Broker price targets on property-related companies and REITs are getting pared back including Commonwealth Property Group, Mirvac Group and Stockland. Ten Network, Cochlear and Telecom NZ have been downgraded to Sell. This week we list stocks with lowered price targets, earnings downgrades and Sells from leading brokers.

Price target lowered

Ten Network (TEN)


Chart: Share price over the year to versus ASX200 (XJO)


Share Price: $0.955

Price target: $0.78 (Deutsche), $0.81 (RBS)

Broker Calls: Deutsche – Sell, RBS – Sell

P/E: 70.22

Market Cap: $998 million

The Dynamic Duo have done it again. James Packer and Lachlan Murdoch are doing a fantastic job of burning through their inheritences, this time losing a wad of cash on an investment in Ten Network (TEN). In October last year, Packer bought a 17.88 per cent stage in TEN at $1.50 a pop, subsequently splitting the stake with Murdoch. With the investment down 40% Packer has turned postively bearish on free-to-air TV. He told a business function in Perth this week that he was now more focused on pay TV than free-to-air television. ‘I can’t see us as a company going back aggressively into the free-to-air industry at the moment,’ Packer said. ‘Seven’s position is too strong.’

And Murdoch was frank enough to say that the Ten business was ‘stuffed’ and had a ‘flawed’ strategy, however when he stepped down from the role of interim CEO last week he modestly claimed that he had got it back on track by cutting staff numbers by 12 per cent. Pity about the share price.  

Ten Network chairman Brian Long says that the outlook for Ten is far from rosy, with conditions in the advertising market still difficult and expected to remain so. ‘Since June, the metropolitan advertising market has been soft, and although there are signs of a slight recovery for December, trading remains tough, with very limited visibility,’ Mr Long told shareholders last week.

‘We expect these difficult conditions to continue, certainly in the near term, and while we are optimistic about the future, revenue success will be largely influenced by consumer confidence. Our projections for growth are modest and in line with analyst views.’

Well, analyst views aren’t terribly positive either. After Ten reported net profit of $14.18 million for the 12 months to August 31, 2011, down 90.5 per cent from the prior corresponding period, a host of brokers downgraded the stock. And it’s not getting any better, This week Deutsche Bank downgraded Ten to a sell and dropped its price target to $0.78, while RBS also have a sell with a price target of 81 cents. RBS analysts have lowered their forecast for FY12 by 33% and think there’s plenty more pain to come.

Macquarie, Citi and Merrill Lynch all remain Neutral on the stock, but don’t have many good word to say with a weak ad market and poor outlook.



Commonwealth Property Fund (CPA)


Chart: Share price over the year versus ASX200 (XJO)


Share Price: $0.99

Price target: $0.97 (UBS)

Broker Calls: Credit Suisse – downgrade to underperform, UBS – Hold, City Index – Hold

P/E: 11.34

Market Cap: $2,434 million

At face value it’s hard to be bullish about listed property trusts (LPTs) – also known as REITs – within an environment that grants investors relatively risk-free returns of 6 per cent-plus on term deposits. With distributions still at the lower end of the range, REITs have struggled to attract the sort of new money they did pre-GFC when returns were 20 per cent-plus.

However REITs have been reducing debt and simplifying their business, and are in many ways less exposed to the European debt crisis than other sectors. Interest rate cuts have also increased the attractiveness of yields from REITs compared to cash and fixed interest. 

While Commonwealth Property Fund had been singled out as a REIT for consideration by the likes of Morningstar, some brokers have been busily downgrading the stock. John Rawicki of Ord Minnett has a Sell on the REIT. ‘The company recently announced it was breaking $625 million of interest-rate swaps, reducing the chances of a special distribution,’ he says. ‘The stock trades on a distribution yield of 6.1 per cent and a price/earnings ratio of 12.9 times versus sector weighted averages of 6.6 per cent and 12 times respectively.’

Peter Esho of City Index has a Hold on CPA, if only for its dividend yield. ‘Like Dexus, this stock is a pure play office exposure with Commonwealth Bank its largest tenant,’ he says. ‘It’s worth holding for a strong yield and upside exposure to an increase in property values in the next few years given the supply constraints in office development.’

On the other hand, Credit Suisse has downgraded it to an Underperform due to recent share price movements, UBS has a $0.97 price target and Merrill Lynch believes the stock is fully priced with an Underperform rating.



Cochlear (COH)


Chart: Share price over the year versus ASX200 (XJO)


Share Price: $56.15

Price target: $49.15 (Merrill Lynch)

Broker Calls:Think Technically – Sell, UBS – Sell, Credit Suisse – Underperform, Citi – Sell

P/E: 17.65

Market Cap: $3,195 million

As Cochlear’s shares went into freefall following a major product recall, contrarian investors keen for a bargain wanted to know more. So far there hasn’t been an easy fix.

Cochlear shares have regained some traction recently, rising from $45 in early October to $56 today. Merrill Lynch isn’t convinced, however, that the stock is heading straight back to the glory days of $85, a height it reached in early April this year. The risk is how long will Cochlear stay out of the market, and what impact will the recall have on its market share (Merrill thinks its market share could tumble from 67% prior to the recall to 59%).

It’s difficult to estimate the damage inflicted on Cochlear’s reputation and long-term earnings. The company has never had a recall before. The recall was only for products yet to be implanted, with existing failures being corrected with parts replacements.  This of course raises the question of what happens if already implanted devices also start to fail.

UBS is fearful that Cochlear could face a bigger loss of market share than anticipated, with an acceleration in N5 failures.

Deutsche has a Sell on Cochlear, arguing that competitor devices may start to appear attractive to patients as if the failure rate climbs. Credit Suisse, too, is concerned over the rising rate of failures; N5 failure rate was 20 in August, 55 in September and 90 in October. Credit Suisse has removed its premium rating, downgrading the stock to underperform with a price target of $52.20, from $56.

Meanwhile several brokers believe that Cochlear’s woes have only just begun. UBS thinks that dividends may be pressured and has a sell on the hearing implant manufacturer; Citi was surprised by management’s announcement that recall costs for defective implants would come in $30-50 million above Citi’s $100m estimate; Deutsche has reduced its price target, and Think Technically has a sell on the company, noting damage to the Cochlear brand and competitive pressures with Sonova re-entering the US market. ‘The company’s reputation is under scrutiny and any further problems could impact future sales,’ says Mark Lennox of ThinkTechnically. ‘Management not only has to contend with a global recall of the Nucleus 5 hearing implant, but with competitor Sonova re-entering the US market…perceptions of stock upside will be limited at best.’ 

Goldman Sachs is another broker to join the queue, cutting earnings forecasts by 30% to 40% and warning of lower margins.  Goldman has a Sell on Cochlear too.


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