Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 24 to Friday November 28, 2014
Total Upgrades: 10
Total Downgrades: 11
Net Ratings Breakdown: Buy 43.05%; Hold 39.48%; Sell 17.46%

FNArena continues to generate more recommendation downgrades than upgrades, which runs contrary to the fact the stock market is experiencing serious price weakness, but then again, spot prices for crude oil and many other industrial and non-industrial commodities continue to weaken too, and this is placing a lot of pressure on forecasts and on valuation models.

In this context, investors should never underestimate the potential for bad news to generate more bad news and eventually end up creating a self-fulfilling negative spiral. Geared-up balance sheets that are coming under pressure from a sudden low price environment in the energy space will do exactly that. Expect the focus of the financial sector to shift towards debt, balance sheets and debt-servicing abilities soon. If you think it's only in Australia where companies such as Santos and Origin have taken on a lot of debt in recent years you are about to be surprised by how much debt there is in this sector globally, all taken on while the price was above US$100/bbl.

The picture becomes more polarised when looking at price targets/valuations and profit estimates where the negative side of the ledger remains dominated by energy companies and their contractors, while industrial companies -customers of energy companies and miners- continue to feature heavily on the positive side.

Underlying, this is the key message investors should take away from present changing dynamics in the global economy and in the domestic share market. There are winners and losers under all circumstances and right now energy companies and their services providers are not among the winners. Better not to underestimate the negative spiral that is taking shape on the back of the continuous slide in global crude oil prices.?

Upgrades

Beach Energy ((BPT)) upgraded to Buy from Neutral by Citi, to Outperform from Neutral by Macquarie and to Add from Hold by Morgans. B/H/S: 4/3/0

Citi considers the recent sell off presents a buying opportunity. The broker is cautious about the outlook for unconventional gas but believes the stock is cheap and the Cooper unconventional represents a free option. Rating is upgraded to Buy, High Risk  from Neutral and the target is reduced to $1.33 from $1.35. Beach's investor update was encouraging for Macquarie. Western Flank expansion is becoming increasingly important to BPT as oil prices fall, the broker suggests. Target falls to $1.65 from $1.70 but with solid cash flow and a sound balance sheet, BPT has become a compelling investment at a 25% discount to net asset value. Upgrade to Outperform. Beach is comfortable with its stage 1 goals in the Cooper Basin while oil discoveries at Martlet, Burners and Balgowan highlight the potential from the drilling program at the Western Flank, in Morgans' view. Morgans expects the oil price to recover in early 2015 and upgrades to Add from Hold, with significant upside likely if exploration programs are successful. Target is reduced to $1.62 from $1.67.

CSR ((CSR)) upgraded to Add from Hold by Morgans. B/H/S: 3/4/1

Morgans analysts have revisited their projections and this has led to increased forecasts. On the back of this adjustment, they upgraded to Add from Hold while pushing up the price target to $3.85 from $3.69. Adding to the stock's appeal, the analysts observe CSR offers the most direct exposure to the Australian residential construction cycle while avoiding exposure to construction materials. The analysts remain concerned about the latter given levels of activity from the non-residential and engineering construction segments.

Dexus Property ((DXS)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 2/4/1

Post share price consolidation (six for one) the securities have experienced somewhat of a sell-off and CS analysts see an opportunity emerging, declaring it's all a bit overdone. They have now upgraded to Neutral from Underperform. Price target $7.21.

Federation Centres ((FDC)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/0/3

Federation Centres has underperformed since its FY14 results, despite the results being one of the strongest in the A-REIT sector, Deutsche Bank observes. The broker acknowledges profitability on longer-dated developments appears modest but visibility on the scope and timing has improved. Operational performance in aggregate appears to be on the rebound and Deutsche Bank upgrades to Buy from Hold. Target is raised to $2.81 from $2.65.

Mirvac ((MGR)) upgraded to Overweight from Underweight by Morgan Stanley. B/H/S: 4/2/1

Australian residential exposure remains attractive to the broker but it is the east coast which is most attractive. Western Australian concerns are increasing, with potential for declining affordability creating downside risk for residential volumes and margins. Morgan Stanley upgrades Mirvac to Overweight from Underweight and the stock is now the broker's preferred residential A-REIT. Target is raised to $1.90 from $1.85.

Paladin Energy ((PDN)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 2/3/1

Paladin's equity raising has cleared near-term debt issues and the uranium price has recovered from mid-year lows. The broker now envisages Paladin offers investors a pure exposure to a more positive uranium outlook. Rating is upgraded to Overweight from Equal-weight and the target to 55c from 45c.

Tower ((TWR)) upgraded to Buy from Neutral by Citi. B/H/S: 1/1/0

Following the FY14 result Citi is upgrading FY15 forecasts by 21%. The insurer is highlighting industry opportunities following consolidation in the NZ market. The broker finds there is a lot to like about the stock, with strong growth in dividends, profitability and improved reinsurance protection. Rating is upgraded to Buy from Neutral and the target to NZ$2.30 from NZ$1.90.

See also TWR downgrade.

