Weekly Reports | Sep 24 2012
By Andrew Nelson
The iPhone5 officially came out last Friday and leading into the release brokers jockeyed for position to judge the impact the event might have on the Australian telco space. However, it seems with the latest iPhone launch that the buzz, at least in the lead up, seems to be outstripping the industry impact.
Analysts at Goldman Sachs on the morning of the launch noted that as yet, telco pricing activity has been fairly subdued compared to prior iPhone launches. Telstra ((TLS)) plans remain pretty much unchanged, with the only noticeable alteration to its offering being a free extra 1GB of data on $80 plans and above.
Optus ((SGT)) is also pretty much unchanged and continues to offer slightly better value, thinks GS, while Vodafone ((HTA)) has actually lifted its price by $1 and reduced data allowances on its cheaper plans. While the broker notes the company still seems to be offering the most bang for your buck, it is no longer the clear price leader it once was.
The broker notes that Telstra and Optus have been reporting strong pre-sales, with both having sold out during the week. Vodafone was still taking pre-orders at the end of the week, although the broker points out that pre-order stock has been prioritised to existing customers.
All in all, Goldman’s sees Telstra as the clear winner, with the phone’s LTE 1800 functionality pushing users to the existing 4G networks of Telstra and Optus. Meanwhile, Vodafone sits on the sidelines wishing its own 4G rollout was rolled out already.
Meanwhile, Credit Suisse notes iPhone5 pricing has not had a tangible impact on mobile handset subsidies in the $60–$100 plan range. The broker notes this development stands in stark contrast to the iPhone4S launch 12 months back, where handset subsidies increased 17%–45% on the most popular $60pm plans.
Optus has toyed with pricing a little, increasing handset subsidies on its $30, $35 and $50pm plans to match Vodafone. This should prove to be an easy win for Optus, thinks the broker, as it will be the only Telco with a 4G network offering such a low entry level price. Telstra’s plans start at $60pm.
Much like Goldman Sachs, Credit Suisse sees this latest launch as a win for Telstra and Optus and the clear benefit of having 4G up and running right when the market wanted it most. CS sees Australia quickly becoming a two-player market given Vodafone will not launch its 4G network until 2013. The broker further sees Telstra as being the best positioned of the lot given its greater 4G coverage. Yet while the lower subsidy levels might be a bit of a bonus, the broker thinks Telstra will actually post a bigger win with some unexpected subscriber growth.
Next, analysts at UBS are starting to see a clear shift in Australian equities towards the cyclical/reflation trade, expecting the reflation trade to extend towards the end of the year. The broker also notes that valuations are looking pretty cheap, which also tends to a shift money away from safety and defensives.
This shift will be augmented by very low bond yields, with the broker thinking P/E ratios could advance more than expected given the backdrop of very low rates and easy monetary policy. However, if we’re going to see this trend really grab hold, UBS thinks we’ll need to see some sort of improvement in growth momentum in the US and to a lesser extent in Europe and China.
Analysts at RBS are of a different opinion, noting that despite some pretty big downgrades thought the reporting season and after, there are likely more to come, especially in the materials and resources sector, where margin compression coming from commodity price weakness and a resilient AUD will probably remain in place for the time being. Consensus forecasts still predict 11% earnings growth in FY13, but RBS is sceptical, saying risk remains to the downside as 2012-13 commodity price forecasts begin to converge towards spot prices.
The industrials sector is looking a bit better, though, notes the broker, with consensus pointing to 16% growth in FY13 after delivering just 11% in FY12. The broker believes the current commodity price weakness that is hurting the miners and co will really being to help Industrials, as it encourages the RBA to cut rates. This will in turn help rebalance growth towards domestic consumption and housing construction, especially into FY14, which is when RBS figures mining investment will plateau.
RBS also took a look at the impact falling bond yields are having on domestic-focused General Insurers (GIs), with the recent fall in yields possibly reducing FY13 insurance margins for both Insurance Australia Group (( IAG)) and Suncorp ((SUN)) by around 1%, with net profit slugged in the neighbourhood of 9%-11%.
While admittedly significant impacts, the broker notes they are largely factored into forecasts and it thus expects to see sound FY13 results from the domestic GIs, with the fall in yields likely only serving to limit upside.
Analysts at Citi have taken another look at domestic retailers to see where their strengths and weaknesses lie. The broker notes that while Australian retailers may enjoy low debt levels, they still carry some pretty hefty lease obligations. In fact, the broker notes lease obligations tend to be 3 to 5 times larger than the balance sheet debt position and this is something lenders definitely look at.
On the broker’s numbers, the companies boasting the highest fixed charges cover, of which rents is a major component, are Metcash ((MTS)), David Jones ((DJS)), and Oroton ((ORL)), while the lowest are Specialty Fashion ((SFH)), Premier Investments ((PMV)) and Billabong ((BBG)).
With banks remaining cautious about the gearing of retailers, the broker thinks the retail plays most at risk and susceptible to higher credit spreads are Billabong and Myer ((MYR)), as their current facilities are soon due roll over.
Looking at the domestic pharmaceuticals space, analysts at Macquarie are starting to see some signs of trouble. Using Mesoblast ((MSB)) as a sort of sector example, the broker notes the company is yet to publish any clinical data, nor any analysis of its phase II heart failure data. Given this, the broker wonders where the $2bn market capitalisation comes from, especially as US peers enjoy nowhere near the amount of valuation support.
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