Weekly Recommendation, Target Price, Earnings Forecast Changes

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

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie 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 November 11 to Friday November 15, 2013
Total Upgrades: 13
Total Downgrades: 8
Net Ratings Breakdown: Buy 37.01%; Hold 44.33%; Sell 18.66%

The Australian share market is receiving more recommendation upgrades than downgrades these days, despite indices hovering near five year-high levels, and the reason for this is simple and straightforward: companies reporting outside the August reporting season are mostly surprising to the upside.

The likes of Orica, Incitec Pivot, CSR and James Hardie have not convinced everyone, also because their share prices had already run up pretty high in advance, but recommendation upgrades for these companies are currently outnumbering any share price-related downgrades.

On the other side of the ledger we find companies disappointing or issuing profit warnings receiving downgrades from stockbrokers, including News Corp and Royal Wolf Holdings.

All in all, changes to earnings forecasts remain rather benign, with exception of Ausdrill, whose profit warning in the previous week took investors by surprise and once again proved that providing equipment and services to miners and LNG projects usually involves a heavily leveraged business model.

There were more fireworks among consensus price targets last week, with a heavy skew towards the negative side where Virgin Australia (unexpected capital raising), Ausdrill (profit warning), Qantas (impact from Virgin capital raising) and News Corp (disappointing results) seemingly made a mockery of the art of making forecasts. On the positive side we recorded big jumps for DuluxGroup, Orica, Incitec Pivot and Alacer Gold.

Underlying all these changes and amendments is the observation that cyclical industrials are suggesting they are worthy of investors' confidence, which is likely to add further to support for the Australian share market. 

Upgrades

Breville ((BRG)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 4/1/0

Breville is on track to meet earnings expectations and, while Credit Suisse does not think the stock is cheap, FY14 price/earnings are distorted by the strong net position and non-recurring impact from losing Keurig.The broker has decided to upgrade the rating to Neutral from Underperform, following share price weakness. The price target is raised to $8.20 from $7.75.

CSR ((CSR)) upgraded to Neutral from Sell by Citi, to Outperform from Neutral by Credit Suisse and to Outperform from Neutral by Macquarie. B/H/S: 2/4/2

An improving market helped CSR to a first half that beat Citi's forecasts by 13%. The broker has lifted FY14-16 profit by 19-29% on improved margins and product mix in building products as well as lower cash costs in aluminium and an increased market appetite for property sales. The stock is seen trading at fair value on a 15 times forward earnings multiple. Credit Suisse analysts point out a low tax rate did provide support, but there was plenty to like in the report. For now, positive earnings momentum is all investors need to focus on. The analysts identify the largest risks in the (seemingly never ending) turnaround of Viridian as well as higher gas costs from FY17 onwards. EPS should more than double in FY14, with (strong) growth to continue in following years. DPS estimates have been increased too. First half results suggested to Macquarie the Viridian recovery is continuing while building products showed an improvement. Meanwhile, aluminium earnings have been protected by the weaker Australian dollar. Macquarie has taken a more positive stance on the outlook, although aluminum earnings are expected to be challenged in the near term by the LME rule changes. The stock is providing exposure to a recovering construction sector and the strong balance sheet provides the opportunity for both organic and acquisition-based growth, in Macquarie's view.

See also CSR downgrades.

James Hardie ((JHX)) upgraded to Neutral from Sell by Citi and to Outperform from Neutral by Credit Suisse. B/H/S: 1/4/1

Key markets have finally moved in sync and James Hardie has upgraded FY14 profit guidance after a strong September quarter. Citi notes that, underpinning the guidance is the expectation of increases of more than 20% in US margins as well as improvements in Australia and New Zealand, along with steady earnings in the Philippines.The broker has lifted FY14-16 profit forecasts by 7-15%. The rating has been upgraded to Neutral from Sell and the price target raised to $11.70 from $7.70. Credit Suisse has welcomed the robust September quarter report and believes it provides greater confidence in the growth story and pricing penetration. The fibre cement prices are higher, margins are improving and market share is growing. It all adds up to a raising of the recommendation to Outperform from Neutral and the price target to $13.50 from $11.00.

See also JHX downgrade.

Incitec Pivot ((IPL)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/6/0

Incitec's outlook is cautious and the broker suggests the ramp-up of Moranbah at a time shutdowns are planned for Phosphate Hill implies FY14 will be a transition year for the company. The broker sees DAP prices improving ahead and urea prices bottoming, alongside an easing of currency headwinds. An earnings inflection point is thus nearing, the broker believes, and the market is likely to price IPL based on more "normal" earnings in FY15. IPL's value is thus undemanding and the broker has upgraded to Outperform. Target rises to $3.10 from $2.90.

K&S Corp ((KSC)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/2/0

K&S intends to merge with Scott Corporation ((SCC)) and the plan has already received the thumbs up from a common shareholder. Deutsche Bank has upgraded to Hold on expected synergies and because the shares are now near target. No other changes have been made.

Mirvac ((MGR)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 3/4/0

The broker has upgraded to Buy from Neutral in the wake of the acquisition of three assets with significant value-adding potential. This leaves Mirvac best positioned of the major A-REITs to benefit from the current demand for Australian commercial property. The broker believes the turnaround of the development business, supported by an improving housing market, means the company is on track for the 10% or more return target. Mirvac has reaffirmed 7-10% earnings growth.The price target is raised to $1.90 from $1.85.

Myer ((MYR)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 2/4/2

Myer's quarterly sales were better than the broker expected. This is enough to see the broker upgrade to Neutral, but with cost pressures continuing compelling value is yet to be found. The pending change in CEO also provides uncertainty.

