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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

In a relatively quieter week for rating changes, brokers in the FNArena database upgraded five recommendations while downgrading a further nine, extending 2012's trend in favour of more downgrades. Total Buy ratings currently stand at 50.57%.

Commonwealth Bank ((CBA)) was among the upgrades, Deutsche Bank moving to a Buy recommendation from Hold previously. The change reflects better relative value in the stock compared to the other major banks, this as CBA's traditional premium to the sector has been eroded somewhat in recent weeks.

The remainder of the upgrades were in resource stocks, with Citi upgrading Kingsgate Consolidated ((KCN)) to Neutral from Sell post the company's quarterly production report. The call is a valuation one given recent share price weakness, as Citi has trimmed earnings estimates and price target to reflect updated commodity price and foreign exchange assumptions. Others in the market have similarly adjusted earnings forecasts and price targets for Kingsgate without changing ratings.

Citi also upgraded Western Areas ((WSA)) to Buy from Neutral post what was regarded as a solid quarterly production report. Higher grades boosted production in the period and Citi continues to have a bullish view on nickel prices.

Not all in the market are as optimistic as Citi, as Credit Suisse downgraded Western Areas to Neutral from Outperform given lower nickel prices impacted on earnings for the company. In Credit Suisse's view there is limited valuation upside from current levels at present.

Oil Search ((OSH)) scored an upgrade to an Overweight rating from Neutral previously by JP Morgan, the broker suggesting successful appraisal at P'nyang offers greater certainty with respect to a third train at the PNG LNG project. This implies share price upside from current levels. The entire market is not in agreement, as Citi downgraded Oil Search to Neutral from Buy on valuation grounds to reflect recent share price performance.

OZ Minerals ((OZL)) was upgraded to Outperform from Neutral by Credit Suisse on valuation grounds, this reflecting recent share price weakness. Helping justify the upgrade in rating was a quarterly production report viewed as solid by the broker.

A downgrade to Hold from Buy by Deutsche Bank reflects the broker's view ASX ((ASX)) is running out of steam at current levels, as recent data suggest trading and capital raising volumes are failing to respond to recent stock market upside. Minor cuts to earnings estimates saw Deutsche trim its price target, a move matched by others in the market.

Citi downgraded AWE ((AWE)) to Neutral from Buy, this given the view while there remains significant upside potential in the stock, there is also a higher level of associated risk. The change comes after further delays to the BassGas project were announced.

Issues in its rail division were enough for Macquarie to downgrade its rating on Bradken ((BKN)) to Neutral from Outperform, while earnings forecasts and targets were also lowered across the market to reflect the revised guidance from management. Achieving new guidance will still be a challenge in Macquarie's view, while gearing is also something the broker sees as worth watching.

Valuation was the driver of Deutsche's downgrade for CSL ((CSL)) to Hold from Buy, as it comes at the same time as the broker lifted earnings forecasts and price target for the stock to reflect greater Ig market share.

For the same valuation reason, RBS Australia has downgraded Orica ((ORI)) to Hold from Buy, while the broker also sees potential for new management to clear the decks at the interim profit result next month.

Downgraded earnings guidance from Seven West Media ((SWM)) was not well received, as both UBS and Citi downgraded to Hold recommendations from Buy ratings previously. UBS sees the stock as fully valued based on its revised forecasts and price target, while higher cost expectations also played a role in Citi's downgrade in rating.

A better than expected interim result saw price targets increase solidly for Australian Pharmaceutical Industries ((API)), this on the back of changes to broker earnings estimates. Post its quarterly production report, Mincor enjoyed some increases to earnings estimates and price targets, while lower earnings guidance saw forecasts reduced for Boral ((BLD)).

 

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 COMMONWEALTH BANK OF AUSTRALIA Neutral Buy Deutsche Bank
2 KINGSGATE CONSOLIDATED LIMITED Sell Neutral Citi
3 OIL SEARCH LIMITED Neutral Buy JP Morgan
4 OZ MINERALS LIMITED Neutral Buy Credit Suisse
5 WESTERN AREAS NL Neutral Buy Citi
Downgrade
6 ASX LIMITED Buy Neutral Deutsche Bank
7 AWE LIMITED Buy Neutral Citi
8 BRADKEN LIMITED Buy Neutral Macquarie
9 CSL LIMITED Buy Neutral Deutsche Bank
10 OIL SEARCH LIMITED Buy Neutral Citi
11 ORICA LIMITED Buy Neutral RBS Australia
12 SEVEN WEST MEDIA LIMITED Buy Neutral Citi
13 SEVEN WEST MEDIA LIMITED Buy Neutral UBS
14 WESTERN AREAS NL Buy Neutral Credit Suisse
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SBM - 67.0% - 33.0% 34.0% 3
2 API 20.0% 40.0% 20.0% 5
3 CHC 80.0% 100.0% 20.0% 5
4 UGL 71.0% 86.0% 15.0% 7
5 PNA 63.0% 75.0% 12.0% 8
6 OZL 38.0% 50.0% 12.0% 8
7 ASL 80.0% 83.0% 3.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SWM 75.0% 50.0% - 25.0% 8
2 ASX 29.0% 14.0% - 15.0% 7
3 AWE 43.0% 29.0% - 14.0% 7
4 SKI 57.0% 43.0% - 14.0% 7
5 BKN 100.0% 86.0% - 14.0% 7
6 AMP 63.0% 50.0% - 13.0% 8
7 BLD 25.0% 13.0% - 12.0% 8
8 CSL 75.0% 63.0% - 12.0% 8
9 ORI 75.0% 63.0% - 12.0% 8
10 MCC - 25.0% - 33.0% - 8.0% 3
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 API 0.330 0.378 14.55% 5
2 SBM 2.197 2.300 4.69% 3
3 CSL 37.758 38.061 0.80% 8
4 CHC 2.505 2.518 0.52% 5
5 MCC 16.113 16.150 0.23% 3
6 ORI 28.824 28.864 0.14% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 BLD 4.345 4.069 - 6.35% 8
2 SWM 4.170 3.913 - 6.16% 8
3 BKN 9.286 8.779 - 5.46% 7
4 OZL 12.236 11.634 - 4.92% 8
5 AMP 4.834 4.771 - 1.30% 8
6 ASX 32.943 32.579 - 1.10% 7
7 PNA 4.005 3.980 - 0.62% 8
8 AWE 2.067 2.064 - 0.15% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 MCR 2.300 2.967 29.00% 3
2 OSH 12.193 13.836 13.47% 8
3 ROC 4.599 4.908 6.72% 5
4 WPL 225.366 239.631 6.33% 8
5 SBM 35.800 37.867 5.77% 3
6 WSA 30.833 32.250 4.60% 6
7 API 4.114 4.240 3.06% 5
8 CGF 46.329 47.729 3.02% 7
9 TAP 3.200 3.275 2.34% 4
10 CWN 55.850 57.113 2.26% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 WHC 12.467 9.750 - 21.79% 6
2 BKN 70.900 58.286 - 17.79% 7
3 AWE 3.400 2.800 - 17.65% 7
4 BLD 21.450 18.038 - 15.91% 8
5 PAN 5.050 4.325 - 14.36% 4
6 OZL 79.914 71.888 - 10.04% 8
7 NCM 168.625 152.625 - 9.49% 8
8 SKI 13.938 12.775 - 8.34% 7
9 SWM 38.888 36.213 - 6.88% 8
10 FMG 49.096 46.547 - 5.19% 8
 

Technical limitations

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article 3 months old

Weekly Broker Wrap: Bank Result Previews And Macro Themes

 - GS strategists identify dominant macro market themes
 - Stockbrokers preview major banks' interim results
 - RBA rate cuts to have little market impact, predicts JP Morgan
 - BA-ML updates views of London clients

By Chris Shaw

While 2012 has delivered a relatively positive start in terms of equity market performance, Goldman Sachs expects a number of macro themes will continue to influence sector and stock selection for the Australian market.

The key macro themes expected to dominate Australian stock performance over the next 12 months are a US economy recovery, China's ongoing industrialisation and growth, mining capital investment, mining volumes and the domestic interest rate cycle.

Of note, Goldman Sachs points out the China industrialisation and growth plus the mining investment themes are highly correlated and have been the dominant drivers of performance over the past year. At the same time, domestic cyclicals have underperformed the market since the end of 2010, though performance within this group has been mixed given weak building material performance and outperformance from the transport sub-sector.

The US economic recovery theme has modestly outperformed since the end of the GFC and has gained momentum since late last year. Goldman Sachs notes a strong Australian dollar rally since the middle of 2010 has reduced the attractiveness of this theme for domestic investors.

Looking ahead, Goldman Sachs continues to view the US recovery themes as one of the more attractive given its long duration potential and the added benefit of offering a currency hedge against any Australian dollar weakness. Preferred stocks for such a theme are Amcor ((AMC)), Brambles (BXB)), Computershare ((CPU)), CSL ((CSL)), James Hardie ((JHX)), News Corp ((NWS)) and Sims ((SGM)).

Domestic cyclicals offer attractive earnings leverage to lower interest rates and the sector offers some value in the view of Goldman Sachs, but improved performance will require the easing of structural headwinds such as an increase in household savings and the recent strength in the Australian dollar. Preferred exposures for the domestic cyclicals at present include OneSteel ((OST)), Super Retail ((SUL)) and Qantas ((QAN)).

In exposure to Chinese growth and its impact on mining investment, Goldman Sachs expects coming years will see the resource sector move from a “delta price” to a “delta volume” environment, which would move most key commodities into surplus conditions. This leaves Goldman Sachs increasingly cautious on the ability of the resources sector to maintain its outperformance relative to the market. 

Assuming mining volumes increase, exposure to a strong capital investment cycle and an increase in volumes is preferred. Goldman Sachs likes Asciano ((AIO)), Orica ((ORI)) and UGL ((UGL)) for playing this theme. 

May means major banks reporting season in Australia and brokers have been updating expectations for the sector in anticipation of the results in coming weeks. Results are expected for ANZ Banking Group on May 2, Westpac ((WBC)) on May 3 and National Australia Bank ((NAB)) on May 10. Commonwealth Bank ((CBA)) will provide a trading update on May 17.

Of particular interest has been the outlook for margin pressures, cost out progress and the source of business loan growth. In general, Macquarie expects the results from ANZ, Westpac and National Australia Bank will show marginal earnings growth.

This reflects a subdued outlook for the sector, as while a mix of out-of-cycle interest rate rises and the retention of rate cuts may help control margins, it will come at the expense of increased risks with respect to softer loan growth in Macquarie's view.

Dividends are also a concern, as while payouts are sustainable, Macquarie suggests softer earnings growth is likely to see dividends decline at the absolute level. Bad debts may exacerbate this trend in the broker's view.

With respect to bad debt levels, Macquarie's review of asset quality suggests the major banks are well provisioned against a slight deterioration in the broader economy. It would take further deterioration for there to be any further significant impact on impairments in the broker's view.

Macquarie expects margins among the banks to come under pressure from higher wholesale and deposit costs eroding retail and business margins, while there is also the view institutional growth is hiding some very soft business and retail SME loan growth numbers.

Currently improving mortgage loan growth may prove to be temporary, suggests Macquarie, while wealth operations are also expected to continue to struggle given still weak market conditions. Macquarie's order of preference is ANZ and Westpac as its preferred plays, while National Australia Bank is rated as Neutral given its exposure to the poorly performing UK economy.

UBS also expects solid interim earnings results for the major banks, the major drivers being subdued loan growth and solid deposits, net interest margin, a potential bounce-back in trading income, more aggressive cost management and patchy bad debt outcomes.

Given this backdrop, UBS has looked at where bank earnings could surprise in 1H12. On a bank by bank basis, UBS expects ANZ will show good net interest margin performance, a trading rebound and 4% revenue growth, while the major question will be return on equity from the bank's Asian assets.

For National Australia Bank the expectation of UBS is for pressure on net interest margin, weak personal banking revenue but strength in the business bank operations. For Westpac, UBS sees a trading rebound in the second quarter, subdued asset growth and cost pressures.

In terms of forecasts for the upcoming bank results, Macquarie is forecasting cash profit for ANZ of $2,964 million, which would equate to cash earnings per share (EPS) of 107c. UBS is a little higher, forecasting cash EPS for ANZ of 112.6c. Macquarie suggests an institutional rebound and cost containment in New Zealand are potential sources of upside in the result. 

For National Bank UBS expects cash EPS of 125.2c, while Macquarie is forecasting cash EPS of 123c. The latter sees the maintaining of margins, reasonable asset growth and continued momentum in the wealth operations as potential sources of upside to the result.

Westpac is expected to report cash EPS of 103.1c for the period according to UBS, while Macquarie's forecast stands at 101c. Good cost containment, solid margin performance and a rebound in trading profits offer possible sources of upside surprise in the view of Macquarie.

Post a recent rally the major Australian banks are not cheap in the view of UBS, as the sector is trading on a price to book ratio of 1.7 times, a FY12 earnings multiple of 11 times and a 6.8% dividend yield.

In contrast, RBS Australia expects European tensions will escalate over the next few months and under such a scenario the Australian banks are attractive given relative earnings certainty and yield support. The banks are also expected to benefit from further cuts to interest rates in Australia given pricing power should moderate the effect of funding cost headwinds.

Order of preference for RBS is National Bank and ANZ as most preferred, this due to their better positioning for structurally lower mortgage credit growth and cyclical improvement in business credit growth. As well, RBS sees NAB and ANZ as having less reliance on wholesale funding markets, while both appear better positioned for the new Basel III regulations. 

In terms of the market's overall view on Australian banks, the FNArena database shows Sentiment Indicator readings of 0.5 for National Bank and Westpac, 0.4 for ANZ, and minus 0.1 for CBA. 

In the view of JP Morgan, a low March quarter CPI outcome in Australia opens the door for a Reserve Bank of Australia (RBA) easing of interest rates, but this is unlikely to lift the domestic equity market out of its current range as a lot of easing is already priced in.

The benign CPI number changes the policy settings needed to hit the RBA's objective of keeping the non-mining economy cornered to keep medium-term inflation risks at bay. This makes an easing likely, but JP Morgan points out the market is already factoring in three rate cuts this year. As a result, the broker suggests the exact level of the cash rate is a secondary issue for equities.

JP Morgan agrees official interest rates are likely going to come down but this implies some earnings risk, particularly because of the ongoing struggles in the Australian housing market. On the flip side, JP Morgan suggests the bank sector is not the correct way to play a move to lower interest rates, as if the unemployment rate rises fast enough to move interest rates to a lower level than already anticipated, there will be an increase in loan quality risks. This would likely be enough to offset any potential upside in credit growth.

An alternative would be a play on the currency, but again JP Morgan notes the market is already well down this path. While there is logic to such an approach the broker suggests finding value using this approach is a more difficult issue at present.

JP Morgan continues to lean towards stocks and sectors with value drivers largely independent of the macro environment or are priced for low expectations. This includes Insurance, Energy and companies struggling from cyclical factors but with a reasonable industry structure. These include the likes of Computershare ((CPU)), Boral ((BLD)), Sims ((SGM)) and Aristocrat Leisure ((ALL)). 

In a recent meeting with its London clients, BA Merrill Lynch notes the dominant view on the market at present is a continuation of the current trading range. This reflects a lack of conviction and willingness to take risks, though investors are looking to add rather than subtract risk as their next move.

There remains some concern over the pace of US economic activity, while BA-ML notes growth in Europe is viewed as a disaster everywhere except Germany. On a more positive note, a soft landing in China is seen as offsetting the weak European outlook.

A majority of clients continue to expect QE3, but BA-ML notes this is only likely after a sharp turn lower in data. There was some interest on the part of clients in BA-ML's favourite trade for the June quarter, which is long China and short US consumer discretionary.


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article 3 months old

Weekly Broker Wrap: Earnings Confessions Season Is Near

 - Risk-off for markets
 - Value sectors in the Australian market
 - Confession season for corporate earnings
 - Small Cap preferences updated
 - Citi reviews its metals and mining expectations

By Chris Shaw

BA Merrill Lynch has developed a Global Financial Stress Index (GFSI), which represents a measure of stress in financial markets. By using the index BA-ML has developed a Critical Stress Signal to detect when markets move into risk-off mode.

In the broker's view the GFSI CSS signalled markets had entered risk-off mode on April 11. In terms of what this means for the Australian market, BA-ML's research shows the domestic market traditionally outperforms the US when the GFSI CSS is triggered. In part this reflects the shock-absorbing nature of the Australian dollar, which tends to depreciate during periods of stress.

Under such periods of risk-off BA-ML notes banks underperform resource stocks, while defensives outperform and small miners underperform. The latter is due somewhat to small miners being takeover targets in better times but losing this premium when times turn tougher, as well as the fact the ability of such stocks to raise capital becomes tougher as financial markets come under pressure.

Citi suggests many of the most sold down stocks of last year have recovered somewhat this year as equities improved. With valuations now closer to normal ranges this increases the risk some of these stocks are increasingly at risk of fading and potentially rolling over again. This is because further gains are likely to require signs of respectable earnings growth, predict the analysts.

Looking at where the market currently offers greater earnings growth potential, Citi suggests looking beyond the banks and resource sector so those sectors where growth is picking up and where share price are not yet overvalued.

For Citi this means the general insurance, engineering and construction and healthcare sectors. This leaves Citi's sector preferences in order as financials ex banks/REITs, industrials, resources, banks, REITs, consumer sectors and defensive sectors.

Citi's review means some changes to its recommended portfolio, with Suncorp ((SUN)), Insurance Australia ((IAG)), Boart Longyear ((BLY)) and CSL ((CSL)) being added, while Dexus ((DXS)), Myer ((MYR)), Seven West Media ((SWM)) and Lend Lease ((LLC)) have been removed from the portfolio.

Goldman Sachs has in turn focused on the so-called confession season for earnings, noting around 25% of annual profit warnings since 2000 have come during the months of May and June. From current forecasts of 6% earnings per share growth for industrials in FY12 the expectation is this number continues to trend lower, this reflecting still tight domestic financial conditions.

A review sees Goldman Sachs list its stocks in the ASX100 with both the largest downside earnings risk and the greatest upside risk heading into May and June. The former includes Atlas Iron ((AGO)), Asciano ((AIO)), ASX ((ASX)), Alumina Ltd ((AWC)), BHP Billiton ((BHP)), Boral ((BLD)), CSR ((CSR)), Caltex ((CTX)), Fortescue ((FMG)), Fairfax ((FXJ)), Harvey Norman ((HVN)), Incitec Pivot ((IPL)), JB Hi-Fi ((JBH)), Lend Lease, Myer, National Australia Bank ((NAB)), Qantas ((QAN)), QR National ((QRN)), Sims ((SGM)), Seven West, Sydney Airport ((SYD)) and Transurban ((TCL)).

Stocks with the greatest upside earnings risk in the view of Goldman Sachs include CFS Retail ((CFX)), Campbell Brothers ((CPB)), CSL, Crown ((CWN)), Downer EDI ((DOW)), Dexus, Graincorp ((GNC)), Iluka ((ILU)), Monadelphous ((MND)), Macquarie Group ((MQG)), Orica ((ORI)), Oil Search ((OSH)), PanAust ((PNA)), Spark Infrastructure ((SKI)), Santos ((STO)) and Woodside ((WPL)).

Following a review of its quantitative analysis model, Credit Suisse suggests investors at present should be long quality stocks, long value plays and neutral on momentum plays. Quality plays should do well given there are material hard landing risks, while value should do well given de-leveraging pressures are not yet out of hand.

On the other hand, momentum factors have so far failed to pick up the recent inflection point in the global growth cycle and will probably miss the next major inflection point as well.

With respect to sector allocation Credit Suisse prefers high yielding defensives to cyclicals given expectations of slower growth ahead, while rate-sensitive cyclicals are preferred to mining stocks given better relative value.

Under such a screening process Credit Suisse notes high yielding defensives such as Telstra ((TLS)), Stockland ((SGP)), Challenger ((CGF)), Tabcorp ((TAH)) and Metcash ((MTS)), banks such as Bendigo and Adelaide ((BEN)), National Australia Bank, Westpac ((WBC)), ANZ Banking Group ((ANZ)) and Commonwealth Bank ((CBA)), and consumer discretionary stocks such as JB Hi-Fi, Myer, Seven West Media and Fairfax dominate the long-end.

In the short basket are metals mining and energy stocks such as Alumina Ltd, BlueScope ((BSL)), Oil Search, Santos, Atlas Iron, Newcrest ((NCM)), OZ Minerals ((OZL)) and Sims as well as selected US dollar exposures such as James Hardie ((JHX)), News Corporation ((NWS)) and ResMed ((RMD)).

According to Citi, the equity market rally in March means value is now harder to identify in the small industrials end of the market, as current earnings multiples appear to paint a true picture of value. In relative terms the current multiple for the sector is below average levels of the past 10 years, which suggests further relative outperformance is possible.

Factoring in recent price movements, Citi has removed Forge ((FGE)), Henderson Group ((HGG)), Super Retail ((SUL)) and Sandfire Resources ((SFR)) from its top picks list, while Mirabella ((MBN)) has also been removed given less conviction on the part of the broker. Ratings for Forge, Henderson Group and Sandfire have all been lowered in recent weeks to Neutral from Buy previously, while GWA Group ((GWA)) has also been downgraded by Citi; to Sell from Neutral. 

To replace these stocks Citi has added Flight Centre ((FLT)) and Adelaide Brighton ((ABC)) to the list of key small cap calls, the rest of the list being Miclyn Express Offshore ((MIO)), McMillan Shakespeare ((MMS)), NIB Holdings ((NHF)), NRW Holdings ((NWH)) and Southern Cross Media ((SXL)) among the industrials and Medusa Mining ((MML)), Resource Generation ((RES)) and Regis Resources ((RRL)) among resource plays.

A Buy for Credit Suisse among small cap plays is Webjet ((WEB)), which has recently guided to FY12 earnings growth of at least 18%, up from at least 10% previously. On the back of this guidance Credit Suisse lifted its earnings forecasts and reiterated an Outperform rating on the stock, expecting further gains as growth continues to come through over the next 12 months.

Despite its positive view, Credit Suisse doesn't list Webjet among its top five small caps, which are made up of Alliance Aviation Services ((AQZ)), Mermaid Marine ((MRM)), Carsales.com ((CRZ)), SAI Global ((SAI)) and Flexigroup ((FXL)).

Deutsche's review of emerging companies has focused on stocks where there may be a 2H12 earnings skew and or a cyclical recovery is factored in FY13 forecasts. This gives a list of stocks offering earnings risk in coming periods and a list of companies offering potential earnings upside.

Among companies in the former category, Deutsche suggests Salmat ((SLM)) has the most risk to consensus forecasts and guidance given still tough operating conditions. Emeco Holdings ((EHL)) also offers some risk from the potential wet weather impact on operations in Queensland and northern New South Wales, while Bradken's ((BKN)) risks relate to the timing and execution of any increases in output.. The latter was confirmed by a profit warning from company management last week.

If retail conditions don't improve there are risks around earnings expectations for Pacific Brands ((PBG)) given around 80% of Deutsche's forecast earnings growth in FY13 is tied to a cyclical recovery, while it is a similar story for Spotless ((SPT)) in that a large portion of expected earnings improvement is related to an improvement in market conditions. For Navitas ((NVT)) the risk is any delay to a recovery in any of the group's divisions.

Deutsche has Hold ratings on all of these companies with the exception of Bradken, which is rated as a Buy.

With respect to companies offering upside earnings potential Deutsche includes Flight Centre given continued strong international travel numbers and easier comparable numbers in the second half of FY12.

Also included is Skilled Group ((SKE)) given scope for further improvement in key labour markets, while digital media is seen as a driver of stronger earnings for STW Communications ((SGN)). All three stocks are rated as Buy by Deutsche Bank.

Post its review of the emerging companies Deutsche has revised its top picks. Among the emerging company cyclicals the broker now prefers Ardent Leisure ((AAD)), Flight Centre, Programmed Maintenance ((PRG)), Prime Media ((PRT)), Skilled and Transpacific Industries ((TPI)). Both Adelaide Brighton ((ABC)) and GWA ((GWA)) have been removed from the broker's top picks among the cyclicals.

In the mining services sector Deutsche likes Ausenco ((AAX)), Ausdrill ((ASL)) and NRW Holdings, while also among the broker's top picks are SAI Global and IOOF Holdings ((IFL)).

In the view of Goldman Sachs the likelihood of a depreciating Australian dollar relative to the US dollar has risen. Given this, the broker has reviewed stocks to ascertain those companies with the most significant earnings sensitivity to a movement in the currency.

Among industrial stocks, Goldman Sachs suggests those with the highest positive earnings per share (EPS) impact in a depreciating AUD/USD scenario as measured by largest to smallest impact are OneSteel ((OST)), Select Harvests ((SHV)), Incitec Pivot, CSR, Aristocrat Leisure ((ALL)), Sims, Matrix Composites ((MCE)), Bradken, Macquarie Group, Campbell Brothers, Treasury Wine Estates ((TWE)), Orica and BlueScope. 

Among resource stocks the largest EPS impacts on the same basis according to Goldman Sachs would be felt by Independence Group ((IGO)), Kagara ((KZL)), Whitehaven Coal ((WHC)), OZ Minerals, AWE Ltd ((AWE)), Western Areas ((WSA)), Energy Resources of Australia ((ERA)), Aditya Birla ((ABY)), Mount Gibson Iron ((MGX)), Sandfire and Evolution Mining ((EVN)). 

Of those companies reporting in US dollars, Goldman Sachs sees the largest impacts of a depreciating AUD/USD as being felt by Brambles ((BXB)), News Corporation, Ansell ((ANN)), James Hardie, ResMed, Computershare ((CPU)), QBE Insurance ((QBE)) and Boart Longyear. 

Goldman Sachs has also assessed those stocks with the highest negative correlation of total excess returns to AUD/USD changes, this list comprising Woolworths ((WOW)), CSL, ResMed, CFS Retail ((CFX)), Westfield Group ((WDC)), SP Ausnet ((SPN)), Coca-Cola Amatil ((CCL)), SingTel ((SGT)), Telstra, Spark, Tatt's Group ((TTS)), Amcor ((AMC)) and BWP Trust ((BWP)).

Citi has also reviewed expectations for the metals and mining sectors, its analysis showing low cost producers and those that deploy capital efficiently remain the preferred exposures. Citi expects industrial commodity prices in general will be somewhat range bound over the medium-term, while precious and base metals are preferred to the bulk commodities.

Within the commodities spectrum, Citi's key picks are in palladium, nickel and gold on the bullish side, while the broker remains bearish on both copper and silver.

Changes to Citi's commodity price assumptions mean adjustments to earnings estimates for resource stocks under coverage, though there have been no changes in ratings. Key picks listed in Australia remain BHP and Rio Tinto.

 

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article 3 months old

The Short Report

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By Chris Shaw

With the Easter break impacting on trading the week from April 3 was relatively quiet in terms of changes in short positions on the Australian market. Few stocks saw changes of more than one percentage point, with an increase to total shorts of 5.75% from 3.75% for SingTel ((SGT)) the largest change for the period and the only increase of more than one percentage point. The increase came despite little recent news from the company, other than a structural streamlining of the international divisions.

On the side of decreases in short positions for the week from April 3, David Jones ((DJS)) topped the list with total shorts declining to 9.63% from 10.82% previously. This change has come as the market has had time to digest the group's interim earnings result from late March.

David Jones was not the only stock exposed to the consumer discretionary sector where short positions fell, as shorts in Myer ((MYR)) for the week declined to 11.57% from 12.39% and for Specialty Fashion Group ((SFH)) to 0.56% from 1.09% previously.

Consumer discretionary stocks continue to dominate the top 20 list of short positions, led by JB Hi-Fi ((JBH)) at 22.3%, followed by Myer, Carsales.com ((CRZ)) at 11.48%, Flight Centre ((FLT)) at 9.9%, David Jones, and Billabong ((BBG)) at 9.4%.

Aside from consumer discretionary stocks, short positions remain elevated across a number of sectors as the top 20 includes the likes of Fairfax ((FXJ)), Gunns ((GNS)), Iluka ((ILU)) Beach Energy ((BPT) and CSR ((CSR)). Note that CSR is one of the worst performers in the Australian share market this calendar year.

Bank of Queensland ((BOQ)) also saw shorts decline to 3.4% from 4.56% the previous week as the market has now factored in the capital raising announced by the bank in late March. The raising has improved the bank's balance sheet, which supports some Buy ratings among brokers in the FNArena database.

Monthly changes in short positions from March 9 have highlighted some more significant changes, the largest on the increase side being an jump in shorts for Carsales.com to 11.48% from 6.31% previously. Deutsche Bank recently noted total inventory growth for Carsales.com remains subdued, while brokers continue to reassess the outlook for the company post a move away from its traditional classifieds business via an investment in Torpedo7.

Shorts also increased by more than three percentage points for both Bathurst Resources ((BTU) and Cochlear ((COH)), the former as a market update indicated delays to the Escarpement appeals process and the latter as the recall process has meant the market no longer sees Cochlear as more reliable than its peers.

With respect to monthly declines in short positions the largest was a fall to 0.49% from 3.55% for Rialto Energy ((RIA)), which comes as the company is in the early stages of a three well drilling program.

Shorts in Alkane Resources ((ALK)) fell to 2.09% from 4.24% for the month from March 9, this as the market factored in both an increase in resource at the Tomingly gold project and a entitlement offer to shareholders to raise additional funds.

Elsewhere, shorts in Nufarm ((NUF)) have risen over the past month and now stand at a little above 2.2%. In the view of RBS this increase reflects the fact while earnings upgrades are needed to generate a share price re-rating this is unlikely given current market conditions. With pricing pressures still in place, RBS recommends investors reduce their exposure to Nufarm, rating the stock as a Hold.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 22050937 98850643 22.30
2 ISO 708915 5703165 12.43
3 MYR 67569627 583384551 11.57
4 CRZ 26850070 233684223 11.48
5 COH 6460956 56929432 11.33
6 FXJ 255882163 2351955725 10.90
7 FLT 9903258 100024697 9.90
8 LYC 169429683 1714496913 9.90
9 DJS 50636631 524940325 9.63
10 BBG 23994166 255102103 9.39
11 EGP 54003153 688019737 7.83
12 GNS 61543147 848401559 7.24
13 HVN 76887590 1062316784 7.22
14 WTF 14314910 211736244 6.75
15 ILU 27218206 418700517 6.50
16 BPT 72923928 1199253779 6.11
17 CSR 30579008 506000315 6.04
18 TRS 1563710 26071170 6.01
19 TEN 61329693 1045236720 5.86
20 SGT 9486159 165074137 5.75

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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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Over the last week ratings downgrades by brokers in the FNArena database have again dominated upgrades to the tune of 11 to six, leaving total Buy ratings at 50.38%.

Among the upgrades was Amcor ((AMC)), where Citi moved to Buy from Hold to account for the expectation of increased M&A activity from the company going forward. Changes to its model to reflect this also saw Citi lift its price target for the stock.

Austar ((AUN)) was also upgraded to Neutral from Underweight by JP Morgan to reflect the ACCC has approved the proposed merger with Foxtel. The lift in rating reflects the removal of previous concerns with respect to the deal being allowed to proceed. At the same time UBS downgraded its rating on Austar to Hold from Buy, this on valuation grounds as the ACCC approval drove the share price to the broker's target price.

While David Jones ((DJS)) was hit with a couple of downgrades post its interim result last month, BA Merrill Lynch now sees enough value to upgrade to a Neutral rating from Sell. The call is strictly a value play, the broker noting the David Jones share price has underperformed the market by almost 40% over the past year.

Another valuation based upgrade has seen UBS lift its rating on Fleetwood ((FWD)) to Buy from Hold, this given a weak share price since the group's interim result earlier this year. A shortage of resource sector accommodation should keep the company in focus in UBS's view, while the attractive dividend is also expected to support the share price.

Strong leverage to iron ore prices and the fact the Karara project is on track to meet expectations has seen JP Morgan move to an Overweight rating on Gindalbie ((GBG)) from Neutral previously, the upgrade supported by the current 20% discount to net present value.

Another upgrade in the mining sector involved PanAust ((PNA)), where Credit Suisse has moved to Outperform from Neutral post a solid quarterly report. Both the Phu Kham expansion and the development of Ban Houayxai project are on track, while higher grades meant lower costs in the March quarter. Valuation has also improved given recent share price weakness.

ASX ((ASX)) was among the downgrades this week as Credit Suisse moved to an Underperform rating from Neutral previously. The downgrade reflects current weak trading conditions, a trend the broker suggests has little chance of any significant turnaround shorter-term.

Credit Suisse also downgraded Coca-Cola Amatil ((CCL)) to Underperform from Neutral, this a simple valuation call given recent solid share price performance. The broker has made no changes to earnings forecasts or price target.

RBS Australia has moved to a Sell rating on Echo Entertainment ((EGP)) from Hold previously, this given the potential for some negative consequences from the Star redevelopment to emerge in coming years. The broker is also uncertain as to the benefit of Crown's ((CWN)) interest in the company.

A review of its model has prompted Macquarie to downgrade Gloucester Coal ((GCL)) to Sell from Neutral previously, while Deutsche Bank has downgraded Investa Office ((IOF)) to Hold from Buy as FY13 earnings are now considered priced in.

BA-ML has downgraded Lend Lease ((LLC)) to Sell from Hold, the broker arguing the market has become too carried away with the stock of late to the extent of overlooking a poor acquisition track record and little news on potential buyers of the Barangaroo project. Cuts to forecasts leave the broker well below consensus with its estimates.

PMI Gold ((PVM)) was downgraded by JP Morgan to Neutral from Outperform. While resource estimates have been increased, grades have been lowered. This is seen as having a potential ongoing impact on production levels. 

JP Morgan also lowered its rating on Seven Group Holdings ((SVW)) on valuation grounds, as while the Bucyrus deal is expected to be earnings accretive, the stock appears fully priced at current levels. Others in the market have adjusted earnings forecasts and price targets to account for the acquisition.

Sandfire Resources ((SFR)) delivered a solid quarterly report but given subdued expectations for copper prices UBS has downgraded to a Hold rating, while Citi downgraded Super Retail ((SUL)) to Hold from Buy following share price gains of around 40% so far this year.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AMCOR LIMITED Neutral Buy Citi
2 AUSTAR UNITED COMMUNICATIONS LIMITED Sell Neutral JP Morgan
3 DAVID JONES LIMITED Sell Neutral BA-Merrill Lynch
4 FLEETWOOD CORPORATION LIMITED Neutral Buy UBS
5 GINDALBIE METALS LTD Neutral Buy JP Morgan
6 PANAUST LIMITED Buy Buy Credit Suisse
Downgrade
7 ASX LIMITED Neutral Sell Credit Suisse
8 AUSTAR UNITED COMMUNICATIONS LIMITED Buy Neutral UBS
9 COCA-COLA AMATIL LIMITED Neutral Sell Credit Suisse
10 ECHO ENTERTAINMENT GROUP LIMITED Neutral Sell RBS Australia
11 GLOUCESTER COAL LTD Neutral Sell Macquarie
12 INVESTA OFFICE FUND Buy Neutral Deutsche Bank
13 LEND LEASE CORPORATION LIMITED Neutral Sell BA-Merrill Lynch
14 PMI GOLD CORPORATION Buy Neutral JP Morgan
15 SANDFIRE RESOURCES NL Buy Neutral UBS
16 SEVEN GROUP HOLDINGS LIMITED Buy Neutral JP Morgan
17 SUPER RETAIL GROUP LIMITED Buy Neutral Citi
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 GBG 83.0% 100.0% 17.0% 6
2 DJS - 63.0% - 50.0% 13.0% 8
3 AMC 50.0% 63.0% 13.0% 8
4 VAH 40.0% 50.0% 10.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SVW 75.0% 50.0% - 25.0% 4
2 LLC 86.0% 71.0% - 15.0% 7
3 SUL 71.0% 57.0% - 14.0% 7
4 ASX 43.0% 29.0% - 14.0% 7
5 IOF 71.0% 57.0% - 14.0% 7
6 EGP 63.0% 50.0% - 13.0% 8
7 CCL 50.0% 38.0% - 12.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AMC 7.734 7.949 2.78% 8
2 GBG 0.957 0.977 2.09% 6
3 EGP 4.498 4.523 0.56% 8
4 SVW 10.925 10.943 0.16% 4
5 IOF 0.690 0.691 0.14% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 LLC 9.404 9.227 - 1.88% 7
2 VAH 0.478 0.473 - 1.05% 6
3 ASX 33.014 32.943 - 0.22% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 VAH 2.940 3.033 3.16% 6
2 OSH 11.840 12.191 2.96% 8
3 QBE 137.164 139.356 1.60% 8
4 EGP 20.675 20.875 0.97% 8
5 WPL 223.185 225.328 0.96% 8
6 AWE 3.371 3.400 0.86% 7
7 CWN 55.513 55.850 0.61% 8
8 PNA 34.762 34.942 0.52% 8
9 ROC 4.577 4.598 0.46% 5
10 PRG 30.386 30.514 0.42% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GBG 1.343 0.800 - 40.43% 6
2 SVW 87.780 80.040 - 8.82% 4
3 HZN 1.193 1.119 - 6.20% 4
4 ILU 241.900 227.063 - 6.13% 8
5 TAP 3.300 3.100 - 6.06% 4
6 CTX 128.333 121.000 - 5.71% 6
7 GWA 16.083 15.200 - 5.49% 6
8 AIO 26.175 25.663 - 1.96% 8
9 BCI 49.567 48.767 - 1.61% 3
10 BLD 21.813 21.488 - 1.49% 8
 

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article 3 months old

Ten Result Rates Poorly

 - Ten's interim result below expectations
 - Most brokers adjust forecasts lower
 - Views remain divided on outlook for the company

By Chris Shaw

Ten Network ((TEN)) yesterday released its interim profit result and despite having pre-released operational results in February earnings till fell a little short of market expectations. As Citi notes, total revenues for the period were down 11% in year-on-year terms and net profit after tax of $15 million was a decline of more than 70% in year-on-year terms.

Both the TV and outdoor advertising divisions posted lower results, UBS noting while the TV operations were boosted by strong performance at digital offering ELEVEN this meant a larger amount of profits had to be paid away to CBS, Ten's joint venture partner in the channel. 

Post the interim result brokers have been quick to adjust earnings estimates lower for Ten, with Citi cutting its earnings per share (EPS) forecasts by 25% this year and by 24% in FY13. This reflects both lower revenue assumptions and increased minority interest charges from the ELEVEN joint venture.

Others have followed suit, UBS lowering its estimates by 8-10% through next year, Credit Suisse by 26% and 18% respectively and BA Merrill Lynch cutting its FY13 earnings forecast by around 4%. BA-ML did go the other way with respect to FY12 forecasts in lifting its estimate by 8%. Consensus EPS forecasts for Ten according to the FNArena database stand at 3.8c for FY12 and 5.6c for FY13.

Price targets have also been adjusted given the changes to earnings estimates, with the consensus target according to the database falling to $0.84 from $0.87 previously. Targets range from Deutsche Bank at $0.62 to Credit Suisse at $1.19.

The result was accompanied by relatively upbeat commentary from management, Citi noting there is a clear focus on the programming schedule and audience ratings. Having said that, the broker suggests it remains early days in terms of any turnaround.

Deutsche Bank is also cautious with respect to the outlook for Ten, suggesting while the current strategy is encouraging improved ratings for the core channel will be critical in restoring the group's fortunes. Some improvement is expected over time, but as Deutsche notes, operating conditions remain difficult at present.

This won't be helped shorter-term by the loss of AFL programming and the upcoming London Olympics, though as BA-ML points out new programs to add to the returning Masterchef and Offspring could provide something of a boost.

Ten continues to receive a spread of broker ratings, scoring two Buys, two Sells and four Hold recommendations among the eight brokers in the FNArena database. The Buy argument is a valuation call, UBS suggesting there is upside from current levels even though it is expected to take some time for improved ratings to translate into higher revenues and earnings. Having said that, UBS prefers Seven West ((SWM)) in the sector.

Among the Neutrals on the stock is Citi. The broker suggests revenues and earnings could be at the low point of the cycle now, though signs of stabilisation in audience numbers and subsequent scope for earnings upgrades is needed to justify valuation at these levels.

BA-ML is also Neutral on Ten, pointing out while the stock is trading on an earnings multiple of around 23 times in FY13, which is more than twice the multiple of Seven West, this is justified by factoring in a control premium given the potential for corporate activity involving the company.

Deutsche in contrast sees the current multiple being paid for Ten as excessive as despite earnings issues the stock is trading above the broker's revised valuation. This makes Ten a high risk proposition for Deutsche, justifying a Sell rating.

In a stronger overall market shares in Ten today are higher and as at 11.25am the stock was up 3c at $0.81. This compares to a range over the past year of $0.725 to $1.40 and implies upside of around 4% to the consensus price target in the FNArena database.


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article 3 months old

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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article 3 months old

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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article 3 months old

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

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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article 3 months old

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

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