Tag Archives: Other Industrials

Downer Shakes Off Railroad Blues

- Downer's investor day commentary well received
- Legacy issues appear behind the company
- Management can now focus on growth
- Brokers upgrade ratings on valuation grounds

By Chris Shaw

Engineering company Downer EDI ((DOW)) held an investor day yesterday and brokers left the update generally happy with the outlook for the company following a reiteration of earnings guidance from management. Full year EBIT (earnings before interest and tax) of $340 million is expected, while (NPAT) net profit after tax of $180 million is expected.

In terms of divisional updates, Macquarie notes the mining division commentary was broadly positive with respect to performance on major projects. The blasting and tyre management businesses are also seen as under-appreciated and offering strong growth potential, while Macquarie also sees opportunities for further work to be won in areas such as thermal coal and Fortescue's ((FMG)) Christmas Creek 2 project, this given Downer is the Christmas Creek 1 contractor.

The news on the Waratah project was also good, Macquarie noting trains in service are performing well at present and there have been signs of quality improvements in general. Delivery of further train sets remain in accordance with the existing timetable.

A further positive for Deutsche Bank is Downer now appears to have control of what have been ongoing legacy issues such as with the Waratah project and various engineering contracts, meaning management is now better placed to focus attention on growth opportunities.

But the news was not all positive, as Credit Suisse notes the update also stressed industry conditions are subdued at present across many of Downer's markets. Projects in the coal and iron ore space are being delayed as resource clients adopt a more cautious approach, meaning volumes are below desired levels in some areas of the business.

To counter this Downer is looking to increase exposure to recurring maintenance work, which Credit Suisse notes will be achieved by leveraging current pockets of expertise. Management has indicated this model will require partnerships to bring additional skills and expertise to the offering, so is likely to take some time to boost earnings.

Deutsche Bank agrees any growth from such an approach will take some time to deliver benefits, so nothing is factored into the broker's earnings forecasts to reflect the longer-term potential. Post the investor day update Deutsche's earnings per share (EPS) forecasts stand at 40c for FY12 and 42c for FY13. This compares to consensus EPS estimates according to the FNArena database of 41.2c this year and 45.2c in FY13.

While revisions to earnings estimates have been modest post the update there has been movement in terms of ratings for Downer EDI. Macquarie, JP Morgan and Deutsche Bank have all lifted ratings for the stock to Buy from Hold, while Credit Suisse has upgraded Downer to Neutral from Underperform.

Valuation has been a key driver of the upgrades, Deutsche noting based on its target price for Downer of $4.17, down from $4.36 previously, the implied 12-month forward earnings multiple of 9.9 times would be a 23% discount to the market.

Macquarie also sees improved value on offer in Downer following recent share price weakness and so upgrades to Outperform. The broker estimates the stock at current levels is trading at a 31% discount to the market, which is greater than its long-term discount of about 19%.

While Credit Suisse also sees improved value given recent share price falls the broker wants to see further confidence in execution of the Waratah contract and greater clarity on cuts to mining capex before turning more positive.

Factoring in the changes, the FNArena database shows Downer EDI is now rated as Buy five times and Hold twice. The consensus price target according to the database is $4.43, largely unchanged from prior to the investor day.

Shares in Downer EDI today are stronger in a better overall market and as at 11.00am the stock was up 12c at $3.59, which compares to a range over the past year of $2.71 to $4.16. The current share price implies upside of more than 24% relative to the consensus price target in the FNArena database.

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The Short Report

By Chris Shaw

Changes in short positions for the week from April 24 were modest, only five companies seeing their total short positions change by more than 1.0 percentage point. Increases slightly outweighed decreases by three to two.

Among the increases was a 1.25 percentage point lift in Cochlear's ((COH)) shorts to 11.17% from 9.92% previously, which came ahead of a conference that led UBS to conclude the company's market share is likely to come under pressure in coming years as competitors introduce new products.

Shorts in Billabong ((BBG)) also rose for the week, climbing to 9.65% from 8.63% the week prior despite no new news from the company. Other discretionary retailers such as Harvey Norman ((HVN)) have struggled and delivered weak sales data in recent weeks, so the top short positions in the market continue to be dominated by stocks in this sector of the market.

As examples, the top 20 short positions include JB Hi-Fi ((JBH)), Myer ((MYR)), Flight Centre ((FLT)), David Jones ((DJS)) and Wotif.com ((WTF)). The media sector is also well represented with both Fairfax ((FXJ)) and Ten Network ((TEN)) in the top 20, while resource stocks are also included in the top 20 via the likes of Lynas Corporation ((LYC)), Iluka ((ILU)) and Paladin ((PDN)).

While not in the top 20, shorts rose in M2 Telecommunications Group ((MTU)) to 2.06% from 1.06% in the week from April 24 as the market adjusted to an entitlement offer from the company to help finance the acquisition of Primus Telecom Holdings.

Among the declines in short positions for the week the largest was in Carsales.com ((CRZ)), where total positions fell to 9.19% from 11.5%. This adjustment in positions came prior to a better than expected update on online advertising revenues, which was enough for Credit Suisse to lift earnings estimates modestly.

Shorts in Whitehaven Coal ((WHC)) declined to 5.61% from 6.87% previously, brokers such as Citi remaining positive on the company given Whitehaven is now a rare breed as an independent coal producer with exposure to seaborne prices, making it the go to stock in the sector in that regard in the broker's view.

Monthly changes in shorts were more significant, both Paladin ((PDN)) and Spark Infrastructure ((SKI)) seeing increases of more than 4.0 percentage points for the month from March 30. For Paladin the changes were likely a reaction to a convertible note issue that helps address some short-term funding concerns, while for Spark the market continues to have mixed views on the proposed move to acquire the Sydney desalination plant.

Among the top 20, Myer, David Jones and Carsales.com (((CRZ)) all saw shorts decline by 1.5-2.1 percentage points in the month, while Wesfarmers partly protected shares ((WESN)) have seen shorts decline from more than 2.5% the month before to 0.1% now.

Beach Energy ((BPT)) saw shorts fall to 3.22% from 5.43% from the month before, this prior to better than expected March quarter production. On the flip side, some in the market viewed Beach's exploration performance during the March quarter as disappointing.

As noted, Ten Network is among the top 20 short positions on the market and RBS Australia sees this as reflective of ongoing TV ad market weakness and poor ratings for the network. The broker recently lowered earnings estimates to reflect these issues, which reinforced a Sell rating on the stock.

Top 20 Largest Short Positions

ank	Symbol	Short Position	Total Product	%Short
1	JBH	21969268	98850643	22.21
2	ISO	725044	5703165	12.71
3	COH	6368476	56929432	11.17
4	MYR	64755077	583384551	11.10
5	FXJ	257611720	2351955725	10.96
6	FLT	10014423	100024697	10.00
7	BBG	24947895	257888239	9.65
8	LYC	159919500	1714496913	9.33
9	CRZ	21511549	233684223	9.19
10	DJS	46526079	524940325	8.88
11	EGP	57950189	688019737	8.41
12	PDN	69893003	835645290	8.36
13	GNS	61609897	848401559	7.25
14	HVN	76815948	1062316784	7.17
15	ILU	26640399	418700517	6.33
16	WTF	13180059	211736244	6.22
17	TEN	64330218	1045236720	6.13
18	CSR	30892376	506000315	6.09
19	TRS	1543849	26071170	5.93
20	SGT	9725769	165074137	5.89

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 simple 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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Little Leakage At Orica

- Orica's interim better than expected
- Key mining services operations the main driver
- Brokers adjust forecasts and price targets
- Majority see value in the stock at current levels

By Chris Shaw

Chemical and explosives manufacturer Orica ((ORI)) reported interim earnings yesterday, delivering a net profit after tax of $253 million, down 4% on the previous corresponding period. This compares to consensus estimates of a result of around $245 million and when some post-tax shut-down impacts are excluded, underlying earnings actually increased by around 20%.

Driving the result was the key Mining Services operations, JP Morgan noting in underlying terms this division recorded EBIT (earnings before interest and tax growth) of 17.5% when plant closures and forex movements are stripped out.

The other positive in the result in JP Morgan's view was evidence of some emerging pricing growth in the ammonium nitrate market. The improvement was most pronounced in the US market, where explosives supply has become increasingly tight.

Cash flow for the period was something of a disappointment, Macquarie noting a $237 million increase in net trade working capital due to increases in both inventory and receivables meant cash flows for the half were only $39 million. An improvement is expected in the second half as Macquarie notes this is typically a stronger cash period for Orica.

Along with the earnings result, new CEO Ian Smith announced a restructuring of some of Orica's operations with the structure now based on end markets. There were no major changes in strategy announced, which Deutsche Bank viewed as a positive.

Post the interim profit announcement management at Orica confirmed full year earnings guidance, which meant changes to earnings estimates across the market have been relatively modest. As an example, Macquarie's earnings per share (EPS) forecasts have increased by just 1% in both FY12 and FY13, while Deutsche Bank lifted its numbers by 3-4% over the same period.

RBS Australia actually trimmed its FY12 estimate by 6% but made only minor changes beyond this, while JP Morgan lifted FY12 numbers but cut FY13 estimates by around 2% in both cases. Consensus EPS forecasts for Orica according to the FNArena database stand at 185.7c for FY12 and 217.5c for FY13.

Changes to forecasts mean adjustment to price targets across the market, the consensus price target for Orica now standing at $29.69, up from $28.86 prior to the result. Targets range from BA Merrill Lynch at $27.00 to JP Morgan at $32.75.

Ratings for Orica have not seen any changes, the database showing the stock scores five Buy ratings and three Hold recommendations. For JP Morgan a Hold rating is appropriate as while valuation is supportive and the medium-term growth outlook is improving, new capacity additions are likely to result in oversupply in Australia and increased capex guidance adds to earnings growth risks.

As well, while the Minova business is showing some signs of stabilising, JP Morgan continues to see downside earnings risk given low barriers to entry and the likelihood competitors use price to win market share.

RBS similarly rates Orica as a Hold, as while long-term the business is attractive given solid growth potential there is some heightened risk as Orica attempts to deliver on new projects in the shorter-term. As well, RBS suggests there is not enough upside relative to its $28.53 valuation to justify a Buy rating.

In contrast, both Macquarie and Credit Suisse have reiterated Buy ratings on Orica, the former reflecting the fact the stock offers a low-risk way to play the positive mining services theme while also offering some internal growth options. For Credit Suisse the expectation is further positive earnings momentum in FY13, which should continue to support the share price.

Shares in Orica today are down slightly in a stronger market and as at 11.05am the stock was 4c lower at $26.36. The trading range for Orica over the past year has been $21.34 to 28.72, the current share price implying upside of around 12% relative to the consensus price target in the FNArena database.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Among brokers in the FNArena database the onset of earnings confessions season has seen downgrades far outweigh upgrades, with 11 ratings being lifted compared to 35 being lowered. Total Buy ratings have dipped below the 50% mark and currently stand at 49.22%.

Energy producer AWE ((AWE)) was the only stock to be upgraded by more than one broker, both Citi and Credit Suisse moving to Buy recommendations from Hold previously. For Credit Suisse the upgrade is simply a valuation call after recent share price weakness, while Citi points out the stock also offers material upside if drilling in the Perth Basin proves to be successful. Others in the market adjusted earnings estimates and price targets for AWE post the company's quarterly production report.

JP Morgan's upgrade of Commonwealth Bank ((CBA)) to Overweight from Neutral is also largely a value call as the stock appears attractive at current levels, this from both a yield perspective and given scope for some improvement in earnings growth.

Recent share price weakness has improved the value on offer in both Emeco Holdings ((EHL)) and Jetset Travelworld ((JET)) and this has been enough to prompt upgrades from BA Merrill Lynch and Deutsche Bank respectively, while a strong balance sheet and strong cash flow generation are enough for Citi to upgrade Mount Gibson ((MGX)) to Buy from Hold despite ongoing concerns related to relatively short mine life.

ResMed ((RMD)) delivered better margins in higher volume products and some gains in market share and this prompted an upgrade to Overweight from Neutral by JP Morgan, though at the same time BA-ML downgraded to a Hold rating given a view there is limited upside from current levels at present. Credit Suisse also downgraded its rating on the stock.

Credit Suisse has started to see some value in Stockland ((SGP)) following share price weakness this year and so has upgraded to a Buy rating, while UBS has similarly upgraded Wotif.com ((WTF)) to a Buy rating on valuation grounds.

JP Morgan can no longer justify anything below a Neutral rating on Woodside ((WPL)) following the company's sale of a stake in the Browse project, the positive read through for valuation and the potential of the project the transaction implies.

With respect to downgrades in ratings, the Australian banks featured prominently this week. ANZ Banking Group ((ANZ)) saw its rating cut by both RBS Australia and UBS, the former to Hold from Buy and the latter to Sell from Hold. Valuation and some emerging earnings headwinds are the reasons for the change by RBS, while recent strength has UBS suggesting now is time to take some profits in the stock.

A strategic review of its UK operations by National Australia Bank ((NAB)) was broadly as the market had expected, but concerns about provisioning levels were enough for JP Morgan to downgrade to a Neutral rating. Deutsche made a similar move given its view there remains some downside risk to earnings. Westpac ((WBC)) was equally not immune to downgrades among the banks as UBS cut its rating to Neutral, this also a valuation call given recent share price gains.

Consolidated Media Holdings ((CMJ)) also saw two downgrades (just as ANZ did), both to Hold from Buy by Macquarie and Citi. Market speculation James Packer will sell his stake in the group has driven trading of late but as Citi notes, at current levels it is difficult to justify the value the market is ascribing to the company even allowing for some corporate premium.

DuluxGroup's ((DLX)) proposed acquisition of Alesco ((ALS)) saw both RBS and JP Morgan move to Neutral ratings from Buy previously, RBS noting the move would take some time to deliver a positive earnings boost and JP Morgan seeing the current time as a good one to pull back its rating given good share price performance over the past year. Alesco was also downgraded to Hold by Credit Suisse given the potential for corporate activity has the stock fairly valued for this stage of the cycle.

