Weekly Reports | Apr 07 2017
This story features SEVEN WEST MEDIA LIMITED, and other companies. For more info SHARE ANALYSIS: SWM
Free-To-Air TV; supermarket chains; regional banks; global gold; Credit Suisse's Asian Investment Conference.
-SWM and TEN difficult investment propositions for Credit Suisse
-Woolworths turnaround suggests sales growth might exceed Coles
-Regional bank outlook envisaged improving for the second half
-Goldman Sachs returns Newcrest to the major league of gold companies
-Credit Suisse comfortable being overweight commodity stocks after conference
By Eva Brocklehurst
Credit Suisse believes a shake-up in the free-to-air television industry is looming. Ten Network's ((TEN)) financial position appears increasingly difficult. The company expects an operating earnings (EBITDA) loss of -$20-30m in FY17 and its bank facility expires at the end of December.
The broker forecasts the TV ad market to decline, while Ten's ratings have weakened early this year and the step-up that is likely in the cost of Big Bash cricket rights could add to the pressure.
The broker suspects the company will have to make some strategic changes to try and return to profitability, and doubts the backers will want to invest further in programming in a declining market. Credit Suisse considers the company's shares as un-investable for most investors and has a Neutral rating and $0.55 target.
The broker believes Seven West Media ((SWM)) will benefit from any decline in Ten's revenue share. Nevertheless, this stock remains a difficult investment proposition because of its print exposure and relatively high debt levels. Neutral retained. Target is $0.81.
Credit Suisse suggests Nine Entertainment (( NEC)) is the best way to play the TV theme. The broker estimates there is potential for a 2-4.5% uplift in sustainable market share above current forecasts.
Therefore, there is a possible $55-120m in upside to longer-term earnings. This would add $0.30-$0.70 per share to the valuation. Credit Suisse has an Outperform rating and $1.50 target for Nine.
Citi suspects like-for-like sales growth at Woolworths ((WOW)) is likely to exceed Coles ((WES)) for the next six months. The main debate for both supermarkets is the long-term earnings outlook. From its analysis, Citi concludes that Woolworths should be able to sustain a 5.5% earnings margin, versus Coles at 4.9%, by FY20.
The broker expects gross margins at Woolworths to expand to 28.9% by FY20, driven by lower levels of stock losses, range rationalisation and better buying terms, offset by price investment. This is in stark contrast to Coles, where price investment is lowering gross margins.
Citi has resumed coverage of Woolworths with a Neutral rating and $27.40 target. The broker believes the chain is in the early stages of a multi-year recovery and momentum should surprise to the upside over the next six months. The broker retains a clear preference for Woolworths over Wesfarmers, for which it has a Sell rating and $42.30 target.
UBS also finds tangible signs of a turnaround at Woolworths after its latest survey. Traffic, spending and overall customer perception have all improved. Moreover, Coles, Aldi and IGA ((MTS)) all softened across key customer spending drivers versus the broker's prior survey in June 2016. This is been largely to the benefit of Woolworths.
UBS continues to believe the risk of a price war is waning but, if momentum at Coles slows further in the current quarter, when softer comparables are cycled, the risk increases. The survey suggests 2-4% upside risk to Woolworths' FY17 earnings per share estimates.
Goldman Sachs believes the outlook for regional banks is healthier in the second half. The broker envisages better prospects for volume momentum and a spot margin environment which is much improved on the first half. There is nothing in the forward-looking measures which suggest a surprise in terms of negative asset quality.
Once APRA delivers its "unquestionably strong" announcements in coming months, Goldman Sachs believes there will be greater clarity on the prize that is gained from advanced accreditation. Suncorp's ((SUN)) bank is well placed for such an environment, the broker suggests, given its more robust revenue growth trajectory and more sustainable cost reduction opportunities.
Goldman Sachs believes that Bank of Queensland ((BOQ)) is fairly valued at current levels and there is further downside for Bendigo and Adelaide Bank ((BEN)). The broker does not believe the current price/earnings ratio adequately reflects that bank's Homesafe risks and the weak capital position.
Goldman Sachs observes the reward for Newcrest Mining ((NCM)) turning around its operations and balance sheet in the past three years has been a return to the major league of gold companies. The broker believes the stock now provides a credible alternative to Barrick, Newmont and Goldcorp for global gold investors.
The broker also believes long mine life is a less tangible, but equally crucial, part of the investment thesis. Of the 36 assets owned by the big four gold miners only four have a mine life of more than 20 years, and two of those are owned by Newcrest – Cadia and Lihir. Of the remaining 32, only five have life of more than 10 years, which illustrates the scarcity of mine life amongst gold assets.
While many argue the lack of asset diversification is a potential negative for Newcrest, Goldman Sachs asserts this is generally only a valid point when assessing investment appeal, and having an asset of the quality of Cadia makes the issue irrelevant.
Asian Investment Conference
Credit Suisse found plenty of news that was relevant to Australian investors at its annual Asian Investment Conference. The consensus from the conference was to be underweight Australian equities and Australian now ranks in the bottom three markets in the region after being in the top four last year.
Despite this, the broker notes investors were bullish or neutral on sectors that make up 55% of the Australian market i.e. financials and materials. The main concern was a rise in trade protectionism by the US, whereas last year the biggest concern was excessive leverage in China.
The broker notes Chinese developers were in a positive frame on mine starts but more cautious on prices and sales for 2017. Tightness in steel and coal supply may cause prices to overshoot this year, the broker contends.
Meanwhile the development of a Western-style healthcare system in China may involve outbound mergers & acquisitions. Also, international travel by Chinese is expected to continue rising substantially, driven by wealth creation in the tier-3 cities. Large road projects are set to launch in Malaysia and Pakistan as well.
Credit Suisse came away from the conference comfortable with an overweight position in commodity stocks. Economic growth is expected to remain strong and go beyond China's borders, and this should be positive for Australian companies with businesses abroad.
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For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED
For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED
For more info SHARE ANALYSIS: MTS - METCASH LIMITED
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED
For more info SHARE ANALYSIS: SWM - SEVEN WEST MEDIA LIMITED
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED