Tag Archives: Other Industrials

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has been fairly evenly balanced in terms of ratings changes by the eight brokers in the FNArena database, with seven ratings upgraded and ten downgraded during the period. Total Buy ratings now stand at 44.64%.

Among the upgrades were two resource plays, Atlas Iron ((AGO)) and Regis Resources ((RRL)). Atlas was upgraded by UBS to Neutral from Sell, as despite the weaker iron ore price the broker suggests Atlas has enough liquidity to meet its capex, dividend and tax requirements in FY13. Recent share price weakness has improved the value on offer enough for UBS to upgrade.

For Regis Resources, full year earnings showed a strengthening of the group's balance sheet, while Deutsche continues to see value as production increases from the combination of the Moolart Well and Garden Well projects and dividends from the company come closer to reality. Deutsche has lifted its rating to Buy from Hold, while also lifting its price target on the stock.

Among the industrials, UBS upgraded Breville Group ((BRG)) to Buy from Neutral given the expectation the company can continue to grow its share of the US market. Breville's profit result prompted changes to earnings forecasts and the result was an increase in UBS's price target for the stock.

While forecasting lower average income growth in the office sector in FY13, JP Morgan continues to like the quality of Dexus's ((DXS)) portfolio, while the broker also sees scope for an increase in payout ratios in coming years. This is enough for an upgrade to a Neutral rating from Underweight previously.

Sigma Pharmaceuticals ((SIP)) delivered a better interim profit result than Macquarie had forecast, the result being increases to estimates in coming years. Macquarie's price target increased as well and on valuation grounds the broker has upgraded to a Neutral rating from Sell.

Deutsche Bank upgraded both Leighton Holdings ((LEI)) and Myer ((MYR)) to Buy ratings this week, in both cases from Hold previously. For Leighton, Deutsche suggests the market is pricing in too much risk, particularly given the company is primarily exposed to low cost mines and committed LNG projects within its resource sector activities. There are also some potential balance sheet positives such as a sale of NextGen, which is enough to justify a more positive view at current share price levels.

With respect to Myer, an improvement in gross margin was the highlight of the full year profit result in Deutsche's view. Top line growth continues to look difficult to achieve but the stock offers an attractive yield and some longer-term value at current levels in the broker's view, which supports the upgrade in rating.

On the downgrade side of the ledger UBS has cut its rating on Ansell ((ANN)) to Sell from Neutral, the change something of a relative valuation call given the company is seen to have less defensive earnings than others in the sector. The downgrade in rating comes despite an increase in price target.

UBS also downgraded Brambles ((BXB)) to a Hold rating from Buy, again on valuation grounds following an 8% rally in the share price since full year earnings were announced in August. As UBS notes, the stock is now trading broadly in line with valuation.

Aquarius Platinum ((AQP)) has been downgraded by BA Merrill Lynch to Sell from Hold as part of a reinstatement of coverage. With two mines on care and maintenance the broker sees a turnaround as reliant on improving operations at Kroondal, which is currently operating at a loss. When political risk is added to the equation BA-ML sees little upside for the stock in the shorter-term.

Credit Suisse has similarly downgraded Envestra ((ENV)) to Sell from Hold, this coming after changes to estimates to account for expectations of upcoming draft regulatory decisions. The cuts to forecasts impacted on the broker's price target, while the rating downgrade is a valuation call by Credit Suisse.

The Reject Shop ((TRS)) was also downgraded to Sell from Hold by Credit Suisse, this after recent share price outperformance suggests limited further upside from current levels. While group gearing should improve with Ipswich DC flooding claims being finalised, Credit Suisse expects tough operating conditions will continue for some time.

Recent share price strength has been enough for Citi to downgrade Insurance Australia Group ((IAG)) to Hold from Buy, as even allowing for an increase in price target the broker doesn't see enough upside from current levels to justify a more positive rating. 

JP Morgan has made two downgrades over the week, lowering ratings on both Southern Cross Media ((SXL)) and Toll Holdings ((TOL)) to Sell from Hold. For Southern Cross, still tough TV conditions lead the broker to suggest further cuts to consensus earnings estimates are unlikely, something that will act to limit potential share price upside.

In Toll's case, JP Morgan suggests a focus on market share is generating some domestic margin pressure and this suggests earnings headwinds are likely to remain in place for some time. Along with the downgrade in rating, the broker has trimmed earnings forecasts and price target.

OnTheHouse Holdings ((OTH)) delivered a result better than RBS Australia had forecast for FY12, but the broker expects FY13 will see earnings pumped back into the online business an in attempt to ensure longer-term growth. This is enough to prompt a downgrade to a Hold rating from Buy.

Macquarie has similarly downgrade Woodside ((WPL)) to Hold from Buy, this as a result of taking a less bullish view on the outlook for Australian LNG plays given the expectation of increasing competition in the global market. This view prompted cuts to earnings estimates and the broker's price target for the stock.

With respect to changes to price targets, the largest increases were seen in Webjet ((WEB)) and Sigma, while the largest decrease was in NRW Holdings ((NWH)). Only the latter saw a change of more than 10%.

Changes to earnings estimates were more significant, with Aquarius seeing the largest increase in forecasts and Panoramic Resources ((PAN)), Lynas ((LYC)) and Gindalbie ((GBG) experiencing the largest cuts to earnings expectations.  

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup
Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,RBS<*br*>Australia,UBS&b0=114,91,103,91,74,130,140,116&h0=76,116,91,130,97,100,154,125&s0=50,26,38,9,45,36,10,15" 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 ATLAS IRON LIMITED Sell Neutral UBS
2 BREVILLE GROUP LIMITED Neutral Buy UBS
3 DEXUS PROPERTY GROUP Sell Neutral JP Morgan
4 LEIGHTON HOLDINGS LIMITED Neutral Buy Deutsche Bank
5 MYER HOLDINGS LIMITED Neutral Buy Deutsche Bank
6 REGIS RESOURCES LIMITED Neutral Buy Deutsche Bank
7 Sigma Pharmaceuticals Ltd Sell Neutral Macquarie
Downgrade
8 ANSELL LIMITED Neutral Sell UBS
9 AQUARIUS PLATINUM LIMITED Neutral Sell BA-Merrill Lynch
10 BRAMBLES LIMITED Buy Neutral UBS
11 ENVESTRA LIMITED Neutral Sell Credit Suisse
12 INSURANCE AUSTRALIA GROUP LIMITED Buy Neutral Citi
13 ONTHEHOUSEHOLDINGS LIMITED Buy Neutral RBS Australia
14 SOUTHERN CROSS MEDIA GROUP Neutral Sell JP Morgan
15 THE REJECT SHOP LIMITED Neutral Sell Credit Suisse
16 TOLL HOLDINGS LIMITED Neutral Sell JP Morgan
17 WOODSIDE PETROLEUM LIMITED Buy Neutral Macquarie
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 PAN 67.0% 100.0% 33.0% 3
2 BRG 67.0% 100.0% 33.0% 3
3 SIP - 14.0% 14.0% 28.0% 7
4 DXS - 29.0% - 14.0% 15.0% 7
5 BSL 43.0% 57.0% 14.0% 7
6 RRL 57.0% 71.0% 14.0% 7
7 AGO 50.0% 63.0% 13.0% 8
8 WEB 25.0% 33.0% 8.0% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AQP 40.0% 20.0% - 20.0% 5
2 CTX - 33.0% - 50.0% - 17.0% 6
3 ARI 83.0% 67.0% - 16.0% 6
4 GPT - 14.0% - 29.0% - 15.0% 7
5 NWH 86.0% 71.0% - 15.0% 7
6 BXB 86.0% 71.0% - 15.0% 7
7 ANN 29.0% 14.0% - 15.0% 7
8 IAG 38.0% 25.0% - 13.0% 8
9 NCM 38.0% 25.0% - 13.0% 8
10 SUN 88.0% 75.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 WEB 3.580 3.917 9.41% 3
2 SIP 0.627 0.681 8.61% 7
3 BRG 5.683 6.117 7.64% 3
4 RRL 4.686 4.844 3.37% 7
5 ANN 15.060 15.226 1.10% 7
6 GPT 3.500 3.534 0.97% 7
7 IAG 4.079 4.098 0.47% 8
8 CTX 14.060 14.110 0.36% 6
9 CHC 2.656 2.663 0.26% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 NWH 3.924 3.516 - 10.40% 7
2 PAN 1.175 1.083 - 7.83% 3
3 ARI 1.238 1.172 - 5.33% 6
4 AGO 2.299 2.236 - 2.74% 8
5 SXL 1.501 1.471 - 2.00% 8
6 WPL 40.359 40.171 - 0.47% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AQP 2.608 3.387 29.87% 5
2 COH 274.738 281.325 2.40% 8
3 SIP 4.657 4.757 2.15% 7
4 GPT 23.957 24.129 0.72% 7
5 QRN 21.075 21.200 0.59% 7
6 RMD 19.962 20.004 0.21% 8
7 WPL 223.107 223.443 0.15% 8
8 WDC 63.775 63.813 0.06% 8
9 SGP 28.914 28.929 0.05% 7
10 HZN 2.081 2.082 0.05% 4

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 PAN 4.400 0.125 - 97.16% 3
2 LYC 1.800 0.600 - 66.67% 5
3 GBG 4.567 3.617 - 20.80% 6
4 AGO 12.763 11.513 - 9.79% 8
5 FMG 53.948 49.840 - 7.61% 8
6 RRL 60.529 56.286 - 7.01% 7
7 GRR 6.933 6.517 - 6.00% 6
8 MGX 24.363 22.963 - 5.75% 8
9 NWH 41.086 39.543 - 3.76% 7
10 BHP 280.180 271.866 - 2.97% 8
 

Technical limitations

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article 3 months old

Headwinds Don’t Change McMillan Shakespeare’s Solid Outlook

 - Goldman Sachs has reviewed earnings outlook for McMillan Shakespeare
 - Expects solid earnings growth in coming years
 - Retains a Buy rating

By Chris Shaw

A market leading position in salary packaging services and a strong share of the fleet management and associated leasing market has enabled McMillan Shakespeare ((MMS)) to deliver solid earnings growth since 2005. The trend continued in FY12, with the company delivering earnings per share (EPS) growth of more than 20% for the year. 

Having reviewed the annual report for McMillan Shakespeare, Goldman Sachs takes the view profits from the re-sale of used vehicles, which contributed 12% of profit before tax in FY12, may fall a little in FY13. This is due to a lower number of vehicles coming off lease and an expected decline in used car prices.

A significant downturn in car prices would force McMillan Shakespeare to review values for its existing fleet, with Goldman Sachs suggesting a 5% reduction would generate a $12 million pre-tax writedown. This would equate to 13% of profit before tax.

Goldman Sachs expects any decline in car prices is likely to be in the order of 2-4%, with the resulting earnings impact to be more than offset by growth in the fleet and Remuneration Services division. As a result, while earnings composition may be a little different in FY13, Goldman Sachs still expects net profit after tax for McMillan Shakespeare can grow by 15% in FY13.

Solid earnings growth should continue in future years, as Goldman Sachs currently forecasts capitalised annual growth rates in earnings for FY12-FY15 of 11% in EPS terms. EPS forecasts for Goldman Sachs stand at 81.8c for FY13 and 91.6c for FY14, which compare to consensus estimates according to the FNArena database of $82.4c and 92.1c respectively.

There is some potential downside risk to earnings from job cuts announced in the Queensland State Budget, as Goldman Sachs notes jobs will be cut in Queensland Health where McMillan Shakespeare is the sole provider. The Queensland Government is McMillan Shakespeare's largest client in the Remuneration Services division.

Any impact from these job cuts is unlikely to be significant, as Goldman Sachs estimates the net profit impact is likely to be around 2% on an annualised basis. Forecasts have been adjusted accordingly. There is a minor positive impact on price target stemming from higher market multiples, Goldman Sachs lifting its target 2% to $13.63. 

This compares to a consensus price target according to the FNArena database of $13.73, with targets ranging from BA Merrill Lynch at $13.50 to Citi at $14.14. Relative to the current share price, the consensus target in the database implies share price upside of around 10%.

Goldman Sachs sees enough valuation upside to retain a Buy rating on McMillan Shakespeare, which matches the Buy ratings from the three brokers in the FNArena database to cover the company. Dividends are also solid and add to the attraction of the stock, forecasts for Goldman Sachs implying a fully franked yield of 4.1% for FY13 and 4.6% for FY14. 

Over the past year the stock has traded in a range of $7.96 to $12.62. 

Technical limitations

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article 3 months old

The Short Report

By Andrew Nelson

For the week to 05 September 2012, significant increases in short positions far outweighed significant decreases, both in terms of the numbers and in terms of the average magnitude of the changes. Just one stock saw its short position pull back by more than one percentage point over the period, while nine stocks experienced a greater than one percentage point increase.

We’ll start our coverage on the decrease side of the ledger, as it is a fairly short list of just one. After last week sitting on the top of the increase list, Allied Gold ((ALD)) finds itself on top of the weekly short decrease leader board this week, with total shorts decreasing by 2.49 percentage points from 2.81% to 0.32%. Investors have seemingly come to grips with the St Barbara Mines ((SBM)) merger that was approved by the High Court a few weeks back.

St Barbara, who were number two on the increase list last week right behind Allied didn’t respond in the quite the same fashion. Shorts in SBM actually increased a further 0.87 percentage points from 3.60% to 4.47% over the period. The stock remains Neutrally regarded by brokers in the FNArena database, with one Buy, Hold and Sell call recorded. The company’s FY result was reviewed by all three brokers towards the end of August, with Macquarie noting some doubts about the risk/reward profile of the merger.

Number eight on this week’s Top 20 list (that being a list of the 20 most shorted stocks on the Australian market) also booked a decline in its overall short position, albeit a minor one. Shorts in the shares in Cochlear ((COH)) declined 0.42 percentage points to 9.51% from 9.53%. The stock is negatively regarded by brokers in the FNArena database, with 4 Sells and 4 Neutrals. Yesterday, the company announced new N5 failure rates from US data that most brokers saw as a sign of improvement. Of course, this news would have had no impact on short position moves up to Sept. 5.

Number 19 on this week’s Top 20 list, Carsales ((CRZ)), also featured near the top of the decliners list, with short positions coming off 0.47 percentage points to 7.59% from 8.06%. Full year earnings in mid-August were well received. Again, while having no bearing on last week’s short position moves, Macquarie noted this Monday that it seems the threat from News Ltd’s ((NWS)) Carsguide that many were expecting to take a chunk out of Carsales has pretty much proved a non event.

Switching focus to the other side of the table, we see that three of the top 4 biggest increases in short position over the week were booked by retailers. Shorts in The Reject Shop ((TRS)) advanced 2.77 percentage points from 7.87% to 10.64%, seeing it now sit at number 5 on the Top 20 list. The company’s FY efforts were fairly well received by brokers late August; with Credit Suisse even lifting its call to Neutral post release. The Reject Shop would likely be higher on the list were JB HiFi ((JBH)), Flight Centre ((FLT)), or Fairfax ((FXJ)) to relax their grip on their seemingly permanent Top 5 spots a little.

Fellow retailer Myer finds itself at number two on the increase list, helping it to easily maintain its position in the Top 20. Short positions in the company increased by 2.70 percentage points from 7.23% to 9.93% over the week. The company reports FY numbers today and just this Monday analysts at Citi voiced their concerns about falling margins. The guys across the street at David Jones also saw their short position increase significantly, rising 2.27 percentage points from 7.18% to 9.45%.

Cabcharge saw its short position grow by 2.57 percentage points from 1.61 to 4.18%. In-line FY results were fairly well recieved in the last week of August and the stock is Neutrally regarded by brokers in the FNArena database, boasting one Sell, one Buy and four Holds.

Engineering services companies also featured amongst the biggest increasers, with Downer EDI ((DOW)), UGL ((UGL)) and Monadelphous ((MND)) all seeing their short position increase by more than 1%. Shorts in both Downer and UGL lifted by 1.71 percentage points, taking Downer to 3.69% shorted and UGL to 5.84%. Monadelphous’ short position rose 1.45 percentage points to 5.88%.

While there has been little of note from Downer over the past few weeks, last week saw UGL host analysts in Shanghai to talk about the new strategy. The response was fairly positive for the most part. Both stocks are regarded positively by brokers in the FNArena database, although out the two, Downer is the more favoured. UGL had to issue a profit warning in August.

The weekly Top 20 list looks pretty much the same as last week, with a only a few minor position changes of note.

Discretionary retail plays continued 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 ((JBH)), Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer and David Jones. All remain in the top 10.

Resources and resources services stocks also maintain their prominent positions in the top 20.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by base materials plays of various description such as CSR ((CSR)), Alumina ((AWC)), Paladin ((PDN)) and Fortescue ((FMG)).

The picture was quite similar looking at the monthly changes to short positions, with 21 stocks booking an increase of 1 percentage point or more, while just eight stocks enjoyed a better than 1 percentage point decrease in position.

The most prominent move on the decrease side of the ledger was booked by Discovery Metals ((DML)), with its short position falling 3.02 percentage points from 5.31% to 2.29%. The latest broker commentary on the stock came from Citi at the end of August, with the broker worried that costs will come in much higher than expected. The broker has DML at Sell, versus two Buys and a Neutral that are also recorded in the FNArena database.

Carsales was number two on the decrease list, down 2.74 percentage points from 10.33% to 7.69% shorted. Next was Seven West ((SWM)), whose short position declined 1.93 percentage points from 3.77% to 1.84%.  The stock is very positively regarded in the FNArena database, with broker’s positively reviewing the company’s FY effort on the 23-24 of August.

The most significant monthly decrease was posted by Silver Lake Resources ((SLR)), with JP Morgan liking the FY result last week and seeing potential upside from the Integra Mining ((IGR)) acquisition.

APA Group ((APA)) was next on the list, with short positions pulling back 2.80 percentage points to 4.51%, while Whitehaven Coal’s ((WHC)) short position improved by 2.43 percentage points to 3.92% shorted. The latter stock enjoys across the board Buy call in the FNArena database.

Monadelphous and Mesoblast ((MSB)) round out the top 5 decliners list. Both companies enjoy marginally positive ratings in the FNArena database and neither have drawn broker commentary over the past three weeks.

Looking at the week to 10 September, analysts from RBS note short positioning across the market remains at a record high average of 2.4%. Small to mid-cap resource stocks like Iluka and Panoramic Resources ((PAN)) remain key targets. The broker also points out that shorts in both Gold and Iron Ore stocks have doubled in the past six months, while Capital Goods stocks have also seen a recent spike in short interest.

On the other hand, short covering in banks has been the recent trend, with short decreases in Westpac ((WBC)) and Commonwealth Bank ((CBA)) more than offsetting the rise in shorts booked by National Australia Bank ((NAB)), which the broker notes has gone from 0.4% to 1.0% over the past two weeks.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 19697908 98850643 19.93
2 FLT 12714644 100072666 12.71
3 LYC 194606019 1715029131 11.35
4 FXJ 263096984 2351955725 11.19
5 TRS 2808625 26092220 10.76
6 ILU 42481692 418700517 10.15
7 MYR 58213554 583384551 9.98
8 COH 5509152 56972605 9.67
9 DJS 50142816 528655600 9.48
10 HVN 97646834 1062316784 9.19
11 CSR 45278798 506000315 8.95
12 LNC 45070275 504487631 8.93
13 AWC 211621322 2440196187 8.67
14 PDN 65993967 835645290 7.90
15 FMG 241608127 3113798659 7.76
16 SGT 10509671 154444714 6.80
17 GNS 55105305 848401559 6.50
18 MSB 18505035 284478361 6.50
19 CRZ 14981006 233689223 6.41
20 WTF 13557185 211736244 6.40

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

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

article 3 months old

Material Matters: Oil Market Tightening, LNG Risks, Mining Contractors Reviewed

 - Global oil demand tightening product stocks
 - JP Morgan lifts oil price forecasts
 - Barclays Capital expects oil to remain in range of past seven quarters
 - Australian LNG projects at risk of missing market window
 - Macquarie revises expectations for the sector
 - Broker also reviews outlook for contractors 

By Chris Shaw

Oil prices have recovered since late June, largely due to stronger demand from Japan, Germany and the US and downward revisions to non-OPEC supply. The strength of this demand has meant a continued tightening in product stocks.

To reflect the stronger than expected demand of recent months, JP Morgan has lifted its global oil demand growth forecast for 2012 by 180,000 barrels per day to 750,000 barrels per day. The forecast for 2013 has been lowered slightly to 1.14 million barrels per day.

JP Morgan suggests while many factors have likely contributed to the pick up in demand evident in the June quarter, a major contributor was an oil price fall of around US$35 per barrel during the period. This offered an opportunity to boost inventories, as well as to rekindle deferred demand.

For JP Morgan this demand pick-up has been enough to generate increases to Brent crude price forecasts through the balance of this year and into 2013. Brent is now expected to average US$105 per barrel over the course of the final quarter this year, up from US$100 per barrel previously. West Texas Intermediate (WTI) is expected to average US$87 per barrel over the same period, down slightly from a previous forecast of US$90 per barrel.

That JP Morgan's revisions to price forecasts for the final quarter of 2012 have been relatively modest is not a great surprise, as Barclays Capital noted for the past seven quarter Bent crude quarterly average prices have been in the range of US$105-$120 per barrel. This is despite intra-day prices over 2011 and 2012 showing a range of more than US$35 per barrel.

Barclays doesn't see prices moving out of this range in the final quarter of 2012, forecasting an average price for the period for Brent crude of US$117 per barrel. One potential variable that could shift prices outside the range of the past two years is the US presidential election, as Barclays suggests once this is behind the market, changes to the geopolitical landscape and the political sensitivity of oil prices are likely to become the key theme.

In the view of JP Morgan, the lower baseline for inventories evidenced over the past couple of months and reduced downside economic risk supports an improved oil price outlook. The rebound in crude also implies the global economy has been stronger than data indicate, with lagging economic indicators such as PMIs potentially not describing current market conditions. 

This should become evident in 2013 oil prices, as JP Morgan is now forecasting an average for next year for Brent crude of US$113 per barrel, up from US$104 per barrel previously. WTI forecasts have also increased to US$100.50 per barrel next year from US$99 per barrel previously.

While forecasts have been increased, JP Morgan notes its new estimates remain below the forward curve for much of the first half of 2013. An expected scenario of easing demand prompting OPEC members to lower output is anticipated by the middle of next year. When combined with an expected pick-up in economic momentum around the same time is seen as supportive of higher prices in the second half of next year.

In the LNG market, Macquarie suggests the combination of strong demand growth and a slowdown in the pace of capacity additions suggests a tighter medium-term market. Longer-term, which in this case means beyond 2017, the outlook is different as there are a growing number of proposed projects expected to compete for what appears to Macquarie to be finite longer-term demand.

As Macquarie notes, over the past 18 months around 150 million tonnes per annum of new capacity has been announced. This amount equals more than 50% of current global demand and in the longer-term suggests upward pressure on development costs and downward pressure on prices.

In Macquarie's view the market window for Australian LNG projects is closing quickly, as the supply story moves to North America and East Africa given the potential for cheaper supply and the fact Australia has reached what may be viewed as acceptable market share limits.

As the outlook for new project sanctions becomes tougher, the Australian LNG sector is becoming more of a development story, something Macquarie suggests is likely to make investors more nervous given the associated risks.

With a stronger supply outlook longer-term, buyers are pressuring to shift the market spot or hub-based pricing, while sellers appear happy to stick with the current oil-indexation system. The expectation of a move towards spot-based pricing for LNG will shift additional pressure onto sellers, Macquarie noting this will add to the existing funding and development challenges being faced.

The result is Macquarie has trimmed pricing slopes for uncontracted LNG volumes, which when added to some increases to project risk weightings causes the broker to lower price targets across the sector. Santos' ((STO)) price target has been cut by 6% to $16.00, while for Origin Energy ((ORG)) the target falls by 10% to $15.50. 

Macquarie has cut its price target for Woodside ((WPL)) by 4% to $37.50, at the same time downgrading its rating on the stock to Neutral from Outperform. The downgrade reflects the fact while more than 60 million tonnes per annum of Australian LNG capacity has been sanctioned since Woodside began the Pluto project, none of it has been Woodside's capacity. 

This means the Browse and Sunrise projects and the Pluto expansion are running close to missing the market window. This creates an issue for Woodside as if issues at the likes of Browse and Sunrise cause timelines to slip further, there will be little in terms of projects under development as the company hits peak production next year. 

This potentially leaves management with a need to consider M&A options, which Macquarie suggests creates an additional problem given buying resources is too expensive and buying exploration is too long-dated.

This M&A risk, along with the unresolved Shell overhang and a fuller relative valuation are enough for Macquarie to justify the downgrade in rating. Macquarie retains Outperform ratings on Oil Search ((OSH)), Santos, BHP Billiton ((BHP)) and Origin Energy.

As a basis for comparison, Sentiment Indicator readings for the stocks according to the FNArena database stand at 0.9 for Oil Search, Origin Energy and Santos, 0.6 for BHP and 0.4 for Woodside.

Any impact on the outlook for major Australian oil and gas plays is likely to have some flow through impact on contractors servicing those companies, so Macquarie has also run the ruler over the listed contractors in Australia post recent profit results.

In general, Macquarie notes revenues were better than expected but margins were weaker than forecast, though up on FY11 levels. While growth expectations for FY13 have been moderated in some cases, the most important factor in terms of any changes to expectations has been end market exposures.

Overall, Macquarie is forecasting a 12% increase in sector earnings per share (EPS) in FY13, with a preference for those stocks with exposure to oil and gas the most preferred. This is followed by exposure to iron ore.

Among stocks under coverage, those most exposed to the oil and gas sector in terms of overall revenues are WorleyParsons ((WOR)) at 68%, Transfield ((TSE)) at 30% Monadelphous ((MND)) at 10-15% (but expected to increase towards 30% from FY14) and Leighton Holdings ((LEI)) at 10% of group revenues.

Key stock picks for Macquarie account for factors such as relative earnings certainty, strong balance sheets and solid yields on offer. Among stocks covered Macquarie rates WorleyParsons, Monadelphous and Downer EDI ((DOW)) as Outperform, the latter given an attractive valuation relative to the sector in general.

Both Boart Longyear ((BLY)) and Transfield are rated as Neutral, while UGL ((UGL)) and Leighton both score Underperform ratings, as does ALS Limited (ALQ)), the former Campbell Brothers. 

Regarding Boart Longyear and ALS, Macquarie believes a more cautious approach to stocks exposed to the outlook for exploration is but appropriate at present, while Leighton is dealing with some balance sheet pressures and UGL faces some power project problems and is dealing with lower revenues.


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article 3 months old

FMG’s Deferral No Big Deal For NRW

- Fortescue's expansion deferral impacts on NRW's revenue forecasts
- Brokers do not see guidance reduction as material
- NRW offers service diversification and a very good yield


By Greg Peel

Mining and energy services provider NRW Holdings ((NWH)) has completed discussion with Fortescue Metals ((FMG)) in light of the deferral of the final stage of Fortescue's Pilbara expansion, and yesterday announced the impact to the market. NRW is contracted by FMG and work on the final stage was included as part of NRW's contract pipeline.

