By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday October 10 to Friday October 14, 2016
Total Upgrades: 13
Total Downgrades: 14
Net Ratings Breakdown: Buy 41.51%; Hold 42.97%; Sell 15.52%

Stockbroker upgrades and downgrades for individual listed ASX-stocks almost remained in balance during the week ending on Friday, 14th October 2016. FNArena registered 13 upgrades and 14 downgrades.

Amongst those receiving upgrades were Magellan Financial, REA Group, Transurban and Vocus Communications. The table for stocks receiving downgrades is stacked with resources stocks, of which both Alumina Ltd and BHP Billiton received two downgrades each. Both miners and oil & gas producers are included. Maybe the latter is the most important observation?

ALS Ltd is the only one with a significant positive adjustment to broker price targets; up 7.68%. Negative adjustments are noticeably larger for the week with Karoon Gas topping the other side of the table with a depreciation of its consensus target by -8.36%. Regis Healthcare, OceanaGold, Bank of Queensland and Santos all suffered cuts of at least 4%.

Western Areas enjoyed the largest increase to earnings forecasts; up 34%, followed by Whitehaven Coal (+24%), BHP Billiton (+11%) and South32 (+8%).  Again, negative adjustments to profit estimates are larger in size with gold producer Perseus Mining topping the negative list, suffering a fall of no less than -336%. Next up is lithium play Orocobre (-111%), followed by Iluka Resources (-20%) and Santos (-12%).

This week sees an acceleration in quarterly market updates, including production reports by mining companies and oil and gas producers, plus AGMs from the likes of Qantas, Cochlear, Amcor and Insurance Australia Group. Amidst a noticeable loss of momentum for the share market overall, investors will be paying close attention for any disturbing details or changes in priced-in outlooks.

Upgrade

BEADELL RESOURCES LIMITED ((BDR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/0

Exploration drilling is pointing to higher grades at Tucano and satellite drilling around Duckhead is also turning up positive results. The company has also strengthened its North American alignment, Macquarie notes, ahead of a planned listing on the Toronto exchange.

Macquarie suggests Beadell's new sense of direction is gathering momentum. Operational improvements need to be confirmed but the trend is in the right direction. With mine life extensions looking likely, the broker upgrades to Outperform. Target rises to 50c from 40c.

BIGAIR GROUP LIMITED ((BGL)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Superloop ((SLC)) has lodged a takeover offer for BigAir, which Morgans estimates values the shares at $1.09, assuming shareholders take 100% scrip.

The broker envisages limited downside risk for the transaction, noting the possibility, albeit unlikely, of a higher offer. The main risk is the value on conversion to Superloop stock and the Superloop share price staying at current levels.

Morgans considers BigAir an attractive entry to Superloop and raises its rating to Add from Hold. Target rises to $1.09 from 75c.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/1

The share price may have fallen since the FY16 result but Credit Suisse observes very strong flows. The broker believes the concerns about a weak fund performance are overdone.

Earnings estimates are upgraded 1-2% to reflect higher funds assumptions. The broker expects the fund performance will benefit as weak quarters roll off. Funds under management were up 4.5% in the September quarter.

Rating is upgraded to Outperform from Neutral. Target is $26.

MEDIBANK PRIVATE LIMITED ((MPL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/5/1

The share price has fallen 25% from its peak less than six months ago. Credit Suisse now considers the stock fair value and upgrades to Neutral from Underperform. Target is $2.50.

The broker continues to expect earnings will be volatile with potential for large moves in profitability in both directions. Moreover, investors are cautioned to be mindful of the regulatory risk. The broker is in no doubt the industry is over earning and that the magnitude of the 2016 premium rate increases should have been lower.

MOTORCYCLE HOLDINGS LIMITED ((MTO)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Industry data suggests motorcycle sales are buoyant and Morgans upgrades FY17 growth assumptions to 7% from 4.5%. The industry remains ripe for consolidation and the broker believes it is just a matter of time before the company makes another acquisition.

The main downside risk is a deterioration in economic conditions and discretionary spending. Rating is upgraded to Add from Hold. Target rises to $3.86 from $3.65.

MAYNE PHARMA GROUP LIMITED ((MYX)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/0/0

UBS upgrades earnings estimates on the back of FX updates. The broker expects the company can outperform generic industry growth through to 2021 and build a track record with successful integration of recently acquired products.

Given recent share price weakness, UBS upgrades to Buy from Neutral to reflect a forecast excess return above its market return threshold.Target rises to $2.30 from $2.20.

OZ MINERALS LIMITED ((OZL)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/5/2

UBS is starting to shift its view, having been negative for some time on copper. The broker observes the demand side is stronger, particularly in China while supply side growth should slow.

2017 earnings estimates lift 19% on higher copper prices.

Despite the risks, with few ways to play copper in Australia, the broker upgrades OZ Minerals to Neutral from Sell. Target rises to $6.34 from $6.26.

REA GROUP LIMITED ((REA)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/2

Following the recent back tracking of the shares Credit Suisse upgrades to Outperform from Neutral. The share price weakness has been driven by lower property listing volumes but the broker believes this is only a temporary issue.

Hence, there is a buying opportunity and Credit Suisse expects the share price to re-rate as listings recover. Target is unchanged at $61.00.

SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 1/1/4

Ord Minnett has reviewed earnings and re-assessed the value of the company's property portfolio. The stock appears to be in sound shape and the portfolio composition improved post the sale of its NZ assets.

The transaction market is still conducive to acquiring neighbourhood centres at reasonable yields and the company is now the leading industry consolidator, the broker observes.

These factors are expected to underpin growth in earnings per share of around 5% per annum over the next three years. The broker upgrades to Accumulate from Lighten and raises the target to $2.33 from $2.14.

TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/1

The NSW government has reversed its decision to ban greyhound racing from FY18. NSW greyhounds represent 5% of Tabcorp's wagering turnover.

Credit Suisse does caution investors that early indications of wagering growth could be erased later by intense competition.

The broker reverses its prior downgrade to FY18 estimates and upgrades its rating to Outperform from Neutral rating, despite a lack of constructive views on the UK venture, Sun Bets. Target is raised to $5.60 from $5.30.

TRANSURBAN GROUP ((TCL)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0

Citi analysts seem okay with the traffic numbers released yesterday. More importantly, they believe recent share price weakness on adjustments in global bond yields has gone too far.

Citi analsts see the stock as well supported by growth opportunities plus earnings upside risk in the medium term from higher bond yields. On top of this they also consider potential future blue sky opportunities from road pricing reform, and -further out- the benefits from autonomous vehicles.

Upgrade to Buy from Neutral. Target price remains $11.75.

UGL LIMITED ((UGL)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 1/2/1

Deutsche Bank upgrades to Buy from Hold, believing the risk/reward is now appealing. The stock offers a 9% dividend yield on FY18 estimates with compound earnings-per-share growth of 3.6% from FY17-20.

The broker considers the current share price contains an overly bearish scenario but does not discount the risks of further over-runs in costs at Ichthys. E&C revenue forecasts are lowered for FY18-20 to reflect no expected recovery in resources construction revenue.

Target is reduced to $2.36 from $2.78.

VOCUS COMMUNICATIONS LIMITED ((VOC)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

The Vocus share price has been under the pump in recent weeks and that almost reads like a severe understatement. Citi analysts have now jumped to the rescue, essentially declaring the market is being silly.

Even with slower growth ahead, which has become Citi's base case scenario, Vocus shares look significantly undervalued in the analysts' opinion. They have upgraded to Buy from Neutral while the target (on lowered estimates) drops to $7.40 from $8.00.

Downgrade

ANSELL LIMITED ((ANN)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/6/1

UBS updates its FX assumptions and believes Ansell has exited a 12-18 month period of headwinds in terms of operations and currency and is on the cusp of improving underlying trading.

The broker believes the growth profile is not that different from other industrial stocks and its share price should reflect a similar allocation of value to long-term earnings growth.

Rating is downgraded to Neutral from Buy as material share price gains now limit the potential return against the broker's price target. Target rises to $24.55 from $24.50.

ALUMINA LIMITED ((AWC)) Downgrade to Sell from Neutral by Citi and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/4/2

Citi analysts expect alumina prices to be range bound between US$230-260/t over the next 12 months, capped by potential Chinese capacity that can restart when prices rise higher.

Alumina Ltd's share price has rallied on the back of a favourable agreement with JV partner Alcoa and rising alumina prices. Time for a pause. Citi downgrades to Sell from Neutral. Price target remains $1.30.

Alcoa's September quarter alumina earnings underwhelmed Ord Minnett. Following a strong run up in the share price, the broker suspects Alumina Ltd is approaching fair value.

The broker acknowledges the good balance sheet and placement of assets on the cost curve but downgrades to Hold from Accumulate. Target is steady at $1.60.

BHP BILLITON LIMITED ((BHP)) Downgrade to Sell from Neutral by Citi and Downgrade to Neutral from Buy by UBS .B/H/S: 4/3/1

Citi analysts expect prices for bulk commodities to pull back "significantly" in late-16 and into 2017 on cooling demand and as supply responds. They have downgraded to Sell from Neutral and cut the price target to $20 from $21 as a result.

There is a chance for an offset, say the analysts, were Chinese authorities to implement further policy measures to support coal and steel prices and/or monetary
stimulus to support growth.

Note: on Citi's projections, BHP will be enjoying a big boost to profits in FY17, but yet another drop off in momentum in FY18 when current estimates for both EPS and DPS are significantly lower than estimates for the current year.

UBS is downgrading to Neutral from Buy believing the risk/reward has become more balanced as iron ore and coal prices are expected to fall back over the next 3-6 months and oil prices stabilise.

The company has largely completed its restructuring in the broker's view and the priority now is to strengthen the balance sheet. FY17 EBITDA forecasts are upgraded by 13%. Target rises to $23.50 from $23.00.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/5/1

FY16 results were soft, with margin performance the weakest element. UBS believes the pressure on net interest margins is ongoing but the one area of improvement continues to be asset quality.

Cost initiatives and niche products are expected to be beneficial but unlikely to offset the headwinds. The broker now assumes a reduction in the second half dividend. Rating is downgraded to Sell from Neutral given the recent rally. Target is lowered to $10.00 from $10.50.

DOWNER EDI LIMITED ((DOW)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/3/0

Changes to FX assumptions have led Deutsche Bank to review earnings forecasts and target prices for the engineering and contractor sector. Earnings per share changes for FY17-20 range from reductions of 6.3% to increases of 2.7%.

Downer EDI is downgraded to Hold from Buy as it is trading close to the broker's target price. Target is raised to $5.22 from $5.20.

INVESTA OFFICE FUND ((IOF)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/1

UBS pares back expectations for growth in earnings per share and dividends. While forecasts for Sydney office in 2016/17 envisage robust growth this is tempered by caution on Sydney rents in 2018 and softer growth expected from Melbourne.

The broker also notes material over renting in specific assets in the portfolio. Rating is downgraded to Sell from Neutral. Target is reduced to $4.17 from $4.42.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/5/1

Citi analysts observe NAB shares have outperformed amidst a notable rotation in investor funds flows in the Australian banking sector. But now the going is expected to get tougher and thus the recommendation has been pulled back to Neutral from Buy.

According to the analysts, continuation of the stocks’ outperformance appears less clear cut now as management at the bank is tackling a number of substantial issues within the remaining operations. Target drops to $30.50 from $31.50. Earnings estimates have been rejigged, a little.

Note: on current projections by Citi NAB will cut its dividend next financial year to 158c from an estimated 178c this year.

OIL SEARCH LIMITED ((OSH)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/2/2

Credit Suisse has lowered its forecast pricing for oil, most notably dropping its long term Brent price to US$65/bbl from US$70/bbl. On the broker's valuation, Oil Search's current trading price implies US$70 oil at a US$75c Aussie.

Hence valuation was already stretched, and now the broker has dropped its target to $5.80 from $6.30. This has prompted a downgrade to Underperform.

RIO TINTO LIMITED ((RIO)) Downgrade to Sell from Neutral by Citi .B/H/S: 5/2/1

Citi analysts expect prices for bulk commodities to pull back "significantly" in late-16 and into 2017 on cooling demand and as supply responds. They have downgraded to Sell from Neutral.

There is a chance for an offset, say the analysts, were Chinese authorities to implement further policy measures to support coal and steel prices and/or monetary
stimulus to support growth. Price target has moved to $47 from $46.

Also, Citi analysts foresee capex starting to rise again in order to maintain iron ore production levels, to US$5.2bn in 2017 and further to US$5.5bn in 2018. Regardless, the company has room for capital management in 2017 due to an estimated US$2bn in excess capital, even with lower iron ore prices, on Citi's calculations.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/5/1

UBS downgrades South32 to Neutral from Buy and lifts the target to $2.50 from $2.25. The broker considers the risk/reward is more balanced as coal and manganese prices are expected to fall back over the next three months. The rand is also becoming a headwind.

The company has said it is contemplating two transactions and additional returns are expected in FY17 as cash continues to build. UBS upgrades FY17 EBITDA by 23%.

SANTOS LIMITED ((STO)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 5/1/1

Credit Suisse has lowered its forecast pricing for oil, most notably dropping its long term Brent price to US$65/bbl from US$70/bbl. On the broker's valuation, Santos' current trading price implies US$62 oil at a US$75c Aussie.

Target falls to $3.50 from $3.90, prompting a downgrade to Underperform.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/3

UBS expects the company to focus on cost controls in FY17. Thermal coal price estimates are lifted for FY17 by 6% to US$68/t and semi soft coking coal by 32% to US$102/t. As a result FY17 earnings are expected to almost double.

The broker downgrades to Sell from Neutral to reflect the premium at which the stock trades versus net present value. Target is raised to $2.60 from $2.15.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 BEADELL RESOURCES LIMITED Buy Neutral Macquarie 2 BIGAIR GROUP LIMITED Buy Neutral Morgans 3 MAGELLAN FINANCIAL GROUP LIMITED Buy Neutral Credit Suisse 4 MAYNE PHARMA GROUP LIMITED Buy Neutral UBS 5 MEDIBANK PRIVATE LIMITED Neutral Sell Credit Suisse 6 MOTORCYCLE HOLDINGS LIMITED Buy Neutral Morgans 7 OZ MINERALS LIMITED Neutral Sell UBS 8 REA GROUP LIMITED Buy Neutral Credit Suisse 9 SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP Buy Sell Ord Minnett 10 TABCORP HOLDINGS LIMITED Buy Neutral Credit Suisse 11 TRANSURBAN GROUP Buy Neutral Citi 12 UGL LIMITED Buy Neutral Deutsche Bank 13 VOCUS COMMUNICATIONS LIMITED Buy Neutral Citi Downgrade 14 ALUMINA LIMITED Sell Neutral Citi 15 ALUMINA LIMITED Neutral Buy Ord Minnett 16 ANSELL LIMITED Neutral Buy UBS 17 BANK OF QUEENSLAND LIMITED Sell Neutral UBS 18 BHP BILLITON LIMITED Sell Neutral Citi 19 BHP BILLITON LIMITED Neutral Buy UBS 20 DOWNER EDI LIMITED Neutral Buy Deutsche Bank 21 INVESTA OFFICE FUND Sell Neutral UBS 22 NATIONAL AUSTRALIA BANK LIMITED Neutral Buy Citi 23 OIL SEARCH LIMITED Sell Neutral Credit Suisse 24 RIO TINTO LIMITED Sell Neutral Citi 25 SANTOS LIMITED Sell Neutral Credit Suisse 26 SOUTH32 LIMITED Neutral Buy UBS 27 WHITEHAVEN COAL LIMITED Sell Neutral UBS

Recommendation

Positive Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 ALQ ALS LIMITED -17.0% -50.0% 33.0% 6 2 VOC VOCUS COMMUNICATIONS LIMITED 80.0% 60.0% 20.0% 5 3 SCP SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP -58.0% -75.0% 17.0% 6 4 TAH TABCORP HOLDINGS LIMITED 21.0% 7.0% 14.0% 7 5 TCL TRANSURBAN GROUP 71.0% 57.0% 14.0% 7 6 MPL MEDIBANK PRIVATE LIMITED 6.0% -6.0% 12.0% 8 7 OZL OZ MINERALS LIMITED -13.0% -25.0% 12.0% 8 8 QUB QUBE HOLDINGS LIMITED 50.0% 43.0% 7.0% 8 9 SWM SEVEN WEST MEDIA LIMITED -33.0% -40.0% 7.0% 6 10 APA APA GROUP 21.0% 19.0% 2.0% 7

Negative Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 BHP BHP BILLITON LIMITED 38.0% 63.0% -25.0% 8 2 KAR KAROON GAS AUSTRALIA LIMITED 75.0% 100.0% -25.0% 4 3 OSH OIL SEARCH LIMITED 19.0% 44.0% -25.0% 8 4 AWC ALUMINA LIMITED -14.0% 7.0% -21.0% 7 5 DOW DOWNER EDI LIMITED 50.0% 67.0% -17.0% 6 6 OGC OCEANAGOLD CORPORATION -67.0% -50.0% -17.0% 3 7 BOQ BANK OF QUEENSLAND LIMITED 13.0% 29.0% -16.0% 8 8 NAB NATIONAL AUSTRALIA BANK LIMITED 13.0% 25.0% -12.0% 8 9 RIO RIO TINTO LIMITED 44.0% 56.0% -12.0% 8 10 S32 SOUTH32 LIMITED 13.0% 25.0% -12.0% 8

Target Price

Positive Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 ALQ ALS LIMITED 4.935 4.583 7.68% 6 2 WHC WHITEHAVEN COAL LIMITED 2.269 2.213 2.53% 8 3 SCP SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP 2.115 2.083 1.54% 6 4 S32 SOUTH32 LIMITED 2.296 2.265 1.37% 8 5 QUB QUBE HOLDINGS LIMITED 2.629 2.597 1.23% 8 6 TAH TABCORP HOLDINGS LIMITED 4.787 4.730 1.21% 7 7 DOW DOWNER EDI LIMITED 4.880 4.850 0.62% 6 8 ORG ORIGIN ENERGY LIMITED 6.093 6.071 0.36% 7 9 RIO RIO TINTO LIMITED 55.288 55.163 0.23% 8 10 OZL OZ MINERALS LIMITED 5.955 5.945 0.17% 8

Negative Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 KAR KAROON GAS AUSTRALIA LIMITED 2.138 2.333 -8.36% 4 2 REG REGIS HEALTHCARE LIMITED 4.693 5.045 -6.98% 3 3 OGC OCEANAGOLD CORPORATION 4.097 4.350 -5.82% 3 4 BOQ BANK OF QUEENSLAND LIMITED 11.400 12.000 -5.00% 8 5 STO SANTOS LIMITED 4.918 5.124 -4.02% 8 6 NAB NATIONAL AUSTRALIA BANK LIMITED 28.188 28.625 -1.53% 8 7 SWM SEVEN WEST MEDIA LIMITED 0.808 0.820 -1.46% 6 8 VOC VOCUS COMMUNICATIONS LIMITED 8.920 9.040 -1.33% 5 9 OSH OIL SEARCH LIMITED 7.823 7.886 -0.80% 8 10 TCL TRANSURBAN GROUP 12.236 12.241 -0.04% 7

Earning Forecast

Positive Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 WSA WESTERN AREAS NL 0.563 0.420 34.05% 7 2 WHC WHITEHAVEN COAL LIMITED 22.129 17.814 24.22% 8 3 BHP BHP BILLITON LIMITED 102.904 92.027 11.82% 8 4 S32 SOUTH32 LIMITED 13.488 12.479 8.09% 8 5 FMG FORTESCUE METALS GROUP LTD 50.118 47.646 5.19% 7 6 IGO INDEPENDENCE GROUP NL 8.608 8.225 4.66% 6 7 SFR SANDFIRE RESOURCES NL 32.444 31.444 3.18% 8 8 ALQ ALS LIMITED 16.536 16.061 2.96% 6 9 AWC ALUMINA LIMITED 4.446 4.349 2.23% 7 10 RIO RIO TINTO LIMITED 285.255 280.127 1.83% 8

Negative Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 PRU PERSEUS MINING LIMITED -1.082 -0.248 -336.29% 5 2 ORE OROCOBRE LIMITED -0.625 5.550 -111.26% 4 3 ILU ILUKA RESOURCES LIMITED 8.400 10.500 -20.00% 7 4 STO SANTOS LIMITED -7.068 -6.307 -12.07% 8 5 KAR KAROON GAS AUSTRALIA LIMITED -14.220 -13.000 -9.38% 4 6 FAR FAR LIMITED -1.217 -1.150 -5.83% 3 7 OSH OIL SEARCH LIMITED 11.735 12.395 -5.32% 8 8 XRO XERO LIMITED -48.057 -45.795 -4.94% 5 9 SRX SIRTEX MEDICAL LIMITED 110.350 115.600 -4.54% 4 10 EVN EVOLUTION MINING LIMITED 21.819 22.533 -3.17% 7

Our top ten news from 06 October 2016 to 13 October 2016 (ranked according to popularity).

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.

By Greg Peel

Yesterday’s weak Chinese trade data has suddenly jolted the market out of a creeping sense of complacency over the Chinese economy. With Fed policy, Brexit and European banks drawing attention away, China had slipped into the background.

Next week may prove different, particularly now the market has come back to earth. Aside from inflation data due today, China will release a monthly data dump of industrial production, retail sales and fixed asset investment numbers on Wednesday, and the September quarter GDP result.

Not that the Fed, Europe et al are about to go away. Janet Yellen will speak tonight, ahead of a raft of US data releases next week including industrial production, inflation, housing sentiment and starts, existing home sales, the Empire State and Philly Fed indices, and the Fed Beige Book.

But tonight we will also see retail sales, which are becoming increasingly important as we head towards Christmas.

The ECB will hold a policy meeting next Thursday. To date the ECB has denied rumours of a planned QE tapering so this meeting will be closely watched.

The minutes of the September RBA meeting are due next week but won’t much stir the pot while Thursday sees the local jobs number.

On the local stock front, quarterly reporting season steps up a gear as resource sector production reports flood in and various non-resource companies issue reports or hold investor days. This coincides with a growing number of AGMs.

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

Pressure on defensive yield and growth stocks; Citi downgrades BHP & RIO; housing outlook muddied; Money3 expands; Citi's view on IMF/World Bank meetings.

-UBS cautions about the retreat of the defensive income trade
-Citi takes more bearish view on bulk commodity prices
-Housing approvals surge but commencements starting to decline
-Developed world monetary policy seen stagnating
 

By Eva Brocklehurst

Market Outlook

UBS observes the outperformance of defensive yield and growth stocks that has dominated the market in recent years has turned in the September quarter. Super-low long bond yields and stretched valuations are unwinding as investors envisage a tightening of rates by the US Federal Reserve and tapering of European Central Bank asset purchases.

This has put pressure on the income trade, which has retreated around 13% in the broker's calculations. UBS remains cautious about the defensive income trade – defined as Australian Real Estate Investment Trusts, infrastructure and utilities - given the size of the rally over the past 4.5 years.

The retreat in long duration “growth” trade has been less dramatic but the broker does note increased disappointment with specific stocks in the high price/earnings ratio end of the market. Stocks such as Medibank Private ((MPL)), TPG Telecom ((TPM)), Vocus Communications ((VOC)) and Blackmores ((BKL)). Earnings results have also been underwhelming in some highly rated stocks such as CSL ((CSL)), Seek ((SEK)) and REA Group ((REA)).

In this unfolding scenario the broker retains a modest overweight position in resources and continues to be overweight in a select group of premium rated stocks such as Aristocrat Leisure ((ALL)), Brambles ((BXB)), Healthscope ((HSO)) and Sirtex Medical ((SRX)) as well as more moderate premium stocks such as Orora ((ORA)) and Star Entertainment ((SGR)).

BHP, RIO And Bulks

Citi has downgraded BHP Billiton ((BHP)) and Rio Tinto ((RIO)) to Sell from Neutral with targets of $20 and $47 respectively. Both stocks have rallied strongly on the back of higher prices for bulk commodities. The broker expects these prices will pull back significantly later this year and into 2017 as demand softens. BHP is considered to be “the best of a bad bunch” because of its higher weighting to copper and oil.

China's stimulus and supply restrictions have driven the surge in bulk prices this year, for coal in particular, but this is expected to abate. Additionally, the broker observes a number of cities in China are attempting to cool house prices. Lower Chinese steel production is expected in 2017. The main risk to Citi's bearish view is further policy measures to support coal and steel prices, and monetary stimulus to support growth.

Housing

Recently the outlook for housing has been muddied by stronger auction clearance rates, a surge in approvals and house price rises, Morgan Stanley observes. The broker had expected housing market conditions would be peaking by this stage, with risks from a looming oversupply and macro prudential tightening.

The latest building activity data from the Australian Bureau of Statistics – from the June quarter - indicates that supply surged, with multi-dwelling completions up 37% quarter on quarter and 87% year on year. Morgan Stanley finds this lagged data consistent with the deterioration in rents this year and expects reported vacancy rates will continue to rise.

While approvals may have surprised, the broker notes commencements declined 25% in the quarter and this suggests that tighter credit conditions and weaker fundamentals may well be slowing activity. On a 1-2 year view the broker believes the housing boom has been responsible for driving the transition from capital expenditure in mining but the necessary slowing to re-balance the market will weigh on the growth outlook. Apartment settlement risk remains elevated, the broker believes, as foreign investors look to secure credit following the pull back by the domestic banks.

Money3

Money3 ((MNY)) is rapidly expanding into the non-conforming automotive loan market. Bell Potter initiates coverage on the stock with a Buy rating and a $2.40 price target. The basis of the broker's call centres on the 20% growth achieved in FY16. The company has guided to FY17 net profit of $26m and this implies a further 20% growth in earnings per share.

Bell Potter believes the funding environment for Money3 continues to improve and the positive outlook relates to cheaper funding over the medium term. The company has recently consolidated its lending platform and the broker envisages upside to this more streamlined operation in the years ahead. The broker is yet to factor in the significant opportunity to enter new markets, such as moving up the credit quality ladder in automotive lending.

Global Economics

Citi met with a number of organisations at the IMF/World Bank annual meetings and observes monetary policy in advanced economies is increasingly out of ammunition while fiscal policy is not quite ready to do the heavy lifting. There was little agreement among the officials on what the next major moves would be and on the relative merits of various policy options.

Growth concerns globally have eased and Citi suspects the worst may be over for emerging markets, although there are few signs of a significant cyclical rebound in growth. The broker notes many of these countries have experienced stronger exchange rates of late, limiting prospects for export-led growth to return. The broker also observes concerns about emerging markets in the context of a potential hike by the US Federal Reserve in December have diminished considerably.

Citi confirmed its view that central banks which are considering reducing asset purchases, such as the Bank of Japan or the European Central Bank, were not doing so with any intention to tighten policy. The broker has a clear sense that it would be good for the ECB to move away from its pre-determined large asset purchases, and there are growing expectations it may reduce the monthly purchases to below the current EUR80bn/month.

The US Federal Reserve expects to hike rates soon, with several speakers recently indicating that this could occur at the December meeting. Politics is becoming important, with the upcoming US election and the risks from Britain's exit of the EU. Brexit is expected to become more complicated and statements by the new UK leadership have been greeted with some concern. The sharp fall in the value of the pound as well as the media and other reactions to the latest statements are viewed as a stabilising constraint on future UK policies.

A common sentiment is that even though global growth is quite weak by historical standards, growth is steady and the risks of a sharp downturn have receded. China did not feature prominently in the discussions, unusually, with little expectation for meaningful policy changes to address the nature and scale of imbalances in the economy. Nevertheless, most of those canvassed thought that China had policy tools to prevent growth from deteriorating sharply for some time to come.

Most European officials reject any further material increases in capital requirements for banks and Citi observes some sizeable differences of opinion with their US counterparts.
 

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By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday October 3 to Friday October 7, 2016
Total Upgrades: 4
Total Downgrades: 2
Net Ratings Breakdown: Buy 41.27%; Hold 43.52%; Sell 15.21%

Four upgrades versus two downgrades. Half of all upgrades didn't go further than Neutral, while only one of the downgrades moved to Sell. Such was the full harvest in stockbroker recommendation changes for the week ending Friday, 7th October 2016.

Needless to say, it wasn't a particularly busy week. Troubled aged care provider Estia Heath was the sole recipient of a fresh Sell rating (though it's labeled "Underweight" in the Morgan Stanley universe).

Only one stock rates a mention for positive adjustments to price targets; ALS ltd, formerly known as Campbell Bros. There isn't much to talk about on the negative side either.

Resources stocks continue to dominate changes in earnings estimates, and this guarantees fireworks on both sides of the ledger. Nickel miner Western Areas stands on top of the positive table, enjoying a boost of no less than +172%, followed by Whitehaven Coal on +23% and South32 on +12%.

On the negative side, Karoon Gas is taking a blow of -146%, followed by AWE Ltd on -144% and Orocobre on -105%. Never a dull day on the ASX with such movements on display.

The local calendar this week consists of more AGMs and quarterly production reports.

Upgrade

ALS LIMITED ((ALQ)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 1/3/2

With the minerals exploration cycle in the throes of a typical 3-year recovery Macquarie takes a more positive view on ALS. The broker upgrades to Outperform from Underperform despite the stock appearing expansive on near-term multiples.

Macquarie suspects the company may consider the sale or closure options for its oil & gas business in the event of ongoing losses and ALS remains on an acquisition footing in food. Target is raised to $6.70 from $5.20.

BLUE SKY ALTERNATIVE INVESTMENTS LIMITED ((BLA)) Upgrade to Add from Hold by Morgans .B/H/S: 1/1/0

Assets under management reached $2.4bn in the September quarter, up 14% over the quarter. The company has made a solid start to FY17, Morgans observes and upgrades estimate by 6% over the forecast period.

Fund divestments and capital recycling continue to be a catalyst. The broker considers the stock a more attractive proposition after its recent share price decline and upgrades to Add from Hold. Target rises to $8.70 from $8.50.

OCEANAGOLD CORPORATION ((OGC)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/1/1

Deutsche Bank has upgraded commodity price forecasts by an average 3% in 2016 and 6% in 2017. Of the larger upgrades, iron ore forecasts for 2017 are upgraded 7%, coking coal 25%, Newcastle thermal coal 27%, zinc 22% and manganese 37%.

The gold sector appears expensive to the broker based on a US$1,300-1,420/oz flat gold deck and weakening Australian dollar profile.

Deutsche Bank upgrades OceanaGold to Hold from Sell on valuation. Target is raised to $4.30 from $3.90.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 2/4/1

Deutsche Bank increases iron ore price expectations significantly and now expects scrap prices to rise in FY17 Accordingly, the company should be able to achieve volume and price rises in FY17 and FY18, leading to margin expansion.

The broker notes the company has continued to cut costs as quickly as possible in order to smooth earnings and the sale or closure of the 13 identified facilities will provide further benefit in FY17.

Rating is upgraded to Hold from Sell and the target is raised to $9.33 from $8.02.

Downgrade

ESTIA HEALTH LIMITED ((EHE)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/1/1

Estia has downgraded earnings guidance by 14-18%. Despite the contribution of acquisitions, guidance now points to an earnings decline of 3.0-7.3%, Morgan Stanley calculates.

This suggests to the broker a lower sustainable margin and less of an ability to cope with the regulatory changes announced in the federal budget. Downgrade to Underweight.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/3/2

UBS strategists ponder whether the growth trade is becoming vulnerable with a backdrop of negative earnings revisions and a potential lift in bond yields. TV is qualitatively the broker's least preferred media with audience declines still outpacing revenues.

UBS reduces TV forecasts because of the soft ad market outlook for FY17, cutting Nine's earnings per share estimates by 27% and by 26% for FY18.

The broker downgrades to Neutral from Buy given the structural concerns. Valuation appears reasonable but UBS believes the risk to earnings is skewed to the downside. Target is lowered to 90c from $1.30.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 ALS LIMITED Buy Sell Macquarie 2 BLUE SKY ALTERNATIVE INVESTMENTS LIMITED Buy Neutral Morgans 3 OCEANAGOLD CORPORATION Neutral Sell Deutsche Bank 4 SIMS METAL MANAGEMENT LIMITED Neutral Sell Deutsche Bank Downgrade 5 ESTIA HEALTH LIMITED Sell Neutral Morgan Stanley 6 NINE ENTERTAINMENT CO. HOLDINGS LIMITED Neutral Buy UBS

Recommendation

Positive Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 ALQ ALS LIMITED -17.0% -43.0% 26.0% 6 2 MPL MEDIBANK PRIVATE LIMITED -6.0% -19.0% 13.0% 8 3 SWM SEVEN WEST MEDIA LIMITED -33.0% -40.0% 7.0% 6

Negative Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs

Target Price

Positive Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 ALQ ALS LIMITED 4.935 4.443 11.07% 6

Negative Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 SWM SEVEN WEST MEDIA LIMITED 0.808 0.820 -1.46% 6 2 MPL MEDIBANK PRIVATE LIMITED 2.730 2.763 -1.19% 8

Earning Forecast

Positive Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 WSA WESTERN AREAS NL 0.420 -0.580 172.41% 7 2 WHC WHITEHAVEN COAL LIMITED 17.814 14.386 23.83% 8 3 S32 SOUTH32 LIMITED 12.476 11.137 12.02% 8 4 IGO INDEPENDENCE GROUP NL 8.275 7.558 9.49% 6 5 BHP BHP BILLITON LIMITED 94.383 87.229 8.20% 8 6 FMG FORTESCUE METALS GROUP LTD 47.623 44.985 5.86% 7 7 MIN MINERAL RESOURCES LIMITED 53.840 52.040 3.46% 4 8 ALQ ALS LIMITED 16.536 16.061 2.96% 6 9 RIO RIO TINTO LIMITED 279.975 273.886 2.22% 8 10 EVN EVOLUTION MINING LIMITED 22.533 22.104 1.94% 7

Negative Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 KAR KAROON GAS AUSTRALIA LIMITED -13.000 -5.280 -146.21% 4 2 AWE AWE LIMITED -0.068 0.152 -144.74% 7 3 ORE OROCOBRE LIMITED -0.625 11.200 -105.58% 4 4 PRG PROGRAMMED MAINTENANCE SERVICES LIMITED 20.742 23.975 -13.48% 4 5 SYR SYRAH RESOURCES LIMITED -6.523 -6.023 -8.30% 4 6 XRO XERO LIMITED -48.057 -45.795 -4.94% 5 7 SBM ST BARBARA LIMITED 34.497 36.163 -4.61% 3 8 STO SANTOS LIMITED -6.307 -6.064 -4.01% 8 9 ILU ILUKA RESOURCES LIMITED 10.500 10.763 -2.44% 7 10 BOQ BANK OF QUEENSLAND LIMITED 92.457 94.300 -1.95% 7