In the good books

BEACH ENERGY LIMITED (BPT) Upgrade to Buy from Neutral by Citi B/H/S: 4/2/1 Given the recent underperforming share price, Citi is upgrading to Buy/High Risk from Neutral/High Risk. The broker considers the growth portfolio uninspiring at current oil prices but the base valuation represents a 31% premium to the current share price.

CEO uncertainty, and asset sales and cost cutting offset by impairments and a conservative growth profile, means the broker finds the outlook mixed in the short term. Still, Citi believes there is potential for creating value. Citi retains a 77c target.

FORTESCUE METALS GROUP LTD (FMG) Upgrade to Buy from Neutral by UBS B/H/S: 3/3/2 September quarter shipments of 41.9m tonnes at a realised price of US$50/dmt with debt declining signals an improved operating performance and UBS upgrades to Buy from Neutral. Fortescue Metals continues to surprise on cost performance and UBS expects the company can continue to de-leverage. Hence the market is expected to ascribe more value to the equity. Target is raised to $2.85 from $2.30.

INSURANCE AUSTRALIA GROUP LIMITED (IAG) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 1/7/0 The company has decided not to pursue further investment in China and, as this was considered a major overhang on the stock, Credit Suisse takes the opportunity to upgrade to Outperform from Neutral.

The broker believes the company can now focus on its core business and capital management. Credit Suisse is confident in the ability to deliver on earnings expectations in FY16 and includes three years of special dividends in forecasts. Target is raised to $5.75 from $5.35.

NIB HOLDINGS LIMITED (NHF) Upgrade to Overweight from Neutral by JP Morgan B/H/S: 2/2/1 The company’s acquisition of the OnePath New Zealand medical insurance book is a small added bonus in JP Morgan’s view. The broker already likes the recent disclosures which signal cash earnings are materially higher than previously assumed.

The broker upgrades to Overweight from Neutral. Target rises to $3.70 from $3.40. JP Morgan considers the stock is attractive on a price/earnings relative basis and also offers growth.

TREASURY WINE ESTATES LIMITED (TWE) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Neutral from Underperform by Macquarie and Upgrade to Neutral from Sell by UBS B/H/S: 0/7/0 Treasury Wine will acquire the wine assets, largely US/UK, of Diageo. Credit Suisse observes the acquisition is accretive, on paper at least, but the company must halt, or offset, the long-term volume erosion of these brands. The company believes it can obtain significant growth for its Californian brands in Asia and Latin America, now that it can access more fruit. Credit Suisse remains to be convinced.

The broker upgrades FY17 forecast by 25% after refreshing currency inputs but notes Treasury Wine has a new exchange rate risk, USD/GDP. A stronger US dollar could erase the very thin margins.

Credit Suisse upgrades to Neutral from Underperform and the target to $6.60 from $5.50.

Strong organic growth, high levels of earnings accretion and a currency tailwind see Macquarie upgrade to Neutral. Target rises to $7.40 from $5.78.

As the earnings outlook continues to improve, UBS upgrades to Neutral from Sell. Target is raised to $7.00 from $5.05.

WHITEHAVEN COAL LIMITED (WHC) Upgrade to Outperform from Neutral by Macquarie B/H/S: 6/2/0 September quarter production was broadly in line with Macquarie’s forecasts. Coal pricing remains flat and this is the key catalyst going forward, in the broker’s opinion.

While thermal coal prices are depressed, the market for the company’s high-quality product appears secure and Macquarie expects supply reductions from marginal producers should provide some price support.

The Maules Creek project appears set to deliver a higher proportion of coking coal than previously envisaged. Macquarie upgrades to Outperform from Neutral and retains a $1.30 target.

In the not-so-good books

BRICKWORKS LIMITED (BKW) Downgrade to Underperform from Neutral by Macquarie B/H/S: 1/2/1 Macquarie is forecasting a big drop in housing commencements in 2016 as the pace of population growth slows while housing supply continues to grow well above trend. While Australian listed building stocks are in more robust shape now following restructures, and balance sheets are in good shape, the broker has nevertheless downgraded expectations.

Brickworks has seen a solid re-rating in past months but Macquarie expects this to erode as housing activity declines. Downgrade to Underperform. Target falls to $14.70 from $15.80.

EVOLUTION MINING LIMITED (EVN) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/3/0 The company has pre-released strong September quarter cash flows and set the tone for what Deutsche Bank suspects is a strong reporting season in terms of margins in the domestic gold sector. The full report should provide greater insight into the sustainability of performances, in the broker’s opinion.

The broker downgrades to Hold from Buy on valuation and increases its target to $1.40 from $1.30.

GENERATION HEALTHCARE REIT (GHC) Downgrade to Hold from Add by Morgans B/H/S: 0/2/0 Morgans suspects FY16 guidance will be reiterated at the upcoming AGM, noting the portfolio continues to expand organically and should deliver enhanced earnings from FY17.

The stock continues to offer a niche investment in defensive health care assets. As the share price has performed well despite recent market volatility the broker moves to a Hold rating from Add. Target is $1.77.

IPROPERTY GROUP LIMITED (IPP) Downgrade to Hold from Add by Morgans B/H/S: 1/2/0 Morgans goes the extra mile to emphasise it remains positive about the growth prospects for iProperty. It’s just that recent share price appreciation means the immediate outlook for the share price no longer warrants an Add rating, hence the downgrade to Hold

OZ MINERALS LIMITED (OZL) Downgrade to Neutral from Buy by UBS B/H/S: 5/2/1 UBS has slashed copper and nickel price forecasts for 2016, with nickel reduced by 31% and copper by 11%. The broker believes, in a falling price environment, a bottom-up approach is more likely to add value than a top-down one.

A lower Australian dollar has helped to mitigate most of the impact from lower copper prices. After a share price re-rating UBS downgrades OZ Minerals to Neutral from Buy. Target is lowered to $4.30 from $4.42.

PROGRAMMED MAINTENANCE SERVICES LIMITED (PRG) Downgrade to Neutral from Overweight by JP Morgan B/H/S: 3/2/0
The Supreme Court of Victoria has approved the merger with Skilled Group (SKE). JP Morgan expects the transaction will be earnings accretive in the mid to high single digits in FY16 and FY17.

The broker remains cautious on the outlook because of the rising exposure to offshore marine services. JP Morgan incorporates the merger into estimates and increases FY16-18 forecasts by an average 8.7%. Target is raised to $3.30 from $2.96. Rating is downgraded to Neutral from Overweight.

TRADE ME GROUP LIMITED (TME) Downgrade to Hold from Buy by Deutsche Bank B/H/S: 2/3/1 A turnaround in property and general items may be encouraging but cyclical tailwinds are becoming headwinds in terms of jobs and motor vehicle classifieds, Deutsche Bank observes.

With a moderate medium-term growth outlook the broker now considers the stock is fairly valued and downgrades to Hold from Buy. Target is raised to NZ$3.64 from NZ$3.55.

Earnings Forecasts

FNArena tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.