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 October 6 to Friday October 10, 2014
Total Upgrades: 16
Total Downgrades: 4
Net Ratings Breakdown: Buy 40.78%; Hold 41.80%; Sell 17.42%

Stockbroker views and changes had a clear positive undertone during the week ending Friday, 10th October 2014. This in particular expressed itself through 16 upgrades for individual stock ratings which were only offset by four negative revisions as stockbroking analysts went bargain hunting in the face of a stock market correction that showed, at times, signals of irrationality and even of fear. A weakening share price featured highly in pretty much each of the rating upgrades recorded during the week.

With regards to price targets/valuations and earnings estimates, overall changes remained benign, even though downward adjustments to price forecasts for commodities and for the Aussie dollar are still taking place. Here too, the general trend remains supportive with Lend Lease's Investor Day having a direct impact and so do analyst visits to the US regarding views for Aristocrat Leisure.

Any changes to earnings estimates, on both sides of the ledger, continue to be dominated by small and mid-cap resources stocks.

Upgrades

Adelaide Brighton ((ABC)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 0/6/2

Following the recent underperformance in ABC shares the broker upgrades to Hold from Sell on valuation. Deutsche Bank has concerns regarding further potential for contract losses but believes WA activity is robust and this should underpin reasonable growth in cement volumes. Recently announced acquisitions may have been expensive but the broker believes it makes sense for the company to vertically integrate in markets where it has a dominant position in cement. Target is steady at $3.34.

AGL Energy ((AGK)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 3/5/0

At the recent full year result release AGL management called the outlook flat to slightly negative, but September quarter data suggests to the broker improvement for retail electricity and gas. The removal of the carbon tax has not resulted in a margin squeeze. While electricity continues to suffer from technological and renewables challenges, supply discipline is supporting the near term price outlook, the broker suggests. Upgrade to Outperform, target rises to $15.99 from $15.28.

ALS ((ALQ)) upgraded to Neutral from Sell by UBS. B/H/S: 0/2/3

UBS has lowered FY15-17 earnings forecasts by 11-15%, largely due to further reductions to life sciences and energy forecasts. Despite the downgrades to earnings forecasts UBS has upgraded the rating to to Neutral from Sell on price weakness. The broker remains attracted to the company's industry position, scale and track record but there is currently little visibility regarding the timing of a turnaround in minerals business. Target is lowered to $5.30 from $5.80.

Alumina ((AWC)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 3/2/2

JP Morgan is upgrading to Neutral from Underweight on the back of the recent weakness in the Australian dollar, improved spot alumina prices and ongoing weakness in bulk commodities, which have improved the relative valuation metrics of the stock. The broker considers the stock could be a beneficiary of investors wishing to maintain a mining sector position while reducing bulk commodity exposure. Target is raised to $1.70 from $1.50.

Aristocrat Leisure ((ALL)) upgraded to Neutral from Underperform by BA-Merrill Lynch. B/H/S: 5/3/0

A trip to the USA which included some channel checks, has provided analysts at BA-ML with marginally more confidence in the Aristocrat investment proposition. Hence, they decided to lift their rating to Neutral from Underperform. The analysts do have a problem with the stock's valuation, which is seen as stretched. On the other hand, they acknowledge there might be potential for increased market share in the US. Price target has jumped to $6.04 from $4.89.

Federation Centres ((FDC)) upgraded to Buy from Neutral by UBS. B/H/S: 2/1/3

The company has taken the opportunity to improve the quality of its portfolio and introduce new capital partners to the business. UBS has adjusted forecasts to reflect the transactions, along with the sale of Arndale. Earnings forecasts have been reduced by 0.8-1% over the forecast period but the transactions result in Federation Centres releasing $60m of capital for future deployment. Rating is upgraded to Buy from Neutral and the target is raised to $2.78 from $2.75.

GWA ((GWA)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 1/4/1

The company's latest restructuring efforts will make 164 people redundant and increase its import-sourced product to 100%, excluding Dux and Brivis. Deutsche Bank considers the move was inevitable, given the significant cost differential with imports. GWA expects to achieve $4m in annualised savings. Deutsche Bank believes the sale of both Dux and Brivis are on track for FY15. Shareholders will likely receive a capital return because of a lack of franking credits by the FY15 result. The broker upgrades to Hold from Sell, given 7% upside to the current share price. Target is raised to $2.69 from $2.32.

Insurance Australia ((IAG)) upgraded to Buy from Underperform by BA-Merrill Lynch. B/H/S: 1/6/1

Merrills finds a compelling growth story in IAG and "double upgrades" to Buy from Underperform. Target is raised to $7.20 from $5.85. The broker believes IAG has room to deliver further on cost cutting and the former Wesfarmers underwriting operations and the Coles Insurance brand should enable the insurer to outperform its peers.

Investa Office ((IOF)) upgraded to Neutral from Sell by UBS. B/H/S: 1/5/1

UBS believes the resignation of fund manager Toby Phelps, for personal reasons, is a negative for the stock as he was well regarded in the market. A replacement is yet to be found but key to any new appointment will be the candidate's independence, given the prospect of internalisation, in UBS' view.

Macquarie Atlas Roads ((MQA)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/2/0

Deutsche Bank has remodelled APRR and Greenway after the results. The broker believes APRR can support the highest yield in the infrastructure sector as well as the highest growth rate over the next two years. The broker upgrades to Buy from Hold on the back of further medium term upside potential from Dulles Greenway and/or further capital restructuring of APRR/Eiffarie. Target is raised to $3.30 from $3.10.

