Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

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, JP Morgan, Macquarie, Morgan Stanley, Morgans 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: Tuesday February 2 to Saturday February 6, 2016
Total Upgrades: 13
Total Downgrades: 13
Net Ratings Breakdown: Buy 43.08%; Hold 44.10%; Sell 12.83%

For the week ending Friday, 5th February 2016, FNArena registered 13 broker upgrades and 13 downgrades for individual stocks with Ansell's pre-released profit warning attracting no less than four downgrades. The week's table only shows 12 downgrades but that's due to the fact that Deutsche Bank downgraded twice; first to Neutral, then to Sell. Only the last downgrade is shown.

Quite noticeably, resources stocks are now largely absent from the overview for ratings changes with the negative side linked to bad news announcements (apart from Ansell, there's also Shine Corporate) and to volatile markets which translates into analysts taking a more cautious view on financials, wealth managers in particular.

Utilities and healthcare stocks proved popular for receiving upgrades to stockbroker recommendations, as did two mining services providers (Downer EDI and UGL).

Changes to price targets are simply enormous with Ten Network's consensus target more than doubling during the week. Other positive changes were more moderate, but the negative side of target changes excels in robust cuts. Programmed Maintenance, yet another one disappointing investors, copped a 23% cut to its targets, followed by Lovisa (-18.3%), Ansell (-16.9%), Macquarie Group (-14.5%), and others. The underlying theme is: all these companies have updated the market about their financial performances. This cannot be taken as a good sign for the remainder of the local reporting season.

Changes to earnings estimates are equally enormous with resources stocks populating both ends of the ledger, which explains why many of the numbers on display look gigantic. The negative side looks like Hiroshima after that bomb, with Vitaco (-56.9%) the sole non-resources related inclusion. To a large extent, these ongoing big cuts to resources stocks forecasts and valuations obfuscate what is going on outside mining and energy, but with industrials and financials unable to woo the market so far, it doesn't look like February is poised for a lot of joy for investors.

The month is still young though and early indications are just that, early and indications only.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/2/0

With heightened market volatility, driven by concerns about commodity prices, Ord Minnett is more favourably disposed towards Australian utilities, given predictable earnings and cash flow yields.

AGL is raised to Accumulate from Hold, as it enjoys leverage to improving retail margins and increasing wholesale electricity prices. Target is raised to $20.00 from $15.60.

AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Upgrade to Overweight from Neutral by JP Morgan .B/H/S: 6/1/1

The new CEO, Shayne Elliot, is restructuring the institutional and investment banking divisions. JP Morgan notes an additional $200m in provisioning for FY16. The broker reduces FY16 earnings and pay-out estimates.

To reflect the challenges the target is lowered to $27.79 from $31.59. The broker upgrades to Overweight from Neutral on valuation, believing the stock is also a switching opportunity as investors move out of Commonwealth Bank ((CBA)) when it goes ex dividend on February 16.

APA GROUP ((APA)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 6/2/0

With heightened market volatility, driven by concerns about commodity prices, Ord Minnett is more favourably disposed towards Australian utilities, given predictable earnings and cash flow yields.

Hence, the broker upgrades APA to Buy from Hold as it is envisaged winning business from ongoing infrastructure development. Target raised to $10.50 from $8.70.

AUSNET SERVICES ((AST)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/4/0

With heightened market volatility, driven by concerns about commodity prices, Ord Minnett is more favourably disposed towards Australian utilities, given predictable earnings and cash flow yields.

The broker upgrades its rating to Accumulate from Hold because of AusNet's solid dividend coverage and attractive valuation. Target is raised to $1.62 from $1.40.

DOWNER EDI LIMITED ((DOW)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 4/2/1

Despite the weak conditions for the sector Morgan Stanley believes the conditions required for a bottom to emerge are converging.

Macro conditions for the engineering & construction sector are not expected to improve in 2016 so the broker warns it is too early to become structurally bullish on the sector.

Still there is scope for some optimism the broker maintains and, with Downer EDI's modest debt position and positive potential catalysts, makes its first upgrade in three years, to Overweight from Underweight. Target drops to $3.65 from $3.78. Industry view is Cautious.

DUET GROUP ((DUE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/5/1

With heightened market volatility, driven by concerns about commodity prices, Ord Minnett is more favourably disposed towards Australian utilities, given predictable earnings and cash flow yields.

The broker upgrades DUET to Hold from Lighten and raises the target to $2.35 from $2.30.

HEALTHSCOPE LIMITED ((HSO)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/4/1

Deutsche Bank expects subdued first-half results from domestically focused health companies due to a softening in demand. Internationally focused names are offering more safety and benefit from a weaker Australian dollar but the broker believes this is largely reflected in valuations.

Deutsche Bank believes the hospital sector is well positioned, despite the reports of slowing activity. Healthscope's rating is raised to Buy from Hold. Target is reduced to $2.50 from $2.70.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/1

Credit Suisse maintains that, while the market is likely to downgrade earnings estimates, the issue underpinning those downgrades are largely cyclical and Incitec Pivot represents value at its current share price.

The broker downgrades forecasts on a reduction in the fertiliser price and coal production assumptions. Still, the outlook for fertiliser prices is positive, Credit Suisse believes.

In terms of the North American market explosives are being affected by the switch to gas from coal. While this may have more permanent features the broker assumes a partial recovery in coal production in FY17.

Credit Suisse finds the valuation undemanding and upgrades its rating to Outperform from Neutral. Target is lowered to $3.50 from $3.81.

JAPARA HEALTHCARE LIMITED ((JHC)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 4/1/0

Deutsche Bank has lifted FY16 estimates for aged care providers to reflect the timing of funding reforms. Japara Healthcare is upgraded to Hold from Sell. Target is steady at $2.80.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/1/1

Funds under management were maintained over January despite the choppy markets and falling Australian dollar. Despite this, Ord Minnett observes the stock has declined around 20% in the year to date.

The broker continues to envisage upside risk form new retail relationships and new product launches and an increasing allocation to global equities by Australian investors. Head room is now emerging relative to valuation so the broker upgrades to Buy from Hold. Target is raised to $24.84 from $20.72.

See also MFG downgrade.

REGIS HEALTHCARE LIMITED ((REG)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/2/0

Deutsche Bank has lifted FY16 estimates for aged care providers to reflect the timing of funding reforms.

After share price weakness Regis Healthcare's rating is upgraded to Buy from Hold, reflecting a preference for organically-driven growth. Target is raised to $6.40 from $6.20.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/2/3

Deutsche Bank expects subdued first-half results from domestically focused health companies due to a softening in demand.

Internationally focused names are offering more safety and benefit from a weaker Australian dollar but the broker believes this is largely reflected in valuations.

Deutsche Bank believes the private hospital sector is well positioned to continue its strong growth, supported by capacity expansion. Ramsay's rating is upgraded to Buy from Hold. Target is raised to $67 from $63.

UGL LIMITED ((UGL)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/4/1

Despite the weak conditions for the sector Morgan Stanley believes the conditions required for a bottom to emerge are converging.

Macro conditions for the engineering & construction sector are not expected to improve in 2016 so the broker warns it is too early to become structurally bullish on the sector.

The broker upgrades UGL to Equal-weight from Underweight, reflecting the easing of a number of risks, Cautious industry view retained. Target is raised to $2.30 from $1.72.

Downgrade

ANSELL LIMITED ((ANN)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Sell from Hold by Deutsche Bank and Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Neutral from Buy by UBS .B/H/S: 0/5/2

Deutsche Bank expects subdued first-half results from domestically focused health companies due to a softening in demand.

Internationally focused names are offering more safety and benefit from a weaker Australian dollar but the broker believes this is largely reflected in valuations.

Deutsche Bank reduces Ansell's earnings estimates by 2.5% to allow for a more cautious view on the outlook for industrial production and employment across major economies. Rating is downgraded to Hold from Buy. Target is lowered to $21 from $22.

Deutsche Bank finds little cause to own the stock at current prices, given the exposure to the increasingly challenged economic outlook.

Sales deteriorated in January and the weak start to the year appears to the broker to be at odds with revised guidance, which implies a recovery in second half earnings.

Deutsche Bank revises estimates down 10% for FY16. Rating is downgraded to Sell from Hold. Target is lowered to $16.75 from $21.00.

Ahead of the first half results, the company has reduced FY16 guidance on the back of lower-than-expected January sales and volatility in current conditions. Management expects an improvement in the second half.

Credit Suisse observes any improvement is premised on a recovery in sales growth and this is a concern, given recent results from key US industrial product distributors.

The broker downgrades earnings forecasts by 7.0%. Rating drops to Underperform from Neutral. Price target is lowered to $18.00 from $20.30.

The company has signalled a weak first half, with guidance for FY16 downgraded. UBS reduces FY16 forecasts by 6.0%. The broker emphasises the company is strongly aligned to global industrial recovery and this remains unclear.

With concerns around the outlook the broker downgrades to Neutral from Buy and lowers the target to $19.95 from $23.60.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/4/0

Deutsche Bank downgrades Cleanaway Waste (formerly Transpacific) to Hold from Buy on valuation grounds with an unchanged target of 80c.

The broker expects solid earnings growth in the first half, driven by sales initiatives, the Melbourne landfill acquisition and cost cutting. The industrial segment is expected to remain under pressure from the lower oil price and increased competition.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Hold from Add by Morgans .B/H/S: 1/5/0

A review of the general retail sector ahead of results season has Morgans forecasting a solid Christmas period giving way to a tougher time in 2016. The broker is a stock picker in the sector, looking for reliable earnings, strong market position and reasonable valuation.

Morgans expects another solid result from Domino's but no great surprises given a recent update. Target rises to $61.58 from $60.60 but rating pulled back to Hold from Add on valuation.

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

Ahead of reporting season and in the wake of Dec Q funds flow data, Macquarie has reviewed wealth management stocks under coverage.

Magellan downgraded to Neutral on valuation. Target rises to $21.91 from $21.53.

See also MFG upgrade.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/2/1

With heightened market volatility, driven by concerns about commodity prices, Ord Minnett is more favourably disposed towards Australian utilities, given predictable earnings and cash flow yields.

However, the broker lowers the rating on Origin to Hold from Accumulate as most of its upside is considered to be leveraged to oil prices. Target is reduced to $5.45 from $6.40.

PERPETUAL LIMITED ((PPT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/7/0

Ahead of reporting season and in the wake of Dec Q funds flow data, Macquarie has reviewed wealth management stocks under coverage.

Perpetual downgraded to Neutral, with the broker noting the global strategy has to deliver above benchmark performance. Target falls to $41.10 from $46.20.

PROGRAMMED MAINTENANCE SERVICES LIMITED ((PRG)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/3/0

The company's update, with FY16 guidance of $65m and FY17 of $100-110m, signals worse-than-expected conditions in some parts of the business. Deutsche Bank had assumed the shut-down and maintenance business would be more resilient.

The broker believes the FY17 guidance is optimistic, given the pressures in mining and oil & gas. With no catalyst to close the valuation gap and given the short-term risks, Deutsche Bank downgrades to Hold from Buy. Target is reduced to $1.70 from $3.60.

PERSEUS MINING LIMITED ((PRU)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/1

Problems at Edikan continue, leading Perseus' production to again miss Macquarie's forecast in the Dec Q. The issue is one of access to higher grades and FY16 production guidance has been lowered.

Given the low grade of the deposit, Perseus has limited tolerance for inevitable disruptions in West Africa, Macquarie suggests. Risk is therefore to the downside and the broker downgrades to Underperform. Target falls to 24c from 37c.

REA GROUP LIMITED ((REA)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/6/0

With the stock now trading above Deutsche Bank's price target the rating is downgraded to Hold from Buy.

The broker expects REA Group to deliver underlying double digit revenue growth, but the negative trends in new property listing in the second half limits further upside.

The broker continues to believe in the long-term value potential of the stock. Target is steady at $52.30.

SHINE CORPORATE LTD ((SHJ)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Shine Corporate has revised down earnings guidance to $43.3m from $52-56m, with an additional $17.5m provision. The main concern for Morgans is the deterioration in the underlying business.

The company is reluctant to provide the non-cash component of the earnings so the broker is unable to confidently determine the detail of the downgrade at this time. The broker notes the company has elected to suspend dividend payments in the current half.

Until cashflow issues are resolved the broker's rating is downgraded to Hold from Add. Target is reduced to 60c from $3.56.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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