Weekly Reports | May 13 2016
This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH
-Trading updates mixed but conditions robust
-Suggestions to buy on weakness
-Equity spread to deposits widen
-MPL, NHF to have margin issues in FY17?
-Coles seen more profitable than Woolies
-Key for domestic gas producers is flexibility
-Structural strength and cyclical weakness noted
By Eva Brocklehurst
Deutsche Bank believes some caution is warranted in investment strategies, despite indications that momentum in the share market is reasonably firm. Global drivers are helping to offset a slowing in domestic drivers. While there are some wobbles, with retailers affected by warm weather and a fall off in port volumes, the broker does not envisage political uncertainty will be a driver of the market. Company trading updates have been mixed rather than disappointing.
The broker believes a recovery is fundamentally on track, with business conditions at five-year highs, small cap earnings revisions at around six-year highs and a solid labour market. Deutsche Bank considers serious share price weakness as buying opportunities.
UBS also looks at the valuation of the market in the context of what appears to be conflicting signals. The overall market appears to be good value on a price/book basis, mainly because of a very low resources measure on this metric and an historically low bank sector.
Yet the price/earnings multiple for the market is around 8% above its long-term average, making it look slightly expensive. Industrials ex financial do not seem cheap to UBS yet the market appears to be prepared to grant the valuation benefit of a lower discount rate to these more defensive areas. Overall, the broker judges the market is fair to moderately inexpensive;.
Strategy and Yield
Morgans continues to advocate higher yielding equities, believing that as the spread between equity yields and deposit rates widen, investors will look to equities with growing dividend profiles to supplement their income. The broker still believes clients should hold deposits but acknowledges the rate cuts and tightening deposit break rules makes them less appealing.
Morgans looks at the ASX300 to screen high yielders that are coupled with operating cash flows sufficient to maintain forecast distributions, low volatility and market caps over $200m. Such stocks include 360 Capital Industrial Fund ((TIX)), AusNet Services ((AST)), Coca-Cola Amatil ((CCL)), JB Hi-Fi ((JBH)), Sydney Airport ((SYD)), Telstra ((TLS)) and Westpac ((WBC)).
Altium ((ALU)) is held in high regard by Bell Potter and the outlook is positive, with double digit earnings growth forecast for the medium term. The broker also recognises the upside from the Dassault PCB product, which uses Altium's technology.
Regardless, valuation is what drives recommendations and the broker reviews its parameters given the recent strong run in the share price. While there are no changes to earnings forecasts Bell Potter increases the premium applied in relative valuations and lowers the weighted average cost of capital in the valuation. The result is a 9.0% increase to the target to $6.00 from $5.50. The rating is downgraded to Sell from Hold.
Similarly, while Bell Potter is forecasting strong growth in the first half it believes Technology One ((TNE)) is starting to look expensive. The stock is cycling a relatively weak prior first half so the strong earnings growth that is forecast is slightly misleading, the broker contends. Bell Potter downgrades to Sell from Hold based on valuation and continues to have high regard for the stock. The price target is $4.75.
Private Health Insurance
The latest statistics on the private health insurance industry suggest to Credit Suisse that structural challenges continue. The large players are continuing to pay large dividends to external holders and generating significant returns. The not-for-profit players continue to have significant excess capital but lack the means to return the capital other than through price decreases, which could affect further profitability.
Credit Suisse expects both Medibank Private ((MPL)) and nib Holdings ((NHF)) to benefit from a multi-year period of inflated earnings as approved premiums exceed claims cost inflation. Yet ongoing margin expansion is likely to be an issue the government will address in 2017. Regulatory risks are expected to increase as governments look to put the interests of policy holders ahead of shareholders. Hence, the broker retains Neutral ratings on both stocks.
UBS estimates Coles ((WES)) ex fuel and liquor is now more profitable than Woolworths ((WOW)). For FY16 the broker estimates Coles will generate an earnings margin of 5.8% which compares with Woolworths at 4.4%.
The gap is seen increasing to 200 basis points in FY17 yet UBS contends there is no structural reason why Coles should have higher margins. The broker actually believes Woolworths should earn higher margins, given its more efficient supply chain, larger scale and similar if not higher, fresh food participation.
The broker believes several factors have driven the divergence including productivity, where Coles is now more productive in terms of sales per square metre. The broker also considers Woolworths is under-collecting from suppliers because of poor execution. Woolworths continues to be more efficient on costs but UBS observes Coles is closing the gap.
The broker suggests, in the event of a successful turnaround where like-for-like sales return to positive, its medium-term forecasts for Woolworths could be conservative. Nevertheless, UBS needs to be confident that the current level of investment at Woolies is sufficient to regain momentum.
Ord Minnett expects Australian domestic gas prices to rise in the eastern states, driven by increasing cost of supply as well as options for Queensland producers to export production. The main beneficiaries are those companies with the flexibility to change where they source and sell gas.
The broker raises its recommendation on Origin Energy ((ORG)) to Accumulate from Hold and the target to $5.70 from $5.50 on the basis that its gas portfolio provides these options. The broker cuts its recommendation on APA Group ((APA)) to Hold from Buy and the target to $9.60 from $10.00, given domestic gas demand is likely to decline and therefore it is difficult to identify from where organic growth will emerge.
Ord Minnett considers Australia's gas market has changed with the introduction of LNG exports from Curtis Island. Queensland gas producers have the option to sell gas to the export market rather than domestic customers. On the demand side, the broker notes domestic gas is highly elastic and retail, industrial and power generation consumers are likely to continue to switch to alternative fuels or reduce consumption to offset higher prices.
Macquarie judges its conference this year as more positive than expected, particularly regarding consumer spending and housing related trends. The broker notes expectations were lowered significantly so the hurdle is low.
There is a clear differentiation noted across the regions in terms of growth that the broker observes is consistent with a two-stage economy, rather than aggregate growth being stronger than expected. Moreover, there are areas of structural strength and cyclical weakness.
Domestically, growth opportunities are seen as more aligned with the small cap stocks or those with an expanding footprint, such as Mantra Group ((MTR)) and oOh!Media ((OML)). A few participants observed early signs of a recovery in Western Australia but this was not strong, the broker notes. These include Nick Scali ((NCK)) and Stockland ((SGP)). There was continued emphasis on the long-term opportunities for growth in international markets by Corporate Travel Management ((CTD)), Lend Lease ((LLC)) and Sydney Airport ((SYD)).
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
For more info SHARE ANALYSIS: ALU - ALTIUM
For more info SHARE ANALYSIS: APA - APA GROUP
For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP
For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED
For more info SHARE ANALYSIS: MTR - STRATA INVESTMENT HOLDINGS PLC
For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED
For more info SHARE ANALYSIS: NHF - NIB HOLDINGS LIMITED
For more info SHARE ANALYSIS: OML - OOH!MEDIA LIMITED
For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED
For more info SHARE ANALYSIS: SGP - STOCKLAND
For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED
For more info SHARE ANALYSIS: TNE - TECHNOLOGY ONE LIMITED
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED