Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie 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 April 7 to Friday April 11, 2013
Total Upgrades: 6
Total Downgrades: 7
Net Ratings Breakdown: Buy 39.70%; Hold 43.82%; Sell 16.49%

Changes in broker ratings and estimates continue to be dominated by miners and oil and gas stocks as the industry updates commodities prices estimates. The difference between last week, ending on Friday, April 11th, and the prior week is that resources stocks are no longer just dominating on the positive side, but now they also dominate on the negative side which might indicate that stock picking has become even more important for playing the China-leveraged assets in the share market.

FNArena registered six upgrades and seven downgrades and in both cases it was mostly about resources stocks. Retailers, David Jones and Myer in particular, also featured on the positive side while AUD victims such as Aristocrat and CSL joined in on the negative side.

The biggest surprise, in light of downward adjustments to commodity prices and upward adjustments to AUD forecasts, is that price targets continue to enjoy a positive skew while changes in profit estimates appear to be mostly in balance.

Upgrades

Atlas Iron ((AGO)) upgraded to Buy from Neutral by UBS. B/H/S: 2/4/2

UBS has upgraded the rating to Buy from Neutral and the target to $1.20 from $1.15. The broker prefers iron ore over coal going into the second quarter amid expectations construction activity will continue to lift in China. The company's valuation includes no value for Horizon 2 which could benefit from the funding of the Roy Hill project.

Arrium ((ARI)) upgraded to Buy from Neutral by UBS. B/H/S: 2/3/3

The broker is revising earnings forecasts down by 4% in FY14 to reflect a lower effective iron ore price and higher Australian dollar. UBS continues to see upside risk to base steel-led earnings, but mining will drive earnings in the near term. The rating is upgraded to Buy from Neutral to reflect the current valuation following the underperformance so far in 2014. The broker thinks the market is attributing little value to an eventual turnaround in steel.

David Jones ((DJS)) upgraded to Neutral from Sell by Citi. B/H/S: 0/6/0

DJs has recommended a cash proposal from Woolworths SA for $4.00 a share, a 25% premium to the prevailing share price. Citi anticipates annual synergies of $50m are available, as Woolworths has a significant private label range in both food and non-food. Citi is not ruling out a bid from elsewhere, suspecting other global department stores may take notice. The rating is raised to Neutral from Sell and the target to $4.00 from $2.60.

Goodman Fielder ((GFF)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/6/1

Credit Suisse is reducing earnings forecasts by around 20% for FY15 and FY16. The company has encountered supply chain problems in its baking division and this, along with de-stocking by Metcash ((MTS)) and declining category trends, has affected grocery performance. The broker suspects the company may need additional capex over a few years to upgrade bakeries. The rating is upgraded to Neutral from Underperform on the share price fall and the target is reduced to 53c from 63c.

Myer ((MYR)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 1/6/1

Deutsche Bank believes the bid for David Jones ((DJS)) does not suggest Myer will also become a target but does highlight the department store's attractive valuation while removing the acquisition risk that has weighed on the share price. Myer has withdrawn its proposal to merge with David Jones. The rating is upgraded to Buy from Hold, given the upside to the target price, which is steady at $2.80.

Panoramic Resources ((PAN)) upgraded to Buy from Neutral by UBS. B/H/S: 3/0/0

UBS has increased 2014 nickel price forecasts by 14%. On a valuation basis Panoramic has benefited most from the upgrades because of a short mine life. Free cash flow estimates have been lifted by 281% for FY14 and 148% for FY15. As a result, the rating is upgraded to Buy from Neutral and the target raised to 60c from 40c.

Downgrades

Aristocrat Leisure ((ALL)) downgraded to Neutral from Buy by UBS. B/H/S: 3/2/1

The Australian dollar has rallied recently and this is important for Aristocrat as a large proportion of earnings are generated overseas. UBS is incorporating the prevailing Australian dollar rate at the end of the March quarter as well as assuming slightly higher R&D costs. The result is a 6.0% downgrade to FY14 profit forecasts and a 5.8% downgrade to FY15. The rating is downgraded to Neutral from Buy given a strong performance in the share price. The broker is still positive about the long-term potential for Aristocrat. The price target is reduced to $5.20 from $5.40.

CSL ((CSL)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 5/2/1

Deutsche Bank observes CSL has been a beneficiary of competitor supply disruption in recent years but this has also opened the door to smaller players. A return to price volatility seems unlikely to the broker but the competitive dynamics have undoubtedly risen. The broker has reduced the rating to Hold from Buy with a target reduction to $73.20 from $76.00. With the threat from new extended half-life haemophilia therapies the broker sees fewer catalysts for above-market growth in the next couple of years.

Drillsearch Energy ((DLS)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 1/1/2

JP Morgan has reviewed production expectations ahead of the quarterly reports. The broker thinks Drillsearch has a strong business model but after a run-up in the share price it is now expensive. For this reason the rating is downgraded to Underweight from Neutral. The target is is raised to $1.51 from $1.49.

Independence Group ((IGO)) downgraded to Neutral from Buy by UBS. B/H/S: 2/3/0

UBS has upgraded nickel price forecasts for 2014 by 14%. The broker has taken the opportunity to downgrade Independence to Neutral from Buy because of the recent moves in the share price. The target is raised to $4.20 from $4.10.

Recall Holdings ((REC)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 1/4/2

A visit to Recall rival and number 3 in the local space, Grace Records Management, suggests to the broker competition is intensifying and Recall is losing market share. Recall is looking to grow locally and internationally which has pushed up costs, and the recent HSBC deal shows a lower yield per storage box than the company's running average. On the positive side, paper prices are rising, but this hasn't stopped the broker lowering forecast earnings to be 8% below consensus. Target falls to $4.42 from $4.53. Downgrade to Underperform.

Whitehaven Coal ((WHC)) downgraded to Neutral from Buy by UBS. B/H/S: 5/2/0

The broker expects coal prices to remain under pressure until producer cuts are evident. As a result Whitehaven has been downgraded to Neutral from Buy and the target reduced to $1.80 from $2.30 to reflect a 40% discount to net present value for market risk.

Western Areas ((WSA)) downgraded to Neutral from Buy by UBS. B/H/S: 3/2/1

UBS has upgraded nickel price forecasts for 2014 by 14%. The company's consistent production has made it the broker's default nickel stock for some time but despite free cash flow lifting by 16% and 30% in FY14 and FY15 respectively the valuation has only lifted by 5% because of the relatively long mine life. The share price has also rallied from its December low and has moved ahead of the broker's target. Hence, the rating is downgraded to Neutral from Buy and the target raised to $3.38 from $3.20.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

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