Last week saw the Australian market trying hard to defend technical support for the index and not get too caught up in trade-related Wall Street madness. Ratings changes by stock analysts over the week look fairly even at 14 upgrades to 10 downgrades, but we should note that of the 14 upgrades, 12 went to Buy (or equivalent) while of the 10 downgrades, only 2 went to Sell. So clearly there is a positive bias.

Miners featured heavily on both sides of the ledger last week, reflecting a seasonal move by brokers to reassess their commodity price forecasts before heading off for a break.

Fortescue Metals topped the earnings forecast list with a 10.2% increase, as the iron ore miner continues to introduce higher grade ore into its mix. WiseTech Global gained 8% on increased revenue expectations.

To the downside, Western Areas was the victim of commodity forecast changes and saw forecasts fall -21% while Mayne Pharma’s numbers dropped -14% following a trading update.

Analyst research will notably slow this week as broking shops start to wind down for Christmas. By next week the shutters will be down.

In the good books

ASALEO CARE LIMITED ((AHY)) was upgraded to Buy from Neutral by Citi. B/H/S: 1/1/0

The company will sell its Australian consumer tissue business for $180m. As this business is losing money Citi believes this is a good decision for shareholders. The broker lifts estimates for earnings per share by 35% in FY19 and 23% in FY20.

Debt will be paid down with the proceeds and the broker forecasts a dividend of 2.5c in FY19. The residual business is largely B2B sales in tissue plus feminine hygiene and incontinence products. These businesses have higher market share, strong brands and a better return on capital, Citi notes.

The broker upgrades to Buy from Neutral and raises the target to $1.05 from $0.80.

AUTOSPORTS GROUP LIMITED ((ASG)) was upgraded to Buy from Neutral by UBS. B/H/S: 2/0/0

UBS notes new car market conditions remain challenging and expects the company’s earnings to be materially affected. The broker believes it will be difficult to report like-for-like new car volumes growth in FY19/20.

Still, back end earnings are increasing and there will be minimal impact from flex commission finance changes on the company. Rating is upgraded to Buy from Neutral as the increased valuation support is hard to ignore. Target is reduced to $1.40 from $1.50.

INDEPENDENCE GROUP NL ((IGO)) was upgraded to Buy from Neutral by UBS. B/H/S: 3/3/0

UBS finds the valuation now more attractive as the share price has fallen -20% since July. This has created an opportunity to obtain exposure to a high-quality, low-cost nickel producer. Rating is upgraded to Buy from Neutral. Target is raised to $4.50 from $4.25.

The broker suspects the investment in Indonesian supply from Chinese battery/nickel producers may be paring back some of the bullish long-term price estimates for nickel. The broker cuts its nickel price estimates by -6% for FY19 and -1% for FY20. Gold and copper price forecasts are also reduced.

METCASH LIMITED ((MTS)) was upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 3/1/3

First half results were broadly in line with expectations. Credit Suisse downgrades earnings, given the weighting to the second half of implementation costs from food distribution growth initiatives, and assumes no sales growth in hardware in FY20.

The broker continues to assume, as yet undefined, cost reductions will continue, which partly mitigate the impact of declining sales revenue in outer years.

Rating is upgraded to Neutral from Underperform. Target is raised to $2.60 from $2.51. 

NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) was upgraded to Overweight from Equal-weight by Morgan Stanley. B/H/S: 3/1/0

Morgan Stanley upgrades to Overweight from Equal-weight, lifting the target to $2.20 from $2.00. The broker consolidates the Fairfax acquisition and estimates for earnings per share move lower to reflect the dilution and factoring in a lower overall TV advertising market.

Revenue share of 38% is assumed. While the broker has a cautious view on traditional media stocks there are a number of company-specific opportunities that it believes should help the shares outperform on a 12-18 month view. Industry view: Attractive.

NORTHERN STAR RESOURCES LTD ((NST)) was upgraded to Buy from Neutral by UBS. B/H/S: 2/2/3

UBS expects Northern Star to beat production guidance in FY19, forecasting 930,000 ounces. The broker incorporates lower gold prices into its modelling.

One issue that has prevented the broker from being more positive on the stock has been the valuation, as the market has put too much store on the successful early turnaround at Pogo.

However, recent share price weakness means the risk/return is now more attractive and the broker upgrades to Buy from Neutral. Target is reduced to $9.00 from $9.50.

SOUTH32 LIMITED ((S32)) was upgraded to Buy from Neutral by UBS. B/H/S: 5/2/0

UBS has revised commodity prices, resulting in a -16% cut to F19 earnings forecasts and a -6% cut to FY20, largely because of lower alumina prices and lower price realisation for thermal coal sales.

The share price is near a 2018 low, in spite of a strong balance sheet and sound margins, and the broker upgrades to Buy from Neutral.

UBS expects guidance to be met across all business units at the half-year result, with the exception of refineries. Target is reduced to $4.10 from $4.20.

In the not-so-good books

ALUMINA LIMITED ((AWC)) was downgraded to Hold from Accumulate by Ord Minnett. B/H/S: 3/2/0

Ord Minnett expects concerns around China’s growth outlook will feed through to lower commodity prices. A move to forward curve base and precious metal prices means -5-13% downgrades to the broker’s base case estimates.

The broker has moved to a more neutral stance on miners, despite strong free cash flow and balance sheets.

Rating is downgraded to Hold from Accumulate. Target is reduced to $2.50 from $3.10.

BHP GROUP ((BHP)) was downgraded to Hold from Accumulate by Ord Minnett. B/H/S: 5/3/0

Ord Minnett expects concerns around China’s growth outlook will feed through to lower commodity prices and reduces 2019 iron ore forecast by -7% amid -5-13% reductions to base and precious metal prices.

The broker downgrades to Hold from Accumulate as BHP has outperformed rival Rio Tinto ((RIO)) by 10% in the year to date. Target is lowered to $35 from $38.

EVOLUTION MINING LIMITED ((EVN)) was downgraded to Hold from Accumulate by Ord Minnett. B/H/S: 2/6/0

Ord Minnett expects concerns around China’s growth outlook will feed through to lower commodity prices. A move to forward curve base and precious metal prices means -5-13% downgrades to the broker’s base case estimates.

Rating is downgraded to Hold from Accumulate. Target is steady at $3.20.

HT&E LIMITED ((HT1)) was downgraded to Underweight from Overweight by Morgan Stanley. B/H/S: 1/4/1

Morgan Stanley believes a positive investment thesis has largely played out and downgrades to Underweight from Overweight. The target is reduced to $1.60 from $2.75 following the sale of Adshel and the announcement of a capital return and share buyback.

The broker decreases estimates for the new smaller business by -7-29% from 2018-20. Attractive industry view maintained.

Earnings forecasts

Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.

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