Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies. For more info SHARE ANALYSIS: BEN

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 April 14 to Thursday April 17, 2014
Total Upgrades: 9
Total Downgrades: 12
Net Ratings Breakdown: Buy 39.82%; Hold 43.63%; Sell 16.55%

Even though many in the financial services industry are enjoying extended holidays this month, stockbrokers have proven remarkably busy with FNArena registering no less than 12 downgrades and 9 upgrades for individual stocks for the four-day week ending on Thursday, April 17th. As this is also the time when updates and re-assessments are being released for commodities prices, most of the overall activity is focused on local mining stocks, at least when it comes to adjustments in earnings estimates and valuations/price targets.

In terms of ratings changes, Coca-Cola Amatil, usually seen as a rather boring staple for most investors' portfolios, accounted for no less than a quarter of all changes, both in terms of upgrades and downgrades. The stock is dividing the stockbroker community after yet another shock announcement from new management, but is it now time to stock up on a long-term buying opportunity? That's the $64m question. Financials, regional banks and Challenger in particular, also attracted changes in ratings in the week past.

Investors should also note the changes on the back of stockbroker commodity prices updates have effectively wiped out short term growth assumptions for iron ore heavyweight Rio Tinto (go to Stock Analysis to see for yourself).

Upgrades

Bank of Queensland upgraded to Neutral from Outperform by Macquarie. B/H/S: 0/7/0

Bank of Queensland's result shows the bank is still struggling for underlying growth beyond provisions, the broker notes. The acquisition of Investec should provide some growth but Macquarie is concerned the group is becoming more complex and a riskier proposition, given reliance on trading profits and corporate lending. The Queensland recovery will nevertheless assist and growth may continue if BOQ pushes on with its acquisition spree, the broker suggests, but as to how long it can last is another matter.  It's enough for an upgrade back to Neutral, with the target rising to $11.99 from $11.52.

See also BOQ downgrade

Bendigo And Adelaide Bank ((BEN)) upgraded to Buy from Neutral by BA-Merrill Lynch. B/H/S: 1/6/1

Merrills observes the stock has traded sideways since February and underperformed rival Bank of Queensland ((BOQ)) by 13%. The broker is increasingly certain that the benefits of advanced accreditation are within the company's grasp. The stock now looks better than BOQ in the broker's view and the rating is upgraded to Buy from Neutral. The target moves to $12.50 from $11.80. Merrills thinks the probability of BEN losing the Great Southern class action is low and even if unsuccessful the downside is likely to be 50c a share. The broker also thinks the outcome of the financial systems inquiry is likely to be positive for regional banks.

Coca-Cola Amatil ((CCL)) upgraded to Add from Hold by CIMB Securities and to Outperform from Underperform by Credit Suisse. B/H/S: 3/2/3

The company has guided to a 15% reduction in first half Australian beverages earnings, a poor outcome in CIMB's view. The broker has lowered FY14 forecasts by 13% and FY15 by 5%. CCL is the cheapest listed bottler globally and CIMB thinks FY14 is likely to be an inflexion point for earnings. The rating is upgraded to Add from Hold, as risk is now seen moving to the upside. The company will deliver the strategic review on May 13. Credit Suisse thinks the challenges in the Australian beverages business can be overcome, via reduced overheads, narrowing the business to core non-alcoholic beverages and improving the relationship with The Coca-Cola Co. The Indonesian business is more troubling, in the broker's opinion. Credit Suisse's advice is to stop gold plating the Indonesian asset and cost base. The company has downgraded first half earnings forecasts but Credit Suisse believes Australian earnings margins will stabilise at these levels. The rating is upgraded to Outperform from Underperform.

See also CCL downgrades

Carsales.com ((CRZ)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 6/0/1

Credit Suisse observes the share price is now below the level prior to the SK Encarsales announcement and this provides a fresh opportunity to buy into Carsales.com's offshore expansion story at a reasonable valuation. The broker believes the acquisition was important as it bulks up the international portfolio and growth options. The rating is upgraded to Outperform from Neutral. Offshore now makes up 13% of valuation and is starting to gain enough scale to be a catalyst, in the broker's view. The price target is unchanged at $11.90, as it remains at a premium to reflect the potential for valuation upside.

