Weekly Ratings, Targets, Forecast Changes

This story features DOWNER EDI LIMITED, and other companies. For more info SHARE ANALYSIS: DOW

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 April 10 to Friday April 14, 2017
Total Upgrades: 8
Total Downgrades: 10
Net Ratings Breakdown: Buy 43.69%; Hold 42.67%; Sell 13.64%

The shortened week ending April 13th saw more downgrades than upgrades for ASX-listed stocks released by stockbroking analysts.

As per usual, the devil is in the detail. Only half of all upgrades went to Buy (or an equivalent). Three companies received two downgrades: Regis Resources, Sandfire Resources and The Reject Shop. Only four downgrades (40%) ended with Sell. FNArena registered ten downgrades outnumbering eight upgrades for the week.

Among the lucky ones to receive one extra Buy rating were Independence Group, Insurance Australia Group and Telstra. The latter's share price has thus far paid no attention, however.

Among the downgrades to a Sell we find AGL Energy, Ardent Leisure and Regis Resources. The latter received two downgrades and both ended with Sell.

Outside of changes in ratings, there was very little activity in adjustments to valuations/price targets and earnings estimates. Most tables for the week don't make it to ten inclusions.

One underlying negative could be the fact that most adjustments for earnings estimates are negative. This week's tables certainly show this is the case, albeit with the caveat that all changes for the week were rather miniscule.

Perseus Mining, often on the negative side of any sort of amendments in months past, is the only one that finished the week with increased earnings forecasts, thanks to a much better than expected quarterly performance.

The two weeks ahead will be shortened too, and probably quieter, macro-events permitting.

Upgrade

DOWNER EDI LIMITED ((DOW)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/4/1

Credit Suisse adjusted numbers to reflect the full $1bn capital raising and minor changes in FY17 guidance. The broker upgrades to Neutral from Underperform.

Credit Suisse continues to struggle to find the rationale in the deal for Spotless ((SPO)), particularly the premium and lack of due diligence.

Whilst the company appears wedded to exposure to Spotless, one way or the other, the broker continues to exclude Spotless earnings  from estimates for the time being. Target is $5.90.

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

Macquarie reviews its battery sector coverage, ahead of what it believes is a supply-side inflection point. Coverage is transferred to another analyst.

While the broker believes pricing will soon pass its peak, in the near term there is expected to be a benefit from high prices. Galaxy is upgraded to Neutral from Underperform, given it has now secured Mount Cattlin's position as an independent producer. Target is $0.46.

The broker remains broadly negative on the lithium sector, with significant supply expected to come online.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/7/0

Morgan Stanley believes the company is uniquely placed to capture cost benefits and price tailwinds. The analysis shows margins of 17% in FY20 are achievable.

Organic capital generation is strong and the unwinding of the New Zealand tax losses and continuing quota benefits from Berkshire provide for options on capital. Adjusting for any Asian investment, capacity exists for over $500m in buy-backs, the broker observes.

Rating is upgraded to Overweight from Equal-weight. Target is raised to $6.80 from $6.30. Industry view is In-Line.

INDEPENDENCE GROUP NL ((IGO)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/2/1

The company has updated FY17 production guidance from Nova. Nova is expected to hit full production during the first quarter of FY18.  Macquarie lifts FY17 nickel production forecast by 5% to better match the guidance.

The broker notes the company appears to have recovered from previously announced operating issues and upgrades to Outperform from Neutral. Target is raised to $4.10 from $4.00.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/1/0

Morgan Stanley expects the company can create valuation upside through the lithium operations, while mining services should reach a trough in FY17.

The company has no debt and generates significant amounts of cash which can either be returned to shareholders or deployed for growth. The broker currently forecasts a 50% pay-out ratio for dividends in future periods.

Morgan Stanley upgrades to Overweight from Equal-weight and raises the target to $13.15 from $11.70. Industry view is In-Line.

ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Neutral from Sell by Citi .B/H/S: 4/3/0

It is Citi's view current high electricity prices are partly a function of limited gas supply reducing competitive pressure within the electricity market. This, the analysts point out, gives Origin the choice between monetising its gas within electricity markets or gas markets.

In the analysts' opinion, with the current gas price arbitrage between domestic prices and an LNG netback starting to close, today represents the sweet spot for the company's gas book, as well as for the value of its gas peaking power stations.

In Citi's view, the medium term outlook remains difficult given the house prediction for US$65/bbl long term oil price and expectation for spot LNG prices to materially weaken by mid-year. Upgrade to Neutral. Price target jumps by 10% to $7.58.

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

The stock has corrected by around -16% from its recent high and now trades roughly in line with Morgans' revised valuation. Hence, the broker upgrades to Hold from Reduce.

Morgans believes the market is now valuing the company's inherent risks, particularly around the Carrapateena development, more appropriately.Target is raised to $8.30 from $8.20.

TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/4/3

Recent share price weakness has elevated the stock to a Buy rating from Hold, Ord Minnett believes. Target is $5.35.

The stock is now suggesting a 6.8% dividend yield and offering significant value, in the broker's opinion, and the shares are trading at a level that implies a -20% reduction to the dividend.

Nevertheless, Ord Minnett expects the dividend to be sustained as the company goes about its strategic transformation.

Downgrade

ARDENT LEISURE GROUP ((AAD)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/2

Third quarter sales were broadly in line with UBS' expectations. Main Event revenues were down -2.5%.

UBS takes a more conservative approach  to the opening of new centres, meaning Main Event is not expected to reach its 200 target until around FY32. Free cash flow is not expected until FY27.

The broker downgrades to Sell from Neutral. Target is reduced to $1.75 from $1.80.

AGL ENERGY LIMITED ((AGL)) Downgrade to Sell from Buy by Citi .B/H/S: 5/1/1

Upon further research, Citi analysts have come to the conclusion that high electricity prices will ultimately command a solution, and thus electricity prices will come down, just not as yet.

In the short term, estimates go up on higher electricity prices, but on the expectation that in twelve months time we should start seeing solutions kicking in to pull down elevated electricity prices, the rating is being downgraded to Sell from Buy.

Target price pushes up by 5% to $26.87.

ASALEO CARE LIMITED ((AHY)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/0

Credit Suisse observes the company is still making year-on-year declines but sales have stabilised and, importantly, the trend is not worsening.

The broker observes that Kimberly Clarke is avoiding deep discounting in personal care products which had forced Asaleo Care to cut prices to protect its market share. For now, the downward pressure seems to have abated.

Guidance of low single digit growth remains achievable, in the broker's view. Nevertheless, stability has been largely priced into the stock and the rating is downgraded to Neutral from Outperform. Target is $1.75.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Sell from Neutral by UBS .B/H/S: 2/3/3

Credit Suisse expects marginally stronger production in the March quarter and downgrades FY17 estimates for earnings per share on the back of more moderate June quarter gold price forecasts.

The broker downgrades to Underperform from Neutral. The stock is one of the broker's least preferred exposures on valuation grounds. Target is $2.80.

UBS cuts gold price forecast by around -5% and believes the sector is looking expensive. Elsewhere, the broker remains positive on copper and nickel.

The broker remains cautious on the direction of gold and focuses on company-specific events as a driver of share prices.

The stock has performed strongly in 2017 and the broker believes there is  better risk/reward elsewhere. Rating downgraded to Sell from Neutral. Target is reduced to $3.13 from $3.36.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Buy by UBS and Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1

UBS cuts gold price forecast by around -5% and believes the sector is looking expensive. Elsewhere, the broker remains positive on copper and nickel.

The broker remains cautious on the direction of gold and focuses on company-specific events as a driver of share prices.

UBS believes  the company is offering heightened risk/reward and subsequently downgrades to Neutral from Buy. Over the next 12 months the shorter mine life is likely to add pressure to find ways to extend mine life further, and this could prompt caution among investors, the broker believes.

Target is reduced to $6.81 from $7.43.

After the release of feasibility metrics for Monty that were slightly worse than Morgans expected, attention is now on the company's ability to add incremental mine life via exploration.

This is required  to justify the valuation/price upside, in the broker's opinion. Rating is downgraded to Hold from Add. Target is reduced to $7.02 from $7.10.

TPG TELECOM LIMITED ((TPM)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/2

Citi analysts have downgraded to Neutral from Buy while cutting their target price by -23% to $6.70 (was $8.65). They suggest expanding into Mobile is the correct strategy for the company, but the chosen path is too expensive for their calculations and comfort.

With a price tag of $1.9bn over three years, the analysts suggest meaningful revenue growth is unlikely to start to flow until the new network is largely built. They have reduced EPS estimates by -28% in FY18 and -62% in FY19. Cash flow projections have been heavily impacted too.

THE REJECT SHOP LIMITED ((TRS)) Downgrade to Neutral from Buy by UBS and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/3/0

The company has reported a drop in like-for-like sales growth in the third quarter, down -4% as the impact of the move to variety  from "Everyday Value" worsened.

UBS reduces forecast for earnings per share by -39-45% from FY18 onwards and downgrades to Neutral from Buy. The broker had maintained a Buy rating predicated on the expectation of returning to positive sales growth in the second half.  Target is reduced to $5.75 from $11.15.

The broker notes the weak performance in foot traffic and sales has overwhelmed any operational improvements being made from the supply chain cost reductions.

UBS finds it difficult to separate the macro and competitive issues in Western Australia and the challenging external environment from the impact of merchandising decisions and supply chain disruptions.

Morgan Stanley observes a strong focus on variety products that did not sell well has been exacerbated by weak consumer environment and results in a sharp downgrade to FY17 net profit forecasts.

The broker believes merchandising risk remains high and this poses a risk for the short term, lowering confidence in the business turnaround. Rating is downgraded to Equal-weight from Overweight. Target is reduced to $5.35 from $9.15.

While there is a strategy in place to re-balance the sales mix towards everyday value, with long product lead times the broker does not expect this to be fully implemented until August-September. This raises the risk of disappointment for the remainder of FY17. Industry view is In-Line.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 DOWNER EDI LIMITED Neutral Sell Credit Suisse 2 GALAXY RESOURCES LIMITED Neutral Sell Macquarie 3 INDEPENDENCE GROUP NL Buy Neutral Macquarie 4 INSURANCE AUSTRALIA GROUP LIMITED Buy Neutral Morgan Stanley 5 MINERAL RESOURCES LIMITED Buy Neutral Morgan Stanley 6 ORIGIN ENERGY LIMITED Neutral Sell Citi 7 OZ MINERALS LIMITED Neutral Sell Morgans 8 TELSTRA CORPORATION LIMITED Buy Neutral Ord Minnett Downgrade 9 AGL ENERGY LIMITED Sell Buy Citi 10 ARDENT LEISURE GROUP Sell Neutral UBS 11 ASALEO CARE LIMITED Neutral Buy Credit Suisse 12 REGIS RESOURCES LIMITED Sell Neutral UBS 13 REGIS RESOURCES LIMITED Sell Neutral Credit Suisse 14 SANDFIRE RESOURCES NL Neutral Buy Morgans 15 SANDFIRE RESOURCES NL Neutral Buy UBS 16 THE REJECT SHOP LIMITED Neutral Buy UBS 17 THE REJECT SHOP LIMITED Neutral Buy Morgan Stanley 18 TPG TELECOM LIMITED Neutral Buy Citi

Recommendation

Positive Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 IGO INDEPENDENCE GROUP NL 33.0% 17.0% 16.0% 6 2 ABC ADELAIDE BRIGHTON LIMITED -14.0% -17.0% 3.0% 7

Negative Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 RRL REGIS RESOURCES LIMITED -19.0% -6.0% -13.0% 8 2 TPM TPG TELECOM LIMITED -6.0% 6.0% -12.0% 8

Target Price

Positive Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 IGO INDEPENDENCE GROUP NL 4.125 4.108 0.41% 6

Negative Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 TPM TPG TELECOM LIMITED 7.356 7.793 -5.61% 8

Earning Forecast

Positive Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 PRU PERSEUS MINING LIMITED -3.238 -3.437 5.79% 5

Negative Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 OGC OCEANAGOLD CORPORATION 39.965 40.616 -1.60% 5 2 NCM NEWCREST MINING LIMITED 79.270 79.955 -0.86% 8 3 NST NORTHERN STAR RESOURCES LTD 31.770 32.040 -0.84% 5 4 SBM ST BARBARA LIMITED 31.413 31.675 -0.83% 4 5 RRL REGIS RESOURCES LIMITED 24.788 24.958 -0.68% 8 6 EVN EVOLUTION MINING LIMITED 17.970 18.081 -0.61% 7 7 LNK LINK ADMINISTRATION HOLDINGS LIMITED 32.800 32.980 -0.55% 4 8 TPM TPG TELECOM LIMITED 47.815 48.014 -0.41% 8 9 AQG ALACER GOLD CORP 22.392 22.480 -0.39% 4 10 SFR SANDFIRE RESOURCES NL 55.983 56.195 -0.38% 8

Click to view our Glossary of Financial Terms