Weekly Reports | Apr 15 2016
This story features TASSAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TGR
-Balanced outlook for salmon
-Aristocrat likely to retain dominance
-China tax policy tempers tourist outlook
-International retailer assault to continue
-Property services negative re sharing economy
-Australia a preferred market for investment
By Eva Brocklehurst
Tassal Group ((TGR)) has withdrawn from domestic retail supply tenders to Coles, indicating to Credit Suisse a previously signalled unwillingness to tender at sub-optimal levels relative to other channels.
The broker was surprised, nonetheless, that the entire contract to Coles changed hands. It appears Petuna has secured the fresh deli contract. Credit Suisse does not believe the Simplot contract has been finalised yet but expects it to go to Huon Aquaculture ((HUO)).
Tassal has also noted supply restrictions and increased pricing as a result of the impact of the long hot summer, which Credit Suisse believes applies to all operators. Importantly, while growth has been affected, mortality levels have not.
The broker reduces expectations in terms of volumes and margin assumptions, with a negative earnings revision for Tassal of 5.0%. Gaining additional retail exposure is considered a positive for Huon, as is reduced competition in wholesale channels. The broker considers the industry supply and demand outlook is increasingly well balanced.
Slot Machine Makers
Macquarie's analysis suggests Aristocrat Leisure ((ALL)) has continued to take market share at the expense of Ainsworth Game Technology ((AGI)). The broker notes patent applications and absolute R&D spending signal Aristocrat can maintain its dominance.
Both companies have strong balance sheets and liquidity which, combined with increased annuity earnings, suggests to the broker that compared with global peers, the Australian manufacturers are likely to increase ship-share in both Australia and North America.
Macquarie upgrades Aristocrat to Outperform (from Underperform) as the trends are clearly supportive form an earnings and sentiment perspective. The broker downgrades Ainsworth to Underperform (from Outperform) as in contrast, market share and momentum are considered headwinds.
Bell Potter considers it appropriate to compare real estate business McGrath ((MEA)) with offshore listed comparables rather than other consumer facing stocks in Australia, as none of these operate within the Australian residential real estate market.
Key offshore peers include Realogy, Foxtons and Countrywide. The broker notes the price/earnings ratios for these stocks on FY16 and FY17 forecasts are well above the average for McGrath.
Bell Potter retains a Buy rating and $2.25 target and continues to believe the company will at least achieve its pro forma prospectus forecasts in FY16, believing it undervalued in both a relative and absolute sense.
Australian Retail Property
New Chinese tax policies could temper the outlook for tourist oriented shopping malls, Morgan Stanley contends. New taxes for cross border e-commerce and international parcel deliveries become effective on April 8.
The broker suspects stricter enforcement and increased scope and quantum of the tariff on imported goods could reduce demand for goods purchased from offshore and outbound tourism.
Tourist exposed centres account for around 20% of the Australian Real Estate Investment Trust retail stock. GPT Group ((GPT)) has the highest exposure by portfolio value, Morgan Stanley observes. Vicinity Centres (VCX)) has the largest number of malls.
With redevelopments increasingly relying on the introduction of new luxury retailers the broker questions the potential risk/reward of future development activity.
Macquarie has analysed the recent financial performance of the international retailers H&M, Zara and Uniqlo. Cumulatively these earned $460m in sales across 29 stores in their latest financial year results. They continue to add competitive pressure to the department and discount department stores as the majority are co-located.
Sales of the three have deteriorated from initial elevated levels, Macquarie observes, with some cannibalisation and lower sales productivity expected as they expand into the suburbs from more productive CBD locations. Still, the broker does not expect this to deter the continuing trend of offshore retailers entering the Australian market.
In terms of the listed property sector, these international stores are typically anchoring retail development activity in Australia, the broker notes, and taking market share away from domestic retailers.
The broker is concerned about the impact, given their typically low price points, which means domestic competitors cannot raise prices to offset the cost of goods impact of a lower Australian dollar. Increased financial stress is considered likely in domestic specialty apparel chains.
Moreover, international retailers are receiving generally lower rents and higher incentives which will continue to hinder shopping centre development returns in Australia. That said, the cost of doing business for these retailer in Australia is expensive, and returns are expected to moderate.
This is a rapidly growing economic model based on access to, rather than ownership of, physical and human assets such as time, space and skills. Examples are Airbnb, where people can list and book accommodation, and Uber, the ride sharing application.
Advances in technology, spearheaded by the internet, have enabled the economy to grow. As a result, some traditional business models have been disrupted while for others it provides a cost effective platform with which to compete.
Among the key findings of the National Australia Bank's report on the sharing economy, the analysts note that while large firms are the most positive about the impact, small firms are the most confident going forward. This may reflect the fact large firms have a better understanding of the sharing economy, as none of them signalled a lack of knowledge.
Small firms operating in the health services and construction industry indicated a lack of knowledge about the impact of the sharing economy on their business. Overall, around one in 10 Australian firms believe the sharing economy had an impact on their business over the last 12 months.
Businesses operating in the property services industry were the most negative in regards to the impact followed by retail businesses.
Participants at Credit Suisse's Asian Investment Conference were bullish regarding the short term but cautious for the long term. The broker suspects Chinese stimulus measures have caused many investors to re-assess their near-term outlook as there remains a considerable overhang of debt and an unbalanced economy.
Australia is now a preferred market in the region but investors are cautious regarding materials and financials stocks, which make up two thirds of the benchmark. The broker observes foreign investors are not smitten by the sector mix in Australia but suspects they want to gain exposure to the appreciating currency and the highest dividend yields in the region.
The relevant presentations at the conference for Australian investors included evidence that VIP gaming volumes in Macau should gradually recover. The acquisition criteria for the Hong Kong Exchange suggests to the broker it would not be interested in ASX ((ASX)) while Singapore Telecom's Optus is looking to differentiate its business in Australia via content. The recent acquisition of English Premier League rights for Australia is part of this strategy.
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For more info SHARE ANALYSIS: AGI - AINSWORTH GAME TECHNOLOGY LIMITED
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For more info SHARE ANALYSIS: ASX - ASX LIMITED
For more info SHARE ANALYSIS: GPT - GPT GROUP
For more info SHARE ANALYSIS: HUO - HUON AQUACULTURE GROUP LIMITED
For more info SHARE ANALYSIS: MEA - MCGRATH LIMITED
For more info SHARE ANALYSIS: TGR - TASSAL GROUP LIMITED