Weekly Reports | Sep 17 2021
Weekly Broker Wrap: Patchy global recovery ahead, telcos tipped for special dividends, REIT upside realigns with fundamentals, Woodside to emerge as favoured MergeCo
By Mark Story
-Global indebtedness and wealth inequality have been reignited by the pandemic
-Proceeds of Telstra/TPG infrastructure sell-downs to return to shareholders
-Reopening story for large-cap mall landlords already priced in
-Post-merger, Credit Suisse expects Woodside’s Top 10 independent O&G status to attract global investors
Global economic recovery: Future rebound no longer in sync
While inflation fears and the delta variant have commanded the market’s attention recently, Oxford Economics' research suggests there are four key themes set to steer financial markets in coming months.
Firstly, while the onslaught of the pandemic set in motion the most synchronised global downturn and subsequent recovery in recent history, the forecaster expects the next phase of the recovery to be markedly different.
Oxford expects the patchy nature of the path to full recovery across western, Asian, and emerging markets to be exacerbated by ongoing disruption to supply chains.
Overall, Oxford expects supply constraints to contribute to the volatile nature of the recovery. The forecaster notes while supply issues have been a feature of past recoveries, they have not been on the same scale as the current disruption and foresees further disruption, especially if Asian countries struggle to cope with more covid waves.
Oxford also points to bloated global savings that have remained a present reality since the pandemic surfaced. While the pandemic has only galvanised policymakers’ desire for growth, the forecaster suspects the flipside to an eventual depletion of households’ excessive savings, will see a reversion to a grinding pace in 2023.
While an extended, rapid recovery from the pandemic may convince some that the market has unshackled itself from secular stagnation concerns, the savings glut remains embedded within the forecaster’s baseline assumptions.
The forecaster subscribes to the contrarian view that the long-term factors – indebtedness, demographics, and wealth inequality - that have depressed growth and inflation have in fact been reignited by the pandemic.
Thirdly, in the near term, the forecaster expects excess savings to underpin high asset price valuations. Oxford admits there’s limited likelihood of multiple expansion dampening returns. But barring a broader downturn, the forecaster suspects the risk of a significant correction in prices is low.
Regardless of central bank tapering, Oxford expects abundant liquidity that has supported valuations, to remain intact. The ensuing quest for yield and the high levels of capital looking for a home should keep valuations elevated relative to fundamentals.
Lastly, Oxford believes reduced living standards from high inflation, unemployment, and income inequality, together with the need to withdraw public sector support to address mounting debt, will lead to geopolitical risk. This risk will surface in the form of populist policies, especially within advanced economies and emerging markets.
Over time, Oxford expects the burden of fiscal adjustment hoisted on many countries by the pandemic, may well worsen the volatility of the recovery.
In conclusion, Oxford suspects economic underperformance in the years ahead only galvanises the base case for more combative international economic policies designed to source advantage from trade relationships. The forecaster’s analysis also suggests that the implications for decoupling on trade and productivity would be more detrimental for China than the US or other western economies.
Oz telcos: Two pending infrastructure divestments
The mouth-watering valuations achieved by both the sale of Vocus Group in its entirety, and a 49% stake in Telstra’s ((TLS)) TowerCo, has spurred companies across the sector to review the telecommunications infrastructure within their portfolios, with a view to boosting shareholder value.
In light of these developments, JPMorgan assesses two potential transactions currently under review: Firstly, Telstra's InfraCo asset, which operates passive infrastructure assets including FibreCo, and Ducts & Fixed Network Sites (DNFS) which reported earnings of $1.47bn, over six times that of TowerCo.
Based on the part-sale of TowerCo, JPMorgan values InfraCo at $31.7bn, representing a 21.6x multiple, and estimates a 49% sell-down would generate $14bn in value, after capital gains tax, which could be used to reduce debt and buyback stock.
The broker expects the likely timing of a potential transaction to occur late FY22 or early FY23, following the completion separating legal entities of the group. If the recent sale of TowerCo is any proxy, JPMorgan expects 50% ($6.8bn) to go to debt reduction, with the remaining proceeds from the transaction being returned to shareholders.
Based on the current share price, the broker estimates a $6.8bn buyback - assuming 49% sale after capital gains tax - would be up to 10-11% earnings per share (EPS) accretive while gearing would also decline to 16%.
Following the 49% divestment of TowerCo and InfraCo the broker estimates Telstra would need to buy back 1.4bn shares (12% of the register) to be EPS neutral in FY23. At current market prices, the broker notes this would result in $5.4bn allocated to share buybacks with the remaining $2.8bn being allocated to a special dividend.
Due to mobile margin improvement, cost reductions driving stronger fixed earnings, and potential for further asset monetisation, Telstra remains JPMorgan’s preferred stock and the broker maintains an Overweight rating and price target of $4.50.
Then there’s sell-down of TPG Telecom's ((TPG)) own tower assets, which JPMorgan believes could net the telco $1.3bn. Due to a higher tenancy ratio, JPMorgan expects TPG’s value per tower to be slightly higher than TowerCo and working backward from the average earnings per tenant from Telstra and Optus of $29,000, forecast overall earnings to be $63 million.
Assuming the transaction proceeds, the broker expects it to occur in 2022 following the review into the tower assets.