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Weekly Broker Wrap: Retail, Energy, Outdoor Media, Banks, Internet Consumers And IVE Group

Weekly Reports | Feb 05 2016

This story features ADAIRS LIMITED, and other companies. For more info SHARE ANALYSIS: ADH

-Morgans sees upside for ADH, RCG and BBN
-Brace for large energy stock impairments
-Outdoor media outlook remains strong
-Bank risks balanced for 2016
-Data intelligence the next internet frontier

 

By Eva Brocklehurst

Retail Previews

Most retailers enjoyed a buoyant Christmas trading season and Morgans expects first half results will be strong. Where the going is likely to get tough is the second half. The broker is cautious, as FX pressure on costs is expected to peak going into FY17, based on hedging profiles, and the housing market is cooling.

Add to this the volatility in equity markets, with little or no wage inflation and fragile consumer sentiment, and the negatives could outweigh such positives as lower interest rates and fuel prices. Hence, Morgans emphasises earnings certainty is critical in the current market.

Where upside earnings risk among retailers exists, the broker maintains, is with Adairs ((ADH)), RCG Corp ((RCG)) and Baby Bunting ((BBN)). Others the broker believes will perform well in the current market are Burson Group ((BAP)) and Super Retail ((SUL)).

The broker notes Lovisa ((LOV)) and G.U.D. Holdings ((GUD)) have already missed expectations and been treated harshly as a result. The broker suspects Ardent Leisure ((AAD)) is in line for a miss this reporting season, given the prolonged rout in the oil price and the impact on its Main Event business.

Energy Previews

Macquarie suspects the energy sector is in for an ugly impairment cycle, to be witnessed at the upcoming results. Sector earnings are projected to fall 58% year on year. The broker expects the large cap oil stocks, including Beach Energy ((BPT)), will announce aggregate pre-tax impairments totalling US$3.5bn. Reserve downgrades are also possible.

Woodside Petroleum ((WPL)), while sustaining a relatively resilient earnings base, is expected to cut its final dividend with a 60% decline in earnings year on year. Santos ((STO)) is expected to report a 75% fall in 2015 profit and its balance sheet will attract further scrutiny at the results. Oil Search ((OSH)) is expected to report a 21% decline in profit.

Outdoor Media

Outdoor media revenues have grown 13.7% in the year to January and UBS expects the pace of growth could continue, although remains hesitant to infer too much from one month's data. While roadside billboard growth slowed to 6.0%, as it cycled strong comparables, other outdoor placements such as street furniture, taxis, and small formats grew 23%. Transport revenues were up 6% while the retail/lifestyle categories of outdoor media lifted 24%.

Key developments including APN Outdoor ((APO)) securing a long-term partnership with the Australian Olympic Committee. UBS retains a Neutral rating on the stock and considers it fairly valued, although, given the outdoor market trends, earnings risk is to the upside.

Banking Outlook

Earnings momentum is expected to improve to 8.5% growth on average for the major banks in FY16, Deutsche Bank contends. The broker forecasts an expected total return of almost 10%, a rate considered reasonable in a low-growth economy.

A number of regulatory issues were settled in 2015 but there are some outstanding, including the Basel 4 proposals and a firming up of what "unquestionably strong” capital ratios mean. The broker interprets industry commentary so far as suggesting capital requirements will not be lifted beyond the sector's ability to absorb the changes in an orderly fashion.

Asset quality remains an issue and while the non-mining books appear well positioned Deutsche Bank envisages a risk of provisions in the oil & gas sector. Still, the issue appears relatively manageable for the banks. Strong loan growth is considered a positive but does present a challenge, the broker maintains, if the sector chases lending growth too vigorously. Overall, Deutsche Bank considers the risks to the sector evenly balanced.

Internet Consumers

This is the largest global consumer group, with almost half the world's population having access to the internet and two billion smart phone users. Credit Suisse notes, from a macro view, the automation of services is not capital intensive but driven by software innovation. This is likely to restrain consumer prices and jobs and translates to low inflation and rates, at least for the near term.

The broker advises investors to adequately capture the positive and negative impacts of this investment theme. Many companies are taking advantage of the benefits of data mining the cloud and “deep learning” algorithms. For example, the artificial intelligence used to achieve traffic management adaptations is advantageous to Transurban ((TCL)). Brambles ((BXB)) has also invested in trucking technology to establish supply chain efficiencies.

Sydney Airport ((SYD)) delivers tailored content to its mobile app users while Qantas ((QAN)) is collating data from its loyalty program to better understand customers. In health care, the broker notes Capital Health ((CAJ)) is applying deep learning to improve the accuracy of diagnostic imaging.

Even in the currently troubled resources sector there are opportunities to exploit. Woodside has teamed with IBM Watson to transform 30 year of historical data into relevant predictive data that should facilitate faster and better decision making. Other segments well ahead in mining the advantages of the net are the gaming sector, financials and retailers.

Smart meters are moving into the utilities sector and, in this case, the broker suspects new entrants could disrupt the market. For example, Powershop is an online power company which allows consumers to track usage and costs and purchase a combination of products to meet their needs.

Insurers are yet to embrace the opportunity fully, the broker notes, but in embracing big data they should gain a better understanding of their customers and this should contribute to higher selling rates.

IVE Group

IVE Group ((IGL)) has charted a course over the last 20 years towards a diversified marketing and print communications business, away from traditional commercial printing.

Bell Potter expects high single digit earnings growth over the medium term, with organic revenue growth and margin expansion through productivity, workplace efficiencies and further investment in capital equipment.

The company is underpinned by a vertically integrated product and service offering and a unique market position in multiple segments in the print and communications industry. This is aided by a track record of accretive acquisitions. Bell Potter initiates coverage with a Buy rating and $2.62 target.
 

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CHARTS

ADH BAP BBN BPT BXB CAJ GUD IGL LOV OSH QAN STO SUL SYD TCL WPL

For more info SHARE ANALYSIS: ADH - ADAIRS LIMITED

For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED

For more info SHARE ANALYSIS: BBN - BABY BUNTING GROUP LIMITED

For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED

For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED

For more info SHARE ANALYSIS: CAJ - CAPITOL HEALTH LIMITED

For more info SHARE ANALYSIS: GUD - G.U.D. HOLDINGS LIMITED

For more info SHARE ANALYSIS: IGL - IVE GROUP LIMITED

For more info SHARE ANALYSIS: LOV - LOVISA HOLDINGS LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

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

For more info SHARE ANALYSIS: SYD - SYDNEY AIRPORT

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED

For more info SHARE ANALYSIS: WPL - WOODSIDE PETROLEUM LIMITED