Weekly Reports | Oct 13 2017
Weekly Broker Wrap: banks; east coast gas; gaming; A-REITs; electricity; and AMA Group.
-Economic and political risks building for the banks in 2018
-Diverting gas to domestic use may be a short-term solution
-More promising growth envisaged for VIP gaming in Australia
-Cutbacks to domestic discretionary expenditure likely to impact specialty retail
-Jump in electricity prices expected to bump up September quarter CPI
By Eva Brocklehurst
Morgan Stanley believes bank earnings are currently in the sweet spot although the economic and political risks are building for 2018. Housing loan growth is expected to slow and margin pressure to re-emerge. The broker first sees the potential for disappointing FY17 results from ANZ Bank ((ANZ)) because of higher loan losses. Around 3% half-on-half earnings growth is expected at both Westpac ((WBC)) and National Australia Bank ((NAB)).
Citi believes ANZ will be the first major bank to announce an overhaul of its organisation, with a major restructure a priority, given revenue has softened more than peers as Asia is scaled back and businesses are divested. The broker expects mortgage re-pricing will offer some respite in a softening revenue environment. Westpac should benefit the most of the majors from mortgage re-pricing in June, to generate revenue growth closer to 2.5%.
Credit Suisse is on the look out for reasonable revenue growth, low/stable bad debt charges and generally stronger capital ratios. When ANZ reports on October 26 the broker expects progress on wealth business divestments and further details of capital management plans. The broker agrees Westpac's result, due November 6, should show leverage to mortgage re-pricing.
In Macquarie Group's ((MQG)) first half result, due October 27, the broker is looking for the stronger funds management performance fees, as suggested by guidance, as well as ascertaining the balances of assets under management and loans, which have been declining in recent periods.
Credit Suisse observes National Australia Bank may only have experienced marginal operating momentum across the full year, given the caveats around the bank levy. The bank reports on November 2.
The broker is looking for details on the RBS state aid obligation opportunity for CYBG ((CYB)), which reports in November 21, as well as an update on progress towards advanced accreditation.
East Coast Gas
Credit Suisse believes the debate on gas has slipped back to where it was a few years ago. Some LNG projects may divert gas for the next few years to the domestic market to avoid the Australian government's Gas Security Mechanism being triggered.
Still, at some stage the LNG buyers will want their volume of gas and, as a projects move into the lower-quality acreage, finding economic reserves to even honour contracted volumes could become a challenge, the broker contends.
There is a supposed surfeit of gas on the east coast but the broker questions its availability in 4-5 years time, given there is no evidence of deliverability below netback LNG pricing, or funded production that is sanctioned and ready to go. Hence, a failure to deliver on domestic gas, which need sanctioning now, leaves two options, either to break legal contracts or short change domestic customers.
Morgan Stanley upgrades VIP expectations for Crown Resorts ((CWN)), and to a lesser extent Star Entertainment ((SGR)), on a more promising outlook for volumes. Junket operators have noted a material improvement across both Melbourne and Sydney properties in recent months.
Morgan Stanley attributes the lift in volumes to junkets taking share from the direct VIP market and renewed interest in coming to Australia to gamble. As the market is focused on a weak domestic economy and not factoring much in the way of a recovery in VIP in FY18, any rebound in growth would be taken positively in the broker's opinion.