The Wrap: Travel, Supermarkets & Property

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Weekly Broker Wrap: travel; cash rates; supermarkets; property; and financial advice.

-Travel expenditure plans bode well for Qantas, Virgin Australia
-NAB analysts delay expected hike to RBA cash rate
-Woolworths considered best positioned to outperform in grocery sector
-Woolworths prices are found to be -6% cheaper versus 10 US grocers
-Where will investors deploy cash proceeds from Westfield?
 

By Eva Brocklehurst

Travel

UBS has surveyed 2,015 Australian business and leisure travellers, revealing an expected increase in travel expenditure for 2018. The result bodes well for Qantas ((QAN)) and Virgin Australia ((VAH)) at a time when rising fuel costs are becoming a headwind.

Business travel is expected to grow at a faster rate than leisure, 9% versus 5%. While expenditure may be up, Australia is the only country surveyed where travel volume is expected to decline, which UBS suggests may show some pricing fatigue and a relatively soft consumer environment.

Price was quoted by 70% of respondents as the main reason for choosing Virgin Australia. In the low-cost category, twice as many respondents indicated direct flights were the reason they have preferred Jetstar to Tiger. While Wi-Fi presents an opportunity for both Qantas and Virgin Australia, less than one quarter of respondents would be willing to pay for it, even if speeds were the same as on the ground.

UBS believes the survey is constructive for Qantas and its ability to continue passing on fuel prices and maintain its brand premium in the Australian market. Yet, the broker retains concerns over the company's ability to fully recover the higher fuel costs in FY19 and has recently downgraded the stock to Neutral on this basis. UBS envisages limited free cash flow generation for Virgin Australia and maintains a Sell rating on the stock.

Cash Rate

National Australia Bank economists have delayed forecasts for the timing of a gradual increase in the Reserve Bank's cash rate cycle. There is no sign of stronger wages growth as yet, and unemployment has been stuck around 5.5% for the best part of a year.

The economists still expect the economy to strengthen and produce a decline in the unemployment rate, which should eventually translate into stronger wages growth. This is predicated on the RBA's expectation that inflation will move back to its 2.5% target. The economists acknowledge the timing of an increase to the cash rate is very dependent on the data but now time this to occur in mid 2019.

Supermarkets

UBS has surveyed 29 grocery suppliers over April and May to assess the market performance of Australian supermarkets. Results of the survey suggest market growth will accelerate and the broker's own estimates may prove conservative, which indicates scope for outperformance of the sector.

Of the listed retailers, Woolworths ((WOW)) is considered the best positioned to outperform while the outlook is less positive for Coles ((WES)) and large packaged grocery suppliers. Suppliers expect top-line growth to accelerate to 2.3% in FY19 while the impact of discounters is expected to wane.

The survey found that 48% of the grocery suppliers are engaging with Amazon and 14% with Kaufland and none had contact with Lidl. UBS remains positive on the Australian grocery market and Woolworths remains the key pick. While suppliers were negative on Metcash ((MTS)), trends for the distributor are not observed to have worsened.

Morgan Stanley questions the notion that Australian supermarket prices are high despite these supermarkets having among the highest margins in the world. The country's concentrated supermarket industry, high labour/rent costs and resulting margins had previously led analysts to believe prices in the supermarket were higher by global standards.

In comparing a 32-product basket with US grocers the broker has discovered, to its surprise, that Woolworths was 6% cheaper versus 10 leading US grocers. Woolworths prices were used as a proxy for Australian supermarkets as Coles' online prices are up to 10% more expensive versus in-store.

The broker acknowledges, had Costco and Walmart been included, comparisons may have been a little different but argues these stores have different formats compared with Australian supermarkets.

Morgan Stanley does point out that the US market is far more competitive and the allocation of space to fresh food is far less than in Australian supermarkets. US ready- to-eat offerings were far better, while the liquor store is inside the US store whereas in Australia licensing laws prohibit this.

There are also much higher staffing levels in the US. The organic food offering appeared far stronger in the US versus Australia and Morgan Stanley suggests the offering of organic food in Woolworths supermarkets could be improved.

Property

Citi wonders where investors will look to deploy cash in Australian property from the proceeds of the potential Unibail/Westfield ((WFD)) merger. If approved, US$2.67 per share of cash will go to Westfield shareholders in coming weeks and the proceeds may not simply go to other large cap retail A-REITs.

The broker suggests Westfield investors may be interested in offshore-exposed A-REITs such as Goodman Group ((GMG)) and Lend Lease ((LLC)). Unlike many of its peers, Westfield is diversified and has exposure to European and US markets.

Goodman Group is also led by its founder, a characteristic the broker observes has appealed to many Westfield investors over the years. Some investors may look to reduce their underweight positions or add to existing positions and Citi notes Australian generalists have been underweight the sector for some time.

Many investors may also be inclined to buy the laggards and, the broker asserts, this would support Abacus Property ((ABP)), Vicinity Centres ((VCX)), Stockland ((SGP)), GPT ((GPT)) and Mirvac ((MGR)).

Financial Advice

Adviser Ratings expects more than 14,000 advisers will exit the financial advice industry over the next five years, fuelled by new educational standards and further changes emanating from the Royal Commission. The research also suggests the fragmentation of institutional distribution is accelerating, with adviser churn from the major banks in 2018 at 270% above the historical rate.

The key findings from an inaugural research report examine the structural transition in the market and the impact of this on key industry stakeholders. The analysis indicates the exodus, together with an ageing client demographic, is putting pressure on practices to modify their business models to sustain growth.

The explosion of self-licenced practices is also driving more open approved product lists and growth in managed accounts. Despite the challenges, Adviser Ratings observes there has been substantial growth in advised asset value and a 25% net increase in the number of practising advisers over the last five years.

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