Weekly Reports | Jul 12 2019
Weekly Broker Wrap: service exports; supermarkets; retail; and online classifieds.
-Softer near-term outlook for Chinese tourism and education exports
-Coles strategy resonating with suppliers, UBS notes culture improving
-Better outlook for discretionary retailing
-Real estate listings, job advertising volumes remain weak
By Eva Brocklehurst
Australia's service exports have primarily centred on tourism and education and are currently worth around $8bn per month. While China has become the strongest contributor to visitor and student numbers coming to Australia, ANZ economists note growth has slowed rapidly.
The economists suspect the trade dispute with the US, and resultant political uncertainty, has contributed to the decline. The softness is expected to continue into 2020 when the trade dispute is likely to be resolved.
Despite this, there remains potential in the education and tourism sectors. China's middle-class is estimated to increase by another 370m people by 2030. While this should allow strong growth in tourism to Australia to return, there is not quite as much scope for growth in education.
As China continues to develop, its universities will also increase in quality and reputation. Once this happens fewer students will choose to travel overseas.
UBS has explored the strategic and tactical as well as cultural aspects of supermarket operations in its latest survey. The new strategy from Coles ((COL)) is resonating with suppliers and the culture looks to be improving, although there were no improvements in customer-facing drivers.
Meanwhile, supplier tensions are building for Woolworths ((WOW)) because of negative culture and relationship scores. Inflation is returning which is a positive for market growth and UBS believes Woolworths is executing best in this regard, although it needs to re-engage with suppliers or risk support moving away to its competitors.
Weakness in retail sales was broad-based in May, UBS notes, dragged down by food, household goods and apparel. Stimulus over the next 6-12 months should provide some impetus but the broker remains cautious about retailers directly exposed to housing such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). The broker prefers Flight Centre ((FLT)), Treasury Wine Estates ((TWE)), Bapcor ((BAP)) and Viva Energy ((VEA)).
Citi considers the outlook favourable for discretionary retailing in FY20, for the first time since FY16. The basis for the broker's optimism relates to a combination of tax cuts, official interest rate reductions, falling living costs and a stabilising housing market. The broker has upgraded Flight Centre to Buy and JB Hi-Fi, Harvey Norman and Premier Investments ((PMV)) to Neutral, in taking a more positive stance on discretionary retail stocks.
The broker considers the balance of risks are to the downside for earnings and trading updates in the reporting season, creating a buying opportunity ahead of a more favourable retail backdrop. Despite the better sales background, margin pressure is expected to continue for some retailers.
This is resulting from higher wage costs, currency headwinds and a shift to the margin-dilutive online channel. Margins are expected to narrow, for JB Hi-Fi, Harvey Norman, Super Retail ((SUL)) and Myer ((MYR)). However, the broker has moderated the margin risk from the direct disruption by Amazon, pushing this out until FY24.
The decline in new listings for REA Group ((REA)) accelerated into the end of the year, UBS notes. While risks to FY20 estimates exist, the broker retains unchanged forecasts. Industry feedback suggests spring, i.e. August/September, will be the period to gauge any potential rebound.
History has shown that once a glut in listings starts to clear, usually accompanied by a stabilisation of prices, this can be a precursor to a rebound. There are risks that the structural elements make this cycle different, such as credit constraints and higher transaction costs, or that the recovery is delayed and/or less pronounced.
JPMorgan notes the fall in real estate listings of -24.8% for the week ended July 7 is worse than the average decline over the 21 prior weeks, and worse than declines currently estimated for both REA Group and Domain Holdings ((DHG)) in the second half.
UBS notes ANZ job advertising volumes remain weak, down -9% year-on-year in June, which takes the second half volume decline to around -7%. The broker suspects Seek's ((SEK)) reported job advertising volumes could decline in the low to mid single digits in the second half.
JPMorgan points out job listings at LinkedIn, as a percentage of Seek, decreased to 113.2% in the latest week versus 123.1% in the prior week. Total listings at Carsales.com ((CAR)) were down -9.6% in the latest reporting week and have averaged a fall of -7.9% in the year to date.
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