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The Wrap: Salmon, Real Estate & Small Retail

Weekly Reports | Dec 08 2017

Weekly Broker Wrap: salmon; technology; high conviction stocks; global real estate; small retailers; house prices; and salary packaging.

-Weaker international salmon prices impact outlook for Oz producers
-Citadel Group debuts as number one in Bell Potter's key picks in technology
-Morgans suggests solid returns still exist but should not come with excessive risk
-Real estate portal adjacencies could be substantial
-RBA may be on hold until 2019
-Consolidation potential in Australia's automotive fleet leasing sector


By Eva Brocklehurst


Weaker international salmon prices have affected Ord Minnett's models for both Huon Aquaculture ((HUO)) and Tassal Group ((TGR)), and a -32% decline has been incorporated since May. The broker envisages an opportunity for Huon, as its valuation has de-rated more strongly than Tassal, and net profit forecasts are still 18% ahead of FY18 consensus estimates. A Buy rating is maintained while the target is trimmed to $5.81.

In contrast, Ord Minnett held less conservative prior estimates for Tassal so marking to market has more of an impact. Moreover, the broker finds the company's cost reduction outlook less compelling. Hence, the rating is downgraded to Lighten from Buy and the target lowered to $3.43 from $5.00.


Bell Potter updates its key stock picks in the technology sector following recent price movements. Citadel Group ((CGL)) debuts at number one with a strong growth outlook and potential to re-rate as a pure software company from a services and software company.

Technology One ((TNE)) remains a key pick as its expected to deliver a strong growth year in FY18 and trades at a PE discount to other high quality tech stocks. A solid earnings rebound is expected from Senetas ((SEN)) while Appen ((APX)) returns as a key stock following a transforming acquisition. There are no changes to the broker's Sell ratings on WiseTech Global ((WTC)) and Altium ((ALU)), which are based purely on valuation.

High Conviction Stocks

Morgans suggests stock markets are in a sweet spot, as global growth is becoming entrenched and there is little evidence of inflation. Nevertheless, geopolitical risks also indicate this environment is unlikely to continue. The broker advises that while solid returns are still achievable, this should not come with excessive levels of risk.

The broker identifies Senex Energy ((SXY)) as ideally position to make a material impact on the east coast gas market, with two projects expected to transform earnings over the next few years. Bapcor ((BAP)) is removed from the high conviction list, having locked in a 12% return over the last nine months . Still, Morgans remains attracted to the stock's defensive characteristics.

Global Real Estate

Macquarie observes digitisation is improving the efficiency of property-related processes and transactions. Established property portals are positioned to participate in growth because they have large audiences engaged at a critical time in the acquisitions cycle. They also have extensive data which allows increasing interaction and improved strategies.

The broker's analysis suggests adjacencies could be as much as 2.5-3.5 times the size of the total advertising market. Opportunities in financial services are generally the largest but the market for connections and home services is also substantial.

Just as Amazon, Uber and Netflix provided a better experience versus the old models they disrupted in retail, taxis and cable respectively, Macquarie's US analysts envisage iBuyers doing the same for US home sales.

This presents a threat to the real estate agent commission pool, which is ultimately the main source of revenue for US property portals. Against this material opportunity in adjacencies for real estate portals Macquarie takes a cautious view of Australian names because of valuation concerns. REA Group ((REA)) has been downgraded to Underperform while Domain ((DHG)) has been upgraded to Neutral.

Small Retailers

Citi places Michael Hill ((MHJ)) as its top pick in the small cap retail sector. The broker considers a PE multiple for FY18 of 13x is too cheap, given the options in the company's two loss-making areas – Emma & Roe and the US. Meanwhile, the broker considers the emergence of BB Capital on Accent's ((AX1)) register (formerly known as RCG) could be a game changer and lead to new earnings opportunities.

The broker expects Beacon Lighting ((BLX)) will enjoy favourable conditions for the next 12 months as it cycles the negative impact from the Masters shutdown. Citi is concerned that Nick Scali ((NCK)) may be affected in the medium term by a slowing housing cycle and increased execution risks from the largest one-year roll out in the company's history amid expansion into New Zealand.

The broker likes the Greencross ((GXL)) model but remains concerned about the impact on margins from a need to harmonise prices between Petbarn and online offerings. Baby Bunting ((BBN)) has a strong business model but could be hurt in the short term as inferior competitors are forced a shutdown, leading to sales loss and margin pressure.

House Prices

UBS observes growth in dwelling prices has dropped to the historical levels where a reduction in official interest rates could be anticipated. House prices have been almost flat over the last six months, dragging year-on-year growth to its lowest growth rate since 2016, at 5.2%. Nevertheless, the Reserve Bank appears less willing to react to weak house prices at this stage.

UBS has long held the view that a soft landing will occur, with growth of 0-3% in 2018, and the RBA will retain steady rates until the Dec quarter of 2018. Now, the broker envisages heightened risk that consumption will weaken and drag on inflation, a scenario that suggests the RBA may be on hold until 2019. However, for the RBA to consider actually cutting the rate, the strong global outlook would have to deteriorate.

Salary Packaging

Citi downgrades two novated leasing and salary packaging companies, Smartgroup ((SIQ)) and McMillan Shakespeare ((MMS)) to Neutral, because of elevated valuations relative to peers.

Given material synergies that could be realised from scale benefits the broker believes consolidation in the Australian automotive fleet leasing sector is probable, led by SG Fleet ((SGF)) and/or EclipX ((ECX)).

The broker estimates a merger of the two could potentially unlock synergies of $26-53m, primarily from purchasing economies and consolidation of operations.

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