Weekly Ratings, Targets, Forecast Changes

This story features ALUMINA LIMITED, and other companies. For more info SHARE ANALYSIS: AWC

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 22 to Friday January 26, 2018
Total Upgrades: 16
Total Downgrades: 11
Net Ratings Breakdown: Buy 41.20%; Hold 42.06%; Sell 16.74%

The Australian share market is experiencing a corporate earnings upgrade cycle. Not that anyone can tell from the share market's performance year-to-date thus far, but since the closing quarter of calendar 2017 analysts have been forced to succumb to higher for longer commodity prices, and it shows up in steadily rising profit estimates for the year(s) ahead.

The positive undercurrent is not just a commodities affair. Growth over-achievers such as a2 Milk, CSL and Aristocrat Leisure are putting in their positive contributions as well.

This upgrade cycle is robust and still ongoing, as clearly visible in this week's tables for positive revisions to earnings estimates and valuations/price targets. The week's overview for negative adjustments to broker price targets is not even worth mentioning.

Things are a little more complicated when we zoom in on stock specific ratings published by stockbroking analysts. For the week ending Friday, 26 January 2018, FNArena registered 16 upgrades in recommendations for individual stocks versus 11 downgrades.

Resources stocks remain prominently involved on both sides of the ledger, with the likes of Alumina Ltd, Graincorp, Orica and Pilbara Minerals receiving upgrades during the week, while Galaxy Resources and St Barbara (2x) are amongst the receivers of downgrades. Outside of the resources space, Fairfax offshoot Domain received two upgrades following its hefty price fall after the CEO's sudden departure, with QBE Insurance also receiving two upgrades following an initial bad reception of its market update accompanied by yet more write-downs.

All in all, total Hold/Neutral ratings for the eight stockbrokers monitored daily by FNArena remain the largest group, at 42% of total recommendations, with Buys totalling 41.20% and the remaining 16.74% filled with Sell ratings. Morgans, Morgan Stanley and Macquarie are the only three (out of eight) with more Buy ratings than Neutral/Holds under coverage.

This week the local reporting season starts warming up. Time to assess whether the underlying optimism is justified, if not already in the share price.

Upgrade

ALUMINA LIMITED ((AWC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/1

Higher alumina prices are expected to underpin a strong year for earnings and dividends and Macquarie expects Alumina Ltd to deliver a 10% yield in 2018.

Rating is upgraded to Outperform from Neutral. Target is raised to $2.70 from $2.50.

BORAL LIMITED ((BLD)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/0/1

Ord Minnett believes Boral has entered a prolonged period of strong earnings growth that is not fully reflected in the share price.

The broker believes investment in infrastructure will be the main driver of growth domestically. In the US, the single family sector appears to be trending higher and repair activity should expand.

The broker upgrades to Accumulate from Hold and raises the target to $8.50 from $6.70.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Upgrade to Buy from Sell by UBS and Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 2/3/2

CEO Antony Catalano has unexpectedly resigned, citing family commitments and difficulties with relocating to Sydney.

Regardless of the reasons for his departure, UBS believes investors were partly pricing the stock at a premium to the REA Group ((REA)) because of a belief that he could help drive significant growth in the business.

Even if the risk to forward growth has increased UBS believes the uncertainty is more than priced in and upgrades to Buy from Sell. Target is $3.20.

Deutsche Bank had initiated with a Sell in November last year, but after share price weakness following the sudden departure of the CEO, the broker thinks it is time for an upgrade to Hold. Price target has remained $3.35.

The analysts acknowledge the immediate outlook is now clouded with uncertainty, but they also believe this is now well and truly reflected in the share price.

GRAINCORP LIMITED ((GNC)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0

Graincorp's winter grain receivals were down some -50% on the previous winter. Given high fixed costs, Morgans notes a below average year means crunched margins, increased competition and potential loss of market share.

The summer crop is not looking too good either, given ongoing dry conditions. The broker has slashed earnings forecasts and lowered its target to $8.51 from $8.73. The broker nevertheless notes that the time the buy Graincorp is in a bad year, rewarding the patient investor when crops normalise.

Upgrade to Add.

LEND LEASE CORPORATION LIMITED ((LLC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Macquarie upgrades to Outperform from Neutral, considering the pending construction issues are now, at least partly, factored into the share price. The broker also retains more confidence in the sources of other profits.

The broker believes, in a changing macro environment, the outright chase for yield has returned the focus to growth and, hence, Lend Lease is well-placed. Target is $17.63.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/1/2

Deutsche Bank now forecasts marginal growth in the metro TV market in FY18. Some of the momentum seen in the first half should continue into the second half, driven by advertising revenue linked to the Commonwealth Games and greater monetisation by Nine Entertainment of some of its better-performing 2017 programs.

Heading into FY19 the broker believes growth will be difficult to maintain, particularly in the light of audience declines. Rating is upgraded to Buy from Hold, as a broker envisages upside from current levels. Target is raised $1.80 from $1.50.

ORICA LIMITED ((ORI)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/5/1

Morgan Stanley reviews its position on chemicals coverage amid increased confidence in the commodity cycle.

The broker believes recent commodity price strength will prove a precursor to expansion activity and an increase in supply. This has prompted an increase in explosives demand forecasts.

The broker calculates Orica has earnings leverage to increased volumes that is underappreciated.

Rating is upgraded to Overweight from Equal-weight. Target is raised to $21.20 from $16.50. Industry view is Cautious.

PILBARA MINERALS LIMITED ((PLS)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/1

Macquarie makes material upgrades to 2018 carbonate and spodumene prices, upgrading these by 14% and 19% respectively. The broker still envisages supply will overshoot near-term demand and maintains a bearish view for 2019/20.

The company's exposure to upgraded long-term lithium pricing leads the broker to upgrade the stock to Outperform from Neutral on a stronger long-term outlook. Target is raised $1.20 from $1.15.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/2

Ord Minnett has decided to upgrade to Accumulate from Hold, while lifting its price target to $11.20 from $10.95. The moves are being justified via a reference to management now having rebased FY18 guidance, in combination with expected upside from the cycle and interest rates, plus possible benefits to margins from a restructure.

The broker does acknowledge there remain risks, with reserve releases potentially drying up in some markets, eventually a rise in reinsurance costs and the need for QBE to increase its underlying margins by some 2% to validate the upside valuation thesis.

New management has re-based margin guidance for 2018. Heading into the February results, Macquarie believes the buyback, premium growth and portfolio sales will remain the focus for investors.

Now the negative catalyst of a profit downgrade is behind the market, the broker believes there is enough clear air to invest in a stock that is trading at a -15% discount to weighted international peers.

Rating is upgraded to Outperform from Neutral and the target reduced to $11.10 from $11.70.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 4/3/1

FY18 underlying margins are falling and, given earnings risks in the medium term and the need for personal lines to improve, Morgan Stanley believes the stakes on the company's "marketplace" strategy are high. The broker targets a first half underlying margin of 10.4%.

Rating is upgraded to Equal-wait from Underweight. Target is raised to $13.20 from $12.90. In-Line sector view.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/1

December passenger numbers showed strong international growth and Morgans expects 11% growth in net operating receipts in 2017. Over the next three years the broker expects 6% per annum compound growth in cash flows.

Rising government bond rates remain the key risk to the investment view and the broker suggests investors retain the capacity to take advantage of share price weakness that may occur if bond rates lift materially.

Morgans upgrades to Add from Hold. Target is raised to $7.14 from $7.11.

SYRAH RESOURCES LIMITED ((SYR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/1/0

Macquarie makes material upgrades to 2018 carbonate and spodumene prices, upgrading these by 14% and 19% respectively. The broker still envisages supply will overshoot near-term demand and maintains a bearish view for 2019/20.

The broker observes commissioning of Balama appears to have gone well for Syrah Resources. The broker's upgraded outlook leads to a lift in long-term prices for battery anode materials. Rating is upgraded to Outperform from Neutral. Target is raised to $5.20 from $4.70.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/2

UBS believes the company has the opportunity to accelerate both value and volume share in China over the next 3–5 years. Asia is expected to become the largest contributor to operating earnings by FY19.

The broker's analysis shows that the company's brands are materially under penetrated but rate highly among wine consumers. UBS upgrades to Buy from Neutral. Target is raised to $17.30 from $13.00.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/3/2

Incorporating significant changes to bulk commodity price forecasts, Macquarie upgrades Whitehaven Coal to Neutral from Underperform. Target is raised to $4.40 from $3.90.

The broker lifts 2018 forecasts for coking coal by 40% and thermal coal by 30%.

Downgrade

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/6/2

Citi analysts have moved to a Sell, from Neutral, while lowering their price target to $72 (was $76.75).

The analysts justify their decision with the assessment that CBA is facing a decline in balance sheet momentum combined with rising compliance and remediation costs.

Examining previous crises suggests the CBA share price remains poised for a period of underperformance, according to Citi.

CIMIC GROUP LIMITED ((CIM)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/1/2

Deutsche Bank retains a positive outlook for the Australian infrastructure construction sector in 2018, given a high backlog in work in hand.

Nevertheless, share prices appear already to be pricing in most of the positives as the broker observes valuations are towards the top end of historical ranges.

Cimic is downgraded to Sell from Hold and the target raised to $38.39 from $38.03.

GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/3/1

Macquarie makes material upgrades to 2018 carbonate and spodumene prices, upgrading these by 14% and 19% respectively. The broker still envisages supply will overshoot near-term demand and maintains a bearish view for 2019/20.

Macquarie believes Sal de Vida is unlikely to be brought into production. Removing the development means upgrades to medium-term earnings for Galaxy Resources because of reduced operating costs, while long-term earnings estimates are down -15-45%.

The broker downgrades to Underperform from Neutral and reduces the target  to $3 from $4.

HOTEL PROPERTY INVESTMENTS ((HPI)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/2/0

Ord Minnett observes improving underlying fundamentals for A-REITs and considerable strength in transaction markets. Nevertheless, the sector is trading at a significant -9% discount to valuation. The broker expects an improvement in 2018 in retail operating conditions, driven by a pick up in consumer sentiment.

Hotel Property is downgraded to Hold from Accumulate. Target is raised to $3.30 from $3.20.

HUB24 LIMITED ((HUB)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

Ord Minnett expects flows to remain strong for the company. Adviser numbers are also up 41% in the December quarter.

The broker likes the business fundamentally but prefers a cheaper entry point and believes the stock has run too hard, too quickly.

Rating is downgraded to Hold from Buy. Target rises to $11.00 from $9.57.

JANUS HENDERSON GROUP PLC. ((JHG)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0

Citi upgrades 2018 and 2019 estimates by 7%, updating flow estimates and performance fee calculations while allowing for US tax cuts.

Given the stock's recent rally, the broker notes it is now trading at a 5% premium to its peer group. Rating is downgraded to Neutral from Buy. Target is raised to $51.30 from $50.75.

MICHAEL HILL INTERNATIONAL LIMITED ((MHJ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0

The company has announced it will exit the US market and re-position the Emma & Roe brand. Credit Suisse welcomes this announcement but, given the recent share price performance, believes the impact is largely priced in.

The broker updates forecasts to reflect a reduced loss profile for Emma & Roe and the exit of the US market, but expects to further refine assumptions once more detail emerges regarding the new proposition for the company.

Rating is downgraded to Neutral from Outperform and the target raised to NZ$1.55 from NZ$1.50.

RESMED INC ((RMD)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 4/2/1

Revenue of US$601m was 4% ahead of Macquarie's forecasts in the second quarter. This was driven by stronger device sales in the Americas. Globally, masks and accessories were robust.

Macquarie finds limited appeal relative to domestic healthcare peers and downgrades to Underperform from Neutral. Target is raised to $11.80 from $11.65.

ST BARBARA LIMITED ((SBM)) Downgrade to Underperform from Outperform by Credit Suisse and Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/3/2

Credit Suisse observes December quarter production was strong and FY18 guidance is upgraded. The broker notes cash is building and the Gwalia extension project remains on budget and on schedule.

Rating is downgraded to Underperform from Outperform on the basis of the share price performance exceeding the valuation. Target is raised to $3.00 from $2.95.

Ord Minnett has downgraded to Hold from Buy, with the decision seemingly related to the fact that updated guidance of all-in sustaining costs (AISC) of US$910/oz is some 8% higher than what the broker had penciled in.

Having said so, the broker does believe management will likely beat its own cost guidance for the full year. Target price gains 10c to $3.50. St Barbara remains one of Ord Minnett's favourites in the sector as the company is considered to be in an enviable position led by strong cash flow, no debt and organic growth options.

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

Somnomed has reported record second quarter revenues thanks to strength in Europe, and early, but significant, contributions from the Renew Sleep Solutions business, Morgans notes. However FY18 guidance has been downgraded due to slower than forecast initial RSS sales.

The result is a pushing out in time of earnings growth expectations. The broker has cut its target to $3.58 from $4.04 and downgraded to Hold.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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