Weekly Reports | Jan 29 2016
This story features WESFARMERS LIMITED, and other companies. For more info SHARE ANALYSIS: WES
-Consumer spending picks up
-But food inflation weakens
-Macquarie retains confidence in A-REITs
-Are regional malls too cheap?
-Traditional media doldrums worsen
-Long term outlook positive for hospitals
By Eva Brocklehurst
Credit Suisse proffers some “left of field” ideas for 2016. These are low probability, but events which, if they occurred, would have a material impact. One is the de-merging of Coles by Wesfarmers ((WES)) due to a declining valuation from increased supermarket competition.
Credit Suisse would be a seller of the stock in this event. Credit Suisse would also be a seller of Wesfarmers if a global home improvement company bought Masters from Woolworths ((WOW)) and earnings from Bunnings fell as a result of a more capable competitor.
Offshore players targeting Myer ((MYR)) or Metcash ((MTS)) is a low probability event but the stocks do meet several criteria for triggering buyer interest, including underperformance, synergies and an open share register. The broker also considers the prospect that Metcash reorganises into a co-operative. The potential for a retailer buy-out would create a floor under that stock's share price.
Consumer spending has picked up over the past two years. UBS observes the main areas of strength in communications, household goods, insurance & financial services, health, entertainment and cars. Weaker trends are noted in food, education and transport.
While spending may pick up toward 3.0% early this year, its fastest pace in two years, the broker’s model forecasts year-average growth of a little over 2.5% and a little below that level in 2017. The main risk to the outlook is from surprises in the labour market and residential property, as well as sharp changes to equity wealth.
The December quarter CPI reveals a sustained slowing in food inflation, which is a reasonable proxy for supermarket inflation, Morgan Stanley contends. Competition among the players appears to be depressing prices. Prices in core categories were reduced in the December quarter. Deflation is occurring despite a weaker Australian dollar. A lower Australian dollar, all things equal, should lead to higher price inflation but the link appear to have broken down, the broker observes.
UBS surveyed 48 suppliers across the grocery sector and found, on average, they expected prices to rise by 0.7% over the next 12 months. This is below 2015 levels. The survey suggest the growth outlook for groceries is slowing, underpinned by lower inflation, consumers eating less and modest levels of population growth.
With this in mind UBS expects the grocery market to grow at 3.4% over the next 12 months. The softer near-term outlook also points towards an increasingly competitive Australian supermarket sector. The broker believes Woolworths is most at risk but Metcash is also losing share to both Aldi and Coles. UBS finds it difficult to envisage upside in the medium term.
Macquarie admits it was unexcited by the Australian Real Estate Investment Trust (A-REIT) sector late last year as the first rise in nearly 10 years was heralded for US interest rates amid expectations for global bond yields to rise this year. The broker retains a high level of confidence in near-term earnings forecasts for A-REITs because of the fixed nature of rental increases and a high proportion of pre-sales in development businesses.
The broker reviews the office market and whilst Perth and Brisbane remain problematic, conditions have improved in Sydney. The positives for A-REITs are their better asset duration and relative simplicity compared with utilities or infrastructure sectors, and greater income security via contracted rents.
Credit Suisse believes regional shopping centres are too cheap. Direct market valuations and A-REIT carrying values of major malls reflect a significant mispricing versus other asset classes, the broker asserts. As this has been the case for 20 year Credit Suisse does not expect it to change soon.
Still, the degree of mispricing has increased of late. The broker believes office and logistics assets now trade well above estimated replacement costs and values for these classes have peaked, whereas upside remains for the top malls.
The broker envisages plenty of value in Scentre Group ((SCG)), both from the development perspective and existing assets. Credit Suisse upgrades Westfield Corp ((WFD)) to Outperform, as it is expected to deliver the highest rate of cash-flow growth out to FY20 of any A-REIT.
Google, Facebook and others are squeezing the revenue pool from Australian TV, newspaper and radio companies, Morgan Stanley believes, as advertising becomes more internet/digital and data based. The rate of structural change in the industry, if anything, has quickened over the last 12 months, the broker adds.
While the industry is acutely aware of this trend Morgan Stanley emphasises the implications are very negative because the more dollars are spent on new media the more funds shift offshore to global media/tech companies.
If the addressable market for local traditional media is shrinking into perpetuity, as the broker believes it is, stocks such as Seven West Media ((SWM)), Nine Entertainment ((NEC)), Southern Cross Media ((SXL)) and Prime Media ((PRT)) warrant a substantial discount to historical and market valuations. Morgan Stanley is Underweight on all four. The broker believes the market underestimates the risk to advertising revenue, margins and returns on a five-year view.
UBS maintains a positive long-term view on private hospitals, expecting over 6.0% in 10-year forward compound growth. Underlying growth drivers are unchanged. The broker does not believe the Medical Benefits Schedule review challenges the fundamentals of the business model.
Some moderation in first half growth is likely but, UBS observes, history suggests there are periods when growth slows from time to time. The broker flags weak first half data and prostheses pricing as providing near-term risk but against the long-term outlook such volatility is considered transient.
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