In the good books

The A2 Milk Co (A2M) Upgraded to Buy from Neutral by UBS B/H/S: 2/1/1

The latest survey of pregnant women in China conducted by UBS has found being a premium and trusted brand remains of importance, but this year has seen a big increase in the importance of being sourced from a trusted country, especially online.

New Zealand clearly gets a nod given A2 is rising rapidly up the charts on brand awareness and performance. A2 now rates sixth on “bought most often” and the broker sees this as highly encouraging as the company rolls out physical stores.

Encouraging enough to upgrade to Buy, despite the obvious regulatory risks in China. Target is raised to NZ$2.75 from NZ$2.38.

Alumina (AWC) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/1/4

Improved disclosure from Alcoa has translated to upgrades to Macquarie’s earnings and dividend expectations.

Potential supply-side restrictions in Chinese alumina later this year have increased the risk that Macquarie’s above-consensus call on alumina pricing in 2017 could extend beyond this year.

AWAC’s emerging bauxite export business also presents upside risk to the base case forecasts. Rating is upgraded to Outperform from Neutral. Target rises to $2.30.

CIMIC (CIM) Upgraded to Outperform from Neutral by Macquarie B/H/S:  1/0/3

2016 net profit was above Macquarie’s estimates and at the top end of guidance. FY17 net profit guidance is 14% ahead of the brokers previous estimates, at $640-700m.

The broker notes the company has now hit the upper end of guidance in each of the last two years, which provides a template for 2017. The project pipeline is robust with $100bn in relevant projects coming on stream in 2017.

The broker upgrades to Outperform from Neutral and raises the target to $42.50 from $35.02. 2017 and 2018 earnings per share estimates are upgraded by 17% and 15% respectively.

Independence Group (IGO) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/4/1

In the swings and roundabouts of global nickel export bans, the Philippines has shut down various mines for environmental reasons including 16 nickel mines to be closed and two to be suspended, given six months to improve. The move means Credit Suisse has restored its assumption of the nickel market reaching supply-demand balance by December.

The broker had already assumed such a balance before Indonesia lifted its exports bans, so the Philippines has provided the offset. The result is an increase in Credit Suisse’s target for Independence to $4.40 from $4.00. Given the stock had been sold down heavily on the prior Indonesian news, the broker upgrades to Outperform.

Oil Search (OSH) Upgraded to Outperform from Underperform by Credit Suisse B/H/S: 5/3/0

Oil Search now appears to Credit Suisse to be the best play on oil and the stock is upgraded to Outperform from Underperform. When growth matters in the sector again, the broker believes this is a stock that potentially has value upside.

The broker believes a trading opportunity exists on the potential for reserves to be upgraded with the results. The broker cautions that the upgrade in recommendation should not be mistaken for a belief the 2017 will be plain sailing for the company. Target is raised to $7.25 from $5.90.

Premier Investments (PMV) Upgraded to Outperform from Neutral by Macquarie and to Buy from Neutral by UBS B/H/S: 1/4/0

The company has released unaudited results for its retail business following speculation the first half was weak. The first half is not as bad as feared, in Macquarie’s view, with the headline numbers largely in line.

The broker had previously believed there was downside risk to forecasts, as the company was cycling a strong previous corresponding half as well as currency headwinds, and there has been mixed feedback regarding the apparel sector over Christmas.

With the perceived earnings risk subsiding, the broker takes the opportunity to upgrade to Outperform from Neutral. Target is raised to $16.84 from $16.43.

Pre-announced first half numbers from Premier show sales in line with UBS’ expectation and earnings exceeding. The broker had previously warned of downside risk from lagged A$ hedges.

With the result offering relief, investors can now focus on gross margin improvement and the Smiggle rollout, UBS suggests. Aside from more stores, Smiggle is looking at new geographies as well. With Premier now out of danger, the broker upgrades to Buy.

In the not-so-good books

AWE (AWE) Downgraded to Underperform from Neutral by Macquarie B/H/S: 1/2/3

Macquarie has reduced its oil and gas price forecasts with tighter balances in 2017 anticipated to cause a return to market surpluses in 2018 and 2019.

AWE Ltd is the sole stock to receive a downgrade in Australia on the back of the move. Rating reduced to Underperform from Neutral. Target drops to 55c from 60c supported by some hefty reductions to forecasts.

Bank of Queensland (BOQ) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/6/1

Despite being the preferred regional bank, with sound credit quality, strong capital and dividend yield, Morgan Stanley downgrades to Equal-weight from Overweight. Home loan growth is shrinking and deposit margins are still under pressure, the broker observes.

The broker now forecasts cash earnings per share to fall -3% in FY17. The combination of downgrades to earnings per share and reduced likelihood of a bull case outcome reduces the broker’s price target to $11 from $12.

Evolution Mining (EVN) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 6/1/0

The Australian mining sector continues to make improvements in costs, with 75% of companies beating Deutsche Bank’s cost estimates the December quarter. The gold sector led the way.

The broker’s preference remains with the gold sector and Evolution Mining is downgraded to Hold from Buy on valuation. Target is $2.40.

GrainCorp (GNC) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0

Credit Suisse has updated forecasts to reflect Graincorp’s divestment of Allied Mills. The broker believes there is little point in owning a downstream flour mill business within an increasingly competitive domestic grain market and sees no downside to the divestment.

Rather, a sound financial return has resulted allowing for greater balance sheet flexibility. Target rises to $9.87 from $9.58. The stock has nevertheless had a solid run on increasingly positive crop reports, and as such Credit Suisse pulls back to Neutral.

Nine Entertainment Group (NEC) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 1/3/1

Deutsche Bank expects the weakness in the TV market in the second half of FY16 has continued into the first half of FY17.

Discussions with advertisers and media buyers suggest no immediate improvement should be expected and the broker lowers its forecast for the metro TV market  to a -2.5% decline for FY17.

With the stock trading close to the revised price target, Deutsche Bank downgrades to Hold from Buy. Target falls to $1.10  from $1.35.

OceanaGold (OGC) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 3/1/1

The Australian mining sector continues to make improvements in costs, with 75% of companies beating Deutsche Bank’s cost estimates the December quarter. The gold sector led the way.

The broker’s preference remains with the gold sector and OceanaGold is downgraded to Hold from Buy on valuation. Targets slips to $4.10 from $4.20.

Regis Resources (RRL) Downgraded to Sell from Hold by Deutsche Bank and to Neutral from Buy by UBS B/H/S: 2/5/1

Regis Resources is downgraded to Sell from Hold by Deutsche Bank on valuation. Target is $2.80.

A general sector update on base metals and gold by UBS has triggered changes to valuations and forecasts across the spectrum. UBS sides with the gold bulls, anticipating US$1300/oz in 2017.

Only one stock has received a downgrade in recommendation, and it is Regis Resources. Downgrade to Neutral from Buy. Price target lifts to $3.44 from $3.08.

Royal Wolf Holdings (RWH) as Downgraded to Neutral from Outperform by Credit Suisse, to Hold from Buy by Deutsche Bank and to Neutral from Outperform by Macquarie B/H/S: 1/3/0

The first half result slightly beat Credit Suisse estimates. The broker continues to believe the company is close to a trough in earnings but there are timing risks and growth appears hard to find in many areas.

Following the share price appreciation since the FY16 result and negative revisions to earnings per share, the broker believes the valuation is fair at this juncture and downgrades to Neutral from Outperform. Target is raised to $1.45 from $1.40.

First half results highlight an ongoing tough operational environment. Deutsche Bank notes, while the company has increased its share of the construction sector, the resources sector decline has largely offset it.

Additionally, there is increased competition in the container sales business, resulting in reduced volumes.

The broker reduces the target to $1.45 from $1.70 and downgrades the rating to Hold from Buy, as the stock is trading close to valuation.

Royal Wolf’s result was slightly ahead of expectation thanks to a one-off payment from Titan. Growth in leasing revenues was a positive, Macquarie notes, offset by limited progress in disposing of surplus camp assets.

The market remains challenging, hence asset disposal is required to accelerate profit growth and timing here is uncertain, Macquarie suggests. Target rises to $1.45 from $1.40 but as the share price is closing in, rating downgraded to Neutral.

Seven West Media (SWM) Downgraded to Sell from Hold by Deutsche Bank B/H/S: 0/3/2

Deutsche Bank believes weakness in the TV market has continued into the first half of FY17 and discussions with advertisers and media buyers suggest no immediate improvement.

The broker lowers its forecast for the metro TV market to a decline of -2.5% in FY17.

With the stock trading ahead of the broker’s updated valuation it is downgraded to Sell from Hold. Target falls to $0.70 from $0.85.

Shopping Centres Australasia (SCP) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/2/4

The first half result signalled an unexpected slowdown in specialty store sales growth relative to the company’s strong performance over the last few years, Ord Minnett observes.

The broker is not sure whether this is because of a slower sales environment in the business geographies or a maturing of the relatively young portfolio.

As the broker awaits further clarity on the drivers of this slowdown, the rating is downgraded to Hold from Accumulate. Target falls to $2.30 from $2.36.

Transurban (TCL) Downgraded to Hold from Add by Morgans B/H/S: 4/3/0

Stockbroker Morgans has downgraded to Hold from Add while revising its price target downwards to $11.16. The result beat expectations, but it’s the subsequent rally in the share price that is responsible for the downgrade.

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