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 February 6 to Friday February 10, 2017
Total Upgrades: 9
Total Downgrades: 15
Net Ratings Breakdown: Buy 43.58%; Hold 42.40%; Sell 14.02%

For the week ending Friday, 10th February 2017, FNArena registered more downgrades in stockbroker ratings for individual ASX-listed stocks and this should not surprise. The share market is in rally mode and share prices seem solidly in an up-trend. FNArena registered 15 downgrades and nine upgrades.

The numbers seem artificially biased, a little bit, because only one company (Premier Investments) received more than one upgrade, while Regis Resources and Royal Wolf Holdings attracted two and three downgrades during the week respectively.

Others receiving upgrades include a2 Milk, Sims Metal and Independence Group while AMP, Bank of Queensland, OceanaGold and Transurban received downgrades.

Cimic Group tops the week's table for receiving upgrades to price targets with a consensus gain of no less than 42% post a rather divisive profit report. Alumina Ltd, AMP, CSR, Kathmandu and Shopping Centres Australasia all enjoyed at least 3% increases to their consensus target.

Negative adjustments to price targets were far more benign. Seven West Media tops the week's table with a -3.80% change, followed by Tabcorp and AWE Ltd.

The earnings estimates table quickly fired up as earnings reports hit pc terminals and iPads. Orocobre tops the week's table, folled by AMP, Rio Tinto, AWE Ltd and Cimic Group. Downward adjustments to forecasts were prevalent for Alacer Gold, Royal Wolf Holdings, Iluka Resources, Virgin Australia and Transurban.

The local reporting season steps up a notch this week.

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/1/1

The latest survey of pregnant women in China conducted by UBS has found being a premium and trusted brand remains of importance, but this year has seen a big increase in the importance of being sourced from a trusted country, especially online. 

New Zealand clearly gets a nod given A2 is rising rapidly up the charts on brand awareness and performance. A2 now rates sixth on "bought most often" and the broker sees this as highly encouraging as the company rolls out physical stores.

Encouraging enough to upgrade to Buy, despite the obvious regulatory risks in China. Target is raised to NZ$2.75 from NZ$2.38.

ARB CORPORATION LIMITED ((ARB)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/3/0

Citi had earlier slapped a Sell rating on the stock as it was deemed well overcooked, but now the share price has fallen -16% since the start of the year, the analysts think it's time to upgrade to Neutral.

Ahead of the upcoming interim report, forecasts have been left largely unchanged.

ALUMINA LIMITED ((AWC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/4

Improved disclosure from  Alcoa has translated to upgrades to Macquarie's earnings and dividend expectations.

Potential supply-side restrictions in Chinese alumina later this year have increased the risk that Macquarie's above-consensus call on alumina pricing in 2017 could extend beyond this year.

AWAC's emerging bauxite export business also presents upside risk to the base case forecasts. Rating is upgraded to Outperform from Neutral. Target rises to $2.30.

CIMIC GROUP LIMITED ((CIM)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/3

2016 net profit was above Macquarie's estimates and at the top end of guidance. FY17 net profit guidance is 14% ahead of the broker's previous estimates, at $640-700m.

The broker notes the company has now hit the upper end of guidance in each of the last two years, which provides a template for 2017. The project pipeline is robust with $100bn in relevant projects coming on stream in 2017.

The broker upgrades to Outperform from Neutral and raises the target to $42.50 from $35.02. 2017 and 2018 earnings per share estimates are upgraded by 17% and 15% respectively.

INDEPENDENCE GROUP NL ((IGO)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/4/1

In the swings and roundabouts of global nickel export bans, the Philippines has shut down various mines for environmental reasons including 16 nickel mines to be closed and two to be suspended, given six months to improve. The move means Credit Suisse has restored its assumption of the nickel market reaching supply-demand balance by December.

The broker had already assumed such a balance before Indonesia lifted its exports bans, so the Philippines has provided the offset. The result is an increase in Credit Suisse's target for Independence to $4.40 from $4.00. Given the stock had been sold down heavily on the prior Indonesian news, the broker upgrades to Outperform.

OIL SEARCH LIMITED ((OSH)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 5/3/0

Oil Search now appears to Credit Suisse to be the best play on oil and the stock is upgraded to Outperform from Underperform. When growth matters in the sector again, the broker believes this is a stock that potentially has value upside.

