Weekly Ratings, Targets, Forecast Changes

This story features ANSELL LIMITED, and other companies. For more info SHARE ANALYSIS: ANN

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 August 14 to Friday August 18, 2017
Total Upgrades: 16
Total Downgrades: 14
Net Ratings Breakdown: Buy 41.88%; Hold 41.95%; Sell 16.17%

It's been a rather underwhelming start to the August reporting season, as also shown by the ratings changes count for the week ending Friday, 18th August, 2017: FNArena registered 16 upgrades for ASX-listed entities versus 14 downgrades. A narrow "win" despite the fact the index cannot muster any sustainable upside momentum.

Telstra received two upgrades after what is likely to turn out one of the shock events of the season. Ansell also attracted two upgrades, as did Aurizon Holdings. REA Group amassed three upgrades. They all went to Buy (which is not the case for the double upgraders).

Telstra also received one downgrade. Iress received two. The underlying observation here is that, accounting for the doubles and triples, more companies are still being downgraded.

Investors can draw more optimism from changes registered for valuations & price targets, and for earnings forecasts.

Regarding the former, ARB Corp climbed on top of the week's ladder for positive revisions to consensus target with a gain of 5.4%, followed by Janus Henderson, Bendigo and Adelaide Bank and CSR. On the flipside, Sigm Healthcare's market update triggered consensus target to drop by -5.7%. Next up sits Westfield (-4%), followed by Ansell (-3%), then Challenger (-2.7%).

Positive revisions to targets tend to be larger than negative adjustments, so that's a plus.

The week's positive amendments to earnings forecasts are unusually large, in itself not that uncommon in the midst of reporting season. Origin Energy sits on top of the week's table, followed by Virgin Australia, Fletcher Building and Ansell.

Ardent Leisure leads the table for negative revisions, followed by Mount Gibson, Aristocrat Leisure, Seven West Media and Charter Hall Retail. With the exception of the bottom two, Ardent Leisure and Virgin Australia, positive revisions tend to be larger than negative changes, which can be taken as yet another plus.

This week the local reporting season lifts another notch.

Upgrade

ANSELL LIMITED ((ANN)) Upgrade to Neutral from Sell by Citi and Upgrade to Add from Hold by Morgans .B/H/S: 2/3/1

FY17 missed and leaves Citi analysts with plenty of questions. The rating has been upgraded to Neutral from Sell, but more so because of the share price weakness that has ensued. EPS estimates have been lowered. Target gains $1 to $21.

FY17 sales were in line with expectations, although Morgans notes solid organic growth and expansion of gross margin did not translate into higher underlying profit growth because of divestments.

The broker lowers revenue and underlying earnings estimates for FY18-20 by up to -1.8%. As earnings have effectively been re-set and the transformation program is in progress the broker envisages improved returns and upgrades to Add from Hold. Target is raised to $23.66 from $23.41.

ARB CORPORATION LIMITED ((ARB)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/2/0

Citi analysts have upgraded to Buy from Neutral, while bumping up their price target to $17.85 from $16.77 on the back of small reductions to estimates post the FY17 results release.

The analysts seem convinced management continues doing all the right things, and this company remains poised to widen the gap with its competitors, in Citi's view.

AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Neutral from Sell by UBS .B/H/S: 0/5/3

Aurizon's result was pre-released so no surprises. The dividend was lower than expected but offset by an announced buyback, Macquarie notes. FY18 guidance is in line with forecasts.

The extent of losses in intermodal and bulk were actually above Macquarie's expectation, but the company's move to address these issues results in a net upgrade. Cash flow yield is strong. Re-contracting offers risk but Aurizon may also be able to win market share, the broker suggests.

Target rises to $5.33 from $5.05. Upgrade to Neutral.

FY17 results confirmed a -4% decline in EBIT. UBS believes the growth outlook is anaemic although the stable cash-flow dynamic should appeal to some. There is limited ability to increase gearing.

The broker forecasts a further $400m in buy-backs over the next three years in addition to the $300m just announced. Rating is upgraded to Neutral from Sell. Target is raised to $4.90 from $4.80.

BENDIGO AND ADELAIDE BANK LIMITED ((BEN)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/4/2

FY17 revenue missed Credit Suisse estimates. The broker downgrades forecasts for earnings per share by -4-5%.

The broker suggests downside risk associated with capital adequacy and the Great Southern bad debts appear to have diminished.

Credit Suisse upgrades to Neutral from Underperform. Target is $11.90.

CLASS LIMITED ((CL1)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0

Class Limited shrugged of industry woes to meet consensus, suggests stockbroker Morgans.

Core operating earnings before interest, tax, depreciation and amortisation jumped 38%, struck on a 25% rise in revenue, with cash generation of 89%.

Morgans notes pleasant margin expansion and strong investment in sales and customer service and upgrades the stock to Add from Hold.

Target price rises to $3.55 per share from $3.37. 

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

FY17 net profit was in line with Credit Suisse forecasts and at the top end of guidance. The broker envisages robust services revenue growth over the short to medium term and expects Kanso will drive market share gains for the company's Nucleus Profile implant.

Rating is upgraded to Neutral from Underperform on the back of improved free cash flow and better working capital management. Target is raised to $142.50 from $129.00.

See also COH downgrade.

CSL LIMITED ((CSL)) Upgrade to Add from Hold by Morgans .B/H/S: 5/1/0

CSL's FY17 full-year results beat the broker thanks to a margin lift on high-value products, strong plasma sales,  more efficient operations and a stumble by competitors.

Morgans says expected second-half weakness should give way to a reinvestment year in 2018, and believes forecasts may be conservative.

CSL is upgraded to Add from Hold and the target price eases marginally to $138.40 from $140.20.

REA GROUP LIMITED ((REA)) Upgrade to Add from Hold by Morgans and Upgrade to Neutral from Sell by UBS and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/4/0

FY17 was weaker than Morgans expected but 12% underlying growth is still considered acceptable. FY18 is expected to provide rising volumes in depth advertising, a price rise and increasing numbers of Premier All subscribers.

The broker upgrades to Add from Hold. Target is raised to $68.75 from $60.73. Several more years of double-digit earnings growth and high free cash generation are expected.

Despite the negative price reaction UBS believes the company should be credited with delivering double-digit growth against depressed residential listings.

However, the market appeared to be pricing in a beat to estimates and the FY17 result missed consensus, albeit in line with UBS. The broker upgrades to Neutral from Sell after the re-set of the share price. Target is raised to $64 from $60.

FY17 results were in line with Credit Suisse. A better Australian result was offset by lower Asian EBITDA. The broker believes the growth profile is strong going into FY19.

Credit Suisse does not consider the stock expensive, given the recent re-rating of peers. Rating is upgraded to Outperform from Neutral and the target to $72 from $65.

TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/0/1

Credit Suisse currently models Tabcorp as if it is merged with Tatts ((TTS)) effective January 1, 2018.

The broker believes the recent drop in the share price, combined with more certainty around Tatts earnings, warrants an upgrade to Outperform from Neutral. Target is $4.80.

TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Add from Hold by Morgans .B/H/S: 2/3/2

FY17 results were ahead of Credit Suisse. The broker reduces FY18 operating earnings estimates by -2.1% to reflect guidance. The dividend reduction now means a majority of the bad news is out of the way, in the broker's view.

Mobile is performing slightly better than forecast although competitive risks remain high. The broker believes the dividend yield is sustainable for the next five years and should provide some support.

Rating is upgraded to Neutral from Underperform. Target is reduced to $3.90 from $4.00.

Telstra's result was in line with Morgans but while the broker had warned of dividend risk, 22c appears to be a worst case scenario. The cut is sparked by lower earnings due to both the NBN and competition, and a need for balance flexibility.

The cut is disappointing but does now remove uncertainty and a buyback may yet offset, the broker notes. Telstra is now better placed for the future and valuation has been rebased. Given the extent of rebasing, the broker sees a bear case in place suggesting upside risk. Upgrade to Add. Target falls to $4.15 from $4.37.

See also TLS downgrade.

WESTFIELD CORPORATION ((WFD)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/1

First half results were in line with Credit Suisse. The company has re-affirmed four-year earnings guidance.

The company has again indicated that future disposals will be at the margin and Credit Suisse no longer allows for US$1.5bn in sales in FY18. In isolation this boosts funds flow estimates by 5-6%.

The broker believes the year-to-date decline in the share price of -18% creates an attractive buying opportunity and upgrades to Outperform from Neutral. Target is reduced to $8.95 from $9.25.

Downgrade

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/5/1

FY17 results disappointed Credit Suisse. Some of the underlying drivers were weaker than expected and guidance has signalled these might continue. June quarter annuity sales were surprisingly weak, down -35% from a year ago.

Credit Suisse lowers FY18 net profit forecast by -4.3%. Management continues to execute on a growth strategy and the broker acknowledges the 8-12% growth implied by guidance is a rarity.

The broker envisages increased risk of slowing domestic sales in the short term and downgrades to Neutral from Outperform. Target is reduced to $12.70 from $13.50.

COCHLEAR LIMITED ((COH)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/4/2

Cochlear's result was in line, featuring strong growth across the portfolio. The return of Services growth was a pleasant surprise for Morgans but the exact contribution from service programs is unknown.

The broker sees risk around the impending launch of the N7, being conducted out of the insurance cycle and offering greater connectivity rather than improved hearing. Target rises to $131.30, still well below the traded price which Morgans believes ignores this risk. Downgrade to Reduce.

See also COH upgrade.

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Hold from Add by Morgans .B/H/S: 1/6/1

Computershare's result missed consensus by -3% but critically FY18 guidance fell short of expectation on several factors including wage increases and a higher tax rate. The result nevertheless indicated continuing business momentum, Morgans suggests.

Despite downgrading forecasts, the broker has been impressed with the company's transformation so far. On share price strength over the past year, Morgan downgrades to Hold. Target falls to $14.72 from $15.42.

CHARTER HALL RETAIL REIT ((CQR)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/4/2

FY17 operating earnings were in line with Macquarie's estimates. FY18 guidance is below expectations as the broker had previously anticipated growth around 3% whereas the company has guided to a flat year.

While the stock remains a relatively defensive proposition and the majority of its income is supported by large non-discretionary retailers, given limited growth and high gearing Macquarie moves to Underperform from Neutral. Target is reduced by -5% to $4.01.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/2

FY17 earnings missed expectations. Macquarie observes the weaker performance was a function of softening comparable store sales growth across all regions and weaker earnings growth in Australia.

As much of the de-rating to the stock has already taken place, the broker finds merit in pulling back to Neutral from Outperform, given concerns around the growth drivers and earnings quality. Target is reduced by -40.7% to $44.47.

FAIRFAX MEDIA LIMITED ((FXJ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/0

FY17 results were broadly in line with Credit Suisse. The outlook for Domain revenue is strong but the broker notes costs will be higher. Domain digital revenue is up 26% in the first six weeks of FY18.

Credit Suisse reduces Domain base case valuation to reflect lower forecast earnings. While there is long-term valuation upside the higher cost base means this will take longer to be realised.

Rating downgraded to Neutral from Outperform and target drops to $1.06 from $1.10.

IRESS MARKET TECHNOLOGY LIMITED ((IRE)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Lighten from Accumulate by Ord Minnett .B/H/S: 1/2/0

First half results were weaker than Credit Suisse expected, attributed predominantly to non-recurring factors. The broker's understanding of the UK industry conditions and client demand implies no fundamental change in the revenue outlook.

Although a strong second half great growth rate is expected, the weaker first half base has resulted in negative earnings revisions. The broker considers the stock fairly valued and downgrades to Neutral from Outperform. Target rises to $12.85 from $12.70.

First half net profit was below Ord Minnett's forecast. Management has maintained guidance for 2017, implying a significant step up in profitability in the second half.

Ord Minnett believes the company could still achieve guidance but notes the stock has re-rated about 10% relative to the market over the past six months.

Given the significant uplift in earnings required in the second half, the broker downgrades to Lighten from Accumulate and reduces the target to $12 from $13.

MINERAL RESOURCES LIMITED ((MIN)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/1/0

FY17 earnings were below Deutsche Bank's estimates. The broker remains positive on the company's growth strategy but downgrades to Hold from Buy on valuation.

The broker observes the company has a solid track record of beating earnings guidance. FY18 guidance is for EBITDA of at least $500m.

Deutsche Bank believes guidance is conservative, despite the company flagging high iron product discounts. Target is $13.50.

SEEK LIMITED ((SEK)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/2/3

FY17 results were broadly in line with Credit Suisse. The broker reduces FY18 net profit forecast by -8.6% to reflect lower guidance.

The stock may be high-quality but the broker struggles to justify the share price at current levels. Rating is downgraded to Underperform from Neutral. Target is raised to $15.80 from $14.70.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/1/2

FY17 net profit was below Credit Suisse forecasts. The broker updates modelling assumptions and, as a result, forecasts for earnings per share decreased by -7% over FY18-20.

Based on recent relative share price performance, the broker downgrades to Underperform from Neutral. Operating earnings growth is expected to improve in FY18 but this is essentially because of acquisitions rather than a step change in regional organic growth rates.

Target is reduced to $22.40 from $22.60.

SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/1/3

The trading update suggests lowered expectations for FY18 and Credit Suisse notes similar trading updates from competitors, highlighting softness in retail-facing sales.

Credit Suisse  lowers earnings forecasts by -3-6% and downgrades to Neutral from Outperform. Target is reduced to 85c from 90c.

TELSTRA CORPORATION LIMITED ((TLS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/3/2

FY17 results were considered "decent" and above forecasts but Ord Minnett believes the results of the capital management review and accompanying cut to the dividend were the worst outcome investors could have expected.

Management intends to use most of the proceeds from the NBN for new endeavours, potentially outside its expertise, in the broker's opinion, rather than returns to shareholders.

Rating is downgraded to Hold from Buy. Target is reduced to $4.20 from $5.00.

See also TLS upgrade.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 4/3/1

FY17 earnings were slightly behind Ord Minnett because of higher costs. The main positive surprise was the proposed distribution of $0.20 per share. However, the company outlined geological challenges at the Narrabri operation, leaving the broker to downgrade FY19 and FY20 estimates.

The share price has had a run-up recently and the broker downgrades to Accumulate from Buy. Target is reduced to $3.45 from $3.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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