Weekly Reports | Jun 26 2015
This story features WESFARMERS LIMITED, and other companies. For more info SHARE ANALYSIS: WES
–Higher yields no threat to equities
-Price war looming in supermarkets?
-Oz departures slow sharply
-Pharma wholesalers need diversity?
-Automotive dealers stretched?
-Donaco’s Star Vegas on track
By Eva Brocklehurst
Australian Equity Strategy
As long-term interest rates push higher UBS does not envisage a significant sell-off in the bond market. The broker expects equities can cope with a modest rise in yields spaced over the next six to 12 months. The broker considers the Australian dollar retains downside potential which should be good for Australian market earnings. The broker has trimmed its year-end target for the ASX200 to 5,800 from 5,900, given headwinds emanating from banking and mining. UBS is overweight US dollar earners, housing construction plays and energy stocks.
Wesfarmers‘ ((WES)) Coles supermarkets have extended their lead over Woolworths ((WOW)) in UBS’ survey. The broker’s proprietary survey of the Australian food and liquor market revealed Woolworths score is at its lowest level since the survey began in 2007. In contrast, Coles score was its highest ever. Coles now leads Woolworths in 25 out of 26 categories. Coles is observed winning the marketing war and executing better.
Of most concern to the broker are declines for Woolworths across customer-facing areas, such as value for money, in-store execution and the effectiveness of promotional campaigns. It will take time and money to fix the problems too. UBS maintains that when the number one player is under pressure, major changes to its strategy can cause disruptions across the market.
UBS maintains Woolworths needs to lift morale and with a new CEO that is not attached to margins, amid increasing competitive intensity, the risk is for a price war, with Woolworths going harder and earlier than the market expects.
It could well be the end of cheap overseas holidays for Australians, given the Australian dollar’s recent depreciation to a six-year low. Departures from Australia slowed sharply to just 2.0% year on year recently from average growth of 10% over 2003 to 2013. In contrast, arrivals accelerated to a decade high rate of 5.0% after being almost flat from 2005-2013. UBS notes the change in net arrivals is the most positive since the 2000 Olympics and should support consumption, given weak nominal household income. The broker maintains that in a sub-trend economy which lacks domestic drivers, tourism is a welcome bright spot. This view is supported by forecasts for the Australian dollar to fall further by the end of the year.
The valuation of automotive dealers is starting to look stretched to Credit Suisse, although Neutral ratings are retained. industry conditions have supported both AP Eagers ((APE)) and Automotive Holdings Group ((AHG)). AP Eagers has the benefit of no direct Western Australia exposure, with a greater skew toward Queensland. NSW is a key area of strength for the dealership. Earnings momentum is seen favouring AP Eagers over Automotive Holdings. if AP Eagers is fairly valued then Automotive Holdings is probably too cheap, Credit Suisse reasons. That said, AP Eagers needs continued upgrades to justify its rating, the broker adds, while a positive surprise could drive a re-rating for Automotive Holdings.
The passage of the Pharmaceutical Benefits Scheme package through the Australian Senate means a material reduction to spending and, hence, wholesaler reimbursement over the next five years. Credit Suisse expects listed wholesalers, Australian Pharmaceutical Industries ((API)) and Sigma Pharmaceutical ((SIP)) to fully offset the impact to profits by winding back pharmacy trade discounts. Beyond this, should prices continue to fall they will need to reduce operating costs or diversify away from PBS medicines to sustain earnings at current levels.
Household banking fee data released by the Reserve Bank of Australia has shown growth for the second consecutive year, following two preceding years of no growth. The main contributor to the 1.5% growth figure was credit card fees (1.9%) while housing fees continued to drag (-0.6%). Macquarie believes the trend points to more rational behaviour and will sit well with shareholders of the major banks as they look to implement strategies to claw back lost returns from the impending increase to mortgage risk weights. The broker notes re-pricing of mortgages has begun and the retail banks are best placed to benefit.
National Australia Bank ((NAB)) has also been progressively re-pricing deposits. Should these re-price to peer-average levels this may boost earnings by 0.6%, Macquarie contends, with potential to create longer term shareholder value.
Donaco International ((DNA)) has signalled its Star Vegas transaction will be completed by next month. Canaccord Genuity views completion of the transaction as a positive catalyst as the company diversifies its revenue base and risks. The Star Vegas acquisition is the primary driver of the broker’s forecast earnings growth in FY16, as the company increases its exposure to Asian consumption. Canaccord Genuity has a Buy rating and price target of $1.25
Bell Potter also has a a Buy rating on the stock, with a $1.36 target. The broker observes completion of the acquisition was a key concern and, with the transaction update, Star Vegas now appears on track. Bell Potter also notes an extra US$20m working capital facility is now being sought because of a persistently low win rate at Aristo Hotel. Visits are strong and occupancy is a record 75% but the actual win rates remains weak. The broker suspects the company has had a run of bad luck but that this should soon change.
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For more info SHARE ANALYSIS: APE - EAGERS AUTOMOTIVE LIMITED
For more info SHARE ANALYSIS: API - AUSTRALIAN PHARMACEUTICAL INDUSTRIES LIMITED
For more info SHARE ANALYSIS: DNA - DONACO INTERNATIONAL LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED