Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features BCI MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: BCI

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 October 20 to Friday October 24, 2014
Total Upgrades: 22
Total Downgrades: 6
Net Ratings Breakdown: Buy 41.90%; Hold 41.12%; Sell 16.98%

Stockbroking analysts continue to seek value and buying opportunities through the rubble that is the Australian share market post the September-October global correction for risk assets. In Australia the focus has clearly shifted towards energy stocks and miners, both sectors have had to endure tougher times than others in the share market thus far in 2014.

As a result, the number of recommendation upgrades continues to outnumber the downgrades. Also remarkable: mining services providers continue to dominate on the negative side. This is not only apparent when overlooking negative revisions to earnings estimates and to valuations/price targets, but also on the negative side of recommendation changes. Clearly, finding a bottom remains a rather flexible concept for this particular segment of the local share market. A fact again highlighted by profit warnings and negative market updates from the likes of Ausdrill, Bradken and Royal Wolf during the week past.

Also remarkable is the come-back of iron ore stocks as witnessed by last week's slew of recommendation upgrades that fell upon the sector, alongside energy stocks, retailers and media stocks.

It is also worth noting that while changes made to profit estimates and price targets seem rather large, in particular for iron ore stocks and other miners, falling share prices are nevertheless opening up cheap values. At least, that's what the rise in stockbroker's recommendation upgrades is suggesting.

Upgrades

AGL Energy ((AGK)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/3/0

Surplus generation capacity has pushed wholesale electricity prices down to marginal cost levels and Credit Suisse observes this limits the downside to wholesale price as the supply curve cannot be compressed any further. AGL is the clear winner in this regard, with the downside priced in. The company has a fixed-price coal supply and a large generation footprint and remains the most leveraged to the upside in power prices. Credit Suisse upgrades to Outperform from Neutral and raises the target to $15.60 from $14.70.

BC Iron ((BCI)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/1/0

BC has now moved to compulsory acquisition of Iron Ore Holdings ((IOH)). The broker takes the opportunity to adjust its earnings forecasts, incorporating a wider discount for lower grade ore prices and the slower ramp-up at Iron Valley, offset by a lower AUD forecast which buffers FY15-16 earnings. BCI will report is quarterly production later in the month which may provide some positive catalysts, the broker suggests. BCI has underperformed peers since announcing the IOH acquisition so while the broker's target falls to $2.10 from $2.30, the rating is upgraded to Outperform.

Beach Energy ((BPT)) upgraded to Neutral from Underweight by JP Morgan. B/H/S: 0/5/1

The broker has reviewed the mid cap oil sector as the recent price rout is even more pronounced for these stocks. JP Morgan upgrades Beach Energy to Neutral from Underweight, given the fall in its share price. The broker continues to find the company's unconventional aspirations challenging but believes the tail risk of Chevron's exit from the JV is now reflected in the share price. Target is lowered to $1.32 from $1.38.

Boart Longyear ((BLY)) upgraded to Neutral from Underperform by Macquarie and to Neutral from Sell by UBS. B/H/S: 0/3/2

Back from the brink. Boart Longyear has announced a "good save", Macquarie suggests, through a debt and equity injection from major shareholder Centerbridge. Existing shareholders are diluted to 58% if they take up their rights but this is a good outcome, in the broker's view, as it removes uncertainty and provides the possibility of BLY trading through the cycle. The deal is nevertheless conditional so the broker has not made changes, and indeed has increased its target to 23c from 20c after switching to an enterprise valuation model. It is enough to upgrade to Neutral, nonetheless. The voting share of Centerbridge is 49.9% but UBS observes there is potential for its economic interest to rise as high as 70%.  The broker notes obvious benefits from the recapitalisation include removing maintenance covenants on the debt, providing longer tenure, lowering cash interest costs and providing liquidity. This comes at the cost of a three time increase in the number of shares on issue. Despite the ongoing difficult market outlook the broker has upgraded to Neutral from Sell but believes it may be some time before there is any earnings improvement. Target is raised to 25c from 13c.

Coca-Cola Amatil ((CCL)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 2/3/3

The broker remains cautious on Coke given the ongoing trend of lower local fizzy drink consumption and sugar pricing pressures. Longer term the broker envisages earnings forecasts as no longer demanding given CCL's cost-cutting efforts and the upside potential in Indonesia. Consensus forecasts have now re-based and while the broker still believes CCL's FY15 PE ratio of 16.3 is a bit rich, it is not overly so. Upgrade to Neutral. Target falls to $8.40 from $8.80.

Downer EDI ((DOW)) upgraded to Buy from Neutral by Citi, to Neutral from Underperform by Credit Suisse and to Buy from Neutral by UBS. B/H/S: 5/2/1

Citi finds but positives from Downer EDI's intention to acquire Tenix. The analysts consider the deal as EPS accretive in FY15, plus it also improves the quality of earnings, expands DOW’s range of capabilities and comes with further attractive growth prospects. Most importantly, argue the analysts, this deal will potentially switch the market's focus to growth opportunities from growth risks and this should see a higher share price. To top it all off, the balance sheet remains in a healthy state and industry consolidation is only starting to happen. Credit Suisse considers the acquisition shows financial discipline has been relaxed to allow for an offensive move to capitalise on the privatisation of state-owned power distribution assets. The broker upgrades to Neutral from Underperform following the slide in the share price as the stock looks more attractive on a risk/reward basis. Credit Suisse believes the acquisition should lead to a more stable and predictable earnings profile but there is no hiding from the challenges in the contract mining and rail sectors. UBS estimates the acquisition to be 6-9% accretive in FY15-16, largely attributable to the low cost of debt from Downer EDI's new committed bank facility. The broker upgrades to Buy from Neutral. After recent share price weakness the stock is now considered compelling and the broker is attracted to the stronger balance sheet, albeit cautious about the contract mining outlook.

Drillsearch Energy ((DLS)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 3/1/0

The broker has reviewed the mid cap oil sector as the recent price rout is even more pronounced for these stocks. JP Morgan upgrades Drillsearch to Overweight from Neutral, given the very sharp pull back in its share price. The broker considers the stock is a strong play on a recovering oil price. The target is reduced to $1.55 from $1.66.

Fortescue Metals ((FMG)) upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 4/3/1

Morgan Stanley now suspects too much conservatism is priced into Fortescue Metals. The broker expects iron ore prices to stabilise above US$85/t and forecasts debt reduction and increased dividends on this basis. The broker's valuation and forecasts are largely unchanged but as the equity is trading below a post price scenario valuation, the rating is upgraded to Overweight from Equal-weight. Target is raised to $4.30 from $4.20. Sector view is In-Line.

Grange Resources ((GRR)) upgraded to Outperform from Underperform by Macquarie. B/H/S: 1/1/1

Grange posted a solid production report and shipments surprised to the upside on a drawdown of stockpiles, leading to improved cash flow, the broker notes. This allowed GRR's balance sheet to improve to the point its valuation is almost fully cash backed. The strong quarter has led the broker to upgrade earnings forecasts, bolstered by lower AUD assumptions. A recovery in pellet premiums has helped GRR turn around from being at risk to being cash flow positive, and the broker suggests the opening of the south pit by year end should reduce operational risk by doubling potential ore sources. Hence a double upgrade to Outperform from Underperform. Target rises to 18c from 13c.

Myer ((MYR)) upgraded to Neutral from Sell by Citi. B/H/S: 2/4/2

The overall environment for retailers in Australia has improved, exclaim analysts at Citi. They add: this seems to be happening at a time when most retailers are suffering weak share prices. Oh but the irony of financial markets! On Citi's estimates, lower oil and tax burdens that haven't gone through parliament should improve overall retail spending by some 1.7% annualised. This is seen as sufficient to lift ratings for retail stocks under coverage. Myer shares have been upgraded to Neutral from Sell. No other changes have been made.

Newcrest Mining ((NCM)) upgraded to Buy from Neutral by Citi. B/H/S: 2/2/4

It is time, say Citi analysts. Time for Newcrest shareholders to finally reap the benefits of  the more than $13bn capex outlay from the past decade. Following site visits and issuance of a trading update to the ASX, Citi analysts have come to this conclusion. On this basis they have upgraded to Buy from Neutral. Price target drops to $11.41 from $11.55 but remains well above the share price.

News Corp ((NWS)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 3/2/0

Foxtel will turn defence into attack from next month as it introduces a big pricing shake-up to head off competition, resulting in anticipated subscriber increases at much lower margins. The broker has downgraded its Foxtel valuation but this is more than offset by increases to News Corp's core businesses. The broker has also adjusted for the lower AUD and raised its target to $19.40 from $18.10. On recent share price weakness, the broker upgrades to Neutral.

Orotongroup ((ORL)) upgraded to Buy from Neutral by Citi. B/H/S: 3/0/0

The overall environment for retailers in Australia has improved, exclaim analysts at Citi. They add: this seems to be happening at a time when most retailers are suffering weak share prices. Oh but the irony of financial markets! On Citi's estimates, lower oil and tax burdens that haven't gone through parliament should improve overall retail spending by some 1.7% annualised. This is seen as sufficient to lift ratings for retail stocks under coverage. Oroton has been upgraded to Buy from Neutral. No changes have been made to target or forecasts.

Pacific Brands ((PBG)) upgraded to Buy from Neutral by Citi. B/H/S: 1/2/2

The overall environment for retailers in Australia has improved, exclaim analysts at Citi. They add: this seems to be happening at a time when most retailers are suffering weak share prices. Oh but the irony of financial markets! On Citi's estimates, lower oil and tax burdens that haven't gone through parliament should improve overall retail spending by some 1.7% annualised. This is seen as sufficient to lift ratings for retail stocks under coverage. Pacific Brands shares have been upgraded to Buy from Neutral.

Premier Investments ((PMV)) upgraded to Neutral from Sell by Citi. B/H/S: 1/4/1

The overall environment for retailers in Australia has improved, exclaim analysts at Citi. They add: this seems to be happening at a time when most retailers are suffering weak share prices. Oh but the irony of financial markets! On Citi's estimates, lower oil and tax burdens that haven't gone through parliament should improve overall retail spending by some 1.7% annualised. This is seen as sufficient to lift ratings for retail stocks under coverage. Premier Investment shares have been upgraded to Neutral from Sell. No other changes have been made.

Southern Cross Media ((SXL)) upgraded to Buy from Neutral by UBS. B/H/S: 2/3/2

The company issued a profit warning at its AGM, downgrading first half guidance because of weaker share and ad markets. First half earnings will now be down 18-20% against prior guidance of down 10-15%. UBS believes the stock is inexpensive and upgrades to Buy from Neutral, given a 28% fall since its results in August. That said, concerns remain regarding uncertain ad markets and negative regional TV/metro radio share momentum as well as high gearing. Target is lowered to $1.10 from $1.15.

Senex Energy ((SXY)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 5/1/0

The broker has reviewed the mid cap oil sector as the recent price rout is even more pronounced for these stocks. JP Morgan upgrades Senex Energy to Overweight from Neutral, given the very sharp pull back in its share price. The broker considers the stock is a strong play on a recovering oil price. Target falls to 63c from 66c.

Transfield Services ((TSE)) upgraded to Hold from Reduce by CIMB Securities. B/H/S: 2/3/1

Transfield received an offer from Ferrovial Servicios at $1.95 a share. The board has rejected the bid but offered Ferrovial the option of undertaking limited due diligence. CIMB would not be enticed by the prospect of an increased bid emerging and believes shareholders should capitalise on the current elevated price rather than rely on the potential of an increased offer. The rating is upgraded to Hold from Reduce as CIMB expects there will be an informal floor under the share price. The broker raises the target to $1.85 from $1.13.

