Weekly Recommendation, Target Price, Earnings Forecast Changes

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

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 July 25 to Friday July 29, 2016
Total Upgrades: 5
Total Downgrades: 19
Net Ratings Breakdown: Buy 40.23%; Hold 45.26%; Sell 14.51%

As the local share market continues to accumulate gains, stockbroking analysts continue to issue downgrade after downgrade. This hardly comes as a surprise with many a listed stock trading above historical valuation, and refusing to succumb to general opinion the share market is looking "expensive".

For the week ending Friday, 29th July 2016, FNArena registered five upgrades for individual listed stocks and 19 downgrades. Diversified miner Independence Group was the only one receiving two downgrades for the week. As one would expect, most downgrades were issued after solid share price gains.

So which stocks are receiving upgrades? Graincorp, Qantas, RCR Tomlinson, Touchcorp and WPP AUNZ. Only Touchcorp stands out with a solid growth profile and a rising share price.

Changes to valuations/price targets carry a skew to the positive, with oOh!Media, Evolution Mining and Newcrest enjoying solid increases while CYBG and Virgin Australia lead the pack on the negative side with reasonably benign reductions.

Gold miner Alacer Corp saw its earnings estimates more than double, which earns it top spot for the week, solidly beating iron ore producer Mount Gibson, another gold miner Perseus and LNG developer with a weak balance sheet, Santos. You get the picture by now (I hope).

The negative side to earnings estimates shows some fireworks too, with Virgin Australia -unsurprisingly- leading the downside, followed by gas producer Senex Energy and Big Australian BHP Billiton. Woolworth lives on this side of the ledger too.

The eight brokers monitored daily now rate 45% of stocks under coverage with a Neutral rating against 40% with a Buy or equivalent. History shows this is a large gap and indicative of bull market conditions in the share market, further supporting general opinion the market is looking stretched and expensive.

Upgrade

GRAINCORP LIMITED ((GNC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/0

Credit Suisse believes a clear way to create value in Graincorp is if the rate of port capacity additions by competitors were to ease and for Graincorp to increase utilisation of its own ports.

The broker believes the stock would be increasingly attractive with the absence of ADM on the register. The broker perceives the potential for ADM to move to full ownership is considered a barrier to co-investment in Graincorp's ports by other grain traders.

Rating is upgraded to Outperform from Neutral, given the recent share price decline, and a $9 target is retained.

QANTAS AIRWAYS LIMITED ((QAN)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 8/0/0

Ord Minnett cannot envisage a more favourable time in which to invest in Qantas and raises its rating to Buy from Accumulate. Target of $4.75 is maintained.

Fuel costs are the lowest in years, passenger demand is higher and operating costs are being eroded. The broker also notes that, based on its forecasts, Qantas could return $1bn or 52c per share to shareholders or conduct a buy-back of 5-10%, without affecting credit ratings.

RCR TOMLINSON LIMITED ((RCR)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/0/0

Ord Minnett considers the company one of the best positioned in the contractors sector in FY17, leading to earnings growth. FY16 is not expected to be flash and the broker believes it will represent a low point.

The broker also believes the current share price is not reflecting the pipeline of work available to the company. The company's reputation in the solar and power sectors is expected to provide an edge over competitors. Rating is upgraded to Buy from Hold. Target is raised to $2.42 from $1.94.

TOUCHCORP LIMITED ((TCH)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/0/0

The company has signed a software agreement with Charge Up Holdings, earning $11.25m in initial integration fees. Touchcorp will be entitled to transaction processing fees and additional integration fees beyond YF16.

UBS believes the deal materially de-risks FY16 forecasts but also builds confidence in the long-term ability of Touchcorp to generate integration fees over $10m.

The broker upgrades to Buy from Neutral and raises the target to $2.20 from $1.85.

WPP AUNZ LTD ((WPP)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/2/0

Following its merger with WPP, STW Communications (SGN) is now known as WPP AUNZ with the stock code WPP.

Following a review, the broker believes the new entity deserves a higher rating due to synergies, a much healthier balance sheet and much better free cash flow prospects than the old STW. Growth will now be organic-focused.

Upgrade to Outperform. Target rises to $1.32 from 89c.

Downgrade

APA GROUP ((APA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/6/0

The latest regulatory review is negative for APA pricing, although nothing has yet been quantified and implementation time is 2020. The market already knew the ACCC would clamp down, yet the stock has continued to rally, Macquarie notes.

The trade off is growth options. But Macquarie notes APA's multiples are looking a little stretched in comparison to regulated peers when cash flow is similar. Hence a downgrade to Neutral. Target slips to $9.18 from $9.19.

APN OUTDOOR GROUP LIMITED ((APO)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/3/0

Ord Minnett is of the view that the structural growth story in outdoor media has some way to go.

Nevertheless, following a review of forecasts and valuations, the broker downgrades APN Outdoors to Hold from Buy.

The share price has moved up almost 20% in the past month. Target is raised to $7.85 from $6.95.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/5/1

The company has pre-announced FY16 earnings of $871m, below Credit Suisse's estimate, and management retains a downbeat commentary on customer conditions, despite coal prices lifting recently.

The broker suspects earnings margin targets for FY17 and FY18 will not be met and downgrades to Neutral from Outperform on valuation. Target is raised to $4.80 from $4.75.

CHARTER HALL RETAIL REIT ((CQR)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/1/5

UBS has downgraded to Sell from Neutral. Target is raised to $4.37 from $4.21.

CSR LIMITED ((CSR)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/0/2

Building materials have performed strongly but Ord Minnett believes the sector is now expensive, given full valuations and lofty multiples.

With an unfavourable outlook for aluminium prices and lack of support from the buy-back program the broker downgrades to Lighten from Hold. Target is raised to $3.55 from $3.50.

FLIGHT CENTRE LIMITED ((FLT)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/5/1

Credit Suisse downgrades forecasts for the UK segment, given increased evidence of a weakening in travel bookings and the rate of improvement assumed for the US segment is also reduced.

The broker expects a 3% fall in profit in FY17. The stock may not be expensive based on forecasts but Credit Suisse maintains, in the short term, earnings are less certain. Rating is downgraded to Neutral from Outperform. Target is reduced to $36.27 from $38.61.

ICAR ASIA LIMITED ((ICQ)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

June quarter cash collections were below expectations because of softness in the Malaysian car market. Morgans observes car buyer sentiment across South East Asia has turned and will make for a tougher environment over the next year or so.

While the long-term outlook for online motor vehicle ads in Asia is robust, on the back of the short-term softness Morgans downgrades to Hold from Add. Target is reduced to 73c from $1.25.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/3/2

The opportunistic equity raising of $280m surprised Morgan Stanley, given the marked improvement in cash flow from key assets, the recent lift in commodity exposures and the debt availability.

The broker acknowledges the balance sheet is now much stronger and there is flexibility to pursue growth once Nova ramps up.

FY16 and FY17 earnings-per-share forecasts are reduced by 10% and 19% respectively. Morgan Stanley downgrades to Equal-weight from Overweight. Target is raised to $3.70 from $3.40. In-Line sector view retained.

June quarter production results were accompanied by a $280m equity raising and FY16 preliminary financials. Deutsche Bank observes the company has taken advantage of recent share price strength to issue stock at a premium to fair value.

The broker remarks that the company had expected to fund Nova from existing cash and undrawn facilities but this was insufficient and the decision to raise just equity rather than a debt/equity combination is taken as an insight into the company's perception of fair value for its stock.

Deutsche Bank downgrades to Sell from Hold. Target is raised to $3.20 from $3.00.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/2/1

Building materials have performed strongly but Ord Minnett believes the sector is now expensive, given full valuations and lofty multiples.

James Hardie's share price implies, UBS maintains, a degree of complacency around execution risks. Any further disruptions are expected to exert downward pressure on the share price. Rating is downgraded to Lighten from Hold. Target rises to $19.00 from $17.60.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/3/1

Guidance for FY17 has been reiterated at the AGM with Ord Minnett noting the year is likely to be a consolidation period and earnings are likely to be flat.

The broker downgrades to Hold from Accumulate following a recovery in the share price. Target is $73.

NEWCREST MINING LIMITED ((NCM)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/1/4

June quarter production was 10% below Ord Minnett's estimates. The broker acknowledges the stock trades on a 6% free cash flow yield but considers it expensive on valuation measures and compared with peers.

The broker also expects short term profit taking in gold is likely. Rating is downgraded to Lighten from Hold. Target is reduced to $21 from $23.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/3/0

Credit Suisse suggests a leap of faith is required on cost reductions at APLNG. Origin is now targeting a 40% reduction in capex per well plus around a 15% reduction in total operating expenditure. The broker models this guidance but suspects the risks lean to the downside.

The broker continues to believe there is merit in Origin de-merging, particularly if it means increased co-operation in LNG projects. The broker increases the valuation of both the energy markets and LNG businesses from higher wholesale electricity prices.

The rating is downgraded to Neutral from Outperform given the recent relative outperformance versus the oil price. Target is raised to $5.90 from $5.50.

RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

Building materials have performed strongly but Ord Minnett believes the sector is now expensive, given full valuations and lofty multiples.

Reliance Worldwide has enjoyed a strong start as a publicly listed company but the broker downgrades to Hold from Accumulate. Target is reduced to $3.15 from $3.23.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/5/1

There appears no end in sight to global scrap market volatility and thus earnings visibility, Macquarie notes. Sims is further hampered by not being eligible for US trade protection. Asia is showing some promise but Chinese overcapacity remains an issue.

Further risk to earnings is offered by Brexit and instability in Turkey. Macquarie downgrades to Underperform given risks to earnings momentum. Target falls to $7.90 from $8.40.

SMARTGROUP CORPORATION LTD ((SIQ)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/0/0

Ord Minnett considers the stock to be supporting multiples ahead of its risk profile and would look to lighten on recent price strength.

Conditions are considered supportive for an unexpected negative change to novated leasing, with the Australian government facing a widening budget deficit. The most likely timing for a change is considered to be the May budget in 2017.

The broker observes the market has discounted this risk but the downside is substantial if such an event occurs. Rating is downgraded to Lighten from Hold. Target is raised to $6.36 from $4.94.

SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/1

Ord Minnett considers the valuations of regulated utilities are increasingly stretched as investors seek out yield. Over the last two months stock prices in the sector have increased by more than 10% and are largely above the broker's valuation.

Hence, while the macro environment remains supportive, the broker reduces its rating to Hold from Accumulate. The $2.40 target is maintained.

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

Morgans reinstates coverage following the recent capital raising to fund the expansion of the networks in Singapore and Hong Kong. The company has raised $35.3m to build out the Hong Kong TKO Express submarine cable and expand the core networks.

Morgans increases earnings forecasts for the medium term but the share price rally results in a downgrade to Hold from Add. Target is raised to $2.60 from $2.34.

WOOLWORTHS LIMITED ((WOW)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/3/3

Guidance for earnings of $2.55-2.57bn in FY16 is below Credit Suisse's estimates. The broker agrees with the company's strategy but does not envisage the performance improvement will be enough to justify a valuation upgrade.

Woolworths is considered to be executing a text book retail restructuring, yet the broker believes there is unlikely to be a substantial opportunity to upgrade supermarket earnings expectations.

Rating is downgraded to Neutral from Outperform because of the increase in the share price and the $24.50 target is retained.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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