Tag Archives: Other Industrials

Neptune Marine – A Turnaround Story

- Neptune Marine a turnaround story
- New management has company on a solid financial footing
- Growth to be supported by exposure to solid industry outlook
- DJ Carmichael initiates with Spec Buy rating

By Chris Shaw

Neptune Marine ((NMS)) provides engineered solutions to the oil and gas, marine and renewable energy industries, but unlike many in the space has had a tough time in recent years as an aggressive acquisition program prior to the GFC almost brought the company undone.

Stockbroker DJ Carmichael, which has initiated coverage on Neptune Marine with a Speculative Buy rating, points out the expansion led to a blowout in net debt but didn't deliver any consistent increase in earnings. The acquisitions also generated a significant increase in corporate costs.

This weakened the balance sheet and has subsequently forced Neptune Marine to repair its financial position via asset sales and a highly dilutive capital raising earlier this year. As part of the raising Singapore based MTQ Corporation emerged with an 11.5% stake in the company, which has since increased to 15.3%.

The capital raising was undertaken at 5c per share and along with the asset sales left Neptune Marine in a net cash position at the end of FY11. Net tangible assets as at the end of FY11 were 3.1c, which is broadly in line with the current share price.

As well as a financial restructuring there have been changes made to the board and management team at Neptune Marine over the past year. The main change was the appointment of Robin King as CEO last November, DJ Carmichael noting he has more than 28 years experience in the oil and gas sector.

New management introduced a turnaround plan and DJ Carmichael notes to date this plan is proceeding on track, as underlying operations appear to have stabilised. This means while there is still some potential for further write-downs in coming years, management should be able to focus on growing the business moving forward.

What should help in this regard is a positive operating environment, as Australia in particular has a significant amount of oil and gas related activity under way at present.

Neptune Marine's strategy will be to generate organic growth and growth of service lines in established geographical regions, while integrating services as part of a 'Total Service Solutions' model. This will require the development of strategic relationships with key partners.

In the view of DJ Carmichael, progress in this respect has been solid to date, as results from both the Offshore Services and Engineering Services divisions have shown stable performance from ongoing operations.

This sees DJ Carmichael forecast earnings per share (EPS) of 0.48c this year and 0.63c in FY13. There is potential for earnings to come in above these numbers, as the broker notes management sees scope for margins to eventually return to levels well above the levels projected by DJ Carmichael.

On the forecasts of DJ Carmichael, Neptune Marine is trading on a FY12 earnings multiple of 5.8 times. While the company is clearly a turnaround story, the relatively attractive multiple and the improved financial position of the company suggest a speculative buying opportunity. This is especially the case given the share price remains well below the price at which capital was raised earlier this year.

Any sale of the US Underwater Services business would likely be a positive catalyst for the share price suggests the stockbroker, while a further potential catalyst is scope for M&A activity involving Neptune Marine, This is a possibility given management noted in August an unsolicited proposal for the company had been received.

Shares in Neptune Marine today are higher and as at 11.15am the stock was up 0.4c at 3.2c. This compares to a range over the past year of 2c to 23.5c. DJ Carmichael has a target on Neptune Marine of 4.5c.

The current share price implies a market capitalisation of around $50 million, which is small enough to mean the stock is not covered by any of the eight brokers in the FNArena database.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

In a change from the recent pattern, the last week has seen broker downgrades outnumber upgrades by a score of seven to three based on recommendations by the eight brokers in the FNArena database. This brings total Buy ratings to 59.3%, down slightly from 59.5% last week.

Fund manager Henderson Group ((HGG)) enjoyed one of the upgrades courtesy of Macquarie, the broker moving to Neutral from Underperform to reflect improved value following recent share price weakness. This has offset ongoing weakness in fund flows thanks to still tough equity market conditions. Macquarie is also attracted to the yield of 6%.

Macquarie also upgraded Tabcorp ((TAH)) to Neutral from Underperform following a trading update that supports the view the stock offers value around current levels. A move to a more positive rating is not justified in the broker's view given overhanging uncertainty of compensation relating to claims in the Victorian market. Earnings estimates have been trimmed as part of the review.

Among resource stocks Credit Suisse has upgraded to an Outperform rating on Western Areas ((WSA)) from Neutral, this due to revisions to earnings and price target on the back of changes to nickel price expectations.

Credit Suisse has also upgraded CSL to Outperform from Neutral following changes to foreign exchange assumptions. Again, there have been related changes to earnings forecasts and price target. Charter Hall Office ((CQO)) has been upgraded by UBS to Buy from Neutral, as while a consortium bidding for the stock has lifted its offer there remains scope for a revised offer closer to net tangible asset backing.

On the downgrade side, Credit Suisse has lowered its rating on Navitas ((NVT)) to Neutral from Outperform to reflect a full valuation. While the Knight Review offered some positives the broker notes earnings are unlikely to be impacted prior to FY13. This suggests a full short-term valuation.

A rights issue announced by Energy Resources of Australia ((ERA)) has prompted Deutsche Bank to downgrade the stock to Hold from Buy. Not only was the issue a surprise but Deutsche notes even if the key Ranger 3 Deeps project goes ahead, it will be one of the world's most expensive uranium mines.

Deutsche has sliced its price target as well on the news, while other brokers in the market similarly lowered both targets and earnings forecasts to reflect the dilution to earnings per share from the capital raising.

A downgrade to earnings guidance by Fletcher Building ((FBU)) given ongoing difficult operating conditions has seen brokers lower earnings forecasts and price targets. Macquarie has gone a step further, downgrading to Neutral from Outperform on valuation grounds, as any recovery in earnings appears set to take some time.

James Hardie ((JHX)) is another building materials group to suffer a downgrade, JP Morgan moving to an Underweight rating from Neutral on the back of lower earnings forecasts. Price target also comes down as the broker sees little chance of strong performance relative to the sector in the current market.

