Weekly Reports | Oct 12 2018
Weekly Broker Wrap: Queensland; fund platforms; mining services; telcos; property; house prices; and customer wallets.
-Queensland construction market deteriorates further
-Competition intensifies within FUA platforms
-Outlook improving for mining service providers
-Investors looking for signs of rational pricing in mobile plans
-Morgan Stanley expects prolonged but orderly correction in house prices
-Major banks experience decline in share of customer wallets
By Eva Brocklehurst
Wilsons observes the Queensland residential, infrastructure and non-residential construction market has deteriorated further. In some instances it has underperformed national activity materially. Construction work yet to be done is at the lowest level since June 2007.
The value of engineering work done in Queensland was materially below the national level in the June quarter and the value of work yet to be done declined -27.6% versus -19.7% nationally. Should this continue, Wilsons believes it signals funding concerns are being realised in Queensland.
Residential activity also softened, with completions declining -7.8% in the June quarter. The Queensland Major Contracts Association has indicated 98 projects are awaiting funding and 17% are unlikely to proceed.
Wilsons believes the risks to earnings are to the downside and the momentum of those exposed to the Queensland construction cycle should be met with some scepticism. For stocks under coverage that are substantially exposed to Queensland activity, Wagners ((WGN)) and GWA Group ((GWA)), the broker's earnings growth forecasts are set at 0.8% and -2.1% for FY19, respectively.
Platforms for funds under administration sustained strong growth in the year to June 2018. Credit Suisse notes contributions from markets were higher than usual and offset a -40% fall in net inflows. As fund flow slows across the industry this will make winning business from competitors an even more important source of growth, in the broker's view.
Net switching between platforms now represents around 100% of net flows versus an average of around 50% over the last five years and the broker believes this may only encourage further competition. HUB24 ((HUB)) and Netwealth ((NWL)) continue to win an outsized share of net flows relative to their funds under management. FY18 was the first year when the specialist platform share of flows exceeded the institutions.
The two companies are also benefiting from an overweight position in the high-growth investment (non-super) market, which is more resistant to competition with industry funds. Nevertheless, while they may be high growth businesses Credit Suisse believes AMP ((AMP)) and IOOF ((IFL)) offer better value, maintaining Outperform ratings on the pair. The broker has a Neutral rating for HUB24 and Underperform for Netwealth.
Deutsche Bank believes most minerals will be in deficit over the next few years as a lack of exploration and strong demand depletes reserves. The number of exploration projects remains low versus the last cyclical peak in 2012, confirming a lack of significant discoveries. Global gold reserves are down -36% from the peak and the copper market is forecast to be in deficit until 2022.
Deutsche Bank suggests gold-related exploration is in the early stages of a recovery and major Australian iron ore miners are now spending to replace tonnage. Capital expenditure on maintenance is also expected to resume with a focus on efficiency.
The broker believes the next 2-3 years are bright for those supplying tools and services to gold exploration such as Imdex ((IMD)), Buy rated, and those with civil capabilities such as NRW Holdings ((NWH)), Hold rated. The broker believes NRW Holdings should win at least one of the two contracts worth $500m-$1bn coming up in earthworks and civil works at Koodaideri and Eliwana.
Given potential for consolidation in the mobile segment UBS believes investors are looking for signs of a more rational pricing environment. Optus and Vodafone have been discounting in postpaid pricing and Telstra ((TLS)) has now responded. With respect to FY19, the broker believes some degradation in mobile revenue should already be factored in by the market.
Telstra is expecting mobile industry service revenue to decline -2%. Longer term, UBS factors in a moderate discounting by Telstra to defend market share and forecasts mobile revenue per unit declining an average of -10% and share declining around -400 basis points.
Products being dropped to the market over the next nine months or so are expected to encourage greater bundling of services, as Telstra seeks to increase average revenue. Increased bundling could also blunt the impact of an aggressive third or fourth player and prepare Telstra for future disruptions.
Morgan Stanley tests the bear case on residential property, noting a hard landing is central to that thesis, as it would bring negative wealth effects from weaker property prices and high leverage would cause a pullback in expenditure and activity, driving up unemployment.
However, the broker's forecasts remain in line with a base case which assumes a prolonged but orderly correction in house prices of -10-15% from peak levels and housing commencements to slow through 2019, amid tighter credit and weaker demand. Margins are expected to remain at current levels thanks to the cumulative price growth nationally over the past three years.
Hence, the broker remains Overweight on Lend Lease ((LLC)) given high pre-sales visibility and the company's exposure to global asset growth. Morgan Stanley also has an Overweight rating on Stockland ((SGP)), forecasting FY19 growth in earnings per share of 6.5%.
Morgan Stanley believes the residential risks are factored into forecasts, although acknowledges the negative sentiment could put near-term pressure on the Overweight call. Still, these two stocks are supported by buybacks and have higher embedded margins as well as growing re-deployment opportunities.
Morgan Stanley's modelling of housing suggests that the decline in prices will continue at a similar pace in 2019. Credit supply was the main driver of weakness over 2018 although the supply/demand balance, which measures the gap between completions and the net increase in households, has recently contributed.
Strong employment growth and temporary migration has helped contain reported vacancy rates thus far but the broker observes a sustained overbuild into 2019 that will weigh on rentals. On the supply side, the run-up in construction of east coast apartments has continued for longer than expected.
Morgan Stanley struggles to envisage any improvement next year and the expected -10-15% peak-to-trough decline in real house prices would mark the largest decline since the early 1980s. As households have twice the leverage they had 25 years ago the impact on equity would be larger again.
Are banks over-relying on cross-selling to boost revenue? Roy Morgans data on 'share of wallet 'suggests this could be the case. This data can help assess how a company is referring existing customers to other product lines under its umbrella.
This feature was heavily criticised in the Hayne Royal Commission. Banks have been accused of aggressive cross selling products, such as superannuation or life insurance, to mortgage holders or financial advice clientele.
The Roy Morgan report on the banking & finance industry compiled information from 250,000 interviews and found that most major banks have experienced a decline in their share of customer wallets over the past four years.
The research points to trends which highlight increased competition in a number of product categories. Consumers are increasingly seeking out new products and new providers, on the back of highly innovative financial technology.
The report shows the share of customer wallet for National Australia Bank ((NAB)) slipped -3.7 percentage points to 29.5% over the past four years while Commonwealth Bank ((CBA)) shed -2.6 percentage points to 31%, ANZ Banking Group ((ANZ)) -1.1 percentage points to 27.7% and Westpac Banking Corp ((WBC)) -0.9 percentage points to 28.3%.
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