Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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: Monday June 29 to Friday July 3, 2015
Total Upgrades: 20
Total Downgrades: 12
Net Ratings Breakdown: Buy 40.60%; Hold 42.75%; Sell 16.66%

Wild, volatile times for the local share market have pulled stockbroking analysts into an upgrade frenzy. At least, that’s what it looks like from afar. For the week ending Friday, 3 July 2015, FNArena registered no less than twenty (20) upgrades being issued for individual stocks against twelve (12) downgrades.

While weakening share prices do make a contribution to the numbers above, of far greater importance have been quarterly updates to price forecasts for energy and base materials by several stockbrokerages. This also explains why FNArena’s lists of upgrades and downgrades seem over-populated by oil and gas and mining stocks, on both sides of the ledger.

The picture doesn’t change when looking at registered changes to valuations and price targets and to earnings estimates. Clearly, there were plenty of reasons to make a lot of changes to price forecasts (believe it or not but both iron ore and crude oil have surprised to the upside, short term) and the results have triggered flow-on changes either way.

Outside the resources space, Slater & Gordon’s accountancy fall-out continues, while corporate interest for Asciano has positive repercussions, as it has too for Kathmandu. All in all, adjustments to price targets remain rather benign a few weeks out from the local reporting season and despite the aforementioned updates on commodity price estimates. The latter might be an indication of some sorts that valuations are near a bottom for the embattled and abandoned resources sector.

Beyond the macro unknowns caused by Greece and the Chinese stockmarket, there’s still a Federal Reserve behind the curtains, waiting to resurface, while August is approaching. There should be plenty of action and anticipation in the weeks ahead.

Upgrades

APA Group ((APA)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 4/3/1

The broker points out post the acquisition of Queensland Curtis LNG (QCLNG) infrastructure, APA is now in possession of an unrivalled, diversified, CPI-linked portfolio of gas
infrastructure assets. Forecasts for earnings and cash flows are a genuine stand-out in the regulated space, the analysts add. Yet they have left their price target unchanged at $8.30. With the share price trading around that level, the rating has been upgraded to Neutral from Underweight.

Aristocrat Leisure ((ALL)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/0/1

Credit Suisse observes a change in the register with value-oriented investors replacing those responding to the company’s growth momentum. This comes amid expectations growth will slow. The stock appears better valued as the share price has underperformed in the last quarter. Hence, Credit Suisse upgrades to Outperform from Neutral. Target is steady at $9.00.

BC Iron ((BCI)) upgraded to Neutral from Sell by UBS. B/H/S: 0/3/0

The broker has increased estimates for short term iron ore pricing for 2015 from the September quarter by 11% on supply disruption but expectations for rising supply and peak steel are unchanged. UBS incorporates new forward iron ore assumptions which leads to increases in earnings estimates for the company. The broker upgrades to Neutral from Sell, also reflecting the recently-announced debt repayment. Target is lifted to 30c from 26c.

Beach Energy ((BPT)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 1/3/3

The Cooper Basin has emerged from a long-term decline with improving markets for gas. Morgan Stanley believes low share prices expose value and potential for consolidation. The broker upgrades to Overweight from Equal-weight. In-Line sector view maintained. Target is raised to $1.19 from 98c.

BlueScope ((BSL)) upgraded to Buy from Neutral by UBS. B/H/S: 6/2/0

Regional steelmaker spreads have fallen on continued oversupply from China. This is likely to push BlueScope’s Australian business towards a loss in FY16. Hence, UBS suspects mothballing the remaining No 5 blast furnace could become a viable option. This scenario would mean a focus on downstream value-adding using imported steel. UBS upgrades to Buy from Neutral on the potential upside seen in the stock. Target is reduced to $4.60 from $4.90.

BT Investment Management ((BTT)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 1/3/0

The broker now prefers asset managers with greater diversity and BT Investment stands out as the best on that basis. The broker upgrades to Overweight from Equal-weight. Morgan Stanley believes consensus is underestimating the scope for margin expansion. Target is raised to $11.00 from $8.70. In-Line industry view retained.

Charter Hall ((CHC)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 4/1/2

The broker upgrades to Overweight from Neutral following a review of the stock which suggests stronger earnings growth potential. The valuation remains appealing as 68% of the earnings are from property income but the stock is seen sold down in line with the higher risk diversified funds managers. Target is raised to $4.90 from $4.77.

Drillsearch Energy ((DLS)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/4/0

An update from Drillsearch indicates FY15 production at the low end of the guidance range but in line with the broker’s forecast. Following recent discoveries, significant reserve upgrades are likely, the broker suggests, which should support high margin production into FY17. This should help to offset the otherwise surprising increase in capex in a climate of energy company austerity. Upgrade to Outperform. Target unchanged at $1.30.

Eclipx Group ((ECX)) upgraded to Buy from Neutral by UBS. B/H/S: 2/1/0

Eclipx listed in April and traded up 40% by end-May, prompting the broker to initiate coverage with a Neutral rating. But having fallen in the general market correction, down 10% in June, Eclipx is now offering a more balanced risk/reward return, the broker suggests. There remains a risk around potential modification of APRA’s capital rules on warehousing, but the broker has upgraded to Buy. Target rises to $3.20 from $3.10.

Henderson Group ((HGG)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/2/0

Credit Suisse is downgrading earnings for wealth managers for FY15-FY17. Managers skewed to domestic mandates experience larger earnings downgrades than those with international mandates, given the ASX200 Accumulation Index was down 6.5% during the June quarter and global equities in Australian dollar terms were only down 0.6%. While noting scope for disappointment in the first half, the broker upgrades Henderson to Neutral from Underperform believing strong earnings growth in FY16 will stand the stock in good stead. Target is unchanged at $5.65.

GWA Group ((GWA)) upgraded to Buy from Neutral by UBS. B/H/S: 1/4/1

GWA expects trading earnings of $67-69m in FY15 or $71-73m if Gliderol is excluded. UBS had already stripped out Gliderol from estimates and makes no change to forecasts. Management has announced the sale of Gliderol for $7m, with a non-cash impairment charge of $25m and one-off costs of $7-9m to re-set the cost base. UBS considers the recent sell off appears overdone. The broker is now more comfortable with the earnings profile and upgrades to Buy from Neutral. Target is reduced to $2.51 from $2.54.

Iluka Resources ((ILU)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 6/0/2

The mineral sands industry is adjusting in terms of price and volumes and the broker believes Iluka Resources is well positioned to cope with this phase as it has a strong balance sheet and significant inventory. The broker also believes a recovery in mineral sands has begun, despite downgrading price forecasts. Deutsche Bank upgrades to Buy from Hold and assumes the pursuit of Kenmare Resources will be successful. Target is raised to $8.80 from $7.25.

Independence Group ((IGO)) upgraded to Buy from Hold by Deutsche Bank and to Buy from Neutral by UBS. B/H/S: 5/1/1

Deutsche Bank has made changes to currency and commodity price forecasts. Commodities are largely downgraded. Base metal fundamentals remain more attractive than the bulks but the broker does not expect a recovery will get underway until 2016. Value is seen emerging in some stocks as the sector has been aggressively sold off. The major changes to forecasts are in iron ore, copper, aluminium, alumina and nickel. The broker still prefers base metals to precious metals. Upgrade to Buy from Hold, given dividend upside potential and a strong yield. UBS has lifted 2015 gold price forecasts by around 1.0% to US$1194/oz, while the forecast for 2016 and the long-term price are unchanged at US$1250/oz and US$1300/oz respectively. Anticipation of a US Fed move on rates is expected to weigh on gold prices this year. Based solely on share price movements the broker upgrades to Buy from Neutral.

Panoramic Resources ((PAN)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/3/0

Macquarie retains a positive stance on the lower-cost Australian nickel miners but is cautious when it comes to Panoramic Resources as the company is loss making at current prices. Still, the stock is trading at a discount to the broker’s price target and the rating is upgraded to Neutral from Underperform. Target is 50c.

Sirius Resources ((SIR)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 3/3/0

Deutsche Bank has made changes to currency and commodity price forecasts. Commodities are largely downgraded. Value is seen emerging in some stocks as the sector has been aggressively sold off. The major changes to forecasts are in iron ore, copper, aluminium, alumina and nickel. Despite being the subject of a friendly acquisition by Independence Group ((IGO)) the broker considers the stock is now trading below fair value and there is an opportunity for other parties to emerge with a higher bid. Hence, Deutsche Bank upgrades to Buy from Hold. Target is $4.20.

South32 ((S32)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 6/0/0

Deutsche Bank has made changes to currency and commodity price forecasts. Commodities are largely downgraded. Base metal fundamentals remain more attractive than the bulks but the broker does not expect a recovery will get underway until 2016. Value is seen emerging in some stocks as the sector has been aggressively sold off. The major changes to forecasts are in iron ore, copper, aluminium, alumina and nickel. Deutsche Bank upgrades South32 to Buy from Hold. Target is reduced to $2.50 from $2.60.

Sydney Airport ((SYD)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/3/0

The company has reached agreement with the regulators on pricing, ahead of Macquarie’s expectations. The broker upgrades earnings estimates for 2015-17. Target rises to $5.35 from $5.15. Macquarie considers the ability to invest capital in terminal 3, a new jet base and second airport amid benefits from rolling the debt portfolio create a strong cash flow outlook. Rating is upgraded to Outperform from Neutral.

Tassal Group ((TGR)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/1/0

The broker believes the negative impact of reduced wholesale pricing in the second half is now reflected in the stock. There could be some upside from a more favourable balance of supply/demand, particularly if the company can win back share from imports or the export price improves. Rating is upgraded to Overweight from Neutral and the price target is raised to $3.92 from $3.86.

Woodside Petroleum ((WPL)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/3/3

Credit Suisse considers Woodside offers something for every investor and remains a good place to house some energy investment. The broker believes, with Wheatstone pushing out production declines to beyond 2020 the company has the ability to aggressively use its balance sheet should oil prices stay lower for longer and asset prices fall. Rating is upgraded to Outperform from Neutral. Target is raised to $37 from $36.

Downgrades

Alumina Ltd ((AWC)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 5/2/1

The broker ‘s commodities team has cut FY16-20 aluminium price forecasts by 13-16% and alumina by 4-7% following significant deterioration in demand/supply fundamentals. These have flowed through to forecast dividend cuts from the Alumina Ltd stock analysts due to the implied reduction in cash flow. This means despite the Alumina price having fallen 15% in June, a now lower yield provides little support. Downgrade to Neutral. Target falls to $1.70 from $2.30.

Asciano ((AIO)) downgraded to Neutral from Buy by UBS. B/H/S: 5/3/0

The company has received a cash and scrip takeover bid from Brookfield Infrastructure. The $9.05 per share offer represents a 36% premium to the stock’s last traded price. UBS views Brookfield as a logical buyer, which already has a presence in the Australian rail industry. Asciano is a high cash generating business and an appealing target. Still, UBS believes there are some risks the bid may not progress, none the least being another bidder emerging. Rating is downgraded to Neutral from Buy. Target is raised to $8.00 from $7.00.

ERM Power ((EPW)) downgraded to Neutral from Buy by UBS. B/H/S: 1/2/0

The outlook for electricity volumes has improved in the past six months, UBS observes. The broker does not believe ERM power has any locked-in supply of REC certificates but it will supply power equivalent to over 5.0% of REC surrender, which by 2017 is $140m. The broker makes no change to estimates but will review FY16 and FY17 at the FY15 results. Rating is downgraded to Neutral from Buy as the broker applies a reduced 10% small-cap discount and rolls forward the target, which is lowered to $2.29 from $2.39.

