Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features GRANGE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: GRR

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday January 13 to Monday January 20, 2013
Total Upgrades: 15
Total Downgrades: 9
Net Ratings Breakdown: Buy 38.34%; Hold 44.09%; Sell 17.57%

As overall activity amongst stockbrokers is ramping up ahead of this year's pivotal February reporting season, the number of rating upgrades for individual stocks is almost twice as high as the number of downgrades. At least, such was the case in the week past, ending on Friday before the long Australian Day weekend. We counted 15 upgrades and 9 downgrades for the week.

Popular themes this month remain sold-down resources stocks (seemingly too cheaply priced thus upgrades follow) and still elevated valuations for defensive industrials for whom questions continue to arise regarding feasible growth in the year(s) ahead.

Stocks that are currently enjoying a noticeable uptick in brokers' sentiment include goldminer Newcrest Mining and fertiliser and explosives company Incitec Pivot, as well as financial services phoenix Macquarie Group. The latter is an ongoing tailwind that started last year and mixes with the offshore, USD-leveraged thematic as well with with a generally anticipated recovery for the US economy and for corporate M&A this year.

Noticeable is the fact that there aren't many negative changes to target prices, as well as the fact that earnings estimates for ResMed were rising just when the company's Q4 update turned around sentiment for the worse.

Otherwise, earnings estimates are now also in decline for Santos post its December quarter production update.

Upgrades

Grange Resources ((GRR)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/1/0

Grange's quarterly production report provided some insight into the potential cash flow from Savage River, the broker explains. Grange generated $21m in cash over the quarter despite paying $11m in dividends, to post an 8% cashflow yield. Production was actually a little below expectation so it was all about lower costs. Wall failure remains the biggest risk in the broker's view but the broker nevertheless sees enough to take its rating up to Overweight. Target rises to 31c from 29c.

GUD Holdings ((GUD)) upgraded to Neutral from Sell by Citi and to Neutral from Underperform by Credit Suisse. B/H/S: 0/4/2

Citi is upgrading to Neutral from Sell and raising the target price to $5.43 from $4.60. The broker considers the company's controllable improvements, such as cost cutting and restructuring, will be the primary drivers of earnings growth in the short term, rather than any fundamental improvement in the underlying businesses. After a soft first half the company has maintained guidance for earnings to be down around 20% and expects general business to be similar in the second half, although price increases are expected to improve profitability. FY14 guidance was unchanged after the first half and this implies a substantial improvement in the second half, according to Credit Suisse. Upside from the turnaround, mainly at Dexion, is attractive but the broker considers the forecast risk is high. Credit Suisse would prefer a cheaper valuation to compensate for the risk profile but, at current levels, the risk/reward balance is fairly even. Hence, the rating is upgraded to Neutral from Underperform.

GWA Group ((GWA)) upgraded to Add from Hold by CIMB Securities. B/H/S: 2/2/1

A housing recovery is gathering pace and CIMB has decided it's time to upgrade the rating to Add from Hold. The broker believes GWA offers an appealing investment case in current markets because of cyclical leverage via the exposure to an improving macro dynamic as well as potential from internal improvements. As the price has fallen 12% in the last three months valuation is now starting to appeal to the broker. The price target is raised to $3.50 from $3.03.

Incitec Pivot ((IPL)) upgraded to Buy from Neutral by Citi. B/H/S: 4/4/0

Citi has raised FY14-15 earnings forecasts by 12-18% following a revision to fertiliser prices and a reduction in the AUD/USD forecast. The target price increases to $3.30 from $2.80 and the rating is upgraded to Buy from Neutral. As DAP prices rally from their lows in November and the new year signals improved demand from Brazil, Asia and the EU, Citi now expects DAP prices for FY14 and FY15 of US$425/t and US$450/t respectively. The broker also expects US explosives earnings will improve in FY14 with recovery in US construction activity.

Macquarie Group ((MQG)) upgraded to Buy from Neutral by Citi. B/H/S:  2/5/0

Macquarie's earnings should benefit from a strengthening capital market cycle, in Citi's view. The broker believes there is significant upside for the company from the impending divestments by JP Morgan, Morgan Stanley and Deutsche Bank. Citi considers the buyers of these divested businesses will not have the resources and experience to match Macquarie. The broker has upgraded to Buy from Neutral, given improved earnings and dividend profile arising from increased FUM, a falling Australian dollar and higher capital efficiency, as well as potential new growth streams. Citi has raised the target price to $60.00 from $48.18 as well, on the back of a prospective 5.5% FY15 dividend yield.

Mortgage Choice ((MOC)) upgraded to Buy from Neutral, High Risk by BA-Merrill Lynch. B/H/S: 1/2/0

Mortgage Choice's outlook is solid as a pure play on rising housing credit growth, the broker suggests, but a recent upgrade to the expected settlements pipeline and a push to increase recruitment should push growth higher. The broker has increased forecast earnings and bumped its target up to $3.30 from $2.50. Upgrade to Buy.

Mount Gibson Iron ((MGX)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/4/2

December quarter sales were 8% above expectations. JP Morgan is relieved that the prospect of large-scale acquisitions has diminished – acquisitions in 2013 were relatively small – in tandem with more sustainable iron ore prices. The broker also likes the strong cash flow yield and cash balance. JP Morgan has become more positive on the stock, hence the rating is being upgraded to Neutral from Underweight. The price target is raised to $1.05 from 90c.

See also MGX downgrade.

Newcrest Mining ((NCM)) upgraded to Neutral from Sell by UBS and to Neutral from Underperform by Macquarie. B/H/S: 2/3/3

UBS has increased long-term gold price forecasts by 18% and long-term copper price forecasts by 16%. This has lifted valuation of Newcrest by 71%. The broker's short-term earnings forecasts have also been lifted on higher copper prices and lower Australian dollar forecasts for FY14 and FY15. The result is an upgrade to a Neutral from a Sell recommendation. The broker thinks sentiment is being refreshed but warns that investors should be prepared to be quick footed in the case of a gold price reversal. New management could be presented with an opportunity to raise equity at prices to minimise dilution, in UBS' opinion. Macquarie has upgraded forecast earnings by 4% in FY14 and lifted its target to $9.50 from $7.00 but remains concerned over cashflow generation in a weak gold price environment. Upgrade to Neutral but the broker is forecasting a lower gold price in 2014.

Perpetual ((PPT)) upgraded to Neutral from Sell by UBS. B/H/S: 0/8/0

December quarter funds under management grew 9.4%, or 4.7% excluding the Trust Co acquisition. UBS expects synergies with Trust should underpin the earnings profile. The broker is cautious regarding weak net flows and constrained top line growth but expects leverage to a rising domestic equities market will offset the weak organic story. The rating is raised to Neutral from Sell and the price target is raised to $47.50 from $42.50.

See also PPT downgrade.

Primary Health Care ((PRY)) upgraded to Buy from Neutral by Citi. B/H/S: 3/4/1

The broker finds the stock reasonably attractive at current levels, such that the rating is upgraded to Buy from Neutral. The shares have under-performed the ASX200 index by 12% in the past six months and the healthcare index by 10%. Demand for the company's main businesses continues at a solid pace, according to Medicare statistics. At the current level of growth – 6-7% – Citi expects Primary should be able to increase margins. The price target increases to $5.50 from $5.24 on the rolling forward of valuation.

Super Retail ((SUL)) upgraded to Neutral from Sell by Citi and to Neutral from Underperform by Credit Suisse. B/H/S: 3/3/1

The company has downgraded first half profit expectations, based on a weak outlook for the leisure segment. Citi has lowered earnings forecasts by 6.7% for FY14 and 5.4% for FY15. A quick turnaround is not expected. The broker likes the consistent growth the company has delivered over many years and considers consensus expectations and the PE ratio were too high anyway. Now the share price has fallen the rating is raised to Neutral from Sell, although the upside is considered limited. The market reacted poorly to the company's trading update which showed seasonal issues are affecting the BCF leisure segment. Credit Suisse believes this reaction reflects the fact the stock was priced well above the market and has moved the rating to Neutral from Underperform. The stock's risk profile is now low, heading into the first half, according to Credit Suisse. Hence the target price is reduced to $11.50 from $11.85 but Super Retail retains a premium to the market.

Woolworths ((WOW)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/2/2

Credit Suisse thinks accelerating supermarket growth is likely to lead to a re-rating and has upgraded Woolworths to Outperform from Neutral. The price target is raised to $38.25 from $36.30. The broker expects like-for-like sales growth will more closely match rival Coles this year and Woolworths may even better Coles in at least one of the next several quarters. Credit Suisse suspects that the agreement with the ACCC to cap fuel discounts will have less impact on Woolies. The main negative potential for Woolworths is a critical event such as the exit from the Masters business by Lowe's or termination of the project by Woolworths. Still, the broker thinks the likelihood of such an event is low.

Downgrades

Domino's Pizza ((DMP)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/3/0

The broker has rolled forward the cost of Domino's equity less dividends to arrive at a target price reduction to $15.90 from $16.58. That said, the broker remains firmly positive on DMP and expects another solid result for the half. The issue is one of valuation, and the market is now pricing in the upside, the broker suggests.Hence a downgrade to Neutral.

Mount Gibson ((MGX)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/4/2

Mt Gibson's solid production continued into the December quarter albeit full year guidance is retained given the wet season is now underway, the broker notes. Given MGX's mines are on the wane, exploration is important and the broker is hopeful about Extension Hill South but cautious over Fields Find. Iron ore price sensitivity is fundamental to stock performance, the broker notes. Target rises to $1.05 from $1.00 but on share price appreciation the broker has downgraded to Underperform.

See also MGX upgrade.

Perpetual ((PPT)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/8/0

Perpetual saw net $400m of equities net inflows in the first half compared to $800m net outflows in the first half last year. The numbers represent a major shift in sentiment towards equities, the broker notes, and with marginal accretion expected from the Trust Company acquisition the broker expects profit to hit the top of the guidance range. But the share price has outperformed the market by 30% since the FY13 profit result and the PE is at a 30% premium to the market. The broker thus downgrades to Neutral, noting the share price will nevertheless remain supported by ongoing positive sentiment. Target rises to $44.60 from $40.00.

See also PPT upgrade.

ResMed ((RMD)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 6/2/0

Macquarie reviewed ResMed ahead of the second quarter results. The broker is positive about the long-term prospects because of an under-penetrated market, strong position and undemanding valuation but observes the market seems to be already picking a rebound in pricing. Near-term, there are earnings risks with perhaps overly optimistic revenue expectations and Macquarie suspects there will be a better entry point than at current levels. The rating is downgraded to Neutral from Outperform and the price target is steady at $6.15.

Resolute Mining ((RSG)) downgraded to Neutral from Buy by Citi. B/H/S: 0/1/0

Citi has decided that there is no longer valuation support amidst an uncertain gold price. Cash reserves are reduced and the broker is looking for near-term improvement to bolster confidence after leverage was increased in the December quarter. The rating is now lowered to Neutral/High Risk from Buy/High Risk. Modest revisions to production and cost estimates are offset by higher capex assumptions and the target is lowered to 70c from 90c.

Sandfire Resources ((SFR)) downgraded to Reduce from Hold by CIMB Securities. B/H/S: 3/3/2

CIMB notes FY14 copper production looks to be on track, but lower gold production and the mill performance so far are putting cost guidance – US$1.05-1.15/lb – at risk. Updating the outlook, CIMB finds C1 cost forecasts are above this range and running at around US$1.23/lb. The broker believes this more than offsets the impact of increased copper recoveries. The rating is downgraded to Reduce from Hold and the price target is lowered to $5.80 from $6.10.

Toll Holdings ((TOL)) downgraded to Underweight from Overweight by JP Morgan. B/H/S: 1/4/3

The broker expects the first half to be flat on a constant currency basis. While the depreciation of the Australian dollar should help translated earnings, JP Morgan expects the market to focus on the underlying trends. The stock is trading above the broker's price target – reduced to $5.47 from $5.84 – and the risk to earnings is seen weighted to the downside. Hence, the rating is downgraded to Underweight from Overweight.

Wesfarmers ((WES)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/4/3

Credit Suisse has downgraded the rating to Neutral from Outperform because the stock has outperformed over 2013. The target is reduced to $45.00 from $46.00. The broker expects 2014 to be the year of capital management for Wesfarmers, which should provide yield support for the share price and increasing defensive characteristics. Outperformance for earnings is considered largely dependent on accelerating retail spending in FY14 and on coal prices in FY15.

Woodside Petroleum ((WPL)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/2/3

Without any further growth project developments or acquisitions, Woodside's earnings will fall around 35% over the next decade, the broker calculates. Production will peak in 2014 but this will merely buy management time to consider how it might proceed. Given there appears limited upside in oil prices, WPL's individual issues will come to the fore amongst energy peers, the broker suggests. Falling earnings mean falling dividends. Downgrade to Underperform. Target falls to $39 from $40.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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