Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

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, Macquarie, Morgan Stanley, Morgans, Ord Minnett 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 June 6 to Friday June 10, 2016
Total Upgrades: 10
Total Downgrades: 10
Net Ratings Breakdown: Buy 41.60%; Hold 44.64%; Sell 13.76%

An end to the multi-week uptrend for the local share market pushed broker downgrades and upgrades for individual companies into balance last week. FNArena registered ten rating changes for each without deciphering any underlying trends, other than "too high" or "too low" share price motivations.

Both Amcor and UGL issued profit warnings and both received one rating downgrade in response.

There was some real action in positive adjustments to valuations/price targets with Webjet, after yet another good news announcement (acquisition), enjoying a 25.4% boost, only narrowly beating ALS Ltd (take-over target), with AWE Ltd on third position. In contrast, there was not much happening on the negative side with only Vitaco's (-5.9%) suffering worth mentioning.

Things looked even more sedate for changes to earnings forecasts. When was the last time a resources company (Fortescue) led the pack with an increase of 2.6%? I cannot remember it either. Regis Healthcare, on the other hand, saw market projections dive by -8.4%, and ALS Ltd's projections weakened by -5.1%. Spark Infrastructure sits on third position with a fall of -4.3%. Next ones to follow include Sirtex Medical, Orocobre and Rio Tinto (-2.5%).

And so endeth the supportive underlying trend that has been underpinning the uptrend in weeks prior. Macro considerations have again grabbed the market's attention. Will the next two weeks see more profit warnings?

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/1/1

Following the expiry of the company's first major patent UBS suspects there may be competing product launches. These products may still breach patents and legal challenges from A2M are considered possible.

Regardless, the broker has taken a more cautious view over the long term. That said, the a2 Platinum brand is gaining traction in China and UBS observes positive early signs in the UK.

Given the more gradual expected phasing in of regulatory changes in China the broker has increased confidence in FY17 earnings growth and upgrades to Buy from Neutral. Target is lowered to NZ$2.07 from NZ$2.22.

ALS LIMITED ((ALQ)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/4/3

The Advent and Bain consortium has made an indicative bid for ALS at $5.30 a share. The board has unanimously rejected the offer as opportunistic.

Deutsche Bank calculates the offer price could generate an internal rate of return (IRR) of 24% based on current forecasts and suspects it could be increased to $5.67 a share and still provide an IRR of 21%.

The broker upgrades to Hold from Sell, suspecting a higher offer price will ensue or a counter bid emerge. Target is raised to $5.30 from $2.93.

COOPER ENERGY LIMITED ((COE)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 1/0/0

The company has divested its remaining interests in Indonesia, selling Tangai-Sukananti for US$4.3m. Ord Minnett observes this frees up management to concentrate on the Sole and Manta gas projects in Victoria.

The recent capital raising provides a foundation for the gas project funding and the broker expects the company will target a retention of 40% of each project.

Ord Minnett upgrades to Buy from Accumulate and increases its target to 35c from 29c on revised equity ownership and the update on exploration potential at Manta.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/2/0

UBS revises hospital revenue growth to 16% in FY17 driven by the early adoption of high-flow oxygen therapy. The broker's analysis suggests penetration could reach 30% of a very large market. Market share gains are also expected in non-invasive ventilation.

UBS lifts earnings forecasts by 1% and 5% for FY17 and FY18 respectively. The price target methodology has been changed and the target rises to NZ$10.75 from NZ$7.35.

Rating is upgraded to Neutral from Sell as the broker recognises the stronger medium-term earnings growth.

JAPARA HEALTHCARE LIMITED ((JHC)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/0

Morgans has reviewed the changes to aged care funding. The major change is effected on January 1 2017, applying to new appraisals or re-appraisals of existing residents.

The broker expects operators to be able to partially offset reduced growth in government payments by higher fees. Morgans moderates forecasts from FY18 but believes the concerns over funding pressure are overdone.

Morgans upgrades to Add from Hold, noting Japara has 906 beds in its building pipeline over the next three years together with an estimated 300 to be added via acquisition. Price target is reduced to $2.97 from $3.09.

METCASH LIMITED ((MTS)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 4/2/1

Macquarie has changed its Metcash analyst, who has made an assessment of the company's progress in its transformation process over the past 12 months.

Strategic execution has improved, the newbie believes, and industry feedback suggests customers are enjoying improved conditions. Competition remains a risk but Metcash boasts a strong balance sheet. Upgrade to Outperform from Underperform. Target rises to $2.54 from $1.60.

OROCOBRE LIMITED ((ORE)) Upgrade to Hold from Reduce by Morgans .B/H/S: 2/1/1

Factoring in the expansion of Olaroz by 2019 instead of 2020 and the stronger lithium carbonate pricing Morgans upgrades its valuation. Having downgraded to Reduce and suggesting investors taking profits with the share price spiking above $4.65, the broker now upgrades to Hold.

The share price below $4.30 is considered a buying opportunity, with higher lithium carbonate prices. Target is reduced to $3.38 from $3.48. The Olaroz project is expected to produce 3,000t lithium carbonate in the June quarter, on the way to nameplate of 4,375t per quarter.

RCG CORPORATION LIMITED ((RCG)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/0/0

Citi analysts don't think recent share price weakness is justified, hence they upgrade to Buy from Neutral. Target $1.60.

RIO TINTO LIMITED ((RIO)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/5/0

Citi has upgraded Rio Tinto to Neutral from Sell.

WEBJET LIMITED ((WEB)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/3/0

Morgan Stanley views the acquisition of NZ-based Online Republic as boosting the company's earnings quality, as well as providing earnings accretion.

The broker upgrades FY17 earnings estimates by 13% and lifts the target to $6.50 from $4.30. As a result the rating is upgraded to Equal-weight from Underweight. Industry view: In line.

Downgrade

ARDENT LEISURE GROUP ((AAD)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/5/0

Ardent Leisure's main growth engine, Main Event, is facing increasing competition and it is hurting sales, says Citi. As the analysts see little, if any, upside from the current share price, they have pulled back their rating to Neutral from Buy.

The analysts question the company's ability to sustain 35% EBITDA returns. Probably needless to point out but, on Citi's estimates, Main Event is Ardent’s most important earnings driver accounting for 53% of FY17 EBIT. The analysts also believe investments will have to ramp up to stay competitive.

AMCOR LIMITED ((AMC)) Downgrade to Reduce from Add by Morgans .B/H/S: 2/4/2

Conditions in Venezuela continue to deteriorate and as a result the company has decided to adopt a floating exchange rate policy from FY17 to minimise earnings risk. A one-off write down of US$350m will be recognised for the Venezuelan business.

Morgans downgrades to Reduce from Add, believing that the issues in Venezuela will probably re-ignite concerns around operations in emerging markets.

While the company's track record in these markets has been excellent, the broker does not envisage a positive catalyst on the horizon and suspects the stock will come under pressure in the short term. Target falls to $13.52 from $15.80.

CARSALES.COM LIMITED ((CAR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/1

Macquarie notes Carsales' broader operating business is tracking well and expects a solid result in August thanks to higher listing prices. But new car sales momentum appears to have now stalled.

Carsales is trading on a 25x earning multiple after and at this level Macquarie believes the company's strong growth outlook is sufficiently priced in. Downgrade to Neutral. Target rises to $12.50 from $12.05.

CHARTER HALL GROUP ((CHC)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/0/2

The stock is trading 16% above Credit Suisse's target with current pricing implying a materially higher rate of long-term earnings growth than companies such as Westfield ((WFD)) and Goodman Group ((GMG)).

Hence, the broker considers the stock is over valued in both absolute and relative terms. The solid funds under management growth is also considered to be more than reflected in the multiple implied by current pricing.

Rating is downgraded to Underperform from Neutral. Target is steady at $4.50.

ECLIPX GROUP LIMITED ((ECX)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/1/0

Citi analysts walked away from the company's Investor Day with increased optimism. Forecasts have been lifted. The company remains positioned to grow above system and the Consumer business in particular looks like a genuine growth engine, according to Citi.

Alas, all of these prospects are already reflected in the share price, say the analysts. Hence the downgrade to Neutral from Buy. Price target lifts to $3.84 from $3.71.

REDFLOW LIMITED ((RFX)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Morgans reinstates coverage of the stock following its recent capital raising. The broker expects FY16 to end with a net cash level of $12.5m and sales ramping up.

The company recently received its first small commercial orders from system integrators and the broker expects these orders to generate revenue and cash. Over the medium term, Morgans envisages upside potential but achieving this comes down to execution.

The shares have almost tripled in value since the start of the year and now trade in line with the broker's valuation. Morgans downgrades to Hold from Add. Target is raised to 60c from 39c.

TREASURY WINE ESTATES LIMITED ((TWE)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/4/2

Citi analysts have now come to the conclusion that Asian margins will increasingly come under pressure in the years ahead, against a background of ongoing exciting volume potential in China.

Lower margins are going to disappoint the market, is the underlying suggestion. Downgrade to Sell from Neutral. Target drops to $8.70 from $9.10. Small decreases have been implemented to forecasts.

UGL LIMITED ((UGL)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 0/3/2

Ichthys construction projects continue to experience delays. UGL is no longer confident in the timing of the resolution of outstanding claims. A formal dispute process could lead to contract loss provisions being taken of up to $200m, management has warned.

Macquarie suggests protracted uncertainty surrounding Ichthys will detract from the favourable thematic of UGL's exposure to infrastructure. The broker thus lowers its target to $2.32 from $3.20 and downgrades to Underperform from Outperform.

VITACO HOLDINGS LIMITED ((VIT)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/2/0

Citi analysts had already taken a more cautious approach, but they've gone more conservative since the last update in early April. Regulatory uncertainty & higher marketing costs are but two of the obvious catalysts for this.

Expectations regarding the Musashi acquisition have been scaled back as well as sales in Japan are seen weakening. Target drops to $1.90 from $2.35.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/6/1

Credit Suisse has re-modelled the North West Shelf equity volumes to match guidance provided at the recent investor briefing. The broker now has production declines from 2020, with LNG volumes 60% lower by 2030. This has reduced valuation by $1.65 a share.

While the stock is not that expensive the broker still envisages the majority of risks are to the downside and finds it hard to envisage a positive catalyst outside of the oil price, even if LNG markets open up.

Credit Suisse downgrades to Underperform from Neutral. Target is reduced to $25.65 from $27.10.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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