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Weekly Recommendation, Target Price, Earnings Forecast Changes

FYI | Dec 20 2013

This story features AUSTIN ENGINEERING LIMITED, and other companies. For more info SHARE ANALYSIS: ANG

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 December 16 to Friday December 20, 2013
Total Upgrades: 13
Total Downgrades: 4
Net Ratings Breakdown: Buy 37.54%; Hold 44.54%; Sell 17.92%

Stockbrokers have used the last week before Christmas to issue 13 recommendation upgrades and only four downgrades. Saying goodbye to 2013 on such a high note, who would've thought?

The week past saw five upgrades to Neutral, with Wesfarmers the recipient of two such upgrades. This still leaves eight upgrades to Buy (or equivalent) and iron ore producers and insurance companies instantaneously come to mind.

Iron ore producers have been receiving upgrades to earnings estimates as analysts are gradually coming to terms with the fact that 2013 has surprised to the upside and the first two quarters of 2014 are likely going to offer more of the same. The first four names in the table for earnings upgrades for the week are all iron ore producers.

Otherwise, and this is more in line with expectations, there hasn't been much in terms of real fireworks during the week, except, of course, for one more blow-up. This one came from online accommodation marketer Wotif.com. No surprise, the company features on top of tables for negative changes in forecasts and price targets.

Wotif only received one downgrade, but with that the last standing Buy rating has now disappeared.

FNArena will return in its normal format from January 14, 2014 onwards. This will be the last Short Report for 2013. Paying subscribers can continue to view data and updates via the dedicated section on the website.

Best Wishes and we hope to see you all back in the new year.

Upgrades

Bradken ((BKN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/5/0

CS analysts believe Bradken is going to miss guidance for FY14. They believe this is exactly what the market is anticipating too. As a result, they think it is now reasonable to assume the worst is behind the stock, in terms of share price performance. Hence they have decided to upgrade to Outperform. The analysts appear to have a rather neutral view on the proposed acquisition of Austin Engineering ((ANG)). Price target reduced to $5.85. Estimates have -again- been lowered, but still suggest FY14 will be the low point with improvement kicking in from FY15 onwards.

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

The company's 2013 operating profit guidance is  $320-340m and Caltex expects marketing earnings to be $765m with refining and supply a loss of $175m. The marketing aspect is above UBS forecasts and the broker believes, if Caltex can achieve growth above 4% in marketing it looks attractive compared with a selection of stocks with similar metrics. Beyond 2014, when Kurnell closes, the exposure to refining and the associated FX impacts will be reduced by 50%. Hence the rating is upgraded to Buy from Neutral. The price target is raised to $21.60 from $20.40.

CFS Retail ((CFX)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/6/0

Details on the internalisation have been revealed at a cost of $460m which reflects 9.5 times proforma earnings and 3.3% of assets under management. JP Morgan believes the move is a positive one and should be 2% accretive because of the scale of the platform it will be managing. The price target is raised to $2.17 from $2.10 and the rating is upgraded to Neutral from Underweight.

DUET ((DUE)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/4/1

The AER has released its final rate of return guidelines for regulated utilities. Credit Suisse thinks the incremental detail is largely neutral for the sector. Hence, only marginal earnings changes have been made. DUET's rating has been raised to Outperform from Neutral, given the recent share price performance and the target price is raised to $2.25 from $2.22.

Fortescue Metals ((FMG)) upgraded to Add from Hold by CIMB Securities. B/H/S: 7/0/1

CIMB has raised iron ore price forecasts for 2014 and 2015 and lowered AUD/USD assumptions. The impact means earnings and valuations across the iron ore sector increase materially. The FX reduction has a smaller impact on Fortescue because the company reports in US dollars. Fortescue remains the preferred exposure to higher iron ore prices. The rating is upgraded to Add from Hold, with an expected 13% total shareholder return over the next year. The price target is raised to $6.15 from $5.95.

Insurance Australia ((IAG)) upgraded to Hold from Reduce by CIMB Securities. B/H/S: 1/5/2

IAG has bought Wesfarmers' ((WES)) underwriting business, strengthening its position in the Australian and NZ markets. CIMB notes the price is high but the deal looks accretive. The 10-year distribution agreement with Coles provides a new channel and also limits a competitive threat, although the broker thinks it could cannibalise existing business. The recent decline in the share price means the valuation is less stretched and the broker thinks this acquisition will support earnings until Asian growth kicks in. The rating is upgraded to Hold from Reduce and the price target is steady at $5.25.

Mount Gibson Iron ((MGX)) upgraded to Add from Reduce by CIMB Securities. B/H/S: 2/2/3

CIMB has upgraded forecasts for iron ore prices in 2014 and 2015 and lowered the AUD/USD assumption. CIMB prefers Mount Gibson in the junior iron ore space and has upgraded to Add from Reduce, expecting a 25% shareholder return over the next year. The target price is raised to $1.20 from $1.00.

QBE Insurance ((QBE)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 3/4/1

The broker has lifted the rating to Buy from Neutral and elevated QBE to the top sector pick. Merrills said several factors prevented an upgrade at the time of the profit downgrade last week, including convertibles trading, credit rating risks and the need for the news to be reflected in the share price. Now that the risks are largely factored into the price, and reserving problems are diminished,  the broker is more comfortable with the stock. The price target is raised to $14.00 from $13.00.

Sigma Pharmaceuticals ((SIP)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/5/1

Macquarie has transferred coverage to a new analyst. The broker's analysis of PBS price disclosure and growth implications has led to expectations for an acceleration in wholesaler revenue growth. Sigma's revenue growth is expected to rise to 5% in FY16 from 3% in FY14. The stock is looking particularly cheap to the broker and whilst conceding the industry faces challenges in terms of bad debts and ongoing reforms, Macquarie thinks the worst is over and upgrades to Outperform from Neutral. The price target is 71c.

Sonic Healthcare ((SHL)) upgraded to Buy from Neutral by UBS. B/H/S: 4/4/0

Sonic trades with a steep discount to the ASX Industrials because of risk, in UBS opinion. The company has been affected by recent downgrades by US peers and cuts in multiple jurisdictions. That said, UBS thinks the adjustment for risk is overdone. The rating is upgraded to Buy from Neutral because of recent weakness and despite a reduction in the price target to $17.50 from $18.15.

Tatts Group ((TTS)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/7/1

Macquarie has reviewed recent jackpot and sales trends for the company's key lotteries product. The first half is likely to be below the prior corresponding half as the stock cycles a tough comparative. Exclusivity discussions with Queensland's racing fraternity also poses some risk. While the balance of risks is to the downside over the next six months, the recent pull back in the share price means the stock is trading below the broker's valuation. The rating is raised to Neutral from Underperform and the price target is unchanged at $3.20.

Wesfarmers ((WES)) upgraded to Hold from Reduce by CIMB Securities and to Neutral from Underperform by Macquarie. B/H/S: 2/3/3

Wesfarmers has sold its insurance underwriting business to Insurance Australia ((IAG)) for $1.85bn. CIMB asks whether the company will now look at buying a metallurgical coal asset at the bottom of the cycle or return cash. Given the negative franking balance a dividend pay-out ratio above 100% is considered unlikely. The company may consider a capital return but CIMB notes this was not particularly popular last time with retail investors. The company has flagged the opportunity for counter cyclical investment in coal and a desire to evaluate acquisitions that offer economies of scale or downstream benefits. The sale arrangement includes the underwriting operations of Coles Insurance which will continue with Coles supermarkets under an arrangement with a remaining 10-year term.The sale does not include the insurance broking business in Australia, NZ and the UK. Macquarie likes the price Wesfarmers received and expects a capital return. Upgrade to Neutral from Underperform.

Downgrades

Amcor ((AMC)) downgraded to Neutral from Buy by Citi. B/H/S: 2/5/1

As the company is about to be separated from spin-off AAPD, Citi analysts have re-assessed. Bottom line: while they ascribe a value of $1.10-1.20 to AAPD, the price target for Amcor has only fallen by $0.56. The analysts think Amcor is already trading on a premium vis-a-vis international peers and a further widening of this premium cannot be justified. The rating has been pulled back to Neutral from Buy. Price target: $11.60 (ex AAPD). Estimates have been cut but that is because AAPD has been removed.

Gindalbie Metals ((GBG)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 0/2/1

Credit Suisse is valuing Gindalbie on the assumption that Ansteel continues to assist with beneficial swapping of funding for Karara equity. Gindalbie has warned that a full solution to the problems may take all of 2014 and consume capex. Hence, the broker thinks Gindalbie's share will drop again, maybe to as little as 14%. The issue with the plant is poor design caused by inadequate understanding of the ore characteristics so Credit Suisse suspects a permanent fix will require permanently higher costs.

Whitehaven Coal ((WHC)) downgraded to Hold from Add by CIMB Securities. B/H/S: 4/4/0

CIMB has reduced thermal and coking coal price forecasts. Whitehaven's valuation has been reduced by 9.5%. The price target is reduced to $1.90 from $2.10. The rating is downgraded to Hold from Add.

Wotif.com ((WTF)) downgraded to Hold from Outperform by CIMB Securities. B/H/S: 0/5/3

Wotif.com has issued a profit warning, expecting a 17-20% decline in first half profits. The driver of the decline is an increase in competition, costs and softer retail markets. CIMB remains more concerned that market share loss is accelerating despite a substantial pick up in marketing costs. Evidence of a stabilising in conditions or new revenue streams are required to make the broker more confident. The rating is downgraded to Hold from Outperform. The price target is reduced to $2.90 from $5.55.

