Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features EAGERS AUTOMOTIVE LIMITED, and other companies. For more info SHARE ANALYSIS: APE

By Andrew Nelson

Australian stockbrokers have put the focus on the Australian dollar and the upcoming elections in September. While the AUD can be used as an explanation for virtually everything these days (more optimistic consumers versus still troubled businesses), it would appear that a widely anticipated loss for the Gillard government is not one of the consequences of a persistently strong Aussie currency.

In terms of rating changes for individual stocks, the week past saw twenty four upgrades, nearly double the thirteen downgrades. Resources stocks proved popular with ever so weak share price performances triggering more upgrades.

CIMB was the stingiest broker when it came to handing out upgrades last week, lifting calls on just three stocks. AP Eagers ((APE)), Mermaid Marine ((MRM)) and Wotif.com ((WTF)) were all bumped up to Buy from Hold. AP Eagers is now the broker’s top pick in the Auto sector, with CIMB especially liking the group's extensive property portfolio. The Sentiment Indicator in the FNArena Database reads positive for the stock.

While a drop in Mermaid Marine's share price might have spurred the broker to upgrade its call, CIMB also noted that increasing activity on the North West Shelf and high demand for Mermaid Marine's supply base services should underpin growth. The broker further believes that, notwithstanding Woodside’s decision on the Browse development, Mermaid Marine remains one of the best ways to play the increased spending in the oil and gas sector in Australia. Sentiment is positive.

As far as Wotif.com goes, the broker sees potential for monetising new revenue streams that the rest of the market doesn’t seem to see. Display advertising and increasing flight to TTV through packaging appears to offer the most potential. On CIMB's forecasts on the day, Wotif.com was trading at a price to earnings ratio of 15.8 times FY14 earnings. The broker notes this is a 22% discount to comparable online stocks. Sentiment for the stock is negative.

Atlas Iron ((AGO)) won the weekly double, upgraded to Buy from Hold by JP Morgan, while Deutsche Bank lifted to Hold from Sell. Deutsche’s move was a simple valuation call, while for JP Morgan the stock has become the broker’s top pick in the mid cap iron ore space. The valuation is appealing and JP Morgan adds Atlas Iron offers strong production growth, holds a strategic port allocation and has a number of long term development options.

Grange Resources (((GRR)) was upgraded to Buy from Hold, JP Morgan calling Grange the cheapest play in the mid cap iron ore space. The broker believes Grange, along with Atlas Iron, represents the least amount of risk in iron ore given the quality of the assets in production, a low probability of cash being spent on mergers and acquisitions and valuation support. Sentiment for both stocks is positive.

Aurora Oil & Gas ((AUT)) moved to Buy from Hold on JP Morgan’s books on the belief the market over-reacted to the disappointing 2013 production guidance. Post the decline in the share price, the stock is now seen to offer considerable upside. The broker also upgraded Gindalbie Metals ((GBG)) to Hold from Sell, noting the company has very strong leverage to the iron ore price. Should benchmark prices remain higher than expected, there are very positive implications for valuation, reasons the broker. Sentiment is positive and neutral respectively.

JP Morgan also upgraded Rex Minerals ((RXM)) to Hold from Sell following a significant fall in the share price. The broker does retain a cautious view, given copper price forecasts and also thinks Hillside will struggle to secure project financing in the current environment without significant copper price hedging. Sentiment is neutral.

Newcrest ((NCM)) was upgraded to Buy from Hold and not just by JP Morgan, but by Deutsche Bank as well. The size of the downgrade at Lihir was bigger than feared, but JP Morgan believes the market over-reacted nonetheless. The broker sees Newcrest as being well placed to weather short-term fluctuations in gold prices, given more than 60% of production comes off long life and relatively low-cost assets. Sentiment for the stock is positive.

Deutsche Bank upgraded Fortescue Metals ((FMG)) to Hold from Sell on valuation grounds after changes to iron ore and Australian dollar assumptions. Oz Minerals ((OZL)) moved to Buy from Sell, Deutsche noting the stock looks cheap on revised valuation. Sentiment for both stocks is positive.

The broker also joined Credit Suisse in upgrading its call on Western Areas ((WSA)) to Buy from Hold. Deutsche expects to see another strong quarter of production and named the stock its top pick in nickel given it boasts the lowest cash costs and also benefits from strong grades. Credit Suisse noted the stock is down 35% this year and believes this is not justified, especially as the nickel price is only down just 9%. Sentiment for the stock is positive.

Deutsche Bank and Credit Suisse also upgraded Iluka ((ILU)). Deutsche went from to Hold from Sell, while CS moved to Buy from Hold. A drop in the share price was the reason cited by Deutsche, the broker also noting product prices are nearing a bottom and volumes should recover during the year. Credit Suisse hopes current weakness will mean the Jacinth Ambrosia mine is finally shut down. The broker reasons this would be a big positive, as it would reduce cash costs, while leaving sales unchanged and reducing the inventory overhang. Sentiment is positive for the stock.

Macquarie upgraded BHP Billiton ((BHP)) to Buy from Hold, the broker thinking the recent sell down has been overdone and also seeing a seasonal pick up in Chinese commodities and improving free cash flow. The broker also upgraded Rio Tinto ((RIO)) to Buy from Hold, saying the stock has never offered as much valuation upside as it does now. While sentiment for BHP is positive, sentiment for Rio is perfect on eight straight Buys.

Macquarie also upgraded both Boart Longyear ((BLY)) and Transurban ((TCL)) to Buy from Hold. The broker observed that while markets for BLY have deteriorated, they haven’t to the extent that was expected. On Macquarie’s numbers, shares are factoring in around 35% in downgrades to guidance. After the upgrade sentiment has improved to neutral.

Traffic was good on most of Transurban's roads in the March quarter, said Macquarie. Key roads like Citylink, M7 and LCT delivered over 2% growth. Macquarie has upgraded Citylink and M7 expectations and notes Transurban sits on significant option value associated with truck tolling that should be unlocked in the coming 12 months.

JP Morgan disagreed, downgrading its recommendation to Sell from Hold.  JP Morgan points out the stock is trading at a 13% premium to its price target and there is a risk that Transurban goes to the next stage in evaluating the F3-M2 project, which may be cash flow negative. Time to take profits, says JP Morgan. Sentiment remains positive for the stock.

Citi upgraded its call on Peet & Co ((PPC)) to Hold from Sell after news came out indicating the company is looking to buy CIC Australia ((CNB)) for $76m in cash. Citi likes the geographic diversification the deal will provide, but points out the impact on total lots is only moderate.

Peet will also look to raise $132m in equity to fund the deal and to provide an extra $41m for working capital to reduce debt and make further investments for growth. The broker liked both bits of that news, noting it will help consolidate the balance sheet and provide a ton of clarity. Even if the deal falls over the company will still look to raise $50m. This gave Citi the confidence to lift its call. Sentiment is positive.

The final two upgrades for the week both came from Credit Suisse, with Mount Gibson Iron ((MGX)) and News Corp ((NWS)) both boosted to Buy from Hold. Credit Suisse may be negative on the outlook for iron ore prices, but this does not affect its view of the valuation in Mount Gibson. The company's mine life is too short to be greatly affected by longer-dated price changes and the recent slide in the share price was just too much too pass up.

As far as News Corp goes, Credit Suisse revisited its model to account for some recent value-accretive acquisitions and for higher expected growth from Fox’s Cable and Television assets. The broker otherwise continues to have a positive view on both companies post-split. The new valuation lifted the price target and gave the broker the room to upgrade its call. Sentiment for both stocks is positive.

In terms of downgrades, Alumina Ltd ((AWC)) received two. BA-Merrill Lynch went to Hold from Buy, while Credit Suisse cut to Sell from Hold. The Alumina division results were broadly in-line with Merrills and showed a big improvement on previous periods. The problem is the broker sees more weak times soon for alumina and aluminium prices given a number of issues. Credit Suisse said that despite the small 1Q beat, it still expects to see a loss of $11m in the 2Q on falling alumina and aluminium prices and higher costs, hence the downgrade. Sentiment remains neutral on the offsetting changes.

Billabong ((BBG)) also had to wear two downgrades, with UBS dropping to Sell from Hold and Credit Suisse down to Hold from Buy. The company has received a $0.60 per share offer from the Sycamore/Naude team, well below their first, non-binding bid at $1.10 and 18% below the last close. UBS sees a good chance of a thumbs-up from the board, especially given the havoc that would be wreaked in the absence of any bid, or a failed one. CS, on the other hand, thinks the offer may not make it past the board and/or shareholders. Sentiment for the stock is negative.

UBS cut Caltex ((CTX)) to Hold from Buy, noting the company has been the king of the energy stocks over the last 12-months and the price has now climbed high enough to move back a notch. The refining business continues to perform well, although marketing growth is now the key focus and challenge, said UBS. Sentiment for the stock is negative.

Macquarie Group ((MQG)) was downgraded to Sell from Hold by Citi, the broker citing reduced M&A activity, weaker ECM volumes and lower commodities price volatility as the cause of 3%, 10% and 8% cuts to FY13-15 EPS. Macquarie shares have risen by 30% over the past 12 months but Citi analysts believe investors have been ignoring the increasingly significant risk to forward consensus earnings estimates. Citi’s FY14 earnings forecast is now around 17% below consensus.

Macquarie’s brokerage arm downgraded its call on Navitas ((NVT)) to Sell from Hold, pointing out the March 2013 enrolment is below market expectations and, as this indicates earnings in the following year, Macquarie expects the numbers will drive earnings downgrades. The stock is expected to be de-rated. Sentiment for the stock remains positive.

The final three downgrades for the week all came from Credit Suisse, the broker reducing its calls on Mirabela Nickel ((MBN)), Panoramic Resources ((PAN)) and Yancoal Australia ((YAL)) to Hold from Buy. Credit Suisse thinks Mirabela will be loss making until FY16 and considers this is too long a timeframe for an established miner in what looks to be a structurally challenged sector in the medium term.

The broker can see no earnings support in the foreseeable future for Panoramic and as it is the highest cost nickel producer in Credit Suisse's coverage, any downgrade to the nickel price outlook will be very problematic. Yancoal’s FY13-14 earnings were cut by 10% and 17% on the back of new and lower coal price assumptions. The broker expects to see a post tax loss of $17m in FY13 and while there is a net profit in FY14, it is now 37% lower. Sentiment for both Mirabela and Panoramic is positive, while Yancoal is negative.

There were numerous significant changes to consensus price targets and EPS forecasts and they are detailed in the tables below. Target prices for News Corp, Brickworks ((BKW)), Caltex ((CTX)) and Bank of Queensland all gained 5% or more. Panoramic Resources’ consensus price target fell nearly 19%, Grange Resources’ slipped 12.3%, Aquarius Platinum’s ((AQP)) 9% and Mount Gibson’s ((MGX)) just over 6%.

Consensus earnings forecasts for Fairfax went up nearly 27%. Both Beadell Resources ((BDR)) and Mirabela Nickel suffered downgrades of 17%, while estimates for Western Areas and Bank of Queensland went down near 12% and OzMinerals’ ((OZL)) estimates fell 10%.

Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables below are based on data analysis from the week past concerning these eight equity market experts. The eight experts in casu are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (formerly RBS) and UBS. Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables below are based on data analysis from the week past concerning these eight equity market experts. The eight experts in casu are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (formerly RBS) and UBS.

Total Recommendations	Recommendation Changes
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