Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of seven major Australian and international stock brokers: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie 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 13 to Friday October 17, 2014
Total Upgrades: 14
Total Downgrades: 7
Net Ratings Breakdown: Buy 41.05%; Hold 41.81%; Sell 17.14%

Local stock analysts are using the seasonal share market correction in September-October to re-assess and embark on a treasure hunt. In most cases, a weaker share price has reinforced the idea there's value up for grabs and this explains why yet another week saw significantly more upgrades for individual stock ratings while only a small number of downgrades were issued.

Probably the most surprising observation is that, overall, changes to profit estimates remain benign, even when analysts are forced to further cut price forecasts for bulk commodities and for energy. Maybe the true story is being reflected in changes to price targets where the negative side is being dominated by miners and related industries (predominantly bulk-related exposures) while the positive side carries a similar theme, just different names.

Maybe the easiest conclusion to draw from all this is that it's a stock picker's market. Choose wisely.

Upgrades

BHP Billiton ((BHP)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/4/0

After visiting the company's iron ore assets Credit Suisse upgrades to Neutral from Underperform, with an unchanged target of $38.00. Tonnage is coming at a faster rate and lower cost and a favourable AUD/USD rate provides potential upside. The broker notes net debt is set to increase to $27.3bn by the end of FY15 and, while this is above the previous net debt target of $25bn for shareholder returns, it is not considered high on any traditional measure.

CSR ((CSR)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/5/0

Ahead of the ACCC decision on the proposed brick joint venture with Boral ((BLD)), JP Morgan expects a "qualified green light". That aside, in the light of the decline in CSR's share price as well as considerably higher aluminium forecasts, the broker upgrades to Neutral from Underweight. Target is raised to $3.45 from $3.00.

Iluka Resources ((ILU)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 5/1/1

Deutsche Bank suspects the Mining Area C royalty is under appreciated. This is a key asset and the broker expects volumes to rise to 66mtpa and Iluka to receive $70m per annum as a royalty. As part of its analysis of the MAC royalty business, and in considering a scenario entailing a spinning off of the asset, Deutsche Bank notes the stock has sold off recently and upgrades to Buy from Hold. The broker is of the view that the mineral sands markets will take more time to recover but suspects prices have bottomed. Target is raised to $8.80 from $8.75.

James Hardie ((JHX)) upgraded to Neutral from Sell by UBS. B/H/S: 4/2/1

James Hardie's share price has fallen 20% in the sell-off to below the broker's target despite the weaker A$ providing a tailwind for earnings and the US housing construction outlook remaining positive. The broker has upgraded earnings forecasts by 2-6% in FY15-17. Target rises to $12.25 from $11.85 and rating upgraded to Neutral.

Lend Lease ((LLC)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 6/1/0

CS analysts have returned from the company's Investor Day with more conviction in the growth outlook for the years ahead. On this basis, they argue the stock deserves to be re-rated, notwithstanding the already impressive looking performance the shares put in over the year past. The analysts note several reasons as to why growth in the immediate future should be supported. Also, management has indicated it will seek to increase offshore exposure in the face of only moderate growth domestically. Upgrade to Outperform from Neutral. Target moves to $16.74 from $15.40. Earnings and dividend estimates have lifted.

Macquarie Atlas Roads ((MQA)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 5/0/0

The broker is expecting French traffic numbers to have disappointed over recent months given the lack of economic growth in the country, albeit there remains upside potential to revenues from the pending EU concession decision and the environment for refinancing is positive, the broker notes. Either way MQA's price has fallen more than enough to compensate for the risks, hence the broker upgrades back to Outperform. Target rises to $3.30 from $3.24 on a currency reset.

Mount Gibson Iron ((MGX)) upgraded to Add from Hold by CIMB Securities and to Buy from Hold by Deutsche Bank. B/H/S: 3/4/0

Mount Gibson's September quarter production was slightly ahead of CIMB's expectations. During the quarter Mount Gibson was focused on the closure of Tallering Peak. CIMB recognises that near-term volatility will place pressure on the company's margins, but continues to expect a dividend of 4c a share is sustainable, despite three years of higher strip mining at Koolan Island. The rating is upgraded to Add from Hold and the target is raised to 80c from 70c. Deutsche Bank downgraded to Neutral in late August but now reverses that decision by upgrading to Buy. The decision follows a strong September quarter performance. In addition, the company still has a lot of cash available. Deutsche Bank analysts believe the current share price incorporates an iron ore price of US$75/tonne. Plus they believe the company's cash position will start improving again in FY18 as that is when Koolan Island cash costs drop to just A$30-40/t. On Deutsche Bank's analysis, this producer is likely to remain in the red for the next three years, but it will continue paying out 4c in dividends each year.

Oil Search ((OSH)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 4/1/1

A sudden, severe fall in the price of Brent crude out of a three-year trading range has awoken bears from hibernation, in JP Morgan's view. The broker considers the associated pull back in Australian oil majors as a compelling buying opportunity because of the long-dated production profiles of the LNG-leveraged large cap plays. Oil Search's rating is upgraded to Neutral from Underweight following the share price retreat. Target is lowered to $8.82 from $8.91.

Orora ((ORA)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/2/1

Orora is a beneficiary of a falling AUD and the broker has adjusted down its currency forecasts. The broker expects ORA to reiterate a positive growth story at its AGM, with North America the key growth driver. As a defensive, ORA has not suffered as much as others in the current pullback but it has still devalued enough for the broker to upgrade to Outperform. On the currency impact, target rises to $1.75 from $1.67.

OZ Minerals ((OZL)) upgraded to Neutral from Underperform by Macquarie and to Neutral from Sell by UBS. B/H/S: 4/3/0

September quarter production was comfortably ahead of Macquarie's forecast on higher gold grades and mill throughput, with copper also outperforming. The Malu underground is on track and OZL is yet to commit to Carrapateena. OZL looks well placed to beat its 2014 production guidance. The broker lifts its target to $4.00 from $3.80 and upgrades to Neutral. The company reported record quarterly milled tonnes and production was 15% ahead of UBS estimates for the September quarter. Production guidance for 2014 looks easily achievable to UBS. The broker upgrades to Neutral from Sell because the share price has hit the downside valuation. After a difficult year UBS believes some of the challenges are now behind the company. Target is raised to $3.80 from $3.70.

Tabcorp ((TAH)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 3/2/2

The first quarter trading update was positive in Deutsche Bank's view, with revenue growth of 6.6% above forecasts and primarily driven by wagering. Tabcorp continues to benefit from growth in fixed odds and digital turnover as well as an easing in the rate of decline in both tote revenue and retail turnover. Deutsche Bank upgrades to Buy from Hold, with the stock trading at a 7% discount to the revised valuation of $3.90. Target is raised to $3.90 from $3.70.

Ten Network ((TEN)) upgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/3/4

Ten Network released a weak performance update and CS analysts argue it could hardly have come as a genuine surprise. They make a bold prediction: lowering costs alone won't restore profitability. In other words something, somewhere has to change. Retaining the status quo is not an option. On this basis, the analysts believe the coming twelve months will bring change and upgrade to Neutral from Underperform, cutting the price target to $0.22 from $0.27.

Downgrades

Alumina ((AWC)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 3/2/2

Macquarie expects increasing prices and decreasing costs will drive margin expansion over the medium term but does not find any value in the stock trading at a 17% premium to net asset value. Moreover, the broker notes China is long on alumina capacity and continues to display a preference for importing raw materials over refined product. Rating is downgraded to Underperform with a $1.40 target.

Dick Smith ((DSH)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/0/1

Credit Suisse has pulled back its rating to Underperform from Neutral and reduced its price target to $2.15 from $2.22. The reason for these moves is the analysts suspect underlying growth will be harder to achieve from here onwards. There's still a good yield on offer but the analysts see limited upside from capital return as sector discounting may well outweigh price inflation.

Fortescue Metals ((FMG)) downgraded to Neutral from Buy by UBS. B/H/S: 3/3/1

Total shipments in the September quarter were 41.5mt at a realised price of US$71/t. UBS notes the ore shipped was ahead of estimates, despite expecting a strong quarter ahead of the wet season. Earnings changes are minimal. The broker downgrades to Neutral from Buy to reflect the new iron ore pricing environment and a lower long-term price of US$75/dmt CFR. Target is $3.80.

SAI Global ((SAI)) downgraded to Neutral from Buy by UBS. B/H/S: 0/4/0

SAI has abandoned its attempts to sell out all parts of its business to interested parties. With a takeover premium now no longer applicable, the broker has revised its estimates, taking into account the lower AUD. The broker suggests the failure of the strategic review to result in a sale has highlighted a number of issues for SAI, including the lack of CEO and risk surrounding the contract renewal with Standards Aust. Removing any premium evokes a downgrade to Neutral with a target price reduction to $3.87 from $5.35.

Technology One ((TNE)) downgraded to Neutral from Buy by UBS. B/H/S: 1/1/0

Technology One has outperformed the ASX small cap industrials index by 50% over the past 12 months and UBS wonders whether the earnings upside potential from the shift to a cloud-based model has been factored into the share price. The broker concludes the answer is now likely to be "yes". While uncertainties linger as the cloud offering is refined UBS has reduced FY15-16 earnings estimates by 4-5% and lifted FY18-20 by 6-8%. The broker downgrades its rating to Neutral from Buy and raises the target to $3.30 from $2.90.

WDS ((WDS) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/1/0

WDS has gone into reverse following the loss of work on APLNG. This follows a fatality on the site. In addition there are productivity problems at Eagle Downs. A strategic review has been announced while the CEO has unexpectedly resigned. Macquarie observes the outlook for the stock is considerably more clouded now. Only new wins in the sustaining phase of CSG development can provide greater confidence, in the broker's opinion. The rating is downgraded to Neutral from Outperform. Target is lowered to 32c from $1.38.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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