Stories To Read From FNArena Friday, 16 December 2011

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1 Week 51 Stories To Read From FNArena Friday, 16 December 2011 FNArena Passionate About Financial News PO Box Sydney Road Fairlight NSW 2094 Your editor Rudi Filapek-Vandyck Your dedicated team of journo's Greg Peel Chris Shaw News Network All Rights Reserved. No portion of this website may be reproduced, copied or in any way re-used without written permission from News Network. All subscribers should read our terms and conditions. Contents Australia 1 Wesfarmers Update Sees Expectations Lowered 2 Whitehaven-Aston 'Merger' Receives Thumbs Up 3 Hearing Cochlear s Call 4 Fundies Predicting A Happy(ish) New Year Commodities 5 Spot U3O8 Jumps US75c Currencies 6 How Deep The Euro Downside? Economics 7 Stronger For Longer For Oz Economy, Predicts NAB FYI 8 Weekly Broker Wrap: A Not So Happy New Year 9 Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes 10 The Short Report Small Caps 11 Bell Potter Remains Positive On Oz Life Sciences Stocks Treasure Chest 12 Treasure Chest: Go Long EUR/AUD

2 1 Australia Wesfarmers Update Sees Expectations Lowered - Brokers trim forecasts post Wesfarmers site visit - Price targets also come down - USB downgrades to Neutral rating By Chris Shaw Industrial conglomerate Wesfarmers ((WES)) last week held a tour of its Chemicals, Fertiliser and Energy business, the update giving additional insight on three main points. One was challenges with respect to LNG and LPG projects giving rising gas prices and falling LPG content, another the expansion plans for ammonium nitrate and the final an update on earnings guidance for the division. Stockbrokers left the tour with a somewhat mixed view on the earnings outlook for Wesfarmers, with forecasts being adjusted accordingly. The changes to views are summed up by UBS trimming earnings per share (EPS) forecasts by 6.4% for FY12 and by 1-3% in later years to reflect a likely deterioration in margins for the division in coming years. The other factor impacting on group earnings overall for UBS was the factoring in of lower operating leverage in the Coles business, this due to continued price deflation. Others in the market have reacted in a similar way, with JP Morgan lowering its numbers by % through FY14, while Citi has been more aggressive in cutting its numbers by 7.5% this year and by 4.6% in FY13. Citi's numbers come down to reflect lower forecasts for Coles, as like UBS the broker sees fresh produce price deflation as still an issue. As well, comparable store sales are expected to slow, while there have been some teething problems with respect to new supply chain practices. The cuts by Citi also reflect lower hard coking coal price forecasts, this to account for slower global growth expectations and ongoing domestic cost pressures. This is significant for earnings at Wesfarmers, as Citi estimates every US$10 per tonne move in met coal changes pre-tax profit by 2.3%. Consensus EPS forecasts for Wesfamers according to the FNArena database now stand at 206.5c in FY12 and 230.1c in FY13. This compares to the 166.3c recorded in FY11. New earnings estimates mean new price targets, with the FNArena database showing a consensus target now of $ This is down from $32.94 previously. For UBS the changes to its numbers are enough to downgrade to a Neutral rating on Wesfarmers, from Buy previously. In the broker's view the outlook for the company remains favourable, but this is reflected in the stock trading around fair value at current levels. This changes what had been an equal weighting between Buy and Hold recommendations, as the database shows Wesfarmers is now rated as Buy three times and Hold five times. The Buy argument for Wesfarmers continues to be supported by JP Morgan. The broker continues to see longer-term upside from an ongoing turnaround at Coles, as well as Kmart and Officeworks, strong resources demand and solid results from Bunnings. Citi sides with UBS and rates Wesfarmers as Neutral, suggesting while a further two years of double-digit earnings growth is likely this is reflected in a high earnings multiple at current levels. This argument is taken further, Citi pointing out if the retail operations of Wesfarmers are assessed separately, these businesses are trading on a much higher multiple than retail peers This implies a turnaround at Coles is being priced in by the market. Shares in Wesfarmers have traded in range over the past year of $26.04 to $ The current share price implies upside of around 6% to the consensus price target in the FNArena database. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

3 2 Australia Whitehaven-Aston 'Merger' Receives Thumbs Up - Whitehaven and Aston announce merger or equals - Stockbrokers generally see the deal as reasonable - Potential for proposal to induce other bidders for Aston By Chris Shaw Consolidation has been a dominant theme in the Australian coal sector for some time and this trend appears set to continue with Whitehaven Coal ((WHC)) and Aston Resources ((AZT)) announcing a merger agreement. The deal will see Aston shareholders receive 1.89 Whitehaven shares for every Aston share held. Given Whitehaven closed last week at $5.82 per share, less a 50c special dividend, the price implies a value for Aston shareholders of $10.05 per share. A merger of the two would create a group with total JORC resources of 2,003 million tonnes and marketable JORC reserves of 672 million tonnes, with a diverse range of assets in the Gunnedah Basin. Macquarie suggests there is potential for annual production to top 20 million tonnes from 2015/16. The deal will also see Whitehaven acquire Boardwalk Resources, an unlisted play, that would deliver additional assets in the Bowen Basin and Hunter Valley. Boardwalk also has a 19.9% stake in Coalworks. For Macquarie, the reasoning behind the merger proposal is a diversification in the asset base of the combined entity. For Aston the benefit would be moving away from a single production source, while the upside for Whitehaven is access to the long life and low cost Maules Creek project. The merger would also offer the potential for what UBS suggests could be significant synergies, potentially in excess of several hundred millions of dollars. UBS notes these synergies would come from blending, lower operating and capital costs and some tax benefits. Macquarie is comfortable with the merger terms, suggesting the numbers appear fair to both sets of shareholders. UBS is not as convinced, noting while Whitehaven shareholders would get 51.1% of the merged entity, on a value weighted average price basis over the past year implies a ratio that would give Whitehaven shareholders around 60% of the new entity's register. JP Morgan is more on the Macquarie side, seeing the proposal as indicative of no significant dilution for either party. Rather, JP Morgan expects the value being ascribed to the early stage assets within Boardwalk Resources will be the focus of further scrutiny as it is difficult to see how these assets contribute much value in the medium-term. The other point made by JP Morgan is there appears to be significant value in the Maules Creek project, so the merger proposal may act as a catalyst for interest from a third party. Given this, the broker retains an Overweight rating on Aston. Credit Suisse raised a similar point, suggesting the proposal may be enough to spark some interest from other potential buyers of Aston before the merger scheme is approved in March of next year. The complication is a option agreement with Tinkler Group for 19.99% of Aston, something expected to act as a deterrent for any possible rival bidders. The merger proposal has seen some brokers become restricted on the two stocks, but overall sentiment remains positive. As evidence, the FNArena database shows five-for-five Buy ratings for Whitehaven, while Aston scores two Buy recommendations and two Holds. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

4 3 Australia Hearing Cochlear s Call By Andrew Nelson Analysts at Macquarie took a little break from covering Cochlear ((COH)). They paused just long enough to do a full review of the company, of the cochlear implant (CI) marketplace and they also surveyed 389 US-based Audiologists. Profit forecasts dropped, the price target fell, but the Buy call and the rationale behind it remain the same. The big question must be: what did Macquarie learn? In a nutshell, they learned that despite an embarrassing product recall, despite supply constraints and despite the ongoing economic weakness in the US and Europe, people will still go deaf and most of them don t even know about, or aren t using CI devices and that Cochlear is still the world leader in that technology. Cochlear sells its products in more than 100 countries and with a 60% market share, it is the global leader in implantable hearing devices. As you can imagine, this is a great position to be in, so why would Macquarie have to completely reassess its view on such a seemingly straight forward story? The answer is simple: Cochlear has taken a beating over recent months due to the recall of its Nucleus 5 product, announced back in September. In fact, the share price has shed 25% over the past three months. The broker notes management moved fast to fund the recall, putting aside up to $150 at the AGM in October. Macquarie thinks the amount will be more than sufficient to cover the costs. But the problem is far from just being the cost of what in the CI industry was a very, very big recall. The broker estimates that 1500 units are going to have to be removed from people s skulls and another 2800 units have been pulled from shelves. However, the bigger problems are an inventory shortfall across the entire market and thus the threat of market share loss from insufficient inventory and from the reputational damage that was caused by the recall. Macquarie feels, however, that Cochlear has, is and will recover from both of these issues and in fairly short order. Looking at the supply constraint, or inventory issue, Macquarie notes the company moved quickly to ramp up production, tripling output in just three months. The company has also been able to push back implants, given most patients moving from an initial implant to a Nucleus 5 implant will want to be sticking with the same brand. The company has also moved to on-demand supply, which the broker notes has been working out well. All up, Macquarie sees all of 2012 demand being met. The big thing helping Cochlear fill the near term shortfall is its Freedom product, which does pretty much the same thing as Nucleus 5. The product is still very popular. So much so that Macquarie thinks it's really not important when the Nucleus 5 gets back on the shelf, as the Freedom is still better and more popular than what competitors are offering. The reputational damage is a little stickier, but again, the broker is little concerned. Peers have had the same sort of issues, with many doctors surveyed saying that while the Cochlear recall is larger than any before, it doesn t raise the same sort of concerns. In fact, the broker thinks the recall may have a counterintuitive effect, pushing doctors into a flight to quality, a metric which Cochlear still leads. In fact, 93% of doctors surveyed seem to feel that Cochlear handled the recall well, while only 8% believe the company s reputation has been tarnished. Still, with fewer Cochlear units on the shelf, the broker admits the recall will result in minor market share increases for some of Cochlear s peers. And while some of these practitioners will come back once supply is restored, there is a chance that some will be lost. Again, the broker thinks this will prove to be only a short to medium term issue, with Macquarie thinking that only 7% of market share will be shed in And with Macquarie expecting the CI market to continue growing at 12% a year, and also expecting Cochlear to remain the market leader, the earnings potential for Cochlear remain solid. That said, margins, once the company s strong suit, will take time to recover to their old growth trajectory, notes the broker. In constant currency terms, gross margin growth has run at around 17% per year over the past 10 years. Given the N5 recall and the uncertainty as to when the company will return to automated assembly, the broker has pencilled in flat gross margins going forward on a constant currency basis. This has caused the broker to cut its FY12-15

5 net profit expectations by 40%, 15% and 24% respectively. Macquarie admits it s probably being a bit too conservative and expects that much of these cuts will be peeled back once Cochlear gets back in to the groove. That takes us to the maintained Buy call. With Macquarie of the opinion that Cochlear s current woes will soon be history, the broker simply thinks that the current price is just too good to pass up. Investors should note Macquarie's new price target is the highest of the eight stockbrokers monitored daily by FNArena. Six out of the remaining seven stockbrokers have a more cautious stance (Neutral) or are negative on the shares with most price targets set well below the current share price. RBS is the only one who shares Macquarie's positive view. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

6 4 Australia Fundies Predicting A Happy(ish) New Year By Andrew Nelson According to a recent outlook paper from Russell Investments, the majority of Australian investment managers believe the S&P/ASX300 will finish 2012 higher than where it started. Russell s quiz of 40 investment managers not only showed the bulk of managers were positive, but nearly 50% predicted gains of 10% or better over the course next near. On the other side of the coin, another 20%, or so, of those surveyed saw a positive new year with less than 10% gains, while about the same thought the market would end down, but less than 10%. The big bears were scarce amongst the fund managers, with only 2% predicting losses of 10% or more, while about 6% were undecided. Russell Investments Greg Liddell, who is the group s MD of Consulting and Advisory Services, thinks the positive outlook was primarily based on valuation grounds. He notes many of the surveyed managers still feel the local market was still fairly, or under-valued. In fact, he points out that not one fund manager surveyed this quarter thought the local sharemarket to be overvalued. However, the survey did show that the enthusiasm was far from unbridled, with fund managers tracking a number of issues that have been in play for the past few years. Elevated market volatility and the deteriorating situation in Europe were listed as the two biggest threats to local market performance in the year ahead. "Those managers who were more bearish on the local market outlook were primarily concerned about a contraction in Europe, and the repercussions that has on global players including China and in turn, Australia. "Overall though, managers appear more bullish than bearish on the outlook for 2012 and suggest valuations are attractive at the moment for those investors ready to take advantage," said Liddell. The financial capacity still available to the RBA, a luxury shared by few other central banks, was another bright spot on the radars of fund managers. However, reactions were mixed about the latest bout of easing from the RBA. Liddell points out that the 25bp cut in November actually served to lower managers' confidence in Australian bonds and cash. The survey indicates that both of the aforementioned investment classes saw a reduction in the number of bullish managers and an increase in the bearish. In fact, the survey showed that there was an increased level of caution across the board, with bearish sentiment increasing to a greater, or lesser extent across all asset classes. There was some out-and-out confidence, with managers drawn to consumer-related sectors. Liddell thinks this is quite possibly due to the November interest rate cut and hopes for further cuts in this month and over next year. Valuations in the sector are also being seen as being fairly attractive, notes Liddell. Yet it was consumer staples that held the fixed gaze of the fund managers, with bullishness at 50%. This is up from the 35% posted in the previous survey. Lastly, the survey shows a lot of hope for consumer discretionary stocks, not out of place at all this time of year. The survey indicated that positive sentiment for the sector rose to 40%, while bearish sentiment shrank from 50% to 20%. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

7 5 Commodities Spot U3O8 Jumps US75c By Rudi Filapek-Vandyck Buyers found themselves chasing higher prices in the spot uranium (U3O8) market last week, with industry consultant TradeTech pointing in the direction of one non-us utility selecting a provider for 275,000 pounds of yellow cake. Demand for deliveries in Europe also picked up considerably during the week. The end result was TradeTech's spot price jumping US75c per pound on the back of seven successfully concluded deals, good for a total of 875,000 pounds changing ownership. TradeTech's new spot price now sits at US$52.50/lb. This compares with a medium-term price benchmark of US$54.50 (unchanged) and a Long-Term price indicator of US$62/lb (also unchanged during the week). There is no new apparent demand in the term uranium market, but TradeTech's list of existing interest suggests there's still plenty of room for price negotiation. According to the industry consultant, one non-us utility is seeking a total of over 1.7 million pounds U3O8 for delivery between 2014 and This utility is currently evaluating offers. Another non-us utility continues to evaluate offers for deliveries beginning in 2019 and continuing through 2023, and another non-us utility is evaluating offers received in response to its Request for Proposals seeking up to 50% of its uranium, conversion, and enrichment requirements with deliveries beginning in 2015, according to TradeTech. A third non-us utility continues to evaluate offers for up to 2.9 million pounds U3O8 equivalent contained in UF6 or enriched uranium product (EUP) for delivery that would begin in 2012 and continue for the life of the plant, or until Another non-us utility is evaluating offers for long-term deliveries that would begin in Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

