article 3 months old

The Wrap: Banks, Gaming, Telstra & Utilities

Weekly Reports | Apr 27 2018

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

Weekly Broker Wrap: banks; gaming; Telstra and utilities.

-Royal Commission signals banks may need to significantly improve underwriting standards
-Aristocrat Leisure's digital exposure provides advantage in rapidly growing mobile gambling
-Telstra could be facing significant mobile disruption
-Demand for gas likely to be higher under most emission reduction scenarios

 

By Eva Brocklehurst

Banks

The Royal Commission into banking misconduct raises questions for UBS regarding the quality of Westpac's ((WBC)) mortgage book. While the bank has undertaken significant work to improve its underwriting standards, the broker expects, along with other major banks, this will need to be sharpened further, and could potentially lead to a reduction in credit availability.

UBS downgrades Westpac to Sell from Neutral and incorporates significantly higher risks than previously assumed, believing APRA's mortgage serviceability review could also be a game-changer.

Macquarie, on the other hand, believes the risks from the Royal Commission are being captured in current valuations but does note the absence of a visible catalyst for the sector to re-rate in the near term.

The broker's analysis suggests that retail investors continued the trend over the first quarter of buying into weakness across all the major banks, while domestic institutional investors were net sellers of ANZ Bank ((ANZ)) and Commonwealth Bank ((CBA)) and net buyers of National Australia Bank ((NAB)) and Westpac.

CLSA continues to envisage relative valuation appeal in the banks, as the sector underperformed during the March quarter. Given soft system growth this was not a surprise.

Reviewing the sector, CLSA believes over-representation of "sticky" domestic retail investors has meant both domestic and international institutional investors are underweight these large, benchmark-heavy, high dividend yield stocks, particularly CBA.

CLSA finds reasons to be constructive on the sector and observes Australian bank PEs have de-rated sharply versus the broader market, such that valuation is no longer stretched relative to global peers. CLSA reiterates positive calls on Macquarie Group ((MQG)), Commonwealth Bank, National Australia Bank and Clydesdale ((CYB)).

Gaming

Gambling on mobiles is a large and fast-growing industry, forecast to grow 14% per annum to 2020. Ord Minnett envisages Aristocrat Leisure's ((ALL)) increased exposure to digital, estimated to account for 38% of revenue and 24% of segment profit in FY18, will provide an advantage in this industry.

Free-to-play is the most popular monetisation model as it offers multiple avenues for generating revenue across a longer timeframe. The broker suggests Aristocrat's digital portfolio diversification provides the opportunity to monetise the market better, using its market-leading ARPDAU metrics from its social casino games.

Eilers-Fantini surveyed 136 slot manufacturers in North America in the March quarter with operations across 587 casinos and 23,752 retail outlets. Macquarie deduces from the survey that Aristocrat continues to take share across the key Class 3 participation segment, supported by game performance.

Outright sales are healthy and attracting 25% ship share and this is expected to continue. The broker upgrades Class 3 participation installations and ship share forecasts for the company.

Meanwhile, the performance of Ainsworth Game Technology ((AGI)) appears steady, with ship share around 4%. Game performance is also tracking around floor average.

Buyers expect to allocate 4% of units purchased to Ainsworth, although this excludes a potential 600 units sale in Kentucky. Including this sale would boost ship share by around 1% but Macquarie points out the should be considered a one-off event.

Telstra

Morgan Stanley has a bearish view on Telstra ((TLS)) based on the competition exerting downward pressure on earnings and returns. Mobiles, the company's largest earnings contributor, is the area where disruption risk is highest. The broker points to some similarities with Orange in France.

Orange posted its first quarter of positive mobile revenue growth in 6.5 years recently and Morgan Stanley believes the long period of revenue stagnation was caused by mobile disruption. Rival Iliad launched a new fourth French mobile network in 2012 and by the end of 2017 had accumulated a 17% market share.

Morgan Stanley suggests Telstra faces a similar situation Australia versus TPG Telecom ((TPM)) because a disruptor mentality exists with no existing mobile profit pool to cannibalise and an established fixed line business enables cross selling opportunities.

The main difference is that TPG Telecom is yet to sign a roaming deal to give it full access to the Australian population, although the broker is confident it will be able to do so. Morgan Stanley maintains a watching brief on developments and retains a Underweight rating and $3 price target for Telstra.

Utilities

Morgan Stanley envisages some cause for optimism should the National Energy Guarantee scheme be adopted in August. The latest version of the guarantee suggests electricity pool prices will likely continue to be set under the familiar "energy-only" parameters.

The guarantee is based on a target but the broker suspects this could well change within the next year, although acknowledges the reliability aspect of the guarantee is unlikely to be triggered.

Morgan Stanley observes electricity pool prices remain the single largest potential driver for earnings change for AGL Energy ((AGL)), being Australia's largest generator.

The broker calculates a sustained movement of $20/megawatt-hour in the pool price should flow through to the company's earnings to the tune of $600-650m over the course of a 1-3-year re-pricing cycle. The next re-pricing point is July retail price changes in NSW/ACT, Queensland and South Australia.

Under most scenarios for emission reductions Morgan Stanley believes demand for gas would be higher, and this should be positive for Origin Energy ((ORG)) and APA Group ((APA)). Origin Energy is the broker's single Overweight rated stock in the sector.

Morgan Stanley suggests that both Spark Infrastructure ((SKI)) and Ausnet Services ((AST)) could benefit from further build out of renewables as both companies have upside exposure to additional transmission connections.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

AGI AGL ALL ANZ APA CBA MQG NAB ORG TLS WBC

For more info SHARE ANALYSIS: AGI - AINSWORTH GAME TECHNOLOGY LIMITED

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: ANZ - ANZ GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: APA - APA GROUP

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION