In the good books

Fortescue (FMG) Upgraded from underweight to equal-weight by Morgan-Stanley. B/H/S: 2/4/1

Morgan Stanley favours quality rather than leveraged miners, given the potential for volatility and is moving to overweight on resources for its model portfolio.

Fortescue Metals is upgraded to Equal-weight from Underweight as it fully captures the spot price and the broker will await a pull back to re-visit its view.

Henderson Group (HGG) Upgraded from neutral to outperform by Credit Suisse. B/H/S: 1/3/0

First half results were below forecasts but signaled to Credit Suisse that the operating environment is not deteriorating further and suggest that previous fund flow assumptions were too bearish.

The broker finds the current valuation appealing and upgrades to Outperform from Neutral.

Mineral Deposits (MDL) Upgraded from hold to buy by Ord Minnett. B/H/S: 2/0/0

Ord Minnett expects operational consistency to improve and with an increase in cash flow and supportive market conditions, raises its rating to Speculative Buy from Hold.

The broker notes the balance sheet continues to be challenged but rising prices and operational improvements reduce the risk. The broker believes investor confidence will recover, if the company can deliver two quarters of improved performance.

Oil Search (OSH) Upgraded from sell to neutral by UBS. B/H/S: 3/2/1

UBS believes it increasingly likely that a co-ordinated LNG project in PNG will be approved, with gas from PNG LNG and Papua LNG feeding into two new 4mtpa trains.

While there are challenges to overcome, the second half of FY18 is considered the likely timing of expansion approval.

UBS upgrades to Neutral from Sell, factoring in a faster rebound in oil prices and lower production costs in PNG LNG as well as a re-assessment of the timing, structure and cost of LNG expansion.

Santos (STO) Upgraded from equal-weight to overweight by Morgan-Stanley. B/H/S: 5/1/1

While the market remains sceptical, Morgan Stanley believes that under the new CEO, a long term cost-out and maintenance capex reduction story is beginning for Santos. Significant opportunities are available in capex in particular, the broker suggests, which has to date hindered the capacity to pay down debt.

Morgan Stanley estimates Santos’ share price implies a long term oil price of US$60/bbl, in line with peers. But among peers, Santos has the greater cost reduction opportunity.

South32 (S32) Upgraded from equal-weight to overweight by Morgan-Stanley. B/H/S: 3/4/1

Morgan Stanley favours quality rather than leveraged miners, given the potential for volatility and is moving to overweight on resources for its model portfolio.

South32 has traded ahead of expectations throughout the year and, based on continued productivity gains, the broker upgrades to Overweight from Equal-weight.

Seven West Media (SWM) Upgraded from underperform to neutral by Macquarie. B/H/S: 1/3/2

FY16 earnings were down 10.7% with the company guiding to FY17 declining by 15-20%. Macquarie downgrades FY17 estimates by 3.9% and FY18 by 0.7%.

Macquarie recently downgraded the stock on the basis that the challenging TV ad revenue and cost pressures would weigh on the outlook.

While this remains the case, the broker observes the significant sell off in the share price has meant the investment case is now more balanced.

Woolworths (WOW) Upgraded from hold to add by Morgans. B/H/S: 1/2/4

Morgans upgrades Woolworths to Add from Hold. The broker expects it may be another 6-12 months before sales growth kicks in and suggests some patience is required.

The broker observes the business faces considerable implementation risks over the next two to three years but believes the market is being overly pessimistic on the outlook for Australian food retailing. Moreover, Morgans suspects margins here may not decline as much for the industry structure is very different compared with overseas.

In the not-so-good books

AWE (AWE) Downgraded from outperform to neutral by Macquarie. B/H/S: 3/3/0

Reserves reports from operator Origin Energy (ORG) imply a 30% cut to BassGas reserves, as a result of lower reservoir performance from recently drilled wells. Macquarie believes the changes bring forward the end of production to mid 2021, two years earlier than previously expected.

The broker downgrades AWE to Neutral from Outperform and still envisages FY17 will be a consolidation year following a number of asset sales.

Bendigo and Adelaide Bank (BEN) Downgraded from neutral to underperform by Macquarie. B/H/S: 1/3/2

Macquarie revises earnings forecasts for the regional banks largely as a result of margin pressure and slower growth expectations.

Harvey Norman Holdings (HVN) Downgraded from accumulate to hold by Ord Minnett. B/H/S: 2/3/2

Ord Minnett has reviewed its thesis on the stock, noting sales growth and margin expansion are the key drivers. There is also the prospect of capital management.

Yet the recent share price performance makes the valuation less appealing and the broker downgrades to Hold from Accumulate.

Independence Group (IGO) Downgraded from outperform to underperform by Credit Suisse. B/H/S: 0/3/3

FY16 production was broadly in line and FY17 guidance disappointing for Credit Suisse. The broker updates its model for the production figures and guidance, accelerated Bollinger decline and the recent capital raising.

Given the strong appreciation in the share price, Credit Suisse downgrades to Underperform from an Outperform rating.

Mantra Group (MTR) Downgraded from hold to sell by Deutsche Bank. B/H/S: 2/4/1

Deutsche Bank downgrades to Sell from Hold because the valuation is not compelling, particularly given the cyclical nature of earnings and robust industry conditions. The broker has concern over earnings quality and the potential impact on share price performance.

Given acquisitions have been a driver of earnings momentum and the associated premium multiple, there is additional risk that the market begins to price a wider disconnect between earnings and the value accretion from acquisitions, the broker maintains.

Navitas (NVT) Downgraded from neutral to underperform by Macquarie. B/H/S: 0/4/1

FY16 earnings were in line with guidance and implies a decline of 11.1% in the second half, slightly ahead of expectations, Macquarie observes. The broker downgrades to Underperform from Neutral.

Macquarie believes the flat growth outlook in FY17 reflects the high level of downside risk associated with the loss of contracts. Ongoing regulatory risks add to the downside.

Seven West Media (SWM) Downgraded from outperform to neutral by Credit Suisse. B/H/S: 1/3/2

Credit Suisse reduces FY17 forecasts given the weaker guidance, with the company expecting earnings to fall 15-20%. FY16 earnings were below the broker’s estimates.

The main disappointment was the return to relatively high cost growth in the second half. The TV ad market is expected to be flat to down slightly in FY17 The broker downgrades to Neutral from Outperform.

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