The Wrap: Telcos, Gas, House Prices & Credit

Weekly Reports | Feb 08 2019

Weekly Broker Wrap: telcos; accounting software; chemicals; east coast gas; and house prices & credit

-Labor's planned NBN write-down likely to be a positive catalyst for Telstra
-UK government initiative provides opportunity for Xero
-Ammonia prices depressed as global market is oversupplied
-Longer-term supply deficit in LNG to sustain higher gas prices
-Slump in house prices broadens, UBS sees credit tightening thesis playing out


By Eva Brocklehurst


JPMorgan notes press speculation that the Labor Party is looking at a potential write-down of the NBN if it wins the federal election. This is one of the positive catalysts the broker expects for Telstra ((TLS)) shares this year. Positive structural changes are also expected for the fixed telecom industry, and a reversal of the negative impact for the NBN that has occurred over the last four years.

JPMorgan's analysis suggests accretion of 0.9-1.3c in earnings per share for Telstra with every 5% improvement in NBN broadband margins over FY20-23. A strong first half result is expected, although post-paid average revenue per unit (ARPU) is expected to decline -5.0% because of the loss of extra data charges.

JPMorgan agrees that a 40-50% write-down of the NBN is required in order to lower the wholesale cost to make broadband more affordable. Telstra has recently argued that wholesale NBN costs need to be -$20 lower in order for the economics to work through re-sellers and in order to lower the retail price for consumers.

JPMorgan notes telcos outperformed technology over 2018. Given the macro economic backdrop this should again be the case in 2019, because of the defensive nature of telco stocks, and potential changes in the industry structure for both mobile and fixed line calls.

JPMorgan believes the technology sector still trades at a relatively lofty valuation. Individual stocks are likely to trade on their merits throughout 2019, nevertheless. Telstra remains the broker's top pick for the telecom, media and technology grouping, along with NextDC ((NXT)) and Seek ((SEK)).

Accounting Software

Morgan Stanley envisages the UK government initiative called "making tax digital" is a significant catalyst for the UK accounting software market. After observing the US accounting software market, the broker has dismissed the opportunity for Xero ((XRO)) as it has has strong competition from Intuit, which enjoys a substantial incumbent position in the US.

Instead, the broker believes the UK market opportunity, twice the size of Australasia, now has a regulatory catalyst to drive penetration for the small-medium enterprise sector closer to the Australasian level of 75-80%, from 20% currently.

Over 1m businesses are affected by the regulatory changes coming into effect in the UK on April 1, 2019. Given that Sage is shifting its focus to the higher-end market, Morgan Stanley foresees Intuit and Xero emerging as winners in the UK SME sector, with their stronger cloud offerings, to the detriment of Sage.


While explosives are recovering as mining sentiment improves, Ord Minnett notes the ammonia market is long and, as a result, price growth has been subdued. Recent pricing for ammonia is negative for both Incitec Pivot ((IPL)) and Orica ((ORI)), as the global market is oversupplied. The potential for further price reductions in ammonia is high and the broker estimates the price dropping to US$260/t by June 2019.

Some near-term stability may eventuate but contract re-pricing is considered a risk for earnings growth for both companies. Ord Minnett maintains a Buy rating for Incitec Pivot, expecting earnings from the Louisiana plant will drive growth. Orica, on the other hand, is challenged from a growth perspective as the Burrup facility is a long-term and uncertain driver of earnings. Ord Minnett has a Hold rating for Orica.

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