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The Wrap: MYEFO, UK, Indices And Media

Weekly Reports | Dec 20 2019

Weekly Broker Wrap: MYEFO; UK election; index changes; and media.?

-MYEFO suggests monetary policy will do the heavy lifting in 2020
-Several “winners” emerging with more Brexit certainty
-Declines in media revenue continue into the Dec quarter


By Eva Brocklehurst


The Australian government has forecast slightly smaller cash surpluses for FY20 of $5.0bn, -$2.1bn lower than the April budget estimate in its Mid Year Economic and Fiscal Outlook. The surplus is expected to increase slightly to $6.1bn in FY21.

The changes stem from lower estimated GST and tax receipts and increases in government payments because of the drought, as well as a response to the Aged Care Royal Commission, a new electricity grid reliability fund and Pacific Islands infrastructure finance.

JP Morgan points out the numbers only serve to pin down previous announcements and there was no new measures of significance. Further out, the broker notes an additional drag from weaker tax collections.

The most significant headwinds for the medium term are assumptions that the terms of trade will contract -8.75% in 2020/21, along with the sharp lowering of 2020/21 wage growth forecasts to 2.5% from 3.25%.

Estimates for real GDP were lowered to 2.25% for FY20 and unchanged at 2.75% for FY21. Nominal GDP forecasts are unchanged for FY20 at 3.25% and lowered to 2.25% for FY21.

Net debt as a percentage of GDP is expected to peak in FY20 at 19.5%. Citi believes the risks are to the upside for company & individual tax receipts and suspects the weak nominal GDP forecasts are likely to be beaten.

The broker also expects iron ore and coal prices will outperform government estimates. However, the estimates suggest a fairly neutral fiscal stance and therefore Citi does not believe this will ease the burden of economic management on the Reserve Bank of Australia.

UBS also believes reduced capacity for fiscal stimulus supports expectations for a further easing of monetary policy. The broker continues to expect the RBA will cut the cash rate by -25 basis points in February and again by -25 basis points in mid 2020, although this remains conditional on further easing by global central banks. [And is a view pre-dating yesterday's jobs report.]

UK Election

JP Morgan notes around 33% of QBE Insurance ((QBE)) gross written premium is from European operations, managed in the UK. The broker assesses the company as one of the "winners" in the wake of the UK general election, where the government was returned with a sharply increased majority that put Brexit firmly on the timetable.

Link Administration ((LNK)) has also indicated that Brexit-related uncertainty was behind some of the problems in the UK operations, and this division comprises 37% of JPMorgan's operating earnings (EBITDA) forecast for 2019.

Another "winner" is likely to be Computershare ((CPU)), with around 20% of its group revenue emanating from the UK. In the list, too, is Pendal Group ((PDL)) as a meaningful proportion of its operating profit comes from JO Hambro and, hence, from the UK.

On the losers' side JP Morgan cannot find any Australian-related stocks, but warns there have been some very strong share price reactions that could reflect undue levels of optimism about the direct impact of the outcome of this election on financial performances.

Index Changes

There were three changes to the S&P/ASX 20 and 200 indices in the latest quarterly re-balancing. AP Eagers ((APE)) is now back in the S&P/ASX 200 index along with Ingenia Group ((INA)).

The broker was not expecting many changes within the top end of the indices but notes Newcrest Mining ((NCM)) has replaced South32 ((S32)) within the S&P/ASX 20. Those stocks with claims for promotion up the ladder include a2 Milk ((A2M)) and Tabcorp ((TAH)) in the case of the S&P/ASX 50, while AMP ((AMP)) and Caltex Australia ((CTX)) are most at risk.

Steadfast Group ((SDF)) has been propelled up the rankings to join Saracen Mineral Holdings ((SAR)) as the two leading candidates for promotion to the S&P/ASX 100.

Morgan Stanley also notes the review of foreign-domiciled securities has generated a significant portion of the passive value that has been traded. A large part of this is the lower revised share for Amcor ((AMC)) and Unibail Rodamco Westfield ((URW)). Janus Henderson ((JHG)) continues to experience a slide in the number of its shares held in Australia.


The Standard Media Index has provided the latest advertising data. Free-to-air metro TV revenue for the big three – Nine Entertainment ((NEC)), Seven West Media ((SWM)) and Ten Network – collectively fell -8.8% in October. Revenues are down -6.7% in the financial year to date.

Regional declines of -9.1% in the case of October and -3.9% year-to date, were also noted. Of the top five advertising expenditure categories, automotive advertising fell -17.5% and retail fell -18.8%. Gambling rose 16.5%, insurance 11.6% and food, produce & dairy 9.2%.

The data confirms Nine Entertainment's expectations that metro TV market growth would be at least as weak in the December quarter as it was in the September quarter. Given first half operating earnings are expected to decline by -10%, UBS assesses the company's guidance for FY20 implies second half growth of 20%.

For this to occur, it will require a reversal in the declines in Domain Holdings ((DHG)) earnings and a listings recovery. Also, the broker posits Nine Entertainment's metro TV market share needs to grow more than 41% in the second half.

UBS also points out advertising market weakness was experienced across the board, not just in TV. Total bookings were down -14.3%, with metro radio down -22.6%, regional radio down -16.9% newspapers down -20.4% and digital down -17.6%. Outdoor advertising bookings were up just 0.3%.

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