Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features DEXUS, and other companies. For more info SHARE ANALYSIS: DXS

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 13 to Friday June 17, 2016
Total Upgrades: 6
Total Downgrades: 12
Net Ratings Breakdown: Buy 41.58%; Hold 44.54%; Sell 13.88%

Twice as many downgraded than upgrades. Such is the report for the week ending Friday, 17th June 2018. FNArena registered six upgrades and twelve downgrades for individual ASX-listed stocks. Apart from profit warnings (MMA Offshore, Wellard) there is no theme behind the moves and most changes seem company specific.

Mining services provider Mineral Resources was the only stock receiving two downgrades throughout the week as analysts are cooling on the overheating lithium space.

Mineral Resources does still lead the table for positive changes to price targets, beating Metcash, MYOB and Steadfast. All have enjoyed double digit increases. On the negative side the picture is much more benign with only Wellard (-33%) worth mentioning.

It's a rather quiet picture for positive changes to earnings estimates too, with this week's table led by Alumina Ltd, Whitehaven Coal and Oz Minerals. The numbers are heavier on the negative side, with Sims Metal suffering a blow of -32%, followed by Wellard (-27%) and BHP Billiton (-6%).

The market itself is more focused on macro issues, led by the Brexit vote in a few days' time. Expectations for local profits are low ahead of the August reporting season. Thus far, profit warnings have been few and far between. It is unclear as to whether tax loss selling has had an impact on the share market's disappointing performance so far this month.

Upgrade

DEXUS PROPERTY GROUP ((DXS)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/2/2

Sydney's office market is likely to be one of the few growth stories domestically and among global property markets and Dexus is the largest and most liquid office stock but has re-rated after a no vote was cast on the scheme to take over Investa Office ((IOF)), UBS contends.

The broker upgrades to Neutral from Sell, believing the current price reflects all of the expected asset price growth in the next few months. Target is raised to $8.64 from $7.45.

GRAINCORP LIMITED ((GNC)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/3/0

UBS expects earnings to fall short of the 31% return target but at least part of this forecast under performance is explained by increased competition for grain supply on Australia's east coast.

Growth capex is expected to be materially reduced over the next two years until there is improvement evident in the returns on equity.

UBS upgrades to Neutral from Sell given upside risk is building for FY17 forecasts. The federal election hiatus is nearing an end and Qube's ((QUB)) Quattro terminal has opened, both of these were previously viewed as barriers to any potential takeover of Graincorp.

A new methodology is being used for valuation and the target rises to $8.60 from $7.80.

JB HI-FI LIMITED ((JBH)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/4/1

Morgan Stanley believes JB Hi-Fi will be the key profitable "last man standing" in the software category, which generates 16% of its sales but a higher share of gross profit.

JB Home expectations have now been re-set lower, with store and sales targets pushed back. Still, amid consolidation in the industry the broker believes the company can be successful in selling home appliances.

Outside of software and Home sales, the broker also believes the company will be a large beneficiary from the closure of Dick Smith. Rating is upgraded to Overweight from Equal-weight. Target is raised to $26 from $23. Industry view is In-Line.

MIRVAC GROUP ((MGR)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 4/2/0

Morgan Stanley retains a positive view on residential exposure, believing the re-emergence of house price growth is an indicator for a multiple re-rating while settlement concerns are over stated.

Furthermore, volume and margin growth are supported by pre-sales, rising prices and fixed term contracts, suiting the stock and likely to deliver over 6% earnings growth in FY17, the broker maintains.

Rating is upgraded to Overweight from Underweight. Target rises to $2.00 from $1.95. Industry view is Attractive.

MOUNT GIBSON IRON LIMITED ((MGX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/0

Mt Gibson has received an $86m insurance settlement from Koolan Island, taking net cash to $430m. Mt Gibson has managed to avoid the pain suffered by iron ore juniors as prices fell, given it was already net cash and debt free as it iron ore operations wound down, Macquarie notes.

Unless Iron Hill is developed, the company will cease to produce iron ore next year and as such is simply a potential acquirer, unaffected by daily iron ore price movements. Macquarie thus expects the share price to move to a level representing that cash. The insurance settlement has removed uncertainty. Upgrade to Outperform. Target rises to 30c from 20c.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/5/1

UBS considers Monty an exceptional discovery but wonders, with 2-3 years before the asset is commercialised, whether the development is a little too late.

The remaining mine life at DeGrussa is five years and capex is set to slow significantly, yet the cash is not likely to build on the balance sheet until FY19, in the broker's view.

The broker observes short-term investors are currently rewarding companies that screen positively quarter on quarter and a lack of cash generation could hold Sandfire back.

UBS upgrades to Buy from a Neutral rating following a pull-back in the share price. Target lifts to $6.20 from $5.90.

Downgrade

3P LEARNING LIMITED ((3PL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/1

Macquarie has reassessed its view on 3P and in so doing has pulled back its rating to Neutral. The broker believes the strategy outlined by the new CEO to be the right one, but given revenues from the weak Fed-Mar sales cycle are recognised across 12 months, it will take time for earnings to show improvement.

3P's debt position is manageable and latent value implies possible corporate activity potential but despite the stock trading below Macquarie's valuation, Neutral is seen as appropriate. Target falls to $1.00 from $1.50.

GPT ((GPT)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 0/4/2

Morgan Stanley prefers office exposure over retail, driven by a tightening Sydney office market as stock is withdrawn. Office pay-out ratios are already adjusted for maintenance capex while retail pay-out ratios are questionably high as retail capex becomes more maintenance in nature, the broker observes.

While the broker still likes GPT for its defensive characteristics, better value is seen elsewhere in the sector. Rating is downgraded to Underweight from Overweight on valuation. Attractive sector view maintained. Target is raised to $5.00 from $4.70.

MINERAL RESOURCES LIMITED ((MIN)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/1/1

Deutsche Bank observes the company is now a major player in the lithium market with Mt Marion set to produce 400,000 tonnes of concentrate per annum, making it the second largest lithium project in the world.

The broker upgrades its valuation of the stake in Mt Marion, lifting the company's valuation by 6%. FY17 earnings estimates are raised by 9%. Despite the upgrade, the broker downgrades to Hold from Buy, given the stock has performed strongly and is now considered fully valued. Target is raised to $8.50 from $8.00.

Macquarie incorporates the Mt Marion lithium project into earnings forecasts, lowering its rating to Underperform from Neutral after the strong share price appreciation this year. Target is raised to $8.30 from $5.35 following the inclusion.

The broker suspects the market is currently capitalising too high a long-term lithium price into the stock but notes Mt Marion could provide as much as 80% of the current shortfall in the lithium market, valuing the project at $1.10 a share.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/5/1

Morgan Stanley believes the company is over earning and margins are set to peak in FY16/17. The broker considers the near-term upside is priced in and downgrades to Underweight from Equal-weight. Target is raised to $2.60 from $2.10.

 The broker expects net policy holder declines to accelerate in the core brand, with record lapses in the second half. Morgan Stanley lowers its premium growth forecast to 3.9% in FY16 and 3.2% in FY17. In-Line sector view retained.

MMA OFFSHORE LIMITED ((MRM)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/2/1

The company has warned that earnings will be slightly below the guided range in FY16 and significantly below broker consensus for FY17.

Macquarie observes the FY16 miss is driven by redundancies and bad debts. Beyond FY16 the broker believes revenue will fall again as the WA LNG project spending declines and the full-year impact of lower day rates is felt.

Macquarie downgrades to Underperform from Neutral. Target is steady at 27c.

SAI GLOBAL LIMITED ((SAI)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/5/0

SAI is not alone amongst global peers in suffering from low organic growth, Macquarie notes. But the company's transition to regional-based sales from product-focused is proving disruptive and the broker does not see any benefits accruing before the end of FY17. 

There is still work to do. The potential of corporate activity should provide a valuation floor, Macquarie suggests, but a lack of catalysts over the next 12 months has the broker pulling back to Neutral. Target falls to $3.63 from $4.00.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/5/0

Following channel checks and a visit to the US Deutsche Bank downgrades to Hold from Buy, noting there is no obvious circuit breaker to the supply constraint. Target is reduced to $8.76 from $10.12.

The broker suspects supply constraints will remain for the near term. While some yards have closed, the broker believes there are still too many players in scrap and rationalisation is taking too long. Nevertheless, Sims is believed to be doing what it can to improve the cash position.

SURFSTITCH GROUP LIMITED ((SRF)) Downgrade to Sell from Buy by Ord Minnett .B/H/S: 0/0/2

Ord Minnett has officially lost its patience with Surfstitch, not that long ago a much beloved market darling, but nowadays firmly in the doghouse of the Australian share market. 

The stockbroker essentially admits it's plain impossible to make any forecasts with a fair degree of confidence. Target price slashed to 20c. Downgrade to Sell.

VIRGIN AUSTRALIA HOLDINGS LIMITED ((VAH)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/5/1

The company has raised over $1bn via a placement and rights issue to strengthen its balance sheet and support operational and structural initiatives. Post the equity raising the lease-adjusted net debt falls in line with Deutsche Bank's target of four times earnings.

The broker reduces its target to 30c from 44c, after taking into account the dilution from the equity raising and downgrades to Hold from Buy, given the stock is trading close to the target.

WESTFIELD CORPORATION ((WFD)) Downgrade to Sell from Neutral by Citi .B/H/S: 4/1/1

Citi analysts have re-examined their valuation for Westfield and come to the conclusion the shares are over-valued.

Downgrade to Sell.

WELLARD LIMITED ((WLD)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0

The company has downgraded FY16 profit forecasts by 37%. The majority of the downgrade is related to the timing of two shipments, now expected to fall into FY17. The remainder of the downgrade is based on margin weakness from high cattle prices.

Morgans observes management has lost a significant amount of credibility, given the magnitude of the downgrade and the fact it has shipped more cattle than expected and benefitted from a lower Australian dollar and fuel prices.

The broker believes it will take some time for the stock to re-rate and downgrades to Hold from Add. Target is reduced to 61c from $1.45.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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