Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley, Morgans 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 March 16 to Friday March 20, 2015
Total Upgrades: 9
Total Downgrades: 9
Net Ratings Breakdown: Buy 40.68%; Hold 41.53%; Sell 17.78%

It would appear price action during the week ending Friday, 20th March 2015, was characterised by disappointing out of season reports from local retailers and at the same time short covering in the wake of a more dovish than expected Federal Reserve in the USA. As expected, the first was matched by negative revisions in ratings, price targets and forecasts. The second, however, goes hand-in-hand with the observation that forecasts and targets are no longer falling for resources stocks.

No doubt, many a patient investor is keeping fingers crossed we may be witnessing a reversal in trend for resources stocks, finally!

No surprise, the table for downward adjustments to earnings estimates has Myer and OrotonGroup in the two top positions, following disappointing results releases, and Fortescue Metals on position three as the price for iron ore continues to weaken. On the other hand, Sigma Pharmaceuticals, which has been in similar position as the retailers for numerous reporting seasons in a row, managed to put together a commendable performance and has been “rewarded” for it.

For the week, which was relatively quiet in terms of broker research, FNArena registered nine upgrades in ratings and nine downgrades. iiNet and Myer were responsible for two changes each. TPG’s offer for iiNet triggered two upgrades while Myer’s larger-than-expected loss triggered two downgrades, plus a whole lot of questions about the company’s compliance with ASX rules to keep the market informed on important developments at all times.

Upgrades

BHP Billiton ((BHP)) upgraded to Buy from Neutral by Citi. B/H/S: 4/4/0

Citi has upgraded to Buy from Neutral following share price weakness and on the estimate that investors looking for yield can have 5.5% if they buy now, or 6% if they wait until South32 has become a separately listed entity, which should happen by late May/June. Price target remains $35. Making this story even more about dividends, Citi believes South32 post separation can become a high yielding stock in its own right, estimating a yield of circa 6% for the spin-off.

BlueScope Steel ((BSL)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 7/1/0

Macquarie has updated FX forecasts, assuming a lower Australian dollar and euro versus the US dollar over the next couple of years. The broker has also made material cuts to near-term iron ore price forecasts. In the steel sector, BlueScope is the largest beneficiary of the changes to forecasts and the broker expects steel spreads to improve. Macquarie upgrades to Outperform from Neutral. Target is raised to $6.80 from $5.40.

iiNet ((IIN)) upgraded to Outperform from Neutral by Credit Suisse and to Equal-weight from Underweight by Morgan Stanley. B/H/S: 3/4/1

TPG Telecom ((TPM)) has launched a takeover offer for iiNet at $8.60 a share. Credit Suisse notes iiNet may declare a special dividend to pay out excess franking credits to shareholders. The broker upgrades iiNet to Outperform from Neutral on the basis that iiNet is trading below terms and offers a 16% annualised return through to deal completion. Credit Suisse believes there is limited risk of the deal being blocked on competition grounds. Target is lifted to $9.82 from $7.00. Morgan Stanley raises the target price to $8.60 from $6.00 to reflect the bid price. Rating is upgraded to Equal-weight from Underweight. Industry view is In-Line. The broker does not believe the ACCC is likely to block the bid and notes the new company would have a 27% retail broadband share, well behind the leader Telstra ((TLS)) which has 45%.

See also IIN downgrade.

Mincor Resources ((MCR)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/0/0

The broker has lowered its A$ forecasts which leads to earnings upgrades for nickel miners. The broker is bullish nickel and bases its valuations upon this stance, acknowledging that valuations would be materially different were the broker to assume current spot nickel pricing. Mincor’s target rises to 80c from 75c Upgrade to Outperform.

OZ Minerals ((OZL)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 5/3/0

The broker has lowered its A$ forecasts which leads to earnings upgrades for copper miners. The broker is bullish copper and bases its valuations upon this stance, acknowledging that valuations would be materially different were the broker to assume current spot copper pricing. OZ Minerals’ target rises to $5.30 from $4.30, upgrade to Outperform.

Regis Resources ((RRL)) upgraded to Buy, High Risk from Neutral by Citi. B/H/S: 4/3/1

First half results were an improvement on the flood and grade affected second half of FY14. While poor weather and lower grades have returned to vex investors in the March quarter the broker considers the share price has fallen too far. Citi upgrades to Buy, High Risk from Neutral, High Risk based on valuation, retaining the high risk rating because of ongoing operational difficulties. Target is $1.79.

Senex Energy ((SXY)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 4/2/0

After a volatile period for mid cap oil producers the stock is down almost 20%. At the current price the broker can envisage the value potential in Senex, as its large gas resources may be called on to supply the east coast market. The broker upgrades to Neutral from Underperform. That said, Credit Suisse is still uncertain about the economics of both Hornet and Surat CSG and the capability of the balance sheet to deal with this uncertainty. Target is raised to 35c from 32c.

Washington H S Pattinson ((SOL)) upgraded to Add from Hold by Morgans. B/H/S: 1/0/0

The broker does not believe the share price reflects the value being ascribed to TPG Telecom ((TPM)) following that company’s bid for iiNet ((IIN)). Soul Pattinson holds a 27% stake in TPG. While normal transaction risks exist, the TPG share price appears to suggest it will be successful. As such, Soul Pattinson should benefit. Morgans upgrades the rating to Add from Hold and raises the target to $16.08 from $14.25.

Downgrades

Affinity Education ((AFJ)) downgraded to Hold from Add by Morgans. B/H/S: 0/1/0

The timing around the company’s $75m raising to acquire $25m in acquisitions and pay back $45m in debt surprised the broker. FY15 earnings per share will be diluted by 13%. Morgans finds it strange that such a large equity raising was needed given it is dilutive and expensive versus debt alternatives. The rating is downgraded to Hold from Add and the target is reduced to $1.34 from $1.80.

BC Iron ((BCI)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/1/2

The broker has cut its iron ore price forecasts which affects material earnings downgrades for junior iron ore producers. However, the downgrades are offset by cuts to the broker’s A$ forecasts. BC Iron is downgraded to Underperform. Target falls to 40c from 53c.

Dulux ((DLX)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/6/1

The company will construct a new paint factory in Melbourne and a distribution centre in Sydney. The investment should be positive for valuation once fully operational, in Credit Suisse’s view. The relocating of the water-based paint manufacture to Melbourne, away from the risk of flood and fire interruptions in Queensland, is considered a good measure. Despite raising the target to $6.70 from $6.20, Credit Suisse downgrades to Neutral from Outperform, hastening to add this is not a reflection of the investment nor a reflection of asset quality and management’s track record. It is simply that, following a period of outperformance, the valuation gap has closed with the good news reflected in the price.

iiNet ((IIN)) downgraded to Hold from Add by Morgans. B/H/S: 3/4/1

Morgans only recently upgraded to Add but has now pulled the rating back to Hold following the bid by TPG Telecom ((TPM)) at $8.60 a share. The broker now sets the target at $8.60, from $7.52. The broker notes iiNet board has the potential to distribute retained profits as a special dividend and the offer price would go down by whatever the cash component is.

See also IIN upgrade.

Kathmandu ((KMD)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/4/0

Credit Suisse will be looking for clarification on trading conditions over Christmas when the company reports its first half results on March 24. The broker is also interested in the strategic plans around store roll-outs, particularly given sales growth is not corresponding with the increases in rent and other variable costs. Credit Suisse takes the opportunity to downgrade to Neutral from Outperform in light of the recent rally and retains a target of NZ$1.80.

Myer ((MYR)) downgraded to Sell from Hold by Deutsche Bank and to Sell from Neutral by Citi. B/H/S: 1/3/4

First half results were below expectations as was guidance. Deutsche Bank believes the chairman needs to make substantial investment to have any chance of addressing the issues stemming from stagnant sales and a growing cost base. The broker downgrades to Sell from Hold, noting the latest earnings downgrade makes for limited head room to address the issues. Management could avoid an equity raising by adding less cost to the business but this will not fix the underlying problem, in Deutsche Bank’s view. Target is lowered to $1.10 from $1.60.

Citi analysts have pulled back their rating to Sell from Neutral, while cutting the price target to $1.25 from $1.60. EPS forecast for FY15 has been reduced by 15% which positions Citi below company guidance with the analysts explaining they anticipate less sales growth. Elsewhere in the report the analysts state they see “a good chance” Myer will be forced to raise fresh capital. This is yet another reason to downgrade to Sell.

Under a worst case scenario, explain the analysts, their valuation would drop to no more than $0.92. The strategic review by new CEO Richard Umbers may be determined by the end of July 2015. Citi analysts see it as a key catalyst event.

TPG Telecom ((TPM)) downgraded to Sell from Neutral by Citi. B/H/S: 2/2/2

TPG’s offer for iiNet ((IIN)) has strong strategic logic, in the broker’s view, and potential earnings accretion of 14% in year one. Still, the shares are priced for perfection while the deal is not yet completed, so the broker suggests it is better taking money off the table at current prices and downgrades to Sell from Neutral. Target is raised to $8.20 from $7.05.

Wesfarmers ((WES)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 0/5/3

Morgan Stanley is downgrading to Equal-weight from Overweight on the back of slower growth at Coles. While its strategies are considered more sustainable than rival Woolworths ((WOW)) the broker contends it is not immune to the weaker industry outlook. The broker now forecasts a flat 5.4% earnings margin for Coles. Target is lowered to $43 from $48 and the industry view remains In-Line.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=Citi,CreditSuisse,DeutscheBank,JPMorgan,Macquarie,MorganStanley,Morgans,UBS&b0=83,77,91,74,135,70,167,98&h0=102,113,136,108,107,60,153,125&s0=50,59,19,50,49,40,22,43″ style=”border:1px solid #000000″ />

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