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 30 to Friday February 3, 2017
Total Upgrades: 16
Total Downgrades: 15
Net Ratings Breakdown: Buy 43.80%; Hold 42.15%; Sell 14.05%

Australian investors had a few nasty profit downgrades to digest ahead of the first financial reports of the season, and James Hardie on Friday missed market expectations. Add unexpected tightening from Chinese authorities and more mayhem in Washington and it has become all but clear: this year's February reporting season is ramping up under a macro cloud.

FNArena registered 16 upgrades and 15 downgrades in ratings for individual ASX-listed stocks for the week ending Friday, 3rd February 2017. There are still more Buy ratings than Neutral/Hold recommendations for all stocks covered by the eight stockbrokers in our database. Traditionally this has earmarked not-so-good times for the local stock market. This time around the major indices are being carried by a rather narrow group of reflation winners.

Amongst stocks to receive upgrades, Navitas was the stand-out with three upgrades post the release of its financial results. Sydney Airport, Woolworths, Transurban and Scentre Group were all upgraded too. A sign the market overall is reconsidering its positioning post the Trump rally?

On the othet side of the ledger, 15 stocks each received one downgrade during the week and amongst them were Ansell, GBST, Orocobre, Iluka Resources and Sonic Healthcare.

In further evidence investors are warming to the prospect of a Woolworths comeback in the local supermarket wars, Woolworths sits on top of the week's table for positive revisions to price targets; up 9%, at a distance followed by IOOF Holdings and Iluka Resources.

The table for negative adjustments is led by GBST, followed by Navitas and Tabcorp.

Orocobre enjoyed the largest increase to forecast profits during the week, seeing consensus jump by 277%. The likes of AWE Ltd, Mt Gibson and Fortescue Metals too enjoyed increases in excess of 50%, but couldn't match Orocobre's pace.

The negative side looks equally impressive with ERM Power topping the table (-1375%), followed by Iluka Resources (-291%), Perseus Mining and Aconex (-40% plus each).

Too early to draw any conclusions just yet as the February reporting season slowly accelerates its pace.

Upgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/4/1

The company's share price has underperformed the market since it reached its all-time high back on August 1, 2016.

Ord Minnett believes the correction has been driven by a recognition of the difficulty in achieving realised cement price increases amid tepid underlying demand.

Both these dynamics are expected to improve in 2017. The broker upgrades to Hold from Lighten and raises the target to $4.90 from $4.60.

BT INVESTMENT MANAGEMENT LIMITED ((BTT)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/0

Credit Suisse suspects the departure of Gavin Rochussen will weigh on BT's capacity to maintain fund inflows at the same level of recent years. Target falls to $10.00 from $10.50 as a result. The broker remains cautious given fund flow and equity market volatility.

However BT's share price has fallen around -15% since December to a point at which Credit Suisse sees valuation support. BT consistently delivers superior funds flows to peers and is successfully executing on its global expansion, the broker notes. Upgrade to Neutral.

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

Brambles' recent first half trading update was a disappointment to Morgans, and the broker awaits new FY guidance at the company's result release. Earnings forecasts have been trimmed in the meantime.

But Morgans believes Brambles' longer term fundamentals remain solid, suggesting the recent pullback in price represents a buying opportunity. Target falls to $11.61 from $11.91. Upgrade to Add.

CHARTER HALL GROUP ((CHC)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/2

In a general update on the sector, Citi analysts observe investors are very much focused on global bond yields in order to recalibrate their strategies with regards to AREITs, but history shows, point out the analysts, cap rates are a more important factor to keep an eye on.

The cap rate is the ratio of Net Operating Income (NOI) to property asset value. Citi analysts suggest investors should watch for potential trend changes.

Charter Hall has been upgraded to Buy from Neutral. Price target gains 5c to $5.59. Estimates have been lifted ever so slightly.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/2/3

December quarter gold production met Morgan Stanley's estimates.The broker considers the metrics are fair and the free cash flow supportive  and that the stock can be a defensive exposure in periods of volatility.

The broker believes the operational issues are dissipating, while margins and scale are robust. Morgan Stanley upgrades to Equal-weight from Underweight. Target is raised to $22.00 from $21.75. Industry view: Attractive.

See also NCM downgrade.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/0

Morgan Stanley is adding the stock to its preferred list of miners. After applying updated commodity prices and operational data, Morgan Stanley's FY17 estimate for earnings per share is down -27%. Nevertheless, FY18 and FY19 are changed  to be up 3% and down -8% respectively.

The broker notes the company is carrying a sizeable cash buffer and no bank debt. The FY17 dividend and yield are projected at 9.1c and 2.3%  respectively, based on 25% pay-out of free cash flow per share.

Morgan Stanley upgrades to Overweight from Equal-weight. Target is $5.30. Industry view: Attractive.

NAVITAS LIMITED ((NVT)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Neutral by UBS .B/H/S: 2/3/0

Macquarie expects sustained earnings growth, with the risks for contract losses and regulation reduced. The broker transfers coverage to a new analyst.

The stock is upgraded to Outperform from Neutral, reflecting these expectations. The broker considers contract losses, which have been a significant concern for prospective investors, are significantly reduced following a successful run of renewals. Target is $5.25.

Campus closures and currency headwinds meant Navitas' result was a messy one, but in line with Credit Suisse at the headline. The broker expects a return to growth in the second half that will finally put the Macquarie Uni contract loss in the past. 

Taking a conservative view, Credit Suisse has nevertheless lowered earnings forecasts and its target to $4.40 from $4.95. On recent share price weakness the broker upgrades to Neutral.

With the transition period from the loss of the Macquarie University contract  largely completed, and the recent addition of another US college locked in, UBS believes the market can now focus on potential earnings growth and other attractive attributes.

UBS upgrades to Buy from Neutral. Target is reduced to $5.18 from $5.65. The company continues to expect FY17 EBITDA to be broadly in line with the prior year on a constant currency basis.

OIL SEARCH LIMITED ((OSH)) Upgrade to Neutral from Sell by Citi .B/H/S: 4/3/1

Citi analysts are of the view that exploration success at Muruk & Antelope changes the outlook for PNG expansion which has now become more feasible.

As such these latest results support 3 Train expansion including potential for reserve increases.

Target price lifts to $7.03 from $6.48. Upgrade to Neutral from Sell.

QUBE HOLDINGS LIMITED ((QUB)) Upgrade to Add from Hold by Morgans .B/H/S: 5/3/0

The Moorebank development project has reached financial closure which is significant event, Morgans suggests, triggering long term earnings growth potential for Qube. The broker believes revenue contracts have been awaiting final closure. 

Morgans has upgraded earnings forecasts, also adjusting for the Patrick and ATT acquisitions and capital raising. Target rises to $2.63 from $2.53. On a potential total shareholder reward of 15%, the broker upgrades to Add.

SCENTRE GROUP ((SCG)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/2/1

In a general update on the sector, Citi analysts observe investors are very much focused on global bond yields in order to recalibrate their strategies with regards to AREITs, but history shows, point out the analysts, cap rates are a more important factor to keep an eye on.

The cap rate is the ratio of Net Operating Income (NOI) to property asset value. Citi analysts suggest investors should watch for potential trend changes.

Scentre Group has been upgraded to Neutral from Sell. Price target moves to $4.35 from $4.28.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 5/2/1

While the fundamentals are in place, valuations for the general insurance sector are approaching that of the broader market and Deutsche Bank takes up a neutral outlook on the sector.

The broker transfers coverage to another analyst and updates its thesis on the sector, highlighting a preference for Suncorp as it is trading at a 20% discount to Insurance Australia Group ((IAG)), despite operating in broadly similar product lines.

Rating is upgraded to Buy from Hold. Target is raised to $14.00 from $13.70.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Add from Hold by Morgans .B/H/S: 4/2/1

Two factors underpin Morgans' decision to upgrade to Add from Hold. First comes the share price slump. Then follows the assumption Sydney Airport will not participate in the development of a second airport at Badgerys Creek, at least not under the conditions proposed.

Morgans acknowledges the long term uncertainty about precise impact from a second airport in Sydney, but for now, growth and yield seem too attractive to ignore. Target remains unchanged at $7.04.

TRANSURBAN GROUP ((TCL)) Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0

The rise in government bond rates has weighed heavily on Transurban's share price. Morgans has cut its target on more conservative assumptions, but the new target of $11.23, down from $12.00, suggests 10% upside from the current price.

Transurban's underlying business remains robust, Morgans suggests, and forecast dividend growth remains strong. On a current total shareholder return forecast of 15%, the broker upgrades to Add.

WOOLWORTHS LIMITED ((WOW)) Upgrade to Buy from Sell by UBS .B/H/S: 3/2/2

It appears UBS has upgraded to Buy from Sell, raising the price target to $27.30 from $19.10.

Downgrade

ANSELL LIMITED ((ANN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/6/1

The broker observes the company is leveraged to a potential uplift in economic conditions but believes this is now largely reflected in the share price, especially  given the near doubling of latex costs.

Despite the benefit from the Nitritex acquisition, the broker is wary, noting Ansell could face challenges from US tax reform given its Asian-based manufacturing.

Rating is downgraded to Hold from Buy. Target is $25.

CARSALES.COM LIMITED ((CAR)) Downgrade to Hold from Add by Morgans .B/H/S: 5/3/0

The company has expanded its Latin American footprint  with the purchase of the Demotores online classifieds businesses in Argentina, Colombia and Chile. While the deal a small, Morgans notes it reveals a broader continental strategy is emerging.

Separately, the broker adjusts earnings forecasts to include price rises implemented this month and higher advertising costs as the company responds to the arrival of Cox Enterprises as a competitor.

The broker believes the home competitive environment is about to get a lot tougher and, while retaining a positive long-term view on the stock, winds back its rating to Hold from Add. Target is reduced to $11.07 from $12.03.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Hold from Add by Morgans .B/H/S: 0/6/2

Morgans believes the bank sector is now fully valued following the post US election rally, however an easing in capital requirement expectations supports the broker's view dividends will remain robust.

CBA is downgraded to Hold. Target rises to $79.00 from $75.80.

CSR LIMITED ((CSR)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/2

Transport restrictions in China have led to tight supply for aluminium in recent months. As this unwinds in the first quarter of 2017, Ord Minnett expects the underlying commodity price to retrace.

 In addition, a shift in the global supply/demand balance to an oversupplied position presents another risk. The broker downgrades to Lighten from Hold  and raises the target to $3.80 from $3.75.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0

Morgans adjusts first half forecasts to show 1% revenue growth and a -1% decline in costs, to deliver 7% growth in EBITDA.

The target lifts to $1.19 from $1.13, to reflect the changes, largely because of the broker's oil price outlook.

Morgans downgrades to Hold from Add as, at current prices, the potential shareholder return is around 5%.

GBST HOLDINGS LIMITED ((GBT)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/1/0

GBST has issued a profit warning ahead of its result, cutting FY17 earnings guidance to 33% below UBS' prior forecast. Project delays, deferred spending on major projects in the UK, and the weak GBP are all to blame.

While the risks are not new, the broker is concerned about the size of the downgrade. Improvement in FY18 is dependent on a recovery in services work and/or new contract wins. Elevated R&D costs will remain a significant drag over FY17, the broker notes.

UBS has cut earnings forecasts and lowered its target to $3.40 from $4.35. Downgrade to Neutral.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/5/1

December quarter production delivered in line with, or better than, guidance. Credit Suisse reduces FY17 revenue estimates by -3% and underlying EBITDA by -10%.

The broker assumes a modestly slower ramp up for Nova, given mine development rates in the December quarter fell short of internal targets.

With a potential relaxation of the ban on Indonesian nickel ore exports, the broker reduces the target to $4.00 from $4.50 and downgrades to Neutral from Outperform.

ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/2/1

Ord Minnett observes feedstock price rises are taking longer than previously anticipated and the latest 2017 guidance highlights a slow start in Sierra Leone.

The stock screens relatively expensive compared with its peers at a 2017 enterprise value/operating earnings multiple. Ord Minnett cuts its rating to Lighten from Hold. Target is raised to $6.60 from $6.50.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/1

The stock is up 20% against the Australian market since it reported FY16 results.

UBS believes this reflects stronger nitrogen fertiliser prices, positive sentiment around the US election and the potential impact on infrastructure-led explosives demand and the ongoing ramp up of the Louisiana project.

While the broker believes there is further upside to fertiliser prices, a large degree of success is now incorporated in the valuation and the rating is downgraded to Neutral from Buy. Target rises to $3.80 from $3.40.

NEWCREST MINING LIMITED ((NCM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/3

Newcrest's Dec Q production and sales were largely in line with Macquarie's forecasts. FY17 production guidance has been maintained for all projects. Modest earnings upgrades follow on a solid performance. Target rises to $23 from $20.

But the stock has had a solid run since December, outperforming the market and both local and global gold mining peers, the broker notes. With little upside apparent from the target, Macquarie downgrades to Neutral.

See also NCM upgrade.

NIB HOLDINGS LIMITED ((NHF)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/4/1

As the share price has rallied, Ord Minnett downgrades to Accumulate from Buy. The main issues the broker envisages in the upcoming first half results  are Australian resident health insurance margins, claims inflation and growth trends.

The margins were upgraded at the AGM largely on the back of more favourable claims environment but the company also increased its drawing rate inflation range.  The broker awaits further clarity from the commentary on claims inflation trends. Target rises to $5.00 from $4.90.

OROCOBRE LIMITED ((ORE)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0

Pricing in the December quarter was lower than Macquarie expected, and cash flow was negative. Production was at the bottom of the guidance range.

While the miss on pricing and sales was disappointing, it is the broader impact on funding and cash flow that drives the broker to downgrade to Neutral from Outperform. The target is reduced to $4.35 from $4.60.

OZ MINERALS LIMITED ((OZL)) Downgrade to Reduce from Hold by Morgans .B/H/S: 2/3/3

Morgans has updated its OZ valuation, applying increased copper price assumptions, pricing operational improvements at Prominent Hill and reducing the risk-weighting for Carrapateena. The result is a target price increase to $7.30 from $5.95.

This remain well shy of the current trading price. The broker believes the market has re-rated OZ by some 50% on global growth exuberance and a lack of other large, high margin copper exposures on the market. Downgrade to Reduce. The broker prefers Sandfire Resources ((SFR)) in the copper space.

PERSEUS MINING LIMITED ((PRU)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/2/1

As the disappointing news flow continues at Perseus, with the second production downgrade in two weeks, Citi analysts have downgraded to Sell/High Risk from Neutral/High Risk.

The analysts estimate another $30m external funding will be needed to complete the new mine at Sissingue for first production in Q1 2018. Target falls to 37c from 42c.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/1

Ord Minnett finds the announcement of yet another acquisition in Germany "encouraging", but otherwise is worried about weak demand in Australia and the USA. On this basis, the recommendation is being pulled back to Hold from Accumulate.

In addition, the analysts point at the lack of progress on the hoped-for reform of collections centres in Australia and pending funding cuts in the USA. Incorporating new FX forecasts has triggered mild reductions to estimates. Price target falls to $23 from $24.30. The analysts see little room for upside surprise.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 ADELAIDE BRIGHTON LIMITED Neutral Sell Ord Minnett 2 BRAMBLES LIMITED Buy Neutral Morgans 3 BT INVESTMENT MANAGEMENT LIMITED Neutral Sell Credit Suisse 4 CHARTER HALL GROUP Buy Neutral Citi 5 NAVITAS LIMITED Buy Sell Macquarie 6 NAVITAS LIMITED Buy Neutral UBS 7 NAVITAS LIMITED Neutral Sell Credit Suisse 8 NEWCREST MINING LIMITED Neutral Sell Morgan Stanley 9 NORTHERN STAR RESOURCES LTD Buy Neutral Morgan Stanley 10 OIL SEARCH LIMITED Neutral Sell Citi 11 QUBE HOLDINGS LIMITED Buy Neutral Morgans 12 SCENTRE GROUP Neutral Sell Citi 13 SUNCORP GROUP LIMITED Buy Neutral Deutsche Bank 14 SYDNEY AIRPORT HOLDINGS LIMITED Buy Neutral Morgans 15 TRANSURBAN GROUP Buy Neutral Morgans 16 WOOLWORTHS LIMITED Buy Sell UBS Downgrade 17 ANSELL LIMITED Neutral Buy Ord Minnett 18 CARSALES.COM LIMITED Neutral Buy Morgans 19 CLEANAWAY WASTE MANAGEMENT LIMITED Neutral Buy Morgans 20 COMMONWEALTH BANK OF AUSTRALIA Neutral Buy Morgans 21 CSR LIMITED Sell Neutral Ord Minnett 22 GBST HOLDINGS LIMITED Neutral Buy UBS 23 ILUKA RESOURCES LIMITED Sell Neutral Ord Minnett 24 INCITEC PIVOT LIMITED Neutral Buy UBS 25 INDEPENDENCE GROUP NL Neutral Buy Credit Suisse 26 NEWCREST MINING LIMITED Neutral Buy Macquarie 27 NIB HOLDINGS LIMITED Buy Buy Ord Minnett 28 OROCOBRE LIMITED Neutral Buy Macquarie 29 OZ MINERALS LIMITED Sell Neutral Morgans 30 PERSEUS MINING LIMITED Sell Neutral Citi 31 SONIC HEALTHCARE LIMITED Neutral Buy Ord Minnett

Recommendation

Positive Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 NVT NAVITAS LIMITED 40.0% -40.0% 80.0% 5 2 WOW WOOLWORTHS LIMITED 7.0% -36.0% 43.0% 7 3 SCG SCENTRE GROUP 25.0% 8.0% 17.0% 6 4 BXB BRAMBLES LIMITED 57.0% 43.0% 14.0% 7 5 SYD SYDNEY AIRPORT HOLDINGS LIMITED 43.0% 29.0% 14.0% 7 6 TCL TRANSURBAN GROUP 71.0% 57.0% 14.0% 7 7 MFG MAGELLAN FINANCIAL GROUP LIMITED 33.0% 20.0% 13.0% 6 8 SUN SUNCORP GROUP LIMITED 44.0% 31.0% 13.0% 8 9 QUB QUBE HOLDINGS LIMITED 63.0% 50.0% 13.0% 8 10 OSH OIL SEARCH LIMITED 31.0% 19.0% 12.0% 8

Negative Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 EPW ERM POWER LIMITED -67.0% -33.0% -34.0% 3 2 GBT GBST HOLDINGS LIMITED 67.0% 100.0% -33.0% 3 3 IFL IOOF HOLDINGS LIMITED 20.0% 40.0% -20.0% 5 4 PRU PERSEUS MINING LIMITED 20.0% 40.0% -20.0% 5 5 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 50.0% 70.0% -20.0% 5 6 BPT BEACH ENERGY LIMITED -25.0% -8.0% -17.0% 6 7 CGF CHALLENGER LIMITED 6.0% 19.0% -13.0% 8 8 IPL INCITEC PIVOT LIMITED 25.0% 38.0% -13.0% 8 9 CAR CARSALES.COM LIMITED 63.0% 75.0% -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 WOW WOOLWORTHS LIMITED 24.306 22.277 9.11% 7 2 IFL IOOF HOLDINGS LIMITED 9.000 8.600 4.65% 5 3 ILU ILUKA RESOURCES LIMITED 7.221 6.921 4.33% 7 4 NHF NIB HOLDINGS LIMITED 4.704 4.584 2.62% 7 5 BPT BEACH ENERGY LIMITED 0.678 0.665 1.95% 6 6 IPL INCITEC PIVOT LIMITED 3.496 3.446 1.45% 8 7 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 1.112 1.100 1.09% 5 8 CGF CHALLENGER LIMITED 10.220 10.118 1.01% 8 9 MFG MAGELLAN FINANCIAL GROUP LIMITED 26.077 25.832 0.95% 6 10 SUN SUNCORP GROUP LIMITED 13.639 13.520 0.88% 8

Negative Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 GBT GBST HOLDINGS LIMITED 3.853 4.690 -17.85% 3 2 NVT NAVITAS LIMITED 5.026 5.336 -5.81% 5 3 TAH TABCORP HOLDINGS LIMITED 4.650 4.823 -3.59% 5 4 PRU PERSEUS MINING LIMITED 0.568 0.584 -2.74% 5 5 CAR CARSALES.COM LIMITED 11.740 11.877 -1.15% 8 6 TTS TATTS GROUP LIMITED 4.391 4.423 -0.72% 7 7 CWN CROWN RESORTS LIMITED 12.538 12.616 -0.62% 6 8 BXB BRAMBLES LIMITED 11.790 11.833 -0.36% 7 9 LNK LINK ADMINISTRATION HOLDINGS LIMITED 8.406 8.413 -0.08% 5

Earning Forecast

Positive Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 ORE OROCOBRE LIMITED 1.950 -1.100 277.27% 4 2 AWE AWE LIMITED -1.550 -3.617 57.15% 6 3 MGX MOUNT GIBSON IRON LIMITED 1.733 1.133 52.96% 3 4 FMG FORTESCUE METALS GROUP LTD 92.065 60.811 51.40% 8 5 NHC NEW HOPE CORPORATION LIMITED 14.923 12.323 21.10% 3 6 BHP BHP BILLITON LIMITED 187.015 165.321 13.12% 8 7 BPT BEACH ENERGY LIMITED 6.071 5.633 7.78% 6 8 ALL ARISTOCRAT LEISURE LIMITED 76.716 72.930 5.19% 6 9 MIN MINERAL RESOURCES LIMITED 77.840 75.040 3.73% 4 10 OGC OCEANAGOLD CORPORATION 30.277 29.375 3.07% 5

Negative Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 EPW ERM POWER LIMITED -2.550 0.200 -1375.00% 3 2 ILU ILUKA RESOURCES LIMITED -7.631 3.993 -291.11% 7 3 PRU PERSEUS MINING LIMITED -3.903 -2.742 -42.34% 5 4 ACX ACONEX LIMITED 3.612 6.145 -41.22% 6 5 GBT GBST HOLDINGS LIMITED 12.233 19.833 -38.32% 3 6 NST NORTHERN STAR RESOURCES LTD 30.978 38.504 -19.55% 5 7 TCL TRANSURBAN GROUP 22.312 26.753 -16.60% 7 8 SXY SENEX ENERGY LIMITED -12.817 -11.000 -16.52% 6 9 EVN EVOLUTION MINING LIMITED 16.923 19.474 -13.10% 7 10 AWC ALUMINA LIMITED 4.903 5.337 -8.13% 7

Our top ten news from 26 January 2017 to 02 February 2017 (ranked according to popularity).

Weekly Broker Wrap: market outlook; Allianz & QBE; asset managers; Australian consumer; Vocus Communications.

-UBS: Global reflation seen favouring cyclical stocks, expressly resources
-Sale of QBE to Allianz would be an obvious positive for IAG, SUN
-MS: Stock picking rather than the cycle to drive Oz consumer stocks

By Eva Brocklehurst

Market Outlook

A backdrop of global reflation should favour cyclical stocks, UBS believes. The broker considers this best expressed through an overweight holding in resources and a selection of cyclical/reflation stocks within the market ex resources. While holding both domestic and globally exposed industrial stocks, the broker envisages better earnings growth trends in global/US exposed stocks and, domestically, consumer discretionary names are highlighted.

The broker is neutral on banks, while non-bank financials are considered reasonably attractive. The reflationary backdrop, the broker believes, is supportive of equities, although these do not look particularly cheap in an absolute sense. Risks over coming months would appear to be either policy risks or the growth pulse fading.

Allianz & QBE

Ord Minnett has analysed speculation regarding a potential bid for QBE Insurance ((QBE)) by Allianz. Speculation has been forthcoming from media both domestic and offshore. The broker notes QBE has emphatically denied it is in discussions with any party regarding a takeover, although Ord Minnett believes this statement does not preclude there being interest on the part of Allianz.

There are synergy considerations, the broker acknowledges, but, that said, QBE already has a very efficient capital-two-premium ratio which is an offset from its increased use of reinsurance. The broker suggests it may be hard for Allianz is to prioritise an acquisition of QBE ahead of possible acquisitions of companies like Generali. The broker believes any sale of QBE to Allianz, was an obvious positive for shareholders, would be also positive for Insurance Australia Group ((IAG)) and Suncorp ((SUN)).

Asset Managers

Credit Suisse observes, in the December quarter, funds under management amongst the listed managers increased on average 3.7%. Growth was primarily driven by positive market movements and complemented by net inflows. Most managers delivered growth of 2-4%, with the exception of very strong growth from Magellan Financial ((MFG)), up 10%, and a contraction in funds under management for Platinum Asset Management ((PTM)), down -1%.

Credit Suisse downgrades Henderson Group ((HGG)) earnings estimates on the back of weaker retail fund flows but retains an Outperform rating. BT Investment Management ((BTT)) is upgraded to Neutral, following a significant fall in its share price since mid December. The broker believes the stock justifies its price/earnings premium - now trading at a 27% premium to its UK peers - because it has consistently delivered inflows above its peer group and successfully executed on its global expansion plans.

Australian Consumer

Domino's Pizza Enterprises ((DMP)), Metcash ((MTS)) and Treasury Wine Estates ((TWE)) are Morgan Stanley's highest conviction, overweight stocks in the Australian consumer sector, with Woolworths ((WOW)) and Flight Centre ((FLT)) the highest conviction underweights. The broker believes stock picking rather than the cycle will drive Australian consumer stock performances.

Feedback on retail trading over Christmas suggests it was better than feared but the broker notes the cycle is cooling. While downgrades are more likely than upgrades, the broad-based weakness the broker had previously predicted is now considered unlikely.

Housing-linked categories are envisaged faring better than apparel, while supermarkets continue to be affected by discounting and deflation. The broker expects 2017 to be a more difficult year than 2016, as leading housing indicators soften while the savings rate is lower and income growth is weak.

Morgan Stanley identifies five potential surprises for the current year, where the outcome has a higher probability than the market is currently pricing in. The surprises include Amazon not entering the Australian marketplace in 2017 and suppliers outperforming the supermarkets. The broker also lists discretionary retail enduring lower earnings and a de-rating, driving under-performance in the segment. The other two surprises involve Domino's Pizza shares going above $100 and Flight Centre shares going below $20.

Vocus Communications

Macquarie has initiated coverage on Vocus Communications ((VOC)) with an Outperform rating and $5.30 target. The broker notes the company has assembled a collection of core fixed line assets, with its fibre network now extending beyond metro to include extensive inter-capital city backhaul in Australasia, and soon-to-be international transit assets between Perth and Singapore.

The broker believes there is scope for ongoing profitable on-net growth in the corporate and government segments with opportunities for market share gains in the consumer segment as the NBN rolls out. Capital expenditure demands are likely to remain high because of the nature of the business but the broker expects them to taper from peak levels in FY17 and FY18.

While the issues regarding the number of acquisitions made recently were largely cleansed at the AGM update in November, the broker acknowledges potential risk to corporate sales momentum and also the risk of medium-term earnings deterioration at Commander. The next catalyst will be the first half result and Macquarie is looking for confirmation that the operating outlook has not deteriorated since the AGM and the company is on track to achieve its synergy targets.

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Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending January 26, 2017

Last week saw the ASX200 regain the 5700 mark before dropping back once more, in a week punctuated by the Australia Day holiday.

In last week’s Report I voiced my suspicions that a jump to 13.8% shorted for Super Retail Group ((SUL)) from under 5% prior could well be a blip in the ASIC data and not accurate, as often occurs, given no new news had emanated from the company.

Last week Super shorts were recorded as 4.8%.

Stop Press: After a seeming eternity, Metcash ((MTS)) has dropped out of the elite 10% plus shorted club. Only just, to 9.7%, but the supermarket retailer/wholesaler had been an incumbent at the top of the table for years, and often number one most shorted, so it’s worth noting. The company had been seen as loser in the Woolies/Coles price war and from the incursion of Aldi, but since the acquisition of Home Hardware the market has taken a brighter view of the stock.

As of last week, Aconex ((ACX)) was second most shorted stock to Myer by a mere 0.1ppt at 16.0%. After issuing a profit warning, this week saw Aconex shares plunge -45% in one day.

Sirtex Medical was another stock to suffer a share price drop last week, after receiving a thumbs up for its SIR-spheres product from the US. But immediately the share price recovered. Last week Sirtex shorts rose to 6.2%

REA Group ((REA)) had jumped into the table at 6.1% shorted from under 5% the week prior, but last week jumped back out again. REA has a track record of beating earnings forecasts, and will report later this month.

Nickel miner Western Areas has been jettisoned by investors since the lifting of the Indonesian nickel ban. Now quite a familiar member of the 10% plus shorted club, Western Areas has seen at least some profits taken with a fall to 11.1% from 12.1%.

Weekly short positions as a percentage of market cap:

10%+

MYR   16.1
ACX   16.0
TFC     11.6
VOC   11.1
WSA   11.1
VOC   11.8
NEC    10.5

Out: MTS

9.0-9.9%

MTS, WOR, SYR
 
In: MTS          

8.0-8.9%

NWS, MYX, HSO, BAL, FLT, NXT

In: BAL, NXT                                                           

7.0-7.9%

MND, DOW, ISD, ORE, RWC, MYO, EHE, AWC, BEN, MTR

In: RWC, BEN, MTR             Out: BAL, NXT

6.0-6.9%

IVC, SGH, BGA, GTY, JHC, PRU, SRX, SEK, CSV

In: BGA, SRX                        Out: BEN, RWC, MTR, PDN, REA, CTD, BKL

5.0-5.9%

AAD, OFX, RIO, MSB, IFL, GXL, BKL, OSH, CTD, WOW, A2M, CSR, GEM, TGR, PDN, AWE, KAR, ILU, IGO, AAC, IPH, CAB

In: BKL, CTD, PDN, GXL, TGR, IPH                     Out: BGA, SRX

Movers and Shakers

Sirtex Medical ((SRX)) last week received a recommendation from the US National Comprehensive Cancer Network for its SIR-spheres product in treating colorectal cancer. Sirtex’ shares promptly opened -7% lower.

Did someone read the press release incorrectly? By day’s end the share price was almost back where it began. Or maybe it was a so-called “fat finger”, where a trader accidently enters the wrong price into the online system. What we do know is that last week, shorts in Sirtex rose to 6.2% from 5.1% the week before.

The share price of nickel miner Western Areas ((WSA)) is one of the most volatile on the market, reflecting the nickel price status of the most volatile of the base metals. But the trend for the miner had been up in 2016 thanks to the Indonesian ban on nickel ore exports, which led analysts to believe the global nickel surplus would be cleared.

The nickel price was further aided by increased Chinese stainless steel demand, and by another export ban – this time from the Philippines in an environmental crackdown.

The Philippines’ environmental audit of nickel mines has been a slow one, but the government is soon to release its list of perpetrators. But Indonesia has since announced a qualified lifting of its own ban, leading mining analysts to slash the earnings forecasts of nickel miners, despite being as yet unsure as to the extent of the impact.

Having long sat at more than 10% shorted, Western Areas has seen at least some profit-taking. Last week shorts fell to 11.1% from 12.1%.

 

 

ASX20 Short Positions (%)

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position "naked" given offsetting positions held elsewhere. Whatever balance of percentages truly is a "short" position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, "short covering" may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to "strip out" the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option ("buy-write") position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a "long" position in that stock.

Another popular trading strategy is that of "pairs trading" in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a "net neutral" market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are "short". Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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International research suggests shares in companies that buy in their own equities are more likely to respond positively through share price appreciation. Investors should note, however, buying back own stock is not a guarantee for significant share price gains ahead.

For local research about investor benefits from capital management, including companies buying in their own shares, FNArena subscribers can read "Buy Capital Management"

Below is an incomplete overview of companies buying in their own shares this year. We very much appreciate all feedback, contributions and suggestions at info@fnarena.com

See attached excel file for more details (paying subscribers only)

 

8IH	8I Holdings	21/09/2016
ACQ	Acorn Capital Inv Fund	10/10/2016
AFA	ASF Group	26/04/2016
AGL	AGL Energy	13/10/2016
AHY	Asaleo Care	01/10/2015
AIV	ActivEX Ltd	01/11/2016
ALR	Aberdeen Leaders Ltd	27/02/2015
APW	AIMS Property Securities Fund	07/09/2016
AQF	Australian Governance Masters	29/11/2016
ARA	Ariadne Australia	21/08/2014
ARG	Argo Investments	01/01/2016
AUF	Asian Masters Fund	23/11/2016
AUI	Australian United Investments	14/05/2015
BWF	Blackwall Property Fund	15/03/2016
BWR	Blackwall Property Trust	07/07/715
CAM	Clime Capital	06/01/2017
CAMPA	Clime Capital Preference	15/08/2016
CGO	CPT Global	27/08/2015
CHN	Chalice Gold Mines	30/06/2016
CIM	Cimic Group	29/12/2016
CIN	Carlton Investments	29/11/2015
CIW	Clime Investment Management	28/12/2016
CLT	Cellnet Group	09/09/2015
CMC	China Magnesium Corp	28/10/2014
CNI	Centuria Capital	24/12/2015
CSL	CSL Ltd	27/10/2016
CSR	CSR Ltd	21/03/2016
CSV	CSG Ltd	12/03/2016
CVC	CVC Ltd	12/12/2015
CVW	ClearView Wealth	19/12/2013
CYG	Coventry Group	23/11/2015
DUI	Diversified United Investments	01/06/2016
EAI	Ellerston Asia Investments	27/09/2016
EMF	Emerging Markets Masters Fund	21/12/2016
EZL	Euroz Ltd	01/01/2017
FID	Fiducian Group	03/03/2015
FRI	Finbar Group	08/12/2014
GOW	Gowing Bros	20/06/2012
GPT	General Property Group	06/05/2016
HML	Henry Morgan Ltd	27/12/2016
HOT	HotCopper Holdings	02/11/2016
ICN	Icon Energy	26/02/2015
IPE	IPE Ltd	12/11/2016
ISU	iSelect	30/03/2016
ITD	ITL Ltd	28/11/2016
JBH	JB Hi-Fi	12/09/2016
KAT	Katana Capital	03/01/2017
KBC	Keybridge Capital	18/01/2017
KBCCPA	Keybridge Capital	18/01/2017
KKT	Konekt	15/11/2016
LLC	Lend Lease Corp	28/08/2015
MEL	Metgasco	04/02/2016
MFF	Magellan Flagship Fund	13/08/2015
MGP	Managed Accounts Holdings	14/08/2015
MHM	MHM Metals	17/02/16
NEN	Neon Capital	17/05/16
NGE	New Guinea Energy	18/08/16
NVT	Navitas	16/02/2016
OCL	Objective Corp	26/02/2016
OPG	OPUS Group	09/12/2016
ORL	Oroton Group	26/04/2016
OZG	Ozgrowth Ltd	30/12/2015
OZL	OZ Minerals	14/03/2016
PME	Pro Medicus	01/04/2016
PTM	Platinum Asset Management	04/10/2016
QAN	Qantas	08/09/2016
REY	Rey Resources	24/05/2016
RND	Rand Mining	12/12/2015
SDG	Sunland Group	27/12/2016
SGM	Sims Metal Management	16/12/2016
SIP	Sigma Pharmaceuticals	13/10/2014
SMX	SMS Management & Tech	15/06/2015
SVW	Seven Group Holdings	12/03/2016
SVW	Seven Group Holdings	17/08/2016
SWK	Swick Mining Services	21/12/2016
TBR	Tribune Resources	28/09/2015
TGG	Templeton Global Growth Fund	26/02/2016
TOT	360 Capital Total Return	28/03/2016
VSC	Vita Life Sciences	13/05/2016
WAT	Waterco	07/04/2016
WIC	Westoz Investment Co	30/12/2015
WMK	Watermark Market Neutral Fund	14/02/2017
XPD	XPD Soccer Gear Group	20/09/2016

 

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