Tag Archives: Utilities

article 3 months old

Weekly Broker Wrap: Earnings Confessions Season Is Near

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

By Chris Shaw

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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article 3 months old

The Short Report

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By Chris Shaw

The week from February 14 was relatively quiet in terms of significant changes in short positions, only 10 stocks experiencing changes in total short positions of more than one percentage point.

Among the increases the largest was in Wesfarmers ((WESN)), where total positions increased from 0.04% to 2.44%. At the same time shorts in the ordinary shares of Wesfarmers also rose to 3.39% from 2.86% previously, this following an interim earnings result that missed on a few key metrics (margins for Coles included).

Shorts continued to rise in Cochlear, hitting 9.59% for the week from February 14 compared to 8.4% the week before, again post what was a solid interim for some in the market but a less positive result in the view of others including UBS given a decline in unit sales.

Little covered Alliance Aviation ((AQZ)) and Tangiers Petroleum ((TPT)) both saw shorts jump from a negligible levels of less than 0.25% the previous week to more than 1.0% respectively, while Paladin ((PDN)) and Iluka ((ILU)) also saw modest increases in total short positions.

In terms of declining short positions, Linc Energy ((LNC)) saw shorts fall from a somewhat significant 5.75% the week before to 2.94% for the week from February 14, while Shorts in Southern Cross Media ((SXL)) declined from 2.3% to 0.44% after the company announced a share buyback with its interim result.

Shorts in Hastings Diversified ((HDF)) fell to 0.41% from 1.88% the previous week as the market adjusts to a proposed acquisition of the company by APA Group ((APA)). The next largest decline in shorts was in Energy World Corporation ((EWC)), where positions in the junior fell to 1.33% from 2.68% the week before.

With respect to monthly changes, the major increases were experienced by Rialto Energy ((RIA)) and Singapore Telecom ((SGT)), increases of more than 5.0 and 3.0 percentage points in each case pushing total shorts to 5.23% and 4.88% respectively.

The major decline over the month from January 20 has been in the iShares Small Ords derivative ((ISO)), where total shorts have fallen to 10.58% from 17.24% previously. From a stock perspective, the major decline was in Bank of Queensland ((BOQ)), shorts falling to 3.28% from just over 5.0% previously.

The changes in positions have not impacted significantly on the top 20 short positions, which continue to be dominated by consumer discretionary stocks. Among the top 20 continue to be JB Hi-Fi ((JBH)), Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)), Flight Centre ((FLT)), Harvey Norman ((HVN)), The Reject Shop ((TRS)) and Wotif.com ((WTF)).

Among these companies the pick of the interim results appeared to come from Wotif.com, where headline results were a little better than had been expected. While this was due in part to one-off cost cutting, the result was enough to prompt a solid rally in the share price that may have reflected some covering of short positions.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21449536 98840643 21.70
2 MYR 70933745 583384551 12.12
3 FXJ 282570650 2351955725 12.04
4 DJS 58355903 524940325 11.09
5 BBG 28028623 255102103 10.96
6 ISO 571468 5403165 10.58
7 COH 5450536 56902933 9.59
8 FLT 9517934 100009946 9.49
9 LYC 156953209 1714396913 9.15
10 HVN 74774546 1062316784 7.05
11 SEK 23486633 337101307 6.94
12 WTF 14407551 211736244 6.82
13 TRS 1714382 26071170 6.55
14 GNS 53124711 848401559 6.25
15 VLC 10000 160001 6.25
16 OST 80037613 1342393583 5.96
17 CRZ 13890041 233264223 5.94
18 PPT 2284897 41980678 5.43
19 TEN 55392137 1045236720 5.31
20 RIA 22560161 431256264 5.23

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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

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

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

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

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

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

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

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

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

With earnings season almost complete it has been a busy week for changes to broker ratings, the FNArena database showing a total of 19 upgrades and 51 downgrades to recommendations by the eight brokers covered. Total Buy ratings now stand at 52.15%, well down from 53.86% last week.

Among the upgrades were four companies where ratings were lifted by more than one broker – these were Bendigo and Adelaide Bank ((BEN)), CSL ((CSL)), David Jones ((DJS)) and Toll Holdings ((TOL)).

For Bendigo Bank, both RBS Australia and BA Merrill Lynch upgraded to Hold recommendations from Sell previously, the former as the recent profit result showed some signs of stabilisation and the latter on valuation grounds post recent share price weakness. Across the market price targets and earnings estimates for the bank were adjusted.

In contrast to a less bad result from Bendigo Bank, CSL delivered strong earnings thanks to albumin and specialty products performing well. Brokers lifted earnings estimates and price targets on the back of the result and both Macquarie and BA-ML now see enough value to upgrade to Buy ratings from Neutral previously.

For David Jones ((DLS)) it was the turn of both UBS and RBS Australia to upgrade to Neutral ratings from Sell previously, this to reflect both better value on the back of recent share price weakness and the company having better positioned itself for stronger FY13 results by clearing excess inventory.

Toll Holdings ((TOL)) has also improved its position and with potential for new contracts and some scope for positive earnings surprise relative to low expectations, both Macquarie and Deutsche Bank have upgrade to Buy ratings. This was partially offset by Credit Suisse downgrading to Neutral from Outperform on valuation grounds.

Among the other upgrades, a strong result from Ausenco ((AAX)) prompted UBS to reverse a recent downgrade and move to Buy from Sell, almost doubling its price target for the stock in the process. A similarly solid Coca-Cola Amatil ((CCL)) result, particularly given tough markets and a dispute with a key customer (Woolworths), was enough for Credit Suisse to upgrade to a Neutral view.

Emerging value following recent underperformance was enough for Citi to upgrade Oil Search ((OSH)) to Buy from Neutral, while around the market earnings estimates and price targets for the stock were largely increased following a better than expected profit result.

Super Retail Group ((SUL)) delivered one of the standout results in the consumer discretionary sector and this was enough for BA-ML to upgrade to a Buy rating, while again estimates and price targets across the market were lifted post the result. 

On the downgrade side those companies copping a cut in rating from more than one broker were Charter Hall Office ((CQO)), Envestra ((ENV)), Fleetwood ((FWD)), iiNet ((IIN)), Industrea ((IDL)), Kingsgate Consolidated ((KCN)), Ramsay Health ((RHC)), Tatts Group ((TTS)), Woodside ((WPL)) and Wotif.com ((WTF)).

Valuation was behind the downgrades to both Charter Hall Office and Envestra, with both Credit Suisse and Citi seeing limited share price upside from current levels for the former even allowing for current corporate interest and RBS and Macquarie taking similar views with respect to the latter.

While Fleetwood's result was broadly as expected, the solid earnings outlook is now priced in according to RBS, a view shared by both UBS and Credit Suisse. For iiNet increasing competitive pressures means the result was a little on the disappointing side for both RBS and Credit Suisse, while both also see less relative value in the stock at current levels than was the case a few months ago.

A poor profit result from Industrea meant earnings estimate across the market have been cut significantly, which leaves the outlook for little earnings growth this unattractive when compared to peers. The earnings miss has also raised the question of management credibility in the view of BA-ML.

Kingsgate Consolidated's earnings were broadly in line with expectations but the company surprised by announcing a capital raising that prompted cuts to estimates and targets. As well, Kingsgate faces a challenging year from an operational perspective in the view of both Citi and BA-ML. 

Uncertainty with respect to the outcome of proposed changes to private health insurance pose enough risks for Ramsay Health that both Macquarie and Deutsche Bank downgraded to a Neutral rating, this despite a result broadly in line with expectations. Valuation was behind the downgrade of Credit Suisse.

Limited upside potential, especially given some recent share price strength, saw both Macquarie and Citi downgrade to Sell ratings on Tatts, while less value following recent gains was enough for Citi and Credit Suisse to downgrade Woodside to Neutral from Outperform in both cases. A similar story is behind downgrades by Macquarie and BA-ML on Wotif.com, as tough market conditions suggest limited upside from current share p[rice levels.

In terms of changes to price targets, the largest increase was seen in Ausenco, as along with the near doubling in target from UBS, the likes of RBS, Macquarie and Deutsche also lifted their targets significantly. 

Aside from the capital raising induced changes to targets for Kingsgate, the most significant cut in target was experienced by Alumina Ltd ((AWC)), both RBS Australia and JP Morgan cutting their targets on revisions to earnings and related commodity price estimates. 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AUSENCO LTD Sell Buy UBS
2 BENDIGO AND ADELAIDE BANK LIMITED Sell Neutral RBS Australia
3 BENDIGO AND ADELAIDE BANK LIMITED Neutral Neutral BA-Merrill Lynch
4 BILLABONG INTERNATIONAL LIMITED Sell Neutral Deutsche Bank
5 CFS RETAIL PROPERTY TRUST Neutral Buy UBS
6 COCA-COLA AMATIL LIMITED Sell Neutral Credit Suisse
7 COMMONWEALTH PROPERTY OFFICE FUND Sell Neutral Credit Suisse
8 CSL LIMITED Neutral Buy Macquarie
9 CSL LIMITED Neutral Buy BA-Merrill Lynch
10 DAVID JONES LIMITED Neutral Neutral RBS Australia
11 DAVID JONES LIMITED Sell Neutral UBS
12 MACQUARIE ATLAS ROADS GROUP Neutral Buy Deutsche Bank
13 MIRVAC GROUP Neutral Buy Credit Suisse
14 OIL SEARCH LIMITED Neutral Buy Citi
15 PERPETUAL LIMITED Sell Neutral UBS
16 SONIC HEALTHCARE LIMITED Neutral Buy Credit Suisse
17 SUPER RETAIL GROUP LIMITED Neutral Buy BA-Merrill Lynch
18 TOLL HOLDINGS LIMITED Neutral Buy Macquarie
19 TOLL HOLDINGS LIMITED Neutral Buy Deutsche Bank
Downgrade
20 AMCOR LIMITED Buy Neutral BA-Merrill Lynch
21 AMP LIMITED Buy Neutral Citi
22 BILLABONG INTERNATIONAL LIMITED Buy Sell Credit Suisse
23 CHALLENGER FINANCIAL SERVICES GROUP Buy Neutral Citi
24 CHARTER HALL OFFICE REIT Neutral Sell Credit Suisse
25 CHARTER HALL RETAIL REIT Neutral Neutral UBS
26 COMMONWEALTH PROPERTY OFFICE FUND Buy Neutral UBS
27 DISCOVERY METALS LIMITED Neutral Neutral Citi
28 DIVERSIFIED UTILITY AND ENERGY TRUSTS Buy Neutral UBS
29 DOWNER EDI LIMITED Neutral Sell Credit Suisse
30 ENVESTRA LIMITED Buy Neutral RBS Australia
31 ENVESTRA LIMITED Buy Neutral Macquarie
32 FKP PROPERTY GROUP Neutral Sell Citi
33 FLEETWOOD CORPORATION LIMITED Buy Neutral RBS Australia
34 FLEETWOOD CORPORATION LIMITED Buy Neutral UBS
35 FLEETWOOD CORPORATION LIMITED Neutral Sell Credit Suisse
36 FLETCHER BUILDING LIMITED Buy Neutral JP Morgan
37 FLIGHT CENTRE LIMITED Buy Neutral UBS
38 GR ENGINEERING SERVICES LIMITED Buy Neutral Macquarie
39 IINET LIMITED Buy Neutral RBS Australia
40 IINET LIMITED Neutral Sell Credit Suisse
41 ILUKA RESOURCES LIMITED Buy Neutral UBS
42 INDUSTREA LIMITED Buy Sell BA-Merrill Lynch
43 INDUSTREA LIMITED Buy Neutral UBS
44 KINGSGATE CONSOLIDATED LIMITED Buy Neutral RBS Australia
45 KINGSGATE CONSOLIDATED LIMITED Neutral Sell Citi
46 KINGSGATE CONSOLIDATED LIMITED Neutral Sell BA-Merrill Lynch
47 MACQUARIE ATLAS ROADS GROUP Buy Neutral JP Morgan
48 MORTGAGE CHOICE LIMITED Sell Sell UBS
49 PERSEUS MINING LIMITED Buy Neutral Credit Suisse
50 RAMSAY HEALTH CARE LIMITED Buy Neutral Macquarie
51 RAMSAY HEALTH CARE LIMITED Buy Neutral Credit Suisse
52 RAMSAY HEALTH CARE LIMITED Buy Neutral Deutsche Bank
53 REA GROUP LIMITED Buy Neutral Deutsche Bank
54 SEEK LIMITED Buy Neutral Macquarie
55 ST BARBARA LIMITED Neutral Sell Citi
56 TATTS GROUP LIMITED Neutral Sell Macquarie
57 TATTS GROUP LIMITED Neutral Sell Citi
58 TATTS GROUP LIMITED Buy Neutral UBS
59 TATTS GROUP LIMITED Neutral Sell Credit Suisse
60 TEN NETWORK HOLDINGS LIMITED Buy Neutral JP Morgan
61 TOLL HOLDINGS LIMITED Buy Neutral Credit Suisse
62 TOX FREE SOLUTIONS LIMITED Buy Neutral RBS Australia
63 Transpacific Industries Group Ltd Buy Neutral RBS Australia
64 TREASURY WINE ESTATES LIMITED Neutral Sell Macquarie
65 UNITED GROUP LIMITED Buy Neutral Macquarie
66 WOODSIDE PETROLEUM LIMITED Buy Neutral Citi
67 WOODSIDE PETROLEUM LIMITED Buy Neutral Credit Suisse
68 WOOLWORTHS LIMITED Neutral Sell Credit Suisse
69 WOTIF.COM HOLDINGS LIMITED Buy Neutral Macquarie
70 WOTIF.COM HOLDINGS LIMITED Neutral Sell BA-Merrill Lynch
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AAX 25.0% 100.0% 75.0% 4
2 SYD - 25.0% 17.0% 42.0% 6
3 MGR 43.0% 71.0% 28.0% 7
4 CSL 38.0% 63.0% 25.0% 8
5 GNC 50.0% 67.0% 17.0% 6
6 OST 57.0% 71.0% 14.0% 7
7 CFX 57.0% 71.0% 14.0% 7
8 SHL 75.0% 88.0% 13.0% 8
9 OSH 75.0% 88.0% 13.0% 8
10 GMG 63.0% 75.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 KCN 60.0% - 20.0% - 80.0% 5
2 TTS 38.0% - 13.0% - 51.0% 8
3 IIN 80.0% 40.0% - 40.0% 5
4 ENV 17.0% - 17.0% - 34.0% 6
5 TOX 67.0% 33.0% - 34.0% 3
6 AMP 88.0% 63.0% - 25.0% 8
7 WES 38.0% 13.0% - 25.0% 8
8 WPL 38.0% 13.0% - 25.0% 8
9 AMC 75.0% 50.0% - 25.0% 8
10 ILU 88.0% 63.0% - 25.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AAX 3.110 4.485 44.21% 4
2 REA 13.243 13.963 5.44% 7
3 EHL 1.218 1.283 5.34% 6
4 DOW 4.146 4.367 5.33% 7
5 FLT 23.448 24.660 5.17% 8
6 IIN 3.232 3.380 4.58% 5
7 TPI 0.877 0.915 4.33% 6
8 OST 1.203 1.253 4.16% 7
9 TOX 2.583 2.683 3.87% 3
10 CSL 34.293 35.516 3.57% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 KCN 8.966 7.435 - 17.08% 5
2 AWC 1.784 1.589 - 10.93% 8
3 PBG 0.737 0.672 - 8.82% 7
4 CGF 5.474 5.039 - 7.95% 7
5 BEN 8.986 8.513 - 5.26% 8
6 WES 31.961 30.335 - 5.09% 8
7 AMP 5.054 4.834 - 4.35% 8
8 SFR 8.800 8.440 - 4.09% 5
9 GFF 0.593 0.569 - 4.05% 8
10 PRU 3.853 3.712 - 3.66% 6
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GBG 0.057 1.343 2256.14% 6
2 AIO 18.625 26.325 41.34% 8
3 AAX 27.380 33.960 24.03% 4
4 SKE 18.767 21.233 13.14% 3
5 BLY 42.214 47.184 11.77% 8
6 CTX 119.600 132.867 11.09% 6
7 MAH 7.200 7.825 8.68% 4
8 GNC 85.683 92.200 7.61% 6
9 SDM 18.500 19.867 7.39% 3
10 ASL 33.440 35.840 7.18% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AWC 1.416 0.144 - 89.83% 8
2 SFR 27.450 17.260 - 37.12% 5
3 WHC 27.717 17.550 - 36.68% 6
4 MQA 28.300 22.183 - 21.61% 6
5 GFF 6.363 5.300 - 16.71% 8
6 AIX 21.650
article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Christmas is edging ever so closer but the share market is not displaying its usual tendencies to put a positive twist onto the calendar year's finish, but that doesn't stop the major stockbrokerages in Australia to continue to downgrade more stocks than to issue upgrades. The week past saw the eight brokers in the FNArena database downgrading recommendations on 16 stocks while lifting only four. Total Buy ratings now stand at 56.6%, down from 57.1% last week.

Among the upgrades was ANZ Banking Group ((ANZ)), BA Merrill Lynch upgrading to a Buy rating from Neutral on both valuation grounds and expectations Asia will provide solid growth opportunities for the bank going forward. ANZ is now the broker's top pick in the sector.

A full review of Cochlear's ((COH)) prospects sees Macquarie upgrade to an Outperform rating from Neutral, this despite cuts to earnings estimates and price target to reflect manufacturing issues, supply constraints and product recalls. The upgrade is a valuation call, Macquarie seeing the stock as attractive at current levels given recent share price weakness.

Investa Office ((IOF)) was the only play to receive two upgrades, both JP Morgan and Deutsche Bank lifting ratings to Buy from Hold previously. For JP Morgan the call is valuation inspired after recent relative underperformance, while Deutsche sees reduced execution risk and some growth prospects following offshore asset sales and a share buyback. 

Deutsche has also adjusted its target for Investa slightly higher. The upgrades follow a similar move the previous week by UBS, who also identified improved value in the stock on the back of overseas asset sales.

On the downgrade side, Amcor ((AMC)) saw a cut to a Neutral rating by Citi given the current share price represents a premium on the broker's numbers. Earnings estimates were also adjusted slightly to reflect changes to forex assumptions.

Citi made a similar change with respect to Ansell ((ANN)), again on the basis the current share price is a stretch relative to valuation even allowing for the possibility current earnings guidance might turn out to be conservative. Target has been trimmed slightly.

APA ((APA)) has made an offer for Hastings Diversified ((HDF)) and this has prompted both Citi and BA-ML to downgrade ratings, the former to Neutral and the latter to Underperform. While the associated sale of AllGas is viewed positively, the possibility a higher offer may be needed and some valuation concerns post recent share price gains is enough to see both brokers adopt more conservative views. Citi has also trimmed its price target.

Commonwealth Property Office ((CPA)) has enjoyed some gains of late and this has created some valuation issues for both Credit Suisse and JP Morgan. The former has moved to an Underperform rating and the latter to a Neutral recommendation as both now see better value elsewhere in the sector.

A review by Deutsche Bank left the broker with the view competition is increasing in some of CSL's ((CSL)) markets, a concern that was enough for the broker to downgrade to a Hold rating. The downgrade also reflects recent share price outperformance, while the review generated an increase in price target.

JB Hi-Fi ((JBH)) surprised the market on Thursday by cutting earnings guidance for 1H12, citing ongoing price deflation and tough competition. Brokers have responded by cutting earnings estimates and price targets, with Citi, JP Morgan and UBS all downgrading ratings as well. JP Morgan moves to Underweight, the other two brokers to Neutral recommendations. 

Valuation has been the driver of Credit Suisse's downgrade on Mirvac ((MGR)) to a Neutral rating, the broker similarly cutting its rating on Stockland ((SGP)) to Underperform following recent share price movements.

As brokers continue to adjust numbers for Telecom New Zealand ((TEL)) to account for the recent de-merger, RBS has gone a step further and downgraded to a Sell rating, this reflecting recent relative outperformance post the de-merger. The broker's target comes down to account for the split in the business.

An asset tour saw UBS adjust numbers for Wesfarmers ((WES)), the trimming of forecasts enough for a minor cut in target. Such a reaction was also seen elsewhere in the market, though UBS was the only broker to also downgrade its rating, moving to Neutral on valuation grounds.

A similar review of prospects for Ten network ((TEN)) saw Deutsche downgrade to a Sell rating, the broker now factoring in increased overall risk and volatility for earnings in the shorter-term.

Elsewhere, BA-ML has reviewed prospects for the IT sector and the result is changes to earnings estimates and price target for Oakton ((OKN)), the move following similar cuts to expectations for SMS Management and Technology ((SMX)) made by Macquarie last week.

Changes to sales assumptions for Whitehaven ((WHC)) have seen RBS Australia lower expectations and price target for the coal play, while a capital raising by Qube Logistics ((QUB)) sees brokers adjust earnings per share expectations.

Changes to expectations for Echo Entertainment ((EGP)) resulted in BA-ML lifting earnings estimates and price target for the group, while Citi has lifted earnings forecasts for Australian Worldwide Exploration ((AWE)) post a review of the Sugarloaf project.

A change in analyst at JP Morgan has resulted in some changes to price target and earnings forecasts for Charter Hall ((CHC)), while AMP's ((AMP)) strategic distribution agreement with Mitsubishi UFJ in Japan has caused some estimate and target changes across the market. Citi has further lowered earnings estimates and its price target for Ridley ((RIC)) to reflect poor weather conditions and associated operating delays.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AUSTRALIA & NEW ZEALAND BANKING GROUP Neutral Buy BA-Merrill Lynch
2 COCHLEAR LIMITED Neutral Buy Macquarie
3 INVESTA OFFICE FUND Neutral Buy JP Morgan
4 INVESTA OFFICE FUND Neutral Buy Deutsche Bank
Downgrade
5 AMCOR LIMITED Buy Neutral Citi
6 ANSELL LIMITED Buy Neutral Citi
7 AUSTRALIAN PIPELINE TRUST Buy Neutral RBS Australia
8 AUSTRALIAN PIPELINE TRUST Buy Neutral Citi
9 AUSTRALIAN PIPELINE TRUST Neutral Sell BA-Merrill Lynch
10 COMMONWEALTH PROPERTY OFFICE FUND Buy Neutral JP Morgan
11 COMMONWEALTH PROPERTY OFFICE FUND Neutral Sell Credit Suisse
12 CSL LIMITED Buy Neutral Deutsche Bank
13 JB HI-FI LIMITED Buy Neutral Citi
14 JB HI-FI LIMITED Neutral Sell JP Morgan
15 JB HI-FI LIMITED Buy Neutral UBS
16 MIRVAC GROUP Buy Neutral Credit Suisse
17 STOCKLAND Neutral Sell Credit Suisse
18 TELECOM CORPORATION OF NEW ZEALAND LIMITED Neutral Sell RBS Australia
19 TEN NETWORK HOLDINGS LIMITED Neutral Sell Deutsche Bank
20 WESFARMERS LIMITED Buy Neutral UBS
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 IOF 50.0% 67.0% 17.0% 6
2 COH - 38.0% - 25.0% 13.0% 8
3 ILU 75.0% 88.0% 13.0% 8
4 EGP 63.0% 75.0% 12.0% 8
5 ANZ 38.0% 50.0% 12.0% 8
6 SGT 57.0% 67.0% 10.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 JBH 75.0% 38.0% - 37.0% 8
2 OKN 60.0% 40.0% - 20.0% 5
3 MAH 67.0% 50.0% - 17.0% 4
4 WHC 100.0% 83.0% - 17.0% 6
5 SGP 71.0% 57.0% - 14.0% 7
6 MGR 71.0% 57.0% - 14.0% 7
7 TCL 100.0% 86.0% - 14.0% 7
8 CFX 71.0% 57.0% - 14.0% 7
9 ANN 43.0% 29.0% - 14.0% 7
10 CSL 63.0% 50.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 ILU 20.219 20.786 2.80% 8
2 CSL 33.600 33.891 0.87% 8
3 IOF 0.678 0.683 0.74% 6
4 EGP 4.440 4.468 0.63% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 OKN 1.970 1.770 - 10.15% 5
2 JBH 17.996 16.925 - 5.95% 8
3 MAH 0.713 0.685 - 3.93% 4
4 WHC 7.090 6.980 - 1.55% 6
5 COH 54.840 54.084 - 1.38% 8
6 QUB 1.593 1.580 - 0.82% 4
7 ANZ 22.869 22.688 - 0.79% 8
8 WES 32.941 32.716 - 0.68% 8
9 TEN 1.036 1.029 - 0.68% 8
10 ANN 14.391 14.357 - 0.24% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 HST 3.237 20.300 527.12% 5
2 QUB 7.800 14.075 80.45% 4
3 BPT 4.140 4.920 18.84% 5
4 AWE 6.871 7.300 6.24% 7
5 QAN 12.988 13.688 5.39% 8
6 CHC 22.800 23.467 2.93% 6
7 AMP 32.103 32.678 1.79% 8
8 HGG 15.964 16.172 1.30% 6
9 STO 59.000 59.538 0.91% 8
10 OSH 14.833 14.959 0.85% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AZT 17.980 - 3.600 - 120.02% 5
2 WHC 37.600 31.650 - 15.82% 6
3 TEL 14.691 12.553 - 14.55% 8
4 PAN 11.475 9.925 - 13.51% 4
5 RIC 10.033 9.333 - 6.98% 3
6 TAH 47.375 44.438 - 6.20% 8
7 JBH 138.325 130.500 - 5.66% 8
8 OKN 18.620 17.640 - 5.26% 5
9 COH 220.275 210.400 - 4.48% 8
10 SMX 48.420 46.460 - 4.05% 5
 

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has seen downgrades by brokers in the FNArena database double the number of upgrades, 10 ratings being lowered to just five increases. Total Buy recommendations now stand at 57.1%, down from 57.4% last week.

Among the upgrades were Bathurst Resources ((BTU)), where Credit Suisse moved to an Outperform rating from Neutral given a view the smaller cap plays are now the more attractive in the Australian coal sector. Bathurst's overall rating also benefited from Citi initiating coverage with a Buy rating.

A recent profit warning saw the Fletcher Building ((FBU)) share price suffer but in JP Morgan's view the sell-off was overdone. On valuation grounds the broker upgraded to an Overweight rating from Neutral previously despite a cut in price target. Macquarie also lowered its target for the stock.

Iluka ((ILU)) has announced better than expected titanium oxide price increases, which has forced brokers across the market to lift earnings estimates and price targets. The changes suggest some upside remains for the stock, enough for RBS Australia to upgrade to a Buy rating from Hold previously.

A US asset sale by Investa Office ((IOF)) was well received by the market given a price in excess of book value. The sale saw UBS lift its price target slightly, the broker also upgrading to a Buy rating given the potential valuation upside from further asset sales.

Management at Peet ((PPC)) offered cautious commentary at the group's AGM this week and the market reacted by pushing down the stock. The falls have been overdone according to Citi, who has upgraded to a Buy rating on valuation grounds.

Among the downgrades was Adelaide Brighton ((ABC)), JP Morgan cutting its rating to Neutral from Overweight following relative outperformance. This is a valuation call as the stock is now trading close to the broker's price target.

Clough ((CLO)) has reported some cost overruns and margin pressure on two contracts, enough for RBS Australia to lower its earnings estimates and price target. The changes are enough for a downgrade to a Hold rating, again a valuation call on the part of the broker.

Valuation is also behind Credit Suisse's downgrade of Gloucester Coal ((GCL)) to a Neutral rating, this following recent share price outperformance. Minor adjustments to earnings forecasts have accompanied the downgrade.

With earnings to be impacted by some one-offs UBS has cut forecasts for HFA Holdings ((HFA)). The changes have also seen its price target cut, while a lack of positive momentum sees the broker downgrade to a Neutral rating.

A lack of positive catalysts is also behind Citi's downgrade of Hills Industries ((HIL)), as earnings are still being impacted by the strong Australian dollar and ongoing challenges in the building industry. Target has been trimmed on minor cuts to estimates.

Deutsche Bank has lowered forecasts for Newcrest ((NCM)) given changes to production expectations, the changes seeing a reduction in price target. On valuation grounds the broker has moved to a Hold rating from Buy previously, the only non-Buy recommendation on Newcrest in the FNArena database.

Demand for IT services is expected to remain subdued given weak domestic economic growth and to reflect this Macquarie sees scope for some contract cancellations. This is likely to impact on earnings for Oakton ((OKN)), so the broker has adjusted its model to the point its rating has been downgraded to Neutral.

A solid run in Programmed Maintenance ((PRG)) shares has seen Citi downgrade to a Neutral rating on valuation grounds. The downgrade comes despite a modest increase in price target. Citi has also downgraded Transurban ((TCL)) to a Neutral rating on the same basis.

United Group ((UGL)) has acquired the DTZ trading assets and this offers the company a European property footprint. Despite this RBS Australia sees a slower rate of margin improvement going forward, enough to downgrade to a Hold rating. Targets for the stock have risen overall to reflect the impact of the acquisition.

Price targets for Charter Hall Office ((CQO)) have risen slightly following news the bidding consortium has lifted its offer slightly, while targets for APN News and Media ((APN)) have fallen on the back of cuts to earnings estimates post the company's investor day.

Broker models for Australian Worldwide Exploration ((AWE)) have been adjusted on news the company has sold part of its stake in the BassGas project, the changes having minor impact on price targets across the market.

Weak global markets have Computershare's ((CPU)) earnings under pressure, enough for JP Morgan to adjust its forecasts. Models have also been adjusted to reflect the recently completed Specialised Loan Services acquisition.

New guidance from Independence Group ((IGO)) has seen brokers lower estimates and price targets, while changes to aluminium price expectations mean BA Merrill Lynch has trimmed its earnings estimates for Alumina Ltd ((AWC)). 


 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup
Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,RBS<*br*>Australia,UBS&b0=123,118,128,107,94,149,189,158&h0=74,96,80,118,87,91,112,81&s0=41,18,14,6,25,20,6,13" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 BATHURST RESOURCES LIMITED Neutral Buy Credit Suisse
2 FLETCHER BUILDING LIMITED Neutral Buy JP Morgan
3 ILUKA RESOURCES LIMITED Neutral Buy RBS Australia
4 INVESTA OFFICE FUND Neutral Buy UBS
5 PEET & COMPANY LIMITED Buy Buy Citi
Downgrade
6 ADELAIDE BRIGHTON LIMITED Buy Neutral JP Morgan
7 CLOUGH LIMITED Buy Neutral RBS Australia
8 GLOUCESTER COAL LTD Buy Neutral Credit Suisse
9 HFA HOLDINGS LIMITED Buy Neutral UBS
10 HILLS HOLDINGS LIMITED Buy Neutral Citi
11 NEWCREST MINING LIMITED Buy Neutral Deutsche Bank
12 OAKTON LIMITED Buy Neutral Macquarie
13 PROGRAMMED MAINTENANCE SERVICES LIMITED Buy Neutral Citi
14 TRANSURBAN GROUP Buy Neutral Citi
15 UNITED GROUP LIMITED Buy Neutral RBS Australia
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 BTU 50.0% 100.0% 50.0% 3
2 IOF 33.0% 50.0% 17.0% 6
3 TPI 50.0% 67.0% 17.0% 6
4 ILU 75.0% 88.0% 13.0% 8
5 FBU 38.0% 50.0% 12.0% 8
6 SWM 63.0% 75.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CLO 100.0% 67.0% - 33.0% 3
2 GCL 100.0% 80.0% - 20.0% 5
3 OKN 60.0% 40.0% - 20.0% 5
4 TCL 100.0% 86.0% - 14.0% 7
5 UGL 71.0% 57.0% - 14.0% 7
6 PRG 100.0% 86.0% - 14.0% 7
7 CQO 43.0% 29.0% - 14.0% 7
8 FKP 80.0% 67.0% - 13.0% 6
9 ABC 88.0% 75.0% - 13.0% 8
10 NUF 38.0% 25.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 UGL 14.137 14.509 2.63% 7
2 SWM 4.045 4.151 2.62% 8
3 ILU 20.219 20.661 2.19% 8
4 PRG 2.437 2.456 0.78% 7
5 IOF 0.673 0.678 0.74% 6
6 TCL 5.859 5.899 0.68% 7
7 TPI 0.872 0.877 0.57% 6
8 CQO 3.568 3.586 0.50% 7
9 NUF 4.843 4.866 0.47% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 APN 1.140 1.004 - 11.93% 8
2 OKN 1.970 1.832 - 7.01% 5
3 CLO 0.927 0.870 - 6.15% 3
4 FKP 0.844 0.793 - 6.04% 6
5 AAX 3.016 2.873 - 4.74% 4
6 BTU 1.000 0.967 - 3.30% 3
7 NCM 45.195 43.939 - 2.78% 8
8 GCL 9.454 9.304 - 1.59% 5
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AWE 6.871 7.086 3.13% 7
2 CPU 51.447 52.513 2.07% 7
3 SWM 41.313 42.075 1.84% 8
4 SUN 78.325 79.400 1.37% 8
5 IMD 22.040 22.207 0.76% 3
6 CPB 305.329 307.043 0.56% 7
7 NHC 29.775 29.900 0.42% 3
8 MGX 38.088 38.163 0.20% 8
9 ABC 23.550 23.575 0.11% 8
10 BTU - 0.600 - 0.667 11.17% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AZT 17.980 - 3.600 - 120.02% 5
2 GBG 0.671 0.243 - 63.79% 6
3 IGO 12.820 7.560 - 41.03% 5
4 TCL 12.314 8.929 - 27.49% 7
5 PPC 7.108 5.792 - 18.51% 6
6 PAN 11.475 10.175 - 11.33% 4
7 AWC 5.893 5.387 - 8.59% 8
8 APN 13.438 12.350 - 8.10% 8
9 CLO 7.433 6.833 - 8.07% 3
10 TNE 7.767 7.200 - 7.30% 3
 

Technical limitations

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has proven to be a more balanced one for broker rating changes, the eight brokers in the FNArena database upgrading five ratings while downgrading seven stocks. Total Buy ratings now stand at 57.7%.

Among the upgrades was RBS Australia lifting its rating on Collection House ((CLH)) to Buy from Hold post a trading update that showed ongoing earnings momentum. While an equity raising is expected the size should be modest and given the move will reduce balance sheet leverage RBS sees the decision as a positive.

Also upgraded during the week was Computershare ((CPU)) after the company announced it had received approval for the acquisition of BNY Mellon Shareowner Services. Macquarie saw the announcement as enough of a positive to move to an Outperform rating from Underperform previously, given the long-term growth the deal should deliver.

Brokers across the market have adjusted earnings estimates and price targets for Computershare, not only to reflect the acquisition and two other small bolt-on deals, but to also include AGM earnings guidance that implied still weak operating conditions.

UBS upgraded Myer ((MYR)) post a quarterly sales result that met expectations, which for the broker implies evidence of some form of positive momentum building into the Christmas sales period. While no other ratings were adjusted brokers in general lifted earnings estimates and price targets for Myer on the back of the sales result.

An upgrade to Outperform from Neutral for Qantas ((QAN)) by Macquarie is a reflection of a de-risking of the earnings profile, this following some industrial resolutions. Macquarie has also lifted its price target but lowered earnings for FY12 to account for the airline paying compensation to passengers impacted by the recent grounding. 

On the downgrade side of the ledger, Australian Pipeline Trust ((APA)) saw two downgrades during the week, Macquarie and Credit Suisse moving to Neutral ratings from Outperform previously to account for a less attractive valuation following recent gains for the former and a sector review by the latter. 

Credit Suisse similarly downgraded Diversified Utility and Energy Trusts ((DUE)) to Neutral from Outperform as part of its sector review, while Macquarie has downgraded SP Ausnet ((SPN)) to Neutral from Outperform on the back of a fall in price target. The change reflects cuts to earnings forecasts to account for higher interest costs and a delay to some earnings.

Citi downgraded CSR ((CSR)) to Neutral from Buy post the interim earnings result, this as management downgraded the outlook for coming periods at the time of the result. Cuts to earnings estimates and price targets reflect ongoing headwinds, a theme identified also by others in the market.

Expectations of further falls in employment advertisement volumes have seen BA Merrill Lynch downgrade Seek ((SEK)) to Neutral from Buy, the move accompanied by cuts to earnings estimates and price target. As BA-ML points out, the current share price implies an unemployment rate of 6.0% for Australia, meaning there is downside risk if conditions in the labour market worsen beyond this level.

Citi has moved to Neutral from Buy on White Energy ((WEC)) to reflect uncertainty from news JV partner and coal supplier PT Bayan plans to increase the cost of feedstock coal. The move means increased risk to production expectations at the Tabang plant and so creates enough uncertainty for Citi to take a more cautious stance. The share price tanked following the news.

Ongoing uncertainty as to the full extent of recall issues for Cochlear ((COH)) has prompted Credit Suisse to downgrade to an Underperform rating from Neutral previously. The removal of a previous multiple premium sees the broker lower its price target for the stock as well.

With Citi initiating coverage on Miclyn Offshore ((MIO)) with a Buy rating and $2.15 price target overall ratings and the consensus target for the company have improved, while targets for Brambles have been adjusted slightly post a solid quarterly trading update. 

One consequence of the industrial issues at Qantas is an increase to earnings estimates for Virgin Blue ((VBA)) as both BA-ML and JP Morgan expect earnings to receive a boost from the company having picked up additional traffic in recent months.

Better than expected interim guidance from Seven Group ((SVW)) has seen earnings forecasts lifted across the market, while signs of a recovery for Macmahon ((MAH)) have prompted Macquarie to lift its full year numbers.

JP Morgan now sees a better US market outlook for Aristocrat ((ALL)) and has adjusted its numbers accordingly, while Telecom New Zealand ((TEL)) has seen some minor changes to valuation models leading into structural separation.

The announcement of $50 million in losses related to the flooding in Thailand has led to brokers lowering earnings estimates for Insurance Australia ((IAG)), while commissioning delays have caused Deutsche Bank to lower forecasts for Lynas Corporation ((LYC)). A similar delay to first shipments from Karara have prompted cuts to earnings estimates and price targets for Gindalbie ((GBG)).

Weak interim guidance was enough for brokers to lower forecasts for Perpetual ((PPT)), while difficult trading conditions have seen Credit Suisse trim forecasts for Boral ((BLD)). Orica ((ORI)) has also seen earnings estimates lowered to reflect additional costs stemming from the forced shutdown of the Kooragang ammonia storage facility.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 COLLECTION HOUSE LIMITED Neutral Buy RBS Australia
2 COMPUTERSHARE LIMITED Sell Buy Macquarie
3 MYER HOLDINGS LIMITED Neutral Buy UBS
4 QANTAS AIRWAYS LIMITED Neutral Buy Macquarie
Downgrade
5 AUSTRALIAN PIPELINE TRUST Buy Neutral Credit Suisse
6 CSR LIMITED Neutral Neutral Citi
7 DIVERSIFIED UTILITY AND ENERGY TRUSTS Buy Neutral Credit Suisse
8 SEEK LIMITED Buy Neutral BA-Merrill Lynch
9 SP AUSNET Buy Neutral Macquarie
10 SP AUSNET Buy Neutral UBS
11 WHITE ENERGY COMPANY LIMITED Buy Neutral Citi
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CPU 14.0% 57.0% 43.0% 7
2 BXB 63.0% 75.0% 12.0% 8
3 MYR 13.0% 25.0% 12.0% 8
4 MIO 67.0% 75.0% 8.0% 4

