Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 May 4 to Friday May 8, 2015
Total Upgrades: 10
Total Downgrades: 7
Net Ratings Breakdown: Buy 39.82%; Hold 42.78%; Sell 17.40%

The week ending Friday, 8th May 2015 marked the worst week for the Australian share market for the year thus far. No surprise thus, stockbrokers responded by issuing more upgrades than downgrades for individual stocks. FNArena recorded ten upgrades vis-a-vis seven downgrades for the week.

Equally unsurprisingly, the banks featured prominently with the sector attracting three upgrades and one downgrade. Other (former) market darlings equally attracted upgrades: Ardent Leisure, REA Group, Woolworths. Investors should note all these upgrades (no exception) are to Neutral from Sell, or equivalent ratings, which is a signal in itself.

There were no surprises among the downgrades either, though Citi's downgrade of Incitec Pivot might be interpreted by some as prescient given the disappointing results release on Monday.

REA Group, Westpac and Woolworths top the week's list of reductions to price targets, but any changes overall remain rather benign as further emphasised by Drill Search's top spot on the positive side with increase of 6%.

Changes to earnings estimates for the week show big swings either way, but this too can hardly be a surprise given most stocks mentioned are small miners or energy-related companies. The stand-out exception is free-to-air broadcaster Ten Network for whom forecasts more than doubled by the end of the week. This is what can happen when expectations are low and small improvements appear on the horizon.

Investors should note Ten Network is prominently absent from the table of positive revisions of price targets and other free-to-air peers are suffering from cuts to forecasts.

Upgrades

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

First quarter funds and flows suggest AMP is well positioned to maintain solid earnings growth. Deutsche Bank, when examining forward earnings estimates, balance sheet strength and yield appeal, does not believe the positives are priced in. Rating is upgraded to Buy from Hold. AMP is now the broker's top pick among wealth managers. Target is raised to $6.90 from $6.30.

ANZ ((ANZ)) upgraded to Neutral from Sell by Citi and to Neutral from Underweight by JP Morgan. B/H/S: 2/4/2

First half results were slightly better than Citi expected. The Dividend Reinvestment Plan discount and asset divestment, as an alternative approach to raising capital, allayed some concerns. Citi considers the diversification away from Australia is setting ANZ apart from its peers. Not only was the weaker Australian dollar an earnings driver but the underlying performance of the offshore business was stronger. The broker upgrades to Neutral from Sell. Target is raised to $33.50 from $32.00. JP Morgan analysts observed how ANZ Bank shows a good understanding of the challenges and the actions that need to be taken, but bottom line, the analysts emphasise, is the future holds a relatively uninspiring low-to-mid single digit EPS growth trajectory through FY15. Just like the rest of the sector, the analysts add. JP Morgan has increased forecasts by circa 1% and notes the stock's underperformance since 2012. Target lifts to $35.69 from $33.33.

Argent Leisure ((AAD)) upgraded to Hold from Reduce by Morgans. B/H/S: 0/5/0

Following a de-rating Morgans lifts its recommendation back to Hold from Reduce. The broker expects firm performances from the business units in its quarterly update, with the exception of health clubs. The broker likes the high growth from Main Event and solid dividend yield. Nevertheless, uncertainty about new management and medium term risks with health clubs makes for a more neutral proposition. Target is reduced to $2.23 from $2.29.

National Australia Bank ((NAB)) upgraded to Neutral from Sell by Citi. B/H/S: 3/3/1

The first half results signalled to Citi the bank's operations are back in line with peers. The bank has taken the action the broker considers necessary to restore the franchise, with a capital raising and a path to resolving legacy issues. Citi observes some risk the half-year dividend may need to be re-set as the pay-out ratio moves up to 85% – which appears high for a business looking to recover its market position. Citi closes the discount between its target price and valuation and lifts its rating back to Neutral from Sell. Target is raised to $33.50 from $32.00.

REA Group ((REA)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/2/1

March quarter growth was weak but the broker expects a pick up in the June quarter. On this basis, relatively small adjustments are made to forecasts. FY15 earnings estimates are reduced by 2.0%, which still equates to 30% growth for the year. The drop in the share price is considered a buying opportunity and Credit Suisse upgrades to Outperform from Neutral. Target is trimmed to $52.74 from $54.45.

Recall Holdings ((REC)) upgraded to Hold from Reduce by Morgans. B/H/S: 2/4/0

As the share price is trading closer to valuation Morgans upgrades to Hold from Reduce. If the acquisition by Iron Mountain does not eventuate the broker considers the downside risk to the share price is now more limited. The broker considers the offer is only marginally positive for institutional shareholders but expects cross shareholdings among institutions should the transaction succeed. Target is $7.10.

Scentre Group ((SCG)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/2/3

The company's first quarter update was welcome news to the broker, with a combination of increased development commencements and specialty sales growth. The biggest risk Credit Suisse highlights is regarding non-core disposals, where there was no news. Offsetting the potential dilution, the broker observes, is some well-timed debt refinancing. Rating is upgraded to Outperform from Neutral. Target is raised to $4.04 from $4.03.

Tower ((TWR)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/1/0

The company expects to increase the claim provisions for the Canterbury earthquake to NZD22.4m. Credit Suisse lowers FY15 profit estimates by 65% and increases the outer years by 9.0%. The FY15 distribution is lowered by 10%, assuming Tower will utilise excess capital to fund the first half dividend. Rating is upgraded to Neutral from Underperform as a result of the recent pullback in the share price and now the negative news is out of the way. While there is a case to be more positive the broker wants to see the first half result before becoming more confident. Target is unchanged at $2.15.

Woolworths ((WOW)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/4/4

The quarterly sales update missed and the Investor Day included a frank admission the company had dropped the ball in terms of looking after its customers. JP Morgan has decided to upgrade to Neutral from Underweight citing increased confidence in a turnaround. While confidence has grown, the analysts do note execution will be key. Target drops to $28.25 from $28.27. Woolworths is a strong business with lots of potential, say the analysts. Their confidence stems from early signals of a cultural change.

Downgrades

ASX ((ASX)) downgraded to Sell from Neutral by Citi. B/H/S: 0/4/4

Following the March quarter update Citi is lowering earnings expectations for FY15-17 by 1.0%. The broker acknowledges the strong, debt-free balance sheet and yield appeal but considers the prospect for a near-term step change in earnings is limited. Rating is downgraded to Sell from Neutral and the target is raised to $38.50 from $38.30.

Crown Resorts ((CWN)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 3/4/1

Morgan Stanley has become more cautious on Macau casinos, given the recent deterioration in industry demand, which could potentially be structural. Earnings risk could add to Crown's balance sheet pressure. Rating is downgraded to Equal-weight from Overweight and target to $14.50 from $16.00. Industry view is In-Line.

iiNet ((IIN)) downgraded to Hold from Add by Morgans. B/H/S: 1/7/0

As expected, TPG Telecom ((TPM)) has countered M2 Telecom's ((MTU)) offer for iiNet. What Morgans did not expect is that the iiNet board would support TPG's $9.55 bid over the M2 scrip offer as, at face value around $9.61, the M2 offer is higher. Morgans believes the M2 offer is better but suspects iiNet is concerned about the value of M2 scrip. The broker does not rule out M2 countering with another bid but considers it unlikely. Morgans downgrades to Hold from Add and reduces the target to $9.55 from $11.00.

Incitec Pivot ((IPL)) downgraded to Neutral from Buy by Citi. B/H/S: 2/5/1

The broker expects profit of $135m and a 4.5c dividend at the first half result. Key influences are expected to be higher average fertiliser prices and more stable volumes. The broker remains positive for the longer term but, after strong outperformance this year, the balance of risks looks more even. Rating is downgraded to Neutral from Buy. Target is steady at $3.80.

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

Atlas Iron ((AGO)) may recommence production at two of its three mines this month and thus McAleese would recommence haulage. If so, new contracts and profit sharing deals are expected, which would see McAleese FY15 earnings come in at around $70m, the broker calculates, below $85-90m guidance. While a restart is good news, and the company is expected to remain in compliance with its covenants, the level of debt on the balance sheet means McAleese is not out of the woods and hence the broker downgrades to Underperform. Target falls to 15c from 42c.

Treasury Wine Estate ((TWE)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 0/2/6

Morgan Stanley believes consensus expectations are too optimistic on the earnings outlook. The broker has analysed FY16 earnings and risks, which leads to a reduction of 8.0% in forecasts. The broker suspects the FY16 Grange and Penfolds Bin releases will create a profit "hole" and the company will struggle to cycle the release of the 2012 bin range release. Moreover, the leverage to a weaker Australian dollar is considered overstated. Rating is downgraded to Underweight from Equal-weight, target to $4.80 from $5.00. Industry view is In-Line.

Westpac ((WBC)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 1/4/3

First half results missed the broker's forecasts. Morgan Stanley considers the trading multiples are stretched and margin pressure will continue to weigh on the outlook for institutional banking. Moreover, there is the risk of even more onerous requirements for investment property loans, which account for over 46% of the Australian mortgage book. The broker downgrades to Underweight from Equal-weight and lowers the target to $30.70 from $33.00. Industry view is In-Line. 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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