Orica ((ORI)) upgraded to Outperform from Neutral by Macquarie and to Neutral from Sell by UBS. B/H/S: 4/4/0

The FY13 results highlighted stronger cash flow and lower debt position and were 3% ahead of Macquarie's forecasts. The explosives business shows some resilience and Orica looks well placed to benefit from recovery in Europe and North America. Macquarie believes the stock is still cheap on 12.3 times FY14 price/earnings, which is a 15% discount to the market versus the long-term rate of 8%. Orica's profit was 3% ahead of UBS' forecasts. Explosives results in Europe were key to the improvement, offset by weaker general chemicals. Cash flow was helped by better working capital. UBS raises FY14 earnings forecasts by 5%. The accompanying announcement about gas supply in NSW, where Orica is to obtain 14PJ in gas from 2017-19 at incremental cost of $12m, removes an important structural headwind, in UBS' view, and adds around $1.20 a share to the valuation.

Ramsay Health Care ((RHC)) upgraded to Neutral from Sell by UBS. B/H/S: 1/6/1

Having reviewed the domestic health care sector and in the context of a sale of Medibank Private, UBS has formed the view that the federal government is likely to be more specific regarding a target date for the reinstatement of previous arrangements for the private health insurance rebate, and use efficient price to cap incentives for public hospitals to pursue private patients. UBS believes Ramsay's underlying Australian business is capable of 7-9% earnings growth and adding in cost savings, offshore operations and acquisitions can stretch growth to 15%. Despite this the broker has struggled to understand the stock's valuation but concedes the trading multiple has been sustained and there is scarcity value without a local comparable.All up, the rating is upgraded to Neutral from Sell and the price target is steady at $36.30.

Skilled Group ((SKE)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/1/0

While Skilled's FY13 result was solid, the broker elected to downgrade to Underperform given a weak perception of FY14 on the back of slow employment growth and weak mining activity, offset by oil & gas activity. However a recent big contract win in LNG has prompted the broker to think again, deciding SKE may be able to ride out the cycle after all. The company's program of cost reduction and balance sheet strengthening adds to a more robust picture, with the broker expecting a more positive second half.

WorleyParsons ((WOR)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 3/3/1

Further analysis by Deutsche Bank has generated the following two key conclusions: 1. the company is now facing a slower growth outlook. 2. despite 1., the analysts still believe the company should be able to achieve a "respectable" 9% EPS CAGR over the next three years. On this basis, the rating has been lifted to Buy from Hold, and the price target has been raised to $23.87 from $20.50.

Downgrades

CSR ((CSR)) downgraded to Underweight from Neutral by JP Morgan and to Neutral from Buy by UBS. B/H/S: 2/4/2

Ahead of the interim earnings JP Morgan observed, with the share price having moved sharply higher this year, the gap to the previous target stands at a 23% premium. This is one of the widest in the broker's coverage. Hence, the rating is downgraded to Underweight from Neutral. The glass division is the thorn in the company's side and it remains to be seen whether CSR can turn this loss-making position around. CSR's result showed some clear positives for UBS, albeit offset by negatives. Exposure to a recovering NSW housing market is a benefit and a Viridian turnaround would be valuable, but demand growth and a lower A$ are needed. Aluminium simply looks flat. On the share price response the broker downgraded to Neutral.

See also CSR upgrades.

James Hardie ((JHX)) downgraded to Sell from Neutral by UBS. B/H/S: 1/4/1

The strong September quarter result may have given the share price a big lift but UBS is wary about the trend continuing. The broker has downgraded to Sell from Neutral. The quarterly result showed a rise in US volumes of 25% and a 4% price increase but UBS does not feel this justifies a 15% increase to what was an already stretched valuation. The target price is raised to $11.35 from $9.52.

See also JHX upgrades.

News Corp ((NWS)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/2/1

News Corp's first result reflects the transition with revenues and earnings after tax both down, the broker notes. Cyclicality suggests this result should not be used as a gauge for the full-year. Aust publishing was weak and News' investment in REA ((REA)) was the stand-out. The broker has trimmed forecasts on higher amortisation and notes the stock has re-rated since the de-merger towards the broker's new target. Target falls to $19.80 from $23.30. Downgrade to Neutral.

Royal Wolf ((RWH)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 2/2/0

Post what Deutsche Bank clearly perceived as a disappointing Q1 market update, the rating has been pulled back to Hold (from Buy) while forecasts have been trimmed. Price target tumbles to $3.25 from $3.50. Management has been mentioning a "difficult underlying environment" and the analysts have taken this on board. On revised calculations, the stock is now seen trading at a market premium, which makes the rating downgrade look even more appropriate. Deutsche Bank remains positive on the company and its business model overall, but for now the valuation is seen as appropriate in light of the difficult trading conditions.

Sims Metal ((SGM)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/2/2

Ahead of Sims' AGM, the broker has reduced its target to $10.00 from $10.20 to reflect the "chronic" overcapacity of shredding facilities in the US which has meant any cost cutting has gone straight to price discounting and not to margin support. The broker expects SGM to be marginally profitable in the first half and see improvement in the second, but in the meantime the rating has been downgraded to Underperform.

SP AusNet ((SPN)) downgraded to Neutral from Buy by Credit Suisse. B/H/S: 2/2/1

The interim result was in line with UBS estimates and distribution guidance has been maintained. The rating has now been downgraded to Neutral from Buy as the stock is trading in line with valuation. The yield of 6.8% and forecast returns of 9% are expected to become comparatively less attractive once the US Fed starts to taper QE. The planned purchase of part of Singapore Power's holding in SP AusNet has both positives and negatives in the broker's opinion. The positive is that the company plans to terminate the management contract in September 2015 and this will trigger savings. The negative is the sell down has prompted a credit rating downgrade which could hinder distribution growth should SP AusNet look to reinstate the rating.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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