Brokers ceasing coverage have also been a feature this week, with both Macquarie and JP Morgan stopping coverage on ConnectEast ((CEU)) given shareholder approval of a takeover offer. Macquarie has also dropped coverage on Minara ((MRE)).

With respect to earnings, an increase to long-term iron ore price assumptions by Credit Suisse has had a positive impact on expectations for Gindalbie ((GBG)). Forecasts for Paladin ((PDN)) have been adjusted to reflect an equity issue that has also meant changes in price targets, while changes to gold price assumptions have impacted on earnings estimates for Newcrest ((NCM)).

BA Merrill Lynch rolled forward its model for Caltex ((CTX)) and this has prompted some increases in estimates, while higher margin assumptions saw Citi also lift its numbers for the stock. Virgin Blue ((VBA)) also saw an upgrade to forecasts from Macquarie as the company is seen as a beneficiary of the issues at Qantas ((QAN)).

Forecasts for Alumina ((AWC)) have come down slightly thanks to a lower than expected 3Q earnings result from Alcoa, while a slower project ramp up has contributed to Macquarie trimming its numbers for Beach ((BPT)).

For Perpetual ((PPT)), a move to outsource some back office functions will impact on earnings in the medium-term, prompting JP Morgan to lower its forecasts and price target. Others have similarly adjusted estimates to reflect weak market conditions.

Conditions also remain tough for Oakton ((OKN)) and brokers have reacted to AGM commentary by trimming earnings estimates, which has also brought about a trimming in price targets.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	HENDERSON GROUP PLC.	Sell	Neutral	Macquarie
2	TABCORP HOLDINGS LIMITED	Neutral	Neutral	Macquarie
3	WESTERN AREAS NL	Neutral	Buy	Credit Suisse
Downgrade
4	ENERGY RESOURCES OF AUSTRALIA	Neutral	Sell	UBS
5	FLETCHER BUILDING LIMITED	Buy	Neutral	Macquarie
6	JAMES HARDIE INDUSTRIES N.V.	Neutral	Sell	JP Morgan
7	NAVITAS LIMITED	Buy	Neutral	Credit Suisse

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	HGG	60.0%	80.0%	20.0%	5
2	WSA	33.0%	50.0%	17.0%	6
3	CQO	29.0%	43.0%	14.0%	7
4	PNA	75.0%	88.0%	13.0%	8
5	CSL	50.0%	63.0%	13.0%	8
6	TAH	13.0%	25.0%	12.0%	8
7	CPA	- 17.0%	- 14.0%	3.0%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	GPT	67.0%	50.0%	- 17.0%	6
2	CER	50.0%	33.0%	- 17.0%	3
3	NVT	43.0%	29.0%	- 14.0%	7
4	CQR	43.0%	29.0%	- 14.0%	7
5	ERA	- 25.0%	- 38.0%	- 13.0%	8
6	FBU	50.0%	38.0%	- 12.0%	8
7	JHX	50.0%	38.0%	- 12.0%	8
8	MRE	- 25.0%	- 33.0%	- 8.0%	3
9	CAB	67.0%	60.0%	- 7.0%	5
10	CEU	- 17.0%	- 20.0%	- 3.0%	5

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	CQO	3.426	3.568	4.14%	7
2	WSA	6.325	6.400	1.19%	6
3	CSL	33.249	33.499	0.75%	8
4	TAH	3.356	3.375	0.57%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	ERA	4.650	3.795	- 18.39%	8
2	PNA	4.591	4.348	- 5.29%	8
3	CAB	5.627	5.426	- 3.57%	5
4	HGG	2.624	2.574	- 1.91%	5

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	GBG	0.614	1.014	65.15%	6
2	OGC	15.388	18.697	21.50%	3
3	PDN	1.672	1.753	4.84%	7
4	NCM	208.971	217.229	3.95%	8
5	PRU	24.600	25.433	3.39%	6
6	CTX	110.900	113.550	2.39%	6
7	WHC	37.950	38.750	2.11%	5
8	TCL	12.157	12.400	2.00%	7
9	AIZ	10.326	10.524	1.92%	4
10	VBA	2.571	2.614	1.67%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	ROC	0.259	- 0.169	- 165.25%	4
2	MRE	5.400	3.500	- 35.19%	3
3	CER	4.250	3.633	- 14.52%	3
4	AWC	6.832	6.009	- 12.05%	8
5	BPT	5.280	4.780	- 9.47%	5
6	FBU	49.214	46.293	- 5.94%	8
7	PPT	169.614	160.486	- 5.38%	7
8	PAN	17.325	16.450	- 5.05%	4
9	OKN	20.300	19.420	- 4.33%	5
10	IGO	25.294	24.334	- 3.80%	5

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Fleetwood Update Confirms Good News Story

- Fleetwood management presented to DJ Carmichael
- Update suggests solid growth should continue
- Further increases in dividends also expected
- DJ Carmichael rates the stock as Accumulate

By Chris Shaw

Manufactured accommodation and recreational vehicles group Fleetwood ((FWD)) has for some time been viewed positively by the market, as evidenced by the FNArena database showing three Buy ratings compared to two Hold recommendations. DJ Carmichael is not in the database but is also positive, rating Fleetwood as Accumulate (one notch below Buy).

DJ Carmichael points out this positive view of brokers has been justified by returns to investors. Since Steve Price took over as CEO of Fleetwood in March of 2010, the stock has delivered a total return of 54% against a 6% decline in the broader All Ordinaries Accumulation index.

Earlier this week Price presented to DJ Carmichael, offering an update on market conditions for Fleetwood at present. In the manufactured accommodation sector demand from resource and oil and gas clients continues to grow steadily and some contracts are being issued, something DJ Carmichael suggests is a positive for the sector in general.