March quarter earnings for Imdex ((IMD)) were disappointing, especially given an upbeat update from the company in February, so both RBS and BA-ML downgraded ratings to Hold from Buy. The changes also reflect adjustments to earnings estimates and price targets for the stock.

Credit Suisse made the same move on Super Retail ((SUL)) for the same reasons, noting while the company is a rarity in that it is a well performed retail stock at present, share price gains suggest little upside scope shorter-term.

SAI Global ((SAI)) also suffered at the hands of brokers post revisions to earnings guidance, RBS, Citi and JP Morgan all cutting ratings to Hold from Buy. RBS suggests valuation now looks stretched given revised earnings expectations, while JP Morgan is less bullish given the stock is clearly being subject to macro conditions at present.

Downgrades for the likes of Discovery Metals ((DML)), AMP ((AMP)) and Goodman Fielder ((GFF)), all to Hold recommendations from Buy previously, are also valuation driven calls, while low volumes from a tough operating environment and the ongoing threat of increased competition have caused Citi to downgrade ASX ((ASX)) to Neutral from Buy.

As far as changes in earnings estimates go, energy companies dominate this week's table of positive changes, alongside office property funds Investa ((IOF)) and CPA, while Ardent Leisure ((AAD)) and ResMed equally joined the positive crew post well-received market updates.

On the negative side, miners and energy producers equally dominate, alongside Jetset Travelworld, Air New Zealand ((AIZ)), SAI Global and Imdex ((IMD)).

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	AWE LIMITED	Neutral	Buy	Citi
2	AWE LIMITED	Neutral	Buy	Credit Suisse
3	COMMONWEALTH BANK OF AUSTRALIA	Neutral	Buy	JP Morgan
4	EMECO HOLDINGS LTD	Neutral	Buy	BA-Merrill Lynch
5	JETSET TRAVELWORLD LIMITED	Buy	Buy	Deutsche Bank
6	Mount Gibson Iron Limited	Neutral	Buy	Citi
7	RESMED INC	Neutral	Buy	JP Morgan
8	STOCKLAND	Neutral	Buy	Credit Suisse
9	TAP OIL LIMITED	Neutral	Buy	Credit Suisse
10	WOODSIDE PETROLEUM LIMITED	Sell	Neutral	JP Morgan
11	WOTIF.COM HOLDINGS LIMITED	Neutral	Buy	UBS
Downgrade
12	ALESCO CORPORATION LIMITED	Buy	Neutral	Credit Suisse
13	AMP LIMITED	Buy	Neutral	Macquarie
14	ASX LIMITED	Buy	Neutral	Citi
15	ATLAS IRON LIMITED	Buy	Neutral	UBS
16	AUSTRALIA & NEW ZEALAND BANKING GROUP	Buy	Neutral	RBS Australia
17	AUSTRALIA & NEW ZEALAND BANKING GROUP	Neutral	Sell	UBS
18	BRAMBLES LIMITED	Buy	Neutral	Macquarie
19	BREVILLE GROUP LIMITED	Buy	Neutral	UBS
20	BT INVESTMENT MANAGEMENT LIMITED	Buy	Neutral	Credit Suisse
21	CALTEX AUSTRALIA LIMITED	Neutral	Neutral	BA-Merrill Lynch
22	CFS RETAIL PROPERTY TRUST	Buy	Neutral	UBS
23	COMMONWEALTH PROPERTY OFFICE FUND	Neutral	Sell	Deutsche Bank
24	CONSOLIDATED MEDIA HOLDINGS LIMITED	Buy	Neutral	Macquarie
25	CONSOLIDATED MEDIA HOLDINGS LIMITED	Buy	Neutral	Citi
26	CUSTOMERS LIMITED	Neutral	Sell	Credit Suisse
27	DISCOVERY METALS LIMITED	Buy	Neutral	UBS
28	DULUX GROUP LIMITED	Buy	Neutral	RBS Australia
29	DULUX GROUP LIMITED	Buy	Neutral	JP Morgan
30	GOODMAN FIELDER LIMITED	Buy	Neutral	Credit Suisse
31	IMDEX LIMITED	Buy	Neutral	RBS Australia
32	IMDEX LIMITED	Buy	Neutral	BA-Merrill Lynch
33	INDEPENDENCE GROUP NL	Buy	Neutral	Credit Suisse
34	JETSET TRAVELWORLD LIMITED	Buy	Neutral	RBS Australia
35	MIRVAC GROUP	Buy	Neutral	Credit Suisse
36	Mount Gibson Iron Limited	Neutral	Neutral	JP Morgan
37	NATIONAL AUSTRALIA BANK LIMITED	Buy	Neutral	JP Morgan
38	NATIONAL AUSTRALIA BANK LIMITED	Buy	Neutral	Deutsche Bank
39	RESMED INC	Buy	Neutral	BA-Merrill Lynch
40	RESMED INC	Buy	Neutral	Credit Suisse
41	SAI GLOBAL LIMITED	Buy	Neutral	RBS Australia
42	SAI GLOBAL LIMITED	Buy	Neutral	Citi
43	SAI GLOBAL LIMITED	Buy	Neutral	JP Morgan
44	SUPER RETAIL GROUP LIMITED	Buy	Neutral	Credit Suisse
45	WATPAC LIMITED	Buy	Neutral	RBS Australia
46	WESTPAC BANKING CORPORATION	Buy	Neutral	UBS