The contract cancellations relate to the tailings dam construction at the Kings Valley mine and also for general civil works at FMG's Solomon hub. NRW is treating the cancellations as just that at this stage, albeit FMG may reinstate its expansion plans down the track were the iron ore price climate to improve. The impact is a reduction in NRW's secured order book to $1.2bn from $1.3bn, and a reduction to the company's active tender & framework agreement pipeline to $2.6bn from $4.6bn, removing Christmas Creek II. The former $100m represents a specific loss of expected revenue, while the latter amount represents a less certain forecast. 

As a result, NRW management has downgraded its FY13 earnings growth guidance to 15% from 15-20%. Not exactly the stuff to keep one awake at night. The bottom line is that while a few years ago this loss of an iron ore contract would have hit right at the heart of NRW, today the company boasts a far more diversified service pipeline. NRW has increased its exposure to actual production-related activities (as opposed to only development-related), notes UBS, and has diversified its commodity exposure into infrastructure, coal and, importantly, LNG. To UBS, NRW is a “different business” in this cycle compared to the last.

Management's revised FY13 revenue guidance is 77% covered by contracts, down from 80%, leaving $360m of new work to win, Deutsche Bank notes. Management sees no impact on NRW's FY14 outlook. The FY13 impact will be manageable, given the company will demobilise hired equipment and subcontracted labour and reposition company-owned equipment to other NRW projects. JP Morgan expects some reduction in permanent staff members and modest cutbacks to capex to reflect lower near-term workloads. JPM believes that growth in NRW's production mining services, such as drill & blast services, supports near-term earnings growth and will provide greater earnings stability over the medium term.

Indeed, Deutsche actually sees reduced exposure to FMG as positive in light of current developments. The analysts acknowledge that earnings visibility beyond FY13 is limited, but are happy to retain Buy.

JP Morgan retains Overweight, with the analysts suggesting that given the cost curve position of many of NRW's clients, they would expect continued capex spending as well as at least maintenance of production rates in the Australian resource sector. “We believe NRW remains well positioned to win available work and expand into new markets/services,” the analysts say, “given its strong reputation and good balance sheet position”.

Citi is also retaining its Buy rating, albeit the analysts have taken the opportunity to reduce their growth expectations for the Civil business in FY14 and beyond, given the falling iron ore price will potentially threaten the timing of other major near term projects such as Gina Rinehart's Roy Hill. The analysts are now assuming no growth for Civil beyond FY13.

Having said that, Citi points out that (as of yesterday's closing price) NRW is offering a 9.9% fully-franked yield to which the analysts see little near-term risk given a payout ratio of only 55% and a strong balance sheet featuring minimal debt.

Brokers have nevertheless trimmed their earnings forecasts as a result of reduced guidance. Not all FNArena database brokers have updated their views as of this morning so FNArena's Stock Analysis currently shows the consensus target having fallen to $3.72 from $3.92, albeit this figure may move a little lower next week. Never mind -- the new figure still suggests 62% upside. Ratings from the major brokers currently stand at six Buys and one Hold.

 
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article 3 months old

Boart Guidance Shock

 - Boart Longyear slashes earnings guidance
 - Changes reflect reduced minerals exploration spending
 - Brokers slash forecasts and price targets
 - Ratings downgraded
 - RBS fears a flow through impact for Imdex's earnings


By Chris Shaw

Record interim net profit after tax of US$74 million was where the good news stopped for resource sector service provider Boart Longyear ((BLY)), as the result was accompanied by a significant downgrade to full year earnings guidance.

A softer and increasingly uncertain drilling outlook has seen management at Boart Longyear provide EBITDA (earnings before interest, tax, depreciation and amortisation) guidance for 2012 of US$360-$390 million. As BA Merrill Lynch points out, this is more than 30% below previous consensus of around US$470 million.

The cut to guidance was driven by a number of factors, Macquarie noting these include higher rig churn as major customers move rigs to higher quality assets, some customer de-stocking and a more cautious outlook for capex from major miners.

Forecasts across the market have been cut heavily to reflect the updated guidance, as RBS Australia has cut earnings per share (EPS) forecasts by 25% this year and by 58% in FY13 and UBS by 33% and 55% respectively. Consensus EPS forecasts for Boart Longyear according to the FNArena database now stand at US38.3c and US30.4c respectively.

The larger cuts to forecasts in FY13 reflect Macquarie's view there could be further downside risk for Boart Longyear's earnings next year as falling volumes and weaker prices have yet to fully impact. As Macquarie points out, lower rig utilisation will generate pricing pressure as contracts are renegotiated, while margins in the Products division in particular will come under pressure given a relatively high fixed cost base.

With the earnings outlook for Boart Longyear now far less certain and with valuations cut to reflect new guidance, brokers have downgraded ratings for the stock. UBS, Macquarie and RBS Australia have all cut ratings to Hold from Buy, while BA-ML and JP Morgan have retained respective Underperform and Neutral ratings. 

Overall the FNArena database shows Boart Longyear is now rated as Buy three times, Hold four times and Sell once. Not all FNArena database brokers have updated their forecasts as yet.

Changes to forecasts have driven down price targets, with the consensus target according to the database falling to $2.58 from $3.95 previously. Among the updates so far, RBS now has the lowest target at $1.39, while JP Morgan's revised target stands at $2.21.

One positive from the update to guidance in the view of BA-ML is that the outlook for Boart Longyear has now effectively de-risked, as current enterprise value is pricing in trough earnings. The one caveat the broker makes is this assumes FY13 proves to the trough for earnings, which is not clear at this point. Given this uncertainty, BA-ML sees further share price underperformance from Boart.

