Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BLUESCOPE STEEL LIMITED, and other companies. For more info SHARE ANALYSIS: BSL

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley 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 November 17 to Friday November 21, 2014
Total Upgrades: 4
Total Downgrades: 14
Net Ratings Breakdown: Buy 42.94%; Hold 39.44%; Sell 17.62%

More than three times as many downgrades than upgrades. That's what FNArena registered for the week ending Friday, 21 November 2014. To make matters look even worse: three of the four stocks that enjoyed a rating upgrade during the week also received downgrades and the one that didn't -BlueScope Steel- was only upgraded to Neutral.

Clearly, this share market is having difficulties coming to grips with total non-performance for substantial sections of the ASX, including energy and mining stocks and their contractors, while financials, yield stocks and structural growth stocks seem limited by valuation concerns. Maybe the unexpected rate cut by the People's Bank of China can put some oomph in the non-performing parts of this market that might last longer than a day or two?

The latter would certainly be welcomed by local stock brokers given their price targets and valuations remain well above share prices for industrial commodities-related equities, but investors have thus far refused to play ball.

No surprise, the lion share of recommendation downgrades involves industrial companies, though still mining contractors as the likes of Programmed Maintenance, Cardno and Seven Group continue to indicate this downturn hasn't ended just yet.

Remarkably, despite the long queue in rating changes for individual stocks, there were only a few changes to price targets and with the exception of Flexigroup (down 6%) it was all benign and pretty harmless.

When it comes to profit forecasts, the balance remains firmly to the downside, but this shouldn't surprise anyone with lower commodity prices still working their way through stockbroker projections and modeling and with mining services companies, including UGL, still issuing profit warnings.

On the positive side, as far as profit estimates are concerned, we find companies such as a2 Milk, soon to list on the ASX to broaden its shareholders base, as well as Horizon Oil, Qantas, James Hardie, M2 Telecom and others. Despite positive effects from weaker AUD, lower oil prices and lower for longer interest rates, overall changes on the positive side are small, though the companies involved might have broader appeal than the motley selection that sits on the negative side.

Upgrades

BlueScope Steel ((BSL)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 5/3/0

It's probably time the BHP spin-off twins, flat steel Bluescope and long steel Arrium ((ARI)), got together to talk about how they might restructure the domestic steel market, the broker suggests. There are many options the two could explore to the benefit of shareholders. Meanwhile, the broker has marked commodity prices and the AUD to new forecasts which leads to a drop in its BSL target to $5.39 from $5.52. But given BSL's underperformance since its FY14 result, the broker upgrades to Neutral.

Pacific Brands ((PBG)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/4/1

The company will divest its Brand Collective division for $39m to various parties. JP Morgan believes this will remove a distraction for management and simplify the business, and upgrades to Neutral from Underweight. The broker considers the recent revenue growth is a positive development but is concerned the business is repositioning at a time when gross margins are under pressure from the currency. Target is raised to 55c from 41c.

See also PBG downgrade.

Programmed Maintenance ((PRG)) upgraded to Add from Hold by Morgans. B/H/S: 3/3/1

First half results missed the broker's forecasts but the outlook for the second half is stronger than expected. Morgans is mindful that the company has completed a re-design of the workforce division which will generate $3m per annum in savings. Separately, the outlook for marine seems better with Ichthys work to drive higher sales. The broker upgrades to Add from Hold on the back of the improving outlook and a compelling valuation. Target is raised to $2.94 from $2.90.

See also PRG downgrade.

Woolworths ((WOW)) upgraded to Add from Hold by Morgans. B/H/S: 4/0/4

Current like-for-like sales weakness reflects the high base under previous fuel discounting, rather than a loss of momentum, in Morgans' view. The broker believes the news flow has reached a low point and the supermarket business is cycling some artificially high comparables. Morgans lowers earnings forecasts by 2% for FY15 but considers the recent share price decline has created a relatively appealing yield and valuation proposition. Rating is upgraded to Add from Hold. Target is reduced to $35.30 from $35.60.

See also WOW downgrade.

Downgrades

DUET ((DUE)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/3/2

Duet has announced a 1:8 rights issue to raise $397m which is likely a response to the Dampier-Bunbury pipeline being placed in negative credit watch in August, the broker suggests. DUE received a lukewarm response to its note issue in September. Given DUE is reliant on either DRPs or, in this case, a dilutive issue to fund its growth shareholder returns are actually below that of the headline 6.8% yield, the broker notes. On that basis, the broker downgrades to Underperform, cutting its target to $2.46 from $2.48 to account for dilution.

Echo Entertainment ((EGP)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/3/2

According to Echo's CEO, there is a 40% expenditure gap per capita to Star Sydney from Crown Melbourne ((CWN)) which management would like to address. The broker's analysis suggests Star punters lose more…sorry…spend more than Crown punters which means to close the gap, Star would need to up its visitor numbers. That will cost significant money, the broker warns. Given EGP has now risen toward the broker's $4.00 target price the broker has downgraded to Underperform.

