Weekly Reports | Sep 06 2019
Weekly Broker Wrap: automotive retailers; aged care; housing; and listed property.
-Slump in new vehicle sales augur poorly for dealerships
-As Royal Commission rolls on, M&A a source of opportunity in aged care
-House prices surge in Sydney & Melbourne as residential building approvals fall to 6-year lows
-David Jones to be more "aggressive" in its strategy to downsize
By Eva Brocklehurst
New vehicle sales data for August from the Federal Chamber of Automotive Industries showed a fall of -10.1%. Rolling annual sales were down -8.1%. However, JPMorgan notes that August was cycling a tough comparable and from September easier comparables will be cycled.
Nevertheless, this was a reversion to a double-digit decline. On a year to date basis, passenger vehicle sales were down -15.9%, sports utility vehicles (SUV) down -3.8% and light commercial vehicles down -4.1%. SUVs remain the most popular segment, making up 45% of new vehicle sales.
When adjusting new car sales by dealerships in operation over the 12 months in each state, UBS calculates that new car sales volumes in the month were down -5.0% for Autosports Group ((ASG)) and -8.8% for Automotive Holdings ((AHG)).
There were mixed results for the Autosports brands, as Audi turned around in NSW, recording a 27% lift in August after a -45% drop in July. BMW was strong in Victoria, Mercedes-Benz and Honda recorded declines nationally and Volvo was flat.
The broker notes the largest decline in private car sales since April 2017 occurred in Western Australia, down -14.6%. New car sales in Western Australia comprised more than 30% of Automotive Holdings' volumes.
JPMorgan observes residential aged care providers are hoping the Royal Commission recommendations will inspire the federal government to introduce reforms that support sustainability. The broker suspects investors will steer clear of the sector as the Royal Commission rolls on.
Sector consolidation and M&A remain a source of opportunity, as the weaker groups struggle to survive, potentially offering the prospect of buying facilities that are below the cost of development. All listed residential aged care providers expect a material reduction in reported profit in FY20. Generally, the providers anticipate a -5-15% drop in reported operating earnings (EBITDA).
The interim report of the Royal Commission is due in October but this is not expected to provide a likely direction for the final recommendations, as it will focus on the state of the industry rather than required reforms.
UBS observes house prices appear to have returned to boom times. CoreLogic data shows a surge of 0.8% in August, the largest monthly gain since April 2017. The year-on-year fall has reduced to -5.2% from -6.4%.
Units rebounded more than houses and the recovery is being led by Sydney & Melbourne. Nevertheless, the broker points out the number of home sales are still down to a 23-year low, down -19% year-on-year.
Residential building approvals, which have fallen to a six-year low, are a negative lead for consumption, while renovation activity remains resilient.
Morgan Stanley believes a seasonal pick up in turnover will be the key test for the near-term, regardless of the acceleration in house prices. The broker is also watching the construction cycle for any spill-over into employment and economic activity. Auction clearance rates averaged 70% nationally in August, which Morgan Stanley believes indicates a tight housing market and near-term upward pressure on prices.
Morgan Stanley assesses there will be a potential undersupply of housing into 2021. The broker's proprietary data is still not pointing to a rebound for housing in the medium term, as key components such as credit supply, rental conditions and the supply/demand balance are weak.
UBS expects the Reserve Bank of Australia to cut official rates by -25 basis points in October and in February 2020, given the ongoing per-capita recession and global weakness. Moreover, if house prices continue to rise at this pace, regulators could resort to reinstating macro prudential tightening.
South Africa's Woolworths Holdings has taken out an onerous lease provision worth $22.4m against upmarket retailer David Jones and aims to reduce the floor space for David Jones by -20% by 2026. The company's Country Road network is also looking to rationalise its footprint.
David Jones was originally intending to reduce its footprint upon the expiry of its flagship Market Street, Sydney, lease but will now be "more aggressive". The stated intention is to have fewer stores and less space in lower demographic areas, exiting any marginal or undesirable leases.
As smaller stores are a key component of the new strategy of David Jones, Macquarie expects a handing back of floor space to occur, as well as store closures. With similar programs from Myer ((MYR)) and Big W ((WOW)), which are downsizing by -20% and -16%, respectively, backfill appears difficult.
Lower-quality centres are more likely to have limited backfill options. Macquarie considers this a negative item of news for the listed property sector. More favourable rental terms for retailers are also a headwind.
The broker retains Underperform ratings on Scentre Group ((SCG)). Scentre Group is exposed to 17 David Jones stores while Vicinity Centres ((VCX)) has five, Stockland Group ((SGP)) has one and GPT ((GPT)) has four. GPT remains the broker's preferred large cap retail property exposure.
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