Weekly Ratings, Targets, Forecast Changes

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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 26 to Friday June 30, 2017
Total Upgrades: 12
Total Downgrades: 14
Net Ratings Breakdown: Buy 41.99%; Hold 41.58%; Sell 16.43%

It remains remarkable that during the weak May and June months for the Australian share market, stockbroking analysts continue to issue more downgrades than upgrades for individual ASX-listed stocks. Equally noteworthy is that the underlying trend for profiit forecasts remains negative, albeit possibly skewed because of heavy bias towards reductions for miners, explorers and energy producers.

The positive stand-out is valuations and price targets where positive developments at companies including Metcash, Link Administration, Seven West Media, ALS Ltd and Corporate Travel keep the overall picture a positive one.

Steadfastly more downgrades than upgrades has now pushed total Buy (and equivalent) ratings for the eight stockbrokers monitored daily above total Neutral/Hold ratings. Traditionally, this is a signal for tougher times ahead for the local stock market, which certainly has been the case over the past two months.

This apparent contradiction can be explained by the fact that Sell ratings have become more popular recently with eight of the week's downgrades moving to Sell. Total Sell ratings have now climbed to 16.43% which, historically, is quite high.

The one exception to past observations was in late 2016 when more Buys than Neutrals translated into a narrow rally in which banks, resources and lowly valued cyclicals fully participated, but the rest of the market not. Is the cross-over signalling a repeat of late 2016?

Profit forecasts are being weighed down by heavy reductions for companies including Vicinity Centres, Tabcorp, Independence Group, Santos and Mineral Resources. Those enjoying positive amendments include Ardent Leisure, Metcash, Link Administration and Seven West Media.

The week's positive news stems from upgrades in target prices where upward revisions for Link Administration, Seven West Media, ALS ltd and Corporate Travel (same names all over) outweigh negative adjustments to the likes of Myer, Class, Sandfire Resources and TPG Telecom.

Confession season hasn't been too busy and the corporate calendar remains thin for the week ahead. No doubt, analysts are now genuinely starting to prepare for the August reporting onslaught.

In terms of downgrades in ratings, there's no clear trend in the week's tally, which culminated in 12 versus 14 (upgrades/downgrades). ALS ltd, Link Administration, Metcash, Seven West Media and Insurance Australia Group were among those receiving downgrades. Among the upgrades we find Insurance Australia Group (2x), Metcash, BT Investment, Flight Centre and Tabcorp.

Upgrade

ALS LIMITED ((ALQ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/1

Gold miners have re-capitalised and exploration budgets have troughed. Credit Suisse estimates the capital raised by juniors alone could underpin a 50% increase in exploration activity over the next 2-3 years.

Despite its optimism, the broker models a recovery to around 75% of the prior peak, which leaves room for upside. Moreover, global testing peers continue to expect trend revenue growth and expansion of margins and this provides a supportive backdrop to turnaround underperforming areas within the company's life sciences segment.

Rating is upgraded to Outperform from Neutral. Target is raised to $7.80 from $6.70.

AUSNET SERVICES ((AST)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/4/1

The company is now on a solid footing, having completed its metering restoration and resolving outstanding litigation, and Credit Suisse increases revenue expectations based on the anticipated acceptance of a higher rate of depreciation and lower forecast inflation.

A favourable outcome from the gas distribution determination should also be supportive. Credit Suisse upgrades to Outperform from Neutral and the target is increased to $1.80 from $1.70.

BEACH ENERGY LIMITED ((BPT)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/3/1

Citi has upgraded to Buy/High Risk from Neutral/High Risk following a -20% underperformance for the shares over the past two months. The analysts point at greater than average leverage to a falling oil price, but also to market concerns about a potential capital raising to fund the next acquisition.

Citi analysts are sympathising with the capital raising risk, while contemplating a scenario whereby a commercial partner can be found to still purchase assets but with less dilution for shareholders.

