Weekly Ratings, Targets, Forecast Changes

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

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 10 to Friday July 14, 2017
Total Upgrades: 11
Total Downgrades: 8
Net Ratings Breakdown: Buy 42.36%; Hold 41.42%; Sell 16.22%

The week ending Friday, 14th July 2017 saw stockbrokers issuing more upgrades than downgrades for investment recommendations on individual ASX-listed entities; finally!

FNArena registered 11 upgrades versus eight downgrades. Most downgrades stopped at Neutral. Receiving upgrades were a mix of regional banks, bond proxies, industrials and one gold miner. Downgrades were predominantly issued on appreciating share prices.

Total Buy and equivalent ratings for the eight stockbrokers monitored daily still exceeds total Hold/Neutral ratings; 42.36% versus 41.42%. Historically, this tends to signal a tougher time for the local share market. The one exception was in late 2016 when the Trump-inspired reflation trade lifted banks and resources stocks, but most of that has come unstuck since and reflation 2.0 isn't genuinely taking off in 2017, at least not thus far.

Positive amendments to valuations and price targets remain low, with rising phoenix Flight Centre taking the crown for the week enjoying a 5% increase, but there's little else with Seven West Media coming second with a gain of 1.6%.

Again, the numbers look larger on the negative side with Michael Hill's consensus target suffering -6.6%, followed by Platinum Asset Management taking a hit of -3.29%, while Incitec Pivot's hit stopped at -1.33%.

Origin Energy enjoyed the largest increase to profit forecasts (+12%), beating Perseus Mining (+5.9%) and Nine Entertainment (+2.86%). On the negative side, Mount Gibson's consensus forecasts fell -58%, followed by Michael Hill (-11.6%) and Whitehaven Coal (-6.22%).

Analysts are now starting to look forward towards the upcoming local reporting season. Thus far, earnings estimates have been declining but otherwise the confession season has remained remarkably silent.

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/2/0

Deutsche Bank analysts have dug deep into what makes a2 Milk tick, and what should potentially still lay ahead. The end result is they have "materially" increased their revenue growth outlook. This has pushed up the price target to NZ$5 (up 52% from prior target).

The broker's optimism is partially based upon the observation that brand interest in key end market China remains strong and the fact it remains materially higher than key brand peers Wyeth and FrieslandCampina.

In addition, states the broker, there's ongoing support from macro factors such as the relaxation of China's single child policy. Upgrade to Buy from Hold.

AGL ENERGY LIMITED ((AGL)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/3/1

The recent fall in AGL's share price, following underlying electricity forward pricing, has taken the stock back to meet Macquarie's valuation. Hence the broker has upgraded to Neutral.

Macquarie notes a lack of wind has impacted on AGL's renewable generation and forced the company to source higher priced gas energy. While this will drag on earnings, the offset is better pricing outcomes from electricity generation on normalised volumes.

Target rises to $24.50 from $24.30.

ASTRO JAPAN PROPERTY TRUST ((AJA)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/0/0

It's a two-step upgrade from Ord Minnett on the back of the broker's observation the transaction market has strengthened in Japan, resulting in yields firming marginally over the past six months for the type of assets Astra Japan Property Group owns.

Ord Minnett has pushed up FY18 realisable NTA estimate to $7.20 (up 7% from $6.75 prior). FY18 DPS forecast moves higher by 2% to $0.47. The latter is linked to AJA’s recent shopping centre acquisitions, explains the broker.

BENDIGO AND ADELAIDE BANK LIMITED ((BEN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/3

Given regional banks have a greater proportional exposure to mortgages in their lending than the majors and are not subject to the government levy, Macquarie calculates the belated move to reprice investor/interest-only mortgages will provide a significant near term earnings tailwind.

To that end the broker upgrades Bendelaide to Neutral. Target rises to $11.50 from $11.00.

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/5/1

Given regional banks have a greater proportional exposure to mortgages in their lending than the majors and are not subject to the government levy, Macquarie calculates the belated move to reprice investor/interest-only mortgages will provide a significant near term earnings tailwind.

To that end the broker upgrades Bank of Qld to Outperform. Target unchanged at $12.50.

BT INVESTMENT MANAGEMENT LIMITED ((BTT)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/1

BT saw 3.1% funds inflows in June for 9.4% year on year, exceeding Macquarie's 5% plus performance benchmark. The manager's new strategies are approaching a three-year track record and funds are attracting new flows and generating performance fees.

BT's share price is nevertheless down -16% since the May numbers with the index down only -3%, making the fund manager attractively priced in Macquarie's view. Upgrade to Outperform. Target rises to $12.05 from $11.70.

CHARTER HALL RETAIL REIT ((CQR)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/5/1

Charter Hall Retail is scheduled to report FY17 numbers on August 15. Credit Suisse is anticipating funds from operations (FFO) of $124.2m (30.6cps), 0.6% above guidance of 30.4cps and 0.6% higher than FY16.

The analysts do highlight they continue to view earnings guidance for zero growth as conservative in the context of the quantum of asset sales executed to date. For FY18, the broker has penciled in 31.9c while suggesting a buy-back at current levels looks attractive.

Combining all of the above, and recent share price weakness, the decision was made to upgrade to Neutral from Underperform. Rolling forward the modeling has resulted in the target price increasing to $4.13 from $4.00.

FLIGHT CENTRE LIMITED ((FLT)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/3/4

Ord Minnett has changed its Flight Centre analyst, resulting in an upgrade to Buy and a target price increase to $48.17 from $31.06.

Flight Centre has benefitted from the growth in outbound travel over the last ten years but suffered more recently from falling international air fares, the new analyst notes.

Fares are now stabilising and a management review should lead to cost reductions. An improved earnings outlook drives the upgrade, with the company now expecting a result towards the top end of the guidance range.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/2

Incitec Pivot has spent some $2bn since 2010 on its Moranbah and Louisiana ammonia plants and the cash flow from these investments is expected to flow from FY18, UBS notes. But fertiliser prices have been weak as new supply has entered the market.

The market has adjusted for low prices but the broker expects a through-the-cycle recovery from FY18. A bottoming in prices and the market's under-appreciation of Incitec's planned cost controls leads UBS to upgrade to Buy on an unchanged $4.00 target.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/4/2

Northern Star's June Q production came in 25% ahead of Deutsche Bank thanks to an excellent quarter at Jundee featuring a 50% grade increase. The FY17 result will come in at the top end of guidance.

The broker believes a more muted FY18 guidance range is conservative given a number of short term catalysts ahead, such as the Kalgoorlie plant extension study and reserve upgrade. The company's August strategy day awaits. A target increase to $4.40 from $4.30 prompts an upgrade to Hold.

See also NST downgrade.

SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/3/3

Shopping Centres has a track record of outperforming guidance and Credit Suisse believes FY17 might prove another case, given recent transactional activity and the later than expected launch of the second SURF fund. Solid growth in Woolworths ((WOW)) sales augur well for the landlord but specialty sales growth may prove a drag.

Ahead of the result next month, the broker has lifted forecasts to above consensus and raised its target to $2.18 from $2.04, prompting an upgrade to Neutral.

Downgrade

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

The company's market update revealed operating dynamics have improved significantly towards the end of FY17, with Morgans pointing out operational profit (EBIT) is now expected to come in at the top-end of guidance range, adding [this is] "an outcome that looked highly unlikely six months ago".

New price target of $1.35 compares with $1.20 prior but given the share price has moved significantly higher already, the rating has been pulled back to Hold from Add.

The analysts do expect gross margin to be pressured towards the bottom of management's guidance, with the added observation the company will now be cycling a period of poor execution last year. Management's focus is now seen shifting towards further cost productivity tailwinds.

BELLAMY'S AUSTRALIA LIMITED ((BAL)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/1/2

Fresh upon the announcement of the $28.5m acquisition of the Camperdown cannery, the company received news from Chinese authorities the Camperdown license had been suspended. The cockroach theory remains in full force.

Citi analysts state it appears Bellamy's cannot catch a break these days. They see alternatives and options for management, but in the short term the mood is expected to turn sour. Downgrade to Sell from Neutral. Target falls to $5.63 from $5.75.

Other challenges that yet need to be dealt with include escalating organic supply costs, excess inventory and reliance on the daigou, state the analysts. They observe the share price has rallied 64% since late March. Small adjustments have been made to forecasts.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/6/0

Fund underperformance in June has led to lower funds under management and lower performance fees for Magellan than Macquarie had expected. The broker has subsequently cut earnings forecasts by -8% and -3% in FY17-18 and cut its target to $26.37 from $26.63.

Given Magellan shares have substantially outperformed the index since May, Macquarie downgrades to Neutral.

MICHAEL HILL INTERNATIONAL LIMITED ((MHJ)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0

Michael Hill's FY17 sales grew 6% thanks to an improvement in the June quarter, led by A&NZ and Canada. The US and Emma & Roe continue to provide a meaningful earnings drag, Morgans notes.

Because of material losses in these businesses, the broker needs to see a change in management strategy before it can recommend the stock to investors. As the stock is trading in line with the sector average PE, Morgans pulls back to Hold. Target falls to $1.32 from $1.53.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/2

Northern Star's June Q production beat Citi's forecast by 19% and costs by 4%, with Jundee driving outperformance. FY18 guidance is in line with expectation as Kalgoorlie and Jundee grow while the focus at Paulsens shifts to exploration.

Citi expects positive news and a reserve upgrade at the August strategy update but believes the good news is priced in for now. Downgrade to Neutral. Target rises to $5.10 from $4.85.

See also NST upgrade.

NAVITAS LIMITED ((NVT)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/3/1

UBS continues to like the longer term structural thematic that supports the outlook for a company like Navitas; it's all about increasing wealth in developing countries driving demand for education services within developed countries.

Plus the risk for Navitas losing another contract like Macquarie or Curtin within the Australian operations is lower than the analysts thought previously. Nevertheless, UBS sees headwinds on the horizon for FY18, and that's why the rating has been pulled back to Neutral from Buy.

Estimates have been lifted, but even so the forecast remains for a minor -3% EPS decline in FY18. This makes the current share price less attractive after recent appreciation. Target lifts to $5 from $4.50.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/0/4

Platinum's international fund has outperformed over 12 months and represents 43% of funds under management. Macquarie notes, while the Asia fund (18%) continues to underperform. Despite international outperformance, Platinum saw net FUM outflows of -7% in June.

Given the drag of outflows, the broker has cut forecast earnings and its target to $3.88 from $4.43, and downgraded to Underperform.

ROYAL WOLF HOLDINGS LIMITED ((RWH)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/4/0

Royal Wolf's major shareholder, GFN Asia Pacific, has launched a full takeover at $1.83 which the board has recommended. GFN is already on that board given 51% ownership.

For that reason, and given there is no domestic competitor with enough scale to acquire the company, Ords does not see another bid emerging. Target raised to $1.80 from $1.70 and as the market has already caught up, rating dropped to Hold.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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