Weekly Reports | Dec 14 2018
Weekly Broker Wrap: telcos; energy; retail; batteries; and Countplus
-Regional 3.6 GHz spectrum bids intense with three bidders in tow
-Deep value may be appearing in Australian sector if forecasts for higher oil prices evolve
-Weak retail expenditure does not necessarily mean weak share prices
-Battery technology a structural challenge for electricity industry
By Eva Brocklehurst
Telstra ((TLS)) spent the most on bidding in the recent auction for 3.6 GHz spectrum, $386m, which was at the high-end of Ord Minnett's expectations. Metro spectrum was in line with expectations because of a low ownership limit and lack of competition.
However, regional spectrum bids were more intense because of a higher ownership limit, 80 MHz, as well as three bidders and the importance of the 3.6GHz spectrum for 5G in terms of propagation.
TPG Telecom ((TPM)) spent $263m, also at the high-end of Ord Minnett's estimates. Optus spent just $185m acquiring 30-30 MHz of spectrum in regional areas, as it already owns more than the allowed 60 MHz in metro in this band.
The broker notes Dense Air, which aims to provide wholesale shared "neutral host" mobile capacity, took advantage of ownership restrictions and was able to pick up 5-35 MHz of metro spectrum for $18m, essentially at the reserve price because of the lack of competition.
Morgans suggests, the partial launch of 5G in 2019 along with the merger of TPG Telecom and Vodafone, could reset the pricing environment for mobile. Once pricing settles, the broker considers it may be time to move to an overweight sector view. Morgans considers Telstra the best way to play the sector.
Morgan Stanley expects the production cuts announced by OPEC will underpin the energy sector and balance markets in 2019, preventing inventory from building. The broker's commodity strategists expect Brent to exceed US$70/bbl by the third quarter of 2019.
Morgan Stanley observes the Australian energy industry has worked hard on its cost structures over the past two years and balance sheets have been restored. Performance should be driven by stable oil prices, particularly if global risk-off sentiment eases.
Morgan Stanley also notes 2019 is shaping up as an interesting year for LNG expansion with a number of projects likely to progress, including PNG LNG, Scarborough, Browse and Darwin. The broker maintains an Attractive view on Australian energy stocks.
Citi, on the other hand, downgrades oil price forecasts and now expects Brent to be US$60/bbl in 2018 and US$55/bbl in 2019. The changes result in large declines to near-term earnings forecasts for stocks under coverage.
The broker maintains a neutral view on the sector but concedes that investors with higher expectations for oil prices may find deep value has emerged across several names. At a US$70/bbl oil price and US$9/mmbtu LNG price the broker still prefers Origin Energy ((ORG)), although Oil Search ((OSH)) would screen almost as cheap.
Woodside Petroleum ((WPL)) is less compelling, given its LNG growth projects are subject to more risk relative to Oil Search. Following the recent share price decline, Citi now considers Beach Energy ((BPT)) fair value and upgrades to Neutral from Sell.
Australian retail stocks have underperformed over recent weeks yet Citi, despite sales growth concerns, remains positive about the Christmas trading period. The broker also has analysed the history of Christmas sales and believes low sales volatility, firm inflation and wages growth are the best indicators.
Citi asserts that weak retail expenditure does not necessarily mean weak share prices. While the 2018 Christmas may not be outstanding, the broker notes retail sales trends have been stable and wages growth is improving. The broker's best "Christmas" stocks are Accent Group ((AX1)), Super Retail ((SUL)), Coles ((COL)) and Woolworths ((WOW)).
Battery technology continues to evolve, both in the small and larger scale, which Macquarie believes will disrupt the electricity wholesale and retail markets. Batteries are a structural challenge for the industry as they balance the oversupply of energy at any one particular time, thus reducing volatility.
Small-scale battery penetration is expected to accelerate off PV solar growth, particularly in NSW and South Australia. Large-scale batteries are allowing renewable energy providers to participate in firming capacity for the market.
The Australian Energy Market Operator estimates 17GW of storage by 2040. As more solar enters the grid, feed-in tariffs are expected to fall and aid battery economics. Unless grid pricing changes rapidly, Macquarie suggests incentives are emerging for retail and small-medium enterprises to use batteries to lower costs. At the generation level, deeper competition is being added.
This is a potential area for industry to invest, the broker asserts, although it is likely to remain the domain of infrastructure funds, particularly as batteries do not carry wear and tear like thermal plants.
Countplus Ltd ((CUP)) is now net cash and Wilsons expects earnings and cash generation will continue to grow. The company's improved financial health is coming at a time when the sector is increasingly prospective for acquisitions.
Countplus is one of Australia's largest networks of aligned accounting and financial planning practices. Wilsons initiates coverage with a Buy rating and $0.94 target. The broker believes the stock offers considerable value at current levels.
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