Last week the Australian share market’s resilience in the face of Wall Street weakness was supported by stockbroking analysts issuing a high number of upgrades for ASX-listed stocks.

A noticeable switch from previous weeks has taken place in earnings estimate with the balance for the week firmly favouring negative adjustments. Amongst the heaviest hit, we find QBE Insurance, Perseus Mining and Independence Group, as well as Virgin Australia, Fortescue Metals and 3P Learning.

Among those enjoying positive revisions, we find Beach Energy, Platinum Asset Management, Treasury Wine Estates and Lovisa Holdings.

The week ahead will see the local reporting season gather steam, and with Wall Street unable to fight gravity on the back of rising bond yields, macro movements will feature large for the Australian share market this week.

In the good books

AIR NEW ZEALAND LIMITED (AIZ) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/2/1. Improving yield and stronger domestic load factors have been offset by an increase in the Singapore jet fuel price. Given the hedging profile, the broker expects limited impact on the current year but the outlook and potential quantum of downgrades for FY19 and FY20 are considered more uncertain. Credit Suisse now believes the stock presents a more balanced risk/reward and upgrades to Neutral from Underperform. Target is raised to NZ$2.96 from NZ$2.90.

ASX LIMITED (ASX) was upgraded to Neutral from Sell by Citi B/H/S: 0/4/4. Citi observes strong secondary capital raisings have nudged up earnings per share. The first half recorded total capital raisings of $44.8m, up 22%. The cash market has been lacklustre in the first half and the broker notes exit momentum has been similarly weak. Citi lifts FY18 estimates for earnings per share by 0.5% and the target to $55.30 from $54.90. Rating is upgraded to Neutral from Sell.

GDI PROPERTY GROUP (GDI) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/0/0. The company has the highest portfolio exposure among the A-REITs to the Perth office market. Credit Suisse believes this makes the stock a counter-cyclical play on a recovery in what is the most challenging of the major CBD office markets in Australia. The broker believes Perth may be on the road to recovery, expecting stronger leasing conditions going forward. The current valuation differential to the major east coast markets is also expected to narrow. Rating is upgraded to Outperform from Neutral. Target is raised to $1.31 from $1.15.

INVESTA OFFICE FUND (IOF) was upgraded to Neutral from Sell by UBS B/H/S: 2/3/1. With Cromwell Property (CMW) now off the register, that overhang on Investa’s share price is gone. Weak cash flow and earnings expectations for FY19 have also been priced in, UBS suggests, and indeed recent leasing success sees the broker move to a flat FY19 forecast. UBS therefore upgrades to Neutral, retaining a $4.44 target, while recognising that rising global bond yields will weigh.

JB HI-FI LIMITED (JBH) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 3/3/2. Ord Minnett reviews JB Hi-Fi following the strong performance of the stock, noting Australia’s consumer sector has been stronger than expected and the launch of Amazon has been underwhelming thus far. JB Hi-Fi has also responded to the competitive threat of Amazon better than expected. Rating is upgraded to Accumulate from Hold and the target to $31.50 from $23.00.

MONADELPHOUS GROUP LIMITED (MND) was upgraded to Outperform from Underperform by Macquarie B/H/S: 1/1/3. Macquarie believes the environment is getting better for contractors, with a synchronised resources and infrastructure recovery underway. Significant tender opportunities await the company in the resources sector and the broker suggests it is well-placed to capture share. Monadelphous revenues tend to outperform the sector in strong market conditions, Macquarie observes. Target is raised to $19.45 from $17.35. The broker includes the potential for accretive acquisitions in its outlook.

NUFARM LIMITED (NUF) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/2/1.Credit Suisse considers the macro backdrop for crop chemicals will remain sluggish in 2018 amid mixed regional conditions and persistently weak soft commodity prices. While the contribution from cost reductions beyond FY18 is reduced, and will lead to slower earnings growth, the broker believes the market is under appreciating the long-term benefits that the transformation program will deliver. Moreover, there appears to be no expectation factored in for a successful development of Omega 3 canola. Credit Suisse upgrades to Outperform from Neutral. Target is reduced to $9.21 from $9.23.

WHITEHAVEN COAL LIMITED (WHC) was upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 3/4/1. An extended rally in coal prices has led to significant de-gearing, creating valuation support, Morgan Stanley observes. The broker considers the stock fairly valued and generating significant cash flow even on bear-case coal prices. This leads the broker to upgrade to Equal-weight from Underweight. The upside risk comes from an expanded Vickery project. Target rises to $5.05 from $3.75. Industry view: Attractive.

WOOLWORTHS LIMITED (WOW) was upgraded to Buy from Neutral by Citi B/H/S: 4/1/3. Citi expects Woolworths to maintain its lead on sales growth in grocery over the next two years. Superior execution is the primary driver of stronger sales growth and the broker upgrades to Buy from Neutral. Target is raised to $30.50 from $28.50. The broker does not expect a repeat of FY18’s stark improvement in execution in FY19 but does suggest the refurbishment program and online growth will support sales growth ahead of rival Coles (WES).

In the not-so-good books

EVOLUTION MINING LIMITED (EVN) was downgraded to Hold from Buy by Ord Minnett B/H/S: 2/5/1. Ord Minnett found the December quarter production sound but considers the rise in the stock of more than 14% over the past three weeks excessive. Rating is downgraded to Hold from Buy. Target is $2.80.

FORTESCUE METALS GROUP LTD (FMG) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/3/1. Ord Minnett believes the company’s significant change in marketing strategy incorporates a view that low-grade ore discounts are partly structural. Hence, the broker raises expectations for the long-term iron ore price discount to -20% from -17%, which lowers the valuation and target to $5.50 from $6.35. Given the uncertainty, Ord Minnett downgrades the rating to Hold from Accumulate.

INDEPENDENCE GROUP NL (IGO) was downgraded to Neutral from Buy by Citi B/H/S: 0/4/2. The company had a strong December quarter at Tropicana and made improvements at Nova, maintaining FY18 guidance. Citi observes strong base metal prices have lifted that share price by 25% and downgrades to Neutral from Buy on valuation. The broker rolls forward multiples to FY19 to reflect a full year of Nova production. Target rises to $5.00 from $4.50.

MEDIBANK PRIVATE LIMITED (MPL) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 1/4/2. Ord Minnett believes the health insurance industry is facing reduced penetration and affordability concerns and Medibank Private is losing share. The broker believes the efforts to address this issue through retention and customer service initiatives are being thwarted by the company only partially embracing the fast-growing aggregator channel.  While top-line trends could weaken with falling participation rates, Ord Minnett also believes low premium increases will pressure gross margins in FY19. Rating is downgraded to Lighten from Hold. Target rises to $3.16 from $3.05.

SOUTH32 LIMITED (S32) was downgraded to Sell from Neutral by Citi B/H/S: 1/4/3. Citi has taken a negative view on the medium to longer term outlook for manganese prices and this has triggered a downgrade to Sell from Neutral, with the target price tumbling to $3.50 from $3.75. The broker update also includes some balance sheet criticism (company accused of hugging too much cash, being too conservative post spin-off) plus the analysts have updated for currency movements.

TPG TELECOM LIMITED (TPM) was downgraded to Sell from Neutral by Citi B/H/S: 1/4/2.  Citi observes price deflation has been a key theme for the telecommunications industry. The broker forecasts three years of earnings declines for TPG and believes the stock will be a more attractive prospect once it gets past the peak of mobile capital expenditure in FY18/19. The broker reduces estimates for earnings per share in FY19 by -15%. Rating is downgraded to Sell from Neutral. Target is reduced to $5.20 from $6.05.

VILLAGE ROADSHOW LIMITED (VRL) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/1/2. The latest trading update disappointed Ord Minnett. Theme parks continue to be affected by the Dreamworld tragedy in October 2016, despite improved ticket revenues in January 2018. The company has recently completed the sale and lease back of the Gold Coast land, which follows a sale of the Singapore exhibition business in November. Proceeds from both transactions were used to repay debt. Ord Minnett believes the sale of these assets, while necessary, comes at a significant cost. Estimates are downgraded by -38% for FY18 and -32% for FY19. Rating is downgraded to Lighten from Hold. Target is reduced to $3.25 from $3.76.

Earnings forecast

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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