Mirvac ((MGR)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/1

The stock has fallen 9% since its FY14 result and underperformed the sector by 5.3% so Credit Suisse considers the price is now attractive and upgrades to Outperform from Neutral. Target is reduced to $1.91 from $1.94. In line with its capital recycling strategy Mirvac has acquired Birkenhead Point for $310m, which will be 0.4% accretive in FY15. The exposure to CBD retail lifts to 36% from 24%. Credit Suisse notes the car parking site may support a residential development which would play into Mirvac's skills in mixed use development.

Nib Holdings ((NHF)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 1/3/1

JP Morgan has upgraded to Neutral from Underweight following a significant de-rating of the stock over the past 1-2 months. Nib faces short term pressures on profitability but, for the most part, the broker believes this is factored into guidance. Still, with the impending listing of Medibank Private and rising lapse rates JP Morgan remains cautious. Target is raised to $3.03 from $3.00.

OZ Minerals ((OZL)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 4/2/2

JP Morgan is taking a more constructive stance on the outlook for copper. In this context the broker upgrades OZ Minerals to Overweight from Neutral. Copper offers more diverse demand from end users – it is not just China – with supportive medium to long-term supply side dynamics. The broker believes copper equities will be beneficiaries of investors who want to maintain mining sector exposure without owning iron ore plays. Target is lowered to $4.30 from $4.40.

Sandfire ((SFR)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 5/2/1

JP Morgan is taking a more constructive stance on the outlook for copper. In this context the broker upgrades Sandfire to Overweight from Neutral. Copper offers more diverse demand from end users – it is not just China – with supportive medium to long-term supply side dynamics. The broker believes copper equities will be beneficiaries of investors who want to maintain mining sector exposure without owning iron ore plays. Target is unchanged at $6.40.

Seven West Media ((SWM)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 7/1/0

Deutsche Bank has downgraded earnings estimates for FY15 following a tough start to the TV ad market. Despite this, the broker's discussions with media buyers suggests a number of advertisers are increasing marketing spending and audiences for key events are continuing to hold up. The broker believes the current issue around the TV ad market are cyclical rather than structural and upgrades to Buy from Hold. Target is lowered to $1.90 from $2.00 but still offers upside given significant weakness since the FY14 results.

Transpacific Resources ((TPI)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 4/2/0

After the fall in the share price since the FY14 result, JP Morgan is upgrading to Overweight from Neutral. The broker observes the company has been through the pain of significant asset re-basing and, with a de-geared balance sheet, additional capital management options become available. The broker estimates the company could buy back 10% of its stock, retain a net debt/earnings ratio of less than one and realise an 8% uplift to FY15 underlying earnings. JP Morgan considers a share buy-back would be the most value accretive transaction for shareholders. Target is raised to $1.05 from $1.04.

Westfield Corp ((WFD)) upgraded to Neutral from Underperform by BA-Merrill Lynch. B/H/S: 2/4/1

The stock offers investors exposure to a number of attractive features in Merrills' view. Approximately 80% of the income comes from US assets and the company is highly leveraged to the uptick in the US economy and potential softening of the Australian dollar. The broker believes the asset quality deserves a premium valuation relative to peers but remains concerned about how the market will value the development pipeline. Merrills upgrades to Neutral from Underperform and raises the target to $7.70 from $7.15.

Downgrades

AMP ((AMP)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 0/6/2

The broker is downgrading to Underperform from Neutral to reflect concerns around near-term regulatory uncertainties. For investors with a long-term view the company's leverage to rising equity markets and structural growth in superannuation funds is appealing. However, Merrills believes investors should prioritise stocks that offer a more defensive return profile and the valuation leaves little room for disappointment. Target is lowered to $5.45 from $5.50.

GI Dynamics ((GID)) downgraded to Hold from Add by CIMB Securities. B/H/S: 0/1/0

EndoBarrier sales have been halted in the EU until CE Mark compliance is achieved. The temporary halt to shipments is not a recall but is because of inadequate vigilance and reporting systems. It does not apply to product currently owned by hospitals or distributors. CIMB is disappointed by the apparent lack of adequate internal controls, given EndoBarrier has been commercialised for more than five years. The shares weakened on the news and this has made the valuation "interesting" to CIMB. Nevertheless, given the unknowns and increasing cash utilisation the broker is cautious and lowers the rating to Hold from Add. Target is lowered to 40c from $1.04.

Nufarm ((NUF)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 5/1/1

JP Morgan downgrades its rating to Underweight from Neutral because of the 24% increase in the share price since the FY14 result. Target is reduced to $4.80 from $4.90. The company may exhibit good earnings growth in the longer term but the broker observes low returns are likely in the medium term because of the working capital requirements, high growth aspirations and an increased investment in capitalised R&D.

Scentre Group ((SCG)) downgraded to Underperform from Buy by BA-Merrill Lynch. B/H/S: 1/3/2

The broker is downgrading the call to Underperform from Buy, premised on the view that the free funds growth rate is relatively weak and gearing of 37.6% might restrict investment flexibility. Moreover, economic conditions are likely to remain tough in coming months as weak retail sales growth is expected. Target is lowered to $3.40 from $3.42.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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