The broker believes a trading opportunity exists on the potential for reserves to be upgraded with the results. The broker cautions that the upgrade in recommendation should not be mistaken for a belief that 2017 will be plain sailing for the company.

Target is raised to $7.25 from $5.90.

PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Buy from Neutral by UBS .B/H/S: 2/4/0

The company has released unaudited results for its retail business following speculation the first half was weak. The first half is not as bad as feared, in Macquarie's view, with the headline numbers largely in line.

The broker had previously believed there was downside risk to forecasts, as the company was cycling a strong previous corresponding half as well as currency headwinds, and there has been mixed feedback regarding the apparel sector over Christmas.

With the perceived earnings risk subsiding, the broker takes the opportunity to upgrade to Outperform from Neutral. Target is raised to $16.84 from $16.43.

Pre-announced first half numbers from Premier show sales in line with UBS' expectation and earnings exceeding. The broker had previously warned of downside risk from lagged A$ hedges. 

With the result offering relief, investors can now focus on gross margin improvement and the Smiggle rollout, UBS suggests. Aside from more stores, Smiggle is looking at new geographies as well. With Premier now out of danger, the broker upgrades to Buy. 

Target rises to $16.85 from $16.60.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/2

Increased confidence about the potential for a positive surprise at the upcoming interim report release has triggered an upgrade to Buy from Neutral at Citi. The analysts mention increased confidence around the company's near term volume outlook.

Citi analysts are currently positioned 10% ahead of consensus for FY17 EBIT forecast. Target remains $13.70.

Downgrade

AMP LIMITED ((AMP)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/4/0

Citi analysts had been praying for the absence of any further negative surprises beforehand, and they got what they were hoping for, but still the decision was made to downgrade to Neutral from Buy.

Citi now thinks significant headwinds for the company's Wealth Management business will weigh on the share price. They see no real value and prefer QBE Insurance ((QBE)) in the sector instead. Target $5.60.

AWE LIMITED ((AWE)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/2/3

Macquarie has reduced its oil and gas price forecasts with tighter balances in 2017 anticipated to cause a return to market surpluses in 2018 and 2019.

AWE Ltd is the sole stock to receive a downgrade in Australia on the back of the move. Rating reduced to Underperform from Neutral. Target drops to 55c from 60c supported by some hefty reductions to forecasts.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/6/1

Despite being the preferred regional bank, with sound credit quality, strong capital and dividend yield, Morgan Stanley downgrades to Equal-weight from Overweight. Home loan growth is shrinking and deposit margins are still under pressure, the broker observes.

The broker now forecasts cash earnings per share to fall -3% in FY17. The combination of downgrades to earnings per share and reduced likelihood of a bull case outcome reduces the broker's price target to $11 from $12.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 6/1/0

The Australian mining sector continues to make improvements in costs, with 75% of companies beating Deutsche Bank's cost estimates the December quarter. The gold sector led the way.

The broker's preference remains with the gold sector and Evolution Mining is downgraded to Hold from Buy on valuation. Target is $2.40.

GRAINCORP LIMITED ((GNC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0

Credit Suisse has updated forecasts to reflect Graincorp's divestment of Allied Mills. The broker believes there is little point in owning a downstream flour mill business within an increasingly competitive domestic grain market and sees no downside to the divestment.

Rather, a sound financial return has resulted allowing for greater balance sheet flexibility. Target rises to $9.87 from $9.58. The stock has nevertheless had a solid run on increasingly positive crop reports, and as such Credit Suisse pulls back to Neutral. 

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

Deutsche Bank expects the weakness in the TV market in the second half of FY16 has continued into the first half of FY17.

Discussions with advertisers and media buyers suggest no immediate improvement should be expected and the broker lowers its forecast for the metro TV market  to a -2.5% decline for FY17.

With the stock trading close to the revised price target, Deutsche Bank downgrades to Hold from Buy. Target falls to $1.10  from $1.35.

OCEANAGOLD CORPORATION ((OGC)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/1/1

The Australian mining sector continues to make improvements in costs, with 75% of companies beating Deutsche Bank's cost estimates the December quarter. The gold sector led the way.

The broker's preference remains with the gold sector and OceanaGold is downgraded to Hold from Buy on valuation. Targets slips to $4.10 from $4.20.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Sell from Hold by Deutsche Bank and Downgrade to Neutral from Buy by UBS .B/H/S: 2/5/1

The Australian mining sector continues to make improvements in costs, with 75% of companies beating Deutsche Bank's cost estimates the December quarter. The gold sector led the way.

The broker's preference remains with the gold sector and Regis Resources is downgraded to Sell from Hold on valuation. Target is $2.80.

A general sector update on base metals and gold has triggered changes to valuations and forecasts across the spectrum. UBS sides with the gold bulls, anticipating US$1300/oz in 2017.

Only one stock has received a downgrade in recommendation, and it is Regis Resources. Downgrade to Neutral from Buy. Price target lifts to $3.44 from $3.08.

ROYAL WOLF HOLDINGS LIMITED ((RWH)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/0

First half results highlight an ongoing tough operational environment. Deutsche Bank notes, while the company has increased its share of the construction sector, the resources sector decline has largely offset it.

Additionally, there is increased competition in the container sales business, resulting in reduced volumes.

The broker reduces the target to $1.45 from $1.70 and downgrades the rating to Hold from Buy, as the stock is trading close to valuation.

The first half result slightly beat Credit Suisse estimates. The broker continues to believe the company is close to a trough in earnings but there are timing risks and growth appears hard to find in many areas.

Following the share price appreciation since the FY16 result and negative revisions to earnings per share, the broker believes the valuation is fair at this juncture and downgrades to Neutral from Outperform. Target is raised to $1.45 from $1.40.

Royal Wolf's result was slightly ahead of expectation thanks to a one-off payment from Titan. Growth in leasing revenues was a positive, Macquaire notes, offset by limited progress in disposing of surplus camp assets.

The market remains challenging, hence asset disposal is required to accelerate profit growth and timing here is uncertain, Macquarie suggests. Target rises to $1.45 from $1.40 but as the share price is closing in, rating downgraded to Neutral.

SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/2/4

The first half result signalled an unexpected slowdown in specialty store sales growth relative to the company's strong performance over the last few years,  Ord Minnett observes.

The broker is not sure whether this is because of a slower sales environment in the business geographies or a maturing of the relatively young portfolio.

As the broker awaits further clarity on the drivers of this slowdown,  the rating is downgraded to Hold from Accumulate. Target falls to $2.30 from $2.36.

SEVEN WEST MEDIA LIMITED ((SWM)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/3/2

Deutsche Bank believes weakness in the TV market has continued into the first half of FY17 and discussions with advertisers and media buyers suggest no immediate improvement.

The broker lowers its forecast for the metro TV market to a decline of -2.5% in FY17.

With the stock trading ahead of the broker's updated valuation it is downgraded to Sell from Hold. Target falls to $0.70 from $0.85.

TRANSURBAN GROUP ((TCL)) Downgrade to Hold from Add by Morgans .B/H/S: 4/3/0

Stockbroker Morgans has downgraded to Hold from Add while revising its price target downwards to $11.16. The result beat expectations, but it's the subsequent rally in the share price that is responsible for the downgrade.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 ALUMINA LIMITED Buy Neutral Macquarie 2 ARB CORPORATION LIMITED Neutral Sell Citi 3 CIMIC GROUP LIMITED Buy N/A Macquarie 4 INDEPENDENCE GROUP NL Buy Neutral Credit Suisse 5 OIL SEARCH LIMITED Buy Sell Credit Suisse 6 PREMIER INVESTMENTS LIMITED Buy Neutral Macquarie 7 PREMIER INVESTMENTS LIMITED Buy Neutral UBS 8 SIMS METAL MANAGEMENT LIMITED Buy Neutral Citi 9 THE A2 MILK COMPANY LIMITED Buy Neutral UBS Downgrade 10 AMP LIMITED Neutral Buy Citi 11 AWE LIMITED Sell Neutral Macquarie 12 BANK OF QUEENSLAND LIMITED Neutral Buy Morgan Stanley 13 EVOLUTION MINING LIMITED Neutral Buy Deutsche Bank 14 GRAINCORP LIMITED Neutral Buy Credit Suisse 15 NINE ENTERTAINMENT CO. HOLDINGS LIMITED Neutral Buy Deutsche Bank 16 OCEANAGOLD CORPORATION Neutral Buy Deutsche Bank 17 REGIS RESOURCES LIMITED Neutral Buy UBS 18 REGIS RESOURCES LIMITED Sell Neutral Deutsche Bank 19 ROYAL WOLF HOLDINGS LIMITED Neutral Buy Macquarie 20 ROYAL WOLF HOLDINGS LIMITED Neutral Buy Credit Suisse 21 ROYAL WOLF HOLDINGS LIMITED Neutral Buy Deutsche Bank 22 SEVEN WEST MEDIA LIMITED Sell Neutral Deutsche Bank 23 SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP Neutral Buy Ord Minnett 24 TRANSURBAN GROUP Neutral Buy Morgans

Recommendation

Positive Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 CIM CIMIC GROUP LIMITED -50.0% -100.0% 50.0% 4 2 ARB ARB CORPORATION LIMITED -13.0% -38.0% 25.0% 4 3 OSH OIL SEARCH LIMITED 56.0% 31.0% 25.0% 8 4 CSR CSR LIMITED -8.0% -25.0% 17.0% 6 5 AWC ALUMINA LIMITED -36.0% -50.0% 14.0% 7 6 BXB BRAMBLES LIMITED 57.0% 43.0% 14.0% 7 7 SGM SIMS METAL MANAGEMENT LIMITED 7.0% -7.0% 14.0% 7 8 SUN SUNCORP GROUP LIMITED 44.0% 31.0% 13.0% 8 9 KMD KATHMANDU HOLDINGS LIMITED 50.0% 40.0% 10.0% 4 10 TLS TELSTRA CORPORATION LIMITED -31.0% -38.0% 7.0% 8

Negative Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 RWH ROYAL WOLF HOLDINGS LIMITED 13.0% 88.0% -75.0% 4 2 RRL REGIS RESOURCES LIMITED 6.0% 31.0% -25.0% 8 3 OGC OCEANAGOLD CORPORATION 40.0% 60.0% -20.0% 5 4 SWM SEVEN WEST MEDIA LIMITED -40.0% -20.0% -20.0% 5 5 GNC GRAINCORP LIMITED 33.0% 50.0% -17.0% 6 6 AWE AWE LIMITED -33.0% -17.0% -16.0% 6 7 EVN EVOLUTION MINING LIMITED 86.0% 100.0% -14.0% 7 8 TCL TRANSURBAN GROUP 57.0% 71.0% -14.0% 7 9 AMP AMP LIMITED 44.0% 56.0% -12.0% 8 10 CBA COMMONWEALTH BANK OF AUSTRALIA -25.0% -13.0% -12.0% 8

Target Price

Positive Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 CIM CIMIC GROUP LIMITED 28.503 19.867 43.47% 4 2 AWC ALUMINA LIMITED 1.814 1.729 4.92% 7 3 AMP AMP LIMITED 5.610 5.361 4.64% 8 4 CSR CSR LIMITED 4.062 3.895 4.29% 6 5 KMD KATHMANDU HOLDINGS LIMITED 2.050 1.980 3.54% 4 6 SCP SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP 2.158 2.095 3.01% 6 7 RRL REGIS RESOURCES LIMITED 3.233 3.188 1.41% 8 8 CBA COMMONWEALTH BANK OF AUSTRALIA 79.088 78.063 1.31% 8 9 SUN SUNCORP GROUP LIMITED 13.735 13.601 0.99% 8 10 OSH OIL SEARCH LIMITED 8.069 8.000 0.86% 8

Negative Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 SWM SEVEN WEST MEDIA LIMITED 0.760 0.790 -3.80% 5 2 TAH TABCORP HOLDINGS LIMITED 4.650 4.833 -3.79% 5 3 AWE AWE LIMITED 0.623 0.632 -1.42% 6 4 RWH ROYAL WOLF HOLDINGS LIMITED 1.513 1.525 -0.79% 4 5 ARB ARB CORPORATION LIMITED 16.480 16.553 -0.44% 4 6 OGC OCEANAGOLD CORPORATION 4.604 4.624 -0.43% 5 7 BXB BRAMBLES LIMITED 11.790 11.833 -0.36% 7 8 TLS TELSTRA CORPORATION LIMITED 5.024 5.025 -0.02% 8

Earning Forecast

Positive Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 ORE OROCOBRE LIMITED 1.950 -2.450 179.59% 4 2 AMP AMP LIMITED 34.888 13.714 154.40% 8 3 RIO RIO TINTO LIMITED 557.660 364.854 52.84% 8 4 AWE AWE LIMITED -1.040 -1.550 32.90% 6 5 CIM CIMIC GROUP LIMITED 190.680 152.625 24.93% 4 6 HGG HENDERSON GROUP PLC. 29.560 28.149 5.01% 5 7 FMG FORTESCUE METALS GROUP LTD 94.621 92.088 2.75% 8 8 NCM NEWCREST MINING LIMITED 83.382 81.891 1.82% 8 9 TPM TPG TELECOM LIMITED 45.420 44.660 1.70% 7 10 AGL AGL ENERGY LIMITED 118.457 117.086 1.17% 7

Negative Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 AQG ALACER GOLD CORP 5.632 11.879 -52.59% 5 2 RWH ROYAL WOLF HOLDINGS LIMITED 9.403 11.250 -16.42% 4 3 ILU ILUKA RESOURCES LIMITED -7.631 -6.631 -15.08% 7 4 VAH VIRGIN AUSTRALIA HOLDINGS LIMITED 0.486 0.551 -11.80% 7 5 TCL TRANSURBAN GROUP 20.182 22.312 -9.55% 7 6 AWC ALUMINA LIMITED 4.580 4.905 -6.63% 7 7 SFR SANDFIRE RESOURCES NL 49.906 53.220 -6.23% 8 8 PRU PERSEUS MINING LIMITED -4.070 -3.903 -4.28% 5 9 SUN SUNCORP GROUP LIMITED 92.038 95.213 -3.33% 8 10 TAH TABCORP HOLDINGS LIMITED 23.022 23.658 -2.69% 5

Weekly Broker Wrap: Oz economy; Ord Minnett re-initiates on telecoms sector; positive data for Woolworths; increased numbers of companies restructuring; the year of cobalt.

-Core inflation expected to under-shoot Reserve Bank's targets
-Structural changes in telecoms presenting opportunities
-Successful restructuring could lead to outperformance
-Cobalt demand growing while supply growth is stagnant

By Eva Brocklehurst

Oz Economics

Credit Suisse believes stagnation in the economy is the likely scenario in 2017, owing to weakness in business capital expenditure and fragility in residential investment. The delayed effects of macro prudential and exchange-rate tightening are expected to manifest in the current year. Nevertheless, with no incremental tightening effect visible to prevent a moderate recovery in 2018, the broker expects around 2.5% growth in that year.

Credit Suisse expects core inflation to under-shoot the Reserve Bank's targets. The trimmed mean of CPI inflation is expected to slow to 1.3% per annum by 2018. The broker does not believe there will be a sufficiently large, timely or sustained fiscal stimulus to prevent the central bank from cutting the cash rate further and forecasts the RBA to cut cash rates at least twice in 2017 and again in 2018.

Telecoms

Ord Minnett resumes coverage of the telecommunications sector, noting structural changes present opportunities. The broker believes the tailwinds in the mobile market are strong and assumes a three player market as its base case. Increasing data usage and mobile device proliferation should support growth in the industry.

In the NBN, margins are likely to continue coming under pressure for the incumbents, but this creates an opportunity to invest in operators such as Vocus Communications ((VOC)), for which growth is expected to accelerate over the next 4-5 years. The broker expects faster speeds and higher data limits to offset pressure on pricing. Ord Minnett initiates on Vocus with a Buy rating and $5.25 target.

Telstra ((TLS)) is rated Accumulate with a $5.45 target. Telstra is facing the strongest headwinds in the industry as the NBN is expected to reduce earnings by $2-3bn annually. The broker believes downside from the NBN is already priced in and a high dividend yield and modest valuation should provide support.

TPG Telecom ((TPM)), while being one of the more cost efficient operators in the industry, is expected to sustain compressed margins from NBN migration and new entrants potentially pressuring pricing and market share. Furthermore, its mobile ambitions in Australia and Singapore are uncertain. Ord Minnett initiates with a Hold rating and target of $6.65.

UBS observes a key feature of the results for Optus was an acceleration in net additions in mobile in the December quarter. The broker's question is whether the increased number of subscribers was driven by an acceleration in the market or a gain in market share.

Optus has stated it is winning incremental subscribers and share in regional Australia on back of its network investments. The company has also sustained increased uptake of its EPL mobile content services.

The broker notes the other aspect to the result was a significant step-up in the cost of sales in the consumer segment. The read-through for Telstra from the Optus result is difficult but the net additions for Optus appear to have accelerated and this suggests to UBS, at the very least, that Telstra's mobile share gains have plateaued.

Supermarkets

The first half result from Shopping Centres Australiasia ((SCP)) provides a positive data point for Woolworths ((WOW)) as that company's supermarkets occupy around 75% of the property group's portfolio. Of interest to Deutsche Bank is disclosure that supermarkets sales increased 2.0% year-on-year in November and 2.4% year-on-year in December. Meanwhile, the data suggests Big W is still doing it tough.

The data is in line with Deutsche Bank's channel checks on suppliers, which signal that Woolworths experienced an improving sales trend over the December quarter. Industry feedback suggests Coles ((WES)) sales growth has slowed, so the recovery for Woolworths may be even more acute than what the numbers suggest.

Deutsche Bank currently forecasts second-quarter food like-for-like sales growth of 1.5% for Woolworths and expects improvement over the longer term as execution gets better.

Restructure

Credit Suisse observes an increase in the number of Australian companies that are restructuring. Many of the candidates are the types of stocks that previously performed well during earnings expansions and are low-valued. They are also under-earning and cyclical, the broker observes. Successful execution of the restructuring should be yet another reason why they may outperform.

In 1999 only 15% of the ASX 200 reported a restructuring expense while Credit Suisse notes, in 2016, more than 25% did. The broker observes that, over the last 20 years, the pace of restructuring accelerated after poor years for the equity market and slowed after buoyant years.

Around 50 companies are reporting a restructuring expense in 2016. The broker lists 17 restructuring candidates for 2017 and they trade on a median price/earnings ratio of 14, a distribution yield of 4.6% and a free cash flow yield of 7.1%.

The 17 trade at a discount to the market but are expected to be considerable growers of free cash flow. Unlike previous years this list is underweight commodity companies.

The dominant theme of the current restructuring is "post-acquisition cost synergies". The list includes ANZ Bank ((ANZ)), Aurizon ((AZJ)), Automotive Holdings ((AHG)), Boral ((BLD)), Crown Resorts ((CWN)), Computershare ((CPU)), Fairfax Media ((FXJ)), Henderson Group ((HGG)), IOOF ((IFL)), JB Hi-Fi ((JBH)), Metcash ((MTS)), Myer ((MYR)), Origin Energy ((ORG)), Speedcast ((SDA)), Treasury Wine Estate ((TWE)), Vocus Communications ((VOC)) and WPP AUNZ ((WPP)).

Cobalt

2017 may be the year when cobalt hits the spotlight. Macquarie observes prices have accelerated to levels last seen in 2011 and, with demand from the recovery in the portable electronic sector and supply growth stagnant, this price rise can be fundamentally justified.

China has almost no domestic supply and is highly reliant on the Democratic Republic of Congo for its cobalt. Moreover, the prioritisation of higher quality battery development by the Chinese government may open up the new energy vehicle market to greater cobalt penetration, the broker contends. There are still risks, both technological, in terms of demand, and geopolitical, in terms of supply.

Macquarie observes cobalt tetroxide prices in China have roughly doubled in RMB terms since mid-2016 which suggests battery demand has been improving. Part of this may be to do with a wider industrial recovery, as cobalt has always tended to benefit from a maturing of such recoveries, when the industrial consumer is feeling more confident.

Cobalt is distinct among peer metals in that roughly half of current consumption is in battery manufacture. While lithium is often thought of as the key battery material, this sector only accounts for around one third of total demand and may only reach cobalt's current levels on a 5-10 year view, Macquarie notes.

As in many other markets, cobalt has limited new supply coming on stream. Refined output in countries such as Australia, Russia and Zambia are well down on levels a decade ago.

The reliance on the DRC, a country where geopolitical risk is rising after a period of relative stability, is also dependent on the copper price, as much of the DRC cobalt supply comes as a co-product with copper.

With a steady down-trend in copper prices until October last year investment in the DRC was limited and certain existing assets sustained supply declines. DRC copper output has been stagnant for the past three years and 2017 is expected to continue this trend. Macquarie expects some growth in 2018-19.

The broker believes the fundamental outlook for cobalt is improving in 2017 and a sustained deficit and draw-down on stocks is expected through to the end of the decade.
 

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