Weekly Reports | Apr 01 2016
This story features IPH LIMITED, and other companies. For more info SHARE ANALYSIS: IPH
-Imminent catalysts for APN Outdoor, IPH
-Benefits ebb from China's "grey" market
-Could Adelaide Brighton acquire CA stake?
-Income growth likely to stay modest
-Less volatility for Adacel
-Favourable drivers for novated leasing
By Eva Brocklehurst
High Conviction Stocks
The $19bn in dividends being paid out in March and April should provide strong support for the equity market ahead of the May confession session, Morgans contends. The broker still urges investors not to be complacent, particularly those with heavy blue chip weightings, as the pace of earnings growth across the market is uneven. (Note: The "confession session" sees companies downgrading guidance ahead of end of FY to get the bad news out of the way before results season in August).
The broker makes no changes to its high conviction list this month but believes APN Outdoor ((APO)) and IPH Ltd ((IPH)) stand out, with imminent catalysts which signal potential re-rating.
Strong growth rates for the industry in the first two months of the year are expected to result in upgrades to APN Outdoor's guidance. IPH continues to reduce costs and has signalled a number of potential acquisitions in Australia and secondary markets which may materialise.
The Chinese government has announced a new tax policy on cross-border e-commerce sales where import duty and VAT for importers using bonded warehouses will be applied to replace postal tax. The duty-free price threshold will be RMB2,000 per transaction. VAT will be charged at an effective 12%. The tariff for infant formula imports has been temporarily reduced to 5.0%.
UBS believes the regulatory changes will negate a significant amount of the benefits from “grey” market imports. For food companies which rely heavily on such sales, like A2 Milk ((A2M)) and Bellamy's Australia ((BAL)), this would require a shift to alternative sales channels, either directly online or via physical stores. As a minimum, it will result in sales disruption but may also reduce markets or limit future growth through higher prices.
Morgan Stanley envisages that a partial sale of Cement Australia, as speculated in the press, could make the Holcim assets in Australia accessible to Adelaide Brighton ((ABC)). For Adelaide Brighton a debt and equity funded acquisition could realise significant accretion.
Holcim is reportedly considering selling its 50% stake in Cement Australia. Morgan Stanley has been of the view that Adelaide Brighton would find it hard to participate in industry consolidation because of the integrated nature of Holcim's Australian assets. If the stake in Cement Australia is sold separately the competition issue could lessen.
Nevertheless, the splitting up of Cement Australia and Holcim Australia may result in a 30% loss of Cement Australia's volume and could impact earnings by up to 50% the broker calculates. It is unclear if the other owner Heidelberg has pre-emptive rights over the remaining stake.
The broker's negative view on Adelaide Brighton has centred on the structural challenges in cement. An acquisition would overcome this and, whilst such is unclear as yet, the broker includes the potential within a bull case scenario, granting 37c-$1.56 per share of value for the potential.
The trend in household spending grew over the past year despite relatively weak income growth, Commonwealth Bank analysts observe. Growth is attributed to higher housing wealth. The analysts expect that this wealth effect could run into headwinds if house price growth stalls over 2016. Slower net migration may also dampen future household income growth.
The analysts also suspect the more populous states of NSW, Victoria and Queensland will enjoy better economic outcomes over the next few years compared with the smaller states because of firmer jobs growth, population and housing prices.
Australia's household savings ratio averaged around 10% from 2007 to 2012 before slipping to just under 8.0% recently. A large portion of the savings is held in mandatory superannuation and there is also a wealth effect from the rising pool of super funds. The analysts believe this causes households to adjust their savings ratio to lower levels.
If the share market, the main repository of super investment, remains in the doldrums over the next few years then a higher savings ratio may return and real consumer spending would have to shift down a gear.
The analysts also observe that lower housing debt servicing, via lower interest rates, could be another factor making households inclined to save less. Anecdotal evidence points to strong growth in mortgage offset accounts, which may be seen as more tax effective means of income management.
Income growth is expected to remain modest in 2016. Wages, the main component of household incomes, still appear to be easing in annual growth terms. If employment is included then the outlook for wages and salaries growth becomes more positive, the analysts contend. Leading indicators suggest a slight downward pressure on the national unemployment rate, although wide divergence is expected across the states.
Adacel ((ADA)), a provider of air traffic control simulation systems and air traffic management automation, has undergone a significant transformation over recent years, Bell Potter maintains. The company is now more diversified, with less volatile earnings. Adacel generates revenue from new systems, extended support, system upgrades and field support.
Bell Potter observes new markets are emerging and there is a significant level of system upgrades scheduled for the next 10 years. The split between recurring and non-recurring revenue is around 60:40. The broker initiates coverage with a Buy rating and $2.50 target.
Morgan Stanley recently initiated coverage on four new stocks linked to the automotive market. The broker believes the group offers exposure to favourable drivers that support strong growth over the medium term including dealership consolidation, fleet management outsourcing and salary packaging growth.
Morgan Stanley believe risks from changes the Fringe Benefits Tax legislation are being overplayed. Short term uncertainty for automotive dealers, the broker acknowledges, does stem from the Australian Securities and Investments Commission review on finance and insurance.
Eclipx ((ECX)) has the greatest relative valuation upside, given it has the lowest regulatory risk. The broker initiates coverage with an Overweight rating and $3.42 target.
The broker also initiates with an Overweight rating on novated leasing exposures McMillan Shakespeare ((MMS)) and Smartgroup ((SIQ)) with price targets of $14.79 and $5.34 respectively. Given the favourable growth drivers in this group the broker retains an Overweight rating on SG Fleet ((SGF)) with a target of $13.00.
In the automotive dealership segment, with increased uncertainty from the ASIC review the broker initiates on AP Eagers ((APE)) with an Equal-weight rating and downgrades Automotive Holdings ((AHG)) to Equal-weight from Overweight. The price targets are $11.91 and $4.35 respectively.
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