Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features CHALLENGER LIMITED, and other companies. For more info SHARE ANALYSIS: CGF

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, 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 January 25 to Friday January 29, 2016
Total Upgrades: 8
Total Downgrades: 23
Net Ratings Breakdown: Buy 42.79%; Hold 44.39%; Sell 12.82%

It seems like the world upside down. Australian equities start recovering from an exceptionally weak opening to the new calendar year, and stockbroking analysts start issuing a flood of recommendation downgrades for individually listed stocks.

Say that again?

For the week ending on Friday, 28th January 2016, FNArena registered no less than 23 downgrades against a meagre eight upgrades. What's happening here?

Further downward adjustments to commodity prices projections, that process is still ongoing. Plus a number of stocks are deemed too expensive by now to still carry Buy ratings. Several domestic gold producers come to mind, as well as Medibank Private. Plus analysts are taking a more conservative view on financial stocks whose fortunes are at least partially dependent on further gains/losses in global equity markets. Hence why wealth managers are receiving downgrades. Then there are companies issuing negative announcements, such as ALS Ltd and Lovisa.

On the positive side of the ledger, six out of eight upgrades moved to Buy and most were carried by positive expectations for growth ahead, not simply a knee-jerk response to falling share prices.

In terms of target prices, Ten Network stands out for the week with its consensus target more than doubling, followed by sizeable increases for Treasury Wine Estates and Medibank Private, ResMed and others. The negative side remains very much dominated by resources stocks, as expected, but bling retailer Lovisa tops the list following its sudden profit warning during the week.

The same companies feature in the tables for changes to earnings forecasts, albeit the positive side also contains resources names such as AWE, Santos and Fortescue Metals, believe it or not. The negative side looks like the aftermath of the battle at Waterloo; there's carnage, damage and downgrades and cuts to resources stocks everywhere.

Reporting season formally starts this week. Expectations short term are low, but are they still too high 12 months out?

Upgrade

CHALLENGER LIMITED ((CGF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/3/1

Challenger's preliminary forecasts for the first half suggest to Macquarie that, while credit risks are elevated, the valuation adequately compensates for this.

The broker upgrades to Outperform from Neutral. Earnings estimates are revised up by 2.8% for FY16 and FY17. Target is reduced to $8.56 from $9.03.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/4/1

Credit Suisse is impressed with the cost control witnessed in the December quarter. Capex is lower than expected, with the company now targeting US$250m for FY16.

The broker has revised up FY16 and FY17 earnings estimates by 6.0% and 7.0% respectively. Credit Suisse remains cautious regarding second half 2016 pricing but envisages the risk is to the upside in the near term as China's construction season gets underway.

Rating is upgraded to Outperform from Neutral. Target is $2.00.

PACIFIC BRANDS LIMITED ((PBG)) Upgrade to Overweight from Neutral by JP Morgan .B/H/S: 1/4/0

The company is seen executing on its strategy to provide greater exposure to high quality brands such as Bonds and Sheridan. JP Morgan considers the challenges such as currency and costs are better able to be managed.

The stock's multiples are at discounts to small cap Australian retailers which the broker considers unjustified, given margins and growth are in line or better. Rating is upgraded to Overweight from Neutral. Target is raised to 90c from 60c.

RESMED INC ((RMD)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/2/1

Underlying earnings were 6.0% ahead of Credit Suisse's forecast in the December quarter. US mask sales growth has likely been underpinned by the Jaysec and CareTouch acquisitions, the broker believes.

 Rating is upgraded to Outperform from Neutral, with current valuations considered relatively undemanding. Target is raised to $8.70 from $8.40, based on roll over of the DCF model.

ROYAL WOLF HOLDINGS LIMITED ((RWH)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/2/0

Factoring in the recent earnings warning on a weaker operating environment and a major client entering voluntary administration, Deutsche Bank now expects FY16 earnings of $18.6m, 26% below its previous estimates.

The target falls to $1.70 from $2.70 and the rating is upgraded to Buy from Hold, given the upside to the current price.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Neutral from Underweight by JP Morgan .B/H/S: 3/5/0

Is this a case of the retail analyst at Ord Minnett over-ruling the wholesale guy at JP Morgan? Ord Minnet has stuck to its guns with a Lighten rating, but JP Morgan has upgraded to Neutral. Both were inconsistent with our own archive, but that too should now be in synch.

The analysts saw a strong performance in the December quarter. They note the maiden resource release for Monty has the potential to surprise in a positive manner, but investors might have already priced this in, is the analysts/ view.

They highlight Sandfire is heading into a net cash position, but commodity prices remain weak. $4.75 target retained. Estimates have been lowered.

TEN NETWORK HOLDINGS LIMITED ((TEN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/4/2

The latest data show the metro TV market is in modest decline and regional is slipping away, Macquarie notes. The Big Bash is helping Ten Network to a solid ratings resurgence at the expense of Seven West Media and Nine Entertainment. Seven has the Rio Olympics to look forward to while Nine's cricket offering this season has been weak.

Macquarie has upgraded Ten to Neutral and lifted its target to $1.55.

WESTFIELD CORPORATION ((WFD)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 5/1/0

Credit Suisse considers the process of refining the portfolio is largely behind the company. From FY16-20 the broker expects Westfield to deliver the highest rate of operational cash-flow growth of any A-REIT, driven by the significant ramp up in development completions.

Westfield currently has $3.8bn in major products under construction. Rating is upgraded to Outperform from Underperform. Target is raised to $10.93 from $9.47.

Downgrade

ALS LIMITED ((ALQ)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/3/4

The company achieved the lower end of guidance in the December quarter but the composition of earnings is a cause for concern at Deutsche Bank.

Geochemistry sample volume growth has turned negative for the first time in 12 months and the energy division is loss making. This has more than offset the better-than-expected revenues in the life sciences and industrial divisions.

The broker downgrades to Sell from Hold. Target is reduced to $2.93 from $3.78.

AP EAGERS LIMITED ((APE)) Downgrade to Hold from Add by Morgans .B/H/S: 0/3/0

The company has guided to pre-tax 2015 profit of $126.4m, up 19%. Goodwill associated with the trucks business has been impaired by $5.5m.

Morgans finds plenty to like about the stock but, following a strong share price re-rating and a premium valuation, pulls back its rating to Hold from Add. Target is raised to $12.88 from $12.54.

There is a significant amount of cash coming in over the next 18 months which the broker expects will allow the company to consolidate further and achieve its goal of controlling 10% of the domestic automotive market.

AWE LIMITED ((AWE)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

AWE will sell its 10% stake in Sugarloaf for US$190m. Credit Suisse observes that just nine months ago Sugarloaf was considered a core asset. That was until the oil price fell sharply.

The speed at which the sale was undertaken is of some concern to the broker, making it hard to forecast out through the cycle.

The broker believed the stock was oversold but now questions where the next leg of upside will come from. Rating is downgraded to Neutral from Outperform. Target is reduced to 60c from 95c.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/6/0

Deutsche Bank has downgraded coal and iron ore volume forecasts as the latest trading update highlighted uncertain demand.

With first half underlying earnings now expected to be $403m and valuation reduced the broker downgrades to Hold from Buy. Target falls to $4.15 from $5.70.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/0

December quarter production was in line but UBS questions whether the company can keep the momentum going in 2016. Management has suggested it could re-visit its dividend policy towards the end of FY16.

UBS would not be surprised if the largest shareholder, La Mancha with 31%, was interested in more dividends but believes investment in exploration still offers the greatest opportunity for share price outperformance.

Rating is downgraded to Neutral from Buy on share price performance. While the stock looks fully valued it remains one of the broker's key picks in the gold sector. Target is reduced to $1.54 from $1.60.

FANTASTIC HOLDINGS LIMITED ((FAN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/0

The first half trading update is ahead of Macquarie's expectations. Sales momentum has continued. Still, Macquarie is unable to maintain an Outperform rating, given uncertainty created by the resignations of both the CEO and CFO.

The rating is downgraded to Neutral. The broker expects the stock to trade at a discount to valuation until new appointments are made and confidence in the new team is established. Target is lowered to $2.00 from $2.60.

LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Hold from Add by Morgans and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/2/0

The first half trading update and FY16 guidance suggests the pressure on gross margins is greater than Morgans expected. The early performance of the first UK store has been in line with expectations.

Management expects FY16 earnings in the range of $23.5-25.5m versus Morgans' previous estimate of $28.3m. The broker downgrades to Hold from Add in light of the recent strong performance in the share price. Target is lowered to $3.59 from $3.91.

Gross margin disappointed Morgan Stanley in the first half, with the extent of the contraction a surprise. The broker does not envisage positive catalysts for the next six months and downgrades to Equal-weight from Overweight.

The broker takes some comfort in the news that sales were up 4.1% and this should ensure the inventory position is fairly clean at the end of the quarter. Industry view is In-Line. Target falls to $2.70 from $3.90.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/0/1

Morgan Stanley downgrades to Underweight from Equal-weight, reflecting a less positive bias versus the sector. The broker also has issues with a stretched valuation and considers the bull case is priced into the stock.

The company also lacks diversity and has less flexibility on costs versus its peers, In-Line view retained. Target is reduced to $18.50 from $21.50.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/2

The company has upgraded its operating profit guidance by 27%, assisted by lower hospital utilisation and reserve releases. Still, Deutsche Bank believes hospital contracting and policy changes are delivering sustainable benefits.

The broker believes further efficiency gains will be recycled into growth and, while this should still support solid earnings growth, with total returns on a 12-month basis of only 5.0% and increased regulatory risk the rating is downgraded to Hold from Buy. Target is raised to $2.53 from $2.46.

The company has upgraded FY16 operating profit guidance to $470m from $370m. Management has also re-submitted its 2016 premium rate change application.

Following the positive announcement on profit margins, Macquarie envisages the balance of risk is now more neutral. Risks come from the number of reviews being undertaken in the sector.

Rating is downgraded to Neutral from Outperform. Target is raised to $2.72 from $2.65.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/3/0

Morgan Stanley suspects headwinds are emerging in four of the operating divisions emanating from a weaker outlook for investment markets. The broker suspects the earnings upgrade cycle is coming to an end and risk of de-rating has increased.

The broker adds that there are no major concerns about the business or the balance sheet. Rating is downgraded to Equal-weight from Overweight. In-Line sector view retained. Target is reduced to $76.50 from $93.00.

NEWCREST MINING LIMITED ((NCM)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/4/4

The December quarter production report impressed Deutsche Bank, with a stand-out performance at Lihir and a rapid recovery at Cadia.

The broker is concerned about the sustainability of the performance, particularly water availability at Lihir. FY16 production forecasts are raised by 3.0%. Target is lifted to $11.90 from $11.70 but the rating is downgraded to Sell from Hold based on valuation.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Sell from Hold by Deutsche Bank and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/1

The December quarter was strong and the company has increased its cash position to $211m at the end of the half year. Despite a healthy balance sheet and cash-generating assets with no debt Deutsche Bank believes the share price is running too hot.

Following a 30% rally over the last two weeks the broker downgrades to Sell from Hold on valuation. Target is $2.50.

Northern Star had pre-released its Dec Q numbers so no surprises in a solid official report. Production and costs were largely in line with Macquarie's expectation but cash generation came in slightly better.

The stock has rallied 24% year to date while the A$ gold price has remained flat, and is sitting 6% above the broker's valuation. Hence a downgrade to Neutral. Target unchanged at $3.10.

OROCOBRE LIMITED ((ORE)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/3/0

Orocobre has raised $85m via an institutional placement to cover final commissioning of Olaroz. Deutsche Bank considers the raising of so much capital was opportunistic but prudent, given market concerns around cash flow.

With the cash position resolved the share price performance is now expected to align better with the operating performance at Olaroz and industry pricing conditions.

The broker downgrades to Hold from Buy and lowers the target to $2.40 from $2.70.

OZ MINERALS LIMITED ((OZL)) Downgrade to Hold from Add by Morgans .B/H/S: 4/4/0

Morgans is impressed by the cash flow accumulation at a cycle low and contends the company is well positioned to buy rather than build its next leg of growth.

Hence, the market is likely to be unenthused by the company confirming plans to continue pre-developing Carrapateena. The broker suspects the market will continue to discount growth until either M&A is executed or Carrapateena is further de-risked.

Rating is downgraded to Hold from Add. Target falls to $4.45 from $4.75.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/2/1

Morgan Stanley envisages lower near-term growth with diminishing uplift from distribution and a more mature retail mix, as well as lower inflows. Still, the broker believes the downside risks are modest and valuation multiples reasonable.

Morgan Stanley downgrades to Equal-weight from Overweight. Target is lowered to $6.90 from $8.30. In-Line sector view retained.

ST BARBARA LIMITED ((SBM)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from No Rating by Macquarie .B/H/S: 0/2/0

Deutsche Bank observes the December quarter has rounded out a strong half. The broker considers production and cost guidance is conservative and now assumes a higher output and lower costs relative to updated FY16 guidance.

Rating is downgraded to Hold from Buy on valuation, although Deutsche Bank acknowledges a possible 30-40,000 ozs in upside over 12-18 months from improved mining practices. Target is $1.50.

St Barbara's December quarter production was in line with prior disclosures. The company has upgraded its production guidance and Macquarie expects it to achieve the top end of forecast ranges.

As the company appears to be expecting an improved grade at Gwalia, Macquarie welcomes the potential for significant cash flow. After an astonishing run the stock is now considered fully valued so Macquarie downgrades to Neutral from Outperform. Target is $1.80.

TRADE ME GROUP LIMITED ((TME)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/3/1

The broker believes Trade Me is nearing a point of earnings acceleration as cost growth is set to moderate in 2017 and the signs look positive for revenue growth. But the market has overcooked the share price against the broker's valuation.

Trade Me offers diverse and thus defensive exposures, hence the broker is happy to pull its rating back to Neutral rather than Underperform. Target rises to NZ$4.30 from NZ$4.25.

The share price has rallied strongly since August but Deutsche Bank observes the improvement in the company's prospects has only been incremental. The broker continues to expect no growth in underlying earnings in FY16.

Margin and volume headwinds make it unlikely the company can grow sustainably faster than mid single digits in the medium term, the broker believes. Hence, a downgrade to Sell from Hold. Target is raised to NZ$3.85 from NZ$3.64.

WORLEYPARSONS LIMITED ((WOR)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/3/2

The continued deterioration in commodity prices suggests to Deutsche Bank there will be no reprieve for the engineering & contracting sector. 2016 is expected to produce significant headwinds with a weak Australian dollar negatively impacting some balance sheets.

The broker envisages potential for M&A, given low asset prices. WorleyParsons faces a challenging year with potential for project delays and contract cancellations. Deutsche Bank envisages further share price weakness and downgrades to Sell from Hold. Target is lowered to $3.09 from $9.55.

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