Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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: Monday June 22 to Friday June 26, 2015
Total Upgrades: 9
Total Downgrades: 8
Net Ratings Breakdown: Buy 40.12%; Hold 43.15%; Sell 16.73%

Amidst the high volatility environment for the local share market, stockbrokers continue to issue more rating upgrades than downgrades, albeit only just. For the week ending Friday, 26th July 2015, FNArena registered nine upgrades versus eight downgrades with Credit Suisse's quarterly update on commodity prices forecasts featuring heavily on both sides of the ledger. Yet another disappointing market update by Flight Centre triggered no less than three downgrades.

No surprise, Seek sits on top of the table for negative revisions to valuations/price targets after it too issued yet a second disappointing market update inside four months. Another disappointer, Industria REIT, is second. Positive revisions are, on average, larger for the week with Healthscope leading the pack (selling non-core assets), followed by GUD Holdings, Evolution Mining and National Australia Bank.

It has to be noted also, average changes to profit forecasts are larger than in weeks prior. Credit Suisse, mentioned earlier, plays an active role in this. BC Iron sits on top of the table for negative adjustments. No surprise here. The near -19% adjustment for BC Iron easily beats negative revisions for OZ Minerals, Industria REIT and Recall. The latter is yet another industrial company that issued a rather disappointing market update (luckily its take-over story remains intact).

The top three for positive profit adjustments will be a surprise to many: Fortescue Metals, handsomely beating Slater & Gordon and Rio Tinto. This table consists primarily of energy stocks as analysts pare back more dire expectations for the price of a barrel crude.

Upgrades

BHP Billiton ((BHP)) upgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/5/0

The broker downgrades commodity price forecasts, continuing to be bearish on iron ore. Even with below-consensus earnings forecasts, BHP's balance sheet holds up reasonably well, in Credit Suisse's view. Hence, the rating is upgraded to Neutral from Underperform. Under new forecasts, the company is not considered able to grow dividends in the next four years. While the yield provides a price floor, it will also provide a ceiling, in the broker's view. Target is steady at $29.00.

Healthscope ((HSO)) upgraded to Buy from Neutral by UBS. B/H/S: 3/2/1

Healthscope has announced the sale of its Australian pathology business to private equity, which the broker sees as a positive move. The business has always been problematic, lacking sufficient scale to make it work. The funds can now be used to finance brownfield hospital expansion, which the broker sees as offering earnings turnaround potential. The broker has left its target unchanged at $3.14 but upgraded to Buy.

Independence Group ((IGO)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/1

Credit Suisse has downgraded commodity price forecasts. The company's FY16 estimates are cut substantially. If the merger with Sirius Resources ((SIR)) goes ahead Sirius, by a slim margin, is the cheaper entry point, in the broker's opinion. Independence Group is considered cheap if the deal does not go ahead and not quite so if it proceeds. The broker concedes a good deal of negative news is priced in. Rating is upgraded to Outperform from Neutral and the target reduced to $5.35 from $5.50.

IOOF Holdings ((IFL)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/3/0

The company has released a statement noting some press comments are misleading regarding misconduct proceedings. Credit Suisse considers the stock's 18% fall is an over-reaction and a buying opportunity. The misconduct differs from other financial advice incidents in that it is not about misappropriating client funds but rather about compliance. Credit Suisse upgrades to Outperform from Neutral. Target is steady at $11.10.

Seek ((SEK)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 4/2/2

Seek has been forced to issue a profit warning, with most of the impact in FY16. While disappointing, JP Morgan analysts seek the positive. They point out this company retains a track record of delivering growth, and opportunities to grow remain. On this basis, the rating has been lifted to Overweight,with the analysts suggesting punishment of the share price now offers investors a favourable entry point. Target falls to $16.93 from $17.15 as estimates have been lowered.

Sigma Pharmaceuticals ((SIP)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/5/2

The pharmaceutical benefits scheme (PBS) access and sustainability package, if passed, means a material reduction in PBS spending and wholesaler reimbursement over the next five years. Sigma Pharma is expected to fully offset the impact by winding back pharmacy discounts. On the back of recent share price performance, Credit Suisse upgrades its rating to Neutral from Underperform. Target is raised to 77c from 76c.

