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 September 1 to Friday September 5, 2014
Total Upgrades: 11
Total Downgrades: 7
Net Ratings Breakdown: Buy 38.12%; Hold 43.80%; Sell 18.08%

By Rudi Filapek-Vandyck, Editor FNArena

The first week after the official reporting season in Australia seems to have provided more positive news than negative with FNArena registering 11 upgrades for individual stocks against seven downgrades. Looking closer into the details doesn't reveal a clear underlying theme. The turnaround in ratings is more likely linked to the fact that averages have blown out to more than 18% Sell ratings (out of all ratings for individual stocks) and close to 44% Neutral ratings which only leaves 38% in Buy ratings. Historically, this is a low number.

Only three of the eight stockbrokers monitored daily by FNArena still carry a bias towards more Buy ratings for stocks under coverage. For the other five, Neutral ratings command the bulk these days.

There is unequivocal positive news emanating from adjustments to price targets and profit forecasts. Negative adjustments to price targets hardly registered during the week while industrial companies such as Qantas, Harvey Norman, Ramsay Healthcare and Macquarie Atlas enjoyed noticeably positive adjustments. The picture looks even more supportive for profit estimates where smaller mining companies are responsible for the bulk in reductions, while changes on the positive side are larger and wider spread. The group of companies enjoying a lift in forecasts for the week includes Peet, Perpetual, Nine Entertainment and Austbrokers on top of several mining companies such as Kingsgate and Independence Group.

All in all, it appears changes in broker views and expectations remain supportive for the Australian share market.

Upgrades

APA ((APA)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 3/2/2

Merrills is upgrading to Buy from Neutral. Target is raised to $8.40 from $7.60. Despite the share price increase since March the broker considers the stock well placed to be the top performer in its category. Cash flow coverage of distributions leaves plenty of head room for growth.

Billabong International ((BBG)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/2/0

The return to like-for-like sales growth in Asia Pacific and Europe pleased the broker. The Americas remain tough and gross margins weakened considerably in the second half. At current levels the broker believes a turnaround is being priced in. The rating is upgraded to Hold from Sell on valuation. Target is raised to 50c from 45c.

Harvey Norman ((HVN)) upgraded to Buy from Neutral by UBS. B/H/S: 4/3/1

FY14 results were well ahead of UBS estimates. Australian franchise stood out but New Zealand was also strong. UBS had made material upgrades to earnings forecasts, raising FY15 estimates by 11% and FY16 by 13%. Still, only a modest recovery is assumed in franchisee margins. The lift in the second half dividend was signal for the broker that the board is more confident about returning cash, as well as franking, to shareholders. Rating is upgraded to Buy from Neutral. Target is lifted to $3.80 from $3.20.

Independence Group ((IGO)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 2/5/0

FY14 results were pre-released. Deutsche Bank expects $113m in free cash flow in FY15 after a $40m exploration program focusing on Tropicana, Flying Spur and extensions at Long Nickel. With the recent share price decline, the broker upgrades to Buy from Hold. Target is steady at $4.95.

Panoramic Resources ((PAN)) upgraded to Buy from Neutral by UBS. B/H/S: 2/1/0

Panoramic's loss was in line with the broker's expectations. An improvement in year-on-year earnings led to a 2c per share dividend. The company has reiterated FY15 production guidance. UBS upgrades to Buy from Neutral based on valuation and a pull back in the share price. The significant production profile means Panoramic has strong leverage to any nickel price movements. Target is steady at $1.00.

Perpetual ((PPT)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 5/3/0

FY14 underlying profit fell short of the broker's expectations. Operationally, Deutsche Bank believes Perpetual is in good shape. Revenue opportunities look brighter and net flows are improving steadily. Earnings forecasts are reduced 6-7% for FY15-16, largely because of the global equities initiative. The broker upgrades to Buy from Hold and lowers the target to $49.90 from $51.25.

Recall ((REC)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 1/5/1

JP Morgan wonders whether Recall can follow its largest global competitor, Iron Mountain, and convert to a real estate investment trust. Iron Mountain has subsequently sustained multiple re-rating in valuation/earnings. JP Morgan believes the physical document storage industry faces structural change and the rationalisation of facilities could be complemented by following Iron Mountain's lead. The broker upgrades to Overweight from Neutral and now incorporates a small potential value uplift if the REIT option eventuates. Target is raised to $5.40 from $4.94.

SAI Global ((SAI)) upgraded to Hold from Reduce by CIMB Securities. B/H/S: 1/4/0

SAI's result was roughly in line with the broker. The focus for the market is nevertheless a potential bid for the business, which had boosted the share price. The broker had ascribed a 20% downside risk expectation were a bid not to materialise, but now that the share price has pulled back it becomes a 10% each way bet. Target rises to $4.90 from $4.89 and given the stock price correction, the broker upgrades to Hold.

Tap Oil ((TAP)) upgraded to Buy from Neutral by UBS. B/H/S: 1/1/0

First half loss was greater than UBS expected but the broker believes this is irrelevant as the company has no production. Manora development will commence production late in the current quarter. UBS envisages some residual risks in the remaining development work program but believes this is more than captured in the share price. Rating is upgraded to Buy from Neutral and the target to 75c from 65c.

Transfield Services ((TSE)) upgraded to Neutral from Underperform by Credit Suisse and to Buy from Hold by Deutsche Bank. B/H/S: 2/2/2

Transfield's FY14 report shows management is finally delivering on its promises, comment CS analysts. While the financial result was in line with expectations, CS notes some 75% of projected revenues for FY15 has already been contracted and management is dealing successfully with unprofitable contracts and margin pressure. The analysts note there are no major contracts up for renewal this year while several large contracts, such as with the Department of Immigration, will run full course this year. Ramping up of NBN volumes should have a positive impact too.

CS has increased forecasts, lifted price target to $1.90 from $1.15 and upgraded to Neutral from Underperform. On current forecasts, shareholders will see the return of dividends in FY16. Finally, the company's transformation program is starting to deliver, exclaim analysts at Deutsche Bank. They point to improving margins for the company's core operations. Despite the positive reception of Transfield's FY14 report by investors, the stockbroker continues to see value. Upgrade to Buy from Hold. Price target jumps to (wait for it) $2.11 from $1.22 prior. Estimates have increased by 26%-67% between FY15-FY18, predominantly on the back of higher expectations for Infrastructure. Deutsche Bank anticipates the return of a 10c dividend in FY16.

See also TSE downgrade.

Downgrades

Altona Mining ((AOH)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/1/0

Altona's solid result was in line with the broker. Shareholders have approved the sale of Outokumpu and 15c will be returned. AOH is now looking to find a partner for or sell its remaining asset, the Roseby copper project in Queensland, for which a positive definitive feasibility study has been conducted. The share price ran up ahead of the Outokumpu sale so in the meantime the broker has pulled back to Neutral. Target falls to 24c from 27c.

Carnarvon Petroleum ((CVN)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/1/0

Lower exploration expense meant Carnarvon's loss was not as much as the broker forecast. CVN took a loss on the sale of its Thai assets but boosted its cash balance by $50m. The share price ran up after Phoenix South provided promising drilling results, but it will take some time to confirm the resource, the broker notes. Target unchanged at 30c but a downgrade to Neutral follows for now.

DUET ((DUE)) downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 1/5/1

The broker has concluded that the existing capital and distribution structure looks tight, albeit sustainable. Merrills is downgrading to Neutral from Buy because of the heavy reliance on the distribution profile and the fact that two of the three assets do not generate enough cash to fund maintenance capex requirements. Target is $2.50.

Orica ((ORI)) downgraded to Sell from Neutral by UBS. B/H/S: 3/4/1

UBS is incorporating increasing headwinds for the Australasian explosives business into forecasts. This results in an earnings per share cut of 4-5% in FY14-16. On current multiples UBS believes the stock looks expensive relative to its cyclical industrial peers. As near-term risk/reward is skewed to the downside, given the leverage to global coal markets, the broker reduces the rating to Sell from Neutral. Target is lowered to $19.50 from $21.67.

Tiger Resources ((TGS)) downgraded to Neutral from Buy by UBS. B/H/S: 1/1/0

The company will acquire the remaining 40% interest in the Kipoi mine in the DRC for US$111m. To fund the deal the company needs to conduct a placement, an underwritten entitlement offer and enter a bridging finance facility. This means a material amount of high cost, short-term debt. The stock remains cheap relative to the broker's valuation but UBS is downgrading to Neutral from Buy, based on the increased risks. Target is lowered to 36c from 58c.

Transfield Services ((TSE)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 2/2/2

FY14 performance proved broadly in line and JP Morgan analysts note the momentum behind profits which has now pushed the share price higher. They see limits to what can be achieved in the short term (on the back of further cost cutting) plus they remain cautious, given high gearing. Operating cash flow was no less than 75% below expectations and this means gearing is higher than what the analysts had anticipated. They reduce their rating to Underweight from Neutral. Target does jump to $1.35 from $0.80.

See also TSE upgrade.

Woolworths ((WOW)) downgraded to Underweight from Overweight by JP Morgan. B/H/S: 2/2/4

Woolworths' FY14 report was in line with guidance but JP Morgan analysts found it less then inspiring. The analysts express their concern about the slowdown in Food & Liquor LFL sales growth and about the risk that strong EBIT margin expansion may not be sustainable. Rating pulled back to Underweight from Overweight. Target drops to $33.45 from $37.65. Wesfarmers ((WES)) is preferred in the sector.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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