A positive for Fleetwood specifically is the recently announced contract with BHP Billiton ((BHP)), as DJ Carmichael suggests this can provide a strong base level of work over the next five years given the growth plans outlined by The Big Australian.

The BRB Modular business acquired in August of last year also continues to perform solidly. DJ Carmichael sees ongoing growth potential for this division as there is scope for the horizontal expansion of BRB products into Western Australia as well as Fleetwood products into East Coast markets.

At the Searipple accommodation village in Karratha demand for 1H12 should remain firm, though a softening is then expected as a contract with Woodside ((WPL)) winds down. Even allowing for lower demand, the good location of the asset suggests continued benefits from ongoing activity in the region, notes the stockbroker.

For the recreational vehicles side of the business the order book remains solid, though DJ Carmichael notes demand for caravans has softened slightly of late given delays to purchasing decisions.

An ongoing attraction of Fleetwood according to DJ Carmichael is the generation of significant free cash flow, which has allowed for increases to dividends for the last 14 years. This trend is expected to continue, investors currently enjoying a fully franked yield of around 6.5%.

In summary, DJ Carmichael suggests Fleetwood should continue to expand its operations into the future, which means ongoing earnings growth and dividend increases. Short-term there are potential catalysts such as additional contract wins on projects such as Gorgon's Wheatstone development and DJ Carmichael expects these will help offset some of the impact of recent market volatility.

Shares in Fleetwood today are slightly weaker in an overall weaker share market. As at 10.40am the stock was down 12c at $11.78. This compares to a trading range over the past year of $9.53 to $14.25. The current share price implies upside of around 6% to the consensus price target in the FNArena database of $12.60.

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Unusual GR Engineering Looks Strong

- GR Engineering a small cap engineering and project management specialist
- Unusual business model offers advantages, according to Macquarie
- New contract wins mean most of forecast FY12 revenue in hand
- Macquarie retains Outperform rating

By Chris Shaw

GR Engineering ((GNG)) is a Perth based company specialised in engineering, project management, design and construction. With a market capitalisation of a little under $300 million there is little attention paid to GR Engineering by the broader market, as the FNArena database shows only Macquarie offers coverage of the stock.

Macquarie rates GR Engineering as Outperform, attracted in part to what is seen as an unusual model for an engineering company. As Macquarie notes, GR Engineering is mainly an EPC or lump sum rather than an EPCM or cost plus company in terms of how it contracts its business.

It is the stockbroker's view this means GR Engineering has limited direct competition. It also gives management greater insight into cost, scheduling and design issues. This supports margins and return on equity, which Macquarie estimates were 19.9% in earnings before interest and tax terms for the former and better than 50% for the latter.

The business structure also makes GR Engineering's capex light, something Macquarie suggests should support a future dividend payout ratio of 50-60%. Low capex requirements also means a solid financial position, Macquarie estimating net cash on balance sheet stands at around $35 million at present.

Given a positive outlook for capital spending in the gold and base metals sectors and geographic opportunities open to GR Engineering, Macquarie expects solid earnings growth in coming years. Earnings per share (EPS) forecasts currently stand at 15.8c for FY12 and 7.5% for FY13.

GR Engineering on Friday announced $55 million in new work across three jobs, two in Australia and one in West Africa. Macquarie estimates this means almost all of expected revenue for FY12 of about $164 million is now in hand. EPS forecasts are unchanged as Macquarie had factored new contract wins into its numbers.

Earnings estimates may yet prove conservative, as GR Engineering is currently working on 25 studies, of which 10 are late stage studies. Macquarie estimates these late stage studies could convert into $900 million in EPC work.

This is apart from the potential $360 million in work from the Moly Mines project previously announced with China's CACS Corporation. The solid medium-term growth potential for GR Engineering from additional contract work is the other driver of Macquarie's positive view.

Shares in GR Engineering have traded inside a trading range over the past year of $1.65 to $2.30.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The first week of October has again brought more ratings upgrades than downgrades by the eight brokers in the FNArena database, the six upgrades double the number of downgrades in the period. Total Buy ratings now stand at 59.5%, up from 59% previously.

Citi upgraded Mirvac ((MGR)) to a Buy to reflect the view that management's moves to reposition the portfolio imply negative risks at the property developer are reducing. This is especially the case given a high level of earnings through FY14 have already been secured, adds the stockbroker.

Charter Hall Office ((CQO)) is another property play to score an upgrade, UBS lifting its recommendation to Buy given the view an offer for the company at closer to net tangible asset backing could still emerge.

For CSL ((CSL)), changes to foreign exchange assumptions by Credit Suisse have been enough to justify an upgrade to an Outperform rating. This reflects increased upside potential relative to a price target that has also been revised higher.

Both Tabcorp ((TAH)) and Alumina ((AWC)) have enjoyed upgrades on valuation grounds, the former from Macquarie and the latter from Citi. Tatts ((TTS)) has also been upgraded to Hold by Citi, this due to higher earnings estimates and an increased price target thanks to higher ticket sales from the introduction of Saturday Lotto Six.

BHP Billiton ((BHP)) has similarly been upgraded to Outperform by Credit Suisse as recent share price weakness is pricing in overly pessimistic commodity price reductions in the broker's view. An initiation of coverage for Campbell Brothers ((CPB)) with a Buy rating by Merrill Lynch has lifted overall ratings for that company. BA-ML's initiation includes earnings estimates 8-16% above consensus through FY14.

On the downgrade side, Credit Suisse has cut its rating on Caltex ((CTX)) to Underperform from Neutral on the back of revised oil price and Australian dollar forecasts. This has the effect of impacting on expected refining margins.

For Citi a further deterioration in the global economic backdrop has driven changes to earnings estimates and price target for National Australia Bank ((NAB)). These changes are enough to see the broker downgrade to a Hold rating from Buy previously. Forecasts and price target have also been reduced.

It is a similar story for QBE Insurance ((QBE)), as UBS has downgraded to a Neutral rating given the view the market is unlikely to recognise what appears good long-term value for some time thanks to poor operating conditions and current margin volatility. The downgrade by UBS was accompanied by cuts to earnings estimates and price target.

Solid recent share price performance and tougher conditions in the US have been enough for UBS to downgrade Sonic Health ((SHL)) to Sell from Neutral, the broker arguing current earnings risks are not being fully priced in by the market. Earnings estimates and price target have also been trimmed.

The increase in offer for Charter Hall Office has caused brokers to adjust price targets higher in accordance with the change in offer, while some increases to estimates for Caltex by Citi have seen both overall earnings estimates and price target for the stock move higher.

The upgrade in rating for CSL has been accompanied by an increase in price target and earnings estimates, while on the other side of the ledger changes to commodity price and foreign exchange assumptions have brought about cuts to price targets for BHP. JP Morgan has similarly lowered its target and forecasts for Alumina, while BA-ML's initiation on Campbell Brothers has brought down the average price target for the stock.

Factoring in full year earnings has sparked some changes to earnings estimates for Gindalbie ((GBG)) and Perseus ((PRU)), while on the back of recent commodity price movements earnings and price target for Newcrest ((NCM)) have also been adjusted. Earnings estimates for Whitehaven ((WHC)) have also risen to account for additional volume assumptions.

Forecasts for Murchison Metals ((MMX)) have been lowered to reflect increased uncertainty with respect to the Jack Hills mine and associated port and rail infrastructure projects. Changes to commodity forecasts see cuts to earnings estimates for Alumina and Paladin ((PDN)), while Paladin's earnings have also been adjusted for the recent capital raising.

Outlook commentary at Oakton's ((OKN)) annual general meeting indicated a still soft operating environment and this sees cuts to estimates across the market, which has also impacted on price targets. Thorn Group ((TGA)) has missed out on a contract re-tender and this has brought about some reductions to earnings estimates and price target, while a weaker macro environment has generated cuts to earnings forecasts for Sims Metal ((SGM)). Price targets for the shares have also come down as a result.

Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables below are based on data analysis from the week past concerning these eight equity market experts. The eight experts in casu are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order	Company	Old Rating	New Rating	Broker
Upgrade
1	ALUMINA LIMITED	Sell	Neutral	Citi
2	BATHURST RESOURCES LIMITED	Neutral	Buy	UBS
3	BHP BILLITON LIMITED	Neutral	Buy	Credit Suisse
4	BILLABONG INTERNATIONAL LIMITED	Neutral	Buy	Citi
5	CHARTER HALL OFFICE REIT	Neutral	Buy	UBS
6	COFFEY INTERNATIONAL LIMITED	Neutral	Buy	UBS
7	CSL LIMITED	Neutral	Buy	Credit Suisse
8	TABCORP HOLDINGS LIMITED	Sell	Neutral	Macquarie
Downgrade
9	CALTEX AUSTRALIA LIMITED	Neutral	Sell	Credit Suisse
10	NATIONAL AUSTRALIA BANK LIMITED	Buy	Neutral	Citi
11	QBE INSURANCE GROUP LIMITED	Buy	Neutral	UBS

Special Note: we have translated all ratings changes in simplified Buy/Hold/Sell labels for readers who are as yet not familiar with typical stockbroker lingo such as "Outperform" or "Underweight".

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	MGR	71.0%	86.0%	15.0%	7
2	CQO	29.0%	43.0%	14.0%	7
3	CSL	50.0%	63.0%	13.0%	8
4	NUF	25.0%	38.0%	13.0%	8
5	AWC	50.0%	63.0%	13.0%	8
6	TAH	13.0%	25.0%	12.0%	8
7	BHP	63.0%	75.0%	12.0%	8
8	TTS	38.0%	50.0%	12.0%	8
9	GPT	57.0%	67.0%	10.0%	6
10	CPB	50.0%	57.0%	7.0%	7

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	CSV	50.0%	25.0%	- 25.0%	4
2	CTX	50.0%	33.0%	- 17.0%	6
3	NAB	88.0%	75.0%	- 13.0%	8
4	QBE	63.0%	50.0%	- 13.0%	8
5	SHL	75.0%	63.0%	- 12.0%	8
6	AUB	60.0%	50.0%	- 10.0%	4
7	DOW	43.0%	33.0%	- 10.0%	6
8	WOR	43.0%	33.0%	- 10.0%	6
9	MRE	- 25.0%	- 33.0%	- 8.0%	3
10	CEU	- 17.0%	- 20.0%	- 3.0%	5

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	CQO	3.426	3.490	1.87%	7
2	CTX	11.793	11.918	1.06%	6
3	AUB	6.670	6.723	0.79%	4
4	CSL	33.249	33.499	0.75%	8
5	GPT	3.277	3.300	0.70%	6
6	TTS	2.396	2.409	0.54%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	BHP	51.679	49.228	- 4.74%	8
2	AWC	2.251	2.151	- 4.44%	8
3	WOR	29.790	28.862	- 3.12%	6
4	CSV	1.338	1.300	- 2.84%	4
5	QBE	16.180	15.743	- 2.70%	8
6	NAB	27.863	27.201	- 2.38%	8
7	DOW	4.296	4.225	- 1.65%	6
8	MGR	1.377	1.369	- 0.58%	7
9	CPB	49.278	49.024	- 0.52%	7
10	SHL	12.809	12.804	- 0.04%	8

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	GBG	0.614	1.029	67.59%	6
2	TNE	6.767	7.933	17.23%	3
3	ORI	170.975	196.425	14.89%	8
4	NAB	249.088	266.025	6.80%	8
5	DLX	21.486	22.500	4.72%	7
6	ANZ	214.500	224.575	4.70%	8
7	NCM	208.971	217.229	3.95%	8
8	PRU	24.600	25.433	3.39%	6
9	CTX	110.567	113.550	2.70%	6
10	WHC	37.820	38.750	2.46%	5

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	MMX	1.033	- 0.733	- 170.96%	3
2	MRE	5.400	3.500	- 35.19%	3
3	AWC	7.160	6.443	- 10.01%	8
4	PDN	1.867	1.753	- 6.11%	7
5	PPT	170.657	160.486	- 5.96%	7
6	GNC	81.130	77.518	- 4.45%	6
7	OKN	20.300	19.420	- 4.33%	5
8	IAG	29.425	28.213	- 4.12%	8
9	TGA	20.227	19.467	- 3.76%	3
10	SGM	133.500	128.500	- 3.75%	7

Technical limitations

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Minnow Humanis On High Speed Growth

- Recent acquisition to boost operations and earnings for Humanis
- New management and senior staff delivering improved performance
- Year to date earnings better than expected
- Moelis rates Humanis a Buy

By Chris Shaw

Specialist labour hire and professional placement firm Humanis Group ((HUM)) recently acquired Total Recruitment Group, a deal stockbroker Moelis expects will deliver both strategic and financial benefits stemming from an expansion in overall activities.

Moelis notes the acquisition gives Humanis additional recruitment services and HR solutions for the office and business support market. The deal also provides Humanis with some points of differentiation, including a mining training simulation facility and some international operations in the Philippines.

Projected sales for the Total Recruitment operations acquired are more than $150 million in FY12, while EBIT (earnings before interest an tax) should be around $5.7 million.

The Total Recruitment acquisition will mean Humanis now comprises four key brands, with an 80:20 earnings mix split between blue collar and white collar employment. Moelis estimates around 35% of group revenues will be generated by providing temporary labour to the resources sector via its Philippines business.

An earnings update offered by management at the end of September indicated both the Humanis and Total Recruitment businesses were ahead of budget for the first two months of FY12. Moelis notes this is particularly a positive for the core Humanis business, as it suggests the new senior management team and new staff in all key positions are delivering improved performance.

Earnings for both divisions are expected to exceed September quarter expectations, management seeing this as a result of expansion into new, higher margin segments that has more than offset ongoing economic volatility.

Solid earnings performance should continue according to Moelis, its earnings per share forecasts standing at 2.5c in FY12 and 3.6c in FY13. This compares to the 0.5c earned in FY11. There is little basis for comparison as with a market capitalisation of around $60 million there is no coverage of Humanis among brokers in the FNArena database.

Assuming its forecasts prove reasonably close to the mark, Moelis sees value in Humanis at current levels, as this would indicate earnings multiples of 9.0 times in FY12 and 6.4 times in FY13. Risk appears to be to the upside, as Moelis notes EBIT margins remain below management's target of 5% within the next three years and around 7% longer-term.

The upside potential stems from the expectation Humanis will enjoy significant operational leverage from a revenue base of a forecast $500 million in FY12. Earnings will be the primary driver of investment returns according to Moelis, as no dividends are forecast through FY14.

Moelis has set a price target on Humanis of $0.28, which compares to a current share price as at 10.15am this morning of $0.23, unchanged on the day. Over the past year Humanis has traded in a range of $0.125 to $0.45.

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Lycopodium Winning Fans

- Strong management highlight for Lycopodium
- Earnings growth and dividends also attractive
- DJ Carmichael initiates with a Buy rating

By Chris Shaw

Lycopodium ((LYL)) was established in 1992 as a consulting engineering company and has since developed to focus on the delivery of EPCM (Engineering, Procurement and Construction Management) consulting services to what is now a global client base.

In the view of stockbroker DJ Carmichael, this growth has been aided by one of the better management teams in Australia. The capability of management has allowed Lycopodium to successfully diversify earnings across clients, project type, geography, industry and commodity.

Growth has not come at the expense of financial health, DJ Carmichael noting Lycopodium has a strong balance sheet with net cash of around $24 million. Returns on assets have also been consistently strong for a number of years, while earnings per share growth since FY05 has averaged 17% per annum.

With Lycopodium generating solid cash flow there has been scope for dividend increases and DJ Carmichael sees the yield as attractive at a forecast of 6.3% in FY12 and 7.0% in FY13. Dividends are currently fully franked.

This estimate is based on DJ Carmichael's earnings per share (EPS) forecasts of 48.6c in FY12 and 53.8c in FY13. This compares to EPS forecasts of Macquarie, the only broker in the FNArena database to cover Lycopodium, of 50.6c and 54.7c respectively.

There appears limited downside risk to the earnings estimates of DJ Carmichael as Lycopodium has not only offered guidance for both years but has a material percentage of revenue for both FY12 and FY13 already locked in.

This offers another advantage according to DJ Carmichael in that it will allow management to be more selective in regards to the new projects taken on over the next 12-18 months.

Earnings risk is more to the upside as DJ Carmichael expects a combination of consistent organic growth, expansion into new regions and industries and further acquisitions. Any such acquisitions are expected to be bolt-on type deals that allow Lycopodium to expand its product offering into new areas.

What may constrain growth going forward is the ongoing objective of management to execute projects and studies to a consistently high standard. As DJ Carmichael notes, this approach required good quality staff and in the current market acquiring such staff is a more difficult proposition.

Given the positive outlook for Lycopodium, DJ Carmichael has initiated coverage on the stock with a Buy rating. Price target has been set at $6.20. Macquarie similarly has an Outperform rating on the stock with a comparable price target of $6.36. Macquarie's target was increased in August to reflect increases to earnings forecasts following a better than expected full year profit result.

Shares in Lycopodium today are unchanged as at 1.20pm with a last sale at $5.65. This compares to a trading range over the past year of $3.91 to $7.42. The current share price implies upside of around 12% to the price targets of Macquarie and DJ Carmichael.

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Fund Managers Still Prefer Defensive Assets

- Russell Investments releases September quarter fund manager survey
- Survey shows fund mangers continue to prefer defensive assets
- Australian equities seen as undervalued
- Interest cuts seen as most likely catalyst for domestic non-mining growth

By Chris Shaw

In the September quarter investors have had to deal with continued equity market weakness and heightened market volatility, reflecting escalating European sovereign debt concerns and doubts about the sustainability of a US economic recovery.

The latest Russell Investment Management survey of Australian investment managers and their views about the market has been conducted with this as a backdrop, the result being some changes in views from the June quarter.

A total of 31% of managers are now bearish on international shares, Greg Liddell, Russell managing director, consulting and advisory services, noting this is ten times the number of managers that were bearish on the asset class at the end of the March quarter.

A majority of fund mangers, 77%, see the Australian equity market as undervalued, the highest number of managers with such a view since Russell began its surveys in 2005. In contrast, 6% of managers see Australian stocks as overvalued at present. The positive views reflect an assessment the Australian economy is relatively well placed compared to developed counterparts.

What didn't change was the number of managers largely maintaining a preference for defensive assets, as evidenced by a further rise of 10% in bullish sentiment with respect to Australian bonds. At the same time bearish sentiment among managers towards growth assets such as Australian and international shares also increased, by 6% and 10% respectively.

The more defensive nature of Australian REIT shares meant managers turned less bearish on the sector in the September quarter. Overall, Liddell, notes managers remain more bullish on domestic shares at 66% than on international shares at 57%.

Views are most bullish for the telecommunications, materials and industrials sectors. Between 59-62% of mangers are bullish on these sectors, which for industrials is an increase from 46% last quarter. Financials are also becoming more popular with 47% of managers now bullish, up from 42% previously. While a majority of managers are bullish on the materials sector, Liddell notes bearish sentiment towards this sector has doubled from 19% to 38% in the June quarter.

At the other end of the market managers are least bullish on the consumer discretionary, IT and consumer staples sectors, with only 29-35% of managers bullish on these sectors and 50% of managers bearish on consumer discretionary stocks.

For smaller capitalisation stocks around one-third of all managers are bearish at present according to Liddell, which compares to 20% of managers being bearish on the broader market.

Falls in the Australian dollar during the quarter allowed managers to become more bullish on the currency, with 15% more managers taking a positive view on the dollar than was the case in the June quarter.

As market volatility has risen a series of interest rate cuts have been priced in for the next 12 months in Australia and Liddell notes this has seen sentiment towards Australian cash turn more bearish. A total of 37% of managers are now bearish on the domestic cash market, up from 26% in the June survey.

At the same time sentiment towards Australian bonds has improved, with 29% of managers now taking a bullish view. This is up from 19% in the June quarter and, as Liddell suggests, highlights the fact Australian bonds are better value than international bonds at present.

With the Australian economy continuing to show significant divergence in performance between the resources sector and the rest of the market, managers were asked what could spark a recovery in domestic growth.

Liddell notes interest rate cuts by the Reserve Bank of Australia was the most likely catalyst according to 43% of managers, while about 35% suggested the most likely catalyst would be an economic recovery in global developed markets.

A similar survey by Russell of fund managers in the US showed a significant majority of managers, 79%, don't see the US economy entering a double-dip recession. This is due to strong corporate balance sheets and high corporate profit levels offering some reasons for optimism.

In contrast, a total of 11% of US fund managers suggests the US is entering a double-dip recession, with most of these managers suggesting a jobs recovery is the critical element needed to drive a recovery in the broader economy.

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Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has yet again seen broker upgrades outnumber downgrades, with 13 increases in rating compared to just seven downgrades. The eight brokers in the FNArena database now have a total proportion of Buy ratings of 59%, up from 58.7% last week.

Resources stocks dominated the rating upgrades this week, with Medusa Mining ((MML)) enjoying an upgrade to Buy from Deutsche Bank on revised commodity price forecasts along with an initiation at the same rating from RBS Australia. RBS is attracted to Medusa's pure gold exposure, solid cash flows and growth potential from both new projects and exploration.

Similarly, Oz Minerals ((OZL)) enjoyed upgrades to Buy ratings from Deutsche Bank and Citi, the former following a review of commodity price assumptions and the latter post a review of the Australian copper sector.

Deutsche Bank also upgraded the likes of Whitehaven Coal ((WHC)), Kingsgate Consolidated ((KCN)), Iluka ((ILU)) and Gryphon Resources ((GRY)) following a general update to commodity price forecasts. Deutsche also upgraded PanAust ((PNA)) to reflect a positive outlook on the Inco de Oro project in South America and the scope for group production to ramp up in the coming year.

PanAust was also upgraded by Citi following the broker's copper sector review, which also generated an initiation with a Buy rating on Sandfire Resources ((SFR)). Woodside ((WPL)) was the energy stock to enjoy an upgrade, this courtesy of Macquarie. The decision was based on valuation grounds following recent share price weakness.

On the downgrade side, Nexus saw its rating cut to Hold from Buy by both RBS Australia and Macquarie, the change reflecting increased doubt surrounding the future of the Crux project now well respected MD Richard Cottee has left the company.

Deutsche's commodity prices review also generated a downgrade for Extract Resources ((EXT)), while Citi's initiation on copper plays brought down the overall rating on both Discovery Metals ((DML)) and Intrepid Mines ((IAU)). A similar initiation on Jetset Travelworld ((JET)) has a similar impact on the overall rating for that stock, Deutsche cautious given only a small free float of shares available in the company.

An equity raising by Goodman Fielder ((GFF)) saw Deutsche (again) downgrade that stock to Underperform from Neutral, while a mixed full year earnings result from Nufarm ((NUF)) and some valuation issues prompted a downgrade by Deutsche to Sell from Hold previously. It was a similar story for Coca-Cola Amatil ((CCL)), Citi downgrading to Hold on valuation grounds.

The commodity price review by Deutsche Bank was the main driver of changes to share price targets, the most significant revisions coming for Medusa, Sandfire, Gryphon, Discovery Metals, Newcrest ((NCM)) and PanAust.

On the other side of the ledger targets were cut for Nexus, Intrepid, Platinum Australia, Paladin, Oz Minerals, Fortescue, Iluka and Whitehaven among the resource plays and Jetset Travelworld and Goodman Fielder among the industrial plays.

From an earnings perspective, resources plays again dominated, with increases to forecasts for the likes of Roc Oil ((ROC)) following the acquisition of an increased stake in the Cliff Head project, Murchison Metals ((MMX)) following full year earnings and adjustments to estimates for Range Resources ((RRL)), Kingsgate and Gindalbie ((GBG)).

Forecasts for CSL ((CSL)) were lifted on signs of a tightening in the global plasma market, while Oroton's ((ORL)) better than expected full year earnings result triggered increases to analysts' estimates.

Lower earnings estimates have flowed through for Mincor ((MCR)), Lynas ((LYC)), Paladin, Gloucester Coal ((GCL)), Platinum Australia, PanAust, Aquarius Platinum ((AQP)), Independence Group ((IGO)) and Minara Resources ((MRE)) largely as a result of changes to commodity price assumptions, and for Goodman Fielder to reflect the equity issue announced this week.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup Suisse,Deutsche<br>Bank,JP<br>Morgan,Macquarie,RBS<br>Australia,UBS&b0=125,124,130,108,88,148,196,159&h0=73,87,76,115,89,87,102,74&s0=40,15,11,5,25,24,5,13" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

Recommendation

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	MML	50.0%	100.0%	50.0%	3
2	OZL	50.0%	88.0%	38.0%	8
3	WHC	67.0%	100.0%	33.0%	5
4	GRY	75.0%	100.0%	25.0%	4
5	KCN	60.0%	80.0%	20.0%	5
6	PNA	57.0%	75.0%	18.0%	8
7	SFR	33.0%	50.0%	17.0%	4
8	PDN	57.0%	71.0%	14.0%	7
9	WPL	50.0%	63.0%	13.0%	8
10	ILU	75.0%	88.0%	13.0%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Rating	New Rating	Change	Recs
1	NXS	25.0%	- 25.0%	- 50.0%	4
2	EXT	67.0%	33.0%	- 34.0%	3
3	JET	100.0%	67.0%	- 33.0%	3
4	IAU	100.0%	67.0%	- 33.0%	3
5	GFF	13.0%	- 13.0%	- 26.0%	8
6	PLA	50.0%	33.0%	- 17.0%	3
7	NUF	38.0%	25.0%	- 13.0%	8
8	CCL	88.0%	75.0%	- 13.0%	8
9	DML	33.0%	25.0%	- 8.0%	4

Target Price

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	MML	8.625	9.300	7.83%	3
2	SFR	8.393	8.913	6.20%	4
3	GRY	2.030	2.128	4.83%	4
4	DML	1.570	1.608	2.42%	4
5	NCM	46.011	46.918	1.97%	8
6	CCL	12.381	12.459	0.63%	8
7	NUF	4.819	4.843	0.50%	8
8	PNA	4.583	4.591	0.17%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous Target	New Target	Change	Recs
1	NXS	0.508	0.270	- 46.85%	4
2	IAU	2.600	1.790	- 31.15%	3
3	GFF	0.826	0.640	- 22.52%	8
4	PLA	0.520	0.430	- 17.31%	3
5	JET	1.125	1.050	- 6.67%	3
6	PDN	2.767	2.646	- 4.37%	7
7	OZL	14.639	14.385	- 1.74%	8
8	FMG	8.021	7.903	- 1.47%	8
9	ILU	20.073	19.798	- 1.37%	8
10	WHC	7.108	7.050	- 0.82%	5

Earning Forecast

Positive Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	ROC	0.140	0.259	85.00%	4
2	MMX	0.900	1.033	14.78%	3
3	ORL	62.467	66.275	6.10%	4
4	GBG	0.586	0.614	4.78%	6
5	MAP	6.016	6.187	2.84%	6
6	RRL	13.273	13.607	2.52%	3
7	KCN	103.075	104.825	1.70%	5
8	CSL	186.786	189.586	1.50%	8
9	LDW	45.000	45.667	1.48%	3
10	SKI	9.600	9.713	1.18%	8

Negative Change Covered by > 2 Brokers

Order	Symbol	Previous EF	New EF	Change	Recs
1	MCR	9.000	4.500	- 50.00%	3
2	LYC	6.425	4.500	- 29.96%	3
3	PDN	2.583	1.867	- 27.72%	7
4	GCL	60.220	49.100	- 18.47%	5
5	PLA	2.150	1.767	- 17.81%	3
6	PAN	20.325	17.325	- 14.76%	4
7	AQP	35.224	31.116	- 11.66%	5
8	MRE	6.067	5.400	- 10.99%	4
9	GFF	7.713	6.886	- 10.72%	8
10	IGO	27.294	25.294	- 7.33%	5

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Material Matters: Copper’s Supply Issues, Oil Price Expectations, Oz E&C Sector

- Supply side issues persist in copper
- Oil prices expected to range trade
- Updates on Australian developers and contractors

By Chris Shaw

The current focus in the copper market is on downside demand risks in China, the US and Europe but Macquarie suggests it is important to remember ongoing poor supply performance has also been an important contributor to market tightness.

