Weekly Ratings, Targets, Forecast Changes

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

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 January 23 to Friday January 27, 2017
Total Upgrades: 10
Total Downgrades: 17
Net Ratings Breakdown: Buy 43.87%; Hold 41.88%; Sell 14.25%

Stockbroking analysts continue to issue more downgrades for individual stock ratings than upgrades. For the week ending Friday, 27th January 2017, FNArena registered ten upgrades versus 17 downgrades.

Stocks receiving upgrades during the week include BlueScope Steel, ResMed, Vicinity Centres and Western Areas (twice). Stocks receiving downgrades include Bendigo and Adelaide Bank (twice), ERM Power (three times), Village Roadshow, Westfield and, yes, BlueScope Steel too.

BlueScope Steel also tops the week's table for positive gains to price targets (+19%), beating Sims Metal, CSL, ResMed and others. On top of the list for negative revisions to price targets sits Village Roadshow (-10.9%), followed by APN News & Media (-9.3%) and Santos (-3%).

Investors might draw confidence from the fact that one week out from the start of the local reporting season, positive revisions are considerably larger than negative adjustments. This is not necessarily the case for profit estimates.

Western Areas was primus inter pares for positive adjustment to forecasts. The gain of 1589% merely proves how fickle the commodities space still is with leverage high in both directions. Sandfire Resources, Santos, South32 and Sims Metal all enjoyed noticeable gains too.

Negative adjustments were large too with ERM Power grabbing the wooden spoon for the week, suffering a blow of -134% to broker estimates. Other noticeable victims of negative revisions include AMP, Village Roadshow, Senex Energy and Oil Search.

Upgrade

ALS LIMITED ((ALQ)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/2/2

Share prices for engineers and contractors in Australia have recovered from last year's lows on the basis that outlooks and market dynamics have improved. Deutsche Bank analysts acknowledge this much, but they still maintain it's better to remain cautious.

The analysts continue to see earnings risks across the sector, highlighting there are significant differences between markets and sub-markets when it comes to assessing this part of the share market.

ALS Ltd receives an upgrade to Buy from Hold. Price target jumps to $6.74 from $5.50.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/2/0

BlueScope has raised its first half earnings guidance by 18% to $600m  driven by improved pricing, spreads and a solid performance from the building products division.

Following the upgrade to guidance, Ord Minnett raises its rating to Accumulate from Hold and the target to $12.50 from $10.20.

Underpinning the broker's view is the fact that the company's low earnings multiples, which more than compensate for earnings volatility, and a rapidly de-gearing balance sheet provide potential for near-term capital management.

See also BSL downgrade.

BRAMBLES LIMITED ((BXB)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/1

A lack of disclosure and a poor explanation from management for the surprise downgrade to guidance has driven a sharp correction in the share price, UBS observes.

The impact of US retailer de-stocking experienced in December is without anecdotal support and how long the impact continues is uncertain. The broker notes the company is waiting to see January numbers before assessing the likely full year impact.

UBS takes the view that the de-stocking represents a one-off step change in earnings. Despite the uncertainty, UBS believes the business model is intact and upgrades to Buy from Neutral. Target is reduced to $11.60 from $12.60.

See also BXB downgrade.

CHARTER HALL RETAIL REIT ((CQR)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/3

Macquarie reviews the outlook ahead of the first half results. The stock remains a relatively defensive proposition although the broker is of the view that near-term income growth will be hindered by fewer anchor tenants in turnover rent, low initial yields on development and further dilutive asset sales.

Nevertheless, with the stock trading near estimates of net tangible assets and the potential corporate risk from Shopping Centres of Australasia ((SCP)) the rating is upgraded to Neutral from Underperform. Target is raised to $4.24 from $4.18.

OROTONGROUP LIMITED ((ORL)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/1/0

OrotonGroup's market update yet again did not meet market expectations. Citi analysts have reduced their price target to $1.90 from $2.05 but post share price shellacking they've also upgraded to Neutral from Sell.

The decision to upgrade is motivated by the fact the analysts anticipate a turnaround in fortune in FY18, when a new range in designer handbags, jewelry and perfume should help sales, along with less discounting.

RESMED INC ((RMD)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 6/1/0

Ord Minnett considers the company on the cusp of a return to double-digit growth, following the successful launch of its new masks. A refresh of the product should deliver a solid benefit to product mix, supporting a rise in gross margins.

The broker's confidence in the outlook is supported by US political changes, which signal a more benign funding environment and this limits the pressure on prices. The broker raises its recommendation to Accumulate from Hold and the target to $9.50 from $8.25.

TOX FREE SOLUTIONS LIMITED ((TOX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/1

Morgan Stanley forecasts Tox's earnings from resource sector construction will fall to less than 1% in FY18, from 43% in FY13. Higher margin production earnings will grow in FY18 driven by contract wins.

Tox is trading at a 35% discount to peers and has a history of rapid re-rates, Morgan Stanley points out. With earnings troughing, and the Daniels acquisition offering long term synergies, valuation and risk/reward are now attractive to the broker.

Upgrade to Overweight. Target rises to $3.00 from $2.65. Industry view: In-line.

VICINITY CENTRES ((VCX)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/2/2

Ord Minnett suggests the A-REIT sector retains all the necessary ingredients for attractive risk-adjusted returns. The main risk is an inflection point in the property cycle. Underperformance has potential to continue if long bond yields continue to rise.

Ord Minnett upgrades to Accumulate from Hold, mainly on valuation grounds. Target is $3.25.

WESTERN AREAS NL ((WSA)) Upgrade to Hold from Sell by Deutsche Bank and Upgrade to Neutral from Sell by Citi .B/H/S: 1/4/1

December quarter production was ahead of Deutsche Bank's estimates because of strong mined grades. Operating costs were below forecasts.

The broker suspects the company could exceed guidance for the seventh year in a row. The stock trades as a proxy for nickel price sentiment and, given the imminent re-start of Indonesian ore exports, sentiment remains weak.

Whilst uncertainty continues, the broker considers the valuation is less stretched and, while remaining cautious, upgrades to Hold from Sell. Target is $2.40.

As the company released a stronger-than-expected December quarter performance, Citi analysts have decided to upgrade to Neutral from Sell. They expect the company to either meet or beat FY17 production guidance and have lifted forecasts.

Estimates have received a boost and this pushes up the price target by 46c to $2.38. On current projections, shareholders should expect resumption of dividend payouts from FY18 onwards.

Downgrade

AIR NEW ZEALAND LIMITED ((AIZ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/0

After a share price rally for Air NZ, Macquarie is downgrading to Neutral, suggesting the stock is now fair value. Dec Q stats showed yields continued to fall due to competition, but that the rate of those falls is now slowing.

Air NZ's numbers should start to improve ahead as a year passes since competition entry, Macquarie suggests. Yield momentum will need to improve but the broker finds competition rationalisation encouraging. Target falls to NZ$2.18 from NZ$2.25.

BENDIGO AND ADELAIDE BANK LIMITED ((BEN)) Downgrade to Sell from Neutral by UBS and Downgrade to Sell from Buy by Citi .B/H/S: 0/1/5

Headwinds facing Australian banks are well known and UBS believes in recent times many of these factors have eased.

Investment property lending has picked up again, mortgage re-pricing suggests banks are more comfortable with meeting targets, while higher bond yields should reduce pressure on net interest margins.

To reflect the improvements the broker upgrades FY17 forecasts by around 2%. That said, a subdued medium-term growth outlook continues.

Despite the recent pull back the broker believes most of the positive news is factored in and downgrades to Sell from Neutral. Target is raised to $10.00 from $9.50.

Citi analysts have been reviewing the regional lenders in Australia. While Bank of Queensland is seen as offering one of most attractive yields in the market, the opinion about Bendigo and Adelaide Bank at present share price level is quite the opposite.

Citi analysts are of the view "Bendalaide's" strong performance over H2 2016 has run ahead of expectations, and risk is now that disappointment is about to announce itself. Downgrade to Sell from Buy. Target falls to $11.75 from $12.25.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/0

The company has confirmed first half expectations for $600m in EBIT, materially higher than the guidance "of at least $510m" delivered at the AGM in November.

The greatest surprise to Credit Suisse was the uplift in building products, dominated by a stronger performance in US operations from higher steel prices and margins.

The broker downgrades to Neutral from Outperform on valuation grounds and increases the target to $10.70 from $10.30.

See also BSL upgrade.

BRAMBLES LIMITED ((BXB)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/2/1

US retailer de-stocking and weak pricing in recycled pallets, along with delayed purchase decisions, have caused the company to issue a warning that it will not achieve forecast profit estimates in FY17. Credit Suisse lowers its FY17 US pallets EBIT estimates by around 15%.

The broker notes it is not clear how severe or how long the de-stocking will be and there is a risk with the new CEO that earnings will get re-based. Rating is lowered to Underperform from Neutral. Target is reduced to $9.80 from $11.30.

See also BXB upgrade.

CIMIC GROUP LIMITED ((CIM)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/0/3

Share prices for engineers and contractors in Australia have recovered from last year's lows on the basis that outlooks and market dynamics have improved. Deutsche Bank analysts acknowledge this much, but they still maintain it's better to remain cautious.

The analysts continue to see earnings risks across the sector, highlighting there are significant differences between markets and sub-markets when it comes to assessing this part of the share market.

