The Wrap: Building, Media, Consumers & EVs

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Weekly Broker Wrap: Oz infrastructure; building materials; media; consumer; property; and electric vehicles.

-Is the outlook softening for Oz infrastructure sector?
-US housing exposure the bright spot for Oz building stocks
-Negative advertising expenditure could prove painful for media equity values
-Challenging backdrop for traditional retailers continues in 2019
-Despite sales strength, caution advised as China contemplates cuts to EV subsidy
 

By Eva Brocklehurst

Australian Infrastructure

Recently, Australia's infrastructure sector has benefited from certainty regarding earnings and distribution yields as well as incurring double-digit growth rates. However, Citi believes the outlook is softening as tax expenses are rising and there is pressure on debt costs. The broker has downgraded Sydney Airport ((SYD)) to Sell from Buy, suggesting headwinds are gathering pace.

Regulatory uncertainty and high leverage are also factors driving underperformance. The broker is also cautious about Transurban ((TCL)), maintaining a Sell rating, as there is potential for increased volume sensitivity to economic conditions. Leverage, expenditure and the credit cycle also place downward pressure on the pay-out ratio.

Building Materials

Morgan Stanley believes 2019 in the building industry will be all about balancing diverging exposures. The broker avoids Australian housing and favours infrastructure and US housing exposure.

The Australian infrastructure construction environment remains the most attractive end market, in the broker's view, and growth will continue in US housing, albeit at a more modest rate. Hence, Overweight ratings are maintained for both Boral ((BLD)) and James Hardie ((JHX)).

For the former, developments with the USG JV may also bring upside if a favourable deal can be achieved. For the latter, Morgan Stanley believes the current share price reflects an overly bearish view regarding the trajectory of US housing and a return to primary demand growth.

Morgan Stanley upgrades Adelaide Brighton ((ABC)) to Equal-weight. While believing it will be difficult for the stock to outperform until a new strategy is announced, the broker concedes the stock offers attractive leverage to the Australian infrastructure boom and is now trading at a more realistic multiple.

Fletcher Building ((FBU)) has streamlined its organisation and repaired the balance sheet but Morgan Stanley believes the NZ housing market is at a peak and declines are inevitable. Therefore, more attractive exposures exist elsewhere. Meanwhile, the broker suspects the share price of CSR ((CSR)) is likely to over-correct as 2019 shapes up as a challenging year. This should provide an opportunity for patient investors.

Credit Suisse forecasts 3.0% growth in US housing starts in 2019 and, while the rate is moderating, still expects growth to continue through 2020. Affordability is the main concern, although mortgage rates have declined from the November highs. Renovations demand is likely to be underpinned by a home owner base locked into legacy low mortgage rates amid expectations house prices will continue to appreciate.

The broker notes exposure to new residential construction is less than 5% for Reliance Worldwide ((RWC)), which is its top pick in the sector as a result. James Hardie, with around 40%, still has a majority of its exposure to renovations as well as momentum in market share. Credit Suisse decreases forecasts for Boral, Neutral rated, based on the US outlook and indications weak conditions are carrying into the second quarter for both the US and Australia.

Media

While Morgan Stanley expects advertising expenditure to be softer, a recession is not in base case estimates. After three consecutive months of negative data in 2018 and discussions with industry, the broker reduces estimates across media companies.

Morgan Stanley believes investors should be aware of how painful negative advertising expenditure could prove to be for equity values. The broker has Underweight ratings on traditional media stocks, which reflects both negative structural change and cyclical revenue/earnings risk. The only Overweight rating in traditional media is the new Nine Entertainment ((NEC)) amid cost reductions and potential for a lift in asset values.

Consumer Stocks

Australian Bureau of Statistics data for November shows retail sales rose 2.8%, below October because of slowing discretionary sales growth. This was driven by electronics and the result of cycling the iPhone release in the prior corresponding period. The main drags on non-food included furniture, electrical and hardware. UBS considers this negative for Super Retail ((SUL)), Harvey Norman ((HVN)) and Wesfarmers ((WES)).

Department stores and clothing/footwear were positive and the broker suspects November was aided by Black Friday/Cyber Monday sales which pulled forward items from the key December period. Softer foot traffic data makes the broker cautious about discretionary expenditure in December and January.

Macquarie agrees the backdrop is challenging for traditional retailers, which are dealing with a combination of structural and cyclical pressures, particularly the apparel sector. Within the consumer segment the broker prefers Wesfarmers and Coles ((COL)) in staples and JB Hi-Fi ((JBH)) in discretionary retail.

The broker has conducted a survey of unlisted retailers to ascertain holiday trade and the outlook. Almost half of all respondents indicated trading was negative over Christmas for their business, and apparel was particularly weak. The bright spot were electronics, which reported stable conditions. Macquarie agrees online trade in November from Black Friday/Cyber Monday caused a pulling forward of sales and created a hole in the higher margin pre-Christmas trade.

Supermarkets were the highlight of November retail sales, up 4.5% and well above the 12-month run rate. UBS believes the results benefited from strong online sales which may have pulled forward from December. November marks the sixth consecutive month of above-trend growth in food. Liquor dragged on overall sales, which may have continued into December because of cooler weather whether in that month.

Property

From the survey of unlisted retailers Macquarie notes they are less bullish on floor space needs than they were five years ago. Only around 7% of large retailers intend to increase space on a one-year view compared with around 61% back in 2014. Store network rationalisation is expected to continue, with 24% indicating an intention to decrease space over the next 12 months.

Hence, Macquarie is cautious about leasing conditions for retail landlords. The broker's preferences remain for A-REITs within other sub-sectors, including Goodman Group ((GMG)), Dexus ((DXS)), Mirvac ((MGR)) and Charter Hall ((CHC)), all rated Outperform. The broker has a Neutral rating for Scentre Group ((SCG)) and GPT ((GPT)).

Electric Vehicles

Electric vehicle sales ascended to a new record high in December, bringing the 2018 total to 2m vehicles. Macquarie observes this is positive for battery materials such as cobalt, lithium and nickel but bearish for the platinum group elements, particularly as, overall, car sales shrank.

Annual sales of automobiles were lower in 2018 for the first time since 2009. The significance of this is that the market share of electric vehicles has risen quickly. Moreover, the importance of China to global electric vehicle growth cannot be underestimated. Chinese electric vehicles accounted for 53% of global sales in 2018.

Still, this is why Macquarie is cautious about the 2019 outlook for sales, as China is expected to announce major cuts to subsidies. Speculation exists that these may be larger than previously expected – between 42-55%.

The broker suspects it will be difficult for the rest of the world to take up the slack, even though this year US sales were up 83% on the back of Tesla's successful launch of the Model 3. Europe is expected to do better as the Model 3 arrives there while Japanese and European offerings are also more diverse.

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