch
10	INVESTA OFFICE FUND	Neutral	Sell	Credit Suisse
11	LEND LEASE CORPORATION LIMITED	Neutral	Sell	BA-Merrill Lynch
12	NATIONAL AUSTRALIA BANK LIMITED	Buy	Neutral	Citi
13	NORTHERN IRON LIMITED	Buy	Neutral	Macquarie
14	SARACEN MINERAL HOLDINGS LIMITED	Buy	Neutral	BA-Merrill Lynch
15	TELSTRA CORPORATION LIMITED	Neutral	Sell	BA-Merrill Lynch
16	WESTFIELD RETAIL TRUST	Buy	Neutral	Citi

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	ALZ	57.0%	86.0%	29.0%	7
2	DLX	14.0%	29.0%	15.0%	7
3	NUF	- 29.0%	- 14.0%	15.0%	7
4	SGP	43.0%	57.0%	14.0%	7
5	NCM	88.0%	100.0%	12.0%	8
6	COH	- 50.0%	- 38.0%	12.0%	8
7	MND	33.0%	43.0%	10.0%	7
8	CWN	86.0%	88.0%	2.0%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	GUD	17.0%	- 33.0%	- 50.0%	6
2	BLY	88.0%	63.0%	- 25.0%	8
3	PXS	67.0%	50.0%	- 17.0%	4
4	GPT	29.0%	14.0%	- 15.0%	7
5	WRT	57.0%	43.0%	- 14.0%	7
6	CPA	- 43.0%	- 57.0%	- 14.0%	7
7	IOF	57.0%	43.0%	- 14.0%	7
8	TLS	38.0%	25.0%	- 13.0%	8
9	GMG	75.0%	63.0%	- 12.0%	8
10	NAB	25.0%	13.0%	- 12.0%	8

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	IOF	1.003	1.679	67.40%	7
2	NUF	4.914	5.101	3.81%	7
3	ALZ	2.887	2.986	3.43%	7
4	DLX	3.037	3.112	2.47%	7
5	TLS	3.510	3.579	1.97%	8
6	WRT	2.911	2.963	1.79%	7
7	COH	59.680	60.488	1.35%	8
8	CPA	1.030	1.043	1.26%	7
9	GPT	3.394	3.436	1.24%	7
10	SGP	3.499	3.539	1.14%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	PXS	1.827	1.658	- 9.25%	4
2	BLY	4.240	3.953	- 6.77%	8
3	GUD	8.198	7.898	- 3.66%	6
4	NCM	32.575	31.761	- 2.50%	8
5	MND	23.285	23.277	- 0.03%	7

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	IOF	7.600	9.857	29.70%	7
2	AIX	15.967	19.483	22.02%	6
3	TPM	13.400	15.850	18.28%	4
4	KMD	12.119	14.026	15.74%	5
5	ORL	63.440	70.780	11.57%	5
6	NUF	39.930	44.358	11.09%	7
7	ALZ	22.914	24.300	6.05%	7
8	ROC	4.472	4.729	5.75%	5
9	SFR	128.443	135.471	5.47%	7
10	BRG	35.167	36.900	4.93%	3

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	LYC	3.780	2.340	- 38.10%	5
2	BDR	3.533	2.533	- 28.30%	3
3	NCM	193.363	163.900	- 15.24%	8
4	BPT	10.240	8.760	- 14.45%	5
5	PAN	5.350	4.650	- 13.08%	3
6	AWE	6.714	5.843	- 12.97%	7
7	GRR	7.783	6.850	- 11.99%	6
8	IGO	15.980	14.580	- 8.76%	5
9	GUD	74.950	69.100	- 7.81%	6
10	HZN	3.174	2.931	- 7.66%	4

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Weekly Broker Wrap: Bank Yields Less Secure

By Andrew Nelson

Local brokers took on a broad range of domestic topics last week. Of note were comments on our local banks, property and housing, the healthcare sector and a few yield ideas from Credit Suisse and Goldman Sachs.

Yield investing has become a real hot topic over the last few months as investors struggle to find ways to extract value from underperforming share markets. One of the dividend and excess capital paying cornerstones of the average Australian portfolio is the Australian banking sector. However, JP Morgan sees some storm clouds on the horizon for those counting on high payouts from domestic banks.

The broker notes pro-forma Basel 3 Core Tier 1 ratios are now approaching 8% and with banks now operating at higher capital levels, the capital intensity needed for growth increases, making buy-backs far less likely.

Why?

Because maintaining higher capital ratios means absorbing a higher level of deductions and managing a more even balance between housing and business credit growth, which will consume more capital in the future than what we can see today.

That means even dividends are not a sure thing if loan losses escalate, as one of the main functions of the new regulatory environment is to preserve capital in a downturn scenario via earnings retention, better known as lower dividends.

While the broker admits slightly lower margins, or slightly higher costs may not in themselves be enough to limit dividend prospects, JP Morgan believes banks will not be in a position to keep paying at current levels if there is meaningful decline in reported earnings that arises via an increase in loan losses, as APRA probably won’t want to see capital released via high dividends during a period of stress.

Thus while Australian banking is probably the most preferred sector in the current environment, which in itself may provide some protection during what is shaping up to be a less than rosy reporting season, valuations are full in the stockbroker's view, which normally tends to cap share performance.

Given such an outlook, the broker prefers the more defensive exposures in the sector like Commonwealth Bank ((CBA)) and Westpac ((WBC)).

Goldman Sachs has a few dividend ideas of its own, singling out companies it thinks are able to not only sustain current dividends, but grow them over the next few years. The broker has paid special attention to earnings risk over the coming years and earnings growth strategy, as well as balance sheet strength and capital management strategy.

With this in mind, Goldman Sachs thinks ANZ Bank ((ANZ)), United Group ((UGL)), Tatts ((TTS)), Woolworths ((WOW)), CFS Retail ((CFX)) and Coca Cola Amatil ((CCL)) offer the most upside.

Next we look at the prospects of the Australian real estate sector, with UBS reporting last week that over the next five years the total amount of stock of office space in the Sydney CBD will increase by around 400,000sqm. Noting over the last 20 years there has only been a supply increase of 870,000 sqm, the current 5-year forecast is more than double the normal rate.

The broker notes this is far from a positive trend given demand is fairly subdued, meaning the currently high vacancy rates are likely to remain the norm in the foreseeable future. In fact, UBS notes that for Sydney vacancies to remain below 10% by 2017, about 70k sqm per year will need to be taken up. Such an outcome seems a bit farfetched, given the historic net absorption is around 60k. Given this, the broker predicts increased vacancy levels and therefore rising incentives to support rents.

The Melbourne office market is a slightly different story than the Sydney market, notes UBS. Absorption rates have been much better than Sydney over the last five years, averaging at around 100k sqm a year. However, in the current environment with an increasing amount of space moving to developments, the broker is starting to see some cracks in its vacancy forecasts.

What to do? Well, UBS likes ING Office ((IOF)) and Commonwealth Property ((CPA)), citing respective yields of 8.6% and 8.2%, with both boasting near 7.5% discounts to Net Tangible Assets (NTA). That said, the broker readily admits the office sector is facing increasing headwinds in a tough environment and advises investors to be no more than market weight on Dexus ((DXS)) and Mirvac ((MGR)) and to keep away from GPT ((GPT)), as it has the highest proportion of office based balance sheet assets in Sydney.

There was some good news for the domestic housing market last week according to analysts at Goldman Sachs recovery, who have made some significant upward revisions to their Australian domestic housing construction numbers. With housing starts in the March quarter hitting their lowest point since June 2001, the broker believes Australian housing activity must be close to a cyclical low, with its key leading indicator indicating a strong recovery from CY13.

The broker thinks the stocks in the best position from an earnings leverage and industry positioning perspective to benefit from a pick-up in housing completions and market turnover are Boral ((BLD)) and Fletcher Building ((FBU)) from a building materials perspective. Also looking good are Stockland ((SGP)), Mirvac and Peet ((PPC)) from a REIT perspective and Alesco ((ALS)) and Dulux in housing products.

Goldman Sachs also thinks Queensland banks are in the best position to benefit from improving housing and subsequent credit growth activity. Increased activity in the domestic housing market helps Suncorp ((SUN)) and Bank of Queensland ((BOQ)) best given 75%-80% of their mortgages are held in the states with the best recovery forecasts, QLD and NSW, notes the broker.

There is even more good news for the materials plays coming from the US, with the broker noting the majority of US housing indicators are demonstrating continued improvement. US analysts for the broker have thus also upgraded US housing starts forecasts. The view sees the broker shift from a defensive stance to one that prefers stocks with more leverage to the predicted recovery.

The problem for James Hardie ((JHX)) is that the broker thinks the current share price is already discounting a significant US housing recovery. CSR ((CSR)) remains structurally constrained, while the broker notes Adelaide Brighton ((ABC)) has the least amount of leverage to a housing recovery, so the potential for additional upside is limited.

The broker believes Boral offers the most significant exposure to both potential US and Australian housing recoveries. While admitting there is a certain amount of near-term earnings risk, JP Morgan still believes the current risk/reward picture looks attractive.

Credit Suisse saw some good news for health care stocks come out of the US last week, with the Centers for Medicare and Medicaid Services (CMS) putting out some fairly robust expenditure forecasts to 2021. The broker notes the report indicated some very high volume growth levels, with around 30m more Americans expected to be insured.

Also helping matter is the fact that the US is presumed to undergo some sort of economic recovery in the years ahead, while the population, in general, is ageing, which means more care will be needed per capita. All in all, CMS forecasts that healthcare as a % of US GDP will rise from 17.9% in 2010 to 19.6% by 2021, with total healthcare expenditure projected to increase by 5.9% a year out to 2021.

So, how does this all pan out for Australian healthcare providers? The good news for ResMed ((RMD)) is that durable medical equipment expenditure is also expected to increase by 5.9% a year out to 2021, with out-of-pocket costs expected to remain at around 54% of total outlays through 2021.

The good news for Sonic Healthcare ((SHL)) is that physician and clinical services expenditure is projected to grow at a rate of 5.6% a year, with an influx of newly insured patients arriving from Obamacare from 2014, which should significantly increase GP visits and thus lab referrals.

Hospital care expenditure is projected to grow at 5.8% a year, which is positive for Cochlear ((COH)), while prescription drug expenditure growth is expected to be at 6.0% as more people will have insurance, which the broker notes is a positive for CSL ((CSL)).

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Downgrades to company ratings by brokers in the FNArena database outweighed upgrades this week by a score of 12 to nine, leaving total Buy ratings at 50.03%.

Among the upgrades was Billabong ((BBG)), where UBS lifted its rating to Neutral from Sell on news of yet another approach from private equity play TPG. UBS's valuation has increased in line with the offer of $1.45 per share, though Citi went the other way and downgraded to a Neutral rating from Buy given the share price reaction to TPG's approach and the conditional nature of its proposal.

Newcrest ((NCM)) was also upgraded by UBS to Buy from Neutral after delivering a solid quarterly production report. While delivery of key projects remains a major driver for the stock, UBS sees improved value following recent share price weakness, which justifies the upgrade in rating. Brokers across the market revised earnings forecasts and price targets on the back of the production report.

The June quarter production report also saw UBS upgrade OZ Minerals ((OZL)) to Neutral from Sell, the move again based on improved valuation stemming from recent share price weakness. The quarterly report resulted in cuts to UBS's earnings estimates and price target, a move matched by others in the market as the result was factored into broker models.

A positive trading update from Nufarm included an increase in full year earnings guidance, which was enough for brokers to lift estimates and price targets. For JP Morgan it was also enough for a rating upgrade to Neutral from Underweight, which reflects both favourable conditions in Australia and positive momentum in the ongoing process of repositioning the business.

While trimming its earnings estimates and price target, Credit Suisse upgraded QR National ((QRN)) to Neutral from Underperform based on revised total expected shareholder return expectations. A softening demand profile remains the broker's main concern with respect to the stock.

Recent share price weakness has presented a buying opportunity in Seek ((SEK)) in the view of RBS Australia, as the broker notes buying the stock in periods when job ads are under pressure has typically paid off. Minor changes to forecasts see the broker trim its price target.

There is potential for Sigma Pharmaceutical ((SIP)) to start distributing excess capital to shareholders in the view of Citi, who expects any such increase in payouts will generate a share price re-rating. Recommendation has been upgraded to Buy from Neutral.