The rating for Cimic has been downgraded to Sell from Hold. Target lifts to $27.12 from $25.76.

ERM POWER LIMITED ((EPW)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Reduce from Hold by Morgans and Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/2

ERM Power has made an unusual move in using penalty credits over its inventory to settle 2016 large-scale generation certificate (LGC) obligations. The move should increase earnings and tax, Macquarie notes, yet ERM has not changed earnings guidance.

The broker sees the move as logical, but the absence of an upgrade to Australian gross margins is concerning. Current margins appear thus to be well down on FY16. On that basis, and with no earnings upgrade, Macquarie downgrades to Underperform. Target falls to $1.15 from $1.24.

The company has changed strategy regarding Large-scale Generation Certificates (LGC) and this means, bottom line, it'll become a tax payer, accumulating franking credits that can later on be attached to dividends paid.

Morgans analysts point out this will also reduced cash flows in the medium term. This implies there is downside risk to the cash dividend, and that means downside risk for the share price, Morgans finds. Downgrade to Reduce from Hold. Target price remains 99c.

Note: Morgans has cut DPS forecasts to 8c from 12c previously (unchanged on gross basis given the addition of franking credits).

Citi analysts have pulled back the rating to Neutral from Buy. On their observation, the share price has rallied by 50% since July last year. There are issues with management's credibility, given omissions in prior guidance provided, suggest the analysts.

While Citi continues to see value on a longer term horizon, there's now an expectation the twelve months ahead won't be that flash. The new deal (complex and not for everyone to understand, explain the analysts) gets the thumbs up. Target loses 1c to $1.31.

GPT ((GPT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/2

Macquarie expects 2016 operating earnings per share of 29.9c, in line with the growth guidance provided at the September quarter update. The growth rate into 2017 is expected to slow.

The broker considers the stock a solid, defensive proposition with a diversified exposure but with a single digit return and lower trajectory for earnings expected it is downgraded to Neutral from Outperform. Target slips to $4.98 from $5.16.

NATIONAL STORAGE REIT ((NSR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/1

Ord Minnett suggests the A-REIT sector retains all the necessary ingredients for attractive risk-adjusted returns. The main risk is an inflection point in the property cycle. Underperformance has potential to continue if long bond yields continue to rise.

Ord Minnett downgrades to Hold from Accumulate, mainly on valuation grounds. Target is $1.52.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0

Northern Star's net production and costs were largely in line with Macquarie's forecasts for the Dec Q. Increased production at Jundee foreshadows expectation of a similar increase at the Kalgoorlie operation as new mines begin to contribute.

But the share price has gained 30% since December against a 5% rise for the ASX100, reaching the broker's target price of $3.70. Hence Macquarie downgrades to Neutral.

SCENTRE GROUP ((SCG)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/1/2

Ord Minnett suggests the A-REIT sector retains all the necessary ingredients for attractive risk-adjusted returns. The main risk is an inflection point in the property cycle. Underperformance has potential to continue if long bond yields continue to rise.

The broker downgrades to Accumulate from Buy, mainly on valuation grounds. Ord Minnett retains a $4.70 target.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/1

Citi downgrades to Neutral from Buy following a rally in the share price. The analysts have also pushed out some of their production forecasts.

The analysts point out, with mine life at DeGrussa constrained by exploration, developing a new project medium term is necessary.

SPOTLESS GROUP HOLDINGS LIMITED ((SPO)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/0

Citi analysts have updated their analysis and there's now an expectation the company's interim report is poised for disappointment. Estimates have been reduced by no less than -30% for this year and next.

Dividend payout ratio has fallen too. Price target dives to $1.07 from $1.80. Downgrade to Neutral from Buy.

VILLAGE ROADSHOW LIMITED ((VRL)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

As Village Roadshow has reported attendance at its Theme Parks has been adversely impacted by Dreamworld’s incident over at competitor Ardent Leisure ((AAD)), Citi analysts have downgraded to Neutral from Buy. Citi analysts estimate Village’s total theme park attendance is down -6% since the incident.

The stockbroker finds the short term outlook clouded, with the impact on the international and interstate customers yet to reveal itself. Estimates have been cut. Price target falls to $3.85 (was $5.40) also taking into account lower valuation multiples.

WESTFIELD CORPORATION ((WFD)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 4/1/1

Macquarie reviews the outlook ahead of the 2016 results. The broker expects operational earnings of US33.1c, below recently downgraded guidance of US33.7-34.0c.

Positive aspects to the investment thesis include the potential for a value-affirming restructure and material apartment earnings potential not yet factored into consensus.

The broker downgrades to Underperform from Outperform as the recent re-rating of the share price has compressed total returns and there is downside risk to the 2017 outlook. Target falls to $9.30 from $9.58.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms