Weekly Ratings, Targets, Forecast Changes

This story features AINSWORTH GAME TECHNOLOGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGI

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 July 16 to Friday July 20, 2018
Total Upgrades: 16
Total Downgrades: 11
Net Ratings Breakdown: Buy 44.91%; Hold 39.70%; Sell 15.39%

It's not all about resources stocks in the Australian share market, but miners, energy producers and their service providers certainly remain the centre of attention among stockbroking analysts. For the week ending Friday, 20th July 2018, FNArena registered 16 upgrades for ASX-listed entities versus eleven downgrades, and many of these changes have been inspired by commodity prices and capex intentions.

Cimic Group (interim result report) and Senex Energy were the two sole recipients of rating upgrades, with fresh Buy ratings also arriving for Alumina ltd, Fortescue Metals and Oz Minerals.

On the flipside, only three downgrades moved to Sell with Cabcharge, Freedom Foods and Northern Star the unlucky receivers.

Total ratings for the eight stockbrokers monitored remain heavily in favour of Buy ratings, currently representing 44.91% of all recommendations, alongside 39.70% Hold/Neutral ratings and 15.39% Sells. Historically, this would suggest a tough time for the share market, but in the present context it is more of an indication the local share market is heavily polarised; something every value investor can confirm.

Target prices retain a skew to the upside, with Fairfax Media receiving the largest increase for the week (+5.99%), followed by Northern Star, Western Areas and St Barbara.

Any negative adjustments remain rather benign, with only Spark Infrastructure, Perseus Mining and APN Outdoor worth mentioning.

It's a different picture for earnings estimates because companies such as Asaleo Care are issuing profit warnings. On the positive side, Senex Energy and Northern Star share the lead in a list that mostly contains of resources stocks.

On the flipside, gold miner Perseus Mining has managed to beat the -45.60% downgrade for Asaleo Care, with Alumina ltd, Galaxy Resources and Ramsay Health Care following at respectable distance.

Preparations for the August reporting season are in full swing with GUD Holdings, Macquarie Group (AGM) and CYBG providing initial indications this week, alongside ongoing releases of quarterly production reports.

Upgrade

AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/1

Ainsworth has upgraded FY18 guidance by 8% thanks to increased sales to Churchill Downs in Kentucky. Further increases are possible in FY19, the broker notes, given Churchill Downs has the capacity to add 1100 more units and Ainsworth is sole supplier so far.

But the broker remains concerned about underperforming new game releases and in balancing out the positives and negatives, upgrades to Neutral from Underperform, despite the stock having underperformed the ASX300 by -49% since its May profit warning. Target rises to $1.10 from 95c.

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

Credit Suisse analysts are of the view that the way of least resistance for aluminium prices is south, but they also anticipate margins at JV AWAC are likely to hold up and the combination of these two factors leads to an upgrade in recommendation to Outperform from Neutral.

Note JV partner Alcoa is scheduled to report Q2 financial performance numbers on Wednesday this week, USA time. Target price gains 10c on increased estimates which pushes the price target to $3.10.

Add-in a net dividend yield forecast of 9% in 2018 and the implied return from here is in excess of 17%. Current forecasts do imply this year will be the peak for a while to come in terms of profits and dividends.

CIMIC GROUP LIMITED ((CIM)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/2/1

First half net profit was up 12% and ahead of Credit Suisse estimates because of stronger margins. The company has reiterated 2018 net profit guidance of $720-780m.

The broker notes work in hand is stable and management expects a further $80bn of bidding opportunities during the year. The broker considers guidance is overly conservative and upgrades to Outperform from Neutral. Target is raised to $47.50 from $45.00.

First half net profit was ahead of forecasts. Ord Minnett increases EPS estimates by 3% for 2018 and 2% for 2019. The broker has previously argued that 2018 should be the strongest year of growth for east coast infrastructure-related stocks. With the mining business also growing strongly revenue accelerated in the June quarter.

The broker suspects management's growth estimates are conservative and assumes 12% net profit growth in the second half. Rating is upgraded to Accumulate from Hold. Target rises to $48.90 from $42.80.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/5/2

Deutsche Bank has upgraded Evolution Mining to Hold from Sell, price target $3.00 (was $2.80).

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Buy from Sell by Citi .B/H/S: 7/0/0

Fortescue plans to address widening discounts for lower grade ore by blending in ore from higher grade mines. Citi has increased its iron ore price forecasts and lowered its A$ forecast with the net result being a target price increase to $4.90 from $4.00.

The broker does have a concern that bringing new mid-grade ore onto the market to replace lower grade shipments will actually widen the discount for the former and tighten the discount for the latter, but the target price increase is sufficient to trigger a rating upgrade to Buy from Sell.

HOTEL PROPERTY INVESTMENTS ((HPI)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/1/0

After reviewing six long WALE real estate investment trusts Ord Minnett notes a total return of 16.3% has been delivered in FY18, outperforming the S&P/ASX 200 REIT index.

The broker upgrades Hotel Property Investments to Accumulate from Hold. The stock underperformed the other long WALE REITs in FY18 while offering a 6.6% dividend yield. Target is $3.30.

MONADELPHOUS GROUP LIMITED ((MND)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/4/1

Deutsche Bank has upgraded Monadelphous to Hold from Sell, with price target of $13.30.

NAVITAS LIMITED ((NVT)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/4/1

The company has announced the rationalisation of its careers & industry division and will convert SAE Indonesia to a licensed operation and close two sub-scale SAE US colleges. The remaining six US colleges will be divested or closed because of ongoing regulatory constraints and underperformance.

With earnings re-based, Macquarie believes visibility over FY19 has improved and value is beginning to emerge. The broker upgrades to Outperform from Neutral. Target is reduced to $4.55 from $4.60.

OZ MINERALS LIMITED ((OZL)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 4/2/0

Deutsche Bank has upgraded OZ Minerals to Buy from Hold while upping the price target to $10.25 from $9.10.

PRAEMIUM LIMITED ((PPS)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Praemium reported strong June quarter inflows. Total funds on platform exceeded $8bn for the first time while Australian funds on platform grew 45% to reach a new record of $5.6bn.

The broker notes the company's separately managed account platform is considered one of the best platforms currently available.

Morgans rolls forward its base year and increases the valuation to $1.07 from $0.69. Rating is upgraded to Add from Hold.

QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/3/0

The upgrade to Buy from Neutral comes with a slightly higher price target -$11.20 instead of $11- as further analysis suggests to Citi analysts that only a reasonable performance in H1 should now suffice to pull the share price a lot higher.

Meanwhile, compositional changes have been made to forecasts resulting in yet more reductions. Despite the latter, the analysts keep on pointing out the valuation discount remains larger than historical averages.

SOUTH32 LIMITED ((S32)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/5/0

Citi's upgrade to Buy from Neutral was inspired by higher forecasts for commodities prices. With EPS estimates receiving a boost, also from buybacks and the weakening AUD, the price target lifts to $4.30 from $3.80.

The analysts saw a rather mixed production report with thermal coal, aluminium and alumina all disappointing. Cost pressures are real too, in particular for the aluminium smelters.

In addition, with a projected US$2.2bn in free cash flows, management should have plenty of options to please shareholders, suggest the analysts.

SANTOS LIMITED ((STO)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/3/2

June quarter production was 7% above Citi's estimates. Citi observes the Cooper Basin is staging a revival, with a sustained period of reserves and production growth.This has led to an increase in valuation and near-term earnings forecasts.

The broker remains aware of the risks of over extending the expected growth in the Cooper Basin, as it has disappointed the market before, but no longer believes a Sell is the right call and upgrades to Neutral. Target is raised to $6.04 from $5.81.

SENEX ENERGY LIMITED ((SXY)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Neutral from Sell by Citi .B/H/S: 4/3/0

Ord Minnett marks to market oil price forecasts and increases its long-term Brent forecast to US$60/bbl. The broker considers the sector fully valued and, for the most part, consensus has caught up with its estimates, which indicates the upgrade cycle may now be over.

The broker retains a preference for Senex Energy based on growth and value and upgrades its rating to Accumulate from Hold. Target is steady at $0.46.

Beach Energy's ((BPT)) reserve upgrade for the Cooper Basin may have positive implications for Senex. Citi has increased its target to 45c from 40c, noting spot oil would imply 55c.

Citi sees the stock at fair value on its own long term forecast of US$55/bbl, but concedes upside for those with a more positive view. Upgrade to Neutral from Sell.

Downgrade

CABCHARGE AUSTRALIA LIMITED ((CAB)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/1/1

UBS analysis suggests momentum has slowed for Uber in both app downloads and share of taxi expenditure. However, Cabcharge only recorded a minimal uplift as a result, and the majority of the benefit appears to have gone to competitors.

The broker suspects the market does not fully appreciate the complexity of the earnings drivers. UBS suggests the stock is stretched and downgrades to Sell from Neutral. Target is raised to $2.15 from $1.65.

COCA-COLA AMATIL LIMITED ((CCL)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/1

On the expectation that tougher times in Indonesia and PNG will lead to weaker sales and earnings, Citi has downgraded to Neutral from Buy. EPS cestimates have been reduced by -0.5% and -1.4% for 2018/19.

As Indonesia is supposed to be the next growth engine for the company, the analysts (understandably) suggest investors awaiting a re-rating for the stock, will likely have to be more patient. Target loses -20c to $9.50.

CHARTER HALL LONG WALE REIT ((CLW)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/2/1

Charter Hall LW will divest 50% of the ATO Building in Adelaide for $135m to Charter Hall Direct Office Fund at book value. Ord Minnett considers this a good move as the transaction reduces risk and exposure to a relatively weak market, and frees up capital for another asset with a potentially higher risk-adjusted internal rate of return.

 The main issue the broker has is that the asset was not put to market, as this raises the question regarding whether Charter Hall LW received full value for the property. Rating is downgraded to Hold from Accumulate on valuation grounds. Target is $4.30.

FREEDOM FOODS GROUP LIMITED ((FNP)) Downgrade to Reduce from Hold by Morgans .B/H/S: 1/0/1

The company has downgraded FY18 sales forecasts by -7% and Morgans note this is now the fourth year in a row Freedom Foods has missed expectations.  FY19 guidance is also lower. The broker believes consensus estimates are still too high and this may lead to further disappointment over time.

Whilst the company has a strong product portfolio, Morgans downgrades to Reduce from Hold on valuation grounds. Target is lowered to $5.50 from $5.90.

FAIRFAX MEDIA LIMITED ((FXJ)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/3/0

Fairfax has finalised agreements with News Corp ((NWS)) to share printing networks. Fairfax estimates this will result in annualised cost savings of around $15m. UBS suggests upside from further deals still exists but this is less straightforward and may involve additional capital expenditure considerations.

On an annualised basis, ex one-offs, the broker expects the deal to be around 8% accretive to EPS. With the stock price up 21% since February, the broker downgrades to Neutral from Buy on valuation grounds. Target is raised to $0.80 from $0.75.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/3

Northern Star sustained record production of 184,000 ounces in the June quarter, 10% ahead of Ord Minnett's estimates. FY19 guidance of 600-640,000 ounces is below expectations, with some conservatism at Kalgoorlie but also lower grades suspected.

The broker remains comfortable that the company's strategy maximises the value of the assets and extends mine life, while acknowledging it does moderate some of the growth optimism embedded in the share price. Rating is downgraded to Lighten from Hold. Target is reduced to $6.30 from $6.50.

NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/2/1

Ord Minnett observes the June quarter net inflows were incredibly strong and 9% ahead of estimates. While structural tailwinds driving independent advice and platform flows are accelerating so to are the broker's assumptions for net inflows and funds under administration.

Yet, Ord Minnett downgrades to Hold from Buy on valuation grounds and would welcome a step change in flows or a lower entry point to revise its recommendation. Target is raised to $9.00 from $6.40.

OIL SEARCH LIMITED ((OSH)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/1

June quarter production was -12% below Ord Minnett estimates and reflected the residual impact from the recent earthquake. A higher proportion of spot sales also affected realised LNG prices.

Nevertheless, the issues are temporary and the broker continues to like the outlook. Target is raised to $8.80 from $8.60. As the stock is now trading in line with the target, Ord Minnett downgrades to Hold from Accumulate.

SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/1

Morgans factors in the draft WACC guidelines and the target is reduced to $2.20 from $2.57. The company is expected to start paying tax shortly and the WACC change is expected to affect revenues negatively.

Furthermore, the sustainability of the distribution at the current level into the next decade is now questionable.  Hence, the broker downgrades to Hold from Add.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/4/0

After a strong run in the share price Credit Suisse downgrades to Neutral from Outperform on valuation grounds. Despite the move, the broker does not believe the stock is expensive, particularly taking into account the capacity for capital management beyond the current dividend policy.

Still, the broker now has less conviction about the quantum of capital returns that may be delivered in August. There is also the risk of a moderation in FY19 guidance for Narrabri and questions over its longer-term sustained production rate. Target is raised to $5.00 from $4.60.

WORLEYPARSONS LIMITED ((WOR)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 4/2/1

Deutsche Bank has downgraded WorleyParsons to Hold from Buy, with price target of $18.10 (was $17.74 in May).

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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