In the good books
EVOLUTION MINING LIMITED (EVN) Upgrade to Outperform from Neutral by Macquarie B/H/S: 3/3/1
Evolution’s strong result was in line with Macquarie. The company continues to accelerate its debt repayments thanks to solid cash flows, the broker notes. An impairment has been taken on Pajingo ahead of its pending sale.
The divestment of Pajingo demonstrates management’s commitment to portfolio optimisation, Macquarie suggests. FY16 was a transformational year given the integration of two new core assets. While further acquisitions or divestments cannot be ruled out, the broker expects FY17 to be a year of asset optimisation.
Target unchanged at $3.00. Upgrade to Outperform.

IRESS MARKET TECHNOLOGY LIMITED (IRE) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 2/2/0
First half results were in line. Credit Suisse upgrades to Outperform from Neutral because for some time its conviction in the growth outlook, especially in the UK, is increasing.
The latest information from the company regarding the trends supports a view that the stock should deliver strong multi-year growth and, while not cheap, Credit Suisse believes the quality warrants the multiple. The broker upgrades the target to $12.70 from $11.80.
MINERAL RESOURCES LIMITED (MIN) Upgrade to Neutral from Underperform by Macquarie B/H/S: 2/2/0
Mineral Resources’ result beat Macquarie. The primary driver was increased margins on iron ore production and another solid contribution from mining services. The stock’s recent run-up has nevertheless been all about lithium, the broker notes.
The Mt Marion lithium project will be proportionately consolidated rather than equity accounted, as the broker had previously assumed. The change means an increase in earnings forecasts but the bulk of Macquarie’s forecast increase reflects those iron ore margins.
Upgrade to Neutral. Target rises to $10.59 from $8.30.
TREASURY WINE ESTATES LIMITED (TWE) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 1/5/1
FY16 sales were lower than Credit Suisse forecasts but margins were higher. The broker upgrades EBIT estimates around 6-7% across the forecast period but, despite this, believes consensus expectations remain too high.
The broker upgrades to Neutral from Underperform rating and raises the target to $10.65 from $9.20.
In the not-so-good books
ARB CORPORATION LIMITED (ARB) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Sell from Neutral by CitiB/H/S: 0/2/1
ARB’s FY16 report slightly missed expectations at Ord Minnett. The analysts make a point in that apparent top line growth doesn’t necessarily translate into profits; at least this hasn’t been the case in recent years.
As a result, Ord Minnett cannot justify what they believe is a valuation gap between what investors are paying for the shares and what the analysts think the shares are worth. Hence the downgrade to Lighten from Hold. Target moves up to $14.21 from $13.14.
In addition, while they laud management for all the good things put in place in years gone by, the analysts do see downside risk to consensus expectations for the year ahead.
ARB missed expectations due to higher manufacturing costs, albeit only by 2-3%. Regardless, Citi analysts have formed the view the valuation has blown out far too much to the upside; downgrade to Sell from Neutral.

BAPCOR LIMITED (BAP) Downgrade to Neutral from Outperform by Macquarie B/H/S: 2/2/0
Bapcor’s result slightly beat Macquarie and met guidance. The recent trade price rise appears to be holding, the broker notes, which should boost margins in FY17.
Bapcor offers a defensible growth outlook and solid balance sheet, providing for more acquisition potential, but on share price strength the broker now sees a full valuation. Downgrade to Neutral. Target rises to $5.67 from $5.03.
G8 EDUCATION LIMITED (GEM) Downgrade to Hold from Buy by Ord Minnett B/H/S: 2/2/0
First half results disappointed Ord Minnett because of the substantial increase in operating costs. The broker notes no real outlook was presented but the target of a first/second half earnings split of 35/65 was mentioned.
On face value this appears to be a stretch given plans for only modest acquisition activity, although the broker understands the company could dispose of up to 20 loss-making centres in the second half which would clearly help margins and earnings.
Rating is downgraded to Hold from Buy as the broker awaits evidence of greater control on costs. Target is reduced to $3.25 from $4.30.
SPARK NEW ZEALAND LIMITED (SPK) Downgrade to Underperform from Neutral by Macquarie B/H/S: 1/2/2
Spark NZ’s profit was in line with guidance. Macquarie saw a robust result and outlook in some respects but warns that competition may be set to intensify following a wave of sector consolidation. Cash conversion was a weak point, the broker notes.
Which puts into focus a payout ratio in excess of 100%. Spark is now trading at a premium to the market and its own historical PE, hence Macquarie downgrades to Underperform. Target rises to NZ$3.50 from NZ$3.35.
TOX FREE SOLUTIONS LIMITED (TOX) Downgrade to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/4/0
While the company is able to offset the activity slowdown and re-tendering through new business wins, Morgan Stanley expects lower growth going forward.
The broker reduces earnings estimates by 28% for FY17 and 25% for FY18. Given the widespread softness in the customer base the broker expects activity and pricing to be affected.
The broker also forecasts FY17 as the trough year for margins, with a steady improvement in FY18 and FY19 amid scope for further accretive M&A providing a catalyst.
Morgan Stanley downgrades to Equal-weight from Overweight. Target is lowered to $2.80 from $3.34. In-Line sector view retained.
WEBJET LIMITED (WEB) Downgrade to Neutral from Buy by UBS B/H/S: 1/4/0
FY16 results were in line with UBS. Cash flow featured and the broker observes the balance sheet is in good shape.
UBS notes the significant momentum in the business but considers there is plenty priced into the stock at current levels and downgrades to Neutral from Buy. Target is raised to $9.85 from $6.84.
WELLARD LIMITED (WLD) Downgrade to Neutral from Buy by UBS B/H/S: 1/1/1
Wellard has delivered its third downgrade since listing, prompting a downgrade from UBS to Neutral from Buy.
The net profit after tax forecast of $22.9m-$23.9m comes hot on the heels of a June 30 revision to $23.5-$30m, and compares with the prospectus forecast of $46.4m. It reflects a $7.7m repair bill, an insurance claim and a $1.2m bad-debt provision.
UBS tips a decline in gross margin over the second half of 2016 given weakness in its Live Export market.
The broker cuts earnings-per-share forecasts 15% to 32% to reflect weaker margins and cash-flow, likely leading to increased net debt and interest costs.
Given Wellard’s history of revisions, UBS has changed its price-target methodology to apply a 30% discount until gross margins stabilise. Target price tumbles to 41c from 77c.
Earning forecast

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