Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley 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 January 19 to Friday January 23, 2015
Total Upgrades: 21
Total Downgrades: 20
Net Ratings Breakdown: Buy 43.95%; Hold 38.96%; Sell 17.10%

The week ending Friday, 23 January 2015, proved exceptionally busy for changes to stockbroker ratings with FNArena counting no less than 41 changes, almost evenly divided between downgrades and upgrades. And neither side was dominated by miners or energy stocks.

One stand-out observation is that major banks feature on the positive side, despite investor concerns about valuations, regulatory risk and increased competition.

Remarkable is also that while resources stocks remain dominant on the negative side of profit forecasts, when it comes to reductions in valuations and price targets, most honours for the week go to industrial companies including OrotonGroup, Kathmandu, Ardent Leisure and UXC.

What does the frenetic activity during the opening weeks of the new year suggest about what might be in store for the upcoming February reporting season? All shall be revealed from next week onwards.

Upgrades

AMP ((AMP)) upgraded to Buy from Neutral by Citi. B/H/S: 3/4/1

Marking to market has triggered small positive changes to forecasts, but what caught Citi's attention was the recent share price fall. Looking through market volatility, argue the analysts, the stock now represents good long term value. There are still risks down the track, but Citi analysts also believe a weaker AUD and falling bond yields should support Funds under Management (FUM). Upgrade to Buy from Neutral. Target price remains at $6.10.

Aristocrat Leisure ((ALL)) upgraded to Buy from Neutral by UBS. B/H/S: 5/2/0

UBS upgrades to Buy from Neutral. The Australian dollar has fallen significantly since September and the broker remains attracted to the investment case. Target is raised to $7.60 from $7.20. While the weaker Australian dollar has provided upside to Australian earnings, the recent acquisition of VGT means Aristocrat's revenue is linked to health of the Oklahoma tribal casinos. As that region has benefitted from a strong oil price in recent years, UBS expects ongoing risks to the level of investment in the area under prevailing conditions. The broker has left forecasts unchanged in this regard, having already taken a conservative approach.

Blackmores ((BKL)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 1/0/1

The company expects to report sales and profit in the first half up 50% on the prior corresponding half. This is ahead of JP Morgan's forecasts. The broker expects a weaker Australian dollar may put pressure on gross margins in the next 12-18 months but upgrades to Overweight from Neutral, believing earnings will continue to recover and the company is better positioned than its competitors. Target is raised to $37.43 from $33.23.

BlueScope Steel ((BSL)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 6/2/0

Steel spreads are continuing to improve and growth in FY16 is being priced in. BlueScope is one of Morgan Stanley's preferred building material stocks and the rating is upgraded to Overweight from Equal-weight. Target is revised up to $5.83 from $5.71.

Dexus Property ((DXS)) upgrade to Overweight from Neutral by JP Morgan. B/H/S: 3/3/1

JP Morgan analysts suggest the overall context in 2015 remains favourable for A-REITs. The analysts estimate total returns of 7-10% for the sector in 2015. Part of the attraction, in the analysts' view, is a defensive earnings outlook, with potential for upside as the year unfolds. Dexus has been upgraded to Overweight from Neutral. Price target has moved to $7.50 (December 2015) from $7.20.

DuluxGroup ((DLX)) upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S: 2/5/1

Falling oil prices should provide a benefit to gross margins but Morgan Stanley observes this is offset somewhat by FX changes. Dulux is considered a relatively defensive play on building materials. The broker has a modest outlook for the stock and continues to envisage risks around the ability to gain market share. Still, given the near-term tailwinds, Morgan Stanley upgrades to Equal-weight from Underweight. Target is raised to $5.57 from $5.50.

Harvey Norman ((HVN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/1/2

The outlook for Australian retailers is not going to get any easier in 2015, argue analysts at CS. They see ongoing challenges from tepid growth in household incomes, a weaker AUD only partially offset by cheaper fuel stimulus. The broker's "self-help" favourites in the sector are Woolworths ((WOW)), Harvey Norman and Super Retail ((SUL)), while Flight Centre ((FLT)) is seen as presenting well on a medium-term view. Myer ((MYR)) is regarded a relatively high risk value opportunity. Harvey Norman has been upgraded to Outperform with a revised price target of $4.10 (was $3.75).

Macquarie Group ((MQG)) upgraded to Add from Hold by Morgans and to Buy from Neutral by UBS. B/H/S: 4/3/0

Macquarie increased its guidance for the financial year and Morgans has promptly upgraded its rating to Add from Hold. The price target lifts to $62.00 from $59.05. The stockbroker believes the upgraded guidance alleviates market concerns regarding MQG’s equity and lending exposures in the commodities space. Given the earnings momentum on show, and the potential for further AUD weakness, Morgans analysts continue to see risks as to the upside. Estimates have been lifted for FY15/16 by 8% and 5%, respectively. Earlier guidance was for little improvement and UBS, for example, had only penciled in 5%. The analysts have decided to upgrade to Buy from Neutral. Underpinning the upgrade is the fact the analysts believe Macquarie has stuck to a conservative forecast. Clearly, the increased volatility in financial markets is benefiting the FICC and Capital divisions, point out the analysts. EPS forecast has been lifted by 12% towards the top of guidance. Price target lifts to $64 from $57.

National Australia Bank ((NAB)) upgraded to Buy from Neutral by UBS. B/H/S: 5/1/2

UBS suspects many investors are struggling for high conviction alternatives, with a patchy economy and an increase in volatility. Although the banks' absolute valuations are not cheap the broker considers a further re-rating is possible. UBS upgrades NAB to Buy from Neutral, expecting investors will support its turnaround strategy. Target is elevated to $36.00 from $34.00.

OceanaGold ((OGC)) upgraded to Buy from Neutral by UBS. B/H/S: 5/1/0

Oceana posted a strong December quarter, with both Didipio and the NZ mines producing ahead of the broker's forecast. The good news is Didipio should be connected to the power grid by September but the bad news is OGC has lowered 2015 guidance due to lower copper prices. OGC outperformed its peers in 2014 despite a tough year for gold and the broker sees compelling valuation in low cost/long life Didipio. Upgrade to Buy. Target rises to $2.80 from $2.57.

Oil Search ((OSH)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 5/2/0

JP Morgan finds there is a case to upgrade Oil Search to Overweight from Neutral. The broker envisages strong free cash flow yields with manageable gearing. Target is lowered to $7.92 from $9.23. While Oil Search does not offer valuation upside in the way Santos ((STO)) does, the broker considers it a strong play on an eventual recovery in Brent and it is priced more attractively than it has been for some time. JP Morgan expects a trough in the Brent price of US$38/bbl over March but envisages little in the way of supply discipline or demand elasticity.

Origin Energy ((ORG)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 7/0/1

A sector report reveals Deutsche Bank has upgraded Origin Energy to Buy from Hold. Due to the delay in response to lower oil prices from the industry, the stockbroker is anticipating continued downward pressure on prices in H1 2015, to be followed by a mild recovery only in H2. The analysts have grabbed the opportunity to revisit their sector preferences. Oil Search ((OSH) is seen as the best quality opportunity, while Santos ((STO)) is considered oversold. Origin is seen as more defensive, but undervalued nonetheless. Target price falls to $12.80 (was $13.65).

Qube Logistics ((QUB)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 3/4/1

Morgan Stanley believes the recent price/earnings compression is at odds with the valuation catalysts and a robust earnings profile. The broker upgrades to Overweight from Equal-weight. Target is raised to $2.67 from $2.40. Industry view remains Attractive. With a financial investment decision looming the broker envisages a renewed market focus on Moorebank's valuation at a time when Australian Real Estate Investment Trust (A-REIT) cap rates are touching new lows.

Super Retail ((SUL)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/2/0

The outlook for Australian retailers is not going to get any easier in 2015, argue analysts at CS. They see ongoing challenges from tepid growth in household incomes, a weaker AUD only partially offset by cheaper fuel stimulus. The broker's "self-help" favourites in the sector are Woolworths ((WOW)), Harvey Norman ((HVN)) and Super Retail ((SUL)), while Flight Centre ((FLT)) is seen as presenting well on a medium-term view. Myer ((MYR)) is regarded a relatively high risk value opportunity. Super Retail's rating has been lifted to Outperform, while the price target has been pared back to $8.95 from $9.60.

Virgin Australia ((VAH)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 1/3/3

Deutsche Bank has updated fuel forecasts for Virgin Australia and also consolidated Tigerair Australia as a fully owned subsidiary from the second half. The broker now expects FY15 underlying profit of $92.7m and upgrades to Buy from Hold. Target is raised to 65c from 45c.

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

UBS suspects many investors are struggling for high conviction alternatives, with a patchy economy and an increase in volatility. Although the banks' absolute valuations are not cheap the broker considers a further re-rating is possible. Trading income should bounce back given the increased volatility in the market, particularly in the Australian dollar. UBS believes this may provide more leverage for Westpac in the near term. The broker also believes Westpac has the strongest credit underwriting process of the banks. The broker upgrades to Buy from Neutral given the bank's solid momentum, and raises the target to $35.50 from $34.00.

WorleyParsons ((WOR)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 4/3/1

Credit Suisse analysts are by no means suggesting the sector is near its bad news cycle, and more downgrades to profit estimates may well be on the cards for the years ahead. However, all the negative news can be offset by the company deciding to buy in its own shares. On the broker's calculations (now below market consensus), a debt funded (5% cost of debt) $500m buyback, at $9/sh, would be circa 20% EPS accretive. CS is of the view this more than compensate for any further potential for negative news. Upgrade to Outperform from Underperform (double upgrade). Price target falls to $11 from $13 prior. Earnings and dividend estimates have been further reduced.

Western Areas ((WSA)) upgraded to Buy from Neutral by UBS. B/H/S: 6/1/0

The December production report proved in-line but the highlight were lower costs. CS analysts point out the reported nickel unit cash costs are the lowest in three years. The analysts point out management has confirmed there will be a significant improvement in unit cash cost guidance for FY15 at the half year financial results in February. Outperform rating retained. Price target (unchanged) at $5.

Xero ((XRO)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/1/1

Xero has revealed an upgraded version of its payroll offering in the United States, targeting a nationwide roll out by the end of the year. Macquarie suspects that one of the reasons Xero was struggling to match customer acquisition rates was the weak payroll product on offer. The rating is upgraded to Neutral as the risks are considered more balanced now. Target is reduced to NZ$19.00 from NZ$20.50.

Downgrades

Adelaide Brighton ((ABC)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 0/6/2

Morgan Stanley believes continued internationalisation of the cement market will deliver long-term challenges for the Australian producer and Adelaide Brighton is the most vulnerable, given it is relatively overweight cement assets. Longer term real price growth in cement is considered unlikely. The broker downgrades to Underweight from Equal-weight, retains an Attractive sector view and reduces the target to $3.00 from $3.80.

Amcor ((AMC)) downgraded to Neutral from Buy by Citi. B/H/S: 1/4/2

After a very strong 2014, Citi analysts believe headwinds are building for the company which probably means 2015 will be a year of consolidation. The weaker euro, the departure of the CEO and a more difficult M&A background are all conspiring against Amcor, suggest the analysts. Longer term, Citi very much lauds the company's high quality fundamentals. Amcor is expected to announce a buyback at the release of interim results. Downgrade to Neutral from Buy. Target drops to $12.85 from $13.15.

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

UBS suspects many investors are struggling for high conviction alternatives, with a patchy economy and an increase in volatility. Although the banks' absolute valuations are not cheap the broker considers a further re-rating is possible. Trading income should bounce back given the increased volatility in the market, particularly in the Australian dollar. While UBS believes this may provide more leverage for ANZ, in the near term the rating is downgraded to Neutral from Buy as excess liquidity and the rising cost of connectivity continue to pressure returns from Asian wholesale banking. Target is reduced to $32.50 from $34.30.

Atlas Iron ((AGO)) downgraded to Sell from Neutral by UBS. B/H/S: 0/2/6

UBS analysts have yet again lowered price forecasts for iron ore. Life is to remain tough for junior producers, argue the analysts, as they will need to find ways to stay cash flow positive in an environment of low prices. UBS is most concerned about Atlas Iron for which debt is anticipated to rise in the year ahead. The analysts speculate about the need for a capital injection before year-end. Downgrade to Sell. Estimates have received the chainsaw treatment.

Beach Energy ((BPT)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 3/3/1

JP Morgan downgrades to Underweight from Neutral. Target is lowered to 90c from $1.19. JP Morgan expects a trough in the Brent price of US$38/bbl over March but envisages little in the way of supply discipline or demand elasticity. The stock is trading above the broker's valuation and while there is a strong net cash position currently, JP Morgan cautions that the current oil price forecasts call for negative free cash flow in FY15 and FY16. The broker is also concerned that Chevron will exit the Nappamerri Trough unconventional JV in the first half of 2015.

BT Investment Management ((BTT)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/3/1

Today's downgrade in rating is a direct result of the share price reaching what CS considers the ceiling of historical valuation multiples (17 times projected EPS). Target moves to $6.75 from $6.55 on upwardly revised estimates.

Caltex Australia ((CTX)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 0/4/3

JP Morgan is downgrading to Neutral from Overweight. Target is raised to $33.26 from $33.12. Cost savings and capital management may be positives but near-term upside from these drivers appears modest. That said, the broker remains confident in the broader business re-positioning and would become more constructive at a lower share price.

Carsales.com ((CRZ)) downgraded to Hold from Add by Morgans. B/H/S: 6/1/1

Falling vehicle listing volumes are a near-term risk to earnings momentum, in the broker's view. Most of the fall is attributed to the boycott on new vehicle listings imposed by five of the largest manufacturers. Short-term competitor activity and market cycles could mean carsales.com reports lower-than-expected growth in FY15 and FY16. As a result, Morgans downgrades to Hold from Add. Target is reduced to $10.81 from $12.20.

Downer EDI ((DOW)) downgraded to Sell from Buy by Deutsche Bank. B/H/S: 4/1/2

Deutsche Bank's analysis suggests Downer EDI is facing negative earnings growth for the next two years, as large construction projects are finished and mining revenues fall. The broker double downgrades to Sell from Buy as the stock appears expensive versus history, with 10-13% downside risk to consensus numbers envisaged. Target is lowered to $3.89 from $5.72.

Evolution Mining ((EVN)) downgraded to Underperform from Neutral by Credit Suisse and to Hold from Buy by Deutsche Bank. B/H/S: 2/2/1

The December performance beat both the broker's forecast and the company's own guidance. The analysts point at the record cash flows for the quarter. Forecasts have been lifted which causes the target to rise to $0.83 from $0.80 but given the share price has moved too, the rating is being pulled back to Underperform. The company has reiterated FY15 production guidance of 400-440,000 ozs and Deutsche Bank observes it is currently tracking at the top of that range. Costs are expected to be at the bottom end of guidance. Evolution Mining is benefitting from an improved Australian dollar gold price but Deutsche Bank downgrades to Hold from Buy on valuation. Target is raised to 90c from 80c.

Federation Centres ((FDC)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 3/1/3

Operating performance appears to be improving but Deutsche Bank contends that the company's churning of its owned asset base has distorted the comparables from former periods. Although the stock's earnings growth is attractive it is trading above the broker's valuation. Hence the rating is downgraded to Hold from Buy. Target is raised to $2.89 from $2.81.

Hotel Property Investments ((HPI)) downgraded to Neutral from Overweight JP Morgan. B/H/S: 0/1/0

JP Morgan analysts suggest the overall context in 2015 remains favourable for A-REITs. The analysts estimate total returns of 7-10% for the sector in 2015. Part of the attraction, in the analysts' view, is a defensive earnings outlook, with potential for upside as the year unfolds. The rating for HPI has now been pulled back to Neutral from Overweight.

Industria REIT ((IDR)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/1/0

Macquarie has reviewed the outlook and updated forecasts for Industria. The stock offers an attractive dividend yield but the broker envisages earnings risk over the next 12-24 months with longer-than-expected lead time in solving initial vacancies. Considering the small earnings base this enhances earnings volatility. Hence, Macquarie downgrades to Neutral from Outperform. Target is lowered to $2.01 from $2.08.

Japara Healthcare ((JHC)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/2/0

The broker has ranked its aged care stocks under coverage in terms of facility quality, earnings risk, operational efficiency, acquisition/development capability and valuation. While Japara offers the most attractive valuation, a series of one-offs since listing means it also offers the highest earnings risk in the broker's view. Downgrade to Neutral. Target falls to $2.60 from $2.90.

JB Hi-Fi ((JBH)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/5/1

The outlook for Australian retailers is not going to get any easier in 2015, argue analysts at CS. They see ongoing challenges from tepid growth in household incomes, a weaker AUD only partially offset by cheaper fuel stimulus. JB Hi-Fi has been downgraded to Neutral from Outperform with a reduced price target of $17.40 (was $20).

Kathmandu ((KMD)) downgraded to Hold from Add by Morgans. B/H/S: 3/1/0

The recent trading update reveals the very soft conditions in Australia and the potential for further discounting to clear excess stock outside of the promotional sales periods. The lack of a permanent CEO is also a concern for the broker. The valuation remains appealing to Morgans, following significant earnings downgrades and share price weakness. Still, the broker cannot maintain a positive rating, with little confidence in the earnings outlook at this stage, and downgrades to Hold from Add. Target is lowered to $2.16 from $3.14.

MacMahon Holdings ((MAH)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/2/0

McMahon's CEO has resigned immediately for undisclosed reasons. A period without a CEO could make MAH vulnerable to takeover, the broker suggests, but in the meantime the broker has applied lower commodity price forecasts in cutting its earnings forecasts and target to 8c from 20c. Downgrade to Neutral.

Scentre Group ((SCG)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 2/3/2

JP Morgan analysts suggest the overall context in 2015 remains favourable for A-REITs. The analysts estimate total returns of 7-10% for the sector in 2015. Part of the attraction, in the analysts' view, is a defensive earnings outlook, with potential for upside as the year unfolds. JP Morgan's sector favourites are Stockland ((SGP)), Dexus Property ((DXS)), Mirvac ((MGR)) and Charter Hall ((CHC)). For Scentre Group, however, there has been a downgrade in rating to Underweight from Neutral. Price target $3.58 (December 2015) versus $3.51 prior.

Specialty Fashion ((SFH)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/1/1

The first half update signalled the business is being hampered by a poor performance at Rivers. The main positive for Macquarie is the success of the Rivers rejuvenation. Currency headwinds are also set to increase this year and Macquarie downgrades to Underperform from Neutral. Target is lowered to 75c from $1.00.

Westfield Corp ((WFD)) downgraded to Sell from Neutral by Citi. B/H/S: 2/2/3

Citi considers the stock is trading well above most key benchmarks and downgrades to Sell from Neutral. Westfield is a major beneficiary of recent weakness in the Australian dollar but Citi notes a weakening of the British pound also creates a headwind to earnings growth, given 30% of the company's assets are in the UK. The broker lifts the target to $8.43 from $7.36 as a result of the US dollar strength. Operationally, the broker contends that not a lot has changed but continues to like the business.

Woodside Petroleum ((WPL)) downgraded to Underweight from Neutral. B/H/S: 0/5/1

JP Morgan notes Woodside was one of the strongest performers among global oil names over 2014 on the back of a strong dividend stream, production and balance sheet. The balance sheet may stay secure but the broker suspects a falling dividend will drive underperformance. Rating is downgraded to Underweight from Neutral. Target is lowered to $33.29 from $41.53. JP Morgan expects a trough in the Brent price of US$38/bbl over March but envisages little in the way of supply discipline or demand elasticity.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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