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: 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 May 19 to Friday May 23, 2014
Total Upgrades: 12
Total Downgrades: 12
Net Ratings Breakdown: Buy 39.63%; Hold 43.89%; Sell 16.48%

The most important observation about broker views, projections and valuations is not that downgrades and upgrades are pretty much in balance, or that ratings for individual companies are grouping together in the Neutral basket, nor does it involve the fact that underlying earnings estimates in Australia now have a negative bias, because of lower iron ore prices and a persistently stronger-for-longer Aussie dollar.

The most important observation to make is that, despite all of the above, on top of potentially negative fall-out from the Federal Government budget, there doesn't seem to be any negative pressure on stockbroker valuations. The week ending on Friday, May 23, registered no more than four downward changes in consensus price targets and, maybe with the exception of junior miner Mt Gibson (-3.63%), none of these changes would have genuinely registered. Number four on this week's list, BlueScope Steel, experienced a target reduction of …(wait for it)… 0.09%.

On the other end of the scale, we still see increases to targets and earnings estimates for nickel producers and a wide variety of industrial stocks including DuluxGroup, Aristocrat Leisure and Myer. Iron ore miners continue to dominate the table with downgrades to earnings estimates. This comes hardly as a surprise and may well remain the case as not yet everyone has updated price forecasts for the sector as yet.

Upgrades

ASX ((ASX)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/4/3

Credit Suisse has increased the target to $37.00 from $35.20 and upgraded the rating to Neutral from Underperform. Earnings estimates are raised by 1.6% for FY14 and by 1.9% for FY15. The valuation is now undemanding and the broker thinks, while there is some scope for further earnings upside, the stock offers less earnings volatility than the broader financial sector, along with a 5.4% dividend yield. Hence, ASX is a relative safe haven investment.

BC Iron ((BCI)) upgraded to Buy from Neutral by UBS. B/H/S: 2/0/1

UBS has reduced iron ore price forecasts. UBS sees value in BC Iron as one of the more stable, low cost Australian producers. The price target is lowered to $4.40 from $5.20 and the rating is upgraded to Buy from Neutral.

Bendigo and Adelaide Bank ((BEN)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/6/0

The broker has reviewed its valuation following the acquisition of RFC Vic. The acquisition demonstrates BEN's M&A discipline, something the broker suggests is "sorely lacking" among peers. Improving vendor willingness to sell could result in material M&A earnings accretion, the broker believes, a theme not shared by the major banks. Throw in the potential for the Great Southern issue to be settled, which would silence accusations of under-provisioning, and the outlook is becoming increasingly more positive for BEN as far as the broker is concerned. Upgrade to Neutral. Target rises to $11.68 from $10.47.

BlueScope Steel ((BSL)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 5/1/1

Credit Suisse has upgraded its rating to Neutral from Underperform on the back of share price weakness. The target is unchanged at $6.40. The broker notes steel spreads relative to raw material costs have improved marginally. Lower iron ore price will have some impact on NZ Steel's iron sands export revenue but the broker believes this is countered by higher steel spreads. Moreover, lower raw material prices are helpful in releasing working capital. The recovery in residential construction in Australia also suggests a potential reduction in loss-making exports.

DUET ((DUE)) upgraded to Neutral from Underweight by JP Morgan and to Outperform from Neutral by Macquarie. B/H/S: 3/4/0

Spark Infrastructure ((SKI)) has acquired a 14.1% stake in DUET for an average price of $2.16 per security via a derivative structure. JP Morgan observes that, while Spark Infrastructure has stated it does not intend to make a takeover bid, this has provoked market speculation regarding further M&A activity. JP Morgan thinks the transaction will buffer DUET's price for the duration of the collar arrangement and has upgraded the rating to Neutral from Underweight. While nothing has fundamentally changed for DUET, Macquarie suggests the company is now "clearly in play" and SKI's actions may yet draw others out of the woodwork. The rating is upgraded to Outperform.

Hillgrove Resources ((HGO)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 1/0/0

JP Morgan is upgrading Hillgrove to Overweight from Neutral, raising the target to 11c from 10c. The broker believes risks round the company's ability to repay its debt have subsided and this warrants the re-rating. An upcoming site trip to Kanmantoo provides a near-term catalyst which should reinforce improvements that have been made to operations.

IOOF Holdings ((IFL)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 2/4/1

IOOF and SFG Australia ((SFW)) have proposed a all-scrip merger. From IOOF's point of view the broker sees the price as reasonable and synergy potential as significant, with the broker noting IOOF has a strong track record of extracting solid expense synergies from its acquisitions. This upside potential and IOOF's recent underperformance are enough to see the broker upgrade to Overweight. Target rises to $9.39 from $8.62.

Qantas Airways ((QAN)) upgraded to Overweight from Underweight by JP Morgan. B/H/S: 3/4/1

JP Morgan has undertaken a review of forecasts, following a recent update from the company on the cost savings and fleet rationalisation. The broker expects an underlying pre-tax loss of $134.6m for FY15 compared with former forecasts for a loss of $325.8m. FY14 expectations are essentially unchanged. JP Morgan thinks FY14 will herald a trough in earnings but does not expect any tax to be paid until FY18 nor any dividends before FY17. The rating is upgraded to Overweight from Underweight and the price target is rolled forward and raised to $1.47 from $1.22.

Regis Resources ((RRL)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 4/2/1

Given the problems that have plagued Garden Well, Regis Resources has been sold down recently. With a strong balance sheet and strong cashflow from Australia-based low-cost assets, the broker believes RRL is now oversold. It will take time to sort out Garden Well, but the market is effectively factoring in very low grades for the life of the asset. The broker suggests RRL is the cheapest gold stock under its coverage. Upgrade to Overweight, target unchanged at $2.70.

Treasury Wine Estates ((TWE)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 1/2/5

The revelation of KKR's bid at $4.70 a share suggests to Deutsche Bank that someone sees value in the stock, but the current price is well above where the broker's fundamental valuation lies, even assuming a dramatic improvement in the business. The bid is likely to provide valuation support and Deutsche Bank would also not rule out a bid from another financial group. The rating is upgraded to Hold from Sell and the target is increased to $4.70 from $3.20. The upside risk is the emergence of a higher bid while the downside risk is for no further interest.

See also TWE downgrade.

Western Areas ((WSA)) upgraded to Buy from Neutral by Citi. B/H/S: 5/2/0

Commodity analysts at Citi are now self-declared "nickel bulls" and if their predictions prove correct, investors in the sector are yet to see the true nature of the term "commodities boom". Citi continues to see lots of upside, despite the 50%-plus rally in prices year-to-date. Nickel is projected to peak at US$26,500/t in 2016. Western Areas is the stockbroker's preferred exposure to the sector in Australia. The analysts like the fact management has the ability to use cash flow to fund growth options that are earnings/NPV accretive. Upgrade to Buy from Hold. Price target jumps to $5.55 from $4.12. Both earnings and dividend estimates have received a big boost.

Downgrades

Adelaide Brighton ((ABC)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/6/1

Adelaide Brighton has provided FY14 guidance at the AGM. The company expects an impact from outages at Birkenhead while lime volumes are down 5% year on year. The company expects the first half and full year results will be similar to the prior comparative periods. Despite a reduced earnings profile Macquarie believes the company can still pay special dividends, although upside in the near term is limited. As there are no short-term catalysts and there is a risk that earnings will be flat or lower in FY15 the broker downgrades to Neutral from Outperform. The price target is lowered to $3.56 from $4.01.

Cochlear ((COH)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/3/5

Cochlear is to spend $130m on R&D – 25% more than its FY14 forecast profit, and more, as a percentage of sales, than all of the top 25 US medical device companies, the broker notes. But despite ongoing heavy R&D investment, COH has delivered zero sales growth over three years. The strategy is not working but the broker is not surprised. Innovation does little to entice new customers into an implant, the broker suggests, and today's technological improvements are more and more incremental rather than game changing. What COH really needs is an effective distribution channel to penetrate the adult segment, the broker suggests. Downgrade to Underperform. Target falls to $48 from $50.

CSR ((CSR)) downgraded to Neutral from Buy by Macquarie. B/H/S: 2/4/2

The broker has updated FX, aluminium and alumina estimates. As a result the company's aluminium division estimates are reduced in the outer years, despite the positive outlook for building products, which appears fully priced in the broker's opinion. The target is reduced to $3.63 from $3.74 and the rating is downgraded to Neutral from Outperform.

Dexus Property ((DXS)) downgrade to Neutral from Outperform by Credit Suisse. B/H/S: 2/5/0

The broker is impressed by the company's execution on Commonwealth Property. Incorporating CPA into the DXS valuation provides a neutral result, but the broker has rolled forward its asset valuations to June 2015 which provides for a DXS target increase to $1.19 from $1.16. The broker would like to see more transparency of the integration of CPA but on a 12% total return for 2014 to date, the broker believes the stock is now fully priced. Downgrade to Neutral.

Goodman Fielder ((GFF)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 0/4/2

The broker has downgraded Goodman Fielder to Underweight in the wake of the rally after the takeover bid. The risk is to the downside, the broker suggests, given the buyer has said it will not increase the offer. The GFF board may thus not accept it, the buyer could yet walk away following due diligence, FIRB could knock it back, and no one else is likely to bid, in the broker's view. Some may consider the bid opportunistic, but the broker believes it is fair. Target rises to 70c from 54c to meet the bid.

Newcrest Mining ((NCM)) downgraded to Neutral from Overweight. B/H/S: 1/3/4

Newcrest has outperformed of late on an easing in balance sheet concerns, the broker notes, but debt remains high, there is little growth outside Cadia, and Lihir needs to see significant improvement. The broker has lowered its target to $11 from $12 which still suggests upside, but given the broker sees better value elsewhere in the sector the rating is downgraded to Neutral.

Spark Infrastructure ((SKI)) downgraded to Hold from Add by CIMB, to Neutral from Overweight by JP Morgan and to Underperform from Neutral by Macquarie. B/H/S: 1/5/1

The company has taken a 14.1% interest in DUET ((DUE)), expected to be immediately accretive as it diversifies the asset base. The average price of $2.16 per security was acquired through derivative contracts. CIMB thinks investor diversification could be achieved through a direct purchase of shares and the asset base of DUET is not without risk. As a takeover does not seem to be in the company's plans the broker is unclear on the strategic merit of building this stake. The stock is now partly hinging its performance on one of its peers and CIMB has lowered the rating to Hold from Add. The play caught JP Morgan by surprise but the emergence of another M&A situation did not. Cash flow accretion from the move is modest but the broker thinks the risk/reward balance has weakened.  Spark Infrastructure is downgraded to Neutral from Overweight. JP Morgan believes there is merit in the company's ambitions to diversify the asset base, but the decision to gear up for the sake of a stake in DUET does little to improve the investment proposition. Macquarie believes the raid is well priced but not firm given the "out" option. The broker fails to see the strategic benefit to SKI, particularly if a further premium has to be paid. With the stock trading near its fair value ahead of a potential merger the broker downgrades to Underperform.

Tabcorp Holdings ((TAH)) downgraded to Neutral from Buy by Citi. B/H/S: 2/3/3

Racing Victoria has announced a new race field fee structure. Higher rates will apply from July 1. Citi lowers earnings forecasts by 2.0% for FY15 and FY16 and expects other state racing bodies will raise fees. The target is reduced to $3.60 from $3.75 because of the reductions to earnings forecasts. With this comes a downgrade to Neutral from Buy.

Treasury Wine Estates ((TWE)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/2/5

Get out while you can! That's the broker's recommendation following the Treasury Wine board's rejection of KKR's cheeky offer at $4.70. While experience suggests KKR's offer may well not be its last, at 30 times FY14 earnings the broker thinks it is fair, particularly given TWE took the opportunity to flag further downside earnings risk. Thus any offer increase is unlikely to be material, the broker believes, and any offer may be rejected by the board given it is trying to turn TWE around. The broker downgrades to Underperform on the risk KKR may withdraw just as likely as sweeten the offer. Target rises to a takeover-based $5.00 from $3.90.

See also TWE upgrade.

Woodside Petroleum ((WPL)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 1/3/3

After the investor briefing, which focused on Browse FLNG, exploration and operational efficiencies, JP Morgan has decided to downgrade Woodside to Neutral from Overweight, believing the stock has had a good run and is now fairly valued. The target is lowered to $39.37 from $39.63. While the stock has limited downside because of its solid free cash flow and yield appeal, JP Morgan thinks upside hinges on progress at Browse and exploration success, both of which are long dated.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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