Fortescue Metals ((FMG)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/3/5

Deutsche Bank has made changes to currency and commodity price forecasts. Commodities are largely downgraded. Base metal fundamentals remain more attractive than the bulks but the broker does not expect a recovery will get underway until 2016. Value is seen emerging in some stocks as the sector has been aggressively sold off. The major changes to forecasts are in iron ore, copper, aluminium, alumina and nickel. Deutsche Bank downgrades Fortescue to Sell from Hold. Target is lowered to $1.50 from $2.35.

Horizon Oil ((HZN)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 1/1/1

The Cooper Basin has emerged from a long-term decline with improving markets for gas. Morgan Stanley believes low share prices expose value and potential for consolidation. Horizon Oil is downgraded to Underweight from Equal-weight. Industry view is In-Line. Target is lowered to 7c from 17c.

Kathmandu Holdings ((KMD)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/3/0

Despite considerable discussion over the Briscoe takeover proposal there has been little about the underlying trading conditions, in Credit Suisse’s view. The broker does not believe the current offer includes any control premium nor takes into account synergies. Hence additional consideration is highly likely in order to get a deal done. Credit Suisse downgrades to Neutral from Outperform. The target is raised to NZ$1.90 from NZ$1.70.

OceanaGold ((OGC)) downgraded to Hold from Buy by Deutsche Bank and to Neutral from Buy by UBS. B/H/S: 2/4/0

Deutsche Bank has made changes to currency and commodity price forecasts. Commodities are largely downgraded. Base metal fundamentals remain more attractive than the bulks but the broker does not expect a recovery will get underway until 2016. Value is seen emerging in some stocks as the sector has been aggressively sold off. The major changes to forecasts are in iron ore, copper, aluminium, alumina and nickel. Rating is downgraded to Hold from Buy. UBS has lifted 2015 gold price forecasts by around 1.0% to US$1194/oz, while the forecast for 2016 and the long-term price are unchanged at US$1250/oz and US$1300/oz respectively. Anticipation of a US Fed move on rates is expected to weigh on gold prices this year. Based solely on share price movements the broker downgrades to Neutral from Buy.

Perpetual ((PPT)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 1/7/0

The broker now prefers asset managers with greater diversity and has become more cautious on Perpetual. Winning further share in domestic markets is considered difficult. Morgan Stanley downgrades to Equal-weight from Overweight. Target is reduced to $56 from $62. Industry view is In-Line.

QBE Insurance ((QBE)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 6/2/0

The rating has been pulled back to Neutral from Overweight due to recent share price appreciation. The analysts can see the rationale behind the share price performance, shorter term, but longer term they label the share price as “full”. The analysts suspect the upcoming interim result will see some reserve releases while US interest rates remain a positive catalyst for the share price. One negative factor remains the turn in the local insurance cycle. Target remains unchanged at $13.90.

Slater & Gordon ((SGH)) downgraded to Neutral from Buy by UBS. B/H/S: 3/1/0

Slater & Gordon has announced a significant accounting issue regarding the recognition of historical UK cash flows. Quindell plc shares have been suspended pending an investigation. The question for investors, in the broker’s view, is whether there are any significant discrepancies with respect to due diligence in valuing the assets recently acquired from Quindell. As a consequence, UBS reduces its rating to Neutral from Buy pending clarification. Target is lowered to $3.70 from $7.90.

Whitehaven Coal ((WHC)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 1/6/1

Deutsche Bank has made changes to currency and commodity price forecasts. Commodities are largely downgraded. Base metal fundamentals remain more attractive than the bulks but the broker does not expect a recovery will get underway until 2016. Value is seen emerging in some stocks as the sector has been aggressively sold off. The major changes to forecasts are in iron ore, copper, aluminium, alumina and nickel. Whitehaven Coal is downgraded to Hold from Buy. Target is lowered to $1.50 from $2.25.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=Citi,CreditSuisse,DeutscheBank,JPMorgan,Macquarie,MorganStanley,Morgans,UBS&b0=81,87,93,77,130,75,174,104&h0=113,114,141,107,115,53,158,124&s0=45,53,18,50,50,48,21,42″ style=”border:1px solid #000000″ />

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