The Wrap: Broadband, REITs And Tech Volatility

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NBN's $700m investment may not necessarily lead to lower wholesale enterprise broadband prices; UBS prefers under-appreciated logistics landowners; tech stocks from a longer-term view.

-NBN's corporate roadmap and its implications
-Industrial real estate and the shift to e-commerce
-Tech stocks should not be feared

By Angelique Thakur

Getting down to business

NBN Co's 2021-24 corporate plan, includes an investment of $700m to expand its Enterprise Ethernet Network over the next three years aimed at regional Australian small to medium businesses.

Both Goldman Sachs and UBS feel this does not bode so well for Telstra Corp ((TLS)). With this move giving businesses an option other than Telstra, UBS experts think this could affect the telecommunication provider's long-term regional enterprise earnings in its data and IP division.

Noting NBN's business revenue target is expected to grow in the mid-teens after FY22, UBS analysts conclude any incremental headwinds to Telstra's earnings may be felt primarily from FY23 onwards.

In addition to the $700m investment, NBN will be investing $2.9bn to work on taking fibre beyond the fibre-to-the-node (FTTN) network, including investments in fibre-to-the-curb (FTTC) and Hybrid Fibre Coaxial (HFC).

UBS analysts believe these investments may curb NBN's appetite for any material future wholesale price cuts. Goldman Sachs agrees, noting covid-19 related concessions will also mean any impact on prices will be muted. A point supporting both the brokers' analysis is no change in NBN's residential average revenue per user (ARPU) forecast.

Goldman Sachs considers the update positive for Vocus Group ((VOC)) and a mixed bag for TPG Telecom ((TPG)) given the increased addressable markets they'll have access to when partnering with NBN, although this will be partly offset by increased competition in the regions where they have fibre assets.

Goldman Sachs prefers both Vocus and Telstra over TPG Telecom.

Increasing demand may not translate to higher rents

UBS analysts note the demand for industrial real estate remains robust given the sub-sector is a key beneficiary of the shift to e-commerce.

A study by UBS confirms supply chains and logistics operators are adapting to changing consumer behaviour, driven by the larger tenants with a focus on e-commerce.

According to the global survey, users expect space requirements to increase by 10% in the next 1-2 years with Australia growing at 7.5%.E-commerce penetration for grocery, currently 3%, will reach 10% by 2024, estimates UBS. Ex-grocery is expected to increase by 17% from 9% in FY19.

However, UBS cautions the solid demand outlook may not extend to rental growth because of increased supply and low capitalisation rates (income to asset value).On a 2-5 year view, UBS points out a huge volume of industrial property could be developed in Western Sydney. But looking at the competition for tenants makes UBS feel rent growth will be limited.

Demand for capital for logistics will likely see the cap rate compressed. The strategy advised by UBS is to go for the under-appreciated logistics landowners like Brickworks ((BKW)) and CSR ((CSR)) along with Goodman Group ((GMG)). Another preferred stock is Centuria Industrial Reit ((CIP)).

The broker likes Goodman Group, Centuria Capital Group ((CNI)) and Charter Hall Group ((CHC)) from a recurring earnings perspective.

Office market undergoing a shift

Morgan Stanley's reassessed views on the Australian office market has the broker advocating caution over the next 6-12 months.

Dexus Property ((DXS)) in particular has been downgraded by Morgan Stanley to Underweight. The broker finds it difficult to see a meaningful recovery in Dexus' growth with a -20% rent decline forecast over the next 12 months.

Add to that Dexus' office WALE (weighted average lease expiry) which at 4.2 years is the weakest versus peers Mirvac Group ((MGR)) and GPT Group ((GPT)).

Morgan Stanley's new price target for Dexus assumes a -20% decline in its property value.

The analysts point out the office market is going through a societal shift with longer-term decisions postponed and tenants requesting shorter-term deals. Furthermore, tenants aren't expected to figure out how much space they will be needing in the new normal in the near term.

Morgan Stanley prefers Stockland ((SGP)) over Mirvac Group from a residential perspective. On the office front, Mirvac is preferred over Dexus and GPT Group while in retail, the broker likes Scentre Group ((SCG)) and Shopping Centres Australasia ((SCP)) over Charter Hall Retail REIT ((CQR)) and Vicinity Centres ((VCX)).

Tonic for handling tech sector volatility

The recent volatility in the tech sector has led to quite a few investors supporting a shift to value stocks. However, Denny Fish of Janus Henderson Investors is adamant the most promising secular growth opportunities are likely to be found in tech and internet-focused communications stocks.

While volatility may lead investors to lose sight of the strong forces that impelled the sector's growth in the first place, Denny cautions a long term view is necessary to maximise the opportunity presented by the transition to a digital global economy. This view is bolstered by the outsized rewards of some companies in the markets in 2020.

With the world on the cusp of the fourth industrial revolution, the analyst believes tech growth stocks tend to find ways to stay the course, especially true for companies leveraged to the themes of artificial intelligence (AI), cloud computing and the Internet of Things (IoT).

While the powerful run by tech stocks is leading to unflattering comparisons to the dotcom bubble of 20 years ago, a major difference Denny highlights is the tech stocks today are actually delivering on their promise of bringing efficiencies to companies and value to consumers.

Also, many of the leading tech and internet-focused companies may offer some of the soundest fundamentals and best secular growth across all equity sectors.

Tech is not homogenous with predictable distributions of winners and losers, Denny reminds us. Towards the later stage of the rally, there were signs of indiscriminate buying, with little differentiation between stocks leveraged to long-term drivers and those more speculative.

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