Rudi’s View: Centuria Industrial REIT, Dexus, OZ Minerals, Pro Medicus, ResMed & South32

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By Rudi Filapek-Vandyck, Editor FNArena

This week I find myself wedged in between a public holiday and two presentations on consecutive days (see further below). As a result, I am limiting this week's Weekly Insights to Conviction Calls.

Equally important, the negative start to the week does not change the broader picture of what is going on for global financial markets. If anything, it makes my writings over the past five months ever more apposite.

One in particular to keep in mind is:

Double Your Protection: https://www.fnarena.com/index.php/2022/03/17/rudis-view-double-your-protection/ (written and published in mid-March)

The story above was later on re-published via Livewiremarkets under the title Beware The Big Bad Bear and has proved highly popular with the investor audience on that platform.

Conviction Calls

"We can’t think of a time in the past 15 years when the consumer macro-outlook has looked more challenging. Consumers face a cocktail of higher costs, i.e., borrowing, petrol, food, energy, insurance, which is not being offset by higher wage growth, while asset prices (equity and real estate) are falling."

With these words retailing analysts at Barrenjoey opened their most recent sector update this week. Barrenjoey is not the first to start downgrading forecasts for Australia's consumer-oriented companies and others will surely follow in the days and weeks ahead.

Barrenjoey's sector preferences have now shifted to supermarket operators and Metcash ((MTS)) among large cap companies, and to Lovisa Holdings ((LOV)) and Universal Store Holdings ((UNI)) among small caps, while a favourable risk-reward proposition is also seen for Adairs ((ADH)) and Dusk Group ((DSK)).

The latest sector update saw the broker downgrading its ratings for JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Kogan ((KGN)), and Temple and Webster ((TPW)).

Macquarie had already been flashing warning signals about consumer spending in Australia (as had Barrenjoey) and on Tuesday downgraded Australia's "discretionary staples" sector to Underweight.

As far as individual companies are concerned, Endeavour Group ((EDV)) was upgraded to Outperform, where it joined Coles ((COL)) and Metcash ((MTS)). Macquarie also downgraded Harvey Norman and JB Hi-Fi, as well as Wesfarmers ((WES)).

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Tired of markets selling down? Strategists at Morgan Stanley remain of the view real support for the S&P500 lays around 3400 (the index closed at 3735 on Tuesday).

That level, the strategists explain, combines their view of -3-5% lower profits (lower than market consensus), a projected 3% yield on US 10-year Treasuries and an equities risk premium (shares versus bonds) of 370bps.

Investors should also note: an economic recession is NOT included in these projections.

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Goldman Sachs issued a keep the faith report on Australian mining stocks.

Key stock calls include South32 ((S32)), Iluka Resources ((ILU)), BHP Group ((BHP)), Rio Tinto ((RIO)), OZ Minerals ((OZL)), Coronado Global Resources ((CRN)), Whitehaven Coal ((WHC)), Mineral Resources ((MIN)), and BlueScope Steel ((BSL)).

Note: Both South32 and Iluka Resources are on the stockbroker's local Conviction List.

Alumina Ltd ((AWC)) has been downgraded to Sell on anticipation of an alumina margin squeeze, while both Fortescue Metals ((FMG)) and New Hope Corp ((NHC)) have retained their Sell rating.

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Jarden is among a number of stockbroking analyst teams who has been calling A-REITs listed on the ASX as oversold and under-appreciated. Of course, as long as bond yields keep rising, putting the fear of the abyss in equity market investors, there's no telling when sustainable buying support might emerge for the sector.

The following are positively rated at Jarden: Charter Hall Group ((CHC)), Centuria Capital Group ((CNI)), Home Consortium ((HMC)), Scentre Group ((SCG)), Shopping Centres Australasia ((SCP)), Vicinity Centres ((VCX)), HomeCo Daily Needs REIT ((HDN)), Abacus Property Group ((ABP)), Centuria Industrial REIT ((CIP)), Charter Hall Retail REIT ((CQR)), National Storage REIT ((NSR)), Charter Hall Long WALE REIT ((CLW)), Charter Hall Social Infrastructure REIT ((CQE)), Ingenia Communities Group ((INA)), and Lendlease ((LLC)).

Maybe equally important, the following REITs are currently negatively rated: Centuria Office REIT ((COF)), GPT Group ((GPT)), Dexus ((DXS)), Arena REIT ((ARF)), BWP Trust ((BWP)) and Mirvac Group ((MGR)).

A recent update by stockbroker Morgans highlighted those AREITs with a positive rating: Goodman Group ((GMG)), Dexus Industria REIT ((DXI)), Abacus Property Group, Charter Hall Long WALE, Dexus, Garda Property Group ((GDF)), Growthpoint Properties ((GOZ)), Mirvac Group, Stockland, HomeCo Daily Needs REIT, Centuria Office REIT, Charter Hall Social Infrastructure REIT, HealthCo Healthcare & Wellness REIT ((HCW)), Hotel Property Investments ((HPI)), RAM Essential Services ((REP)), Waypoint REIT ((WPR)), Dexus Convenience Retail REIT ((DXC)), and Rural Funds Group ((RFF)).

Property analysts at Macquarie once again highlighted there is a global revolution taking place for industrial assets with leasing fundamentals across all markets remaining "solid" while development margins are holding up. This is not to say the sector won't get hit in case of a severe global economic downturn, but things will need to deteriorate a lot further from here, the broker suggests.

At present, Macquarie reports, conditions remain buoyant for key sector preferences Goodman Group, Centuria Industrial REIT and Growthpoint Properties Australia.

For AREITs in general, Macquarie is recommending a defensive bias. Most preferred exposures are Goodman Group, Vicinity Centres, Qualitas ((QAL)), Arena REIT, and HomeCo Daily Needs REIT.

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Macquarie has put the effort in identifying those ASX-listed companies most at risk from surging electricity prices. A great and well-timed initiative, if only to remind investors the mining sector is very much exposed with gold miners and copper producers leading the pack.

Macquarie reports Evolution Mining ((EVN)), Newcrest Mining ((NCM)), Aurelia Metals ((AMI)) and OZ Minerals are most sensitive to the burden of high electricity costs. Among bulk producers, the iron ore sector suffers most from a higher diesel price, but Macquarie retains a positive view on both iron ore and coal producers, as product prices are expected to remain higher-for-longer.

Outside of the resources sector, data centres, food producers, supermarkets, refiners, telcos, casinos and retail assets are at risk of falling margins due to a spike in electricity costs. Some companies, like data centres, have the ability to pass on higher costs to end-users.

Macquarie has equally identified Boral ((BLD)), Adelaide Brighton ((ABC)), CSR ((CSR)), Orica ((ORI)) and Orora ((ORA)) as vulnerable.

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Goldman Sachs believes the healthcare sector in Australia is yet again ready to develop its own idiosyncratic narrative, leaving the prior covid beneficiaries versus recovery stories behind.

Companies that appear well-positioned inside a "highly dynamic market environment" include Buy-rated ResMed ((RMD)), Cochlear ((COH)) and Integral Diagnostics ((IDX)).

The analysts are "less comfortable" on Nanosonics ((NAN)) and Pro Medicus ((PME)). Goldman Sachs has long held a Sell rating on the latter due to its share price consistently trading on premium valuation multiples. The broker is currently prevented from publishing a rating for CSL ((CSL)).

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Having recently built a case for more portfolio exposure to Quality Defensives, Wilsons' Focus List positioning remains Underweight Resources, but only because the preference is for Energy, copper and EV minerals, not so for iron ore.

Stocks included are BHP Group, Santos ((STO)), Woodside Energy ((WDS)), OZ Minerals, Northern Star ((NST)) and Allkem ((AKE)).

Wilsons moved Overweight the banks in late May, and remains undeterred in the view that RBA hiking will bring more benefits than drawbacks for the sector. National Australia Bank ((NAB)), Westpac ((WBC)), ANZ Bank ((ANZ)) and Judo Capital Holdings ((JDO)) are the sector favourites.

A slight Overweight positioning is now in place for Cyclical Value stocks, with exposures to Qantas Airways ((QAN)), Seven Group Holdings ((SVW)) and Tabcorp Holdings ((TAH)).

A separate section has been reserved for Quality Cyclicals; companies Wilsons believes will continue to generate high returns on capital irrespective of rising bond yields. Wilsons has selected Macquarie Group ((MQG)) and James Hardie ((JHX)).

Rising bond yields represent a major headwind for Structural Growth companies, but Wilsons keeps a small selection on board: Aristocrat Leisure ((ALL)), Goodman Group, Seek ((SEK)), Silk Laser Australia ((SLA)), and Pinnacle Investment Management Group ((PNI)).

Following on from the prior selection, Wilsons keeps a certain exposure to High Growth companies and currently they are Xero ((XRO)) and Telix Pharmaceuticals ((TLX)).

For those Quality Defensives mentioned earlier, Wilsons looks at CSL, Insurance Australia Group ((IAG)), Telstra ((TLS)), Healthco Healthcare & Wellness REIT ((HCW)), and The Lottery Corp ((TLC)).

Finally, there is always room for that one company that is severely under-appreciated and capable of emerging with hidden value, uncorrelated to the rest of the market. Wilsons believes News Corp ((NWS)) is such a company.

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Citi analysts went on a hunt for ASX-listed companies with pricing power, which means these companies can pass on the inconvenience of inflationary pressures to end-users.

Companies selected excludes those that have a negative rating from the broker: CSL, Cochlear, Fisher & Paykel Healthcare ((FPH)), Pro Medicus, Brambles ((BXB)), WiseTech Global ((WTC)), Fineos Corp ((FCL)), Xero, REA Group ((REA)), Domain Holdings Australia ((DHG)), Altium ((ALU)), Transurban ((TCL)), Auckland International Airport ((AIA)), Insurance Australia Group, QBE Insurance ((QBE)), Suncorp Group ((SUN)), Orora, James Hardie, Incitec Pivot ((IPL)), Goodman Group, Stockland, Coles Group, Metcash, Harvey Norman, Super Retail ((SUL)), and Woolworths.

More Reading:

-Quo Vadis, Corporate Profits? https://www.fnarena.com/index.php/2022/06/02/rudis-view-quo-vadis-corporate-profits/

-Don't Fight The Fed: https://www.fnarena.com/index.php/2022/05/26/rudis-view-dont-fight-the-fed/

-Trend Is Turning For Corporate Profits: https://www.fnarena.com/index.php/2022/05/12/trend-is-turning-for-corporate-profits/

-A Bear Market Anomaly That Confuses: https://www.fnarena.com/index.php/2022/05/05/rudis-view-a-bear-market-anomaly-that-confuses/

-Peter's Portfolio Reviewed: https://www.fnarena.com/index.php/2022/04/13/rudis-view-peters-portfolio-reviewed/

-2022, The Big Adjustment: https://www.fnarena.com/index.php/2022/02/17/rudis-view-2022-the-big-adjustment/

FNArena Talks

I'll start the week, post-Queen's Birthday, with a panel debate alongside Henry Jennings (Marcus Today) on behalf of the Chatswood chapter of the Australian Investors Association (AIA) on Tuesday, 14 June, 7pm.

The next day, on Wednesday the 15th, I'll be presenting at the Australian Gold Conference inside Crown Barangaroo.

(This story was written on Tuesday 14th June, 2022. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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