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 costs 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.