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:

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: 18
Total Downgrades: 15
Net Ratings Breakdown: Buy 37.98%; Hold 44.13%; Sell 17.89%

The week past proved unexpectedly busy with FNArena recording no less than 15 recommendation downgrades and 18 upgrades for individual stocks by the eight leading stockbrokers we cover on a daily basis in Australia.

On a rough analysis, resources and related cyclicals dominate on the upgrade side while reliable industrials, including the major banks, otherwise known as yesteryear's outperformers, are clearly dominant when it comes to receiving downgrades. Often these downgrades come with the explanation that share prices have simply run up too high in the short term.

Analysts have been busy updating their sector calls for the year ahead, including updating projections for commodity prices, which explains why a large number of resources stocks has been receiving recommendation upgrades. Not reflected in these statistics is the observation that brokers have used the past few weeks to add new stocks to their coverage. Often this involved initiating coverage on small cap miners.

As analysts are preparing for the February interim reporting season, overall changes to earnings estimates and price targets have remained minor.

Due to a technical glitch, this week's update runs from Monday to Monday, instead of ending on Friday. This anomaly will be rectified next week.

Weekly Upgrades

Alumina ((AWC)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 3/1/3

Last month the broker maintained an Underperform rating on AWC based on expectations of low alumina/aluminium prices and a too-high A$. The A$ has since fallen and alumina prices have rallied off their lows but more importantly, the shift to spot trading in alumina has picked up pace. In 2013, 53% of trades were conducted in spot and the broker sees 80% by 2015. This would mean a substantial increase in dividend to AWC from Alcoa which could be passed on to shareholders given no debt. The broker is forecasting a 7.3% ff 2015 dividend yield for AWC after a more subdued 2014. This sees its target rise to $1.30 from 90c and prompts an upgrade straight to Outperform.

Challenger ((CGF)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/2/2

Macquarie has upgraded Challenger to Outperform ahead of the 2014 interim this week.A strong operation performance in the December quarter, combined with solid September-quarter growth and a narrowing of credit spreads (reducing risks) contributed to the upgrade. The target price jumps to $7 from $6.

Goodman Group ((GMG)) upgraded to Overweight from Neutral by JP Morgan and to Buy from Hold by Deutsche Bank. B/H/S: 2/4/1

In previewing their expectations for REITs in 2014 both brokers suggests a challenging year with rising bond rates, lower trust income growth and fewer earnings benefits from lower debt. That said, following relative underperformance in 2013 JP Morgan expects solid valuation support around healthy transaction markets. On a sector relative basis, Goodman is upgraded. Deutsche Bank predicts large caps with growth are set to outperform. On this basis, GMG has been upgraded.

Grange Resources ((GRR)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/2/0

Macquarie has undertaken extensive remodelling of its iron ore producer/developer valuations based on both individual factors and adjusted A$ and iron ore price assumptions. The broker has also added several new names to its coverage universe. Grange is among those offering "excellent" exposure to expanding pellet and lump premiums and has been moved onto the broker's preferred list, with an upgrade to Outperform. Target nevertheless falls to 30c from 35c.

Iluka Resources ((ILU)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/4/0

In a mixed quarterly result, Iluka posted lower production, higher sales, lower revenues and lower costs, the broker notes. The good news is that rutile demand is recovering — slowly — while China is supporting zircon demand, at least so far. Mineral sands prices have nevertheless continued to decline. Demand needs to improve, the broker suggests, given high levels of inventory held by producers. The broker has nevertheless increased its target to $9.00 from $8.50 and upgraded to Neutral on the improving demand picture.

See also ILU downgrade.

Incitec Pivot ((IPL)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 3/5/0

The target price is $3.20, the broker noting the stock is trading at a 15% price-earnings discount to the ASX200, with 10% being the long-term average. To this backdrop, add 16% earnings-per-share growth compared with 5% for the ASX200 and the broker's belief that industry headwinds have abated, and Merrills puts a compelling case for an upgrade.

JB Hi-Fi ((JBH)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/2

Credit Suisse has upgraded JB Hi-Fi in a sector review and lifts the target price to $23.06 from $21.75. The broker notes strong in-store and online Christmas trading with electronics proving one of the best performers in December. Discounting appeared negligible and prices stable. CS expects retailers overall will outperform in 2014 and offer strong growth across the board.

Mt Gibson Iron ((MGX)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/3/2

Macquarie has undertaken extensive remodelling of its iron ore producer/developer valuations based on both individual factors and adjusted A$ and iron ore price assumptions. The broker has also added several new names to its coverage universe. Mt Gibson is among those offering "excellent" exposure to expanding pellet and lump premiums and has been moved onto the broker's preferred list, with an upgrade to Outperform. Target rises to 91c from 90c.

Navitas ((NVT)) upgraded to Outperform from Underperform by Macquarie. B/H/S: 3/3/1

What a difference a new set of eyes makes. Macquarie has changed its analyst for Navitas, and the last pundit saw only a substantial price premium to market and to NVT's own historical multiple, and FY14-15 earnings already well priced in. The newbie sees a company exposed to population growth in Asia and a growing demand for higher education from the likes of China and India. NVT's US business is about to reach breakeven and there are other geographies into which the company can expand, with a solid balance sheet at hand. The result is an upgrade straight to Outperform from Underperform and a target increase to $7.00 from $4.35.

Newcrest Mining ((NCM)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/1/5

Newcrest shares have fallen 15% recently to reach the broker's net present value on a spot price basis. While price risk remains, the broker points to an upside skew in cash flow leverage to the gold price, improving production from this half and into FY15, and no imminent debt maturities in suggesting NCM is now a positive risk/reward investment opportunity. The broker has cut its target to $11.00 from $11.50 but has upgraded to Overweight.

Nufarm ((NUF)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 2/3/3

Deutsche Bank's upgrade follows recent share price weakness and after incorporating new FX projections triggered a lift in EPS expectations.

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

Citi's upgrade was inspired by recent share price weakness.

Roc Oil ((ROC)) upgraded to Buy from Neutral by UBS. B/H/S: 4/1/0

UBS has slightly lifted its forecasts for crude oil prices in 2014, but even the revised forecasts still imply a slight reduction in crude oil prices throughout the year ahead (compared to last year). This is not the reason why the rating for ROC Oil has moved to Buy from Neutral. That decision was inspired by share price weakness, explain the analysts. Price target has remained unchanged at $0.60.

Stockland ((SGP)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 5/2/0

Deutsche Bank's sector update came with an expectation that large cap AREITs delivering growth this year will outperform the sector. On this basis, the rating for Stockland was upgraded.

Suncorp ((SUN)) upgraded to Buy from Neutral by CIMB. B/H/S: 4/3/1

Suncorp is CIMB's preferred pick in sweeping upgrades of first-half profit forecasts for the domestic GI sector. CIMB notes Suncorp has a greater than 10% upside to its target price on a total return basis and predicts a firm first half in 2014 could deliver a $300 million special dividend in the second half. Target rises to $14.10 from $13.21.

Super Retail ((SUL)) upgraded to Neutral from Sell by Citi. B/H/S: 3/2/2

Super Retail's rating was upgraded to Neutral following the sharp sell-off that followed the disappointing market update. Prior to the correction, Citi was convinced the shares were too expensive. This has now been corrected with the additional note that any upside is believed to remain limited until the market gets more confortable again with growth at what is arguably Australia's prime retailer.

Weekly Downgrades

ARB Corp ((ARP)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 0/4/1

JPMorgan has downgraded ARB ahead of its interim report next month, citing the resources slowdown and the effect of fringe benefits tax changes on fleet demand. The broker expects a soft result as domestic challenges overshadow export growth potential arising from a lower $A. The price target is downgraded to $11.80 from $12.50.

ANZ Bank ((ANZ)) downgraded to Neutral from Buy by Citi. B/H/S: 3/3/2

This week’s banking sector update is one of seemingly contradictory conclusions. Citi analysts have become more positive on earnings growth and reliability of margins for Australian banks. Yet they also downgraded three out of the Big Four to Neutral. The reason is that valuations are "quite full" and projected total returns remain below 15% for the year ahead, which is the cut off to warrant a Buy rating in Citi's universe. Minor adjustments have been made to estimates. Citi's sector pecking order is skewed towards Commbank and Westpac.

Arrium ((ARI)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 1/2/5

Merrills has downgraded Arrium believing the share price is overvalued, having "run too hard". Despite this, the broker has updated its iron-ore assumptions to account for stronger prices in the December and March quarters, better lump premiums and foreign exchange outlook. FY14 earnings-per-share estimates jump 28%, allowing swifter reduction in net debt, prompting the broker to lift the target price to $1.40 from $1.20.
Total Recommendations

Australand Property Group ((ALZ)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/4/2

In previewing its expectations for REITs in 2014 the broker suggests a challenging year with rising bond rates, lower trust income growth and fewer earnings benefits from lower debt. That said, following relative underperformance in 2013 the broker expects solid valuation support around healthy transaction markets. On a sector relative basis, Australand is downgraded.

Commonwealth Bank ((CBA)) downgraded to Neutral from Buy by Citi. B/H/S: 1/4/2

See ANZ Bank.

Domino's Pizza ((DMP)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/4/0

Domino's Pizza remains a well-managed franchise offering continued growth but the share price had simply become too expensive, in the view of JP Morgan.

Echo Entertainment Group ((EGP)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 3/3/2

BA-Merill Lynch has downgraded Echo Entertainment to Underperform from Neutral, citing structural headwinds. Competitive pressures in Sydney post 2019, soft domestic market and the lack of an exposure to offshore markets continue to dog the stock. The broker says Echo lacks a clear solution to these structural issues and drops the target price to $2.20 from $2.70.

Graincorp ((GNC)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/2/2

A receivals update from Graincorp was weaker than expected, and with the Vic harvest now complete and hot weather across the country impacting on summer crop potential the broker has reduced forecast earnings by 15% and 14% in FY14-15. GNC remains a long term value play but short term momentum is missing, the broker suggests. Target falls to $8.36 from $9.00.

Iluka Resources downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/4/0

Dec quarter sales recovered strongly from a weak Sep and Iluka believes demand is on the mend, the broker notes. On the downside, mineral sands prices declined by more than the broker expected. The broker suggests ILU's sales volumes are likely to be erratic going forward under the new spot trading system. Downgrade to Neutral. Target retained at $10.

See also ILU upgrade.

Investa Office Fund ((IOF)) downgraded to Underweight from Neutral by JP Morgan and to Hold from Buy by Deutsche Bank. B/H/S: 3/3/1

In previewing its expectations for REITs in 2014 the broker suggests a challenging year with rising bond rates, lower trust income growth and fewer earnings benefits from lower debt. That said, following relative underperformance in 2013 the broker expects solid valuation support around healthy transaction markets. On a sector relative basis, Investa is downgraded. Deutsche Bank's sector update on AREITs and the outlook for 2014 generated one sole recommendation downgrade.

Regis Resources ((RRL)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 0/5/1

Ongoing problems at Garden Well led to a weaker than expected December quarter and, accompanied with revised production estimates and guidance, triggered a downgrade for Regis Resources. JP Morgan notes this is the second downgrade in six months and there are continuing grade issues. Price target falls to $2.70 from $3.20.

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

Macquarie retains a strong conviction in the long term outlook for ResMed, but in the short term the odds seem in favour of weakness and disappointments due to sharpening competion in the US market pushing product prices down. The downgrade in rating as an acknowledgement of the short term risks.

Ten Network ((TEN)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/2/6

The broker sees the local metro FTA TV sector trading at a multiple discount to offshore peers and other local cyclical sectors. The ad ad market is patchy but showing signs of life, the broker suggests. The market is factoring in improved market share for Ten at the expense of both Seven ((SWM)) and Nine ((NEC)). Ten is moving in the right direction, the broker suggests, and the Big Bash has proven a Big Success, but the broker questions whether such momentum can be sustained all year. On recent share price outperformance the broker has downgraded. target retained at 29c.

Westpac ((WBC)) downgraded to Neutral from Buy by Citi. B/H/S: 2/4/2

See ANZ Bank.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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