Earnings uncertainty is the main driver of Hold ratings elsewhere, UBS noting Boart has a cyclical earnings profile given the exposure to exploration spending where the outlook is far from clear at present.

RBS agrees, taking the view investors are unlikely to consider the stock while earnings visibility remains poor. This implies potential for further share price weakness before fundamentals again come to the fore, which is unlikely before at least next year in RBS's view.

Another point noted by RBS is that Boart's downgrade to earnings guidance is a negative for Imdex ((IMD)) given Boart is Imdex's largest customer and accounts for around 11% of group revenues.

The revised guidance from Boart is evidence market uncertainty is now translating into reduced exploration and development spending, which RBS expects will pressure Imdex's earnings as well.

Changes to forecasts reflect this, RBS cutting EPS forecasts for Imdex by 13-17% for FY13-FY14. This generates a cut in price target to $1.40 from $1.70, with RBS retaining a Hold rating on Imdex. Overall, Imdex is rated as Buy once, Hold once and Sell once by brokers in the FNArena database, with an average price target of $1.72.

Shares in Boart Longyear today are slightly weaker in a broadly flat overall market and as at 11.50am the stock was down 5c at $1.45, the stock having fallen heavily yesterday post the downgrade to guidance. Over the past year the shares have traded in a range of $1.435 to $4.41.

Imdex is also weaker and was down 3.5c at $1.305 as at 11.50am, compared to a 12-month range of $1.305 to $3.28. 


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article 3 months old

NRW Holding Its Own

 - NRW Holdings profit result better than expected
 - Guidance implies further solid growth in FY13
 - Updated guidance conservative in view of UBS
 - Brokers remain positive, Buy ratings dominate


By Chris Shaw

Stronger revenues and higher margins drove a full year net profit result for civil construction and mining services group NRW Holdings ((NWH)) of $97.1 million, which was better than consensus and represented an increase of 136% in year-on-year terms. 

Strong earnings growth is expected to continue, as management at NRW has guided to at least 15-20% growth in revenue and earnings for FY13. This guidance is likely to prove conservative in the view of UBS as NRW has a solid existing order book, a pipeline of opportunities and a management team with a strong track record in terms of execution. 

UBS's earnings forecasts reflect this, as the broker expects a FY13 net profit after tax of $120.4 million. This would equate to earnings growth of 24%. In earnings per share terms UBS expects 43c in FY13 and 50c in FY14, which compares to consensus estimates according to the FNArena database of 41.1c and 43.7c respectively.

Longer-term solid earnings growth should continue according to Macquarie, as the outlook for core iron ore operations remains solid and NRW has recently expanded operations beyond iron ore into oil and gas and into the Queensland market. 

There is also less earnings risk for NRW in the view of Macquarie, as the strategy of taking on a limited number of clients builds stronger relationships. Such an approach also lowers business development costs.

Credit Suisse has less confidence in the longer-term earnings growth outlook of NRW. The broker estimates if guided revenues for FY13 were met and held at that level for the following three years, NRW would need to successfully tender around 50% of the entire identified tender pipeline of around $13.4 billion.

There is little risk of shorter-term earnings disappointing, as Deutsche Bank notes revenue guidance for FY13 is a little more than 80% covered based on current projects under contract. With additional work likely to be won in iron ore, coal and energy markets Deutsche made modest increases to earnings forecasts for the coming year.

Changes to earnings estimates mean the consensus price target for NRW Holdings according to the FNArena database now stands at $3.92. This is down from $4.28, Macquarie attributing the cut in its target to $3.92 from $4.78 to a de-rating of peer multiples. Targets range from Credit Suisse at $3.10 to UBS at $5.15.

Brokers remain positive on NRW, as the database shows six Buy ratings and one Neutral recommendation. This is courtesy of Credit Suisse, who downgraded from an Outperform rating post the profit result on the back of a change in analyst. 

One concern for Credit Suisse is what NRW looks like post peak earnings, which the broker suggests may become an increasingly important consideration for investors given current economic uncertainties.

UBS sums up the Buy argument for NRW, seeing the stock as attractive at current levels given the combination of an attractive earnings multiple and fully franked dividend yield and a solid earnings growth outlook through FY16.

While there is some need to diversify earnings given a current strong focus on the iron ore market, RBS Australia suggests the solid track record of NRW and the currently undemanding valuation offer enough compensation for investors in the meantime. For RBS, this justifies a Buy rating. 

Shares in NRW Holdings are higher in a stronger overall market and as at 12.00pm the stock was up 7c at $2.96, which compares to a range over the past year of $2.08 to $4.36. The current share price implies upside relative to the consensus price target in the FNArena database of a little more than 30%.

 
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article 3 months old

Icarus Signal New Entries: Monadelphous

Update on share prices and consensus price targets.

By Rudi Filapek-Vandyck, Editor FNArena

By now, I assume, you are all aware of the existence of a company called Monadelphous ((MND))?

In simple terms, Monadelphous is the ultimate gift that keeps on giving. It's the Champion amongst champions. It has been, by far, the most profitable investment decision any investor could have made over the past decade - second to none. Which is why Monadelphous has been on my personal radar for years and why the company has featured in quite a few of my analyses and stories in the past.

Unluckily, for most investors, the provider of services to iron ore and coal miners, and to the rising LNG industry in Australia has been flying under the radar for most of those ten years. So while everyone was trying to secure his or her piece of BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)), management at Monadelphous was quietly turning loyal shareholders into millionaires; literally! (I think I have met two of them throughout the years). Most stockbrokers have only added the stock to their research universe in the past two years.

If you are amongst the many buyers of a lottery ticket every week, you'll probably find it depressing to know that an investment of only thousands of dollars in Monadelphous shares ten years ago would have been sufficient to be a member of the millionaires club today.

This week management again beat market expectations and expressed confidence in the ongoing strong outlook for the company. Day-to-day price movements aside (today is one of weakness), Monadelphous shares entered the calendar year around $20. They are trading above $22 on the day after the release of FY12 results. While updated price targets by stockbrokers suggest only limited upside from here onwards, it has to be noted that today's Price Earnings ratio of less than 14 is well below historical averages; plus the prospective dividend yield (fully franked) is better than what most of the major banks are offering at 6.3% and 6.9% respectively for the two years ahead.

One of the reasons why Monadelphous has at times featured prominently in my analyses is because its total investment return includes solid, growing dividends, uninterrupted, year after year after year. The share price may have multiplied by 21x in ten years, the growth in dividends has been equally spectacular with the payout increasing from 6.25c in 2003 to a projected 139.5c this financial year (an increase of more than 2000%).

Amidst all the hullabaloo about "the end of the equities culture", "the end of Buy and Hold" and the persistent underperformance of Australian equities, Monadelphous shares are up more than 10% since the beginning of the year, dividends not included (add circa 6% if you include the upcoming final payout).

All this raises the obvious question: when will this success story come to an end? Nothing this good can last forever,can it?

Probably not. Most shareholders would certainly feel less comfortable if the current management team decided to call it quits (there have been rumours) and there is, of course, the ongoing prospect of two more years of strong capex spending by miners and LNG producers in Australia, but what's next?

Well, under a worse case scenario the amount of work available post 2014 will resemble something of a fall off the cliff experience and we can only assume this won't leave even a company such as Monadelphous unaffected. Which is why stockbrokers covering the company are now more divided about what valuation multiple and what rating should apply given the limited visibility post 2014. Observe that the lowest price target in the FNArena database is $17.69 from JP Morgan while uberbull RBS is happy to go as high as $27.84.

I think both will be proven wrong. If Monadelphous' historic record is anything to go by, there's no reason to go doom and gloom as JP Morgan does, but given only two more years of (virtually guaranteed) strong growth ahead, I very much doubt whether investors will allow a return to a high double digit PE ratio.

Which brings us to the question of the day: what then can we expect from Monadelphous from here onwards?

Post all the updates after yesterday's FY12 release, the consensus price target doesn't reach higher than $23.30, which suggests 4.4% upside plus dividends (still a double digit return, mind you!). Even if we exclude JPM and RBS -the two outliers- from our calculation, the consensus price target doesn't reach higher than $23.36. I wouldn't be surprised to see the share price trade at a premium to this "ceiling", as it has done on many occasions in the past. So there remains potential for upside surprises.

On the flipside, I also suspect investors will increasingly start realising the golden age of owning shares in Monadelphous is now well and truly behind us. While double digit returns are still possible in each of the next two years, it will be closer to 10% than to 20% and there is now a real danger that shareholders will start jumping ship at some point in 2013, which could become a real headwind for the shares.

Yesterday's surge in the share price pushed Monadelphous shares onto the Icarus' radar, together with the likes of ResMed ((RMD)), Flight Centre ((FLT)) and Kathmandu ((KMD)). One other appearance that caught my attention was National Australia Bank ((NAB)) now at less than 2.2% from the consensus target. (Regular readers of my analyses know why I watch the banks).

There are now 40 stocks within reach of their price target, while the list of stocks trading above target is even larger; 91 in total. Yesterday AMP ((AMP)), Telstra ((TLS)), Cardno ((CDD)), ASX ((ASX)) and Credit Corp ((CCP)) joined the likes of Breville Group ((BRG)), Ardent Leisure ((AAD)) and Coca-Cola Amatil ((CCL)).

I think that's sufficient to put out a warning to investors looking to join the rally tomorrow or next week: not everything's cheap in today's share market. On the ultra-cheap side of the market (Bottom 50 according to Icarus) we find names such as Azimuth Resources ((AZH)), Rialto Energy ((RIA)) and Aquarius Platinum ((AQP)) - these stocks also deserve a warning. Be careful in assuming cheap equals future value. There's probably a very good reason why Mr Market has allowed these stocks to trade well below potential.

Investors should consider the information and data are provided for research purposes only.

Stocks <3% Below Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 MND $ 23.26 $ 23.277 0.07%
2 KMD $ 1.36 $ 1.357 0.15%
3 ALZ $ 2.98 $ 2.986 0.20%
4 PTM $ 3.47 $ 3.493 0.66%
5 DLS $ 1.36 $ 1.37 0.74%
6 RRL $ 4.61 $ 4.686 1.65%
7 APA $ 4.82 $ 4.914 1.95%
8 MCR $ 0.72 $ 0.73 2.10%
9 NAB $ 25.37 $ 25.906 2.11%
10 CHC $ 2.54 $ 2.594 2.13%
11 FLT $ 23.95 $ 24.461 2.13%
12 ABP $ 2.04 $ 2.093 2.60%
13 RMD $ 3.55 $ 3.648 2.76%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 AMP $ 4.49 $ 4.489 - 0.02%
2 TLS $ 3.75 $ 3.725 - 0.67%
3 CDD $ 8.56 $ 8.463 - 1.13%
4 ASX $ 31.30 $ 30.877 - 1.35%
5 CCP $ 6.60 $ 6.50 - 1.52%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 AZH $ 0.35 $ 0.60 71.43%

To see the full Icarus Signal, please go to this link

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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article 3 months old

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
 

Technical limitations

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