SMS Management & Technology ((SMX)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 1/3/1

The market has been concentrating on the downside risk after a prolonged period of softness, the broker observes. The company has reiterated FY15 earnings should be in line with expectations. Morgan Stanley envisages the annuity managed services becoming a majority of earnings in the longer term, which should drive growth and higher earnings quality. Rating is upgraded to Overweight from Equal-weight. In-Line sector view is retained. Target is steady at $4.10.

South32 ((S32)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/1/0

The broker downgrades commodity price forecasts but upgrades South32 to Outperform from Neutral to reflect the fact it has capital management options which its large cap peers do not. The company's FY16 estimates are cut substantially. South32 has plenty of leverage to an expected lift from cycle-low commodity prices, in the broker's view. Credit Suisse reduces the target to $2.20 from $2.50.

National Australia Bank ((NAB)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 3/5/0

The bank has underperformed the sector since its first half result and JP Morgan upgrades to Neutral from Underweight, given a more evenly balanced risk/reward. A $34.55 target is maintained. The bank has now ruled a line under its UK exit which provides some certainty and the broker suspects the bank may be a relative beneficiary upon transition to Basel 4.

Downgrades

Ansell ((ANN)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 1/5/2

The considerable depreciation of the euro against the US dollar is a significant headwind in Morgan Stanley's observation. The broker does not believe FY15 results will be affected but FY16 expectations look challenged. Adverse FX movements are likely to outweigh the benefit from falling input costs. Given the uncertainty Morgan Stanley downgrades to Equal-weight from Overweight. In-Line sector view retained. Target is reduced to $24.89 from $26.33.

Dexus Property ((DXS)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 1/2/4

Following media reports that Commonwealth Bank ((CBA)) is considering pre-committing to the Parramatta Towers development around 2019, the analysts have dug deeper into lease expiries of Dexus as CBA is a key tenant in Parramatta. The analysts note CBA represents some 4% of annual earnings while Woodside Petroleum ((WPL)) is also expected to vacate current premises in Perth around the same time. Woodside represents some 5% of annual earnings. The analysts have taken a more cautious view on expiries for key tenants over the next five years. They left their price target intact, but have decided to downgrade to Underweight from Neutral.

Flight Centre ((FLT)) downgraded to Neutral from Outperform by Credit Suisse, to Neutral from Outperform by Macquarie and to Hold from Add by Morgans. B/H/S: 2/3/2

The company has downgraded FY15 estimates amid more competition and a slowing market. Credit Suisse downgrades FY16 forecasts by 7.4% on the expectation the current rate of growth continues. The broker considers this is a difficult point in the cycle in which to predict market growth and there is a risk Flight Centre over-extends consultant numbers at a time of increasing competition. Downgrade to Neutral from Outperform. The impact of competition is small and should not materially affect the packaged holiday market where Flight Centre dominates, in Macquarie's view. However, the broker does raise concerns around the margin outlook for FY16 and FY17. Hence, a downgrade to Neutral from Outperform. Macquarie finds better value in Qantas ((QAN)). FY15 estimates a reduced by 6.9% and FY16 by 12.6%. The rate of decline in Australian operations during the second half is of concern to Morgans, given Flight Centre was already cycling a weak comparable period. Morgans notes FY15 has been impacted at all levels from a tough consumer environment, revenue margin contraction, higher costs and lost market share. The broker is cautious about the near-term, despite a reasonable valuation and downgrades to Hold from Add.

OceanaGold ((OGC)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/2/0

The broker considers the fundamentals for gold are largely unchanged but earnings estimates are downgraded. Credit Suisse downgrades to Neutral from Outperform on share price strength. Target price is unchanged at $3.00.

OZ Minerals ((OZL)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/4/0

The broker considers the fundamentals for gold are largely unchanged but near-term copper price expectations have been reduced. Earnings estimates are downgraded for FY15 and FY16. Credit Suisse downgrades to Neutral from Outperform and reduces the target to $4.70 from $5.30.

Sandfire Resources ((SFR)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 6/1/1

The broker considers the fundamentals for gold are largely unchanged but near-term copper price expectations have been reduced. The rating is downgraded to Underperform from Neutral and the target falls to $4.40 from $5.05. The company has also presented the results of the massive sulphide intersection at the Springfield project which reveals very high grades. While this alone does not make the case for an ore body, Credit Suisse expects follow up drilling may identify such, just 10km from the DeGrussa mine.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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