8 6 Currencies How Deep The Euro Downside? - Eurozone debt crisis not a currency crisis - CBA suggests sharper correction in euro not expected - Any further downside in EUR/USD and AUD/USD may be an opportunity By Chris Shaw Despite the European region's sovereign debt crisis putting global economic growth under threat, the euro has held up surprising well over the past few months. For Commonwealth Bank the reason behind this is the obvious one, in that the debt crisis is not a currency crisis. As the bank's Economist Europe, Martin McMahon, points out, the related re-pricing of European sovereign debt markets doesn't imply large euro negative currency flows. This reflects the fact most eurozone sovereign bonds are held within the eurozone. This has helped the euro hold up well relative to most European and other G10 crosses through the crisis, even if the currency has lost some ground against the Japanese yen and the US dollar. In trade weighted terms the euro is down about 5% since the middle of the year, meaning it is roughly flat relative to where it started The current generalised tightening of financing conditions is beginning to impact on Eurozone GDP growth, so causing the European Central Bank (ECB) to ease monetary policy. McMahon notes this is putting some strain on the euro, but he expects trade dynamics and European bank balance sheet repair should prove to be supportive for the currency in the medium-term. McMahon views the pattern in currency markets over the past few months as reflecting typical phases of risk aversion. When the markets are in a risk averse phase the US dollar has rallied as the world's most liquid and ultimate safe haven currency. At the same time the euro has performed solidly, as it is Europe's most liquid currency. The debt crisis in Europe is not a currency crisis because while various economies in the Eurozone have high debt levels, they are not primarily due to the existence of a single currency. This has meant the crisis may not have directly fed much into underlying forex flows. As McMahon points out, while sovereign debt markets have been re-pricing sharply, this doesn't necessarily imply large associated currency moves as yields may simply be moving in illiquid and volatile markets. But the fact European bond markets are repricing so sharply is a bearish development for the Eurozone according to McMahon. This is because it will force austerity, tighten financial conditions, raise questions over the health of banks and weaken the economy in the region. These factors are all weighing on the euro. As the economic outlook softens, the ECB has eased monetary policy by lowering interest rates. This is also a drag on the euro in McMahon's view, especially as the speculative end of the forex market starts to factor in the potential for eventual contagion that could trigger a wider capital flight. This could be far more significant, as McMahon estimates foreigners' gross claims on the Eurozone total around EUR17.6 trillion. This equates to around 189% of GDP for the region. Figures in the September quarter showed a notable reduction in Eurozone asset holdings by international investors, a trend regarded as worth watching says McMahon. McMahon notes there are also a number of sources of potentially euro-supportive flows in play at present. An example is speculation European banks will reduce their balance sheets to meet new capital rules, which could see a repatriation of funds. As well, McMahon notes there is an existing sizable currency mis-match on the consolidated Eurozone banking sector balance sheet, which is unlikely to be left un-hedged. At the same time, trade dynamics could work in the euro's favour, as McMahon suggests the Eurozone and current account positions in the region may move into surplus in coming quarters as domestic import demand weakens and external demand holds up in relative terms. This all suggests no sharper euro correction should be on the cards, though McMahon notes a further deterioration in the crisis could trigger a deeper de-risking shift and so send the euro sharply lower against the US dollar.

9 Assuming the crisis in Europe is contained, and given the potential for further policy easing by most central banks and scope for QE3 next year, McMahon suggests any further downside in the EUR/USD and the AUD/USD in coming months may actually be an opportunity to acquire these respective units at better prices for the long-term. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

10 7 Economics Stronger For Longer For Oz Economy, Predicts NAB By Rudi Filapek-Vandyck National Australia Bank reports its monthly survey has revealed that overall conditions for businesses throughout Australia have improved slightly in November. The survey results are consistent with an economy growing around trend. According to the survey, services sectors (ex. finance) and retail are performing better, while business confidence overall is relatively stable despite European concerns. NAB economists have revised up their GDP estimate on mining and consumer strength (more about this later). Business conditions edged higher in November, after softening a little in the previous month. With the exception of trading conditions, all of the survey indicators improved in the month, with increases in forward orders, stocks, employment and capacity utilisation suggestive of improved economic activity, report economists at NAB. They add the survey s activity readings over the December quarter to date are broadly consistent with underlying demand growth of around % and GDP (ex. coal) growth of around % in the December quarter (6-monthly annualised rate). Business confidence was unchanged in November, remaining below its long-term average, note the economists. The November survey also showed business conditions remained mixed by industry. The services sectors (outside finance) all reported better activity in the month. Mining, transport & utilities and retail conditions were also noticeably stronger. In contrast, conditions deteriorated heavily in construction in November, while manufacturing conditions also deteriorated in the month. NAB states conditions were "worryingly weak" in both sectors. Labour cost growth ticked up in November, consistent with an improvement in employment conditions in the month. Final product prices rose in the month, but retail prices remained broadly flat. Economists at NAB also report they have made various changes to forecasts. The continuing financial crisis in the eurozone is seriously damaging European business confidence and affecting economic activity. As a result, NAB is now expecting a deeper recession in that region with spill-over effects around the world (particularly to the UK, where forecasts have also been lowered). In addition, the big emerging market economies are also slowing as earlier policy tightening takes effect in China, India and Brazil. Overall, NAB economists have cut global growth forecast to 3.25% for 2012, a below-trend performance crucially reliant on the contributions from the US, China and India. Australian national accounts data heralded the start of the long-awaited mining investment boom, while consumption growth remains firm; NAB sees these components (in particular) supporting further growth in the Australian economy in the medium term. NAB's GDP forecasts have been strengthened to reflect stronger consumption and mining investment growth. NAB economists state they are generally more bullish on near-term growth than the Commonwealth Treasury and the RBA s latest forecasts, anticipating year-average growth of 2.1% this year and around 4.50% in The economists see downside risks to near term inflation (2% by mid 2012), but expect above target inflation to re-emerge in 2013, consistent with the stronger growth profile. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