See also TSE downgrade.

Western Areas ((WSA)) upgraded to Outperfrom from Neutral by Credit Suisse. B/H/S: 4/3/0

The September quarter production result was excellent in Credit Suisse's opinion with cash costs impressive and higher-than-expected grades at Flying Fox. FY15 production guidance is unchanged but the broker believes there is a risk it will be upgraded. Credit Suisse upgrades to Outperform from Neutral, given the 15% fall in the share price in the last three months. Target is unchanged at $5.20.

Downgrades

Ausdrill ((ASL)) downgraded to Hold from Buy by Deutsche Bank. B/H/S: 0/4/1

The company's profit warning and subdued FY15 outlook reveals the challenges facing the business and the broker has materially reduced near-term forecasts as a result. Ausdrill has flagged potential asset impairments but Deutsche Bank expects it to remain in compliance with debt covenants. The broker downgrades to Hold from Buy and reduces the target to 77c from $1.45.

G8 Education ((GEM)) downgraded to Sell from Neutral by Citi. B/H/S: 4/0/1

G8 Education continues doing what it does best: acquiring smaller child care centres at a steep discount to its own share market valuation. So far so good and it clearly is working.  Citi analysts, however, are starting to have second thoughts about it all. Pointing at the shares' high PE, Citi analysts would rather buy into Navitas ((NVT)) or Veda Group ((VED)), which are trading on similar PE multiples but carry a better "feel". Have Citi analysts gone "zen"? Bottom line: they believe at some point the G8 business model might come unstuck and when it happens they do not want to be on the register. Downgrade to Sell from Neutral. Target reduced to $4.20 from $5.10.

Royal Wolf ((RWH)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/3/0

The first quarter was affected by the cycling of a significant sale in the prior corresponding quarter but the broker observes the trend was still negative for sales revenue. Leasing revenue growth remains strong. The broker is positive on the outlook for a diversified, innovative business but now expects a lower short-term growth trajectory. The stock is trading in line with its long-term historical average and Credit Suisse regards this as appropriate. Rating is downgraded to Neutral from Outperform and the target lowered to $3.35 from $3.90.

Super Retail ((SUL)) downgraded to Neutral from Overweight by JP Morgan. B/H/S: 4/3/0

At the AGM the company signalled trading has improved slightly but flat margins have contributed to guidance downgrades. Vehicle and sports division sales growth in the first 16 weeks of FY15 were up 4% and 3% respectively while leisure was down 8%. JP Morgan downgrades to Neutral from Overweight, noting the problems in leisure are worse than feared and there appears to be less potential for margin recovery in sports. The broker acknowledges the share price decline has already achieved some valuation support, resulting in a less negative view than otherwise would have been the case. Target is reduced to $8.30 from $9.75.

Transfield Services ((TSE)) downgraded to Neutral from Buy by Citi. B/H/S: 2/3/1

Given the severe downturn for the resources services sector, Citi is not surprised consolidation is happening. Ferrovial has now made an initial approach for Transfield but the bid might need extra sweeteners to get acceptance, note the analysts. With the share price now above their target, and above the indicative $1.95 offered by the suitor, Citi analysts downgrade the rating to Neutral.

See also TSE upgrade.

WorleyParsons ((WOR)) downgraded to Sell from Neutral by UBS. B/H/S: 3/2/2

UBS has lowered FY15-17 profit forecasts by 4-19%, largely because of a slower capex environment from major oil customers but also to reflect increasing risks around the gas and oil outlook on the back of lower prices. The broker remains attracted to WorleyParsons track record, balance sheet strength and exposure to global hydrocarbons spending but has downgraded to Sell from Neutral as the stock is trading at a premium to revised valuation and to peers. Target is reduced to $13.00 from $17.25.
 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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