Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ALUMINA LIMITED, and other companies. For more info SHARE ANALYSIS: AWC

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.

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 September 23 to Friday September 27, 2013
Total Upgrades: 10
Total Downgrades: 8
Net Ratings Breakdown: Buy 37.90%; Hold 43.61%; Sell 18.49%

Perhaps the most important observation from changes in views and predictions by securities analysts in Australia is that smaller resources companies are back in focus, albeit not in a universal fashion with gold miners, mining services providers and others continuing to dominate both the positive and the negative side of stockbroker ratings and projections. Another mitigating observation is that many upgrades in rating don't stretch further than a non-exciting Hold or Neutral rating, but at least it's no longer all negative. Besides, 10 upgrades last week outnumber 8 downgrades, even more so as Nufarm featured twice on the downgrade side.

As noted in weeks past, yield stocks continue to feature as well and it's no longer about upgrading after falling share prices with DUET and Sydney Airport receiving downgrades.

All in all, activity from stockbroking analysts remains fairly subdued amidst low volatility and low volumes in the share market and as the investment community prepares for AGM season and financial results from most of the banks. In the background there remains a widespread feeling that many stocks are not particularly cheap, with earnings yet to announce themselves in many cases. This might also explain why half of all rating upgrades only added to Neutral ratings while five out of last week's eight downgrades went down to Sell.

In terms of changes in earnings estimates, the week past saw some spectacular changes for the likes of Alumina Ltd ((AWC)) and Gindalbie Metals ((GBG)) on the negative side and for Kingsgate ((KCN)) and Perseus Mining on the positive side. Such is the nature of dealing with smaller resources companies. Overall, underlying trends for valuations and price targets, supported by changes in earnings forecasts, have been positive since the August reporting season and last week provided more confirmation.

Note that even Newcrest Mining ((NCM)) is now enjoying positive revisions to earnings estimates, while former market darling Cochlear continues to feature on the negative side.

Upgrades

Australand ((ALZ)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/3/2

Residential real estate was the best perofrming real estate asset class in the first half of 2013 and in the broker's opinion is likely to be the best performer in the second half. JP Morgan sees strong earnings growth in train for the developers and has upgraded Australand to Overweight from Neutral as it has the most earnings sensitivity to residential price growth.

Beadell Resources ((BDR)) upgraded to Neutral from Sell by Citi. B/H/S: 3/2/0

The broker has upgraded gold price forecasts which have driven upgrades to earnings across the sector. Hence Beadell's rating has been upgraded to Neutral from Sell. The target price is raised to $1.00 from 80c.

Macquarie Group ((MQG)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/5/0

Macquarie's annual staff stock selling window has now closed and so the broker can now upgrade to Neutral. Guidance is for first half 14 earnings growth to be flat on second half 13 but with encouraging signs of deal activity, potential for increased performance fees and strong growth in mortgages, the broker can now be more confident of the group's earnings profile.

Perseus Mining ((PRU)) upgraded to Neutral from Sell by Citi. B/H/S: 3/4/0

Things can only get better for Perseus in Citi's view. The broker has upgraded gold price forecasts and earnings across the sector. The rating is upgraded to Neutral from Sell. The target price is steady at 70c.

Pharmaxis ((PXS)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/3/0

The company is facing considerable challenges including slow sales and the risk that competing therapies could reduce the market opportunity. Deutsche Bank has reviewed its modelling and scaled back sales expectations in Europe and removed further US sales estimates and expected trial costs. The broker thinks the stock is trading near fair value, even it it never succeeds in bringing Bronchitol to the US market. The rating is upgraded to Hold from Sell and the price target reduced to 12c from 21c.

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

Citi has upgraded gold price forecasts and earnings across the sector. Resolute has been upgraded to Buy from Sell and the price target is raised to $1.00 from 80c.

Sandfire Resources ((SFR)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 3/4/1

Sandfire has renegotiated payment terms on its debt obligations. This will take pressure of a tight balance sheet, the broker notes, at a time when DeGrussa is entering the final stage of ramp-up. The broker expects a successful ramp-up and thus a significant de-risking of SFR at the operating and funding level. The broker suggests SFR looks cheap compared to peers PanAust ((PNA)) and OZ Minerals ((OZL)). Target rises to $8.10 from $6.50.

