Tag Archives: Other Industrials

The Short Report

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By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

Top 20 Largest Short Positions

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

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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

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

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

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

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

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

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

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

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

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

Recommendation

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Target Price

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Earning Forecast

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

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Programmed Back On Acquisition Trail

- Programmed acquires Turnpoint Group
- Deal will expand Programmed's group maintenance operations
- Should be earnings accretive in FY13
- Stockbroker ratings remain positive on Programmed

By Chris Shaw

Programmed Maintenance Services ((PRG)) has announced it will acquire Turnpoint Group, a provider of landscaping, construction and maintenance services for golf and horse racing courses and major sports stadiums around Australia.

The deal will cost Programmed $9 million, with earn-out incentives worth up to a further $2.9 million included in the transaction, with funds for the deal to come from Programmed's existing debt facilities. Gearing should rise to around 23% from 21% previously on Citi's numbers.

Given Turnpoint delivered earnings before interest and tax of around $3 million in FY11, the deal has been priced at a multiple of 3-4 times trailing earnings. Credit Suisse suggests the deal is a positive in the sense Turnpoint should be easily absorbed into Programmed's existing ground maintenance operations. This supports expectations of a positive earnings outlook for Programmed in general.

As Credit Suisse notes, there is potential for earnings growth from restructuring initiatives, better cost control in more mature businesses and new contract wins in the Marine business in particular. The Turnpoint acquisition adds nicely to this outlook in the broker's view.

The deal is also important from a strategic sense notes Citi, as it signals a return to acquisitions for Programmed. From 2008-2010 Programmed had made a number of purchases but the last was more than two years ago when KLM Group was acquired.

Market estimates suggest Programmed's earnings will receive a boost from the deal by FY13, with Credit Suisse seeing accretion of 2-3% in that year and Macquarie suggesting the boost could be as much as 5%.

On news of the Turnpoint acquisition securities brokers covering Programmed have adjusted earnings estimates. Changes have not been uniform though, as while Credit Suisse has lifted forecasts for FY13 by just under 2.0% Macquarie has actually lowered its numbers by a similar amount.

In Macquarie's view the outlook for Programmed's property maintenance operations will remain patchy, while Marine operations' earnings are expected to flatten out by FY13 as non-Gorgon related work secured in FY12 begins to roll off.

Post its changes, Macquarie is forecasting earnings per share (EPS) for Programmed of 23.4c in FY12 and 27.3c in FY13, while Credit Suisse is forecasting EPS of 25.9c and 31.9c respectively. Consensus EPS estimates according to the FNArena database stand at 25.4c for FY12 and 30.5c for FY13.

Along with adjustments to its earnings estimates, Macquarie has revised its price target for Programmed to $2.71 from $2.56. This lifts the consensus target for the stock to $2.56 from $2.48, with a range of $2.34 to $2.80.

Ratings remain positive, as the FNArena database shows Programmed scores six Buy ratings compared to just one Neutral recommendation. Macquarie's Buy argument is supported by the view earnings for Programmed have based and there will be steady improvement in coming years. Credit Suisse is also attracted to the improving balance sheet at Programmed, seeing this as providing more utility with respect to achieving earnings growth going forward.

Citi on the other hand suggests while the Turnpoint deal is a return to growth via acquisition, investors should not expect this trend will continue as the deal appears to be an opportunistic one rather than the start of a series of acquisitions. Given this, the broker retains a Neutral rating on the stock on valuation grounds.

Shares in Programmed today are weaker in an overall weaker environment. As at 12.45pm the stock was down 7c at $2.43. This compares to a trading range over the past year of 1.63 to $2.59, the current share price implying upside of about 5% 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

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

Recommendation

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Target Price

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Earning Forecast

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

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Weekly Broker Wrap: Getting Better, With Ongoing Headwinds

By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Deutsche Predicts Earnings Boost For Ardent Leisure

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

By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

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

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

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

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

Recommendation

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Target Price

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Earning Forecast

Positive Change Covered by > 2 Brokers

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

Negative Change Covered by > 2 Brokers

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

Technical limitations

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Weekly Broker Wrap: Double Digit Returns, Plus Dividend Opportunities

By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Strong Growth Outlook For Decmil

- Decmil set for solid earnings growth
- Exposure to managed village sector offers upside
- Moelis sees value at current levels
- Other brokers to cover the stock also rate Decmil a Buy

By Chris Shaw

While mining service companies have been of particular interest to investors in recent months, Moelis notes those offering accommodation villages among their services have been priced at a premium to broader mining services exposures.

For Moelis this suggests a positive outlook for Decmil Group ((DCG)), as there appears to be upside with the Calliope village near Gladstone contributing a greater proportion of group earnings going forward. Moelis rates Decmil a Buy, with a price target of $3.30.

With respect to the Calliope village, Moelis notes expansion plans continue to suggest the planned 2,265 rooms will be installed by April of next year. Revenues for Decmil will come from both the construction contract and a 50% ownership stake, with Moelis forecasting a room rate of around $110 per night.

Feedback from management at Decmil suggests this may be a conservative estimate in terms of per room per night revenues. This offers some upside risk to earnings estimates for the division, as Moelis points out an average rate of $150 per night would add 10% for FY14 earnings per share (EPS) forecasts.

Elsewhere, Decmil should generate revenue growth from additional contracts in the LNG, coal and iron ore sectors. Moelis estimates there are around $4.0 billion of such contracts to be awarded over the coming year, with Decmil winning $280 million in new work and extensions in 1H12.

Growing credibility in the civil sector will help, Moelis suggesting a recent preferred contractor agreement with Rio Tinto ((RIO)) for 333 Program civil works will assist in boosting Decmil's status in the market.

For the current year Moelis anticipates a strong second half for Decmil, with revenues for the full year expected to increase by more than $500 million. This supports Moelis's model for solid earnings growth in coming years, as EPS are expected to increase from the 18.7c recorded in FY11 to 20.1c this year and 24.1c in FY13.

This compares to consensus EPS forecasts according to the FNArena database of 21.2c in FY12 and 24.4c in FY13.

For Moelis, the combination of a justifiable premium for village earnings and solid earnings growth in general for Decmil is enough to justify a Buy rating on the stock. This is especially the case as the broker's EPS forecasts for FY13 imply an earnings multiple for that year of 11.8 times, which is below peers offering managed accommodation as part of their business such as Fleetwood ((FWD)) and the recently acquired Mac Services.

Also supportive of Moelis's positive view on Decmil is a strong financial position, as cash on hand at the end of 1H12 was $107.7 million and debt was just under $17 million. Cash on hand increased from $64.4 million at the end of FY11.

Others in the market agree Decmil has a positive outlook, as both Deutsche Bank and RBS Australia rate Decmil as a Buy, Deutsche having initiated coverage on the stock earlier this month. As well as the scope for earnings growth in coming years, Deutsche is attracted to the recurring nature of earnings in Decmil's construction operations.

Part of the attraction for RBS is Decmil continues to grow from what was a WA-centred company initially to one well on the way to operating nationally, while still maintaining earnings growth through this expansion.

While RBS is more conservative with a price target for Decmil of $2.99, Deutsche's3.25 target is much closer to the target set by Moelis.

Shares in Decmil today are unchanged with a last sale price of $2.83. This implies upside of around 10% relative to the consensus price target in the FNArena database and compares to a trading range over the past year of $1.725 to $3.85.

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Time To Own UGL, Says Goldman Sachs

- UGL has underperformed over the past 12 months
- A recovery in earnings growth should reverse this trend
- Goldman Sachs reiterates a Buy rating

By Chris Shaw

A lack of earnings growth and some uncertainty with respect to the recent DTZ acquisition has contributed to UGL Ltd ((UGL)) underperforming the market over the past 12 months. As noted by Goldman Sachs, UGL generated earnings growth of around 9% in FY11 and is on course for growth of about 5% this year, well below others in the engineering and contracting sector.

The stockbroker predicts double-digit earnings growth will return from FY13 onwards, helped in part by some signs of improvement at DTZ. This is important, as the DTZ acquisition increased UGL's exposure to property services. This created some confusion in the market as to whether UGL was an engineering services provider or a property services company.

The combination of a better growth outlook and improvements at DTZ leads Goldman Sachs to suggest now is the time to reconsider the stock.

Driving the anticipated improvement in earnings should be further growth in the underlying business and a turnaround at DTZ, with margins expected to improve in coming periods. Assuming such an improvement, the business should contribute EBITA (earnings before interest, tax and amortisation) of $20-$25 million in FY13, which is meaningful from a group earnings perspective.

There are potentially some additional shorter-term catalysts for UGL. A frigate maintenance contract has already been won and is a positive for sentiment, while Goldman Sachs notes the group is tendering for some structural, mechanical and piping contracts with BHP Billiton ((BHP)) in Western Australia and appears well placed to possibly win one of these contracts.

Goldman Sachs is forecasting earnings growth in FY13 of 15% and in FY14 of 13%. In earnings per share (EPS) terms this translates to 120.5c in FY13 and 136.2c in FY14, up from a forecast 90.5c this year. By way of comparison, consensus EPS forecasts for UGL according to the FNArena database stand at 103.8c in FY12 and 116.5c in FY13.

On the forecasts of Goldman Sachs, UGL is trading on a FY13 earnings multiple of 10.5 times at current levels. This appears attractive assuming earnings growth does return to double-digit levels in that year.

During its recent underperformance UGL appears to have been used as a funding stock for other investments in the sector with better short-term earnings potential. Goldman Sachs sees scope for this trend to reverse in coming months as the market begins to price in the improved earnings growth outlook from FY13.

Post a review Goldman Sachs has retained its price target on UGL of $15.50, which compares to a consensus price target according to FNArena's database of $14.31. Targets in the database range from RBS Australia at $13.02 to Citi at $15.26.

Given an expected 12-month total return from UGL of around 28%, Goldman Sachs continues to rate the stock as a Buy. Most in the database agree, as UGL is rated as Buy five times compared to two Hold ratings.

Credit Suisse is one of the brokers with a Buy on UGL, having upgraded from a Neutral rating earlier this month. The upgrade followed a sector review that generated some positive earnings revisions and was enough for the broker to list UGL as its preferred sector exposure.

Shares in UGL today are higher and as at 10.50am the stock was up 2c at $12.70. This compares to a range over the past year of $10.95 to $16.48. The current share price implies upside of around 13% relative to the consensus price target in the FNArena database.

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