Among the downgrades, BC Iron ((BCI)) continues to deliver operationally according to UBS, but revisions to iron ore price expectations see the broker lower earnings forecasts from FY13. The changes mean a cut in price target and cause the broker to downgrade to a Neutral rating from Buy previously.

Both UBS and Citi downgraded GUD Holdings ((GUD)) to a Sell, the former from Buy and the latter from Neutral. The changes came after a full year profit result lower than had been expected and limited upside potential given what remain difficult operating conditions.

Limited total return potential is also the reason behind Credit Suisse downgrading Goodman Fielder ((GFF)) to Sell from Hold, as the broker simply sees little scope for outperformance in the current environment. Minor changes to forecasts reflect some revised timing assumptions for restructuring charges.

BA-Merrill Lynch has downgraded a couple of resource plays, moving to Sell ratings on both Grange Resources ((GRR)) and Intrepid Mines ((IAU)) from Buy in both cases. For Grange operational issues impact on production expectations and there are some management changes coming, while for Intrepid the suspension of operations at Tujuh Buki adds significantly to the investment risk associated with the company.

Higher cash costs have impacted on Macquarie's earnings forecasts for Kingsgate ((KCN)) but the bigger issue is the potential for higher external funding requirements for the Nueva Esperanza project. This has been enough for Macquarie to downgrade to a Neutral rating from Buy.

Expectations for a continuation of the trend of declining traffic for Macquarie Atlas's core APRR asset has seen JP Morgan revise its model for the company. Along with a cut in price target the broker has downgraded to a Sell rating from Neutral.

Recent share price outperformance and some minor changes to forecasts and price target have been enough for Credit Suisse to downgrade Stockland ((SGP)) to a Neutral rating from Buy previously, while UBS has similarly downgraded Westfield Retail Trust ((WRT)) on valuation grounds.

Outside of those stocks where ratings were changed, the major price target adjustment during the week was for Hutchison Telecommunications ((HTA)), where targets were reduced following what was regarded as a poor interim earnings result.

There were no major increases in earnings estimates during the week, while cuts to forecasts were largest for Aquarius Platinum ((AQP)), Western Areas ((WSA)), BC Iron, OZ Minerals, Ten Network ((TEN)) and Newcrest.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup Suisse,Deutsche<br>Bank,JP<br>Morgan,Macquarie,RBS<br>Australia,UBS&b0=119,105,121,101,81,141,149,132&h0=78,104,81,123,92,88,143,108&s0=42,22,30,4,39,35,10,15" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	BILLABONG INTERNATIONAL LIMITED	Sell	Neutral	UBS
2	NAVITAS LIMITED	Neutral	Buy	Credit Suisse
3	NEWCREST MINING LIMITED	Neutral	Buy	UBS
4	NUFARM LIMITED	Sell	Neutral	JP Morgan
5	OZ MINERALS LIMITED	Sell	Neutral	UBS
6	QR NATIONAL	Sell	Neutral	Credit Suisse
7	SEEK LIMITED	Neutral	Buy	RBS Australia
8	Sigma Pharmaceuticals Ltd	Neutral	Buy	Citi
Downgrade
9	BC IRON LIMITED	Buy	Neutral	UBS
10	BILLABONG INTERNATIONAL LIMITED	Sell	Neutral	Citi
11	G.U.D. HOLDINGS LIMITED	Neutral	Sell	Citi
12	G.U.D. HOLDINGS LIMITED	Buy	Sell	UBS
13	GOODMAN FIELDER LIMITED	Neutral	Sell	Credit Suisse
14	GRANGE RESOURCES LIMITED	Buy	Sell	BA-Merrill Lynch
15	INTREPID MINES LIMITED	Buy	Sell	BA-Merrill Lynch
16	KINGSGATE CONSOLIDATED LIMITED	Buy	Neutral	Macquarie
17	MACQUARIE ATLAS ROADS GROUP	Neutral	Sell	JP Morgan
18	STOCKLAND	Buy	Neutral	Credit Suisse
19	WESTFIELD RETAIL TRUST	Buy	Neutral	UBS

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	BBG	- 50.0%	- 13.0%	37.0%	8
2	NVT	17.0%	33.0%	16.0%	6
3	QRN	14.0%	29.0%	15.0%	7
4	NUF	- 29.0%	- 14.0%	15.0%	7
5	NWS	29.0%	43.0%	14.0%	7
6	SEK	29.0%	43.0%	14.0%	7
7	SWM	75.0%	88.0%	13.0%	8
8	OZL	25.0%	38.0%	13.0%	8
9	NCM	88.0%	100.0%	12.0%	8
10	HTA	- 33.0%	- 25.0%	8.0%	4

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	GUD	17.0%	- 33.0%	- 50.0%	6
2	BCI	100.0%	67.0%	- 33.0%	3
3	GRR	83.0%	50.0%	- 33.0%	6
4	MQA	40.0%	20.0%	- 20.0%	5
5	WRT	71.0%	57.0%	- 14.0%	7
6	SGP	57.0%	43.0%	- 14.0%	7
7	WOW	38.0%	25.0%	- 13.0%	8
8	OSH	100.0%	88.0%	- 12.0%	8

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	BBG	1.159	1.277	10.18%	8
2	NVT	3.853	4.168	8.18%	6
3	NUF	4.893	5.059	3.39%	7
4	WOW	27.108	27.510	1.48%	8
5	WRT	2.900	2.911	0.38%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	HTA	0.055	0.030	- 45.45%	4
2	MQA	1.854	1.738	- 6.26%	5
3	BCI	3.350	3.150	- 5.97%	3
4	OZL	9.956	9.439	- 5.19%	8
5	SWM	2.503	2.390	- 4.51%	8
6	GUD	8.148	7.898	- 3.07%	6
7	NCM	32.575	31.761	- 2.50%	8
8	GRR	0.728	0.712	- 2.20%	6
9	SEK	7.144	7.101	- 0.60%	7
10	QRN	3.850	3.836	- 0.36%	7

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	NAB	248.925	254.950	2.42%	8
2	ROC	4.470	4.572	2.28%	5
3	CGF	56.800	57.871	1.89%	7
4	JHX	37.502	38.017	1.37%	8
5	QBE	137.747	139.205	1.06%	8
6	ASL	42.214	42.643	1.02%	7
7	CTX	131.233	132.400	0.89%	6
8	TEL	15.131	15.217	0.57%	8
9	WOW	189.850	190.750	0.47%	8
10	ALZ	24.050	24.157	0.44%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	AQP	7.473	4.566	- 38.90%	5
2	WSA	23.667	19.017	- 19.65%	6
3	BCI	80.800	69.233	- 14.32%	3
4	OZL	63.438	54.388	- 14.27%	8
5	TEN	1.953	1.675	- 14.23%	8
6	NCM	193.363	166.475	- 13.91%	8
7	AGO	23.550	20.938	- 11.09%	8
8	PNA	32.602	29.118	- 10.69%	8
9	STO	65.650	59.925	- 8.72%	8
10	MQG	269.143	246.529	- 8.40%	7

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.

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Treasure Chest: Special Dividend From Sigma?

By Greg Peel

When investing in listed companies which are beholden to government policy, one must be prepared for the worst. Pharma companies come under the heading of Healthcare and as such should be considered “defensive” under normal circumstances, however anyone who's played the pharma market in Australia these past years will well know that one little change to the PBS or some other government rebate etc policy can render such stocks anything but defensive.

The government, as we also know, is in spending cut mode.

Policy uncertainty surrounding the government's PBS intentions and its capacity to push them through parliament, offset with more than one broker's expectation of some form of capital management ahead, leaves the FNArena broker database pretty well split. Before today, SIP attracted one Buy, four Holds and two Sells.

Having said that, Sigma Pharmaceuticals ((SIP)) is currently offering a fully franked yield of around 7% with projected earnings growth in the low-to-mid single digits. The Citi analysts consider a 12-month forward PE of 12x to be appropriate. Modest market growth and cost initiatives should see projections achieved.

A recovery in Sigma's market growth, or market share gains, would provide upside, Citi notes. But there is also the matter of around $113m in net cash sitting on the balance sheet. Given Sigma will continue to generate cashflow from operations, Citi suggests this cash is “entirely excess”, even after the company has paid its ordinary dividends. The company has declared a return on invested capital (ROIC) focus, so Citi believes the board will want to give this excess back to shareholders.

Which means the potential for a special dividend. Citi is now factoring in a 2.5cps unfranked special dividend every half year for the next two years. The payout will be spread out so as to provide a reasonable return while retaining some flexibility, in case. Paying out the cash means less interest income so a resultant trimming of earnings forecasts follows. But Sigma will be paying around a 16% yield in FY13 and FY14 if Citi is on the money, with franking of 58%.

Despite more than one broker agreeing with Citi to the point some form of capital management is possible, Sigma's current share price does not reflect such an outcome. Citi has thus upgraded its rating to Buy, leaving the B/H/S ratio now at 2/3/2.

Citi's 61c target price sits in the middle of the database pack, which ranges from 50c (UBS; Sell) to 76c (Deutsche Bank; Buy) for a consensus of 63c, or 14% upside from the current price.

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Mesoblast Delivers Positive Early Results

- Mesoblast returns positive early test results for rheumatoid arthritis
- Brokers caution there is some way to go for a human treatment
- Success offers upside given a substantial market
- Mesoblast still attracts a range of broker ratings

By Chris Shaw

For some time Mesoblast ((MSB)) has been developing Mesenchymal Precursor Cells (MPCs) for the treatment of various inflammatory tissue diseases. The company has now had some success, as animal testing of a rheumatoid arthritis treatment has delivered positive results.

While testing to date remains a long way from delivering a treatment for humans, BA Merrill Lynch notes the results offer a potential new market for Mesoblast. The rheumatoid arthritis market was worth US$10.3 billion in 2010 and is growing at 12% annually on BA-ML's numbers.

One advantage Mesoblast appears to have is the compound used in the tests reduced multiple rheumatoid arthritis-inducing cytokines. As Credit Suisse points out, this is a step up from current treatments which target only one inflammatory cytokine.

Credit Suisse agrees with BA-ML that while the Mesoblast results were a positive, any human MPC therapy for rheumatoid arthritis appears a long way off. This reflects the limited testing done in what was a small and short study, which implies more definitive results in human trials are needed before the market starts to factor the potential upside into models for Mesoblast.

A marketed product is at least three to five years away in the view of Credit Suisse but Mesoblast will continue development. Bell Potter notes a phase II trial to scheduled for late this year assuming FDA approval.

Aside from the positive results from Mesoblast's rheumatoid arthritis trial, BA-ML sees phase II trials for treatment of congestive heart failure (CHF) as they key to share price performance in coming months.

If the FDA approves the trial design the full trial will cost Teva, the large global pharmaceutical company providing MSB with financial backing, around US$150 million. But BA-ML expects a 'stop and look' element will be factored in that would reduce the initial cost to Teva to around US$30 million.

Assuming Teva didn't want to proceed beyond that point BA-ML suggests there would be a material negative for market sentiment towards the stock. On the plus side, Mesoblast has the balance sheet to be able to fund such a trial for themselves.

Looking beyond the CHF trial, Bell Potter suggests the opportunities for Mesoblast in cardiovascular and bone marrow transplants, as well as other pipeline opportunities in diabetes, eye disease and orthopaedic applications, continue to become more substantial.

This means a valuation range for Mesoblast according to Bell Potter of $9.87 per share base case to $19.24 per share on more optimistic numbers. Target price of $16.00 is around the midpoint of the broker's discounted cash flow valuation range.

Bell Potter's target is significantly above the consensus price target according to the FNArena database of $8.23. Within the database, targets range from Macquarie at $5.40 to BA-ML at $10.35. The database shows Mesoblast is rated as Buy twice and Hold and Sell once each.

In ratings terms, Credit Suisse suggests a Neutral rating is appropriate given the uncertainty of more trial results, Teva's funding decision and the upcoming full year results for Mesoblast. Macquarie is even more cautious, rating the stock as Underperform given strong competition in the areas in which Mesoblast is working and the lack of robust clinical data delivered to date.

BA-ML sides with Bell Potter and rates Mesoblast as a Buy, which reflects the upside on offer relative to a discounted cash flow valuation of just over $20.00 per share. Factoring in conservative pricing and timing assumptions sees the broker's price target set well below this level, though relative to the current share price there remains significant upside potential.

Shares in Mesoblast today are slightly higher in a weaker overall market and as at 11.30am the stock was up 2c at $5.92. Over the past year the shares have traded in a range of $5.44 to $10.04, the current share price implying upside of around 39% relative to the consensus target in the FNArena database.

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