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: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley 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 January 12 to Friday January 16, 2015
Total Upgrades: 7
Total Downgrades: 12
Net Ratings Breakdown: Buy 43.48%; Hold 39.68%; Sell 16.84%

The week ending Friday, January 16 2015 was characterised by a dark and sombre mood. Not only did share prices weaken on each day of the week, but stockbroking analysts kept downgrading stock ratings and reducing earnings estimates and valuations and price targets.

This is not how the usual script plays out. Weakening share prices are supposed to trigger recommendation upgrades, not downgrades. The reason as to why last week proved different is, of course, because analysts are still incorporating the new normal for crude oil and other commodity prices in their models, while investors in the share market are not taking any prisoners either.

The combination of both meant last week carried a decisive sombre mood. With 12 downgrades in ratings, against 7 upgrades, and with negative adjustments in estimates and price targets significantly larger than what was happening on the positive side, it is difficult to escape the share market's negative mood.

Apart from energy companies and mining stocks, retail oriented stocks such as OrotonGroup and Pacific Brands were equally prominent on the negative side of the ledger. On the positive side, there is a clear improvement in sentiment towards National Australia Bank, while Alumina Ltd has been going against the trend in the mining space.

Upgrades

Acrux ((ACR)) upgraded to Hold from Reduce by Morgans. B/H/S: 0/1/1

The broker expects a seasonally stronger quarter for Axiron when marketing partner Eli Lilly reports its results this month. Morgans advises that investors with a short term view can consider trading the stock into the expected result. The broker upgrades its rating to Hold from Reduce and raises the target to $1.28 from $1.17. Upside risk is predicated on continuing weakness in the Australian dollar and the stabilisation of script volumes. Downside risk is uncertainty surrounding the clinical risks being reviewed by regulators.

National Australia Bank ((NAB)) upgraded to Overweight from Equal-weight by Morgan Stanley and to Outperform from Neutral by Macquarie. B/H/S: 4/2/2

Morgan Stanley is encouraged by the efforts to address the bank's problems but needs to see a sustainable Australian turnaround and a clearer path to a UK exit. That comment dates from the stockbroker's research update back in November last year. Morgan Stanley has taken the view there are now sufficient signals the tide might be turning under the new CEO, hence the upgrade to Overweight. Options to address higher capital requirements and a genuine exit from the UK further underpin the stockbroker's decision. Price target jumps to $36.50 from $33.70. Sector rating remains In-Line. Macquarie considers the underperformance of the business bank is explained by an over emphasis on value-neutral retail expansion, and a poorly constructed cost reduction program which led to a revenue hole. Macquarie is pleased the bank is working to address this situation and moves the rating to Outperform from Neutral. Target is raised to $36.75 from $32.20.

OZ Minerals ((OZL)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 7/1/0

Macquarie makes modest reductions to copper price forecasts but the weaker Australian dollar forecasts means upgrades to OZ Minerals' earnings expectations. The stock should also benefit from weaker oil prices and Macquarie upgrades to Outperform from Neutral. Target is raised to $4.10 from $4.00.

QBE Insurance ((QBE)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 6/2/0

QBE strengthened its capital position in 2014 and Macquarie believes the current risk/reward balance is favourable. That said, premiums are expected to remain weak in 2015. While upgrading to Outperform from Neutral the broker does not believe a material re-rating is likely, given the difficult operating conditions in the sector and uncertainty regarding forecast earnings. Target is raised to $11.70 from $11.60.

REA Group (REA)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/2/1

With the acquisition of MOVE in JV with News Corp ((NWS)) Deutsche Bank adjusts forecasts. Current US exposure is not substantial but the addressable market of US$14bn provides significant growth potential, in the broker's opinion. With the roll forward of valuation Deutsche Bank increases the target to $50.70 from $43.90 and upgrades its rating to Buy from Hold, given the amount of upside to current trading levels.

Santos ((STO)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 4/3/0

Credit Suisse has been amongst the most bearish on Santos in the Australian share market, arguing that only a fool would not incorporate a highly dilutive capital raising in the modeling for the company. The upgrade, to be read as "Neutral for the brave, but a Neutral nonetheless" according to the analysts, is thus likely to attract a lot of market attention. To avoid all misinterpretation: CS maintains a capital raising is going to happen, pointing out the company stands to lose some 16mmboe of existing production from 2015-2020. In a wicked way of putting things, the upgrade is actually based upon the fact that, if Santos does not raise additional capital, the analysts can see 20-30% more downside over time. In case of a capital raising of at least $2.5bn, the current share price seems "fair" to the broker.

Downgrades

AGL Energy ((AGL)) downgraded to Neutral from Buy by Citi. B/H/S: 3/4/1

Citi has downgraded FY15 profit forecasts by 15% and FY16 by 6%, primarily from lower wholesale electricity prices, especially in Victoria where AGL has the most excess capacity. Rating is downgraded to Neutral from Buy. The broker envisages downside risk to consensus earnings estimates in FY16 and would need to see delivery on earnings growth before the stock re-rates. Target is reduced to $14.62 from $15.25.

ALS ((ALQ)) downgraded to Sell from Neutral by UBS. B/H/S: 0/3/4

UBS already had lowered expectations on the back of falling energy prices last year, but they've decided to lower forecasts a little more given persistent weakness which is expected to impact on the company's Reservoir Group (RG) oil and gas services business. UBS analysts estimate the RG business is for 60-70% exposed to exploration related activities. This latest adjustment, in combination with the observation the share price looks rather expensive, is sufficient for a downgrade to Sell from Neutral. The target tumbles to $4.45 from $5.05. Revised estimates imply a downtrend in EPS and DPS for this year and next, before an up cycle commences.

BC Iron ((BCI)) downgraded to Underperform from Outperform by Macquarie. B/H/S: 0/3/1

Macquarie is downgrading BC Iron to Underperform from Outperform on the back of new commodity price forecasts. Target is lowered to 40c from 60c. The broker expects spot iron ore prices to trough at US$60/t in the second half of 2016 which, based on current break even points, is likely to mean all four mid-cap producers generate significant losses. Cuts to Australian dollar forecasts provide a little relief.

Commonwealth Bank ((CBA)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 1/6/1

Morgan Stanley has this morning decided to reshuffle its preferences among Australia's major banks. CBA goes from number one to number three with National Australia Bank ((NAB)) now most preferred. The analysts suggest CBA is about to run out of steam, with the EPS upgrade cycle coming to an end and with its valuation most stretched in the sector. Rating goes to Equal-Weight from Overweight. Target remains at $82. EPS estimates have been slightly lowered.

Grange Resources ((GRR)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/2/1

Macquarie is downgrading to Neutral from Outperform and reducing the target to 12c from 15c in the wake of reductions to iron ore price forecasts. The broker expects spot iron ore prices to trough at US$60/t in the second half of 2016 which, based on current break even points, is likely to mean all four mid-cap producers generate significant losses. Cuts to Australian dollar forecasts provide a little relief.

Lend Lease ((LLC)) downgraded to Hold from Add by Morgans. B/H/S: 6/2/0

Morgans is increasingly wary of the company's valuation and downgrades to Hold from Add. Continued compression of cap rates, while helping the FY15-17 earnings performance outlook, makes the medium-term pipeline more expensive. The broker is concerned about the prospect of replenishing major projects albeit very confident regarding the earnings profile for the next couple of years. Target rises to $16.13 from $14.98.

Mineral Resources downgraded to Sell from Neutral by UBS. B/H/S: 1/2/2

The commodities team at UBS has lowered price forecasts for iron ore (incorporating the impact from lower oil prices) and their peers at the equities desk note this means this company's iron ore mining operations will now be loss making at the EBITDA level. Incorporating this prospect in their modeling has triggered a recommendation downgrade, to Sell from Neutral. The analysts are quick in pointing out this is and remains a high quality business, but for now the negatives from downtrending iron ore prices outweigh any positives. Estimates have been cut. Target drops to $7.00 from $8.50.

Northern Star ((NST)) downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/1/0

The impact of the broker's changes to the gold price forecast is mixed. Those producers with Australian dollar cost bases benefit from a weaker forecast for the currency while international producer earnings forecasts are reduced. Macquarie expects the gold price to average over $1,700/oz over FY16-18, suggesting Australian-based producers should generate significant cash flow. That said, the sector has outperformed in recent weeks and the broker is downgrading Northern Star to Neutral from Outperform. Target is raised to $1.90 from $1.70.

Orotongroup ((ORL)) downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse. B/H/S: 1/3/0

Another profit warning in six weeks and Citi analysts have clearly turned more cautious post the disappointing event. The analysts believe management's guidance remains "ambitious" while visibility remains low. Citi does see profits likely higher in FY16, but risks remain. Downgrade to Neutral from Buy. Estimates have been cut and this has caused a fall in price target to $2.90 from $4.30. Citi analysts point out there's now genuine prospect for negative like-for-like sales trends. Credit Suisse is downgrading to Neutral from Outperform, given the material profit downgrade for FY15. It seems to the broker that reduced discounting and FX had a greater impact on gross profit than was initially expected. Credit Suisse reduces earnings forecasts by 42% for FY15, suspecting the new strategy will take time to bed down while FX remains a headwind. Value is still there for the patient investor, the broker maintains. Target is lowered to $3.15 from $5.00.

Regis Resources ((RRL)) downgraded to Sell from Hold by Deutsche Bank and to Neutral from Outperform by Macquarie. B/H/S: 2/3/2

The preliminary December quarter production data is in line with Deutsche Bank's estimates, despite throughput issues continuing at Garden Well. The disappointment at Garden Well was countered by higher output at Rosemont. The broker downgrades FY15 earnings forecasts by 4% and, as the stock is trading at a premium to the unchanged target of $1.70, downgrades to Sell from Hold. Macquarie's changes to the gold price forecast have a mixed impact. Those producers with Australian dollar cost bases benefit from a weaker forecast for the currency while international producer earnings forecasts are reduced. Macquarie expects the gold price to average over $1,700/oz over FY16-18, suggesting Australian-based producers should generate significant cash flow. That said, the sector has outperformed in recent weeks and the broker is downgrading Regis Resources to Neutral from Outperform. Target is raised to $1.86 from $1.75.

Tassal Group ((TGR)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 0/2/0

JP Morgan has downgraded Tassal to Neutral from Overweight because of the potential oversupply in the domestic salmon market. The broker acknowledges the risks associated with its valuation and the fact that, long term, global demand dynamics for fish protein remain favourable. Target is lowered to $4.30 from $4.60.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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