Meanwhile, point out the analysts, Beach has substantial high-returning opportunity for capital allocation in Cooper. The analysts also suggest the outlook is likely to be stronger than consensus is giving the company credit for, but management needs to provide more details.

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

The company has acquired 28 KFC restaurants from Yum! Brands for $110m. The acquisition will be funded through a $44m non-renounceable entitlement offer and $66m in debt.

Meanwhile, the company reported a strong FY17 result, beating UBS expectations. This was predominantly driven by stronger-than-expected KFC Australia performance and lower depreciation.

Rating is upgraded to Buy from Neutral and the target is raised to $6.00 from $5.60.

DULUX GROUP LIMITED ((DLX)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/4/2

In the light of a recent wave of global consolidation in the industry, Credit Suisse weighs up whether Dulux might be predator or prey. On the prey side, the broker sees the core paint business as attractive but the home improvement businesses not so. Dulux could divest these to unlock value, but a solid share price rules out a private equity bid.

On the predator side, the broker believes the company is likely targeting a UK paint acquisition. Factoring in its analysis sees Credit Suisse lift its target to $6.85 from $6.05 and upgrade to Neutral.

GREENCROSS LIMITED ((GXL)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/1/1

UBS notes feedback from the industry in pet retailing has signalled there is some trading down in food products and weaker gross margins.

The broker cuts its sales growth expectations for the Australasian retail division for the second half to 3.3% from 4.2%, and lowers divisional gross margins forecasts to a -50 basis points contraction.

Rating  is upgraded to Buy from Neutral on the back of recent share price weakness.  Target is reduced to $7.10 from $7.50.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Hold from Reduce by Morgans .B/H/S: 2/4/2

Insurance Australia Group expects reserve releases of around 5% of NEP in FY17 and has upgraded insurance margin guidance to 13.5-15.5%.

Morgans argues that elevated reserve releases are a lower-quality item and not sustainable. The broker finds the market's view on the stock peculiar, as recent weather downgrades were ignored while the elevated reserve releases appear to be rewarded.

The broker upgrades FY17 estimates by around 20% and FY18 by 2%. Target is lifted to $6.27 from $5.56. Rating is upgraded to Hold from Reduce.

See also IAG downgrade.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/0

Citi labels the acquisition of Capita Asset Services (CAS) "transformational", destined to facilitate "significant EPS accretion" from FY19 onwards. No double guessing as to why the broker has decided to upgrade to Buy from Neutral.

No doubt, an acquisition this size represents a challenge for management, acknowledge the analysts, while the price paid seems pretty full. But Citi seems firmly of the view the upside potential outweighs the potential negatives.

EPS estimates have been lifted by 3% this year, reduced by -3% for FY18 and lifted by 13% for FY19. The accompanying trading update is seen as slightly positive. Target jumps to $9.20 from $8.25.

MEDIBANK PRIVATE LIMITED ((MPL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/2/4

Macquarie observes policy holder disputes are at the lowest level since 2000. This reduced level of disputes, amid expectations that IT system problems will diminish, increase the potential for improved customer retention and a more positive FY18, the broker believes.

Macquarie upgrades to Outperform from Neutral. Target is raised to $3.07 from $3.00.

METCASH LIMITED ((MTS)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 2/4/1

FY17 results pleased Deutsche Bank. Food sales were not as bad as forecast, the balance sheet was better and cost reductions have lifted the margin.

While the outlook is tough and the second half revealed slowing market growth, intense discounting and the continuing spread of Aldi, sales did not come under as much pressure as the broker had feared.

Rating is upgraded to Hold from Sell. Target is raised to $2.30 from $1.60.

See also MTS downgrade.

SEVEN WEST MEDIA LIMITED ((SWM)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/3/1

The federal government has effectively removed licence fees for free-to-air TV broadcasters in FY17. Deutsche Bank adjusts numbers to take into account the absence of licence fees and now expects the removal will be made permanent.

Offsetting this, the broker lowers advertising market forecasts for FY18 and FY19 to factor in the likely restrictions on gambling advertising.

While continuing to forecast Seven West operating earnings to fall by -12% in FY17, the broker's changes result in upgrades to forecasts for FY18 and beyond. Target is raised to $0.80 from $0.70 and the recommendation is upgraded to Hold from Sell.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/3/1

Morgan Stanley remains positive on the mining industry but discussions with investors suggest they are cautious.

The broker finds the global outlook favourable, with a low risk of a slump in China, and commodity prices are beneficial, particularly as bulk commodities are finding support levels. While the broker acknowledges the setting is not "red-hot" it is constructive.

Morgan Stanley upgrades to Overweight from Equal-weight on the back of a more upbeat thermal coal outlook. Target is raised to $3.55 from $3.30. Industry view: Attractive.

Downgrade

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

UBS does not believe the business can achieve near-term consensus expectations regarding performance fees. Over the last five years performance fees have contributed 16% of revenue and 20% to group pre-tax profit.

The broker notes the company's success over the last five years has been driven largely by the acquisition of JO Hambro and, with net flows remaining strong, recent underperformance across a range of funds has flown under the radar.

UBS downgrades to Sell from Neutral. Target is reduced to $11.15 from $12.00.

FLIGHT CENTRE LIMITED ((FLT)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/5/2

The company's share price has risen 25% in the year to date and UBS observes it has outperformed the broader market. This, coupled with a more sombre outlook for the Australian discretionary retail environment, is the main driver of the broker's downgrade to Neutral from Buy.

The main issue for the company over FY17 has been airfare deflation which is offset strong volume growth and limited the business's ability to generate over-riders.

UBS believes a weaker consumer backdrop is the main risk to an earnings recovery, despite management suggesting the rate of deflation has started to ease. Target is raised to $37.60 from $36.10.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Sell from Neutral by Citi .B/H/S: 2/4/2

Insurance Australia Group has raised its FY17 insurance margin guidance range  to 13.5-15.5% from 10.5-12.5%.

Despite price rises, Macquarie believes structural claim issues in motor vehicle insurance should mean the underlying margin contracts into FY18.

The broker believes the multiples are now stretched and downgrades to Underperform from Neutral. Target is raised to $6.05 from $5.95.

Factoring in higher reserve releases and other changes, Citi lifts forecasts for earnings per share in FY17 by 21% and FY18 by 5%. The broker now forecasts FY17 reported insurance margin of 15.3%, towards the top end of revised guidance.

The broker raises the target to $6.30 from $6.05 but downgrades to Sell from Neutral, as the stock appears too expensive.

Citi suspects the underlying margin may still be under some pressure from elevated claims inflation in motor vehicles and the earn-through of prior commercial insurance pricing.

See also IAG upgrade.

METCASH LIMITED ((MTS)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/1

FY17 results were better than Credit Suisse expected. The broker was surprised by the re-introduction of the final dividend at 4.5c.

The broker downgrades earnings forecasts to largely reflect a refining of a 52-week EBIT estimate. Target drops to $2.38 from $2.54. The share price appreciation leads Credit Suisse to downgrade to Neutral from Outperform.

See also MTS upgrade.

MYER HOLDINGS LIMITED ((MYR)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/1

Myer's share price has fallen around 40% in the year to date but UBS believes further share price underperformance is likely because of a weakening consumer backdrop.

There is also the issue of rising competition, both from international entrants and through online. The broker's medium-term forecasts fall materially, driven by mid-single digit downgrades to top-line sales.

UBS now assumes like-for-like sales growth will be flat.. Rating is downgraded to Sell from Neutral. Target is reduced to $0.75 from $1.00.

NEWCREST MINING LIMITED ((NCM)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/3/4

Morgan Stanley remains positive on the mining industry but discussions with investors suggest they are cautious.

