The Wrap: Retail, Asset Managers & Building

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Weekly Broker Wrap: Retail centres; superannuation; asset managers; Australian equity strategy; building; Afterpay Touch; and Paragon Care.

-Outlook for shopping centres still bright despite Amazon, Moelis asserts
-Industry funds making gains from super at expense of other categories
-Morgan Stanley expects uptick in flows for asset managers in June quarter
-Australian demographics underpin residential, Queensland-exposed stocks
-Oz dollar fall versus euro supportive of stocks exposed to Europe

By Eva Brocklehurst

Retail Centres

Moelis believes the future of shopping centres in Australia is bright, despite the potential for some isolated losses as the market adjusts to competition and changes in the way people shop. Retail A-REITs have come under pressure as investors fear the impact of Amazon in the local market.

The broker suspects supply of new centres will moderate, with few new outlets being rolled out by major tenants. Shopping centres typically do not get built without a supermarket anchor in Australia.

Nevertheless, the broker's analysis suggests demand for physical supermarkets should still exceed the current supply, even if online sales double in the next five years. This is based on a growing population, geographic & planning constraints and limited new supply.

Moelis highlights the successful re-development of Myer's ((MYR)) department store at Warringah, which involves less space – footprint reduced by around -35% – and more productivity for the store. There is still a place for the strongly performing discount department stores although the space allocated is expected to shrink and provides for alternative use.

The broker acknowledges large-format retailing appears vulnerable to the threat of increased supply, a slowing housing market and the growing online threat.

Super

Bell Potter forecasts Australia's superannuation system to reach $3trn by June 2020. In addition, the compulsory contribution level is set to increase to 12.0% from the current 9.5%, starting to rise again in around two years by 50 basis point increments each year.

The main winners in super are self-managed super funds and industry funds, both gaining over 8% of total market share since 2004. Most recently, industry funds appear to be making the gains at the expense of every other category.

IOOF ((IFL)) appears to be bucking the trend, Bell Potter observes, by differentiating with an adviser-first strategy and growing its adviser network. The move away from large incumbents such as the four major banks and AMP ((AMP)) continues the trend to independence, a key theme in the sector which the broker believes will continue. Bell Potter has a Sell rating on AMP and a Buy rating on IOOF.

Asset Managers

Morgan Stanley observes retail flows appear better in the June quarter at Janus Henderson ((JHG)), while there is upside risk for flows and performance fees at BT Investment ((BTT)). Janus Henderson is the broker's top pick among Australian asset managers because of its higher earnings quality, undemanding trading multiples and flows that benefit from cross selling geographically diverse products.

Meanwhile, Morgan Stanley envisages upside risk to its BT Investment forecast of $1.1bn in retail flows from the JO Hambro division for the June quarter, given that amount seems to have already been collected in April and May based on the latest analysis.

Performance fees at Magellan Financial ((MFG)) are also looking higher. The broker suspects a slowdown in retail flow momentum could be a reason why Magellan Financial is exploring a new LIC launch. A strong turnaround in international funds bodes well for improving flows in the future performance fee potential at Platinum Asset ((PTM)), in the broker's view.

Oz Equity

Deutsche Bank outlines several themes to underpin equity strategies going forward. Australia's population growth continues to rise and overseas migration has picked up in response to improvements in the labour market in 2015. This is supportive of housing demand and underpins earnings growth for those companies exposed to construction. The broker retains a view of housing under-supply.

Migration to Queensland has also hit a six-year high and has further to go the broker suspects. Cheaper housing is the key attraction and sentiment has risen to the national average for the first time in six years, which suggests jobs growth should be buoyant enough in that state to attract migrants. The broker continues to back exposure to Queensland in stocks such as Stockland ((SGP)) and Suncorp ((SUN)).

The broker prefers large industrials to their small peers, despite the fact that the price/earnings discount for small cap stocks has risen to -17% from -11% in late 2016. This is based on a view that a soft economy puts more pressure on small cap stocks.

Meanwhile, for the first time in a while, the euro area is delivering the strongest growth in all the major regions. The Australian dollar has fallen against the euro this year, delivering an earnings boost for those companies with European operations.

Deutsche Bank notes this has beneficial implications for Amcor ((AMC)), Link ((LNK)) and ResMed ((RMD)). Other companies which have exposure to this region include Brambles ((BXB)), Ramsay Health Care ((RHC)), Ansell ((ANN)), Sonic Healthcare ((SHL)) and CSL ((CSL)).

Building Outlook

Macquarie observes the outlook for the residential building market in Australia continues to subside, although the existing pipeline of building approvals suggests activity will be underpinned for a time but the risks are rising. Seasonally adjusted, 12-month rolling building approvals fell -8.4% in May. Multi-residential approvals remain weak nationwide and there were notable falls recorded in NSW, Victoria and Queensland in the month.

As a result, Macquarie continues to prefer infrastructure-exposed stocks such as Boral ((BLD)) and Adelaide Brighton ((ABC)), where the outlook for activity is robust and pricing power is improving. Macquarie continues to like the US building market, which underpins Outperform ratings on Boral, James Hardie ((JHX)) and Reliance Worldwide ((RWC)).

Afterpay Touch

The merger of Afterpay and Touchcorp into Afterpay Touch ((APT)) has resulted in a substantial upgrade to Bell Potter's view of the business. The risk weighting has been upgraded to Buy from Speculative Buy and the price target to $4.90 from $4.50. The earnings are now on a firmer footing given a much more mature Touchcorp earnings profile, coupled with a strong growth in Afterpay, explains the broker.

Bell Potter upgrades FY17 forecasts for earnings per share by 14.6% and FY18 by 3.1%. The chances of the stock being included in the ASX300 over the year ahead are significantly improved, which the broker considers is another key positive catalyst.

Paragon Care

Shaw and Partners has initiated coverage of Paragon Care ((PGC)) with a Buy rating and $0.95 target. The earnings profile has evolved significantly over the last year or so and acquisitions have made the company significantly larger and more diversified from a defensive play on government-funded hospitals and aged care.

The broker notes there is also an increased level of long-term consumable contracts delivering recurring earnings, and a number of significant, as yet, unrecognised growth opportunities.

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