Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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: Wednesday November 25 to Sunday November 29, 2015
Total Upgrades: 8
Total Downgrades: 15
Net Ratings Breakdown: Buy 44.07%; Hold 43.62%; Sell 12.31%

For the week ending Friday, 27 November 2015, FNArena registered no less than eight recommendation upgrades for individual stocks and 15 downgrades; almost a factor of 1:2. But more so than the gap between the two opposites, investors' attention would have been drawn to some of the companies involved on either side of the ledger.

A multi-year peak performance for department store owner Myer generated three upgrades from the stockbrokers that make up the FNArena universe. Myer's moment in the sun was accompanied by high flyers IPH Ltd and TechnologyOne also receiving upgrades, despite lofty looking share prices.

On the other side of the ledger, JP Morgan threw in the towel and downgraded BHP Billiton to Sell with a price target below the current share price. No doubt, that has had a few tongues wagging. More disappointments from ALS Ltd and Primary Healthcare also triggered downgrades, but the one that has had everyone's attention during the week was Slater & Gordon.

As the share price punishment for the once market darling grew to ever larger proportions, stockbrokers simply threw out their valuation-based rosy ratings. Three downgrades followed. Only one to Sell. Monash IVF also received two downgrades but that's more in response to the recent share price rally for the stock.

There was a lot less fireworks going on with changes to valuations and price targets, though the negative side is dominated by Slater & Gordon and ALS ltd, beating commodity stocks, including BHP Billiton, in receiving sharp downside adjustments.

Aristocrat Leisure, one of the solid good news stories in the market, tops the table for positive revisions to earnings estimates, closely followed by Mineral Resources. Myer is in there too, of course.

On the negative side, cloud infrastructure provider NextDC tops the table after announcing a capital raising to pay for expansion. The operation is dilutive at first, hence the number one position this week. The rest of the table reads like a bad news section of the local newspaper: Ten Network, Slater & Gordon, ALS Ltd and yes, BHP Billiton is in there too.

Those investors positioning for a recovery in resources stocks better prepare for more downward price adjustments from stockbrokers, because that is and remains the trend.

Upgrade

IPH LIMITED ((IPH)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Morgans observes the company continues to improve in FY16, with the first four months tracking ahead of budget. Forecasts are upgraded by 8.0%.

The company has flagged acquisitions are a priority, particularly in Asia to bolster market share. Morgans believes there are a number of catalysts to support a positive view on the stock and, post revisions to forecasts, upgrades to Add from Hold.

Target is raised to $8.61 from $7.19.

JB HI-FI LIMITED ((JBH)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/7/1

The latest consumer electronics industry data show elevated sector growth of 5.2% in September. A lot of it has to do with iPhone sales, Macquarie notes, but the headwinds suffered over the past few years in TV, audio, computer and tablet sales, being low growth and price deflation, appear to be abating, and Dick Smith ((DSH)) has so far not gone over the top with discounting.

JB Hi-Fi remains Macquarie's preferred stock in the category. The broker does not subscribe to the view Christmas trading is set to be strong, but for investors who are more optimistic, the broker notes JB is trading at the low end of its valuation range. Upgrade to Neutral on an unchanged target of $19.39.

MYER HOLDINGS LIMITED ((MYR)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Neutral by UBS and Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 4/1/2

First quarter sales were better than Credit Suisse expected, up 3.9% on a like-for-like basis. Guidance was re-affirmed and if sales growth continues at a similar rate the broker expects upside to guidance.

The broker upgrades to Neutral from Underperform because of a weak share price and better sales momentum. Target is reduced to $1.15 from $1.20.

First quarter sales revealed an improving trend and FY16 guidance is unchanged, UBS observes. The broker upgrades FY16 forecasts by 4.0%. The company has a strong brand but has been set back by under investment in stores and UBS considers it is well positioned to outperform.

UBS believes the new strategy makes sense and the capital allocated to turn the business around appears appropriate. Rating is upgraded to Buy from Neutral. Target is steady at $1.20.

Deutsche Bank is wary about the first quarter sales, which could have been boosted by clearances. Still, the broker is pleased to see strong growth from a franchise which has struggled for some time.

As the retail environment is stronger than it has been for some years this should help, hence the broker upgrades its rating to Buy from Hold. Target is raised to $1.20 from $1.00.

RETAIL FOOD GROUP LIMITED ((RFG)) Upgrade to Neutral from Underweight by JP Morgan .B/H/S: 1/1/0

The trading update indicates the company is either meeting or exceeding internal budgets and guidance has been reaffirmed at 20% growth in underlying profit.

JP Morgan notes the stock looks cheap, after falling around 30% over the past year. Despite this observation, the broker maintains it is difficult to forecast the earnings trajectory with changes in strategy.

Upgrade to Neutral as risks are now seen as priced in, but the broker is not turning more positive just yet. Price target is lowered to $4.30 from $5.00.

SELECT HARVESTS LIMITED ((SHV)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/0/0

The AGM update signalled 2016 almond production should be similar to 2015 and pricing around $12.00/kg. UBS updates its medium-term planting profile and upgrades to Buy from a Neutral rating. Target is raised to $13.65 from $13.05.

The broker notes the recent sale and lease-back of orchards provides the company with an opportunity for rapid expansion.

While the impending El Nino event signals higher rainfall for drought-stricken California, UBS suspects it would be 2017 or later for California to return to optimal yields.

TECHNOLOGY ONE LIMITED ((TNE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0

Technology One reported a 16% increase in profit for FY15, in line with Macquarie's forecast. The final dividend is up 10% and a 2c special will also be paid. Client migration to the cloud is the company's medium term driver, the broker notes.

Cloud migration is not without its risks, but the broker sees considerable leverage to be realised from new products, providing Tech One with the opportunity to up-sell clients to stickier and/or higher value solutions. A premium valuation is thus warranted and as such Macquarie upgrades to Outperform. Target rises to $4.35 from $3.65.

Downgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Underperform from Outperform by Credit Suisse .B/H/S: 1/1/1

Credit Suisse has reviewed its risk/reward assumptions after a 26% rally in the stock over the past week.

The broker respects management's expertise and execution to date in Australia but confidence that this can be duplicated elsewhere requires further evidence.

Based on the stock price and the broker's rating framework the rating is downgraded to Underperform from Outperform. Target is steady at NZ$1.18.

ARISTOCRAT LEISURE LIMITED ((ALL)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/1/1

FY15 results were above UBS forecasts with all segments delivering a better-than-expected outcome. North America stood out and market share there continued to increase.

UBS continues to like the business but expects growth will slow into FY17.

The broker upgrades forecasts by 1% and 3% for FY16 and FY17 respectively. The rating is downgraded to Neutral from Buy, given recent price strength. Target is lowered to $9.75 from $9.85.

ALS LIMITED ((ALQ)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/4/3

The company has announced a highly dilutive entitlement offer in conjunction with its first half result, Credit Suisse observes. While part of the offer will be used to fund growth, the broker questions the merit and timing.

The broker considers the initiative was premature and a knee-jerk reaction to earnings pressure and higher US-dollar denominated debt which has clearly stretched the balance sheet.

Rating is downgraded to Underperform from Neutral. Target is lowered to $4.00 from $5.80.

BHP BILLITON LIMITED ((BHP)) Downgrade to Underweight from Neutral by JP Morgan .B/H/S: 3/4/1

JP Morgan envisages the deterioration in commodity prices and the likely costs relating to the Samarco dam failure will mean a US$10bn cumulative deficit in free cash flow underpinning dividend commitments.

The broker now forecasts a 50% cut to the progressive dividend at the FY16 results. Rating is downgraded to Underweight from Neutral and the target is lowered to $18 from $27.

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/5/0

Citi has downgraded the rating to Neutral from Buy while bumping up the price target to $9.40 from $8.00 and leaving earnings estimates unchanged. The analysts note tailwinds continue building, but also that the share price has rallied quite hard.

In addition, the analysts note some investors are fretting about risks, but their own analysis suggests it would take significantly adverse market movements to materially stress Challenger’s capital.

MACQUARIE ATLAS ROADS GROUP ((MQA)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/0

Morgans remains bullish on the potential growth in distributions, while European debt markets continue to be supportive of the APRR refinancing.

That said, the broker believes the share price strength has reduced potential capital growth and reduces its rating to Hold from Add. Target is lowered to $4.20 from $4.26.

MONASH IVF GROUP LIMITED ((MVF)) Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0

Management has highlighted a solid start to FY16 at the AGM and Morgans notes recent acquisitions are performing well.

That said, the broker remains cautious ahead of the Medicare Benefits Schedule review and, with the share price within 10% of target, downgrades to Hold from Add. Target is steady at $1.79.

Monash guided to 25% profit growth in the first half at its AGM, 3% above Macquarie's forecast, driven by a rebound in demand and market share gains. The stock has previously been trading at a discount to valuation but yesterday's rally has put paid to that.

On a 50% rally since August, Macquarie has elected to pull back to Neutral. Momentum is solid but risks remain, the broker warns, given the upcoming MBS review and the announcement by Primary Healthcare ((PRY)) it is opening a new IVF facility in Melbourne. Target rises to $1.80 from $1.50.

PRIMARY HEALTH CARE LIMITED ((PRY)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/2

The company's trading update translated into a profit warning and Citi analysts have responded with a downgrade to Neutral from Buy. Target tumbles to $3.54 from $5.21 on sharply reduced estimates.

The analysts point at pathology revenue growth which is ahead of Medicare market data, yet below Primary's expectations.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/2/0

South32 is downgraded to Neutral from Buy, given the challenging outlook for key commodities. Target is reduced to $1.45 from $2.15.

Aluminium is expected to follow the steel industry trajectory, where expanding low-cost Chinese production exports surpluses around the world. UBS has downgraded long-term price forecasts for both aluminium and alumina. 

UBS has downgraded long-term prices for seaborne thermal and metallurgical coal, reflecting falling seaborne demand and falling capital and operational intensity.

The broker reduces FY16 earnings estimates by 23% and FY17 by 6.0% and continues to envisage material downside risk to long-term manganese ore prices.

SLATER & GORDON LIMITED ((SGH)) Downgrade to Underperform from Outperform by Macquarie and Downgrade to Hold from Add by Morgans and Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/3/1

The UK government has proposed changes to laws relating to the rights of those involved in road accidents. While a consultation process will now follow, the new laws would be a significant negative for Slater & Gordon, Macquarie notes. The company does not expect any impact on FY16 guidance but FY17 is at risk.

The broker has not changed forecasts at this stage but notes S&G's heavily geared balance sheet may not be able to withstand a significant earnings hit. The stock has been sold off heavily but there is further downside risk if the proposals are implemented, Macquarie suggests. Downgrade to Underperform from Outperform. Target cut to $1.00 from $4.59.

The share price has come under severe pressure, Morgans notes, with the announcement by the UK government that it is proposing to restrict the right of people injured in road traffic accidents to obtain compensation for minor soft tissue injuries.

The broker accepts, if the proposals are implemented, this would have a negative impact on earnings, although Slater & Gordon has proven over the years that it can adapt and benefit from legislative changes.

Still, with heightened financial risk, the broker's rating is downgraded to Hold from Add. Target falls to $1.00 from $5.31.

Deutsche Bank downgrades to Hold from Buy and reduces the target to $1.65 from $3.35, given increased earnings risk.

This follows the proposals by the UK government regarding regulatory changes which would adversely impact the Fast Track road traffic accident operations of the company's solutions business.

The proposals present significant risk to FY17 and beyond and come as a surprise to both the company and the market. Deutsche Bank notes a consultation process is scheduled for the new year.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/3/0

With UBS downgrading long-term price forecasts for seaborne thermal and metallurgical coal, Whitehaven's rating is downgraded to Neutral from Buy. Target is lowered to $1.09 from $1.75.

The broker expects FY16 earnings will increase on the inclusion of lower costs but estimates the drop in the coal price could impact FY17 and FY18 by 42% and 60% respectively.

Still, the company is expected to weather the storm and, if prices can remain stable, grow its margins over time through further cost cutting and an increased proportion of metallurgical coal in the sales mix from Narrabri and Maules Creek.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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