The Wrap: Banks, Gas, Gaming & Power

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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

Banks

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.

Gaming

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.

A-REITs

Morgan Stanley has surveyed mortgagors, which provides insight into household income and spending dynamics in a tightening credit cycle. There are downside risks envisaged to demand for retail space. Households are vulnerable, as around 40% have little or no savings, and consumption remains under pressure.

Softer consumption growth is expected as consumers cut back on discretionary purchases. The survey suggests that entertainment/dining and apparel are the three categories in which consumers are most likely to reduce their exposure as interest rates rise.

Collectively, these account for 40-60% of specialty sales as of June 2017, which the broker believes explains a relatively strong correlation between estimated growth in discretionary sales and reported A-REIT specialty sales growth.

Morgan Stanley also questions the sustainability of lease structures and retail book values. The change in retail backdrop may increase the risks of obsolescence and the broker prefers retail exposure via companies that are budgeting for increased capital expenditure such as Stockland ((SGP)) and Mirvac ((MGR)) and have an additional buffer from retained earnings.

Electricity

Commonwealth Bank analysts have surveyed the average change in power bills for customers based on debit card and Bpay transactions. The data is considered quite volatile but indicates that the average power bill has lifted by 17.6% over the September quarter. The analysts note that there is a pick up in both price as well as consumption.

The latest spike in prices has not been uniform and for the individual household the change in the price of power is very dependent on the location and energy provider. Nevertheless, at a national level, prices have risen significantly and the average increase will be picked up in the September quarter CPI on October 25.

The analysts calculate that the 15% surge in energy prices over the September quarter means the direct contribution to the headline CPI will be 0.51 percentage points, very similar to the impact from the carbon tax on power prices in the September quarter headline CPI in 2012.

At this stage the analysts forecast the headline CBA to rise by 0.9% that would push the annual rate up to 2.1%. The analysts note, over the past eight years, households have had to devote a greater share of their income to paying energy bills because power prices have significantly outpaced household income growth.

The RBA is likely to look through a step-up in headline inflation, while the analysts note core inflation and wages are more important for the outlook for official interest rates.

On that basis, the CBA analysts believe the labour market needs to tighten more so wage inflation rises beyond the contribution that the increase in the minimum wage will make to the wage price index. Yet, a lift in energy prices will not help the bargaining position of employees given higher energy prices are also driving growth in business input costs.

AMA Group

AMA Group ((AMA)) provides automotive after-care services and accessories for the Australian market with a number of brands. The business is the largest accident repair group in Australia. AMA Group also manufactures automotive components including re-manufactured transmissions and torque converters.

Bell Potter believes the business is well-positioned to lead consolidation in the industry, with a track record of successfully integrating acquisitions. Strong growth in earnings is expected over the next three years, driven by both organic growth and acquisitions. The broker initiates coverage of the stock with a Buy rating and target of $1.20.

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