The broker finds the global outlook favourable, with a low risk of a slump in China, and commodity prices are beneficial, particularly as bulk commodities are finding support levels. While the broker acknowledges the setting is not "red-hot" it is constructive.

Morgan Stanley downgrades to Underweight from Equal-weight, not because there are specific downside risks, but rather because value is captured in the share price and other miners screen better. Target is reduced to $20.75 from $21.50.  Attractive industry view.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/2

Macquarie believes the reduction to license fees from FY18 and the removal of fees for the FY17 year is a positive for the media industry.

The company has provided updated FY17 guidance of $200-210m to incorporate the benefit of no license fee. Macquarie notes the government is still pushing for a broader reforms package but, if enacted, does not believe consolidation will create significant value for existing players.

Rating is downgraded to Neutral from Outperform on valuation grounds. Target is $1.35.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 1/2/3

Morgan Stanley remains positive on the mining industry but discussions with investors suggest they are cautious.

The broker finds the global outlook favourable, with low risk of a slump in China, and commodity prices are beneficial, particularly as bulk commodities are finding support levels. While the broker acknowledges the setting is not "red-hot" it is constructive.

Morgan Stanley downgrades to Underweight from Overweight, not because there are specific downside risks, but rather because value is captured in the share price and other miners screen better. Target is $4.85.  Industry view: Attractive.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/2

Morgan Stanley remains positive on the mining industry but discussions with investors suggest they are cautious.

The broker finds the global outlook favourable with a low risk of a slump in China and commodity prices are beneficial, particularly as bulk commodities are finding support levels. While the broker acknowledges the setting is not "red-hot" it is constructive.

Morgan Stanley downgrades to Underweight from Equal-weight, not because there are specific downside risks, but rather because value is captured in the share price and other miners screen better. Target is reduced to $5.90 from $6.40. Industry view is Attractive.

SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/3/1

The stock is now trading at a three-year high relative to AusNet ((AST)), and at or above privatisation benchmarks.

Credit Suisse estimates that the value of synergies that may be achieved by combining the company's stake in Victorian assets with those of DUET are likely to be less than 1.4% of its discounted cash flow value.

Rating is downgraded to Underperform from Neutral. Target is $2.40.

SEYMOUR WHYTE LIMITED ((SWL)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The company has recommended the proposed acquisition by VINCI at $1.285 cash per share. The company may decide to pay one or more dividends up to 44.5c and, if paid, the cash consideration as part of the scheme will be reduced by the cash amount of the dividends.

Morgans suspects the dividend payment is highly likely given the company's cash and franking credit balance. The broker downgrades to Hold from Add and sets the target at the offer price ($1.29).

TABCORP HOLDINGS LIMITED ((TAH)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/1/1

Credit Suisse downgrades FY18-20 forecasts for earnings per share by around -4% because of growth in retail commissions, as the company introduces a geo-locating system to allow venues to participate in digital turnover. While knowing this initiative was underway, the broker did not anticipate the material cost involved.

Also contributing to the downgrade is a lower FY17 wagering revenue base. Rating is downgrade to Neutral from Outperform as previously the broker believed there was enough value for investors to take on the synergy growth option, and now the stock has to fall for the risk/reward to be attractive. Target is reduced to $4.80 from $5.00.

TPG TELECOM LIMITED ((TPM)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/3/2

UBS has surveyed consumers and the majority of the survey is willing to pay more than $25/month for the type of plan that the broker believes TPG may offer at a $25 price point. Whether this translates into churn for the company is unclear, as proof of the network quality is required.

Nevertheless, UBS has increased confidence that the company can capture mobile market share and increases its long-term mobile share assumptions to 9.0% from 7.5%.

Rating is downgraded to Neutral from Buy is the near-term risks are skewed to the downside, and the increase to the broker's mobile capital expenditure forecasts is not enough to offset the increase to long-term market share assumptions. Target is reduced to $6.00 from $6.70.

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