Rudi’s View: Bega Cheese, Computershare, NextDC, Playside Studios, Treasury Wine And Qantas

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Sep 15 2022

In this week's Weekly Insights:

-Inflation & House Prices
-Conviction Calls
-Research To Download


By Rudi Filapek-Vandyck, Editor

Inflation & House Prices

One of the more eye-catching forecasts made recently is that persistent inflation in Australia will prevent local house prices from experiencing a true crash a la Spain, Ireland or the US post-GFC.

After all, building a new property is still becoming more expensive, just ask any builder, and ultimately existing homes cannot be cheaper than building a new one - if it happens, it won't last. Not in a country like Australia.

The forecast was made by UBS where economists and analysts have collaborated on a deep-dive analysis of Australian housing markets.

While Australia might be poised to avoid worst-case scenarios, UBS's prediction is house prices will still drop by a record -13% peak-to-trough with serious follow-on impact on related activities.

Overall sales of houses are projected to fall by -25%. Home loan values are expected to drop by -40% and housing credit growth is anticipated to slow to 4% year-on-year by late 2023; the latter would also be a record low for Australia.

The good news, UBS suggests, is that, adjusted for inflation, the fall in house prices amounts to -20%.

And while the cost of building a new house has already risen by some 20% since this time last year, the odds remain in favour of further cost increases, not only because of international dynamics, but also because of extremely tight labour markets locally and the government soon allowing for increased immigration numbers entering the country.

Vacancy rates already are tight and rents on the rise.

As is typical in a sharply opinion-divided 2022, UBS's report has already been countered by a more dire outlook from Goldman Sachs where forecasters believe Australian properties are due for a -18% fall in price, beating Canada's -13% and only preceded by New Zealand where property prices are forecast to fall by -21%.

For all the self-serving talk that Australia "shall be right, mate" while economies in Europe, the UK, China and the US might be facing various versions of what is commonly known as "economic recession", even the more moderate projections by UBS add a genuine question mark to what "escaping recession" might actually mean for Australia, and for its share market.

UBS, believe it or not, is "relatively constructive" - a view largely based on the mantra that history shall repeat and this means policy makers will intervene to support housing when necessary.

The economics desk at the firm has for a while now upheld belief the RBA can talk and act tough this year, but by mid-2023 rate cuts will start to come through, changing overall dynamics for building and housing, and for the local economy in general.

Notes UBS: in the last 30 and more years, the RBA has always stopped hiking before CPI peaked locally in year-on-year terms. The RBA historically also started loosening despite headline CPI still above 2-3%, with exception of the covid-period in 2020.

Hence, while this year's rate hikes are likely to cast a shadow over the outlook for the next, say, 6-9 months in Australia, UBS's messaging is one of: don't be too bearish about it. Chances are but realistic that markets are preparing for too dire scenarios that may never actually eventuate (or for a brief period only).

Cue: share prices for Adairs ((ADH)), CSR ((CSR)), JB Hi-Fi ((JBH)), Mirvac Group ((MGR)), and Stockland ((SGP)), to name but a few.

Following through on its own forecasts, UBS is counting on a rapid and sharp recovery in overall building activity, after a more subdued remainder of 2022 and 2023. This scenario is built on the forecast of four RBA rate cuts of -25bp each in the second half of next year and the opening half of 2024.

The underlying suggestion made is that even if inflation proves stickier than currently anticipated, this would force the RBA to push the cash rate higher into restrictive territory, but it will also shorten the odds for monetary loosening within the following year.

By the way, UBS concurs with Goldman Sachs: New Zealand will be feeling more pain. UBS thinks house prices there are due for a -20% fall with sales collapsing -40%.



Conviction Calls

This week's line-up of Conviction Calls is possibly the largest ever. Feel free to save, print, compare, analyse, or use in any way that suits best.

****

"We are passionate about software" repeat Jules Cooper and Josh Goodwill with every sector update for stockbroker Shaw and Partners.

The duo has recently become enthusiastic about Playside Studios ((PLY)), Australia's largest independent game developer. This sounds like a big medal to carry, until one realises total market cap is still less than $300m. It's a minnow, and we don't use the term as a form of insult.

Playside Studios might be en route to breaking even in 2024, and that would be a positive milestone. Shaw lauds the company's "record game launch pipeline" in the short term.

Shaw's initiation of coverage occurred last week, with a maiden Buy rating (of course) and 90c price target.

So enthusiastic are the two software aficionados, the stock has been added to Shaw's Top Picks for the ASX-listed sector, joining Gentrack Group ((GTK)), Elmo Software ((ELO)), ReadyTech Holdings ((RDY)) and Mach7 Technologies ((M7T)).

Equally noteworthy: Shaw's Top Three of August reporting season highlights (as far as software companies are concerned) refers to ReadyTech, Elmo Software, and Mach7 Technologies. Pretty much a confirmation of the team's favouritism.

The only three software companies covered and not rated Buy are Nitro Software ((NTO)) and PushPay Holdings ((PPH)) -both under take-over interest- rated Hold, and Iress ((IRE)) on Sell. Shaw doesn't like Iress, and hasn't for a long while.

****

Stockbroker Morgans has used the August market updates to remove each of Reliance Worldwide ((RWC)), Eagers Automotive ((APE)) and Challenger ((CGF)) from its extensive list of Best Ideas among ASX-listed companies.

Only one sole addition was made: Domino's Pizza ((DMP)).

Morgans' full list now consists of 31 stocks, in alphabetical order:

-Acrow Formwork and Construction Service  ((ACF))
-AGL Energy ((AGL))
-Aristocrat Leisure ((ALL))
-BHP Group ((BHP))
-Corporate Travel Management ((CTD))
-Dalrymple Bay Infrastructure ((DBI))
-Dexus Industria REIT ((DXI))
-Domino's Pizza
-GQG Partners ((GQG))
-Healius ((HLS))
-HomeCo Daily Needs REIT ((HDN))
-IDP Education ((IEL))
-Incitec Pivot ((IPL))
-Jumbo Interactive ((JIN))
-Karoon Energy ((KAR))
-Lovisa Holdings ((LOV))
-Mach7 Technologies
-Macquarie Group ((MQG))
-NextDC ((NXT))
-Nufarm ((NUF))
-Pro Medicus ((PME))
-QBE Insurance Group ((QBE))
-ResMed ((RMD))
-Santos ((STO))
-Seek ((SEK))
-South32 ((S32))
-Technology One ((TNE))
-Transurban Group ((TCL))
-Treasury Wine Estates ((TWE))
-Webjet ((WEB))
-Wesfarmers ((WES))


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