The Wrap: BHP, Media, Property & Consumers

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Weekly Broker Wrap: Oil & Gas; equity strategy; media; property; consumers; and Ellex Medical Lasers.

-Could BHP generate cash by selling out of Delaware Basin?
-Elevated short interest in ASX200 stocks
-Citi suggests rapidly rising house prices have been a headwind for property portals
–Potential for buy-backs in the property sector
–Morgans envisages reduced likelihood of consumer discretionary stocks missing guidance
 

By Eva Brocklehurst

BHP Billiton

Macquarie examines the potential for a mutually beneficial transaction in the US Delaware Basin, involving Anadarko, Shell and BHP Billiton ((BHP)). The broker notes recent investor activism at BHP has brought the issue to the forefront and recent marketing in Australia has indicated there is a strong desire from investors to have BHP move away from US onshore business.

The broker theorises that Anadarko can acquire and consolidate acreage in the basin while Shell can consolidate its position and receive some cash in the process. BHP could either sell out of its Delaware position completely or partially monetise it. In order for any transaction to take place it would need to provide a better outcome than the status quo for each participant and Macquarie believes such a transaction provides the outcome.

For Anadarko a transaction may fight the negative sentiment on Colorado and mitigate concerns of the Gulf of Mexico. For Shell it could provide an improved operating outlook as well as a cash injection. Finally, BHP would demonstrate value and cash generation while responding to a shareholder base that the broker believes desires change.

Equity Strategy

Deutsche Bank finds short interest for ASX 200 stocks remains quite elevated relative to history. This could reflect investor unease with valuations as the price/earnings ratio has been holding in the 15.5-16x range since early 2016, which is 10-15% above average. The broker notes short interest is particularly elevated for discretionary retail, telcos and food & beverages. There is minimal shorting of stocks in general insurance, packaging and media.

The broker's analysis finds the most shorted ASX200 stocks tend to outperform during results. This outperformance disappears in the two months following the results. Unsurprisingly, outperformance is best for those companies that beat expectations. Hence, the broker believes the most shorted stocks are good to own during results, particularly if there is a conviction that earnings will not disappoint, although it is worth selling after the results. (See: FNArena's weekly Short Report)

Media

Morgan Stanley is a structural bear regarding traditional media amidst an accelerating rate of change in technology and consumer behaviour. In looking at the strategic opportunities and structural risks, the broker identifies key overweight stocks as REA Group ((REA)), Fairfax Media ((FXJ)) in terms of its Domain business, Trade Me ((TME)) and WiseTech Global ((WTC)).

The broker's underweight stocks include Seven West Media ((SWM)), Southern Cross Media ((SXL)), Sky Network TV and Prime Media ((PRT)). The broker believes advertising revenue is most likely to surprise on the downside while cost reductions could provide a positive surprise.

Credit Suisse expects reductions in licence fees and associated changes will be made permanent when Parliament reconvenes in August. The broker adjusts forecasts accordingly, and notes savings worth 8% for Southern Cross in FY17 and 4% for HT&E ((HT1)).

Southern Cross is Credit Suisse's top pick in small media as it has an undemanding valuation and several areas of incremental upside, including improvement in TV market share on the back of Nine Entertainment's ((NEC)) rating strength and the cost savings in radio.

Citi upgrades News Corp ((NWS)) and Fairfax to Buy. As the property market cools down the broker expects listings growth will pick up and drive earnings upgrades across these companies as well as REA Group. Contrary to popular belief, the broker believes Australia's rapidly rising house prices have been a significant headwind for the REA and Domain portals that advertise properties for sale.

In a balanced market roughly half of all properties would require more than one listing, or advertisement, in order to achieve a sale. Average time on market in the property portals is down to 40 days and under 30 in Sydney, driving the listings/sales ratio down to 1.1 versus the long-term average of 1.5.

The broker notes residential property listing volumes have declined in five of the past six years and, in that same period, both the construction boom has boosted total housing stock by 10%. Throughout this time the broker observes both declining housing turnover and faster sales and believes a pull-back in investor activity would be the most probable catalyst to trigger a return to long-term turnover rates.

Property

Vicinity Centres ((VCX)) has announced an on-market buy-back of up to 5% of the outstanding shares. Citi believes the company remains well-placed to reinvest and the buy-back is an attractive opportunity at current levels. The broker ponders which of the Australian property stocks could be next, as the two main pre-conditions for a buy-back are adequate financial capacity and attractive share pricing.

In addition Citi believes buying back shares makes most sense for Shopping Centres Australasia ((SCP)) and Investa Office ((IOF)), which both trade below likely June 2017 net tangible assets and have gearing at the lower end of policy ranges.

Charter Hall Retail ((CQR)) may also become more active in executing on its buy-back program as further asset sales materialise, in the broker's opinion. Citi envisages less capacity for Westfield ((WFD)) and Scentre Group ((SCG)) to buy back stock in the absence of asset sales.

Consumer

Morgans assesses consumer spending has not sequentially worsened since late April. Moreover, around 85% of stocks in the discretionary consumer sector under coverage have either provided formal guidance ore trading update on the last 2 months. This suggests to the broker that the risk of missing earnings is decidedly reduced.

The broker believes most companies will be able to hit guidance and expectations. Nevertheless, FY18 retail sector growth forecasts may well prove to be optimistic. The main themes Morgans expects to dominate commentary at the upcoming results include gross margins, foot traffic, Australian dollar strength, potential slowing in the rolling out of stores and defence strategies in view of Amazon's entry in 2018.

Ellex Medical Lasers

Bell Potter expects Ellex Medical Lasers ((ELX)), a specialist ophthalmology product company, will grow its top line at around 20.5% compound and reach $182m by 2022. The broker forecasts a strong return to earnings growth in FY19 and FY20 after an expected decline in FY17 and FY18, which stems mainly from an increase in near-term spending to expand sales and marketing efforts, particularly in the US.

The marketing efforts centre on iTrack, a minimally invasive glaucoma surgery device. Bell Potter initiates coverage with a Buy rating and $1.92 target. The broker forecasts strong double-digit growth in revenue in earnings over the next five years and considers the stock is undervalued when compared with high-growth small cap medical technology companies in the US.

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