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 APA 63.0% 38.0% - 25.0% 8
2 SEK 88.0% 75.0% - 13.0% 8
3 COH - 25.0% - 38.0% - 13.0% 8
4 MRM 80.0% 67.0% - 13.0% 6
5 DUE 50.0% 38.0% - 12.0% 8
6 TSE 50.0% 40.0% - 10.0% 5
7 SGT 50.0% 43.0% - 7.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 CPU 8.526 9.277 8.81% 7
2 MIO 1.970 2.015 2.28% 4
3 MYR 2.509 2.563 2.15% 8
4 BXB 7.581 7.626 0.59% 8
5 APA 4.430 4.443 0.29% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 TSE 2.922 2.788 - 4.59% 5
2 MRM 3.500 3.433 - 1.91% 6
3 COH 55.315 54.840 - 0.86% 8
4 DUE 1.796 1.785 - 0.61% 8
5 SEK 7.309 7.265 - 0.60% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 VBA 2.614 2.871 9.83% 7
2 SVW 78.100 81.900 4.87% 4
3 MAH 5.800 5.933 2.29% 3
4 ORI 195.563 199.613 2.07% 8
5 ALL 10.688 10.863 1.64% 8
6 MIO 21.072 21.377 1.45% 4
7 TEL 18.347 18.532 1.01% 8
8 EGP 20.538 20.725 0.91% 8
9 APA 19.163 19.288 0.65% 8
10 IAG 26.725 26.875 0.56% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 LYC 0.850 0.540 - 36.47% 4
2 GBG 1.157 0.771 - 33.36% 6
3 IGO 15.760 12.820 - 18.65% 5
4 DUE 11.169 9.569 - 14.33% 8
5 PPT 154.100 135.400 - 12.13% 7
6 OST 17.043 15.114 - 11.32% 7
7 CSR 17.525 16.225 - 7.42% 8
8 CPU 54.560 51.497 - 5.61% 7
9 PRU 23.600 22.517 - 4.59% 6
10 BLD 26.550 25.425 - 4.24% 8
 

Technical limitations

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Total Buy ratings among brokers in the FNArena database continue to increase as the market works its way through profit reporting season, the database showing 51 upgrades this week against 25 downgrades. Total Buy ratings now stand at 57.9%, up from 56.2% last week.

Among those enjoying upgrades to ratings were Charter Hall Office ((CQO)) as models were adjusted to reflect both better than expected full year earnings and the sale of the group's US portfolio. Charter Hall Retail ((CQR)) similarly enjoyed an upgrade following a solid operational result for the full year.

A similarly good result from Super Retail ((SUL)) has seen ratings upgraded for what is regarded as one of the top picks in the retail sector, while a solid profit result and good earnings momentum in coming years saw upgrades for Challenger Financial Services ((CGF)).

Whitehaven Coal ((WHC)) has been upgraded given its attractiveness among a limited number of options for Australian coal plays, while recent share price weakness has seen an upgrade in rating for Ridley Corp ((RIC)). Others to enjoy upgrades over the past week include Blackmores ((BKL)) and Virgin Blue ((VBA)). 

On the downgrade side Mortgage Choice ((MOC)) has seen ratings lowered by two brokers despite what was regarded a solid profit result, while ANZ Banking Group ((ANZ)) suffered a similar fate post a below consensus trading update.

While the outlook for Beadel Resources ((BDR)) remains positive, the stock has been downgraded following the announcement of a capital raising, while the view risk remains to the downside was enough for Ardent Leisure ((AAD)) to equally receive a downgrade in rating.

Tough macro conditions explain the downgrade for Southern Cross ((SXL)), while new guidance from management is enough to generate a downgrade for Downer EDI ((DOW)). Board infighting is enough to see Mount Gibson ((MGX)) downgraded, while others seeing drops in ratings include Telecom New Zealand ((TEL)) and Telstra ((TLS)).

In terms of price targets, Increases to forecasts for ARB Corporation ((ARP)), Challenger, Mortgage Choice and Whitehaven have driven increases to broker target prices, while changes to models have also seen targets rise for the likes of Kingsgate Consolidated ((KCN)), Perseus Mining ((PRU)) and NRW Holdings ((NWH)).

Targets have fallen for Consolidated Media Holdings ((CMJ)), Seven West Media ((SWM)) and Southern Cross as slower growth expectations are factored into the media sector, while QBE Insurance ((QBE)) also saw cuts to targets as operating conditions remain difficult for the company.

Adjustments to earnings estimates in coming years have meant cuts to targets for Ausenco ((AAX)) and Ardent Leisure, while the board issues at Mount Gibson and a lack of catalysts for Boart Longyear ((BLY)) also impact on price target assessments.

Changes to earnings forecasts are largely profit result related, with increases to forecasts for Santos ((STO)), Woodside ((WPL)), Mortgage Choice, NIB Holdings ((NHF)) and Sedgeman ((SDM)) and cuts for BlueScope Steel ((BSL)), Beadel, QBE Insurance, DUET ((DUE)), Ardent Leisure, Australian Pipeline Trust ((APA)) and Goodman Fielder ((GFF)).

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CQO - 14.0% 57.0% 71.0% 7
2 CQR - 14.0% 43.0% 57.0% 7
3 SUL 50.0% 100.0% 50.0% 6
4 CGF 57.0% 100.0% 43.0% 7
5 WHC 33.0% 67.0% 34.0% 6
6 BKL 33.0% 67.0% 34.0% 3
7 RIC 33.0% 67.0% 34.0% 3
8 NWH 67.0% 100.0% 33.0% 3
9 AAX 50.0% 80.0% 30.0% 5
10 VBA 43.0% 71.0% 28.0% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MOC 67.0% 33.0% - 34.0% 3
2 ANZ 63.0% 38.0% - 25.0% 8
3 BDR 50.0% 33.0% - 17.0% 3
4 AAD 83.0% 67.0% - 16.0% 6
5 SXL 86.0% 71.0% - 15.0% 7
6 DOW 57.0% 43.0% - 14.0% 7
7 MGX 88.0% 75.0% - 13.0% 8
8 TEL 38.0% 25.0% - 13.0% 8
9 TLS 63.0% 50.0% - 13.0% 8
10 PBG 38.0% 25.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 ARP 8.063 8.675 7.59% 4
2 WHC 6.842 7.108 3.89% 6
3 CGF 5.471 5.603 2.41% 7
4 MOC 1.427 1.460 2.31% 3
5 PRU 3.430 3.508 2.27% 6
6 KCN 9.270 9.456 2.01% 5
7 NWH 3.260 3.310 1.53% 3
8 NCM 44.126 44.626 1.13% 8
9 DXS 0.929 0.936 0.75% 7
10 CQR 3.287 3.310 0.70% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 CMJ 3.197 2.672 - 16.42% 7
2 SWM 4.845 4.103 - 15.31% 8
3 QBE 18.776 16.208 - 13.68% 8
4 AAX 3.375 3.016 - 10.64% 5
5 AAD 1.590 1.445 - 9.12% 6
6 MGX 2.163 1.988 - 8.09% 8
7 SXL 1.864 1.716 - 7.94% 7
8 BLY 4.879 4.544 - 6.87% 8
9 ANZ 24.824 23.399 - 5.74% 8
10 CTX 12.742 12.103 - 5.01% 6
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 STO 49.825 56.313 13.02% 8
2 WPL 183.740 205.667 11.93% 8
3 TOL 44.075 48.513 10.07% 8
4 MOC 14.000 15.267 9.05% 3
5 MRE 5.575 6.067 8.83% 4
6 NHF 12.933 14.067 8.77% 3
7 SDM 17.033 18.500 8.61% 3
8 TEL 17.297 18.353 6.11% 8
9 NWH 23.700 25.133 6.05% 3
10 PRU 19.000 20.100 5.79% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 BSL 3.843 - 0.543 - 114.13% 7
2 BDR 9.300 7.633 - 17.92% 3
3 QBE 158.295 135.288 - 14.53% 8
4 DUE 12.763 10.969 - 14.06% 8
5 AAD 15.167 13.050 - 13.96% 6
6 KCN 119.640 106.880 - 10.67% 5
7 APA 21.563 19.413 - 9.97% 8
8 OGC 16.274 14.917 - 8.34% 3
9 GFF 10.663 9.813 - 7.97% 8
10 SWM 44.513 41.575 - 6.60% 8
 

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

MS Predicts Upgrades For Resources, Plus More On Media

By Rudi Filapek-Vandyck

Hot on the heels of media sector updates by UBS and Deutsche Bank comes a similar exercise by media analysts at Morgan Stanley. As one would expect, MS has a slightly different take on things (see also our story yesterday “Not All Media Stocks Are The Same”).

