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The Wrap: Gaming, Aged Care & Property

Weekly Reports | Nov 29 2019

Weekly Broker Wrap: Oz economy and climate change; gaming; telcos; aged care; salary packaging and property.

-Likely slump in rural export volumes could significantly reduce current account surplus
-Australia's casino sector facing substantial headwinds
-Optus counters Telstra with new 'no lock-in' mobile plans
-Temporary funding boost for residential aged care sector now unlikely
-Slowdown in co-working may have material impact on Oz office markets


By Eva Brocklehurst

Climate Change & Australian Economy

Citi calculates, if farm production were to fall by a total of -20%, Australian GDP could be -0.5 percentage points lower. This is not out of the question, based on previous periods of severe drought. If rural export volumes fell by a total of -10% this would be equivalent to around a -$5bn hit to the current account. Given Australia's current account surplus was $5.8bn in the June quarter, it would be reduced significantly.

Australia's rural sector is in recession and is expected to remain so until early 2020. While drought has typically been viewed as a natural disaster, climate change is a trend that has increased the frequency and severity of extreme weather events. Modelling undertaken by the Climate Council of Australia estimates cumulative damage from reduced agricultural productivity could reach -$19bn by 2030 and -$211bn by 2050.

This modelling does not include damage arising from loss of arable land because of rising sea levels, flooding, bushfires, storms and cyclones. Citi asserts, on the evidence, governments will need to allocate more headroom in the budget for disaster relief and reconstruction. This means the spending focus needs to shift.

In 2015 the Productivity Commission recommended the federal government shift the focus of natural disaster management to resilience, from recovery. The broker also notes Australia ranks poorly on its vulnerability index as drought, cyclones and temperature contribute strongly to risk.


Morgan Stanley finds it hard to envisage any meaningful sign a recovery is underway for VIP gambling in Australia. UBS agrees, believing it unlikely the Australian casino sector can withstand a weakening housing market and this is being compounded by weaker VIP demand across Asia.

Morgan Stanley recently visited Macau and found Melco still finds a strategic rationale in owning Crown Resorts ((CWN)). Crown Resorts has world-class assets and the Australian market has rare monopolies (Melbourne and Perth). Tax rates in Australia are also considered reasonable. Melco believes the valuation of Crown Resorts is fair, ex capital expenditure, while the Australian currency provides a tailwind.

Meanwhile, Queensland tourism minister, Kate Jones, has announced the government will begin direct negotiations with Star Entertainment ((SGR)) to fast-track new infrastructure on the Gold Coast. Exclusivity is not been granted but The Star has been issued with the terms for negotiation. Meanwhile, the NSW Independent Planning Commission has rejected The Star's proposal for a new hotel and apartment tower in Pyrmont.

Morgan Stanley's meetings with various US casino operators have highlighted Aristocrat Leisure's ((ALL)) land-based business, with operators very positive regarding the ability to improve floor performance through the company's product. Competitors also complemented the company on its ability to move into adjacencies, which has already allowed market share to shift in its favour.

The broker also notes that sports betting in the US is a big opportunity and, with most of the company's competitors experiencing stretched balance sheets compared with Aristocrat Leisure, it is likely that any incremental expenditure will be on sports betting vs land-based business. Hence, Aristocrat Leisure is likely to remain a leader in its R&D investment in slots.


Optus has launched new 'no lock-in' mobile plans, similar to Telstra ((TLS)) in that it will charge for the core connectivity/data and then add-ons such as international calling/roaming/handsets will be an additional cost for the consumer. UBS makes comparisons and notes Telstra prices are now a 20% premium to Optus at the $60 price point. Unlike Telstra, JP Morgan points out Optus still charges for excess data usage across all plans at $10/gigabyte.

However, Optus is also offering double data on certain eligible 5G device repayment plans and UBS considers this an incremental negative for the industry. The broker suspects Optus is placing a greater emphasis on moving customers up the revenue per unit curve. That said, the industry is still considered more rational than 18 months ago.

JPMorgan notes Optus is also offering the option for customers to build their own plan, adding or removing features such as additional data, international call/text and international roaming. The smallest plan with 10GB per month and no international calls/texts or roaming comes in at $39 while the plan with maximum inclusions is $91 per month.

Aged Care

The federal government has announced a new $537m funding package for aged care which targets three priority areas, including homecare packages, medication management programs and new targets for removing young people with disabilities from residential aged care. In the light of this announcement, brokers envisage a temporary funding boost for the residential aged care sector is unlikely.

Any level of funding relief to the sector remains outside of the priority list and, in the light of this, and in the absence of any further reforms, UBS retains a cautious stance on listed operators. Ord Minnett expects earnings will contract for at least another 12 months and finds little reason to invest in the sector, while the pressure on aged care occupancy is likely to increase.

Negative "jaws" (the extent to which income growth exceeds expenses growth) are expected to continue in the near-term. The occupancy environment also limits any opportunity for outperformance. While the sector offers an attractive long-term demand profile, UBS is unsure as to how government will regulate and fund the sector post the Royal Commission.

Salary Packaging

Conditions in the salary packaging sector have been tougher than Credit Suisse anticipated. While still growing, novated lease volumes have been affected by weak car sales. Yields have been negatively impacted by credit availability and lower sales of related products such as warranties. The broker expects McMillan Shakespeare ((MMS)) will maintain profit levels but, as the stock has re-rated back to fair value, the rating is downgraded to Neutral from Outperform.

Credit Suisse also believes the reaction to the news that CEO Deven Billimoria will depart Smartgroup ((SIQ)) was excessive, exacerbated by the proximity to the recent sell-down by Smart Packages of its 25% stake. While conditions are tough, the broker suspects earnings momentum has troughed and will benefit from any cyclical upturn.


Morgan Stanley highlights co-working may be just 1.0-1.5% of office occupancy in Australian cities but it has driven 45% of the 2018-19 absorption of space. Hence, a slow-down in leasing from this segment may have a material impact on office markets. The broker notes reports that WeWork, which dominates the co-working industry with around 48% market share, may halt its planned expansion in Australia.

Job advertisements, a traditional indicator of net absorption, have been running at negative in NSW/Victoria since October 2018 and this coincides with a slowdown in office space take-up, Morgan Stanley notes. Given the headwinds, the broker prefers other categories in the property industry and suspects Dexus Property ((DXS)), which has 60% of its assets in the Sydney office market, could be vulnerable if co-working demand decreases.

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