Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BRAMBLES LIMITED, and other companies. For more info SHARE ANALYSIS: BXB

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.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday November 18 to Friday November 22, 2013
Total Upgrades: 10
Total Downgrades: 9
Net Ratings Breakdown: Buy 36.97%; Hold 44.49%; Sell 18.55%

Last week's story in Australia was mostly about airlines and mining services providers. Domestic airlines feature heavily in broker downgrades of future profit projections with Virgin announcing a new capital raising leading analysts to expect the pricing war is going to continue, at the very least, and this will keep both Virgin and Qantas in the red this year, and probably next year too.

Mining services providers are going through yet another reality check with a heavy, and unexpected, profit warning by oil and gas oriented WorleyParsons putting investors once again on alert, if not in panic selling mode.

The sector of engineers and contractors was responsible for most changes in ratings last week with some stocks receiving upgrades as share prices tumble, but most analysts zooming in on persisting downward risks and thus scaling back ratings to Neutral or worse. There's no denying that in many cases valuations do look "cheap", but this doesn't preclude there are more negative developments yet to be announced.

Downer EDI was top of the bill in terms of improvement in earnings estimates last week, but the bias remained to the downside where Qantas, Virgin, Sydney Airport and a whole slew of mining services providers suffered heavy cuts to earnings estimates.

On the positive side, we find names such as James Hardie, Ainsworth Games, BlueScope Steel and McMillan Shakespeare all are currently enjoying a lift in earnings expectations.

Upgrades

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

The broker has decided to upgrade the rating to Buy from Neutral on the basis of relative value and the exposure to the US economic recovery. Around 50% of the company's revenue comes from the Americas. The broker's US economists expect the QE tapering to begin in March next year but there is a risk it comes earlier and has a sharper focus. The stock is now trading at a price/earnings premium to the market of 19% versus a long-term average of 33%. Merrills FY14 earnings forecasts are maintained. The price target is lifted to $10.50 from $9.25.

Charter Hall ((CHC)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 5/2/0

The broker recommends investors buy Charter Hall as it is best placed to benefit from the current level of investor demand for direct Australian real estate, with property funds management driving around 40% of earnings. Merrills considers the current share price represents a compelling entry point. The rating is upgraded to Buy from Neutral and the price target is steady at $4.18.

Drillsearch ((DLS)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/0/0

Robust crude production is expected in the medium term and the company has confirmed an increased commitment to the unconventional program. Macquarie notes unconventional expenditure is not expected until the second half and the market is likely to focus on the growth in crude production and exploration potential on the Western Flank. The rating is upgraded to Outperform from Neutral and the price target is raised to $1.60 from $1.55.

Endeavour Mining ((EVR)) upgraded to Buy from Neutral by UBS. B/H/S: 1/0/0

The ramp-up of the Tabakoto mine led Endeavour to beat the broker's Sep quarter production forecast albeit net costs were also higher than expected. The broker does not expect EVR to post positive earnings until 2015 but it will generate good cash flow, and the pending commissioning of the Agbaou mine in Cote d'Ivoire should provide momentum.

James Hardie ((JHX)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 2/4/1

The second quarter result was hard to fault and Deutsche Bank has upgraded the rating to Buy from Hold. The price target is raised to $13.51 from $8.90. The quarterly result gives the broker the confidence to increase the terminal earnings margin assumption to 25% from 20%. Moreover, the 6-10% primary demand growth in FY14 is expected to accelerate into FY15 as it appears to Deutsche Bank the market sentiment towards fibre cement is shifting, because of a reduced cost focus.

McMillan Shakespeare ((MMS)) upgraded to Neutral from Underperform. B/H/S: 1/2/0

Regulatory risks have diminished and this creates improved earnings visibility and reaffirms the company's business model. Offsetting this, in Merrills' view, is that regulatory risks in the automotive industry still exist and are a real concern, permanently impairing equity valuation. The broker has upgraded to Neutral from Underperform, largely on the basis of valuation. The price target is $12.30.

Mermaid Marine ((MRM)) upgraded to Buy from Neutral by Citi and to Buy from Neutral by UBS. B/H/S: 4/2/0

The recent weakness in the share price has prompted Citi to upgrade the rating to Buy from Neutral. The company expects a weak first half. Falling vessel utilisation and lower activity at the supply base has meant Citi has cut FY14 profit estimates by 11% and a major second half bounce is needed to hit forecasts. Having said all that the broker thinks, on a medium-term view, positive earnings momentum is returning. Mermaid Marine expects FY14 profit to be in line with FY13 – at around $60.3m. This is below UBS estimates and reflects timing issues. Incorporating the revised guidance results in a 7.4% reduction to FY14 estimates. As earnings are underpinned by construction and production in the Australian offshore oil and gas sector, the recent share price weakness is considered to be a buying opportunity.

OZ Minerals ((OZL)) upgraded to Neutral from Sell by UBS. B/H/S: 2/4/2

It's been a tough year for copper prices and copper producers and as a result, OZ has lost half its value, with the pit wall failure at Prominent Hill late 2012 not helping. But with robust copper demand out of China and a better performance from the Hill expected in 2014, the broker feels market bearishness may start waning.

WorleyParsons ((WOR)) upgraded to Neutral from Underweight. B/H/S: 2/6/0

Yesterday saw the share price plunge that Worley needed, the broker implies, to bring the market in line with the short term headwinds that had been building, and reflected all at once in the company's FY14 guidance downgrade. That said, the downgrade was more severe than the broker had forecast. The broker nevertheless believes WorleyParsons' medium-long term drivers remain intact. Target falls to $16.51 from $19.16 but on the share price response, rating upgraded to Neutral.

See also WOR downgrades.

Downgrades

Arrium ((ARI)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/3/4

Credit Suisse found from the AGM that the first half domestic steel market was weak. The company is seeking an increase in quote activity and does expect the second half to be stronger. There was no quantitative earnings guidance. Credit Suisse speculates on whether a new chairman might consider raising equity to address the balance sheet. Peter Smedley, who is to retire in November 2014, has consistently said there was no need. The broker's rating is downgraded to Underperform from Neutral on share price strength. The price target is steady at $1.43.

Downer EDI ((DOW)) downgraded to Neutral from Outperform. B/H/S: 7/1/0

New contract wins have led to CS analysts lifting EPS estimates for the years ahead. This has pushed up the price target to $5.40 from $5.05. Downer EDI is looking towards a positive growth year in FY15, after what looks like a mildly negative FY14, point out the analysts. The problem CS analysts have with the scenario above is that it seemingly has been priced in already. Rating downgraded to Neutral from Outperform as a result.

Graincorp ((GNC)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 0/4/1

The broker has downgraded to Neutral from Overweight. The recent speculation about the ADM offer, and that it may be vetoed by the Australian government, means the probability it won't go ahead, for JP Morgan, has been raised to 30%. Incorporating a higher risk premium reduces the present value of the offer to $11.46. The price target remains at $12.93.

Prime Media Group ((PRT)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/1/0

Prime Media has guided to an FY14 profit of $31-33m, 10% below consensus estimates. The company noted the advertising market has slowed, despite a strong start to FY14. The company also indicated the new affiliation agreement with Seven came at a higher cost but provides greater certainty over the longer term. Credit Suisse sees upside to the earnings from a cyclical recovery and TV as a medium is likely to benefit disproportionately more than other sectors. A buy-back may also be on the cards given the company's strong cash flow, in the broker's opinion.The rating is downgraded to Neutral from Outperform and the price target is reduced to $1.10 from $1.20.

Qantas Airways ((QAN)) downgraded to Neutral from Outperform. B/H/S: 3/3/2

Reflecting on the Qantas AGM, the broker notes yield declines are worse than forecast and the weak domestic economy is taking a toll on the company, albeit weakness appears more widespread across the group. Intentions by Virgin ((VAH)) to add more capacity is just one reason there appears to be little respite ahead. The broker is not surprised QAN is moving its heavy maintenance offshore. Cost improvements, efficiency gains and the deal with Emirates are just not enough. The broker has slashed forecast earnings. Target falls to $1.45 from $1.72. Downgrade to Neutral.

Singapore Telecommunications ((SGT)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/2/0

The second quarter profit was 9% below JP Morgan's estimates. Optus revenues declined 6%. The broker thinks Vodafone's recovery, when it happens, is likely to hit Optus harder than Telstra ((TLS)). The brightest spot in SingTel's report was Singapore, where wireless revenue grew 7%. JP Morgan has reduced FY14-16 earnings estimates by 6-7% and revised the price target to S$3.88 from S$4.15. The rating is downgraded to Neutral from Overweight.

WorleyParsons ((WOR)) downgraded to Neutral from Buy by BA-Merrill Lynch and to Neutral from Outperform by Credit Suisse. B/H/S: 2/6/0

The company has downgraded FY14 profit guidance to between $260-300m six weeks after saying that profit would be ahead of FY13 ($322m). The downgrade was blamed on a greater-than-expected decline in Australia and project deferrals and additional costs in Canada. Forecasts have been consistently downgraded over the past three years and Merrills expects negative market sentiment may constrain the share price upside until a sustainable earnings recovery is apparent. CS analysts have some difficulties in getting their heads around what just happened, but at the end of the day, they agree on one thing: there is no hiding from a 27% downgrade. The sudden change in guidance remains hard to explain within only a space of six weeks, they add. To add more insult to injury: management gave a big presentation only three weeks ago. And here comes the hard assessment: "uninvestable" until more clarity arises about earnings prospects.

Yancoal Australia ((YAL)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 0/1/1

The uncertainties surrounding volumes, capex and takeover offers make the stock hard to value, in the broker's opinion. It is not clear whether several potential expansion projects will go ahead and Credit Suisse has reduced assumed production growth forecasts. Moreover, the FIRB is not expected to give the green light to Yanzhou's indicative proposal. The rating is downgraded to Underperform from Neutral and the target price is reduced to 65c from 70c.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms