Weekly Reports | May 07 2021
This story features JANUS HENDERSON GROUP PLC, and other companies. For more info SHARE ANALYSIS: JHG
Weekly Broker Wrap: Oz Fund managers mixed fortunes; inflation jitters unwarranted; media rides ad recovery; Oz housing continues strengthening
-ASX-listed fund managers trading at a -30% discount to all industrials
-Australian companies have cited a stronger inflation pulse in recent weeks
-Corporates believe rising costs can be mitigated early in cycle without impacting profitability
-Regional houses have stronger growth than capital cities in annual terms at 13.0%
By Mark Story
Oz fund managers: Mixed bag for March quarter
Positive markets and foreign exchange movements in the March quarter may have lifted funds under management for the sector at large, but at the fund manager level there was a mixed bag of flow performance. ASX-listed fund managers including Janus Henderson ((JHG)), Magellan Financial Group ((MFG)), Pendal Group ((PDL)), Perpetual ((PPT)), and Platinum Asset Management ((PTM)) average one-year forward earnings of 15.3x are -3% below the five-year average.
This equates to a -30% discount to all industrials versus the five-year average discount of -9%. With central banks continuing to provide significant amounts of liquidity, and asset prices and equity markets continuing to see support, Macquarie retains an Overweight view on the sector.
Net in flows
While Magellan Financial Group ((MFG)) led the charge with net inflows of $1.1bn, this included $726m of inflows from a partnership offer, with retail flows negative in February (-$23m) and March (-$15m) ex Partnerships.
Market performance increased funds under management (FUM) by $3.7bn (3.6% of opening FUM) due to better performance in March. But Macquarie notes, relative performance remains below benchmarks with the exception of the High Conviction Fund, so the broker expects a more modest performance. Macquarie has an Underperform rating on Magellan and a target price of $47.50.
Pendal Group ((PDL)) also experienced net inflow FUM ($0.9bn), with market movements and forex increasing FUM by $3.4bn. While Pendal Group has re-rated of late, Macquarie notes, recent performance trends should continue to drive inflows, with potential performance fees presenting upside risk to the broker’s current earnings forecasts.
Macquarie has an Outperform rating on Pendal Group (target price of $7.90), and together with Janus Henderson are the broker’s preferred exposures to the sector.
Net out flows
During the March 2020 quarter, Perpetual ((PPT)) and Platinum Asset Management ((PTM)) saw net outflows of -$1.2bn and -$0.8m respectively. While the former witnessed improving trends, the latter experienced an acceleration, which Macquarie believes is disappointing in light of recently improved performance. Market movements and forex positively contributed across each by 4-8%, with Perpetual seeing the greatest uplift.
Market movements and forex added $7.3bn (8.2%) to Perpetual’s FUM in the quarter. Macquarie expects one-year relative performance metrics, which have significantly improved in recent months – following the value rotation that commenced towards the end of CY20 – to continue to lead to improvements in flows.
But the broker expects the recent acquisition of the lower multiple Barrow Hanley business, plus a revised definition of underlying profit, to drive a structural de-rating in the fund manager's PE multiple. As a result, Macquarie sees Perpetual as fairly valued at the current 14x multiple relative to peers. Macquarie has a Neutral rating on Perpetual and a target price of $34.50.
Given Platinum’s recent performance – with FUM up 9% on the previous quarter – Macquarie would have expected to see the trajectory improve. This raises the broker’s concerns around Platinum’s ability to move back into inflows.
The contribution to FUM from market performance was positive in the March quarter ($1.3bn or 6% of opening FUM). Macquarie has an Underperform rating on Platinum and a target price of $4.10.
Inflation: Where will it finally surface first?
While the current US earnings season has seen mentions of the word “inflation” treble versus 2020, higher inflation is yet to make its mark on Australian corporate earnings. Only a handful of companies have cited a stronger inflation pulse, notably Ansell ((ANN)) and Reliance Worldwide ((RWC)) in recent weeks.
Despite this cost headwind still being in front of Australian investors, Wilsons’ cautions against getting too bearish on this impact on corporate earnings at this stage of the cycle. The broker notes it’s not until the economic/earnings cycle begins to mature that this becomes more of an issue for corporate earnings.
So that said, why are commodity and freight prices rising? Wilsons believes surging global demand for consumer hard goods combined with government-led infrastructure/housing programs has resulted in most commodities currently trading well above long-term price assumptions.
Given the amount of stimulus in the system and the inability to deliver supply, the broker think there’s a risk prices remain elevated for much longer than the market believes.
Freight prices have surged off the back of increased demand for hard goods, with shipping supply chains significantly dislocated due to covid, while slower wharf processing times also have a direct cost to companies.
Rising costs can be mitigated
Wilsons reminds investors’ that with corporate profits generally leveraged between 2-4x revenues, Australian companies, almost without exception, are saying that these costs can be mitigated early in cycle without having an impact on profitably. Some of the company-specific factors leading to cost mitigation cited by Wilsons include: customer pass-through, efficiency programs, input substitution, a rising Australia dollar, and hedging.
The current earnings season in the US provides some clues as to what could be in store for Australian corporates over the longer haul. However, Wilsons cautions against applying a direct translation to Australian companies given several differences in respective markets across scale, prominence of manufacturing-type business and currency.
Boost to corporate earnings
While Wilsons base case around the medium-term inflation outlook is relative sanguine, the brokers also reminds investors periods of higher inflation are not necessarily bad news for corporate earnings.
For example, in the last two periods in which Australian (headline) inflation ran above 3%, profit margins of corporate Australia expanded. While this could reflect a combination of operating cycle leverage and cost mitigation, Wilsons believes it suggests higher cost inflation does not to be feared at face value – particularly if it is transient inflation.
Wilsons believe positioning across these sectors, which are all leveraged to both the global and domestic recovery, is the best way to protect against the cost-push inflation.
The three stocks Wilsons is closely monitoring with potential to be negatively impacted by cost-push inflation include: Reliance Worldwide due to higher copper prices; James Hardie ((JHX)) due to higher freight costs; and Super Retail Group ((SUL)) due to higher freight costs and wholesale prices.
Media: Riding the post-covid recovery
Reflecting the ongoing recovery in the Australian advertising market, Nine Entertainment ((NEC)) and Seven West Media ((SWM)) both provided relatively solid third quarter 2021 updates, while in contrast Domain Holdings' ((DHG)) revenue growth was marginally below expectations.
While Nine’s extensive 3Q21 trading update was broadly consistent with Goldman Sachs' expectations, TV revenue (free and streaming) and operational expenditure second half 2021 forecasts were both better than the broker expected. Partly reflecting stronger TV/Radio, the broker has updated Nine’s FY21-23 earning by -0% to 2%, and has a Buy rating, with the target price remaining at $3.30.
Following Nine’s 3Q21 updated guidance, JPMorgan has updated expectations for free-to-air revenue estimates, and assumes 28% for the second half 2021 versus the previous period. The broker assumes $789.4m for TV in FY21, and video-on-demand third quarter market growth of 50% versus the previous period, with similar trends continuing in the fourth quarter.
The broker expects digital publishing costs to be down -10%, and expects net adds for Stan Sports of 165,000 by end of second half 2021. For average revenue per user (ARPU) growth, JPMorgan expects 8% (supported by Stan Sports) with second half 2021 earnings lower than first half 2021.
JPMorgan believes Nine’s management has successfully diversified its revenue base away from its traditional broadcast TV business into new growth areas with significant potential upside, and retains an Overweight rating with a price target of $3.40.
Seven’s advertising revenue in third quarter 2021 grew at the upper end of its 7-10% prior guidance. Following the sale of its 18.4% Airtasker stake the company’s FY21 net debt is expected to be $270-280m.
To reflect updated TV estimates and lower interest, Goldman Sachs has revised Seven’s FY21-23 earnings growth forecasts from 14% to 22%. The broker has a Neutral rating on Seven with the target price up 14% to $0.48.
While Domain’s total/digital revenues grew 2%/8% in third quarter 2021, marginally softer than Goldman Sachs expected, this was partly offset by lower operating expense increases in FY21. As a result, Goldman Sachs has revised Domain’s earnings forecasts -4% to -5% lower, has a Neutral rating on the stock and has reduced its target price -2% to $4.95.
While Domain’s depth penetration was a positive, JPMorgan believes costs still remain in question. On the company’s third quarter 2021 updated guidance, JPMorgan has decreased cost assumptions with the management guiding to costs increasing by mid-single digits. The broker has also increased depth penetration estimates due to 11.3% growth over January-April 2021 versus the previous period.
Due to a lack of valuation support, the broker has a Neutral rating on Domain with price target of $4.80.
Seek’s ((SEK)) A&NZ & Asia segments continue to perform quite strongly, which led to an FY21 guidance upgrade. Following Seek’s sell-down of Zhaopin (from 61.1% to 23.5%), JP Morgan estimates Zhaopin will contribute $44.1m earnings for four months in the second half 2021, as the broker includes the remaining two months in equity accounted investments.
Due to strength from SMEs, the broker has upgraded FY21 A&NZ earnings forecasts.
Following Seek’s updated third quarter 2021 guidance, JPMorgan has incorporate a 20cps special dividend (to be paid in the second half) due to the Zhaopin sell-down.
JPMorgan believes Seek’s geographical diversification not only lessens dependence on the Australian economy, but also creates much greater growth potential, as its international investments are all in developing markets with very long runways for growth.
However, due to the uncertain environment in A&NZ, Asia, and Latin America over the next 6-12 months, the broker remains cautious, and has a Neutral rating on Seek with a price target of $31.00.
Oz housing: The entire market is awash with growth
National house prices increased 1.8% for the month in April, slower than the record pace set the previous month, but still very strong relative to history. While forward indicators remain elevated, and policy tightening likely to be gradual, Morgan Stanley sees scope for housing strength continuing through 2021.
Prices are now up 6.4% from a year ago, and 7.5% in the first four months of 2021. Detached house price growth, up 2.0% in the month and 8.0% for the year, continue to significantly outpace apartment prices (1.2% for the month, 1.8% for the year).
At the city level, price increases in the month were led by Sydney (2.4%), although other cities also posted strong growth (Brisbane 1.7%, Melbourne 1.3%, and Perth 0.8%). Interestingly, while regional price growth was similar to the capital city average in the month (1.9%) it is still stronger in annual terms at 13.0%.
Across the broader market, Morgan Stanley observed strength in every part of the housing market. Auction clearance rates held in the high 70% range in April. The broker believes this points to strong demand and price growth continuing over coming months.
House price expectations remain very strong, although the broker notes the share of would-be buyers that thinks it is the right time to buy has started to soften – suggesting some affordability concerns are emerging. Finally, the very sharp lift in housing loan approvals is starting to flow through to housing credit growth, which rose 0.5% for the month, and 4.1% for the year – with both investor and owner-occupier credit growth increasing.
Increasing loan values
Housing finance data for March reveals a further 5.5% month-on-month increase in aggregate new loan values. Investor activity has increased sharply in recent months with investor loan values now back at levels last recorded in 2017.
In stark contrast, first-home buyer (FHB) loan commitments fell for the second consecutive month (-0.9%) and indicate activity among this group is now cooling following the spike in loan demand in first half 2020.
The most recent RBA commentary suggests the board remains comfortable with the housing sector, though the spike in investor activity and drop in FHB demand may start to challenge this view. In light of these developments, JPMorgan expects to see the introduction of macro-prudential measures in coming months.
Refinancing activity remains well below the 2020 peak, but at 20%, mortgage switching remains well above historical norms. Lastly, growth in owner occupier average loan size has slowed to 2%, which in nominal terms equates to $560,000.
Based on Morgan Stanley’s observations, current rates imply a 40% increase in household sector debt servicing capacity, which the broker expects to drive further upside in credit supply. This suggests to the broker that there’s scope for continued housing strength over 2021, albeit at more moderate rates of growth given incrementally less stimulus and higher fixed rates.
While a policy correction is the most likely candidate for ending the current housing cycle, Morgan Stanley expects any action to be incremental, including housing stimulus measures, macro-pru measures, and finally rate hikes.
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