Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 July 11 to Friday July 15, 2016
Total Upgrades: 7
Total Downgrades: 9
Net Ratings Breakdown: Buy 42.09%; Hold 44.36%; Sell 13.55%

Given the strong performance of equities during the week ending on Friday, 15th July 2016, it probably comes as a surprise broker downgrades for stocks during the week only slightly exceeded upgrades. FNArena registered nine downgrades against seven upgrades.

Stockbroker Morgans first downgraded sports tech wear company Catapult but then reversed course a few days later which makes for an awkward appearance in both tables for the week.

The close tally is probably indicative of the money flow rotation behind the strong equities performance. New targets are resources stocks and banks, indicative of growing risk appetite across the globe, but investors are not yet willing to abandon safe havens either. All downgrades ended at neutral.

Incitec Pivot, by now perennial disappointer in what should be a purple patch for the company ahead of its Louisiana plant start-up, was the only receiver of two downgrades during the week. Global fetrtiliser prices are not playing ball and there's very little management can do about it.

The list of positive amendments to valuations and price targets is near completely dominated by resources stocks; more signals market sentiment has turned more in favour for the growth dependent parts in the market. The negative side only contains three members and there's no disasters included. Incitec Pivot suffered the largest set back with a -5.18% decrease of its consensus target.

The table for positive changes to earnings estimates for the week is 100% resources. BHP Billiton is still included, but this time BlueScope Steel, clearly on a tear, leads the pack with an increase of no less than 1357%. Yes, resources stocks are a different kind of breed, even after repeated upgrades.

The negative side is also dominated by resources stocks, led by Karoon Gas (-94%) with Whitehaven Coal (-29%) following at respectable distance. Here we find a few non-resources names, including Transurban, Primary Healthcare and Magellan Financial. Incitec Pivot, of course, is also included with further reductions to market projections.

With the August reporting season beckoning, some of the weaker companies in the market have started to issue profit warnings. Thus far, the encouraging observation is that outside the likes of Primary Healthcare and Incitec Pivot, there doesn't seem to be much follow through, at least not until to date.

Only two more weeks now.

Upgrade

AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Upgrade to Add from Hold by Morgans .B/H/S: 4/2/0

Morgans upgrades to Add from Hold based on the company's review of the cold logistics performance, which should yield some quick cost reductions and synergies, and mark FY16 as a potential low point in profitability.

The broker believes the board should be aware of the valuation upside that would come from a potential exit of cold logistics, which makes this a medium term catalyst.

Another relatively benign FY16 result is expected with a strong performance in automotive divisions. Target is raised to $4.51 from $4.45.

CATAPULT GROUP INTERNATIONAL LTD ((CAT)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

The company has strengthened its position as a supplier of sports analytics globally through the acquisition of XOS Technologies, which provides video systems to US sporting teams. Morgans believes this will create significant value over time.

Catapult will pay US$60m for XOS and, separately, will purchase Playertek, a developer of wearable analytical devices for semi-professional athletes.

The acquisitions will be funded by $100m in new equity, a placement and accelerated rights issue. Morgans upgrades to Add from Hold. Target is raised to $4.29 from $3.55.

See also CAT downgrade.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/2/3

Ord Minnett upgrades to Hold from Lighten following revisions to the valuation of BHP Billiton's Mining Area C, from which Iluka earns a royalty.

The broker also upwardly adjusts earnings estimate to account for currency changes and higher rutile price estimates for 2017 and 2018.

Price target is raised to $6.50 from $5.60.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/4/1

Morgan Stanley is losing its conviction the private health insurance reform and contract re-negotiations will meaningfully impact on FY17 earnings.

Diminished regulatory risk has weakened the thesis that softer insurer profitability would instigate poorer funding outcomes for hospitals.

With earnings momentum likely to remain positive the broker now considers the valuation more reasonable and upgrades to Equal-weight from Underweight. Target is raised to $69.03 from $57.44. Industry view is In-Line.

RESOLUTE MINING LIMITED ((RSG)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/1/0

Citi has upgraded to Buy from Neutral and lifted the price target to $1.80 (we had $1.25 prior) on higher forecasts both in production terms as gold price-wise.

The analysts note the stock is still trading on a discount, hence the upgrade. Note the shares have rallied more than 400% over the past twelve months.

Forecasts have received a serious boost.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/1

FY16 copper and gold production beat Macquarie's forecasts by 6-7%. This has enabled the company to move to a net cash position for the first time since production began at DeGrussa, the broker observes.

Hence, Macquarie upgrades to Outperform from Neutral, expecting dividends should increase. The broker expects cash flow to increase significantly over the next 2-3 years, benefitting from lower capital expenditure and improved grades as Monty is brought on line. Target rises to $6.10.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 1/4/2

Ord Minnett upgrades to Accumulate from Lighten after reviewing the investment thesis on the stock. Target rises to $10.25 from $8.75.

The broker believes the new operating model is managing the agricultural risk better while Asian wine demand is strong, with Treasury Wine well placed to benefit. Changes to the commercial portfolio in the Americas are also positive.

Ord Minnett upgrades earnings estimates by 7% fro FY16 and FY17 and by 10% for FY18.

Downgrade

APN OUTDOOR GROUP LIMITED ((APO)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0

The company will purchase Metrospace and iOM, regional billboard operators in Victoria and Queensland, adding 240 sites to its portfolio. Morgans expects the post-merger cost synergies will be substantial.

Morgans also suspects that competition concerns may hinder the company in acquiring further share of the Australian outdoor market as it is already highly concentrated although a number of smaller bolt-ons are possible.

The broker notes the recent share price performance which has lifted it above the price target and downgrades to Hold from Add. Target is raised to $7.38 from $7.24.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/4/0

Citi analysts note the risk to haulage volumes has abated and the share price has responded accordingly. So that's priced in.

As the analysts have positioned themselves below consensus, thinking one cannot take projected cost savings for granted, the rating is being pulled back to Neutral from Buy. Target gains 10c to $4.75.

CATAPULT GROUP INTERNATIONAL LTD ((CAT)) Downgrade to Hold from Add by Morgans .B/H/S: 1/0/0

Morgans revises forecasts following an update on order volumes. The company's orders for FY16 are now 4.4% higher than prior guidance of 8,000 units.

The broker notes a larger proportion of the new orders are subscriptions, rather than capital sales. The mix shift results in lower revenue booked in FY16 and FY17 but higher and more sustainable long-run revenue streams.

Morgans downgrades to Hold from Add as a result of the strong share price performance. Target is raised to $3.55 from $2.89.

See also CAT upgrade.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/2

Credit Suisse observes FY16 has ended strongly for the company with shipments ahead of expectations. Yet the broker believes the stock, leveraged to the spot price of iron ore, is running too high.

At the current share price Credit Suisse believes the risk/reward is no longer favourable and the rating is downgraded to Neutral from Outperform. Target rises to $4.30 from $4.00.

The broker continues to expect iron ore supply in the second half of 2017 will mean iron ore prices move lower, sufficient to squeeze out marginal tonnage. The price for that is estimated at around US$40/t.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Buy by UBS .B/H/S: 4/3/1

Credit Suisse has downgraded its price forecasts for ammonia, urea and phosphate, believing ammonia and phosphate capacity growth will outstrip demand growth through to 2018. The earnings outlook has therefore deteriorated for Incitec over the period.

On the other hand, improving cash flow will lead to de-gearing and potential capital management opportunities which should imply a floor under the share price, Credit Suisse suggests. The broker has pulled back to Neutral and cut its target to $3.10 from $3.63.

With the imminent commissioning of the Louisiana project UBS expects the market to turn attention to capital management. This is supported by an expected rise in free cash flow next year as Louisiana earnings are realised.

UBS suspects there is potential for a $200m buy-back to be announced at the FY16 results. This is based on spot fertiliser price assumptions. The broker also suspects the market may be set up for disappointment amid expectations for up to a 10% or $500m buy-back. To achieve this, the broker maintains, it would require a significant lift in fertiliser prices, which is unlikely.

UBS envisages little scope for outperformance at current levels. Rating is downgraded to Neutral from Buy. Target is reduced to $3.10 from $3.80.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/6/1

Even though the analysts are anticipating yet another upgrade from Medibank, they've nevertheless decided it's time to pull back to Neutral from Buy. The share price looks too bloated.

Estimates have received yet another boost and the analysts observe they are now positioned well above the last guidance provided by the company. Target lifts to $3.05.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/6/0

Morgan Stanley is unconvinced the gap between billet and scrap can improve whilst Chinese exports remain high. As such the broker downgrades longer term earnings forecasts.

While an improvement is still forecast in FY17 and FY18 the broker's confidence is low. Moreover, balance sheet capacity is somewhat reduced.

The broker downgrades to Equal-weight from Overweight and lowers the target to $7.96 from $8.45. In-Line industry-view.

TASSAL GROUP LIMITED ((TGR)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/0

Shaking off the Coles contract means Tassal should benefit from increased exposure to a wholesale market seeing rising prices, Credit Suisse suggests. However volumes and costs will be impacted from the hangover of a hot summer.

This implies only modest FY17 earnings growth and while Credit Suisse acknowledges higher prices both locally and overseas, near-term downside earnings risk warrants caution. The broker thus downgrades to Neutral, noting peer Huon Aquaculture trades at a higher multiple but offers stronger growth.

Target nevertheless rises to $4.45 from $4.05.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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