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Weekly Recommendation, Target Price, Earnings Forecast Changes

Australia | Sep 08 2014

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

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 APA GROUP Neutral Buy BA-Merrill Lynch
2 BILLABONG INTERNATIONAL LIMITED Sell Neutral Deutsche Bank
3 HARVEY NORMAN HOLDINGS LIMITED Neutral Buy UBS
4 INDEPENDENCE GROUP NL Neutral Buy Deutsche Bank
5 PANORAMIC RESOURCES LIMITED Neutral Buy UBS
6 PERPETUAL LIMITED Neutral Buy Deutsche Bank
7 RECALL HOLDINGS LIMITED Neutral Buy JP Morgan
8 SAI GLOBAL LIMITED Sell Neutral CIMB Securities
9 TAP OIL LIMITED Neutral Buy UBS
10 TRANSFIELD SERVICES LIMITED Sell Neutral Credit Suisse
11 TRANSFIELD SERVICES LIMITED Neutral Buy Deutsche Bank
Downgrade
12 ALTONA MINING LIMITED Buy Neutral Macquarie
13 CARNARVON PETROLEUM LIMITED Buy Neutral Macquarie
14 DUET GROUP Buy Neutral BA-Merrill Lynch
15 ORICA LIMITED Neutral Sell UBS
16 TIGER RESOURCES LIMITED Buy Neutral UBS
17 TRANSFIELD SERVICES LIMITED Neutral Sell JP Morgan
18 WOOLWORTHS LIMITED Buy Sell JP Morgan
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous Rating New Rating Change Recs
1 PPT PERPETUAL LIMITED 25.0% 63.0% 38.0% 8
2 MQA MACQUARIE ATLAS ROADS GROUP 33.0% 67.0% 34.0% 6
3 PAN PANORAMIC RESOURCES LIMITED 33.0% 67.0% 34.0% 3
4 SDF STEADFAST GROUP LIMITED 33.0% 67.0% 34.0% 3
5 VED VEDA GROUP LIMITED 50.0% 75.0% 25.0% 4
6 PGH PACT GROUP HOLDINGS LTD 80.0% 100.0% 20.0% 5
7 EVN EVOLUTION MINING LIMITED 20.0% 40.0% 20.0% 5
8 AIZ AIR NEW ZEALAND LIMITED 33.0% 50.0% 17.0% 4
9 IGO INDEPENDENCE GROUP NL 14.0% 29.0% 15.0% 7
10 HVN HARVEY NORMAN HOLDINGS LIMITED 25.0% 38.0% 13.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous Rating New Rating Change Recs
1 ATM.NZ The a2 Milk Company Limited 50.0% 33.0% – 17.0% 3
2 CHC CHARTER HALL GROUP 57.0% 43.0% – 14.0% 7
3 ORI ORICA LIMITED 38.0% 25.0% – 13.0% 8
4 BHP BHP BILLITON LIMITED 38.0% 25.0% – 13.0% 8
5 RHC RAMSAY HEALTH CARE 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 QAN QANTAS AIRWAYS LIMITED 1.309 1.453 11.00% 8
2 HVN HARVEY NORMAN HOLDINGS LIMITED 3.269 3.584 9.64% 8
3 RHC RAMSAY HEALTH CARE LIMITED 47.751 51.209 7.24% 8
4 MQA MACQUARIE ATLAS ROADS GROUP 3.253 3.400 4.52% 6
5 CHC CHARTER HALL GROUP 4.353 4.439 1.98% 7
6 EVN EVOLUTION MINING LIMITED 0.904 0.914 1.11% 5
7 BHP BHP BILLITON LIMITED 41.375 41.663 0.70% 8
8 SDF STEADFAST GROUP LIMITED 1.830 1.837 0.38% 3

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous Target New Target Change Recs
1 PPT PERPETUAL LIMITED 51.345 50.420 – 1.80% 8
2 ORI ORICA LIMITED 23.506 23.235 – 1.15% 8
3 IGO INDEPENDENCE GROUP NL 4.864 4.821 – 0.88% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous EF New EF Change Recs
1 KCN KINGSGATE CONSOLIDATED LIMITED 0.467 4.133 785.01% 3
2 IGO INDEPENDENCE GROUP NL 27.047 40.754 50.68% 7
3 GRR GRANGE RESOURCES LIMITED 1.775 2.175 22.54% 3
4 SFR SANDFIRE RESOURCES NL 53.280 64.991 21.98% 8
5 HVN HARVEY NORMAN HOLDINGS LIMITED 19.029 22.995 20.84% 8
6 RHC RAMSAY HEALTH CARE LIMITED 162.434 194.808 19.93% 8
7 PPC PEET & COMPANY LIMITED 7.100 8.350 17.61% 4
8 PPT PERPETUAL LIMITED 243.875 274.438 12.53% 8
9 NEC NINE ENTERTAINMENT CO. HOLDINGS LIMITED 15.684 17.581 12.10% 8
10 AUB AUSTBROKERS HOLDINGS LIMITED 59.325 63.725 7.42% 4

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous EF New EF Change Recs
1 AGO ATLAS IRON LIMITED 1.850 – 2.036 – 210.05% 8
2 EVN EVOLUTION MINING LIMITED 8.360 6.575 – 21.35% 5
3 PRU PERSEUS MINING LIMITED 2.944 2.373 – 19.40% 7
4 MQA MACQUARIE ATLAS ROADS GROUP 12.133 10.133 – 16.48% 6
5 BDR BEADELL RESOURCES LIMITED 11.980 11.580 – 3.34% 4
6 IPL INCITEC PIVOT LIMITED 19.850 19.213 – 3.21% 8
7 ENE ENERGY DEVELOPMENTS LIMITED 36.204 35.524 – 1.88% 5
8 TOX TOX FREE SOLUTIONS LIMITED 19.100 18.850 – 1.31% 4
9 APN APN NEWS & MEDIA LIMITED 8.074 7.974 – 1.24% 6
10 AGI AINSWORTH GAME TECHNOLOGY LIMITED 21.700 21.433 – 1.23% 3
 

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CHARTS

APA CVN HVN IGO ORI PAN PPT TAP WES WOW