Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Greg Peel, Acting Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley, Morgans 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 6 to Friday April 10, 2015
Total Upgrades: 5
Total Downgrades: 7
Net Ratings Breakdown: Buy 40.36%; Hold 41.72%; Sell 17.93%

The week ending April 10 saw fewer ratings up/downgrades from brokers than in past weeks, likely reflecting the market’s current predilection to move around a lot but not actually go anywhere. The ups and downs were also relatively balanced at 5-7.

Indeed there may have hardly been any movement much at all were it not for two brokers deciding to reassess their commodity price forecasts.

Credit Suisse was particularly active, deciding the bulks, particularly iron ore, will remain in the doldrums for some time, while gold should be steady and base metals a little brighter, particularly copper. The broker also downgraded its Aussie dollar forecast. The combination led to some fairly significant movements in earnings forecasts and target prices, both up and down, along with various rating up/downgrades. BHP and Fortescue saw downgrades, including to a rare and lonely Sell equivalent rating for BHP, while Evolution Mining and Alumina enjoyed upgrades.

Macquarie has been stoically bullish the nickel price this year but the broker’s resolve has begun to waver in the face of ever weaker nickel prices. Not so much a capitulation but a trimming of expectations, but it has meant some serious earnings downgrades for nickel miners under the broker’s coverage. Mincor and Panoramic Resources copped ratings downgrades.
 

Upgrades

Alumina ((AWC)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/1/1

The broker has cut its commodity price and A$ forecasts but suggests the fundamentals for alumina are much better than iron ore, for example, and notes Alumina Ltd is moving into a much better dividend paying position with a yield of 8% rising to 13% in 2017. Target unchanged at $2.10. Upgrade to Outperform.

ASX ((ASX)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/5/3

March quarter stats show a strong result for ASX trading, with equities and derivative activity solid and rate cut expectations driving volumes, the broker notes. March is usually a quiet quarter for raisings but activity was solid in that space as well. Strong cyclical activity is providing a tailwind for ASX volumes at present and given dividend and valuation support, the broker has upgraded its rating to Neutral and lifted its target to $43 from $38. But the broker continues to believe ASX faces structural headwinds over the next 2-3 years.

Evolution Mining ((EVN)) upgraded to Outperform from Underperform by Credit Suisse. B/H/S: 4/0/1

The broker has revised its commodity price forecasts and is negative on bulks but more positive on base metals, particularly copper, and sees gold holding steady. The broker has also downgraded its A$ forecast. Ahead of Evolution’s production report release, the broker has raised its target to $1.10 from $0.91 and double-upgraded its rating to Outperform from Underperform.

Oil Search ((OSH)) upgraded to Neutral from Sell by Citi. B/H/S: 6/2/0

The recent underperformance in the share price means the stock is now trading below the broker’s target and, as such, the rating is upgraded to Neutral from Sell. Citi observes the factors anticipated this year such as the arbitration and the Hides Deep exploration have all played out with disappointing results for Oil Search. The broker considers the current share price includes much of the value for growth already. Target is raised to $7.21 from $7.12.

ResMed ((RMD)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 6/2/0

Credit Suisse has reviewed margins for the past three years and estimates the constant currency margin reported in the second quarter of FY15 was the highest in three years. With stronger volume growth forecast on the back of successful product launches the broker expects ongoing improvement in this margin. Rating is upgraded to Outperform from Neutral. Target is raised to $10.70 from $8.40.

Downgrades

Aristocrat Leisure ((ALL)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 5/0/2

The broker likes Aristocrat’s market leading products, recurring revenue and favourable A$ exposure, but the stock has run up too far. The broker sees headwinds in the form of a tepid US market, a greater than anticipated capex requirement and a fight-back from the competition. The broker is now forecasting a declining return on capital profile and has downgraded to Underperform. Target unchanged at $7.20.

BHP Billiton ((BHP)) downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 4/3/1

The broker does not believe a trough in the iron ore price is in sight and has lowered its 12-month average price forecast to US$45/t. This implies significant earnings downgrades for BHP. Target cut to $30 from $34 and rating downgraded to Underperform.

BT Investment Management ((BTT)) downgraded to Sell from Neutral by UBS. B/H/S: 1/2/2

While the March quarter flows and upcoming first half results should prove to be strong UBS now believes earnings forecasts need to be re-based to realistic levels. Equity markets, currency and funds flows have driven the share price 47% higher in the year to date, outperforming Australian and UK peers by more than 20%. Hence, the broker downgrades to Sell from Neutral. The price target is raised to $8.70 from $6.40 to account for earnings upgrades and higher market price/earnings. The broker now believes it will become more difficult to deliver the growth required to justify the current valuation.

Fortescue Metals ((FMG)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/5/2

The broker does not believe a trough in the iron ore price is in sight and has lowered its 12-month average price forecast to US$45/t. This implies significant earnings downgrades for Fortescue, and a loss in FY16, and the broker suggests the company will need to cut capex and costs to the bone and drop its dividend. Target cut to $2.00 from $3.00 and rating downgraded to Neutral.

Incitec Pivot ((IPL)) downgraded to Underweight from Equal-weight by Morgan Stanley. B/H/S: 3/4/1

The broker continues to prefer the stock to Orica ((ORI)) but considers the price has run too far and the valuation is stretched. Hence, Morgan Stanley is downgrading to Underweight from Equal-weight. The broker accepts conditions have improved as the Australian dollar weakens, and FY15-16 estimates are lifted by 8-17% while there is a commensurate lift in the target to $3.53 from $2.80.

Mincor Resources ((MCR)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 1/0/1

Stainless steel demand growth is considered non-existent and Macquarie estimates this has materially reduced the forecast deficits in the nickel market. The broker pares back its bullish outlook for nickel prices which has driven material downgrades to earnings and valuation for Australian nickel miners. As Mincor is loss making at current prices the broker downgrades to Underperform from Outperform. Target is 55c.

Panoramic Resources ((PAN)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 0/2/1

Preliminary production numbers for the March quarter were higher than Macquarie forecast but the company has guided to production at the bottom end of FY15 guidance for nickel in concentrate because of lower expectations for the June quarter from Lanfranchi. Macquarie observes Panoramic is not generating positive free cash flow at current spot nickel prices and needs higher prices, despite possible extensions to the mine lives at both Savannah and Lanfranchi. Macquarie downgrades to an Underperform rating from Outperform with a 45c target.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup <img src="https://www.fnarena.com/charts/fnarena/3dbar.php?mydata=1&mylabels=Citi,CreditSuisse,DeutscheBank,JPMorgan,Macquarie,MorganStanley,Morgans,UBS&b0=83,79,92,74,131,71,166,97&h0=103,109,136,107,105,59,155,124&s0=49,61,19,51,53,41,23,45″ style=”border:1px solid #000000″ />

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