There appears to be agreement across sector specialists that shares of Fairfax Media ((FXJ)) look structurally undervalued, and Morgan Stanley shares the same view. Otherwise, the analysts like Ten ((TEN)), Seek ((SEK)) and REA Group ((REA)), plus Austereo ((AEO)) for investors seeking dividend yield.

Morgan Stanley has an Underweight rating for APN News & Media ((APN)), Austar ((AUN)), Seven ((SVW)) and West Oz News ((WAN)).

One of the interesting predictions made in the sector update is the fact that job ads will at some point make a significant shift to the internet in Western Australia, with devastating impact on West Oz News.

Also hot on the heels of some of my personal market analyses recently, the commodities desk at Morgan Stanley has issued its own sector update, predicting market momentum is about to shift from pure base metals producers to the Diversifieds.

Why? Morgan Stanley is anticipating a wave of upgrades by analysts, to take place around the end of the current quarter (Q3 ends this month) and which should see resources analysts across the market lift their price forecasts for bulk commodities in the year ahead, iron ore in particular.

A strong Aussie dollar, however, is anticipated to temper much of the additional upside. Regardless, Morgan Stanley reiterates what my analysis revealed already: diversified resources stocks (think BHP Billiton ((BHP)) and Rio Tinto ((RIO)) are currently cheap, cheap, cheap.

In line with predictions made public elsewhere recently (Barclays, Macquarie and others) Morgan Stanley believes copper prices are poised for a strong rally.

The analysts see two factors supporting such prediction:

1) scarcity of supply from mines and seasonal demand lead recovery
2) a short squeeze being played out in markets.

Unlike previous short squeezes on the market, the analysts forecast this time copper prices probably won't pull back after, with the analysts predicting copper might continue to see support for a sustainable price as high as US$4.00/lb.

For those investors who haven't got tired of hearing about the new government and its potential impact on the Australian share market yet, RBS Australia today published its own assessment.

Negative impacts are seen for commodity stocks, due to the prospect for higher tax, for energy and utilities companies, due to the prospect for the introduction of some sort of a carbon tax, for banks, due to the prospect of additional regulation and restrictions, for gaming stocks, due to the prospect of extra restrictive legislation, and for healthcare stocks as the new government is seen as less supportive of private healthcare than the Liberals would be.

Positive impacts are seen for the media sector, due to expected relaxation of rules, for wealth managers, due to the prospect for increased super contributions and for telcos, possibly, as a result of the government's NBN plan.

All in all, the new government is seen as a net-negative for the share market overall.

RBS analysts in Hong Kong see a trading opportunity in Asian steel stocks, predominantly on the back of temporary relief in input costs. Could be a rubb-off effect on Australian steel stocks?

Analysts at UBS are this morning toying with the idea of who might be the next international retailer to put more extra pressure on local retailers in the Australian market. Their guess is the next battleground will be cosmetics, and their preferred candidate to announce next it will be visiting Australian shores is Sephora.

Possible impact? Nothing genuinely scary in terms of real earnings impact for the likes of Myer ((MYR)) and David Jones ((DJS)), argues UBS, but it will probably put a dent in sentiment overall towards these department store owners.

article 3 months old

Previewing FY10 Results And FY11 Outlook

By Greg Peel

Cash is king, says RBS Australia. The analysts recognise this line is a cliché, but in such uncertain times they suggest the “quality” of earnings results is just as important as the quantity. Quality is obviously a subjective measurement, but RBS believes quality can be quantified at least in part by a calculation known as a “cash realisation ratio”.

The analysts want to deploy CRR measurements given cashflow generation is a “unifying force” among companies that cuts through the noise of factors within company reports including one-off items, provisions, seasonal earnings bias and so forth. The CRR is measured as normalised profit after tax (NPAT) plus depreciation and amortisation divided by operating cashflow. It represents the “cash backing” of earnings and thus their quality, RBS suggests.

RBS has applied CRRs to its FY10 forecasts for stocks in the ASX 100 and will recalculate once all reports are in.

The top ten stocks on a CRR basis are Australian Worldwide ((AWE)), Oil Search ((OSH)), United Group ((UGL)), OZ Minerals ((OZL)), OneSteel ((OST)), Goodman Fielder ((GFF)), Myer ((MYR)), Alumina Ltd ((AWC)), Woodside ((WPL)) and DUET ((DUE)).

The bottom ten are MAp Group ((MAP)), Paladin ((PDN)), Intoll ((ITO)), BlueScope ((BSL)), Amcor ((AMC)), CSR ((CSR)), Sims Group ((SGM)), Westfield ((WDC)), JB Hi-Fi ((JBH)) and James Hardie ((JHX)).

BA-Merrill Lynch has been looking at the infrastructure and utilities sector. The analysts expect “very solid” six-month results. Assuming no more “debt events” (such as another European implosion for example), Merrills expects this sector to hold up well through any further market volatility, although it is not so clear as to whether this “defensive” sector can actually continue to outperform.

Those companies in the sector Merrills is looking to for “stand-out” results are AGL ((AGK)), Asciano ((AIO)), MAp Group, Transurban ((TCL)), Australian Infrastructure ((AIX)) and ConnectEast ((CEU)). The analysts particularly like MAP and AIO.

The analysts have these stocks trading at steep discounts to their discounted cash flow valuations, but note that price/earnings and other multiples do look high in comparison to other sectors. This may mean some resistance from the market, but Merrills considers them reasonable “in light of earnings security and likely growth”.

The broker warns, however, that AGL has outperformed the market by 6% since the beginning of June which limits its upside.

Morgan Stanley has considered another so-called “defensive” sector, being healthcare, but suggests regulatory risk undermines such defensiveness. MS has Ramsay Health Care ((RHC)) and Ansell ((ANN)) on Overweight ahead of reporting season believing the market may be too conservative in its earnings forecast consensus. ResMed ((RMD)) is the analysts' preferred growth exposure, but upside appears now to be capped, they suggest.

The new government initiative of pathology centre licensing is a negative for companies in that game, Morgan Stanley suggests. The analysts thus have an Underweight on Primary Health Care ((PRY)) and note that while less exposed, Healthscope ((HSP)) and Sonic Healthcare ((SHL)) remain “vulnerable”.

Morgan Stanley believes expectations for earnings growth for Cochlear ((COH)) are too high following a survey of the implant industry.

From defensive to offensive, or cyclical, Morgan Stanley has also run its ruler over the resources sector.

Companies which the analysts believe have upside risk to earnings results are BHP Billiton ((BHP)), Rio Tinto ((RIO)), OZ Minerals, PanAust ((PNA)), Equinox ((EQN)) and Newcrest ((NCM)). Companies with downside risk are Alumina, Iluka ((ILU)), Fortescue ((FMG)), Macarthur Coal ((MCC)) and Centennial Coal ((CEY)).

Morgan Stanley suggests management outlook from resource sector companies will tend to be on the conservative side given ongoing global uncertainty over European debt and Chinese slowing. The MRRT will no doubt crop up and the Chinese steel price will be seen as a lead indicator with iron ore spot prices now falling.

The analysts nevertheless expect improving share prices for mining companies over the course of the September quarter.

UBS has looked at the Real Estate Investment Trust sector. After considering upside and downside risk to results and guidance, the “always coming” office recovery, debt refinancing obligations, asset valuations, dividend payout ratios and the recovery of funds flow into REIT investment, UBS prefers Westfield and Goodman Group ((GMG)).

Moving on to FY11 guidance and analyst forecasts, UBS suggest margin expectations are a little optimistic. The analysts expect timing will be adjusted to suggest a longer than previously anticipated recovery, such that FY11 earnings forecasts across the market will need to come down by some 5%. UBS does not expect any “huge” downside.

On a sector distribution basis, UBS' strategists are Overweight the mining sector and the industrial cyclicals (media, selected consumer discretionary and selected mining services). They are Neutral on the banks but note banks will outperform in any market bounce.

At the stock level, the strategists' strongest growth/defensive ideas are ResMed, AGL and Crown ((CWN)).

While RBS is looking at cash realisation ratios to assess FY10 results, Deutsche Bank is using profit “run rates” to gauge the outlook for FY11 in the emerging companies (small industrials) sector.

A “run rate” is simply an extrapolation of a previous result. If company XYZ posted $100m profit in the first half of FY10, for example, then its run rate implies a full-year profit of $200m. But Deutsche is using forecast second half run rates to gauge expectations of first half FY11 earnings.

Run rates lose their value for certain specific sectors or stocks where seasonality is a major factor (Christmas for retail, for example). And for cyclicals in general, run rates are not taking into consideration troughs and peaks in cycles. But nevertheless, Deutsche notes most stocks in its coverage universe have run rates below current forecasts. Says Deutsche, “It appears that the market's expectation for earnings growth has improved over the calendar year to date, but remains slightly negative to FY11 earnings growth. If results prove to be closer to run rates than current forecasts, the analysts would expect downward pressure on the Small Industrials index.

Stocks with an FY11 run rate below current forecasts include Ardent Leisure ((AAD)), Crane Group ((CRG)), GWA International ((GWT)), Miclyn Express ((MIO)), Mermaid Marine ((MRM)), Realestate.com ((REA)), Salmat ((SLM)), Spotless ((SPT)), Swick Mining Services ((SWK)), Transpacific ((TPI)) and Wotif ((WTF)).

Stocks with run rates above consensus forecasts include Flight Centre ((FLT)), Bradken ((BKN)) and NRW Holdings ((NWH)).

Leaving off where we began, with RBS, the analysts have had a look at FY11 prospects for the construction and engineering sector.

The upshot is that the roll-off of government infrastructure stimulus coupled with delays to new resource projects in light of mining tax uncertainty have meant a risk to short-term performance. The sector does appear to be recovering, but the recovery is neither uniform nor linear, RBS suggests.

The analysts thus warn of downside risk to current FY11 forecasts in the sector but they nevertheless have a positive medium-term view, looking for performance on a three-year basis.

On that measure, the stocks RBS prefers in the sector are Downer EDI ((DOW)), Transfield ((TSE)), WorleyParsons ((WOR)), Monadelphous ((MND)), United Group, Leighton ((LEI)) and Boart Longyear ((BLY)).

FNArena will bring readers more broker previews as they come to hand.

article 3 months old

A Guide To The Australian Reporting Season

By Greg Peel

In the US, listed companies report their earnings results officially on a quarterly basis, with the great concentration being around the natural quarters of March, June, September and December. The June quarter season has just begun.

In Australia, reporting is required only on a half-year basis, although often companies will provide interim quarterly updates. The majority of Australian companies work off a June financial year, meaning December half results posted in February and full year-results posted in August. Increasingly, companies reporting in US dollars (many resource sector stocks for example) are working off a December financial year, meaning their August results are half-years and their February results full-years.

Then there are other companies, such as three of the big banks, which report on an “off” cycle to everyone else. But suffice to say, we are about to hit the major reporting season for the year. Next week and the week after will see the first handful of results, the second week of August sees a lot more, and thereafter comes the deluge. By September it's all over.

It is important for investors to appreciate that the market response to a result has nothing to do with whether or not a company posts a record profit, or a record loss. Responses will only be based on whether a company matched, beat or fell short of analyst forecasts. Every single day of the year, stock prices are building in earnings expectations. Thus an actual earnings result is only providing confirmation of market expectations, and affirmation of pricing, or otherwise. The inexperienced investor is often perplexed when BHP, for example, announces a record profit yet its shares fall on the day. The reason for the fall is usually that the market had expected an even bigger record profit, and thus is disappointed.

One must also not discount the “buy the rumour, sell the fact” effect. A stock may go for a run ahead of its results announcement on anticipation of an “upside surprise”, for example. If the result does surprise to the upside, the stock price can still fall as traders take profits on a successful trade.

Which brings us to the contradictory notion of “surprise”. Ahead of a results season, brokers will usually prepare lists of those stocks which their analysts believe may “surprise to the upside” or “surprise to the downside”. Your old English teacher would probably immediately ask “How can one expect something to surprise? Surely it cannot be a surprise if expected?” However, the butchered English simply reflects an analyst's view that perhaps market consensus is a bit conservative, for example, on a particular stock, and that it will find itself surprised by the result.

In the US, it's very easy to know immediately whether a result has “beaten the Street” or not given a very specific focus on earnings per share (EPS) and revenue forecasts and comparable results. In Australia, we tend to focus on the profit number. This is problematic, given profit results can be impacted by such things as tax changes, asset write-downs, depreciation charges and so forth. Analysts will often speak of a “messy” result, which is one which requires the report to be picked apart before the “real” performance can be gauged. It may not thus be immediately apparent whether the result is a “beat” or not. Sometimes an analyst needs a few hours to arrive at realistic opinion.

This also flows through to the important notion of result “quality” as opposed to “quantity”. The quantity of a result is simply the profit or earnings number which can be compared to last half and the same half last year, as well as previous management guidance and analyst forecasts. But let's say for example, that XYZ beat forecasts by a long margin, but did so because it closed and sold off several shops, slashed staff numbers, pared back inventory lines, brought forward tax losses, fully depreciated machinery – any such notion that suggests earnings were more about downsizing and less about growing revenues. Such a result lacks quality, because it paints a misleading picture of corporate growth.

Another example is banks which post solid trading profits from their proprietary desks in time of high market volatility. It's a good result in a quantitative sense, but not so in a qualitative sense given such volatility is unusual and such profits cannot be expected to always be repeated.

Quality or otherwise can take many forms.

Then having been hit with a series of numbers to interpret from the period past, the market will also take note of ongoing company guidance. Analysts do not only have FY10 forecasts running, they also have FY11 forecasts (and beyond) in their models. Guidance is just as important as the result.

For example, a company's accompanying statement to a result might be something like “We saw difficult trading conditions in FY10 but evidence in the past month or so suggests prices are firming and margins are increasing. We are forecasting an FY11 profit improvement of X”. Once again, the value of X is only important by comparison to analysts' FY11 forecasts, not as an absolute number. But if a company posts a weak result but sweetens it with better than expected guidance for the period ahead, that stock may still find buyers when selling might have been expected.

Note, however, that some companies may choose to provide only near term guidance, or, perhaps citing “uncertain global conditions”, provide none at all. There is no obligation, but the market does tend to assume by default that no news is bad news.

Just when you thought it was getting complicated, we must also consider the notion of “sandbagging”. 

Given it is always better for a company to beat market expectations than fall short, company managers will often understate their ongoing guidance, or even guidance updates they produce leading up to a result. This might strictly be called misleading disclosure, but such an accusation is hard to prove if management argues it was simply being “conservative”. By understating guidance, companies have a better chance of “surprising to the upside” when the true result is revealed. This is known as sandbagging.

Macquarie Group, for example, became known as a serial sandbagger back in its glory days before the GFC. Every half the bank would post conservative guidance and every result would blow that guidance away. But the market became so used to this game that analysts would simply take Macquarie's profit guidance and add 10-20% as a rule before declaring any “surprise”. So it helps not to become too transparent.

On the other side of the coin, some companies have been known to constantly miss guidance, leading to unexpected profit downgrades, which suggests they may be serial over-staters. As to whether this is deliberate or simply innocent evidence of rose-tinted glasses is by the by. Companies which do seem to overstate guidance are usually held in contempt and marked down for such “risk”.

So taking all of the above, the small investor must be wary of any knee-jerk reactions to profit results. BHP might report a record profit, but that does not necessarily ensure its share price will go up. Did the result beat analyst forecasts? Did the result beat company guidance? Was it a result of good quality? Was it a “messy” result? Was ongoing guidance positive? And was it more positive than FY11 forecasts suggest? All of these considerations must be made.

Often you'll see a stock price spike one way and then do an about-turn soon after, or even the next day. Stock analysts can tell you immediately whether a profit result was higher or lower than consensus, but before readjusting their views they will first tune into the conference calls held by management, pick through the details of the report, look at guidance, re-run their models and generally reformulate their outlooks. It may not be until the day after, or more, that an analyst decides, for example, to upgrade a stock to Buy.

So it's best for longer term investors to leave short term trading to the traders, and to wait for the dust to settle before considering portfolio adjustments.

Enjoy results season.