11 8 FYI Weekly Broker Wrap: A Not So Happy New Year By Rudi Filapek-Vandyck No doubt, investors the world around would have liked to see it differently, but Europe continues to feature prominently in investment banks and stockbrokers research in the final month of Global equity strategists at Citi set the tone during the week with a rather dire prediction: Europe will have a protracted recession that will last until well into Did anyone mention "Happy New Year"? Citi strategists advised investors across the globe should have another good look at their portfolios and reconsider those companies for whom Europe represents a substantial part of sales and profits. In Australia, Citi highlighted three familiar names: Cochlear ((COH)), Goodman Group ((GMG)) and QBE Insurance ((QBE)). The implication here is that forecasts for these companies will increasingly come under pressure next year and this is likely to weight on the share price. On the other hand, suggest those same strategists, these stocks are also likely to rally at times of euro-optimism, offering a different perspective for market participants who aim to play short term price movements. If you think that looks bad, how about global equity strategists at UBS who offered their outlook for 2012 this week and put one ugly looking grizzly bear on the cover of their report, title: Global Bear - Special Edition Outlook No guessing as to what kind of message they are trying to get across. The UBS report contains an overview of international equities investors should better avoid in the year ahead, for the same reasons as mentioned by Citi; earnings forecasts will be cut, these share prices looks vulnerable to the downside. Remarkably, there are only two Australian companies mentioned in UBS's lists: Cochlear and Dexus Property ((DXS)). These predictions were made before yet another break-through in the eurozone troubles over the weekend, but all things economics move slowly and thus downbeat scenarios for Europe are unlikely to be avoided in the short to near term at least. The future does not only consist of negative news and warnings, however. RBS strategists joined a growing group of experts who believe that fortunes for Chinese equities will turn around for the better in the months ahead while AMP strategist Shane Oliver predicts more interest rate cuts from the RBA next year, which should ultimately provide a boost for the Australian economy, also helped by the fact the Australian dollar is now widely expected to weaken. Macquarie agrees with this view, and while investors have been enthusiastically buying domestic cyclicals in the Australian share market this month, Macquarie strategists point out what investors too often overlook is that more rate cuts implies the domestic economy will be weaker than previously anticipated. This then means those same domestic oriented companies will see downgrades to growth forecasts. Macquarie remains convinced there is "significant downside risk" to current market forecasts for FY12. Stocks for whom current forecasts look "unrealistically strong", in Macquarie's view, include Leighton Holdings ((LEI)), Virgin Blue ((VBA)), BlueScope Steel ((BSL)), Toll Holdings ((TOL)), Boral ((BLD)), Downer EDI ((DOW)), Wotif.com ((WTF)), Ten Network ((TEN)), Fairfax Media ((FXJ)), OneSteel ((OST)), Primary Healthcare ((PRY)), Suncorp ((SUN)) and Bank of Queensland ((BOQ)). Macquarie also offers a list of names for whom already a significant decline in profits is anticipated: Fleetwood ((FWD)), Qantas ((QAN)), GUD Holdings ((GUD)), DuluxGroup ((DLX)), ANZ Bank ((ANZ)), Amcor ((AMC)), Rio Tinto ((RIO)) and BHP Billiton ((BHP)) are all included, plus many others. Quant analysts at RBS lined up candidates whose profits are likely to surprise to the upside next year: Perseus Mining ((PRU)), Santos ((STO)), Newcrest Mining ((NCM)), Carsales.com ((CRZ)) and Telstra ((TLS)). In line with ruling market sentiment, RBS's list of candidates likely to surprise in a negative sense is longer: Westpac ((WBC)), Boral, Myer ((MYR)), Macquarie Group ((MQG)), Seven West Media ((SWM)), APN News and Media ((APN)), Cochlear, CSL ((CSL)), Primary Healthcare, OneSteel and Ten Network. Finally, quant analysts at JP Morgan used a variety of market momentum indicators to select the best and the worst for December in the Australian share market. Amongst the highest scoring candidates for a positive result this month are DuluxGroup, Telstra, Resolute Mining ((RSG)), Orica ((ORI)) and Metcash ((MTS)).

12 At the bottom of the rankings we find Gloucester Coal ((GCL)), AWE Ltd ((AWE)), Billabong ((BBG)), Qantas and Macquarie Group. Is it just my observation or have all these lists quite a few names in common? Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

13 9 Top Ten Weekly Recommendation, Target Price, Earnings Forecast Ch By Chris Shaw The past week has seen downgrades by brokers in the FNArena database double the number of upgrades, 10 ratings recommendations now stand at 57.1%, down from 57.4% last week. Among the upgrades were Bathurst Resources ((BTU)), where Credit Suisse moved to an Outperform rating from Neutral giv attractive in the Australian coal sector. Bathurst's overall rating also benefited from Citi initiating coverage with a Buy ratin A recent profit warning saw the Fletcher Building ((FBU)) share price suffer but in JP Morgan's view the sell-off was overdon Overweight rating from Neutral previously despite a cut in price target. Macquarie also lowered its target for the stock. Iluka ((ILU)) has announced better than expected titanium oxide price increases, which has forced brokers across the mark changes suggest some upside remains for the stock, enough for RBS Australia to upgrade to a Buy rating from Hold previousl A US asset sale by Investa Office ((IOF)) was well received by the market given a price in excess of book value. The sale sa upgrading to a Buy rating given the potential valuation upside from further asset sales. Management at Peet ((PPC)) offered cautious commentary at the group's AGM this week and the market reacted by push according to Citi, who has upgraded to a Buy rating on valuation grounds. Among the downgrades was Adelaide Brighton ((ABC)), JP Morgan cutting its rating to Neutral from Overweight following r the stock is now trading close to the broker's price target. Clough ((CLO)) has reported some cost overruns and margin pressure on two contracts, enough for RBS Australia to lower it are enough for a downgrade to a Hold rating, again a valuation call on the part of the broker. Valuation is also behind Credit Suisse's downgrade of Gloucester Coal ((GCL)) to a Neutral rating, this following recent s earnings forecasts have accompanied the downgrade. With earnings to be impacted by some one-offs UBS has cut forecasts for HFA Holdings ((HFA)). The changes have also momentum sees the broker downgrade to a Neutral rating. A lack of positive catalysts is also behind Citi's downgrade of Hills Industries ((HIL)), as earnings are still being impacted by in the building industry. Target has been trimmed on minor cuts to estimates. Deutsche Bank has lowered forecasts for Newcrest ((NCM)) given changes to production expectations, the changes seeing a broker has moved to a Hold rating from Buy previously, the only non-buy recommendation on Newcrest in the FNArena data Demand for IT services is expected to remain subdued given weak domestic economic growth and to reflect this Macquarie likely to impact on earnings for Oakton ((OKN)), so the broker has adjusted its model to the point its rating has been downg A solid run in Programmed Maintenance ((PRG)) shares has seen Citi downgrade to a Neutral rating on valuation grounds. T price target. Citi has also downgraded Transurban ((TCL)) to a Neutral rating on the same basis. United Group ((UGL)) has acquired the DTZ trading assets and this offers the company a European property footprint. Desp improvement going forward, enough to downgrade to a Hold rating. Targets for the stock have risen overall to reflect the im Price targets for Charter Hall Office ((CQO)) have risen slightly following news the bidding consortium has lifted its offe ((APN)) have fallen on the back of cuts to earnings estimates post the company's investor day. Broker models for Australian Worldwide Exploration ((AWE)) have been adjusted on news the company has sold part of its minor impact on price targets across the market. Weak global markets have Computershare's ((CPU)) earnings under pressure, enough for JP Morgan to adjust its forecas recently completed Specialised Loan Services acquisition. New guidance from Independence Group ((IGO)) has seen brokers lower estimates and price targets, while changes to alumi trimmed its earnings estimates for Alumina Ltd ((AWC)).

14 Total Recommendations Recommendation Changes Broker Recommendation Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,RBS<*br*>Australia,UBS&b0=123,118,128,107,94,149,189,158&h0=74, style="border-bottom: # px solid; border-left: # px solid; border-top: # px solid; border-right: #0000 Broker Rating Order Company Old Rating New Rating Broker Upgrade 1 BATHURST RESOURCES LIMITED Neutral Buy Credit S Morgan 3 ILUKA RESOURCES LIMITED Neutral Buy RBS Australia 4 INVESTA OFFICE FUND Neutral Buy UBS 5 PEET & COMP BRIGHTON LIMITED Buy Neutral JP Morgan 7 CLOUGH LIMITED Buy Neutral RBS Australia 8 GLOUCESTER COAL LTD Buy N Neutral UBS 10 HILLS HOLDINGS LIMITED Buy Neutral Citi 11 NEWCREST MINING LIMITED Buy Neutral Deutsche Bank PROGRAMMED MAINTENANCE SERVICES LIMITED Buy Neutral Citi 14 TRANSURBAN GROUP Buy Neutral Citi 15 UNI Recommendation Positive Change Covered by > 2 Brokers Order Symbol Previous Rating New Rating Change Recs 1 BTU % 67.0% 17.0% 6 4 ILU 75.0% 88.0% 13.0% 8 5 FBU 38.0% 50.0% 12.0% 8 6 SWM 63.0% 75.0% 12.0% 8 Negative Change Co New Rating Change Recs 1 CLO 100.0% 67.0% % 3 2 GCL 100.0% 80.0% % 5 3 OKN 60.0% 40.0% % 5 4 TCL 100 PRG 100.0% 86.0% % 7 7 CQO 43.0% 29.0% % 7 8 FKP 80.0% 67.0% % 6 9 ABC 88.0% 75.0% % 8 10 NUF Covered by > 2 Brokers Order Symbol Previous Target New Target Change Recs 1 UGL % 7 2 SWM % 7 5 IOF % 6 6 TCL % 7 7 TPI % 6 8 CQO Covered by > 2 Brokers Order Symbol Previous Target New Target Change Recs 1 APN % 8 2 OKN % 6 5 AAX % 4 6 BTU % 3 7 NCM % 8 8 GCL Covered by > 2 Brokers Order Symbol Previous EF New EF Change Recs 1 AWE % 7 2 CPU % 8 5 IMD % 3 6 CPB % 7 7 NHC % 3 8 MGX % 3 Negative Change Covered by > 2 Brokers Order Symbol Previous EF New EF Change Recs 1 AZT IGO % 5 4 TCL % 7 5 PPC % 6 6 PAN % % 8 9 CLO % 3 10 TNE % 3 Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, bu Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unash

15 10 FYI The Short Report.ref1 {background-color:#b8e3f8;} By Chris Shaw Changes in weekly short positions this week have seen only one case where total shorts have risen by more than 1.0%, while no reductions in short positions reached that level over the past seven days and only two fell by more than 0.5%. On the increased short position side the biggest increase was seen by a derivative in Asciano ((AIODC)), where shorts rose nearly 1.5% from a negligible level previously. The next largest increase was seen in Alkane Resources ((ALK)), where shorts increased by 0.48% to just more than 3.0%. On the other side of the ledger, shorts fell most significantly in Bank of Queensland ((BOQ)), a decline of 0.73% to around 4.5% coming despite JP Morgan seeing evidence of the bank still dealing with some margin pressures, but amidst market speculation BOQ's French shareholder Banque Populaire, which owns 12.1%, might be putting its stake up for sale. Ansell ((ANN)) also enjoyed a decline in shorts of 0.57% to just over 1.5% in the past week, which comes after the company made a minor acquisition in the US that RBS Australia suggested offers some longer-term upside. Monthly changes in short positions have shown some larger adjustments, with a number of stocks seeing total shorts change by more than 1.0%. On the increase side the largest was for Flight Centre ((FLT)) and Myer ((MYR)), shorts for both increasing by around the 2.0% mark. Despite two cuts in official interest rates signs still point to a difficult trading environment for Australian companies exposed to the consumer discretionary sector. Another where shorts have risen well above previous levels for the month is Wesfarmers ((WES)), the stock recording an increase for the month of 1.3% to around 3.4% in total. Brokers recently trimmed earnings estimates for Wesfarmers post a site visit, this reflecting not only the impact of ongoing food deflation for Coles but also changes to expectations for the coal operations. Monthly falls in shorts have been most pronounced for Fairfax ((FXJ)) and BlueScope Steel ((BSL)), both seeing positions decline by around 2.0%. The latter likely reflects ongoing position adjustments post the recently announced equity issue by the company. Resource stocks have also seen short positions come in, with Western Areas ((WSA)) and Murchison Metals ((MMX)) both recording declines of close to 1.5%. Shorts remain elevated for Western Areas at around 5.7%, though the company is expected to deliver solid news flow between now and the end of the year given the recent commencement of underground mining at Spotted Quoll. Short positions in Santos ((STO)) have also come down significantly, essentially halving over the past month to 1.3%. While costs at the PNG LNG project are likely to increase the market had been expecting this, so brokers continue to like Santos on relative valuation grounds. Elsewhere, an increase in short positions for QR National ((QRN)) has been more modest in recent weeks, totalling only around 0.45% for the past month. Despite this, RBS Australia suggests the increase is of significance as a recent cut to coal haulage guidance for the coming year implies some downside risk to earnings in coming months. While housing numbers in Australia continue to suggest a tough market, shorts have declined over the past month for both James Hardie ((JHX)) and Boral ((BLD)), both by close to 1.0%. For both stocks brokers have seen some signs of conditions improving, these including price increases by Boral and a gradually improving outlook in the US market for James Hardie. Top Ten Largest Short Positions Rank Symbol Short Position Total Product %Short 1 JBH ISO FXJ MYR BBG DJS FLT LYC PPT WTF To see the full Short Report, please go to this link IMPORTANT INFORMATION ABOUT THIS REPORT The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

16 It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position naked given offsetting positions held elsewhere. Whatever balance of percentages truly is a short position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, short covering may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign. Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to strip out the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets. Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option ( buy-write ) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a long position in that stock. Another popular trading strategy is that of pairs trading in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a net neutral market position. Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are short. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear. Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate. FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein. Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

17 11 Small Caps Bell Potter Remains Positive On Oz Life Sciences Stocks - Oz life sciences stocks have underperformed this year - Sector still in an uptrend according to Bell Potter - This suggests upside once market conditions improve - Bell Potter outlines its preferred plays in the sector By Chris Shaw The last seven months have not been kind to Australian life sciences stocks, as Bell Potter's Life Sciences Index has fallen 28% to 76.3 points since May 10 this year. This compares to a 10% fall in the All Ordinaries Index over the same period. The stockbroker's Life Sciences Index is an equally weighted index of 71 ASX-listed stocks. Having calculated the index back to December 1999, Bell Potter makes two main conclusion. The first is the Life Sciences sector tends to enjoy multiyear trends. The second finding is despite recent weakness the current trend is bullish and could extend until possibly 2013 in the broker's view. Relative movements support this, as while over the past eight years the All Ordinaries has gained 37% the Life Sciences Index is still 50% below its high of August Bell Potter attributes this underperformance to two factors. First, the global debt crisis has reduced the risk tolerance of investors, meaning less interest in the more speculative end of the market. As well, a number of the life sciences companies have disappointed the market in terms of announcements with respect to development progress. Despite the recent poor performance, Bell Potter sees the sector as well placed to recover as the market comes out of its present period of weakness. News flow should be strong for many companies in the sector over the next 12 months, while fundamentals for most companies are largely unrelated to current economic conditions. One basic thesis for the sector suggested by Bell Potter is the benefit of the survival of the fittest nature of the market. Post the GFC and a generally poor period from , biotech and medical device companies have performed strongly over the past couple of years. This reflects a maturing in the sector in Bell Potter's view, with products and technologies now at later stages of development and being better understood by investors in the marketplace. As well, life sciences companies in Australia are now being better managed. While there is upside potential, Bell Potter acknowledges the life sciences sector is not without risk. As an example the broker points to Pharmaxis ((PXS)), where a negative ruling on its Bronchitol drug cut market value by 74% in a day, only for the decision to later become a positive one. But with these risks come potential rewards, Bell Potter noting for the 15 biotech and medical device companies under coverage, the average price target upside from current levels is 205%. These targets are based largely on clinical progress expected over the next 12 months. With respect to clinical results, Bell Potter notes the success rate for biological drugs is now about one-in-three. This means the cost of clinical failure has fallen in recent years, which in turn means companies are not as impacted financially by the failure of a clinical development program. Another key driver is the fundamental need for big and specialty pharma to acquire new compounds to feed drug pipelines, especially given low research and development productivity. This is happening at the same time Big Pharma is falling over the cliff in terms of patent expiries and as drug development costs are increasing. This is likely to see M&A activity remain a feature in the sector, as acquisitions can bring late stage drug candidates with lower levels of risk and help freshen product life. As well, Bell Potter notes acquisitions can come more cheaply than internal research and development. In terms of preferred sector exposures, Bell Potter has seven stocks it particularly likes. These include Bionomics ((BNO)), GI Dynamics ((GID)), Phosphagenics ((POH)), Mesoblast ((MSB)), REVA Medical ((RVA)), Starpharma ((SPL)) and QRxPharma ((QRX)). All are rated as Speculative Buy.

18 The attraction of Bionomics is two potential blockbuster drugs, one the anti-anxiety compound BNC210 where outstanding Phase Ib/IIa clinical data has been received. The other positive with Bionomics is a strong technology platform, which has delivered a number of valuable pipeline opportunities according to Bell Potter. Potential in the diabetes and obesity markets are the attraction of GI Dynamics, given the upside on offer from the group's EndoBarrier product. Strong news flow should keep investor attention, especially as Bell Potter notes the EndoBarrier product works better than comparable therapies. For Mesoblast, Bell Potter sees upside from stem cell technologies that work, as evidenced by Phase II data in heart failure the broker regards as outstanding. Given large cardio therapy markets the share price should benefit from further good trial news in the broker's view. Phosphagenics offers a transdermal drug therapy that works, Bell Potter noting as an example the company is well placed to develop the world's first patches for the analgesic drug oxycodone. This represents a US$3 billion market in the US alone. For QRxPharma the MoxDuo drug combination offers investors a late stage opportunity as the drug is near to being released to what is a large and growing pain relief market. Bell Potter suggests the current share price undervalues the upside potential available in QRxPharma. REVA offers an opportunity in bioresorbable stents, a product Bell Potter suggests could reinvigorate the stent category. This leaves REVA well placed to be a target of M&A activity, while a timetable slippage suggests value at present in the broker's view. Starpharma should enjoy a strong royalty flow once its VivaGel related condom royalties begin next year. Bell Potter sees additional upside potential given Phase III trials of its bacterial vaginosis product beginning in Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

19 12 Treasure Chest Treasure Chest: Go Long EUR/AUD By Rudi Filapek-Vandyck What? Investors who agree the underlying trend in the global economy remains to the south in the short term are advised to go long EUR/AUD. Background Analysts at FXCM note there is increasing evidence of a spread of the euro-contagion to the east. They believe China will be the next big shoe to drop. If correct, this will have serious consequences for the Australian economy FXCM believes it will force the RBA into a more aggressive monetary policy reversal in favor of further accommodation. This plus the anticipated downward pressure on commodity prices should pull the AUD lower relatively to the euro. In other words: the euro should weaken as things are likely to get worse first before getting better, but the flow-on effect on the Australian economy should result in even more downward pressures for the AUD. Addding to FXCM's conviction is the fact that while the euro-zone looks extremely vulnerable right now, this has already largely been priced in by investors. For Australia, however, FXCM doesn't think this is equally the case (thus more downside should be expected). Investors Should Note Going long EUR/AUD was the favourite trading idea at FXCM at the beginning of Alas, that turned out an nonprofitable move as the trade failed to show any follow through during the year, but FXCM expects it will start to do so into Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame. Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

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