Flexigroup ((FXL)) downgraded to Neutral from Buy by UBS. B/H/S: 4/1/0

Flexigroup reiterated FY15 guidance at its AGM but admitted the first four months have been tough. Beyond FY15, a challenging growth profile for consumer leasing and an already high base for Certegy means FXL's other divisions are going to have to do some serious heavy lifting, the broker warns. FXL is doing a good job, the broker suggests, while a high degree of visibility in its book and a solid yield provide downside support. But competition, costs and a $2.5m loan provision are making life difficult. The broker has decided to downgrade to Neutral, cutting its target to $3.39 from $4.25.

GUD Holdings ((GUD)) downgraded to Sell from Neutral by Citi. B/H/S: 2/2/2

Citi considers the stock is overvalued, given the headway that is yet to be made regarding restructuring and operational improvements. Investor briefings, while supportive, do not overcome the broker's impression that the stock is overpriced. Rating is downgraded to Sell from Neutral and the target lowered to $6.28 from $6.29.

iiNet ((IIN)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/3/2

The AGM revealed continued subscriber growth but also increasing costs. Credit Suisse is downgrading earnings forecasts by 5% and the rating to Neutral from Outperform following the strong performance of the stock over the year to date. The broker continues to expect the small cap telco sector will benefit from industry consolidation and this should underpin iiNet. Target is lowered to $8.74 from $9.15.

James Hardie ((JHX)) downgraded t o Equal-weight from Overweight by Morgan Stanley. B/H/S: 4/3/1

Revenue growth was strong in the second quarter despite a slower-than-expected recovery in the US. The rate of margin expansion continues to disappoint Morgan Stanley and the rating is downgraded to Equal-weight from Overweight. The broker refrains from an Underweight rating as the stock has outperformed in the past despite consensus downgrades. Industry view remains Attractive. Target is reduced to $12.00 from $14.00.

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

The headline FY14 result was just ahead of Macquarie's forecasts but the quality was considered low, boosted by asset sales and a 23% tax rate. The broker is underwhelmed by the value of the chemicals division sale but considers the capital management potential good news, although any buy-back will not be announced until around March next year. Macquarie was also not surprised that the company did not provide discrete guidance, given the tough conditions. Rating is downgraded to Underperform from Neutral and the target lowered to $18.20 from $20.50.

Pacific Brands ((PBG)) downgraded to Neutral from Buy by Citi. B/H/S: 0/4/1

The company has sold Brand Collective for what Citi considers is a very low $39m. The broker lowers earnings forecasts by 5% for FY15 and by 6% for FY16, given the net loss of earnings from the sale. Citi observes restructuring is now mostly complete and the remaining brands have far greater equity but downgrades to Neutral from Buy because of the recent share price moves. A 55c target is retained.

See also PBG upgrade.

Programmed Maintenance ((PRG)) downgraded to Sell from Neutral by Citi. B/H/S: 3/3/1

The first half result was weak and, while acknowledging the potential, Citi is concerned about the cyclical and structural headwinds. Rating is downgraded to Sell from Neutral and target to $2.46 from $3.02.

See also PRG upgrade.

Seven Group ((SVW)) downgraded to Hold from Add by Morgans. B/H/S: 0/5/0

The forecast downgrade at the AGM does not come as a surprise to Morgans, as increased cancellations have accentuated a fall-off in capital equipment sales. The broker reduces FY15-16 earnings and continues to believe Seven is a quality exposure. However, in the current environment it is likely to be range bound and the rating is downgraded to Hold from Add. Target is reduced to $6.48 from $8.15.

Sonic Healthcare ((SHL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/3/1

The dynamics of Australian pathology have caused the company to downgrade FY15 guidance. Credit Suisse now forecasts earnings growth of 3.2%. Key issues for the broker include higher operating costs and the recent vitamin D and folate fee reductions. The underperformance of the US pathology business, which accounts for around 10% of US revenues, surprised the broker as it has clearly affected the incremental recovery in US revenue. New offshore contracts are a positive but domestic concerns remain. Rating is downgraded to Underperform from Neutral and the target lowered to $17.50 from $18.30.

Sundance Resources ((SDL)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/0/1

Macquarie is downgrading to Underperform from Neutral, having made material reductions to valuation in the wake of the slump in iron ore prices. Target is reduced to 4c from 6c. The bulk of the changes to forecasts reflect sustaining higher discounts for mid grade iron ore products in 2015 and the removal of resource option value for projects that are not currently in production.

Toll Holdings ((TOL)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 2/3/3

Morgan Stanley suspects management's return-on-capital targets are challenged. Only the network businesses offer the leverage, namely forwarding and express, and these two also have their challenges. Having downgraded the outlook for the Australian economy the broker is also downgrading Toll to Underweight from Equal-weight. Target is lowered to $5.15 from $5.30.

Woolworths ((WOW)) downgraded to Sell from Buy by UBS. B/H/S: 4/0/4

UBS has downgraded Woolworths to Sell from Buy. We first read about it late last night on Twitter. Today, we'd like to share some of the reasoning behind the move, but the actual report is missing from the daily morning communication. Someone's going to notice and it'll be in there by tomorrow, no doubt. Target price tumbles to $31 from $39.20. Earnings estimates have received a haircut.

See also WOW upgrade.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

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