Weekly Ratings, Targets, Forecast Changes

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

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 September 25 to Friday September 29, 2017
Total Upgrades: 9
Total Downgrades: 7
Net Ratings Breakdown: Buy 42.24%; Hold 41.56%; Sell 16.19%

The share market has been caught in a moribund state for best of the past four months. During that time a gradual re-weighting has taken place among the eight stockbrokers monitored daily by FNArena. Today, half of them (4) carry more Buy ratings than either Neutral or Sell ratings.

The week ending Friday, 29 September 2017 delivered more positive news with total tally in rating changes showing nine upgrades versus seven downgrades. Six upgrades went to Buy, but five downgrades moved to Sell.

It has to be noted: a lot of resources stocks are among those receiving downgrades to Sell.

For the week, Monadelphous takes top spot for positive revisions to its target price; up in excess of 9%, closely followed by gold producer Perseus Mining; also up bu more than 9%. Galaxy Resources, Beach Energy and Macquarie Atlas Group follow next.

On the flipside we find Greencross, Regis Resources, Evolution Mining and Fortescue Metals; but overall reductions remain small.

There's a few more fireworks going on among changes to profit estimates. Here, Beadell Resources commands pole position with a gain of 35% to consensus projection, with Nufarm (+14%) coming second and Kathmandu (+10%) third. Premier Investments also enjoyed a gain of more than 10%.

The latter three all released financial results, reversing the negative trend that dominated the August reporting season.

Greencross suffered the largest negative revision for the week (-67%), at respectable distance followed by Brickworks (-13%), Resolute Mining (-3.9%) and Downer EDI (-3.6%).

Given Labour Day holiday in most of the country, the week ahead is poised to start off on a soft note in terms of broker research.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/0

Credit Suisse chooses to look through a period of heightened policy risk and suggests the market structure is largely unchanged and, if anything, the position of AGL in the medium to longer term is entrenched.

A -20-25% underperformance versus the electricity futures highlights the rewards for bearing the risk, the broker adds.

Credit Suisse increases net profit estimates by 6.5% for FY20 and raises the target to $27.00 from $23.25. Rating is upgraded to Outperform from Neutral.

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

Beach Energy has effectively used its "lazy" balance sheet to buy Lattice Energy for $1.585bn from Origin Energy ((ORG)), a deal that will transform the company and make it stand out from its peers in Australia, comment Citi analysts.

While it is not a given this deal will be earnings accretive in the short term, Citi sees plenty of positives and takes an optimistic view regarding options available to Beach Energy to derive additional value from the acquired assets.

With the target price jumping 20% to 92c, Citi is upgrading to Buy from Neutral. As many investors are now looking at these assets for the first time, Citi suggests Beach management must now deliver earnings and demonstrate potential for material cost savings over the coming 12 months,

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/1/0

Ord Minnett raises earnings estimates by 5% and the potential for higher citrus export pricing, offsetting margin declines in the berry category, leads it to change its view. The broker finds no clear negative catalyst now.

Rating is upgraded to Hold from Lighten. Target is raised to $5.01 from $4.68.

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

DOWNER EDI LIMITED ((DOW)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/1

Citi upgrades to Buy from Neutral and raises FY18-20 underlying net profit forecasts by 33-40%. This comes largely on the back of incorporating the integration of Spotless into forecasts after a period of restriction, with a subsequent transfer of coverage to another analyst.

The broker increases the target to $7.50 from $7.26 following the revisions. Citi remains attracted to the diversification and leverage to infrastructure-related sectors.

INVESTA OFFICE FUND ((IOF)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/0/2

Credit Suisse observes the stock has traded down to a -8% discount to stated net tangible assets amid soft FY18 guidance and perceptions of the stock overhang from the Cromwell ((CMW)) holding.

The broker considers the current book values are unsustainable yet acknowledges the strength of recent transactions in key office markets suggests there are plenty of direct real estate investors with far more bullish views.

The broker considers it reasonable that a portfolio with this scale and quality may come onto the radar of a purchaser that is more willing than the Cromwell consortium to adopt hostile tactics.

Rating is upgraded to Outperform from Neutral. Target is raised to $4.67 from $4.53.

MURRAY RIVER ORGANICS GROUP LIMITED ((MRG)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Following the completion of a $12.1m capital raising Morgans reduces forecasts for earnings per share in FY18, FY19 and FY20 by -31.7%, -38.3% and -33.5% respectively.

Assuming normal seasonal conditions the broker forecasts strong earnings growth from the maturity profile of the vines amid synergies from food business.

The company failed to deliver on prospectus forecasts which affected credibility and the broker recognises it will take time to rebuild investor confidence.

Yet value exists, given a -39% discount to net tangible assets and a low FY18 price/earnings ratio of 8.5x. Morgans upgrades to Add from Hold. Target is raised to $0.43 from $0.42.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

Commodity analysts at Citi have updated their price deck, which has resulted, mainly, in higher price forecasts for Q4 and calendar 2018, albeit in many cases prices remain below present spot prices.

For Australian based operations the exercise has a flipside in that a stronger-for-longer Aussie dollar is, despite the above, triggering downgrades to forecasts. This is partially offset by higher valuation multiples for the sector overall.

Citi is now projecting AUD/USD to remain above 80c for the next three years. Perseus Mining is the sole recipient of a recommendation upgrade following all of the above; to Buy/High Risk from Neutral. Price target jumps to 53c from 36c.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/6/1

A heightened risk backdrop means Morgan Stanley adopts a more defensive stance while retaining a positive view on the resources sector.

The broker lifts its rating for Sandfire Resources to Equal-weight from Underweight on valuation grounds. Target is reduced to $5.70 from $6.00. Industry view is Attractive.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/2/2

US Medicare has released proposed fees schedules for 2018 and the reductions are deeper than Ord Minnett expected. Final rates will be published in November following a consultation period.

The broker believes the impact of the rate reduction should be manageable and the company will probably seek savings to offset the cuts.

Rating is upgraded to Hold from Lighten despite the negative news, given the share price is now close to the target. Target is steady at $21.20.

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

Downgrade

COMPUTERSHARE LIMITED ((CPU)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/5/2

Deutsche Bank downgrades to Sell from Hold. The broker believes the expansion into mortgage servicing may not deliver the operating leverage the company expects.

The broker's analysis of the industry in the US suggests regulatory scrutiny that results in changes to business practice is likely to offset any operational gains.

The broker makes a small upgrade to FY18 and FY19 earnings and lowers the target to $13.00 from $13.70.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 3/3/1

A heightened risk backdrop means Morgan Stanley adopts a more defensive stance while retaining a positive view on the resources sector.

The broker downgrades to Underweight from Overweight on valuation grounds. Target is reduced to $2.10 from $2.70. Sector view: Attractive.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 3/4/1

A heightened risk backdrop means Morgan Stanley adopts a more defensive stance while retaining a positive view on the resources sector.

A risk of a commodity price correction by the end of the year, in addition to specific concerns for the elevated 58% grade discount, means the broker downgrades to Underweight from Equal-weight.

Target is reduced to $4.50 from $5.40. Attractive industry view.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/1

Commodity analysts at Citi have updated their price deck, which has resulted, mainly, in higher price forecasts for Q4 and calendar 2018, albeit in many cases prices remain below present spot prices.

For Australian based operations the exercise has a flipside in that a stronger-for-longer Aussie dollar is, despite the above, triggering downgrades to forecasts. This is partially offset by higher valuation multiples for the sector overall.

Citi is now projecting AUD/USD to remain above 80c for the next three years. On the back of all of this, Independence Group's rating has been downgraded to Neutral from Buy. Price target falls to $3.67 from $3.82.

ORICA LIMITED ((ORI)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/6/2

Deutsche Bank downgrades to Hold from Buy as the stock is trading at a 1% premium to its revised valuation. The broker believes the increased explosives volumes and strip ratios from which the company will benefit will be partly offset by foreign currency movements and increased sourcing costs in Europe. 

Deutsche Bank reduces earnings forecasts by -3-10% to reflect the impact of revised FX assumptions. Target is reduced to $20.25 from $21.30.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/6

Commodity analysts at Citi have updated their price deck, which has resulted, mainly, in higher price forecasts for Q4 and calendar 2018, albeit in many cases prices remain below present spot prices.

For Australian based operations the exercise has a flipside in that a stronger-for-longer Aussie dollar is, despite the above, triggering downgrades to forecasts. This is partially offset by higher valuation multiples for the sector overall.

Citi is now projecting AUD/USD to remain above 80c for the next three years. On the back of all of this, Regis Resources' rating has been downgraded to Sell from Neutral. Price target falls to $3.60 from $4.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 3/3/2

A heightened risk backdrop means Morgan Stanley adopts a more defensive stance while retaining a positive view on the resources sector.

The broker envisages the stock at risk of a commodity price correction by the end of the year and downgrades to Underweight from Overweight. Target falls to $3.20 from $3.60. Industry view: Attractive.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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