Challenger ((CGF)) upgraded to Buy from Neutral by UBS. B/H/S: 3/5/0

Challenger has made an offer for the minority stakes in Challenger Diversified ((CDI)). UBS  thinks the offer, cash of $2.74, for 41.3% of CDI units is a relatively attractive price. Owning CDI would increase Challenger's property to 20% of life investment assets. The broker also suspects the balance sheet capacity for this acquisition signals annuity sales momentum has been sustained through the March quarter. The rating is upgraded to Buy from Neutral and the target is steady at $6.70.

SP AusNet ((SPN)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/1/2

Ahead of SPN's result next month, the broker has increased its forecast FY15-16 earnings to reflect higher income from electricity distribution. The broker suggests the regulated utility sector is now fully valued but SPN's conservative balance sheet protects it from any surprises. The broker thus expects SPN to maintain its steady dividend growth path. Target rises to $1.39 from $1.21. Upgrade to Outperform.

Telstra ((TLS)) upgraded to Add from Hold by CIMB Securities. B/H/S: 3/3/1

CIMB thinks NBN payments may accelerate more sharply than previously estimated after further information was published. The broker values the asset sales component of the NBN deal at $11.4 billion, with payments peaking in FY19 at over $2.0bn. Separating asset sales from ongoing operating income and using a lower discount rate for related government guaranteed payments means the broker's valuation has increased. Hence, the target is raised to $5.73 from $5.20 and the rating is revised up to Add from Hold.

Western Areas ((WSA)) upgraded to Neutral from Sell by Citi. B/H/S: 3/3/0

Citi has rolled forward earnings-based multiples and incorporated a bullish view on nickel, based on the likelihood that Indonesia's ore export bans will be enforced. Profit forecasts for Western Areas are raised to $54m in 2015 and $131m in 2016, based on forecast annual production of 25,000t nickel in concentrate for the next five years.The rating is upgraded to Neutral from Sell and the target is raised to $4.12 from $3.00.

Downgrades

Aristocrat Leisure ((ALL)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 3/1/2

The stock may be a market darling, having re-rated to 23 times FY14 earnings estimates, but Merrills is guarded. The market may like the offshore earnings and scope for capital returns but the broker remains concerned about cash flow.  Specifically, more widespread use of vendor financing in Australian and a capex drain from participation units in the US does not inspire the broker. Merrills suspects this could undermine the potential to return capital. The valuation also seems stretched, as the stock is trading at a material premium to its peers. Hence, the rating is downgraded to Underperform from Neutral and the price target to $4.38 from $4.50.

Bank of Queensland downgraded to Neutral from Buy by BA-Merrill Lynch. B/H/S: 0/7/0

The first half result was broadly in line with the broker's forecasts. The intention to acquire Investec's financial and asset finance & leasing businesses is a solid deal but not likely to drive significant upside in the broker's opinion. Merrills thinks BOQ will be 2.2% and 4.1% cash earnings accretive in FY15 and FY16 respectively. Including the acquisition in valuation, Merrills thinks upside to the new price objective of $12.30, from $12.10, is limited. The rating is downgraded to Neutral from Buy.

See also BOQ upgrade

Challenger Diversified ((CDI)) downgraded to Neutral from Buy by UBS. B/H/S: 0/2/0

CDI has received an off-market offer from Challenger Life, a wholly owned subsidiary of Challenger ((CGF)). The offer price of $2.74 per unit will be reduced by any distribution paid by CDI. UBS notes CDI is currently in the ASX300 index and it is likely that when Challenger Life reaches 70% (has 58.7%) CDI will be removed from the index. The rating is downgraded to Neutral from Buy and the target is steady at $2.74.

Coca-Cola Amatil ((CCL)) downgraded to Sell from Hold by Deutsche Bank, to Sell from Neutral by UBS and to Neutral from Overweight by JP Morgan. B/H/S: 3/2/3

The latest downgrade is primarily from a continued deterioration in trading, in Deutsche Bank's view. The broker expects an FY14 earnings decline of 13%, primarily driven by cuts to the Australian and Indonesian estimates, offset by a modest increase to NZ estimates. The broker has made a deeper downgrade to 2015 forecasts, to allow for further margin impact stemming from the price investment that is likely to be needed. The rating is downgraded to Sell from Hold. UBS has cut earnings for FY14 by 18% and believes there are more risks to come. UBS thinks CCL and its parent have failed to get on top of changes in consumer preferences and too much earnings growth has been coming from price. The issue now for CCL is the stock will be perceived as less defensive as it once was and thus could well be de-rated further, with management strategy unclear at this point. Hence despite the stock appearing to offer value at this level, the broker has downgraded to Neutral. JP Morgan suggests stock will be perceived as less defensive now and thus could well be de-rated further, with management strategy unclear at this point. Hence, despite the stock appearing to offer value at this level, the broker has downgraded to Neutral.

See also CCL upgrades

CSL ((CSL)) downgrade to Hold from Buy by Deutsche Bank. B/H/S 5/2/1

Deutsche Bank observes CSL has been a beneficiary of competitor supply disruption in recent years but this has also opened the door to smaller players. A return to price volatility seems unlikely to the broker but the competitive dynamics have undoubtedly risen. The broker has reduced the rating to Hold from Buy with a target reduction to $73.20 from $76.00. With the threat from new extended half-life haemophilia therapies the brokers sees fewer catalysts for above-market growth in the next couple of years.

Echo Entertainment ((EGP)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/1/3

The March quarter update revealed revenue growth surpassed the broker's forecasts. Credit Suisse thinks investor scepticism is abating and improved Queensland gaming product and relaxed regulations have ignited growth. The rating is downgraded to Neutral from Outperform on share price appreciation while the target raised to $3.00 from $2.50.

GWA Group ((GWA)) downgraded to Neutral from Buy by UBS. B/H/S: 2/2/1

First half earnings were affected by some issues at Gainsborough as well as losses in Gliderol. Gainsborough should be back on track and have positive momentum but the broker thinks the turnaround at Gliderol will take time. In sum, UBS thinks achieving FY14 guidance of $75-78m will be a stretch. UBS has lowered forecasts for FY14, expecting trading earnings of around $72.7m. Nevertheless, the company derives 85% of earnings from the housing market so UBS thinks its well placed to capture an advantage from the upturn. The rating is downgraded to Neutral from Buy and the target reduced to $2.95 from $3.40.

McAleese ((MCS)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/1/1

McAleese has issued another profit warning, suggesting revenue and earnings will fall well short of February forecasts. The broker has slashed earnings forecasts by around 30% and sees various problems continuing into the fourth quarter. MCS also announced the acquisition of WA Freight Group, but the broker notes the company's debt/earnings ratio is getting close to covenant limits. Earnings will have to be delivered for the market to regain confidence. Downgrade to Underperform. Target falls to 47c from 92c.

Oz Minerals ((OZL)) downgraded to Sell from Neutral by UBS. B/H/S: 3/4/1

OZ Minerals has reported March quarter production of 18,200 tonnes at a US$1.22/lb cash cost. This is better than UBS expected and ahead of guidance. Copper sales of 15,000 tonnes were below expectations. The broker forecasts a significant reduction in cash at the end of June, with a forecast outflow of $110m in March quarter and $50m estimated for the June quarter, resulting in an interim cash position around $210m. The rating is downgraded to Sell from Neutral based on valuation and the target is reduced to $3.50 from $3.70.

Sigma Pharma ((SIP)) downgraded to Sell from Neutral by Citi. B/H/S: 1/5/1

Sigma shares have rallied 30% in recent sessions and Citi analysts cannot comprehend why that has happened. The broker's remedy is rough and straightforward: downgrade to Sell. Target has risen by 1c to 63c. Citi analysts note industry dynamics remain tough and Sigma will be spending some $50m over the next three years, which will initially dilute earnings. Making matters worse, Citi is anticipating no growth in FY15 and only 5% growth in FY16. On this basis, the shares are considered expensive.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

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