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	AWE	29.0%	57.0%	28.0%	7
2	CBA	- 13.0%	13.0%	26.0%	8
3	TAP	50.0%	75.0%	25.0%	4
4	EHL	60.0%	80.0%	20.0%	5
5	BPT	- 40.0%	- 20.0%	20.0%	5
6	OZL	38.0%	50.0%	12.0%	8
7	WPL	38.0%	50.0%	12.0%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	IMD	100.0%	33.0%	- 67.0%	3
2	SAI	100.0%	63.0%	- 37.0%	8
3	BRG	100.0%	67.0%	- 33.0%	3
4	ANZ	38.0%	13.0%	- 25.0%	8
5	JET	75.0%	50.0%	- 25.0%	4
6	NAB	50.0%	25.0%	- 25.0%	8
7	WBC	50.0%	25.0%	- 25.0%	8
8	IGO	80.0%	60.0%	- 20.0%	5
9	DML	60.0%	40.0%	- 20.0%	5
10	ALS	50.0%	33.0%	- 17.0%	6

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	RMD	3.213	3.560	10.80%	8
2	ALS	1.698	1.830	7.77%	6
3	SUL	7.403	7.877	6.40%	7
4	BPT	1.320	1.402	6.21%	5
5	ANZ	23.255	24.524	5.46%	8
6	BRG	3.967	4.133	4.18%	3
7	WPL	40.286	41.579	3.21%	8
8	WBC	22.833	23.441	2.66%	8
9	BXB	7.715	7.834	1.54%	8
10	CSL	37.761	38.191	1.14%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	JET	0.890	0.768	- 13.71%	4
2	AGO	3.688	3.426	- 7.10%	8
3	OZL	12.236	11.634	- 4.92%	8
4	SAI	5.525	5.318	- 3.75%	8
5	WSA	6.067	5.858	- 3.44%	6
6	DML	1.740	1.700	- 2.30%	5
7	IGO	5.134	5.018	- 2.26%	5
8	NAB	26.630	26.314	- 1.19%	8
9	AMP	4.771	4.733	- 0.80%	8
10	IMD	2.887	2.867	- 0.69%	3

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	AWE	2.800	7.929	183.18%	7
2	AGO	5.738	11.975	108.70%	8
3	IOF	4.986	7.100	42.40%	7
4	BPT	8.540	9.420	10.30%	5
5	ROC	4.600	4.911	6.76%	5
6	WPL	239.591	252.379	5.34%	8
7	RMD	15.675	16.307	4.03%	8
8	CPA	7.243	7.514	3.74%	7
9	CTX	121.000	124.000	2.48%	6
10	AAD	11.800	12.000	1.69%	6

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	IGO	3.740	2.240	- 40.11%	5
2	HZN	1.120	0.945	- 15.63%	4
3	JET	7.525	6.600	- 12.29%	4
4	WHC	9.750	8.650	- 11.28%	6
5	AUT	31.852	28.324	- 11.08%	5
6	OZL	79.914	71.888	- 10.04%	8
7	AIZ	3.313	3.007	- 9.24%	4
8	SAI	26.500	24.375	- 8.02%	8
9	IMD	25.300	23.633	- 6.59%	3
10	TAP	3.275	3.100	- 5.34%	4

Technical limitations

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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

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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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The Short Report

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By Chris Shaw

Already one of the top 20 short positions on the Australian market, Myer ((MYR)) saw total shorts increase further for the week from April 10. Shorts rose to 12.92% from 11.57% previously, the market still dealing with weak conditions for the consumer discretionary sector.

Also in the top 20 and exposed to discretionary spending are the likes of JB Hi-Fi ((JBH)), David Jones ((DJS)), Billabong ((BBG)), Flight Centre ((FLT)) and Harvey Norman ((HVN)), with Myer now in the number two position. JB Hi-Fi remains the clear number one, shorts in the stock increasing for the week to 23.22% from 22.3% the week prior.

Others with significant short positions include Cochlear ((COH)), Lynas Corporation ((LYC)), Iluka ((ILU)) and Gunns ((GNS)).

Paladin ((PDN)) was the other stock where shorts rose by almost 1.0 percentage points, rising to 5.7% for the week from April 10 from 4.73% previously. The increase came leading into a quarterly production report that fell short of market expectations, while Paladin has at least addressed refinancing concerns with the announcement yesterday of a convertible bond issue.

The most significant change in shorts for the week from April 10 was in Beach Energy ((BPT)), where total positions fell to 2.04% from 6.11% previously as the market continues to adjust to Beach's capital raising last month.

Shorts in Charter Hall Office ((CQO)) also declined, falling to 0.03% from 1.46% previously as the company confirmed some consortium agreements and confirmed distribution guidance. Lynas was one of the few in the top 20 to enjoy a fall in short positions in the week from April 10, with a decline to 9.23% from 9.9% as at least one broker adjusted its model to account for delays to the LAMP project in Malaysia.

With respect to monthly changes from March 16 the largest increase was in Carsales.com ((CRZ)), positions rising to 11.47% from 6.32% previously. The gain has been a relatively constant one since the company announced it was taking a stake in New Zealand online retailer Torpedo7.

Shorts in Bathurst Resources ((BTU) rose in the month to 4.44% from 0.93% following a disappointing quarterly report and the fact there will be some delays to the Escarpment appeals process, while Paladin's shorts have increased over the month by a total of 2.20 percentage points.

Falls in monthly short positions were less pronounced, the largest a decline to 1.78% from 3.62% for Alkane ((ALK)), which came as the company acquired royalties over the Tomingly gold project.

RBS Australia notes short positions in GWA ((GWA)) have risen over the past week by more than one percentage point to 4.6%, the broker seeing this a reflection of still tough conditions in the housing market. With cuts to housing cycle forecasts and the expectation of a flatter cycle bottom a recovery for GWA and similar companies is likely to be more protracted than RBS had previously thought.

Others in the market pay be taking a similar view, as RBS notes short positions rose over the past week in the likes of CSR ((CSR)), BlueScope Steel ((BSL)) and GUD Holdings, all of which have some exposure to the housing market.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22957064	98850643	23.22
2	MYR	75484581	583384551	12.92
3	ISO	717405	5703165	12.58
4	CRZ	26824439	233684223	11.47
5	COH	6255238	56929432	11.00
6	FXJ	256447608	2351955725	10.91
7	DJS	55037981	524940325	10.47
8	FLT	9952226	100024697	9.92
9	BBG	25035585	255102103	9.80
10	LYC	158271121	1714496913	9.23
11	EGP	55781335	688019737	8.10
12	HVN	78167927	1062316784	7.33
13	GNS	61500887	848401559	7.24
14	WTF	14124172	211736244	6.65
15	ILU	26552271	418700517	6.33
16	TRS	1573891	26071170	6.06
17	TEN	62123783	1045236720	5.93
18	CSR	29830093	506000315	5.89
19	SGT	9466583	165074137	5.74
20	PDN	47575816	835645290	5.70

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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.

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Ausdrill Winning Admirers

- UBS initiates coverage of Ausdrill with a Buy rating
- Buy rating supported by solid earnings growth expectations
- Earnings risk to the upside in the view of UBS

By Chris Shaw

Ausdrill is a diversified mining services company, providing services in contract mining, grade control, drill and blast, exploration, mineral analysis, procurement and logistics and manufacturing. Ausdrill operates in Australia, Africa and the UK.

Prior to this week, four of the five brokers in the FNArena database already covering the stock rated Ausdrill as a Buy. The positive views have been added to today with UBS initiating coverage with a Buy rating and $5.00 price target. This compares to a consensus price target according to the database of $4.55, ranging from BA Merrill Lynch at $4.20 to UBS at $5.00.

Supporting the positive view of UBS is the expectation Ausdrill will deliver compound earnings per share (EPS) growth of 24% over the period of FY11 to FY14. This reflects UBS's positive view of an uplift in commodity production, which bodes well for Ausdrill given 85% of the company's revenues are generated from production related activities.

For UBS, earnings risk for Ausdrill is to the upside with the broker currently 7-8% above consensus EPS estimates in both FY13 and FY14. UBS's EPS forecasts stand at 36c this year and 45c in FY13, while consensus numbers according to the FNArena database are 36.7c and 41.4c respectively.

With the company well positioned in both Australia and Africa, UBS expects positive revisions to market forecasts going forward. What should support increases to expectations according to UBS is Ausdrill's ability to generate higher margins from incremental revenues as the company invests additional capital in its business.

In the view of JP Morgan, Ausdrill's interim result in February showed management has done a good job in terms of boosting returns via investing additional capital in both Australia and Africa. With a still strong balance sheet the company is well placed to continue this investment, which supports further earnings growth in JP Morgan's view.

RBS Australia agrees, taking the view while capex is set to increase significantly over the next year or so this is justified by the opportunities available to grow earnings via this capex spend. At the same time, RBS suggests good earnings visibility for Ausdrill justifies a higher share price.

Based on its earnings growth expectations, UBS suggests an earnings multiple for Ausdrill of 11 times in FY13 is appropriate. While this would be a premium of 18% relative to the current sector average multiple it would be justified by the earnings growth on offer. As well, UBS suggests the premium would reduce as the sector in general is re-rated.

The one Hold rating in the FNArena database comes from BA-ML, who downgraded Ausdrill from a Buy in February following the group's interim profit result. While the result was better than expected the issue for BA-ML is valuation, even allowing for a continuation of positive operating leverage.

In a weaker market today shares in Ausdrill are slightly lower. At 10.30am the shares were down 1.5c at $4.175, which compares to a range over the past year of $2.52 to $4.34 and implies upside of a little more than 8% relative to the consensus price target in the database.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has been a busy period for changes in broker ratings as the eight brokers in the FNArena database have upgraded recommendations on 12 stocks while downgrading a further 14. This means the trend of more downgrades than upgrades continues. Total Buy ratings now stand at 50.59%.

The only stock receiving multiple upgrades was Energy Resources of Australia ((ERA)), where both BA Merrill Lynch and UBS have moved to Buy ratings from Sell previously. The rating upgrades reflect a more positive view post an update by the company on the progress of operations at Ranger.

BA-ML has also upgraded Alacer Gold ((AQG)) to Buy from Sell, reflecting the broker's view the market is at present too concerned about the group's Australian assets, to the point value is emerging at current levels.

Interim earnings from Australian Pharmaceutical ((API)) were good enough for Macquarie to lift earnings estimates and its price target, the latter change enough to justify an upgrade to a Buy rating from Neutral previously. Across the market earnings estimates and price targets were adjusted post the result.

Following a strategy update by the bank UBS has upgraded Commonwealth Bank ((CBA)) to Buy from Neutral, as the broker sees strategy execution delivering relative outperformance. UBS has also lifted its price target post the update.

UBS similarly upgraded CSL ((CSL)) to Buy from Neutral on news Baxter faces delays with its HyQ product that should provide something of an earnings boost to CSL. Other brokers covering the stock have revised earnings expectations and price targets on the news.

News Fleetwood ((FWD)) will build an accommodation village in Gladstone was enough for RBS to upgrade to a Buy rating from Hold previously, as the expectation is this will deliver an earnings boost from FY14.

Credit Suisse sees value in Perseus ((PRU)) post a solid quarterly production report where output was solid and costs fell, while increases to earnings estimates for Tatt's ((TTS)) from higher win rates on fixed odd bets are enough for the broker to move to a Neutral rating from Sell previously.

While not changing its earnings forecasts Macquarie has upgraded UGL ((UGL)) to Buy from Neutral, the broker suggesting ongoing contract wins and the continued integration of DTZ will act as catalysts for the stock in coming months.

On the downgrades side, UBS has cut its rating on AMP ((AMP)) to Neutral from Buy on valuation grounds post a review of its model, while JP Morgan has similarly downgraded Aristocrat Leisure ((ALL)) on the back of recent share price strength.

For the same reason RBS has downgraded Automotive Holdings ((AHE)) to Hold from Buy, while Credit Suisse has similarly downgraded Caltex ((CTX)) to Neutral from Buy given recent share price strength.

Centro Retail ((CRF)) has been downgraded to Neutral from Overweight by JP Morgan on news the company is to sell some of its assets, as while the group's balance sheet will be strengthened overall asset quality will be reduced, in the view of JP Morgan.

BA-ML suggests it is getting tougher for Newcrest ((NCM)) to achieve production guidance this year and this implies consensus earnings estimates are too high. For the broker this is enough reason to downgrade to Neutral from Buy. Newcrest will release its March quarter production report in the week ahead.

While domestic market conditions are supportive, conditions for Nufarm ((NUF)) in other markets are more difficult and this has prompted Citi to downgrade its rating to Sell from Neutral, while Spark Infrastructure's ((SKI)) proposed expansion away from electricity via (an attempt to) taking a stake in the Sydney desalination plant is not a great move in the view of Macquarie. The broker downgrades to Neutral from Buy.

The most downgrades were applied to Westfield Group (WDC)) as UBS, Credit Suisse and Deutsche Bank have all lowered ratings to Neutral from Buy. Westfield has announced plans to sell non-core assets and this news has been well received, but valuation has been the key driver behind the cuts in ratings.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	ALACER GOLD CORP	Sell	Buy	BA-Merrill Lynch
2	AUSTRALIAN PHARMACEUTICAL INDUSTRIES	Neutral	Buy	Macquarie
3	COMMONWEALTH BANK OF AUSTRALIA	Neutral	Buy	UBS
4	CSL LIMITED	Neutral	Buy	UBS
5	ENERGY RESOURCES OF AUSTRALIA	Sell	Buy	BA-Merrill Lynch
6	ENERGY RESOURCES OF AUSTRALIA	Sell	Buy	UBS
7	FLEETWOOD CORPORATION LIMITED	Neutral	Buy	RBS Australia
8	PERSEUS MINING LIMITED	Neutral	Buy	Credit Suisse
9	ST BARBARA LIMITED	Sell	Neutral	Macquarie
10	TATTS GROUP LIMITED	Sell	Neutral	Credit Suisse
11	UGL LIMITED	Neutral	Buy	Macquarie
12	WOODSIDE PETROLEUM LIMITED	Neutral	Buy	Credit Suisse
Downgrade
13	AMP LIMITED	Buy	Neutral	UBS
14	ARISTOCRAT LEISURE LIMITED	Buy	Neutral	JP Morgan
15	AUTOMOTIVE HOLDINGS GROUP LIMITED	Buy	Neutral	RBS Australia
16	BANK OF QUEENSLAND LIMITED	Sell	Sell	Macquarie
17	CALTEX AUSTRALIA LIMITED	Buy	Neutral	Credit Suisse
18	CENTRO RETAIL AUSTRALIA	Neutral	Neutral	JP Morgan
19	COMMONWEALTH BANK OF AUSTRALIA	Sell	Sell	Macquarie
20	NEWCREST MINING LIMITED	Buy	Neutral	BA-Merrill Lynch
21	NUFARM LIMITED	Neutral	Sell	Citi
22	PALADIN ENERGY LTD	Sell	Sell	Macquarie
23	SPARK INFRASTRUCTURE GROUP	Buy	Neutral	Macquarie
24	WESTFIELD GROUP	Buy	Neutral	UBS
25	WESTFIELD GROUP	Buy	Neutral	Credit Suisse
26	WESTFIELD GROUP	Buy	Neutral	Deutsche Bank

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	ERA	- 63.0%	- 13.0%	50.0%	8
2	SBM	- 67.0%	- 33.0%	34.0%	3
3	AQG	57.0%	86.0%	29.0%	7
4	PRU	20.0%	40.0%	20.0%	5
5	FWD	20.0%	40.0%	20.0%	5
6	WPL	25.0%	38.0%	13.0%	8
7	DJS	- 63.0%	- 50.0%	13.0%	8
8	CBA	- 25.0%	- 13.0%	12.0%	8
9	PNA	63.0%	75.0%	12.0%	8
10	CSL	63.0%	75.0%	12.0%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	SVW	75.0%	50.0%	- 25.0%	4
2	AHE	75.0%	50.0%	- 25.0%	4
3	CTX	33.0%	17.0%	- 16.0%	6
4	EGP	63.0%	50.0%	- 13.0%	8
5	AMP	63.0%	50.0%	- 13.0%	8
6	NCM	75.0%	63.0%	- 12.0%	8

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	ERA	1.394	1.580	13.34%	8
2	CSL	36.273	37.758	4.09%	8
3	SBM	2.197	2.267	3.19%	3
4	SVW	10.925	11.235	2.84%	4
5	AQG	10.219	10.504	2.79%	7
6	AHE	2.655	2.710	2.07%	4
7	VAH	0.473	0.476	0.63%	7
8	EGP	4.498	4.523	0.56%	8
9	CBA	51.030	51.301	0.53%	8
10	FWD	13.512	13.546	0.25%	5

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	PRU	3.414	3.304	- 3.22%	5
2	NCM	40.003	38.753	- 3.12%	8
3	PNA	4.095	3.980	- 2.81%	8
4	AMP	4.834	4.771	- 1.30%	8

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	MCR	1.100	2.967	169.73%	3
2	TCL	13.443	14.386	7.01%	7
3	WPL	225.310	238.645	5.92%	8
4	STO	67.488	71.288	5.63%	8
5	IAG	24.075	25.100	4.26%	8
6	TAP	3.100	3.200	3.23%	4
7	API	4.114	4.214	2.43%	5
8	PNA	34.769	35.316	1.57%	8
9	CGF	46.329	47.014	1.48%	7
10	SBM	35.800	36.300	1.40%	3

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	GBG	0.800	- 0.943	- 217.88%	6
2	BOQ	28.938	15.663	- 45.87%	8
3	BCI	48.767	41.100	- 15.72%	3
4	CRF	10.383	8.850	- 14.76%	6
5	WHC	14.383	12.467	- 13.32%	6
6	GRR	10.900	9.467	- 13.15%	6
7	SVW	87.780	79.960	- 8.91%	4
8	PRU	15.940	14.533	- 8.83%	5
9	ILU	241.900	224.113	- 7.35%	8
10	VAH	3.033	2.857	- 5.80%	7

Technical limitations

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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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