Weekly Broker Wrap: Strategy, Small Caps And Regional Banks

This story features QANTAS AIRWAYS LIMITED, and other companies. For more info SHARE ANALYSIS: QAN

Equity Strategy; Woolworths and shopping centres; small cap picks; regional banks; general insurers; Senetas.

-Oz equities upside & downside seen capped near term
-Finding replacement tenants for Woolworths could be hard
-Lower growth expectations for regional banks
-Listed general insurers retain capital management potential
 

By Eva Brocklehurst

Equity Strategy

Credit Suisse economists have reduced their global GDP forecasts to 2.4% for 2016 and 2.6% in 2017. They contend the global economy continues to move at a snail's pace and remains vulnerable to shocks.

Australian equities are forecast to move sideways in the near term, with upside capped by a combination of testing valuations and macro concerns. The downside is also limited, Credit Suisse maintains, as the global search for yield will bring Australian equities to the attention of investors.

The analysis suggests Australian health care stocks trade at a 50-60% price/earnings premium to the global sector average, despite weaker profit margins and earnings momentum. In contrast, the broker maintains Australian building materials may appear expensive versus the domestic but are relatively cheap versus international peers.

Companies in a position to announce an accretive buy-back but currently not doing so in Credit Suisse's opinion are Qantas ((QAN)), Caltex ((CTX)), Boral ((BLD)) and AGL Energy ((AGL)).

Woolworths & Shopping Centres

In the wake of the Woolworths ((WOW)) decision to close 27 supermarkets, Macquarie observes the pay-out of leases will be positive for short-term cash flow but negative for down time and the development pipeline at shopping centres. Charges are likely to include compensation to landlords and third parties where lease or contracts are broken.

Woolworths is re-directing capital to refurbishments, which should be positive for those shopping centres and a slowing of the store roll-out may reduce competition in the supermarket sub sector, aiding performance of the existing store base.

The key issue will be the ability of landlords to fill the space and finding successful replacement could be difficult, if even Woolworths was unable to achieve adequate returns and sales from the location. The shopping centres are yet to be informed which stores are to close.

The broker believes headwinds will continue to batter the supermarket sector and Woolworths is still facing margin pressure. Shopping Centres Australasia ((SCP)) and Charter Hall Retail ((CQR)) are the most exposed to supermarkets, with turnover rent likely to be under pressure.

Macquarie notes SCP has two original portfolio anchor tenants paying turnover rent relative to its original 64 supermarkets while Charter Hall Retail has 41% of anchor tenants currently on turnover rent.

The broker reiterates and Underperform recommendation for Vicinity Centres ((VCX)), Scentre Group ((SCG)), CQR and SCP.

Small Cap Picks

Ord Minnett believes Shaver Shop ((SSG)) can maintain earnings momentum, with the recent IPO to provide the means to roll out stores and buy back franchises without stretching its balance sheet. The broker also observes a growth opportunity in Bellamy's Australia (BAL)) has been buried in the recent regulatory disruptions in China. The broker calculates forward earnings multiples more than capture this risk.

The broker also likes those funds managers and platforms where flows are a large driver of upside, noting HUB24 ((HUB)) currently administers $3.3bn on its platform and is generating in excess of $300m per quarter of net inflows. Meanwhile, retail travel agencies have been challenged as outbound passenger growth rates slow and this has been unhelpful for Flight Centre ((FLT)). In contrast Helloworld ((HLO)) is linked to a turnaround story following its merger with AOT and the broker prefers this stock.

In technology the broker highlights MYOB ((MYO)) and Hansen Technologies ((HSN)) as offering attractively priced recurring revenue. Contractors have also become a sector for stock picks where they are leveraged to growth in the NBN, transport and solar. The broker expects Service Stream ((SSM)) and Mineral Resources ((MIN)) will fare well in reporting season.

Regional Banks

Deutsche Bank reviews forecasts for the regional banks Bendigo and Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)). Specifically, the broker reduces medium-term loan growth forecasts given lower system growth expectations and a belief that a soft residential mortgage backed securities market will prevent the regionals from growing materially above system.

The broker retains a Hold rating on both stocks, with significant short term earnings uncertainty clouding the long-term upside potential from a levelling of the playing field in capital. Recent strength in house prices is a positive for Bendelaide, which takes revaluation gains and losses through its Homesafe investment property portfolio while BOQ's pillar 3 report highlights a rise in mortgage impaired assets.

General Insurance

Returns from general insurers have halved over the last decade from a downturn in commercial lines, more catastrophes and lower bond yields, Deutsche Bank notes. Reinsurance savings and cost discipline are helping but the industry is increasingly reliant on improved premium rate trends to preserve double digit returns.

The broker highlights listed general insurers, which have a more defensive mix of business and scale as well as strong balance sheets which underpin attractive yields and capital management potential. Deutsche Bank prefers Suncorp ((SUN)) and QBE Insurance ((QBE)) which have greater value appeal relative to Insurance Australia Group ((IAG)).

Senetas

Senetas ((SEN)) is far from being a speculative stock, Bell Potter maintains, despite a share price around 13c. There are a lot of shares on issue from a re-capitalisation of the company in 2012. Yet, Senetas is a provider of encryption hardware globally and sells its product to government organisations in more than 20 countries. The company is profitable and has a growing net cash position.

The company has both recurring and non-recurring revenue, more like a software business, and Bell Potter believes it deserves to trade on a similar multiple to software companies. The broker maintains a Buy recommendation and 16c target.
 

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