Wesfarmers ((WES)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/4/3

Macquarie reviews the challenges and opportunities in the wake of Glencore Australia's closure of its coal mines for three weeks in mid December. The broker believes Wesfarmers is well placed for a turn around in the event of an improvement in the coal market and has the ability to raise and deploy capital more efficiently than its peers. The broker upgrades to Neutral from Underperform following the recent share price correction. Coles and Bunnings continue to perform well, partly offsetting the headwinds which Macquarie does not expect will abate over the next 12 months. Target is raised to $43.90 from $43.80.

Downgrades

Aristocrat Leisure ((ALL)) downgraded to Neutral from Buy by UBS. B/H/S: 4/3/0

FY14 profit of $118.1m was up 10.2% but below the broker's forecasts. UBS notes adding back in the R&D investment in the US business means there would have been little or no growth from this division. The broker's forecasts are unchanged for FY15 and FY16 is lowered by 7.4%. UBS remains attracted to the investment case but downgrades to Neutral from Buy on the price strength. Target is reduced to $7.20 from $7.30.

Cardno ((CDD) downgraded to Neutral from Buy by UBS and to Underperform from Neutral by Macquarie. B/H/S: 2/3/1

Cardno's first half update included a profit guidance reduction to $27-31m from a previous $35m. Several factors contributed to the downgrade but an earnings decline from resources-related work in Australia was the main culprit, UBS notes. The broker has cut its FY15 profit forecast by 25%. The share price has declined 26% recently but UBS can only envisage headwinds from lower iron ore and oil prices. Target falls to $3.70 from $6.75. Macquarie believes the timing and magnitude of the downgrade will shake confidence. The company expects the second half will show improvement, driven by infrastructure and urban development in Australia. Macquarie downgrades to Underperform from Neutral and reduces the target to $3.52 from $6.30.

Fisher & Paykel Healthcare ((FPH)) downgraded to Sell from Neutral by UBS: B/H/S: 2/0/3

Fisher & Paykel Health's result beat the broker by 8%, with a 10% profit increase. Quality was not great but strength in core product lines and another impressive margin result makes it academic, the broker suggests. The interim dividend has increased by 7%. FPH continues to deliver on its strategy but at a forward multiple of 27x has become too pricey for the broker. Target rises to NZ$5.50 from NZ$5.25 but rating downgraded to Sell.

Magellan Financial ((MFG)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 2/1/0

Magellan's global equity position is attractive but funds under management growth is slowing. The broker does not believe a repeat of the rapid institutional inflows of FY13/14 is likely and retail flows appear to have peaked with market share maturing and competition emerging. The broker downgrades to Equal-weight from Overweight and reduces the target to $14.30 from $14.50.

Mantra ((MTR)) downgraded to Hold from Add by Morgans. B/H/S: 2/1/0

Mantra is off to a strong start in FY15, although guidance was left unchanged at its AGM. The broker suspects there will be an upgrade with the first half result. The broker has not changed its forecasts but has lifted its target to $2.70 from $2.45. The stock is nevertheless already trading at that target, so the broker pulls back to Hold.

Panoramic Resources ((PAN)) downgraded to Neutral from Buy by UBS. B/H/S: 2/2/0

Panoramic has announced it will go ahead with the development of a decline to the ore body at Lanfranchi, providing a new ore source for 16 months. Subsequent development will depend on the prevailing nickel price. It appears the Lanfranchi deposit will not produce nickel at the rate the broker had assumed, thus production forecast cuts follow. Target falls to 53c from 90c. Lanfranchi is in need of exploration success or Savannah will become PAN's only mine in the next two years, the broker warns.

Seek ((SEK)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/2/3

Seek's market update signaled strong domestic volumes but Deutsche Bank analysts point at costs which are rising too. And then there's increased investment in operations. Deutsche Bank maintains management is conducting the correct strategies, but results likely won't be reflected in FY15 performance numbers. On this basis, limited upside is seen from present share price levels and thus the rating has been pulled back to Hold from Buy. Estimates have been slightly lowered.

Stockland ((SGP)) downgraded to Underweight from Overweight by Morgan Stanley. B/H/S: 3/2/2

Australian residential exposure remains attractive to the broker but it is the east coast which is most attractive. Western Australian concerns are increasing, with potential for declining affordability creating downside risk for residential volumes and margins. Morgan Stanley downgrades to Underweight from Overweight, given Stockland's material exposure to WA residential markets and limited scope for positive margin surprise in FY16. Target is reduced to $3.95 from $4.30.

Telstra ((TLS)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/5/2

Credit Suisse observes competitive pressure is mounting for Telstra. The broker reduces mobile revenue forecasts to reflect both lower subscriber growth and revenue per unit. The valuation looks stretched to Credit Suisse and the rating is downgraded to Underperform from Neutral. NBN is expected to support the cash flow/dividend. The dividend yield provides the support in an environment of low interest rates but the broker is wary that, if mobile market share and revenue start to decline, this could be a turning point. Target is reduced to $5.55 from $5.64.

Tower ((TWR)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/1/0

FY14 results were below Credit Suisse's forecasts. The broker notes earnings have been affected by a number of large events and management has now put in place reinsurance cover that should reduce downside risk and provide increased confidence in the dividend. Target is increased to $1.84 from $1.70 but, as a result of the strong share price performance, the rating is downgraded to Neutral from Outperform.

See also TWR upgrade.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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