Weekly Recommendation, Target Price, Earnings Forecast Changes

This story features ARISTOCRAT LEISURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALL

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 July 14 to Friday July 18, 2014
Total Upgrades: 6
Total Downgrades: 12
Net Ratings Breakdown: Buy 39.76%; Hold 43.55%; Sell 16.69%

The story for the Australian share market remains the same as investors and analysts start looking forward towards the upcoming reporting season. Incorporating lower estimates for commodity prices, in particular iron ore and coal, leads to downgrades in price targets, valuations, earnings forecasts and, in some cases, to downgrades in ratings, but outside this specific adjustment, the underlying picture remains supportive of ongoing strength.

The week ending Friday, July 18th 2014, saw twice as many downgrades in ratings for individual stocks than upgrades -12 against 6- but the negative picture is heavily dominated by mining stocks suffering from price estimates adjustments. The same applies to the tables for changes in price targets and profit forecasts.

On the positive side we find industrials stocks such as Transurban, Village Roadshow and insurance companies, alongside the energy sector which is enjoying the positive flow-on effects from better-than-expected quarterly production reports and rising oil price forecasts.

Upgrades

Aristocrat Leisure ((ALL)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 5/2/1

The broker admits it has erred to the conservative side on gaming stocks to date, favouring lower PEs and lower growth, but strong cash flow, over high growth risks. But the broker believes Aristocrat's VGT acquisition is transformational, being highly accretive and allowing Aristocrat to harvest cash flow to pay down debt. A potential risk is VGT's high profit margin on a low customer base, given one little change in gaming machine yield assumption can affect an exponential change in value, but the broker assumes short term yield trends will be benign. Target rises to $6.00 from $4.80. Upgrade to Neutral.

Macquarie Atlas Roads ((MQA)) upgraded to Hold from Sell by Deutsche Bank. B/H/S: 3/3/0

The company will acquire an extra 0.7% stake in APRR. Additionally, the distribution guidance of 8.3c for the second half is higher than the broker expected. Given the company is trading at a 5% yield and over an 8.3% rate of return, Deutsche Bank is upgrading to Hold from Sell. The target is increased to $3.10 from $2.00 based on the improved distribution and valuation roll forward.

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

The broker notes 2014 production guidance is maintained, despite weaker June quarter production, as initiatives are continuing to increase the annualised mill rate. There was no meaningful update on the GRAM offer in the broker's view, other than the fact that due diligence is continuing. Credit Suisse upgrades the rating to Neutral from Underperform and raises the target to $2.30 from $2.20.

Sonic Healthcare ((SHL)) upgraded to Add from Hold by CIMB Securities. B/H/S: 5/3/0

CIMB expects further synergistic acquisitions in Germany and has performed a scenario analysis to better determine the financial impact. The broker also believes the FY14 earnings guidance is achievable with abating FX headwinds. While acknowledging upside risk to forecasts, estimates are not changed based on the re-analysis. However, valuation metrics have been rolled forward and the target increases to $18.89 from $17.04. Given potential earnings drivers and a cumulative return of about 10% on current estimates the broker upgrades to Add from Hold.

Village Roadshow ((VRL)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/1/0

Macquarie upgrades to Outperform from Neutral, noting the company has an enviable portfolio and remains the market leader in each of its businesses. 2015 is expected to be a significant year for the box office and the outlook for Village Roadshow's distribution business is improving. The stock is now trading at more than a 20% discount to peer Ardent Leisure ((AAD)) and the broker thinks this is a buying opportunity. The price target is raised to $8.50 from $7.60.

Webjet ((WEB)) upgraded to Overweight from Neutral by JP Morgan. B/H/S: 1/2/0

The broker is upgrading to Overweight from Neutral. The target is reduced to $3.00 from $3.30. JP Morgan envisages upside risks to earnings if the company is successful with ZUJI and Lots of Hotels. Some of this risk is mitigated by the longer-term structural risks in the sustainability of the business model. Many investors have raised concerns about consumers eventually refusing to pay the high services fees, especially with new entrants providing alternatives. JP Morgan agrees with this and thus factors in declines in the core Webjet branded business, as well as attributing only 10% probability to the stock surviving past 10 years.

Downgrades

AGL Energy ((AGK)) downgraded to Underperform from Neutral by Macquarie and to Neutral from Buy by UBS. B/H/S: 1/5/1

The company expects to achieve the lower end of its FY14 guidance of $560-610m and has indicated FY15 results will be affected negatively by the withdrawal of the carbon tax subsidy and LPG. This should be offset by strong growth in the rest of the business. Macquarie observes the retail market is weak and forward electricity prices are falling. LNG delays are also having an impact. The broker suspects the risk for downgrades around MacGen is growing, given the outlook for power prices. This all adds up to a downgrade to Underperform from Neutral for Macquarie and a reduction in the target to $15.14 from $16.00. UBS revises earnings forecast for FY15 down by 17% and for FY16 down by 11%. Dividend estimates have also been reduced. Following the revisions UBS downgrades the rating to Neutral from Buy and the target to $15.56 from $19.14.

Atlas Iron ((AGO)) downgraded to Neutral from Buy by UBS. B/H/S: 0/5/3

UBS has re-modelled Atlas Iron to incorporate an impurity discount of US$7.00/dmt, although the broker estimates it widened to US$11.00/dmt in the June quarter. The net result is a 37% reduction in FY14 earnings and 155% reduction for FY15. The rating is downgraded to Neutral from Buy, given the drop in valuation and a view that the market is unlikely to ascribe any value to the Horizon 2 project in the current environment. The target is lowered to 62c from $1.00.

Fortescue Metals ((FMG)) downgraded to Hold from Add by CIMB Securities. B/H/S: 4/4/0

Fortescue's pre-released production report showed 124mt shipped in the June quarter at an average realised price US$22/t below the benchmark fines price, although the broker expects that discount to reduce over the medium term. Higher depreciation sees the broker trim its earnings forecasts. Target is nevertheless unchanged at $4.35 and given FMG's recent share price bounce, the broker has downgraded to Hold suggesting the risk/reward is evenly balanced.

Maverick Drilling ((MAD)) downgraded to Hold from Add by CIMB Securities. B/H/S: 0/1/0

The asset review has concluded the best path is to acquire and develop new assets to best use funds, rather than pursue growth from the existing portfolio. Longer term, the broker backs the new management team to create value. Until there is greater clarity regarding growth options, CIMB moves to a Hold rating from Add. The target is downgraded to 19c from 60c.

Macquarie Group ((MQG)) downgraded to Underweight from Neutral by JP Morgan. B/H/S: 3/3/1

Macquarie's share price has outperformed international investment banks by some 10% since the FY14 result. But the broker notes FY15 will likely not see another big jump in US gas trading given the unusual 2014 winter, there will be no Sydney Airport distribution this time, and the A$ has crept up. Consensus is also ahead of guidance, hence leading into next week's AGM the broker has downgraded to Underweight, further noting the staff selling window will open. Target nevertheless ticks up to $54.75 from $54.62.

Perseus Mining ((PRU)) downgraded to Underperform from Neutral by BA-Merrill Lynch. B/H/S: 4/1/1

The broker is downgrading to Underperform from Neutral, retaining a 40c target. The price has run up strongly in recent months because of improving gold sentiment but the high costs, admin and tax rate mean margins remain negative, in the broker's view. Merrills wants to see more runs on the board before becoming comfortable the company has overcome its production challenges.

SEEK ((SEK)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/5/1

The broker is surprised SEEK's share price has held up near its highs despite the lower multiple implied by the Zhaopin IPO. SEEK's fortunes swing on its international assets and risk around their multiples has now increased. The broker has reduced the valuation premium it assumes for quality online growth stocks. Target falls to $16.00 from $16.60 and rating is downgraded to Underperform.

Sirius Resources ((SIR)) downgraded to Neutral from Buy by Citi and to Hold from Buy by Deutsche Bank. B/H/S: 2/2/0

The broker initiated coverage of Sirius in May with a Buy rating, and since then the share price has appreciated. The Definitive Feasibility Study provides the broker with the assumption of a 70/30 debt/equity split on project funding, so incorporating this and the share price run, the broker has decided SIR is now fairly valued, notwithstanding exploration upside. The broker thus downgrades to Neutral. Target falls to $3.70 from $3.90. The Nova definitive feasibility study has underlined the potential of the 2012 discovery. Site works will begin in early 2015. Deutsche Bank assumes the company funds the project with a 70:30 debt to equity split. The broker raises the target to $3.75 from $3.50 but, after a strong month, the stock is trading in line with valuation and the rating is downgraded to Hold from Buy.

Virgin Australia ((VAH)) downgraded to Sell from Neutral by UBS. B/H/S: 1/3/4

The June quarter appears to have been particularly tough and UBS is increasing FY14 pre-tax loss estimates to $240m. Looking ahead, unit cost control is the major focus but will remain a challenge as capacity growth moderates, in the broker's opinion. UBS reduces the rating to Sell from Neutral, given the share price has risen above valuation. The target is lowered to 35c from 36c.

Woolworths ((WOW)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/3/3

Masters JV partner Lowe's holds a put option, implying Lowe's can sell its share to Woolies. This is always a risk, the broker notes, but unlikely to occur while Masters is performing so poorly. The risk is for further underperformance. Woolies' recent rally has been all supermarket-led, the broker suggests, without much consideration given for the Masters drag and potential further cost required to do something about it. Valuation is now sufficient for the broker to pull back to Neutral. Target retained at $38.25.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms