The Wrap: Banks, Advisors, Retailers & Media

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Weekly Broker Wrap: Australian banks; advisor platforms; high conviction stocks; Australian retailers; media; Pro-Pac Packaging; and Think Childcare.

-Australian banks likely to lag peers in 2018
-Bank-owned dealer groups likely to sustain greatest flight risk in advice platforms
-Limits looming to investing-for-yield strategies
-Fall-out could be forthcoming for retailing over January
-Online and Outdoor the only segments likely to gain share of advertising market
 

By Eva Brocklehurst

Australian Banks

UBS now has a flat earnings outlook for the major banks. Several inputs to a challenging outlook have conspired to put pressure on the sector. The Australian housing market faces a number of headwinds, amid the full impact of macro prudential measures on interest-only and investment property lending. APRA is also focused on lax mortgage underwriting standards.

Meanwhile, wages are weak and there is a slump in retail sales amid benign inflation and soft consumption. UBS downgrades forecasts for consumption growth to 2.0% in FY18 because of a fading household wealth affect and falling savings rate. The Reserve Bank is expected to keep official rates on hold until 2019.

Given this backdrop the broker downgrades housing credit growth forecasts to 4.4% in FY18 and 3.0% in FY19. Hence, the broker expects Australian banks will lag peers in 2018 as net interest margins come under pressure from competition and switching. The Banking Royal Commission is another area of uncertainty while mis-selling of mortgages and responsible lending risks are also a growing concern.

Advisor Platforms

Morgan Stanley notes some opportunities for specialist advice-led wealth managers. More supportive markets and regulatory certainty has underpinned growth in independent financial advisers. Banks are reducing their commitment and investment in advice, given heightened regulatory scrutiny, and this has meant planners have re-evaluated their dealer groups.

Moreover, the unbundling of IP, technology advancements and fee-for-service requirements have created the opportunity to capture more value. The broker notes Hub24 ((HUB)) and NetWealth are prepared to package their platform as a service with execution-only capability.

In this area the major wrap platforms with a large independent advisor footprint that are hosted by BT Investment Management ((BTT)), Colonial ((CBA)) and Macquarie Group ((MQG)) are most at risk. Bank-owned dealer groups are likely to face the biggest flight risk, Morgan Stanley suggests.

Meanwhile, wealth manager networks of AMP ((AMP)) and IOOF ((IFL)) are supported by investment and a commitment to advice-led models. These, in turn, are supported by managed account capabilities. The broker also notes rising compliance scrutiny is driving inactive and unproductive planners out of the system.

High Conviction Stocks

Morgans observes markets are in a sweet spot, as global growth is becoming entrenched and inflation conspicuously absent, but suspects this environment is unlikely to continue for much longer. While solid returns are still achievable the broker suggests these should not come at the expense of investors taking on excessive levels of risk.

Low growth and low rate settings have made investing for yield a profitable strategy post the GFC, but Morgans is starting to envisage limits to this strategy. The broker suggests the local market may lag peers until investors can get a clearer reading on a genuine acceleration in the business cycle, and active stock selection will be key to returns in 2018.

The broker adds Senex Energy ((SXY)) to its ex-100 list and considers the stock well-positioned to make a material impact on the east coast gas market. Bapcor ((BAP)) is removed, locking in a 12% total shareholder return over the last nine months. The broker remains attracted to the stock's defensive characteristics.

Australian Retailers

Citi finds the signs not great for Christmas retailing. Discounting has been pulled forward and there are few "must have" items this year. The broker envisages the greatest downside threats are for Myer ((MYR)), Harvey Norman ((HVN)), JB Hi-Fi ((JBH)) and Premier Investments ((PMV)). The broker envisages a subdued Christmas and perhaps some fallout, with downgrades, over January.

Significant negative sentiment on retail in January is suspected to be an enhanced buying opportunity for Premier Investments and Super Retail ((SUL)) because of fundamental valuation support. Citi has a Neutral rating for Woolworths ((WOW)) and remains positive about the prospects for higher food inflation.

Media

Citi believes outdoor and online are the only sectors of the media likely to gain share in the advertising market in the medium term. The most immediate issue is a risk of earnings downgrades, as weak retail sales are a negative leading indicator for advertising expenditure. Retail turnover is currently near all-time lows and this points to the risk of downgrades across the sector. December-January sales will be the key catalysts for the sector.

Citi initiates coverage on the sector with a Buy rating for oOh!Media ((OML)) and Neutral ratings on APN Outdoor ((APO)) and HT&E ((HT1)). The broker has Sell ratings on Nine Entertainment ((NEC)), Seven West Media ((SWM)) and Southern Cross Media ((SXL)).

The broker notes TV broadcasters are now reliant on live sport and reality TV shows to drive audiences with streaming services dominating scripted content. Broadcast TV viewing has declined rapidly with the average hours watched down -16% in the past three years and revenue down -8%.

Meanwhile, online advertising has grown to become almost 50% of the advertising market in the past 17 years, although this is dominated by search and social segments, to which Australian media has negligible exposure. Citi expects online to reach around 60% of the advertising market by 2021.

Pro-Pac Packaging

Pro-Pac Packaging ((PPG)) manufactures a range of rigid packaging products and distributes a full array of packaging materials. Following a merger with Integrated Packaging in November, the group now manufactures flexible packaging products, predominantly stretch film, shrink film and other plain and printed flexible packaging. Bell Potter find significant benefits from the recent merger and an opportunity to release synergies.

The increased scale is expected to result in procurement savings. The broker initiates coverage with a Buy rating and target of $0.50. When compared with listed packaging peers the company has a substantially lower forecast expenditure profile as a percentage of revenue. Bell Potter expects this will result in improved free cash flow and growing returns on capital.

Think Childcare

Think Childcare ((TNK)) is an owner/operator of 42 child care centres across Australia with an 85% weighting to Victoria. Moelis notes the company has a valuable pipeline of third-party owned centres which are providing a de-risked pathway to acquisitive growth, in addition to sourcing its own greenfield acquisitions.

As a result the portfolio will contain a mix of well-established centres (high occupancy), greenfield centres (low occupancy) and acquired centres (around 75% occupancy). Moelis initiates coverage with a Buy rating and $2.70 target. Estimates assume the company will acquire 60 centres over the next six years at a total cost of around $120m.

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