Total Recommendations
Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 BRADKEN LIMITED Neutral Buy Credit Suisse
2 CALTEX AUSTRALIA LIMITED Neutral Buy UBS
3 CFS RETAIL PROPERTY TRUST Sell Neutral JP Morgan
4 DUET GROUP Neutral Buy Credit Suisse
5 FORTESCUE METALS GROUP LTD Neutral Buy CIMB Securities
6 INSURANCE AUSTRALIA GROUP LIMITED Sell Neutral CIMB Securities
7 QBE INSURANCE GROUP LIMITED Neutral Buy BA-Merrill Lynch
8 Sigma Pharmaceuticals Ltd Neutral Buy Macquarie
9 SONIC HEALTHCARE LIMITED Neutral Buy UBS
10 TATTS GROUP LIMITED Sell Neutral Macquarie
11 WESFARMERS LIMITED Sell Neutral CIMB Securities
12 WESFARMERS LIMITED Sell Neutral Macquarie
Downgrade
13 AMCOR LIMITED Buy Neutral Citi
14 GINDALBIE METALS LTD Neutral Sell Credit Suisse
15 WHITEHAVEN COAL LIMITED Buy Neutral CIMB Securities
16 WOTIF.COM HOLDINGS LIMITED Buy Neutral CIMB Securities
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous Rating New Rating Change Recs
1 WES WESFARMERS LIMITED – 38.0% – 13.0% 25.0% 8
2 IAG INSURANCE AUSTRALIA GROUP LIMITED – 38.0% – 13.0% 25.0% 8
3 AQA AQUILA RESOURCES LIMITED – 50.0% – 33.0% 17.0% 3
4 ERA ENERGY RESOURCES OF AUSTRALIA 33.0% 50.0% 17.0% 4
5 API AUSTRALIAN PHARMACEUTICAL INDUSTRIES 33.0% 50.0% 17.0% 4
6 CTX CALTEX AUSTRALIA LIMITED – 33.0% – 17.0% 16.0% 6
7 TTS TATTS GROUP LIMITED – 29.0% – 14.0% 15.0% 7
8 DUE DUET GROUP 13.0% 25.0% 12.0% 8
9 SHL SONIC HEALTHCARE LIMITED 38.0% 50.0% 12.0% 8
10 FMG FORTESCUE METALS GROUP LTD 63.0% 75.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous Rating New Rating Change Recs
1 CWN CROWN LIMITED 88.0% 63.0% – 25.0% 8
2 WTF WOTIF.COM HOLDINGS LIMITED – 25.0% – 38.0% – 13.0% 8
3 WHC WHITEHAVEN COAL LIMITED 63.0% 50.0% – 13.0% 8
4 AMC AMCOR LIMITED 25.0% 13.0% – 12.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous Target New Target Change Recs
1 ERA ENERGY RESOURCES OF AUSTRALIA 1.333 1.425 6.90% 4
2 WES WESFARMERS LIMITED 41.384 42.165 1.89% 8
3 IAG INSURANCE AUSTRALIA GROUP LIMITED 5.644 5.725 1.44% 8
4 FMG FORTESCUE METALS GROUP LTD 6.144 6.213 1.12% 8
5 CWN CROWN LIMITED 18.230 18.368 0.76% 8
6 CTX CALTEX AUSTRALIA LIMITED 18.560 18.675 0.62% 6
7 SHL SONIC HEALTHCARE LIMITED 16.579 16.635 0.34% 8
8 TTS TATTS GROUP LIMITED 3.157 3.164 0.22% 7
9 DUE DUET GROUP 2.143 2.146 0.14% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous Target New Target Change Recs
1 WTF WOTIF.COM HOLDINGS LIMITED 4.801 3.214 – 33.06% 8
2 AMC AMCOR LIMITED 11.209 10.629 – 5.17% 8
3 AQA AQUILA RESOURCES LIMITED 2.225 2.217 – 0.36% 3
4 QBE QBE INSURANCE GROUP LIMITED 13.049 13.036 – 0.10% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous EF New EF Change Recs
1 AGO ATLAS IRON LIMITED 9.313 10.638 14.23% 8
2 MGX Mount Gibson Iron Limited 15.975 17.000 6.42% 7
3 FMG FORTESCUE METALS GROUP LTD 100.716 105.038 4.29% 8
4 RIO RIO TINTO LIMITED 501.168 512.459 2.25% 8
5 MQG MACQUARIE GROUP LIMITED 322.700 329.843 2.21% 7
6 CTX CALTEX AUSTRALIA LIMITED 134.137 136.866 2.03% 6
7 ENV ENVESTRA LIMITED 7.433 7.547 1.53% 6
8 APA APA GROUP 22.483 22.825 1.52% 8
9 CWN CROWN LIMITED 87.316 87.813 0.57% 8
10 API AUSTRALIAN PHARMACEUTICAL INDUSTRIES 5.154 5.174 0.39% 4

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous EF New EF Change Recs
1 WSA WESTERN AREAS NL 0.906 0.620 – 31.57% 6
2 WTF WOTIF.COM HOLDINGS LIMITED 26.538 21.670 – 18.34% 8
3 EVN EVOLUTION MINING LIMITED 10.312 9.645 – 6.47% 5
4 AZJ AURIZON HOLDINGS LIMITED 24.293 23.018 – 5.25% 8
5 NCM NEWCREST MINING LIMITED 33.668 31.918 – 5.20% 8
6 AWE AWE LIMITED 6.743 6.414 – 4.88% 6
7 SFR SANDFIRE RESOURCES NL 74.566 71.066 – 4.69% 8
8 AMC AMCOR LIMITED 69.616 66.628 – 4.29% 8
9 SXY SENEX ENERGY LIMITED 5.300 5.133 – 3.15% 5
10 IGO INDEPENDENCE GROUP NL 28.023 27.190 – 2.97% 5
 

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CHARTS

AMC ANG FMG IAG MGX QBE SHL WES WHC

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: ANG - AUSTIN ENGINEERING LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE LIMITED

For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED

For more info SHARE ANALYSIS: MGX - MOUNT GIBSON IRON LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED