The Wrap: Housing, Cash Rate & Wealth

Weekly Reports | Oct 04 2019

Weekly Broker Wrap: petrol; infant formula; housing & cash rates; wealth managers; platforms; and childcare.

-Higher refiner margins slightly positive for Caltex and Viva Energy
-Market growth in infant formula slows in China
-Little recovery in new housing and record low credit growth
-More provisions likely for wealth managers
-Margins likely to be squeezed for platforms


By Eva Brocklehurst


Regional refiner margins rose significantly over the September quarter and UBS notes second half base margins in the year to date are up $3.20/bbl to $6.55/bbl. Reasons for the jump include a decision to permanently shut the Philadelphia Energy Solutions refinery (the company has filed for Chapter 11) and temporary disruption from the strikes on Saudi Arabian oil refineries.

Overall, UBS considers this slightly positive for both Caltex ((CTX)) and Viva Energy ((VEA)). Stronger than expected refiner margins are offset by weaker retail fuel margins. UBS upgrades FY19 net profit estimates by 3-6% for both stocks and prefers Viva Energy for its medium-term earnings upside.

Infant Formula

UBS observes market growth in infant formula in China has slowed while premium and local brands are outperforming. Margin differences between channels are narrowing and the cost to operate online is rising.

Recent feedback suggests some de-stocking pressure in the daigou channel (purchases made locally for sale in China) but consolidation is likely to have a positive impact on pricing in the long-term. Overall, the broker came away from a meeting with Chinese operators more cautious about the outlook for the international mass market and more positive about premium and local brands.

The broker expects near-term volume will remain challenged and competition will increase. Meanwhile, the regulatory focus is on quality and safety and recent changes appear to be having an impact.

China's National Development & Reform Commission has announced it will strive for over 60% self-sufficiency for the infant formula market. UBS envisages local Chinese operators with strong brand positions and clear multi-brand channel strategies are best positioned followed by international premium brands such as a2 Milk ((A2M)), Danone and Nestle.

Housing & Cash Rates

Residential building approvals dropped -1.1% in August to a low not seen for more than six years. On the positive side, UBS notes, the value of non-residential building approvals has rebounded sharply, likely reflecting a lumpy public sector, such as the case with hospitals.

Despite a recovery in auction clearance rates in September the recovery in house prices is mainly driven by Sydney and Melbourne. The number of home sales have still fallen to almost the worst on record and around the lowest level in 23 years, the broker points out.

Morgan Stanley agrees volumes remain low and are unlikely to recover quickly. Current availability of credit is not sufficient to cause an acceleration in prices and turnover and this is why the broker's key indicators are not suggesting a sustained bounce in the housing market.

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