Weekly Broker Wrap: Equity Strategies, Top Picks And Catapult Group

This story features ADBRI LIMITED, and other companies. For more info SHARE ANALYSIS: ABC

-Low rates supportive but for how long?
-In turn, growth may be non existent
-Caution advised given macro risks
-Merger potential in resources flagged
-Catapult takes wearable tech global
 

By Eva Brocklehurst

Equity Strategies

Australia’s stock market has made a strong start to 2015 driven by the income/yield trade. In contrast to 2014, UBS observes resources have bounced on a rebound in oil and a tentative stabilisation in iron ore. The broker finds it difficult to gauge just how much premium one should pay for this market in a low interest rate environment, given that very low interest rates may not be around for long and may also signal low earnings growth prospects, which would impact on valuations. The broker suspects rates will edge back up, although remain low by the standards of the last 10-20 years, while growth will be slower than historically the case, but not as slow as implied by the current long bond yield.

UBS has moved its target market price/earnings ratio to 15.0 from 14.5 but has left earnings forecasts unchanged for the ASX200, given the recent reduction in bond yield forecasts. This takes the broker’s year-end market target to 5900 from 5700. Even by nudging up the target P/E, the broker does not find the market particularly attractive at current levels, with the potential of a rebound in long bond yields and weaker commodity prices looming as key risks.

UBS remains Overweight banks, energy, US dollar-denominated earnings and underweight real estate trusts, telcos, mining, consumer staples and general insurance. Adelaide Brighton ((ABC)), Automotive Holdings ((AHE)), Computershare ((CPU)), Mirvac ((MGR)) and Sandfire Resources ((SFR)) have been added to the model portfolio while BlueScope ((BSL)), Crown Resorts ((CWN)), Federation Centres ((FDC)), Henderson Group ((HGG)), Independence Group ((IGO)), Macquarie Atlas ((MQA)) and Rio Tinto ((RIO)) have been removed.

Goldman Sachs downgraded 50% more stocks than it upgraded during the latest profit season. Results were ahead of expectations and performance on costs was the most commonly cited reason for beating estimates. Miners were big outperformers over the reporting month on cost and capex cuts. The broker observes that despite the better-than-expected performance on costs in the period, consensus forecasts suggest a contraction of 23% in resources earnings in FY15, which would result in no earnings growth for the ASX200.

Morgans’ high conviction stocks are becoming scarcer after the market’s stellar run-up this year so the broker is cooling its heels, banking profits in GBST ((GBT)) and switching a large cap property preference to Federation Centres. The broker maintains expectations were subdued heading into the February results so a low hurdle was easily cleared. Now, 2015 earnings growth appears flat to slightly negative to this broker as well, while 2016 growth estimates of 9% appear at risk.

Morgans is also struggling to justify the market’s re-rating. Clearly the low rate environment is driving premium valuations for blue chip equities which pay a reliable dividend yield. Corporate payout ratios are currently observed at post GFC highs which helps support investor appetite. Hence, the broker believes investors need to exercise caution in the light of lingering macro risks, such as geopolitics, oil and a bond market correction.

Top Picks

Goldman Sachs adds Covermore ((CVO)) and Sirtex Medical ((SRX)) to its small & mid cap focus list after the February performance and removes Kathmandu ((KMD)). The list underperformed the ASX Small Ordinaries Accumulation Index in the month by 4.4%. Key performers in February from the list were Flexigroup ((FXL)), Nine Entertainment ((NEC)) and Super Retail ((SUL)) while those detracting from the performance were Kathmandu, iiNet ((IIN)) and Ozforex ((OFX)).

Credit Suisse adds Godfreys ((GFY)) to its top picks for Australia, given the stock is on track to deliver 11% earnings growth in FY15. New products, new stores and franchise conversion will be the key drivers of that growth, with sourcing efficiencies expected to offset FX headwinds. A healthy 7.0% dividend yield is expected to be supported by strong cash flow.

Merger Activity

Morgans believes market sentiment is improving for mergers & acquisitions in resources, with many of the big producers keenly seeking Australian assets. The theme at a recent explorers conference in Fremantle was that it is cheaper to buy resources than to explore for them. The broker expects M&A activity to ramp up and, coupled with an Australian currency tail wind, this should result in increased interest in mid cap resource companies.

The broker highlights deals that have potential such as a consolidation of Phoenix Gold ((PXG)) and Norton Goldfields ((NGF)). Both share synergies in development and Norton’s recent acquisition of 11% of Phoenix stock suggests there could be interest in a tie-up. Morgans also believes there is strong potential for corporate activity in Gold Road ((GOR)), which could be an attractive bolt-on asset for an entity such as Independence Group which already operates in the region.

Catapult Group

Catapult Group ((CAT)) has an attractive recurring revenue model and Bell Potter has initiated coverage with a Speculative Buy rating and 80c target. The company is in the early stages of expanding globally with its wearable technology products targeted at elite sporting organisations and athletes. The broker expects near-term growth to come from an expanding sales force and increased revenue per client through product and software growth, which would drive subscription revenue. The company also has few direct competitors.

What does it do? Catapult has wearable technology which can link an individual athlete’s “print” to benchmark data and make comparisons. The company’s founders were involved in the early development of micro technology in sport, spurred on by the Australian Institute of Sport’s focus on a scientific approach to improving sporting performance. Wearable sensors have been developed more recently to allow better access to athlete information and Catapult is now a global leader in athlete analytics.
 

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.

Click to view our Glossary of Financial Terms