Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

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 27 to Friday July 1, 2016
Total Upgrades: 16
Total Downgrades: 18
Net Ratings Breakdown: Buy 42.08%; Hold 43.83%; Sell 14.09%

The week ending Friday, 1st July, 2016 proved extremely busy for stockbroker ratings regarding individual listed stocks. FNArena registered no less than 16 upgrades and 18 downgrades for the week. These are numbers more akin to required adjustment during reporting season, but instead we witnessed analyst revisions post-Brexit and incorporating higher commodity prices into modeling.

The likes of Automotive Holdings and Capilano Honey received upgrades following share price weakness, while Kathmandu's surprise market update generated two upgrades in response. Mayne Pharma's pivotal acquisition was also greeted with an upgrade.

On the downgrade side we find many Brexit-related names, as well as contractors, some yield plays and the occasional valuation call such as Collins Foods, National Storage and Xenith IP.

No coincide then, the table for positive revisions to price targets has lithium producer Orocobre on top, followed by Whitehaven Coal and telecom challenger Vocus. Apart from Orocobre, overall changes remain relatively benign. On the flipside we find Clydesdale Bank, otherwise known as CYBG which is no surprise given post-Brexit adjustments.

The table for positive revisions to earnings forecasts is dominated by resources stocks, with Sims Metal on top and BHP Billiton and Rio Tinto next. The opposite side has graphite play Syrah Resources on top, followed by Virgin Australia, APN News & Media and Caltex.

Upgrade

AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/0

After a 17% fall in the share price over 2016 Ord Minnett suggests there is value now on offer. The rating is raised to Accumulate from Hold.

The broker expects shareholders will put increasing pressure on the board to justify the current asset portfolio. Ord Minnett considers there are no meaningful synergies between the automotive retailing segment and logistics and the poor return profile of the latter has affected sentiment.

The broker considers an in specie distribution to divest the logistics business as the best transaction. Target is raised to $4.34 from $4.12.

CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/4/0

Ord Minnett has reviewed its investment thesis following the share price weakness over the year to date. The broker notes the business re-positioning has delivered the first round of capital management and surplus capital is expected to be deployed for growth.

Beyond strong growth in premium fuels the broker considers the next leg of growth is less evident. Still, the risk/reward equation is attractive, with valuation support, and the broker upgrades to Buy from Hold. Target is $35.

See also CTX downgrade.

CAPILANO HONEY LIMITED ((CZZ)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Morgans updates forecasts to account for the recent capital raising and new acquisitions. The broker lauds the company's track record of buying highly accretive acquisitions at attractive multiples.

With new avenues of growth the broker expects strong double digit earnings growth in the next few years.

With 15.6% in upside to the new valuation and price target of $23.10 ($21.80) Morgans upgrades to Add from Hold. Compared to peers the broker considers the stock attractively priced.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/3/0

Higher gold price forecasts has driven an upgrade to the broker's target to $2.20 from $1.87. Rating is also upgraded to Neutral from Underperform.

The broker flags a strongly disciplined business development with a doubling of the dividend pay-out and robust 3-year production outlook.

See also EVN downgrade.

INDEPENDENCE GROUP NL ((IGO)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0

Given the share price correction Credit Suisse upgrades to Outperform from Neutral. The broker retains nickel as its top pick in base metals despite the oversupply.

The broker suspects depressed prices in an over supplied market means some large losses are being taken and, while producers have been stubborn, some mines will ultimately have to close. Target rises to $3.60 from $3.00.

KATHMANDU HOLDINGS LIMITED ((KMD)) Upgrade to Buy from Hold by Deutsche Bank and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

The company's market update and guidance were better than Deutsche Bank's expectations. Even better still, the analysts point at the unusually warm winter which makes them even more confident in management's turnaround strategy.

The analysts do note the FY result is still dependent on trading through July which is the largest trading month, but their confidence has grown there's value up for grabs. Upgrade to Buy from Hold. Price target lifts to NZ$2.10. Estimates have improved.

Kathmandu has reported sales year to date are up 2.6%. FY17 earnings targets are upgraded, with a range of $49-53m now expected.

Macquarie had expected the late start to winter and warm Easter put the earnings risk to the downside. While the second half performance appears to have validated management's strategies the broker believes questions may arise about the sustainability of the turnaround.

Still, with the stock trading at a 20% discount to the previous bid price the broker upgrades to Outperform from Neutral. Target rises to $1.70 from $1.60.

MANTRA GROUP LIMITED ((MTR)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/4/0

Citi analysts, previously firm on their assessment the share economy represented by Airbnb were too big a threat to recommend shares in Mantra Group, have done an about-face following recent share price weakness.

The analysts still believe the threat from Airbnb and the likes is real, just that whenever it starts biting, it will be further into the future, not right now. Another positive is that Mantra has been improving its ratings on Tripadvisor, seen as an unmistakably positive by the analysts.

Upgrade to Neutral from Sell.Target price loses a little bit of its shine; minor cut to $3.45. The share price lost some 20% of its value in less than two months.

MAYNE PHARMA GROUP LIMITED ((MYX)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/0/0

The company will acquire a portfolio of 37 specialty generic products and at least five FDA-filed products as a result of the required divestiture from the Teva/Allergen merger. The acquisition price is US$652m.

UBS upgrades FY17 estimates to account for the contribution and, isolating the acquisition along, considers the deal is 17% accretive in FY17.

The rating is upgraded to Buy from Neutral and target to $1.78 from $1.51.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Add from Hold by Morgans .B/H/S: 3/4/1

Morgans believes the Brexit related price weakness for the major banks represents a buying opportunity. The broker believes the widening of the major bank's credit default swap spreads will be short lived.

Moreover, if credit conditions tighten further the broker suspects the globally influential central banks will take action and bank share prices will be among the beneficiaries in such a scenario.

The broker upgrades National Australia Bank to Add from Hold and elevates it to second preference among the majors. Target is steady at $26.40.

NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Morgans has decided its time to upgrade to Add from Hold. Sales forecasts are upgraded 14% to reflect the strong momentum seen in the third quarter. 

The next catalyst is the release of the UK guidelines for ultrasound probe de-contamination, expected soon. Target lifts to $2.46 from $2.15.

OROCOBRE LIMITED ((ORE)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/1

Guidance for the June quarter is 3,000 tonnes of lithium carbonate equivalent and nameplate of 4,375t in the September quarter. Morgans observes management has demonstrated the ability to meet product specifications, affirming the potential of the Olaroz plant.

Morgans also factors into its valuation a much stronger lithium price, partly offset by lifting the Australian dollar exchange rate. Given the focus on lithium stocks, Morgans lifts its target to $5.66 from $4.38. The rating is upgraded to Add from Hold.

OZ MINERALS LIMITED ((OZL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/5/2

Credit Suisse upgrades to Neutral from Underperform and raises the target to $5.70 from $5.30 on the back of upgrades to gold price forecasts. The broker's copper forecasts are largely unchanged.

The broker's valuation of the stock is underpinned by robust production and cost forecasts and the company is observed to be managing well the aspects under its control.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 5/3/0

Ord Minnett considers the concerns for QBE over Brexit vote are overdone. The broker retains its concerns around margin expectations but believes, at this juncture, the stock is not overvalued.

Ord Minnett upgrades to Hold from Lighten. That said, the broker believes the aspiration to raise insurance margins in a soft cycle, with headwinds from a reduction in lender mortgage insurance, is fraught and the market is not recognising this in its forecasts.

Ord Minnett retains an $11.55 target.

RIO TINTO LIMITED ((RIO)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/4/0

Morgan Stanley has updated its commodities price deck, lifting its iron ore price forecasts by 17% and 13% for 2016 and 2017 respectively. Copper prices have been downgraded by 13% for 2016. Leverage to the iron ore price results in an upgrade to Rio Tinto's target to $55.50 from $52.00.

The broker is also more constructive on the stock, given recent equity price weakness, a favourable position on the cost curve and a sound financial position. Rating is upgraded to Overweight from Equal-weight. In-Line sector view.

WESTERN AREAS NL ((WSA)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/0/3

Given the share price correction Credit Suisse upgrades to Outperform from Neutral. The broker retains nickel as its top pick in base metals despite the oversupply.

The broker suspects depressed prices in an over supplied market means some large losses are being taken and, while producers have been stubborn, some mines will ultimately have to close. Price target falls to $2.50 from $2.85.

Downgrade

ASALEO CARE LIMITED ((AHY)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/0

Citi has lifted the price target to $2.15 (was $1.90) but downgrades its rating to Neutral from Buy. The analysts believe the shares are fairly valued.

On the analysts' observation, external factors have moved into the company's favour in 2016 with pulp prices declining and Coles including Libra in its Every Day Low Price basket.

Citi is anticipating a pick up in Libra volumes in the months ahead, offset by unfavourable AUD strength and pressure in the Tissues segment.

Ongoing support for the share price should stem from the remaining $25m share buyback program. Relatively small adjustments have been made to forecasts.

APN NEWS & MEDIA LIMITED ((APN)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/2/0

UBS calculates its estimates for the stand alone company, ex the de-merged NZ assets. With the anticipated divestment of Australian region media assets later this year the broker observes the company will consist of the Australian radio assets, a 50% stake in AdShel and 100% of Hong Kong Outdoor.

Hence 2016 is shaping up to be messy and the broker forecasts profit of $47m and earnings per share of 24c. While management has executed well the next level of upside appears to UBS to be the potential re-rating of the Australian outdoor and radio business closer to peers.

The broker downgrades to Neutral from Buy and the price target is moved to $4.20 from $5.25.

BT INVESTMENT MANAGEMENT LIMITED ((BTT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/1

BT's UK business will be materially negatively affected by the Brexit, Macquarie believes. Costs are manageable, but a lower UK index level, net outflows, reduced performance fees and the currency impact are all significant.

The broker has cut forecast BT earnings by 9% in FY16 and 32-38% in FY17-18. Target falls to $7.57 from $10.42. Downgrade to Neutral.

COLLINS FOODS LIMITED ((CKF)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/0

FY16 results were broadly in line, and UBS considers the company did well to achieve second half profit growth of 10%. While the broker likes the growth potential from the store roll out and recent acquisitions it downgrades to Neutral from Buy based on valuation. Target slips to $4.90 from $5.00.

The company expects to increase shareholder returns in FY17 and will be exploring further KFC acquisition opportunities. Management expects positive KFC revenue growth in the first half but notes the first eight weeks of trading have been marginally negative.

CALTEX AUSTRALIA LIMITED ((CTX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/4/0

Caltex has provided a first half profit outlook of $245-260m, below Macquarie's forecast. But net debt in line with forecast, suggesting cash flow remains solid.

The update showed some positive elements, particularly growth in supply and marketing, but also a bigger negative in the form of falling Lytton refining margins. To that end, Macquarie has pulled back to Neutral. Target falls to $32.61 from $35.00.

See also CTX upgrade.

CYBG PLC ((CYB)) Downgrade to Hold from Add by Morgans and Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/1/0

The UK decision to leave the EU has created uncertainty which Morgans expects will quickly translate into a reduction in both UK consumer sentiment and business confidence.

If the risks are realised this is likely to result in lower income growth for CYB as well as asset quality deterioration, in the broker's opinion.

Morgans makes no changes to earnings forecasts but emphasises the downside risks. The broker re-bases its target on an AUD/GBP cross assumption of GBP0.560. The target is reduced to $4.20 from $5.81. The rating is downgraded to Hold from Add.

The British vote to leave the EU has potentially adverse effects on the company's growth ambitions and margins, in Ord Minnett's view.

Given high operating leverage the 15% decline, or thereabouts, in the broker's revenue forecasts, cannot be matched by a compensatory reduction in costs.

With the resulting tangible return on equity stalling at 7% against a previous target of 10% the broker reduces its rating to Lighten from Hold. Target drops to $4.00 from $5.00.

DECMIL GROUP LIMITED ((DCG)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/0/0

The company has not signalled any large contract wins recently and Ord Minnett believes the contractor sector, in general, has run too hard and too early.

Hence, the broker downgrades to Lighten from Hold. The target is reduced to 61c from 69c. The broker believes the stock has potential to disappoint at the upcoming results.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/0

FY16 production was 800,000 ozs at an all-in cost of $1,000/oz and the forecast is for stronger FY17 production of 800-860,000 ozs at $985-1045/oz.

Credit Suisse observes the business is creating shareholder value while maintaining a disciplined development program. The broker downgrades to Underperform from Neutral purely on a valuation call rather than on sentiment. Target is raised to $1.87 from $1.80.

See also EVN upgrade.

HENDERSON GROUP PLC. ((HGG)) Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/0

Citi factors in the likelihood of harsher equity markets and flow conditions in a post Brexit environment, lowers 2016 earnings estimates by 9% and 2017 by 20%. Henderson is seen underperforming primarily because of its relative skew to the UK, with 60% of revenue coming from that direction.

The rating is downgraded to Neutral from Buy and the target to $4.00 from $5.55. While envisaging the Brexit market move is more likely to be a correction than the start of a major global bear market, the broker envisages downside risks in the near term.

Henderson Group will be materially negatively affected by the Brexit, Macquarie believes. Costs are manageable, but a lower UK index level, net outflows, reduced performance fees and the currency impact are all significant.

The broker has cut forecast earnings by 9% in FY16 and 30-40% in FY17-18. Target falls to $3.91 from $5.76. Downgrade to Neutral.

NATIONAL STORAGE REIT ((NSR)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/2/1

The company has acquired the Southern Cross portfolio for $285m, consisting of 26 storage assets. An additional four storage centres, three in Perth and one in Cairns, have also been acquired for $16.1m.

The acquisitions will be funded by debt and equity, with an equity raising of $260m announced as well. Macquarie considers the acquisition slightly accretive to FY17.

The broker remains attracted to the material yield spread of a fragmented storage segment but calculates that the company's underlying growth has been anaemic since 2013.

With the stock trading at a 42% premium to revised net tangible assets and 18 times earnings, the rating is downgraded to Underperform from Neutral. Target is reduced to $1.69 from $1.82.

RCR TOMLINSON LIMITED ((RCR)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/1/0

Given several large recent wins in terms of contracts the stock has rallied hard, Ord Minnett observes.

Hence, the broker upgrades the target to $1.94 from $1.83 but downgrades its recommendation to Hold from Buy.

The broker considers the stock one of the contractors which has potential to disappoint at its upcoming results.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Credit Suisse observes capacity growth from low fuel prices and new airlines is ebbing. This strong growth will be lapped in November and from then there is potential for lower growth, the broker maintains.

If domestic demand remains weak airlines could cut capacity plans, and this could reduce overall capacity growth to below 5%, versus guidance of 6-8%.

Credit Suisse considers the shares are more than fully valued and downgrades to Underperform from Neutral. The target is raised to $6.40 from $6.30.

SYRAH RESOURCES LIMITED ((SYR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/1/0

The company has completed a $194m capital raising to fund completion of the Balama project and the continuation of the study and construction of a plant to produce spherical graphite.

Macquarie observes the market's appetite for the energy storage theme remains strong and continues to envisage Syrah Resources as a leader in the sector.

The strong appreciation in recent weeks leads the broker to downgrade to Neutral from Outperform. Target is increased to $6.40 from $5.60.

VOCUS COMMUNICATIONS LIMITED ((VOC)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/2/0

The acquisition of NextGen is of no surprise to UBS as national backhaul was the missing link to a fully vertically integrated network.  The acquisition will be funded via a $652m capital raising and debt.

On UBS estimates FY17 earnings forecasts need to be trimmed around 6%, factoring in dilution and softer core earnings. The broker's price target of $8.60 is unchanged. Rating is downgraded to Neutral from Buy on the outperformance of the share price.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/2/2

Given the rally in the share price Credit Suisse downgrades to Neutral from Outperform. Looking ahead, China's metallurgical coal imports have lifted sharply in  the last two months and, as supply looks tighter, the broker expects US$100/t is achievable.

Seasonal demand means thermal coal prices are modestly higher but, with China's imports expected to continue to decline, the broker looks to a US$50/t price tag in 2017. Target is raised to $1.20 from 90c.

XENITH IP GROUP LIMITED ((XIP)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The company has upgraded guidance from prospectus forecasts, expecting earnings of $8.8-9.0m for FY16.

Morgans incorporates the upgrade and does not factor acquisitions into forecasts, although anticipates the company would look to target small/middle market firms based in Australia.

Yet, at current prices and without an acquisition, the stock appears fair value to the broker and the rating is downgraded to Hold from Add. Target is raised to $4.16 from $3.99.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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