The Wrap: Clothes, Waste, Utilities & Ports

Weekly Reports | Oct 18 2019

Weekly Broker Wrap: clothing; refinery margins; waste management; fund managers; platforms; utilities; and port volumes.

-Clothing consumption trends signal structural decline
-Consolidation likely to drive Australian waste management industry
-Momentum likely to continue for financial services platforms
-AGL & Origin benefiting from higher wholesale electricity prices
-Port movements in August at the weakest for 10 years


By Eva Brocklehurst


Morgan Stanley suspects clothing markets may be going into structural decline. Over the past 20 years, prices for apparel have fallen in developed markets and this has, to date, been offset by consumers buying larger quantities.

However, volumes appear to have peaked and prices are still falling. Even online clothing retailing in the UK appears to be going into decline. The broker assesses the world's leading retailers for apparel have, on average, experienced earnings downgrades of almost -40% since the beginning of 2016.

While the shift in channel to online is clearly unhelpful to volume consumption it does not fully explain the trend. The possibility exists that clothing purchases have now moved beyond utility, whereby most individuals in developed countries have more than they want or require and are therefore spending money elsewhere.

Clothing has become cheaper to produce, with Asia providing most of the clothing manufacturing globally. Morgan Stanley envisages scope for production to continue to shift from China to even lower-cost countries, such as Vietnam and Bangladesh. Moreover, technology could significantly reduce the amount of labour required to make clothing and keep prices on a downward spiral.

The broker suggests falling prices, static volumes and ongoing channel shifting make for a toxic combination and apparel consumption in developed markets may now have hit a ceiling.

Refinery Margins

Margins in refining continue to improve, which provides a positive bias to Morgan Stanley's earnings forecasts, although a large uplift is not expected for the September quarter.

This has been a trend with diesel throughout 2019 but now gasoline margins are also increasing. The broker suspects crude premiums have risen, which will offset some of the gains for both Viva Energy ((VEA)) and Caltex ((CTX)).

The large spike in gasoline margins has only occurred recently and therefore should become more evident in the December quarter if maintained. Caltex has guided for lower production from its refining facility in the second half 2019 which will limit some of its performance.

The key to the stock performance will be whether both these companies can show that retail conditions are improving.

Waste Management

Citi believes the long-run dynamics of the Australian waste management industry will be driven by consolidation and a need for increased waste processing and recycling capacity.

There are high barriers to entry being driven by licensing and compliance requirements while there remain prospects for further margin expansion. This should underpin double-digit earnings growth for participants, albeit revenue growth could moderate in FY20 as volumes soften and tailwinds from acquisitions fade.

Citi initiates coverage on the sector with a cautious outlook, awaiting further evidence that the passing through of costs has been effective. The broker rates Bingo Industries ((BIN)) Neutral/High Risk with a $2.40 target and Cleanaway Waste ((CWY)) Buy with a $2.40 target.

Fund Managers

Fund managers revealed material net outflows in the September quarter. Magellan Financial Group ((MFG)) bucked the trend, Macquarie observes, delivering around $1.3bn of inflows in the quarter. The broker suggests market conditions were supportive for asset growth, albeit less so than in previous quarters. Market movements increased funds under management by 1-5% across the sector.

Nevertheless, the broker observes valuation support has emerged and while flow trends are clearly a concern, the recent de-rating has meant Perpetual ((PPT)) is upgraded to Neutral from Underperform. Given the relative valuation appeal of Pendal Group ((PDL)) and the potential for flows to improve it remains Macquarie's preferred exposure in the sector.

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