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Weekly Broker Wrap: Gaming, Telcos, Retail, Media, Housing And US Building

Weekly Reports | Apr 17 2015

This story features ARISTOCRAT LEISURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALL

-Gaming outlook positive
-Mobile revenues stable
-Housing retail strongest performer
-Out-of-home ad spend grows fastest
-Housing finance stalls in February
-Confidence underpins US construction

 

By Eva Brocklehurst

Gaming

Queensland gaming machine expenditure rose by 4.5% in March while, year to date, expenditure was up 5.9%. This compares with growth in Victoria of 4.0% and 2.5% and NSW of 7.8% and 6.2% respectively. Deutsche Bank observes, of relevance to Echo Entertainment ((EGP)), Brisbane was up 7.1% in March and Gold Coast up 6.0%. The broker believes the strength in gaming can be attributed to improving economic activity and the removal of restrictions on note acceptors, which is positive for both Echo Entertainment and Aristocrat Leisure ((ALL)).

Telcos

Mobile operator industry data suggests a rational market which is intent on sustainable growth and operational profitability and, while it may be short-lived, Citi finds this encouraging. Mobile subscribers grew 1.6% over 2014 after no growth in 2013 but remain well below the five-year compound growth rate of 4.0%. Wireless broadband growth is now declining.

Telstra ((TLS)) extended its market share to 53% and SingTel‘s ((SGT)) Optus has 30%. Revenues have stabilised in the industry after declining continuously since December 2009. Citi expects Telstra will continue to grow revenue from its business but suspects it will be difficult to capture additional market share, while Optus should benefit from revenue per unit growth but muted subscriber growth. Vodafone ((HTA)) is expected to grow its subscriber base from recent lows and remain intent on retaining its 17% market share.

Retail

Australian retailers enjoyed the strongest sales trends in four years in the first half of FY15 and Citi expects sales growth to broaden with lower petrol prices a help. Housing-related retailers did best. However, Citi notes Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) lost market share. Wesfarmers‘ ((WES)) Bunnings and Woolworths‘ ((WOW)) Masters gained share through store openings. Profit margins remain tight and retailers struggled to lift gross margins despite the good sales.

The broker prefers Super Retail ((SUL)) as it should lift both sales momentum and profit margins and benefit from the cycling of the federal budget in the six months to June 2015, as should JB Hi-Fi. Moreover, currency headwinds are expected to ease for the rest of the second half. Citi suspects the falling Australian dollar will be a bigger headache in FY16 for retailers. The broker’s retail sales indicator was up 4.4% in February and retail sales growth has reverted to below trend, with weakness in supermarkets, clothing and department stores. Household categories remain the strongest performers.

Media

Advertising agency spending was up 1.9% in March, reflecting strong growth in digital display, radio and out-of-home. Goldman Sachs has not changed forecasts, despite the market tracking ahead of estimates. The reason is that the media types that are strongest are mostly in the smaller segments of the sector. Among the top categories insurance grew strongly as did entertainment, retail and media. Weaker spending occurred in banking, restaurants and pharmaceuticals. The NSW election helped boost government spending on advertising which particularly benefitted digital, outdoor and TV, in the broker’s observation. Out-of-home’s share of agency spending continues to grow, reaching 11% in March.

The latest CEASA report has confirmed the fourth year of flat ad market growth. While the report is for 2014 and therefore backward looking, Citi notes the weakness was partly affected by lower advertising revenue for business publications, as a result of a lower number of titles included in the reported figures. Total online ad spending grew 11.4% in the second half of 2014 and online display and classifieds were stronger than the broker expected. Online search was below expectations, reflecting a slowing in desk top searches. Total TV advertising spending fell 3.2% in the half, with metro TV and regional TV down 3.0% each and pay TV down 4.2%. newspapers fell 14.1% with metro news down 10.7%.

Housing Finance

Lending for housing stalled in February. The investor segment sustained the largest fall,  economists observe. Commonwealth Bank economists suspect this is an early sign that warnings from the Reserve Bank of Australia since late 2014, and changes introduces by the Australian Prudential Regulation Authority (APRA), early this year are having some impact. Goldman Sachs believes policy makers will welcome the largest decline in approvals to investors since October 2012, particularly if this provides to be early evidence the macro prudential constraints are starting to gain traction.

The value of loans to owner occupiers and investors fell by 1.0% but remains 9.2% higher over the year. Developers still report strong interest in off-the-plan purchases in Sydney and Melbourne. The CBA economists expect the RBA to reduce the cash rate to a new record low of 2.0% in May.

Goldman Sachs observes the number of owner occupier approvals rose by 1.2% in February. This was short of expectations and insufficient to offset a larger fall in January. Moreover, the number of these approvals for new construction edged up only 0.6% in the month. Goldman expects the renewed easing cycle from the RBA will help mitigate the risks of a typical down cycle in housing construction but does expect levels of activity will stay high in 2015. Still, the broker believes the poor confidence levels and lacklustre outlook for non-mining investment argue for an additional policy response and expects two further reductions to the cash rate in coming months.

Building Materials 

Credit Suisse has surveyed real estate agents in the US as the spring selling season ramps up. Activity is being underpinned by low mortgage rates, an improving employment landscape and support from government initiatives. Tight inventory continues to be widespread, supporting better prices although limiting overall sales. The broker’s proprietary survey suggests market confidence should drive more renovation and new home construction activity for Boral ((BLD)) and James Hardie ((JHX)).
 

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CHARTS

ALL BLD HTA HVN JBH JHX SUL TLS WES WOW

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC

For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED