Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

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 18 to Friday April 22, 2016
Total Upgrades: 5
Total Downgrades: 17
Net Ratings Breakdown: Buy 43.44%; Hold 43.51%; Sell 13.05%

Last week saw the ASX200 surge ahead thanks to some big moves up in commodity prices, particularly oil and iron ore. Perhaps unsurprisingly, resource sector stocks dominated broker ratings changes last week. Of 5 ratings upgrades, all involved resource sector names. Of 17 downgrades, 8 involved resource sector names.

The split reflects scepticism from brokers that all recent commodity price rises are sustainable. While gold and energy names feature among the upgrades, bulk mineral and base metal producers dominate the downgrades. Citi is responsible for the many of the downgrades, believing the rallies in iron ore and coal to be fleeting and pressure to remain on nickel and copper.

Outside of resources, ratings downgrades mostly reflected share prices rising to or above broker valuations in the recent run-up.

Positive target price moves last week were led by Ten Network, following the company's earnings release, and Perseus Mining, after the company released a new plan for its troubled Edikan mine. On the negative side, Qantas' announcement of lower yields in the March quarter had some brokers trimming their targets while remaining generally positive on the stock.

Movements in earnings forecasts last week showed some very big numbers, even for mining majors, but this is a reflection of moving from a low base.

Upgrade

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/2/0

Cowal has driven March quarter output and FY16 production guidance has been upgraded. Deutsche Bank also notes a significant reserve upgrade for Cowal and Mt Carlton. The company now has an operating platform to produce over 800,000 ozs per annum to 2020, the broker maintains.

With sector leading cash flow, the stock is one of Deutsche Bank's preferred gold exposures and the rating is upgraded to Buy from Hold. Target is raised to $2.00 from $1.80.

See also EVN downgrade.

OROCOBRE LIMITED ((ORE)) Upgrade to Add from Hold by Morgans .B/H/S: 1/1/1

The Olaroz operation achieved break even in the march quarter. Guidance is for 3,000t of lithium carbonate in the June quarter.

The lithium carbonate price has risen to US$7,500/t a tonne from US$5,500/t in 2014 with expectations that strong demand will maintain this price as battery storage demand continues to rise.

Morgans increases valuation significantly and upgrades to Add from Hold. Price target is raised to $3.48 from $2.39.

OIL SEARCH LIMITED ((OSH)) Upgrade to Neutral from Sell by Citi .B/H/S: 4/3/1

Citi is busy updating its commodity prices forecasts, revealing its global expert team remains on the bullish side for crude oil. Citi's forecasts are for crude to gradually recover to US$52/bbl by 4Q 2016, and further to US$60/bbl in 2017.

For Oil Search the update has led to an upgrade to Neutral from Sell.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Neutral from Sell by Citi and Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/2/0

Citi analysts have updated by including the new life-of-mine plan (LOMP) for Edikan, plus assets acquired via the merger with Amara Mining. As a direct result, the recommendation moves to Neutral from Sell.

In the broker's view, Amara's assets are worth $0.30 and Perseus' original assets $0.40, with Net Asset Value (NAV) now amounting to $0.77/sh after net cash and corporate. Price target increases to 54c.

The company has released a revised life-of-mine plan for Edikan. This offers some improvements on the prior plan, Macquarie observes. Of most importance, it should allow sufficient cash flow for the company to consider going ahead with Yaoure.

The broker considers the merger with Amara and the new Edikan plan position the company to achieve its long-held ambition to develop a second mine. Yaoure should double production in FY21, Macquarie suggests.

Rating is upgraded to Outperform from Underperform. Target rises to 65c from 36c.

Downgrade

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

Credit Suisse upgrades 2017 earnings estimates by 5.0% on the back of its commodity pulp research from Brazil, which suggest prices are likely to remain low because of medium-term oversupply.

The Australian dollar has also moved in the company's favour. 2016 revenue remains challenging, with competition intense in the feminine hygiene channel.

Credit Suisse downgrades to Neutral from Outperform, as the stock may be offering a solid return but commodity stocks are likely to outperform. Target is $2.00.

AIR NEW ZEALAND LIMITED ((AIZ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0

Air NZ's March stats indicate a weakening in yield and load factor, suggesting to Macquarie competition is intensifying. The broker believes the airline is well placed to deal with competition but if subsequent monthly stats continue to suggest declines, market sentiment will turn.

There remains the possibility of a capital return if the sale of the company's Virgin Australia ((VAH)) stake is completed and Air NZ manages to respond to competition, Macquarie suggests. But a fresh air of caution sees the broker downgrading to Neutral. Target falls to NZ$3.00 from NZ$3.40.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/1

Citi is busy updating its commodity prices forecasts, revealing its global expert team remains on the bullish side for crude oil. Citi's forecasts are for crude to gradually recover to US$52/bbl by 4Q 2016, and further to US$60/bbl in 2017.

Beach Energy is the sole stock that has received a downgrade in the wake of the update; to Neutral/High Risk from Buy/High Risk.

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/0

Challenger's March quarter update contained several disappointments, including lacklustre retail annuity book growth, but Citi analysts are zooming in on the positives, and there were plenty to draw more confidence from (which they did).

A reduction in previous "volatility discount" sees the price target jump to $9.30 from $8.50 but this cannot prevent the broker being forced to downgrade this stock to Neutral from Buy. It's a valuation call.

CSR LIMITED ((CSR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/3/1

The share price has run higher in recent months and Ord Minnett now considers the stock fully priced and downgrades to Hold from Accumulate.

The broker attributes the strong performance to east coast residential construction and a near-term bottom in aluminium prices. Although construction momentum is expected to stay positive the broker is less optimistic about aluminium. Target is $3.20.

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/2/0

The company will acquire Travizon Travel for US$21m which extends its US total transaction value (TTV) to US$1.2bn and broadens its exposure to the US east coast.

Ord Minnett expects revenue synergies from improved supplier negotiating power. The broker downgrades to Hold from Buy on valuation. Price target rises to $14.66 from $13.57.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/0

Credit Suisse notes Cowal was the key contributor to the March quarter performance while Mt Carlton's grade-driven performance was also a highlight.

Other segments of the portfolio were mixed with the broker observing Edna May and Mt Rawdon were weak and high cost, affected by weather.

The broker downgrades to Neutral from Outperform. Target is raised to $1.80 from $1.75.

See also EVN upgrade.

GPT ((GPT)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/4/1

GPT is popular with investors as a high quality, defensive REIT, but Credit Suisse notes GPT's returns have meaningfully underperformed of late across all of retail, office and industrial. The broker believes super-regional malls are best placed to outperform at this stage in the cycle.

Credit Suisse thus sees Scentre Group ((SCG)) as a better placed REIT at present and has downgraded GPT to Underperform on valuation. Target falls to $4.75 from $4.94.

GWA GROUP LIMITED ((GWA)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Sell from Neutral by Citi .B/H/S: 0/5/1

The company's guidance for second half earnings to be higher than the first half is unchanged. Management has announced an efficiency program, targeting $13-15m in cost savings between FY16-19.

Deutsche Bank downgrades to Hold from Buy on valuation. The broker expects housing to remain robust in FY17. Target is $2.47.

As the company presented its new strategic direction, aiming for a corporate transition that should see GWA turning from being a manufacturer to managing brands that deliver product solutions for its clients, Citi analysts remain supportive, but also sceptical about execution and time needed to deliver a positive outcome.

For these reasons the recommendation has been pulled back to Sell from Neutral. The analysts find current share price quite expensive given their own forecasts are for FY15-FY18 Core EPS CAGR of only 3% with profit falling in FY18. These numbers are being supported by the company's share buyback.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/3/1

Citi analysts updated their forecasts for commodities prices. They prefer precious metals over their base/industrial peers, maintaining a bearish outlook for nickel, while also anticipating short term downward pressure for copper.

Citi has now also adopted higher forecasts for AUDUSD and this has a dampening effect on future growth for Australia's resources companies.

For Independence Group, the rating is lowered to Sell from Neutral, while the price target falls to $2.99 from $3.16. EPS estimate for FY17 has dropped by half.

OZ MINERALS LIMITED ((OZL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/4/3

March quarter production suggests the company is on track for full year guidance yet Credit Suisse notes record December quarter throughput was not maintained, constrained by a scheduled re-line and underground ore contamination.

Mining costs are expected to rise on the adverse fixed cost element of  the Thiess contract, despite favourable oil and productivity gains. A lack of action on M&A, despite a widespread search, has positioned the smaller scale Carrapateena as the main option, in the broker's observation.

Credit Suisse downgrades to Underperform from Neutral. Target is raised to $5.15 from $4.95.

RIO TINTO LIMITED ((RIO)) Downgrade to Sell from Neutral by Citi and Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1

Citi analysts updated their prices forecasts for commodities and for the first time in a long while new forecasts went up, not down. But it's not universal good news as the analysts remain bears on nickel, while retaining a sceptical view on bulk commodities once the strong steel restart/restocking in China has run its course.

In Citi's view, the iron ore crunch that was meant to happen in 2016 may just be pushed out to 2017. The broker downgrades Rio Tinto to Sell from Neutral. Price target retained at $45. Estimates have gone up.

The stock has risen on the surge in iron ore prices, beyond Morgans' target. The broker downgrades to Hold from Add. The broker maintains a positive view of the business, noting potential upside to earnings if the current strength lingers.

The broker's valuation has been revised following changes to production assumptions and the iron ore price rise. Target is reduced to $47.30 from $50.40.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/4/1

Citi analysts updated their prices forecasts for commodities and for the first time in a long while new forecasts went up, not down. But it's not universal good news as the analysts remain bears on nickel, while retaining a sceptical view on bulk commodities once the strong steel restart/restocking in China has run its course.

For South32, the outlook of manganese is of crucial importance and here Citi believes prices have peaked, without likely going back to the lows seen earlier in the year. A bearish outlook for nickel has an impact too.

The net impact is a gigantic increase to FY16 estimates (from a low base), but lower expectations for FY17. Price target gains 5c to $1.55. Rating downgraded to Neutral from Buy.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Sell from Neutral by Citi .B/H/S: 5/1/2

Citi analysts updated their prices forecasts for commodities and for the first time in a long while new forecasts went up, not down. But it's not universal good news as the analysts remain bears on nickel, while retaining a sceptical view on bulk commodities once the strong steel restart/restocking in China has run its course.

Coal price forecasts have been lifted, but the analysts remain cautious and note balance sheet risks remain. Price target moves to 66c from 50c. Rating downgraded to Sell/High Risk from Neutral/High Risk.

WESTERN AREAS NL ((WSA)) Downgrade to Sell from Neutral by Citi .B/H/S: 3/0/3

Citi analysts updated their forecasts for commodities prices. They prefer precious metals over their base/industrial peers, maintaining a bearish outlook for nickel, while also anticipating short term downward pressure for copper.

Citi has now also adopted higher forecasts for AUDUSD and this has a dampening effect on future growth for Australia's resources companies.

The broker downgrades Western Areas to Sell from Neutral. Target is lowered to $2.02 from $2.20.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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