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: 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 30 to Friday April 3, 2015
Total Upgrades: 6
Total Downgrades: 10
Net Ratings Breakdown: Buy 40.69%; Hold 41.64%; Sell 17.67%

Caltex and Slater & Gordon featured with a star performance during the Easter Friday shortened week ending on Thursday, 2nd April, 2015. Both stocks received respectively two and one recommendation upgrade, plus price targets received a nice boost on top. Caltex has become the new go-to stock for future dividend and capital management potential. Slater & Gordon has now acquired itself into the top shelf in the UK market.

For the week, FNArena registered six upgrades in ratings but ten downgrades, so the trend bias towards more downgrades in Australia thus far in 2015 remains intact.

In the slipstream of the departure from Chevron, Beach Petroleum is feeling the crunch with the company receiving two downgrades during the week. Analysts are now asking: quo vadis? PanAust, now trading on take-over premium, also received two downgrades, while the banks with Bendigo and Adelaide Bank and Westpac continue to remain prominent receivers of recommendation downgrades. Results from both Bank of Queensland and Bendigo Bank failed to impress both analysts and the market.

Miners and energy companies will soon be updating investors with their quarterly production achievements, which should be interesting given resources stocks, and their contractors, remain responsible for most of the downward adjustments in valuations/targets and in profit forecasts.

Brickworks is still enjoying positive follow-through from its better than expected financial report plus buoyant guidance, while hotel operator Mantra is also increasingly making its presence felt, equally on the positive side.

Note: three out of the eight stockbrokers are still carrying more Buy ratings than Neutral, and they remain the three brokers whose name starts with an M.

Upgrades

Caltex Australia ((CTX)) upgraded to Outperform from Neutral by Credit Suisse and to Equal-weight from Underweight by Morgan Stanley. B/H/S: 1/4/2

Chevron will sell its entire 50% stake in Caltex. Credit Suisse now believes cheap debt, in a low-growth world, makes defensive infrastructure plays like Caltex prime targets. Credit Suisse has lowered earnings forecasts by 12% for FY15 and by 8% for FY16 and FY17 but notes Caltex still trades on a 5.5% free cash flow yield. In this market this yield remains highly attractive. The broker considers its November downgrade a mistake and upgrades to Outperform from Neutral. Target is raised to $42.60 from $38.55. With further analysis on the sale of the Chevron stake, Morgan Stanley upgrades to Equal-weight from Underweight. The broker envisages more chance of a buy-back, and organic growth through acquisitions over the next 12 months. Near-term earnings are unchanged but with the Chevron exit, higher trading multiples are justified in the broker’s opinion. Target is raised to $32.40 from $25.30. Sector view is In-Line.

ERM Power ((EPW)) upgraded to Add from Hold by Morgans. B/H/S: 2/1/0

Morgans has raised earnings forecasts, factoring in operating cost leverage in the electricity sales business. The broker expects double digit earnings growth across FY15-18. The outlook, potential share price upside and a solid yield of 5.8% justify an upgrade to Add from Hold in the broker’s view. Target is lifted to $2.58 from $2.27.

Metcash ((MTS)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 1/4/3

Deutsche Bank remains concerned about the company’s grocery business, given independents are expected to shed market share while Woolworths ((WOW)) is likely to become more aggressive with pricing. Nevertheless, industry feedback suggests to the broker that independents have performed better over the last few months after a long period of underperformance. The stock’s valuation is undemanding, particularly given the prospects for its non-food divisions appear reasonable to the broker. Deutsche Bank upgrades to Hold from Sell and reduces the target to $1.50 from $2.00.

Qube Logistics ((QUB)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/3/1

Given the Moorebank Terminal in Sydney has been discussed for a decade now, the market does not ascribe any value for it in Qube’s valuation, the broker notes. Macquarie envisages a strong valuation proposition based on location and the increasing use of rail infrastructure in the logistics industry. Qube is out of favour as it’s too expensive, trading at a premium to peers Aurizon and Asciano, but this is not the case if Moorebank is factored in, the broker contends. The broker has lifted earnings forecasts to be 30% above consensus in FY17. Target rises to $3.29 from $3.00 and the broker suggests it’s time to Buy. Upgrade to Outperform.

Slater & Gordon ((SGH)) upgraded to Buy from Neutral by UBS. B/H/S: 3/0/0

Slater & Gordon has acquired Quindell’s professional services division, which operates in the UK and includes personal injury legal services business. The acquisition means the company becomes the largest UK player in personal injury with a market share of 12%. UBS maintains its investment thesis but considers the acquisition-driven growth opportunity has diminished and organic growth must become the driver. Rating is upgraded to Buy from Neutral and the target to $8.83 from $7.45.

Downgrades

Beach Energy ((BPT)) downgraded to Neutral from Outperform by Macquarie and to Underperform from Neutral by Credit Suisse. B/H/S: 0/2/3

Chevron has announced it will not participate in stage 2 of the NTNG project, meaning Beach reverts to 100% ownership. Beach will spend limited capital on the project until another partner is found. The Chevron exit means Beach is largely devoid of near-term catalysts, the broker notes, and with a new CEO it may be some months before any new strategies are announced. Beach may now seem a more attractive takeover target, but then the broker suspects Beach will more likely be an acquirer rather than a target. Target falls to $1.20 from $1.25 and rating pulled back to Neutral. Credit Suisse believes, without near-term deal upside from unconventional plays, the story is tougher for Beach in a low-priced oil environment. The broker downgrades to Underperform from Neutral. A risk to this view is a second farm-in to the project. Target is lowered to $1.00 from $1.07.

Bendigo & Adelaide ((BEN)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 1/4/3

Downward pressure on margins and reduced scope for acquisitions signal a downgrade to Underweight from Equal-weight to Morgan Stanley. The broker observes Bendigo’s business mix is more sensitive to margins than other Australian banks. With advanced accreditation behind schedule and bank capital requirements in a state of flux, Morgan Stanley envisages little scope for capital relief in the near term. Price target is lowered to $11.00 from $12.40.

Navitas ((NVT)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 1/4/2

First semester enrolments disappointed the broker, as growth of 3.0% represented a significant slowdown from the 7.0% growth in semester three of 2014. Credit Suisse had previously not factored in any impact from the forthcoming loss of the SIBT contract in 2016 but it appears some withdrawals have been brought forward. The broker suspects guidance is beginning to look out of reach, although the company reiterated its earnings forecasts for FY15. Credit Suisse reduces FY15-17 earnings estimates by 3-10% and downgrades to Underperform from Neutral. Target is lowered to $4.60 from $5.10.

PanAust ((PNA)) downgraded to Neutral from Outperform by Macquarie and to Equal-weight from Overweight by Morgan Stanley. B/H/S: 5/3/0

It’s been a long time coming, but finally PanAust’s largest shareholder, Guangdong Asset Management, has made an unconditional bid for the balance of the company at $1.71per share. This represents a zero premium, compared to the previous 2014 offer of $2.30 which represented a 46% premium, Macquarie notes. But the copper price was much stronger then, and the broker believes this unconditional bid has a greater chance of getting over the line, with a low chance of a counter-offer. PanAust is yet to respond, but the broker has pulled back its rating to Neutral. Target rises the extra cent to $1.71. Morgan Stanley envisages the potential for a small bid rise to its target of $1.85 but acknowledges there is no certainty. Given this view the broker downgrades to Equal-weight from Overweight, maintaining some exposure for any bid increase. Morgan Stanley suspects the board may try to push the price higher, given the opportunistic nature of the bid, but also expects some reluctance to push too hard, given the outcome of last year’s process. Sector view is In-Line.

Tissue Therapies ((TIS)) downgraded to Hold from Add by Morgans. B/H/S:0/1/0

The company has been advised that additional data is required before VitroGro can be approved for sale, creating a further delay in a long drawn out approval process. With the timing of approval now hard to predict Morgans has downgraded to Hold from Add. Target is reduced to 13c from 44c.

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

First half results were in line with the broker’s expectations. The immediate focus in Morgans’ view remains on the M&A activity in the telco sector. The continued improvement in the building products contribution and a bottoming of coal contributions are of significance as well. Morgans downgrades to Hold from Add, as the arbitrage between SOL and TPG Telecom’s ((TPM)) share price continues to close. The broker remains attracted to the progressive dividend policy and strong balance sheet. Target is reduced to $16.01 from $16.08.

Westpac ((WBC)) downgraded to Neutral from Buy by UBS. B/H/S: 1/5/2

Although banks appear expensive in absolute terms, relative to low bond yields and term deposit rates they appear relatively attractive. The broker considers the banks still fairly priced relative to industrials. Banks may remain expensive or even rally further, provided earnings fundamentals remain intact, but they remain highly sensitive to any change in the macro environment, in UBS’ opinion. The broker downgrades Westpac to Neutral from Buy, given movement in its share price. Target is raised to $40.00 from $35.50.

Xero ((XRO)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/1/2

The broker has been forced to reassess its margin assumptions for Xero, noting that companies in Xero’s space tend to post negative earnings in periods of strong growth. Xero is growing at a rapid rate and may be the company can buck the trend, but on revised assumptions the broker has “reluctantly” downgraded to Underperform on a risk/reward basis. This is not a reflection on operating momentum or quality of management, the broker is quick to point out. Target falls to NZ$12.25 from NZ$12.50.

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=83,78,92,74,134,71,165,97&h0=102,109,136,107,106,60,155,125&s0=50,62,19,51,50,40,23,44″ style=”border:1px solid #000000″ />

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