Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BCI MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: BCI

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley 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 February 2 to Friday February 6, 2015
Total Upgrades: 11
Total Downgrades: 23
Net Ratings Breakdown: Buy 44.20%; Hold 38.55%; Sell 17.25%

It should be no surprise that broker downgrades are now outnumbering upgrades by a wide margin. The share market has been on a tear of late and there's not necessarily a sign this strong upward momentum is going to run into a brick wall anytime soon.

For the week ending Friday, 6 February 2015, FNArena registered no less than 23 downgrades in ratings while only 11 ratings were upgraded. Echo Entertainment proved to be the biggest positive surprise, leading to multiple upgrades plus positive revisions to price targets and profit forecasts. On the negative side we saw multiple downgrades in ratings for REA Group, Newcrest Mining and Tabcorp Holdings. All three companies also delivered a positive surprise, but analysts are becoming less comfortable with specific valuations.

There's more supportive news from price targets where hardly any changes were registered and only two of those -Kathmandu and MMA Offshore (formerly Mermaid Marine)- really took some big hits. Resources companies continue to dominate the table for negative revisions to profit forecasts, but this can hardly be a surprise. The positive side is dominated by companies that have updated the market, including Tabcorp, ERM Power, Energy Developments, Australian Pharmaceutical etc, and this too is one observation that is supportive for the share market.

Upgrades

APN News & Media ((APN)) upgraded to Neutral from Sell by Citi. B/H/S: 2/4/1

APN News & Media has essentially turned itself into a radio operator, plus some other assets, argue analysts at Citi. Yes, of course, the legacy print media still represent downside risks, but that's all in the share price, they believe. Equally important, their valuation is now 90% based around the radio assets. APN recently acquired Perth 96FM and Citi suggests here is a case of credible earnings upside potential. Upgrade to Neutral from Sell. On their own observation, the analysts' optimism regarding revenues from radio has now placed them around 10% above FY15 market consensus. Citi predicts the return of dividends in FY16.

BC Iron ((BCI)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/4/0

December quarter production was better than Macquarie expected with cost reductions starting to have an impact. The company will assess the carrying value of its assets and the broker expects an impairment charge of $100m is possible given the decline in iron ore prices. Macquarie is upgrading to Neutral from Underperform. The broker expects the company to retain positive cash flow for at least the next 18 months but the sustainability beyond FY16 remains questionable given iron ore price expectations. Target is raised to 50c from 40c.

Burson Group ((BAP)) upgraded to Add from Hold by Morgans. B/H/S: 2/1/0

Solid growth in the first half should be accompanied by acquisitions, store roll out and clear margin upside in the broker's view. Morgans believes Burson Group is better placed than most in a lower Australian dollar environment to push through price increases.With the solid growth profile on offer the broker upgrades the rating to Add from Hold and the target to $2.60 from $2.38.

See also BAP downgrade.

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

Macquarie has upgraded Carnarvon Petroleum to Outperform from Neutral. The decision was embedded deep inside a general sector report and forecasts have been left untouched. The price target has remained unchanged at $0.24. Referring to the sector generally, Macquarie notes the sharp sell-off in Brent prices has hit the mid-cap sector particularly hard, but valuation support is starting to emerge assuming oil prices recover from current levels, which is the broker's base case scenario looking forward.

Echo Entertainment ((EGP)) upgraded to Outperform from Neutral by Credit Suisse, to Equal-weight from Underweight by Morgan Stanley and to Buy from Neutral by Citi. B/H/S: 5/3/0

Credit Suisse saw enough in the reported half-year numbers to turn more positive on the outlook. Rating upgraded to Outperform from Neutral. The analysts observe it increasingly looks like liberalisation of QLD slot machine regulations is stimulating solid momentum for the industry and Echo is benefiting big time. Management did raise some caution regarding competition for VIP gamblers, but nothing to stop a more supportive view. Morgan Stanley is now more comfortable with the risk/return in Brisbane although concerned about market share risk in Sydney in 2019. The broker now considers the company well placed to generate value-accretive returns in Brisbane and removes its longstanding bearish view. Hence the rating is upgraded to Equal-weight from Underweight. First half results were strong and this confirms the success of the company's domestic strategy, in Citi's view. Moreover, VIP profitability was understated by one offs. The broker increases earnings forecasts by 13-23% for FY15-17. Rating is upgraded to Buy from Neutral.

Japara Healthcare ((JHC)) upgraded to Add from Hold by Morgans. B/H/S: 2/2/0

Ahead of the first half results Morgans is taking the opportunity to upgrade to Add from Hold. The health care sector is attracting investor attention, reflecting an interest in sustainable and defensive earnings. The recent share price weakness creates the opportunity for the upgrade as Morgans believes the stock is trading too far below its peers.

Macquarie Group ((MQG)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 5/2/0

Further analysis by analysts at Morgan Stanley suggests there is a strong case for further re-rating of the shares, also because there appears to remain further upside to current consensus expectations. Morgan Stanley has decided not to wait for the market catch-up and upgrades to Overweight from Equal-Weight. Price target jumps to $76.00 from $62.50. The analysts report sensitivity analysis shows the three most profitable divisions (Funds, CAF, FICC) are even more leveraged to a weaker AUD than the broader group.

MMA Offshore ((MRM)) upgraded to Buy from Neutral by UBS. B/H/S: 3/3/0

UBS has upgraded to Buy from Neutral according to an overview of changes made to stock ratings and forecasts. However, to date no specific company report appears to have been released. Price target has fallen to $1.23 from $2.40. Earnings forecasts have been reduced, in particular for FY16 and FY17.

Myer ((MYR)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 2/4/2

Morgan Stanley believes Myer's shares are too cheap. Refurbishment and new store activity should drive gross margins and offset the fall in the Australian dollar. Morgan Stanley expects balance sheet concerns will be allayed and a re-rating should eventuate, upgrading to Overweight from Equal-weight and raising the target to $2.50 from $1.80.

Downgrades

Boral ((BLD)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 3/5/0

Residential construction remains positive across Australasia and the US which should underpin reasonable growth in the sector over the next five years, in JP Morgan's opinion. Boral has generated a 27% total return over the last year and is now trading in line with the target price of $5.85, revised up from $5.60. Hence, JP Morgan downgrades to Neutral from Overweight.

Brambles ((BXB)) downgraded to Hold from Add by Morgans. B/H/S: 4/3/0

Morgans analysts observe Brambles shares have performed well in past months, supported by a weakening AUD. They also believe this is now reflected in the share price. Any disappointment in the upcoming interim report might trigger a pull-back, they warn. Preferring to remain on the cautious side, Morgans has decided to pull back the rating to Hold from Add. Updating  modeling for FX triggers a minor downgrade to profits, but it also pushes up the price target to $11.15 from $10.62.

Burson Group ((BAP)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 2/1/0

Despite the fact Morgan Stanley anticipates a robust interim result with bias towards upgraded guidance vis-a-vis IPO prospectus, the stockbroker nonetheless has a problem with the stock's valuation, hence the downgrade to Equal-Weight from Overweight. The stockbroker is projecting a steady climbing share price, in line with the company's growth profile from here onwards. The company offers defensive growth, but no catalysts, suggest the analysts.

See also BAP upgrade.

Charter Hall Retail ((CQR)) downgraded to Sell from Neutral by Citi. B/H/S: 0/1/6

Citi notes investor demand for Australian shopping centres is rising but some will benefit more than others. The broker finds pricing in the sector is increasingly demanding. Citi pulls back its rating on Charter Hall Retail to Sell from Neutral. Target is raised to $4.06 from $3.83.

Federation Centres ((FDC)) downgraded to Neutral from Buy by Citi. B/H/S: 2/2/2

Citi notes investor demand for Australian shopping centres is rising but some will benefit more than others. The broker finds pricing in the sector is increasingly demanding. The broker's rating on Federation Centres is downgraded to Neutral from Buy, with the stock having returned over 70% in the last 2.5 years.

Fletcher Building ((FBU)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 4/0/4

Residential construction remains positive across Australasia and the US which should underpin reasonable growth in the sector over the next five years, in JP Morgan's opinion. Fletcher Building still trades at a modest premium to the broker's target of NZ$8.30, reduced from NZ$8.40, so the rating is downgraded to a sector-relative Underweight from Neutral.

Kathmandu ((KMD)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 2/3/0

The first half update signals a small loss is imminent for the half, which Macquarie takes to mean there was no improvement in the post Christmas sales. This appears to be the worst half year performance since the stock listed and the broker expects it will continue to trade with a high degree of uncertainty. Macquarie downgrades to Neutral from Outperform and expects it will be into FY16 before recent currency movements are reflected in costs, given hedging. Target is lowered to $1.55 from $2.80.

Navitas ((NVT)) downgraded to Reduce from Hold by Morgans. B/H/S: 1/5/1

Morgans analysts have been negatively surprised a few times lately when it comes to Navitas and its growth outlook. The interim result again surprised to the downside, also because it came with the news of Navitas having lost the SIBT city campus contract. The broker believes this is a sign of competition increasing. One additional concern is that Navitas' balance sheet allows for more acquisitions, but the analysts suggest such announcement right now may well be received negatively by investors. The stockbroker retains a supportive view on the company, longer term, bur for now has decided to downgrade to Reduce from Hold.

Newcrest Mining ((NCM)) downgraded to Sell from Hold by Deutsche Bank and to Hold from Add by Morgans. B/H/S: 1/3/4

December quarter was broadly in line with Deutsche Bank's forecasts, driven by Cadia and Telfer which both benefitted from a lower Australian dollar. Lihir remains problematic and the broker notes issues at Hidden Valley and Gosowong. Newcrest retains leverage to a weaker Australian dollar but Deutsche Bank highlights the weight of US dollar debt. That said, the broker downgrades to Sell from Hold on valuation. Cadia Valley and Telfer have driven an upgrade to production guidance but Morgans is not completely convinced, noting costs in Australian dollar terms have increased. The broker expects the company will meet FY15 guidance and acknowledges progress in restoring investor confidence. The target is raised to $14.40 from $13.00 but the rating is downgraded to Hold from Add as a result of share price appreciation.

Nufarm ((NUF)) downgraded to Underperform from Outperform by Credit Suisse, to Neutral from Outperform by Macquarie and to Hold from Buy by Deutsche Bank. B/H/S: 1/5/1

Credit Suisse downgrades two notches to Underperform from Outperform as neither a weaker Australian dollar nor an improvement in Australian earnings prospects warrant the recent share price rally. The broker no longer finds valuation appealing at the current price and the substantial discount to peers has diminished. Australian demand may be improving but it is still early days. Nufarm's long serving CEO is retiring, leaving the company in better shape than it was a few years ago, Macquarie suggests. The departure will come as no shock after 15 years at the helm. The broker downgrades to Neutral on transition uncertainty, also citing the solid run the shares have had of late. Deutsche Bank views the planned rationalisation of the European manufacturing footprint to be a positive. Also the share price has benefitted from recent rainfall in key growing regions and an improvement in soft commodity prices as well as the Australian dollar depreciation. All are now adequately factored in and the broker decides time to downgrade to Hold from Buy.

Orora ((ORA)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 2/4/1

JP Morgan is downgrading to Neutral from Overweight. The broker considers the risk/return balanced, while a falling Australian dollar offers potential for improved pricing in the domestic market. Target is raised to $2.00. In the near term earnings momentum is expected to slow as a result of a step up in gas costs ,the furnace turnaround and repeal of the carbon tax. This makes the broker more cautious.

REA Group ((REA)) downgraded to Hold from Add by Morgans, to Neutral from Outperform by Credit Suisse, to Underperform from Neutral by Macquarie and to Neutral from Buy by UBS. B/H/S: 3/4/1

The analysts at Morgans believe there's more upside potential for the shares, but not enough to warrant an Add rating, hence the downgrade. The analysts made the effort to highlight they remain positive on the stock's long term prospects.They also believe current PE multiples are high, but not outrageously so. First half results were above Credit Suisse's forecasts. Revenue growth accelerated, driven by an increased uptake in depth products. The broker expects this story to continue as the company increases its share of property transactions online but considers a lot of growth is priced into the stock. Rating is downgraded to Neutral from Outperform. Increased costs reflect marketing and investment in new product pipelines, and international investments should kick in down the track. Macquarie thus sees ongoing longer term growth. But on current pricing, REA would need to generate five years of 20% compound growth before it could provide a 5% yield to investors, the broker calculates. Too rich. Downgrade to Underperform. UBS maintains FY15-18 estimates but reduces earnings per share forecasts to factor in increased depreciation & amortisation from higher capex. The broker downgrades to Neutral from Buy on the outperformance of the share price but the stock remains a preferred online play, albeit fully valued.

Southern Cross Media ((SXL)) downgraded to Neutral from Buy by Citi. B/H/S: 2/4/1

The trend is not Metro Radio's friend at the moment and Citi analysts have decided to lower their ad revenues forecasts. The analysts report their channel checks with media buyers indicate SXL Metro Radio has continued to struggle. Balance sheet constraints remain and competition is heating up from APN News & Media ((APN)), point out the analysts. Target price rises to $1.04 from $1.00 but rating downgraded to Neutral from Buy.

Tabcorp ((TAH)) downgraded to Sell from Neutral by Citi and to Neutral from Outperform by Credit Suisse. B/H/S: 2/3/3

First half results were strong but the decision to release franking credits through a 30c special dividend stole the show in Citi's view. To fund this, the company will undertake a $236m equity raising. The choice to raise equity suggests to the broker that the board is being conservative about overextending debt or maybe intends to use debt for future acquisitions. The broker believes, operationally, Tabcorp is executing successfully but valuation appears stretched. Hence, a downgrade to Sell from Neutral. Credit Suisse would have preferred that Tabcorp fund its 30c special dividend with debt rather than an equity raising. The broker downgrades to Neutral from Outperform because of share price strength. The dividend/capital raising does not change the value of the company but there are now more shares participating.

Tiger Resources ((TGS)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 1/0/1

December quarter production was in line but costs were well above what the broker expected. Phase 2 appears unfundable from here, in Macquarie's view. Macquarie downgrades earnings forecasts for FY15. Forecasts for FY16 rise 20% as the broker now assumes an improvement in the availability of grid power. The broker still believes Kipoi copper is an attractive project but its development is jeopardised by the company's balance sheet. Rating is downgraded to Underperform from Outperform and the target is 3c.

Toll Holdings ((TOL)) downgraded to Reduce from Hold by Morgans. B/H/S: 2/2/4

Morgans believes the risks are to the downside as far as the upcoming interim results are concerned. In combination with the observation the shares are trading above their long-term average PE, a downgrade to Reduce seems apt. Operating conditions are still challenging, suggest the analysts. This is why they suspect a disappointment might be forthcoming. Updating the model leads to an increase in the price target to $5.67 from $5.27. 
 

Total Recommendations	Recommendation Changes
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