On Macquarie's numbers, global mine production growth has averaged only around 1.5% per year since the copper price began to boom in 2005. The current year is not expected to be any exception, as mine production is likely to show little growth in 2011 thanks to nearly 600,000 tonnes of supply losses.

Much of the lost supply can be attributed to a strike at the Escondida mine, but Macquarie notes Chinese production was down 8.7% a year in August and total Chilean production has fallen 5% in year-on-year terms for the first eight months of the year.

Challenges to supply increases such as declining grades and project delays are expected to continue, so there is no change to the forecast of a small deficit between global supply and demand in 2012. The size of the deficit will depend on both supply performance and the extent of any Chinese re-stocking.

In oil, JP Morgan sees a number of factors potentially impacting on the path of the oil price into 2012. On the supply side these include the return of supplies from Libya, with scope for output from that country to reach 1.3 million barrels per day by the end of next year.

As this is coming at the same time as rising supply from Iraq and non-OPEC producers, JP Morgan sees scope for supply to increase by about 1.9 million barrels per day relative to current levels.

At the same time, weaker global economic growth expectations lead JP Morgan to suggest oil demand growth next year may come in at around one million barrels per day, meaning the market would need to re-balance by an amount of around 0.9 million barrels per day from current levels.

This suggests to JP Morgan prices for Brent crude should remain in a range of US$100-$120 per barrel, even as the market re-balances. As an example of this re-balancing, JP Morgan notes there are proposed refinery closures of 700,000 barrels per day in the US and 200,000 barrels per day in Europe expected in the coming year, offset by an addition of 810,000 barrels per day of capacity in Asia.

This re-balancing process is likely to increase the pull on Atlantic Basin crudes from Asian refineries by around one million barrels per day. JP Morgan expects this will increase the pressure on a potential narrowing of the sweet/sour crude spread.

At present JP Morgan suggests short-term risks for the oil price are skewed to the upside, this due to North Sea production issues and the fact it will be several months before significant additional supply from Libya hits the market. But moving into the second half of 2012 JP Morgan suggests the Brent/Dubai spread could compress, to the extent that Dubai prices might trade at a premium occasionally.

Similar to JP Morgan's view, Barclays Capital also sees little in base case assumptions to imply any large changes to oil price estimates are required at present. This base case assumes an 80-85% chance economic policy failure is avoided.

In 2011 Barclays notes oil prices have been capped on the upside by supply fears and macroeconomic issues, while downside protection has come from strong fundamentals in the physical market, narrowing spare capacity and disappointments in non-OPEC supply growth.

This means assuming only an economic slowdown, the oil market should stay relatively tight. The 15-20% chance of a different outcome remains the major concern, Barclays noting this is resulting in the market currently behaving in an irrational manner by reacting to headlines falling in the 80-85% scenario as strongly as those relating to the 15-20% scenario.

In terms of market fundamentals, Barclays notes the degree of excess demand in 3Q11 has been so large even the release of significant government stockpiles has not been enough to balance the market. With space capacity also low, market volatility has increased.

Given the more likely outcome of an economic slowdown, Barclays expects Brent crude prices should comfortably average more than US$100 per barrel this year. West Texas Intermediate is expected to remain at lower levels given an expected 3Q11 average of about US$90 per barrel.

Returning to the Australian market, Deutsche Bank has attempted to assess current and expected conditions with respect to labour supply in the Australian resources sector. Deutsche suggests a labour shortage is likely if planned resources capex plans proceed.

Assuming these shortages eventuate, Deutsche suggests project delays and low industry growth rates are likely. Most likely to be affected are smaller projects and the oil and gas sector, as both have disadvantages in terms of attracting labour.

This potential for labour shortages has the potential to impact on resources sector industry growth rates and Deutsche has lowered its forecasts to reflect this view. While industry forecasts are for growth of 12-24% annually over the next few years, Deutsche now expects growth of 5-10%.

Added to this have been changes to Deutsche's foreign exchange forecasts, the end result being adjustments to earnings forecasts for the major developers and contractors listed on the Australian market.

The changes to forecasts flow through to modest adjustments to price targets, though Deutsche's ratings on the stocks are unchanged. Buy ratings are ascribed to Leighton Holdings ((LEI)), WorleyParsons ((WOR)) and Boart Longyear ((BLY)), while the broker rates UGL ((UGL)), Downer EDI ((DOW)) and Transfield Services ((TSE)) as Hold.

By way of comparison, the FNArena database shows Sentiment Indicator readings for the stocks of 0.9 for Boart Longyear, 0.7 for UGL, 0.5 for Transfield, 0.4 for both Downer EDI and WorleyParsons and 0.1 for Leighton Holdings.

Goldman Sachs has also looked more closely at the engineering and construction sector, maintaining a positive view given record levels of planned resources capex spending. At present, planned capex projects total $210 billion, while less advanced projects suggest additional capex of around $170 billion.

Dominating the expected work is the LNG sector, accounting for around 70% of definite projects over the next few years. The sheer magnitude of this pipeline suggests a solid scope for work levels for Australian engineering and construction companies.

This elevated level of work should allow companies in the sector to achieve improved project pricing, which should also boost margins. At the same time, Goldman Sachs expects an improvement in earnings visibility in the sector.

In terms of how best to play the sector, Goldman Sachs prefers Boart Longyear, UGL and WorleyParsons among the larger cap plays. Among the small to mid-cap plays, the broker's preferences are Sedgeman ((SDM)), Imdex ((IMD)) and Ausenco ((AAX)).

In ratings terms, Goldman Sachs has Buy ratings on UGL and Boart Longyear among the larger cap plays and Hold ratings on Leighton, WorleyParsons, Transfield and Downer EDI. At the smaller end of the market Goldman Sachs rates Ausenco, Bradken ((BKN)), Imdex, Norfolk ((NFK)) and Sedgeman as Buy, while rating Monadelphous ((MND)) and WDS ((WDS)) as Hold.

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