Skilled Group ((SKE)) upgraded to Outperform from Neutral by CIMB. B/H/S: 3/0/1

Skilled has won a $200m contract at Ichthys for the Engineering & Marine division which highlights the group's capacity to convert large oil & gas opportunities into orders, the broker suggests. The broker has upgraded forecast FY15 earnings by 5% on the strength of the contract but suggests this could prove conservative group-wide given additional earnings potential in other divisions. The broker believes the first half FY14 will prove a trough with a recovery evident in the second half. This turnaround leads to an upgrade to Outperform with a target increase to $3.66 from $3.41.

SP AusNet ((SPN)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 3/2/1

The broker has reviewed the issues facing the network utilities, in particular the impact of declining electricity demand on tariff revenue. Declines have been exacerbated by a mild winter but SP AusNet's transmission revenue remains unaffected by demand. Moreover, higher bond rates look set to improve regulatory returns from the Victorian electricity transmission. It all adds up to an upgrade to Overweight from Neutral and an increased target price of $1.25 from $1.20.

St Barbara ((SBM)) upgraded to Neutral from Sell. B/H/S: 0/2/1

Citi has upgraded gold price forecasts and earnings across the sector. St Barbara's recommendation is upgraded to Neutral from Sell. The price target is raised to 75c from 70c.

Downgrades

Alacer Gold ((AQG)) downgraded to Underperform from Outperform by Credit Suisse. B/H/S: 2/1/3

Alacer has sold its Australian businesses of Higginsville and South Kalgoorlie. The transaction price of $40m was below the broker's $62m valuation. Despite this, the sale is seen as a positive outcome because of the materially weaker gold price environment. The company has severed its links with Australia and focus is now squarely on Copler. For the broker, the medium term production outlook there remains quite uncertain. Credit Suisse has downgraded the rating to Underperform from Outperform rating and the price target is reduced to $3.40 from $4.15.

Aquila Resources ((AQA)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/1/1

The broker has trimmed its price forecasts for aluminium, nickel, uranium and coking coal but raised its longer term price view on iron ore. Despite price declines, the broker notes producers will benefit from anticipated A$ weakness. Aquila's target falls to to $2.20 from $3.50. Downgrade to Neutral.

Cochlear ((COH)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 0/2/6

The company missed out on the Chinese government tender and Deutsche Bank thinks this is a symptom of the increased competition. The N6 offers some potential for differentiation but the broker doubts it will be evident at first because of the staggered US approval process. Sales are expected to recover later in FY14 as N6 gains traction but the first half is expected to be poor. The rating is downgraded to Sell from Hold and the price target is reduced to $55.00 from $60.50.

DUET ((DUE)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 2/5/1

DUET is now trading 5% above the June 2014 target price of $2.05 (retained) hence the recommendation has been downgraded to Underweight from Neutral on valuation. The broker observes yield of 8% is the highest in the sector but, on a cash yield basis, it has the weakest yield in the sector at 8.4%.

Nufarm ((NUF)) downgraded to Underperform from Neutral by BA-Merrill Lynch and to Sell from Neutral by UBS. B/H/S: 3/1/4

Merrills has downgraded Nufarm in the wake of the FY13 results, believing the company faces significant growth challenges. These include the recent fall in soft commodity prices, rising global grain stocks and intense rivalry in Australia – to name a few reasons. Profit estimates have been reduced by 4% and 2% in FY14 and FY15 respectviely. FY13 earnings were down 10% but that was broadly in line with what UBS expected. There was earnings growth in all regions except Australia which was enough to drag overall earnings lower. UBS questions whether the company can generate sustainable free cash flow while the domestic business is under competitive margin pressure.

Oakton ((OKN)) downgraded to Neutral from Buy by UBS. B/H/S: 0/4/0

Oakton has outperformed the ASX 300 by 15% since its profit report in August, yet an IT sector revenue recovery remains uncertain in FY14, the broker suggests. The market seems to believe the new government will provide IT spending upside and as such a trough will be seen in the industry. The broker is more conservative, but has raised its target to $1.45 from $1.35 to reflect the market's apparent "look-though" valuation. The rally has nevertheless been too strong for the broker, hence a downgrade to Neutral.

Sydney Airport ((SYD)) downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 2/2/1

Merrills is downgrading to Neutral from Buy as the benefits from the ATO settlement are now priced in. The broker had only minor concerns with the first half result and has made no major changes to earnings forecasts. It's just that Sydney now looks fairly valued.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms