Tag Archives: Building Material & Const

article 3 months old

Weekly Broker Wrap: Electronics, Supermarkets, Insurers, A-REITs, House Building And 3P Learning

-Citi lowers economic forecasts
-JBH, DSH benefit from Apple boost
-IAG stands out in personal lines
-Moderation in housing, building likely
-Oz advantage as players shy from Macau
 

By Eva Brocklehurst

Leading Indicators

Citi's domestic economic barometer has shown signs of deterioration over the last three months in keeping with global leading indicators which have also softened. The broker's economists have reduced growth forecasts for a wide range of countries, the fourth consecutive downgrade to year-ahead forecasts. In Australia, the interest rate-sensitive housing sector appears to be peaking and there remains more downside to come for mining capex.

In contrast, labour indicators are more positive and confidence measures are lifting with the change of Prime Minister, so these more favourable signs should limit downside risk to growth, in Citi's view. Inflation is expected to stay low and a tentative bottoming in the rate of decline in the terms of trade could signal the downward momentum in profit growth is peaking.

The broker's leading indicators suggest more downward adjustment in the Australian dollar and no further change in the cash rate.

Consumer Electronics

Apple has apparently sold more than 13m units of the new iPhone worldwide in the three days post its launch. This is a new record, Deutsche Bank observes, and bodes well for the retailers. The Australian Bureau of Statistics in September last year specifically called out the launch of the iPhone as factor in the 10.6% increase in electronics retail sales.

JB Hi-Fi ((JBH)) and Dick Smith ((DSH)) are considered to be the primary beneficiaries but Harvey Norman ((HVN)) should also gain a fillip.

Supermarkets

Deutsche Bank observes that the Woolworths ((WOW)) store network has aged considerably over the past few years and become older than the Coles ((WES)) network. In addition to price and value perceptions, the broker believes this is a key reason behind the underperformance of Woolworths.

Deutsche Bank's analysis suggests that the 80-plus per annum refurbishment target will modestly improve the situation but there needs to be around 120 per year to restore the network to where it was 3-4 years ago. Around 41% of Woolworths' stores are less than five years old while around 60% of Coles stores fall into that bracket. This is even more acute when considering that Woolworths has rolled out new stores more rapidly.

Australian Insurers

Morgan Stanley has surveyed 3,700 motor and home insurance customers. Strength in personal lines stands out for Insurance Australia Group ((IAG)). To date the company is successfully managing the risk of dilution from Coles to its incumbent brands. IAG locks in customers with multi-policy discounts and has the best cross-sell in home and motor. Its customers are also the least likely to shop around on renewal and it takes greater discounts to persuade them.

Suncorp ((SUN)) has a lower cost strategy but appears challenged, given recent 3-4% price reductions have failed to deliver a higher share of new business, Morgan Stanley observes. Rate increases are now being sought but this risks opening the door to challengers.

Next to IAG, Suncorp's main source of growth is its own brands. As the company simplifies its platform and extracts scale from vertical integration Morgan Stanley suspects it risk further diluting the multi-brand strategy.

After building a reputation for sharp pricing the challengers have delivered lower than average savings, with Youi seen holding back on discounting in 2015. The impressive growth in motor insurance share has paused, stagnant at 13%. Still, the challengers are well placed to advance their share, Morgan Stanley observes, particularly as Suncorp raises rates. Meanwhile, online brokers remain with just 5.0% of sales in both home and motor insurance.

A-REITs

Australian real estate investment trusts (A-REITs) performed strongly over the past week, in contrast to the broader market weakness. Credit Suisse observes the index generated a 0.6% return compared with the broader markets 2.5% decline.

The best performers were Goodman Group ((GMG)), Mirvac Group ((MGR)) and Federation Centres ((FDC)). The worst performers were National Storage REIT ((NSR)), Abacus Property ((ABP)) and Growthpoint Properties ((GOZ)). Credit Suisse expects sector earnings growth to remain stable at 4.4% over FY15-17 with the greatest acceleration from Westfield Corp ((WFD)) and the greatest deceleration from Dexus Property ((DXS)) and GPT Group ((GPT)).

Housing

UBS finds the question in the recent consumer sentiment survey of whether now is a good time to buy a dwelling worrying. This measure has slumped to a 5-year low while, when asked where the wisest place for savings are, the share of respondents citing real estate rebounded to a 12-year high.

Residential approvals are near a record high so, even as commencements ease back in 2016, dwelling investment should lift in coming quarters before flattening in the second half of 2016.

Price growth has likely peaked but UBS does not expect a large drop, given record low interest rates. Adding auction clearance rates into the mix, these are seen falling amid tighter macro-prudential policy and enforcement of foreign investment rules. Still, clearance rates are at solid levels and hardly indicative of a weak market. Overall, the UBS economists expect a moderation in housing strength rather than a downturn.

Building Materials

UBS explores the question of when the housing market does eventual turn. The broker calculates 10% decline in detached housing starts and 35% decline in the number of high rise, which would take total starts back to around 150-160,000 from the current level around 220,000. Boral ((BLD)) and CSR ((CSR)) are the most sensitive to this scenario.

Gypsum wallboard is most vulnerable in terms of product as its sells well into both high rise and detached housing. Data on product segments suggests only 20% of concrete/cement/aggregate volumes are sourced for housing which, if true, would make Boral less vulnerable, comparatively.

Bricks, tiles, insulation and glass would also be negatively affected much more by detached housing changes than by high rise. Land profits would be delayed by a fall in property markets.

For Boral, the US and Asia are expected to continue ongoing growth. For CSR, the aluminum business is the main problem and biggest concern for UBS. Both companies are likely to be looking at how they can invest to ease the exposure to Australian housing as the cycle inevitably moves on.

Gaming

Macquarie is confident that Australian operators can gain a greater share of the Asian VIP market, boosting domestic mass and VIP gaming revenue. The broker is negative regarding the Chinese VIP market, as tightening credit conditions weigh on the high rollers but regional destinations should pick up the players that are shying away from Macau.

The depreciating Australian dollar should support more visits from Chinese tourists, with excess capacity in most properties encouraging more junkets. Macquarie expects Chinese tourists will account for 32% of domestic gross gambling revenue.

Echo Entertainment ((EGP))) is consider the biggest beneficiary of an increase in VIP share. Macquarie estimates, if Echo Entertainment was to hold its current share and Australia lifted its share of the Asian VIP market by a further 1.0%, there is 4.6% upside to earnings estimates. For Crown Resorts ((CWN)) this calculation would boost base earnings forecasts by around 4.0%.

3P Learning

3P Learning ((3PL)) is an online education company with a suite of software products for students in grades up to year 12. The stock has fallen 30% since mid May and provides an attractive entry point in Goldman Sachs' opinion. The broker suspects investors may have over-reacted to the lower FY15 licence numbers.

The move away from textbook learning to online and increased public spending on education supports a positive view of the stock. Goldman Sachs initiates coverage with a Buy rating and $2.49 target.

FY15-18 earnings growth is expected at a compound 27%, underpinned by the company's ability to increase prices increase penetration and cross-sell its products. The broker suspects the market is underestimating the growth potential in the US and UK as well as the upside in Australia.

Competition is substantial, given there are thousands of online education providers around the world. The risk is one could make a significant move into the markets where 3P Learning currently enjoys precedence.
 

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article 3 months old

Brickworks On Firm Course In FY16

-Sustaining price rises
-Skill shortage constraints?
-Potential to re-start capacity

By Eva Brocklehurst

Brickworks ((BKW)) is in a purple patch. Not because of its investments, which largely disappointed brokers in the FY15 results, but because of its strong leverage to the buoyant building product market as well as its substantial land bank.

The company believes, with residential building at its highest level on record, strong momentum in building approvals will drive sales over coming years. This is underpinned by historically low interest rates. Moreover, the company was able to push through price increases of 5-10% from July 1, 2015, for its Austral Bricks division, and other divisions should also sustain price rises over the coming year.

The valuation of the stock reflects these supportive conditions, in Macquarie's opinion. Hence, a downgrade to Neutral from Outperform. The prospect of land sales and development profit has led to an upgrade to forecasts but the broker maintains a degree of conservatism relative to guidance because of some substantial property transactions slated for late FY16.

Revenue from bricks grew 11% in the second half after growth of 17% in the first half. Bristile Roofing sales momentum improved in the second half although wet weather on the east coast slowed progress. Macquarie observes land and development earnings were a little light versus its expectations, while investments were broadly in line. The improvement in operating cash flow appears attractive at first glance but the broker does highlight the fact this included property disposals.

Labour constraints accompanied by escalating trade costs could be a constraint on housing activity in FY16, Citi suspects. While demand for bricks is robust there is growing concern in the construction industry regarding suitably skilled bricklayers and, while a supply response will eventually ensue, there is likely to be a near-term constraint on activity. Amid an elongated construction cycle, the broker expects 14% earnings growth in building products for Brickworks.

Land and development are significant focal points and, despite management's guidance for property earnings to be flat in FY16, Citi flags the opportunity that exists in the company's land position, which could provide upside surprise for earnings.

The result was weaker that Deutsche Bank expected, largely because of a soft performance for the investments division. Specifically, the company's investment in New Hope Corp ((NHC)) delivered a lower return as a result of the resources downturn. The diversified holding in WH Soul Pattinson ((SOL)) investments should deliver increased earnings and dividends in the long term, the broker believes. Deutsche Bank expects 21% earnings growth for building products in FY16 and an increase in margin to 9.6% from 8.0%.

The order book is extremely strong, particular for Austral Bricks and Bristile Roofing along the east coast. In response to the increased demand the Punchbowl factory has changed to a premium brick manufacturer from floor tile and pavers. The Horsley Park plant 2 was brought out of moth balls in March and is running at 50% capacity. Deutsche Bank notes there is surplus capacity and a mothballed kiln in South Australia but these would take six months to come on line. Throughput could increase 10-15%, the company suggests, should conditions warrant.

Earnings were modestly ahead of Bell Potter's forecasts, because of a higher-than-expected contribution from SOL. The near-term outlook is encouraging for building products and there is potential in the sale of the Oakdale West property as well as a boost from a $60m distribution from the BGAI CDC Trust.

Bell Potter makes only small upgrades to FY16 and FY17 forecasts, 1.9% and 1.0% respectively. The broker, not one of the eight monitored daily on the FNArena database, considers the current share price implies a value for the building materials assets at a premium to the sector. Hence, a Hold rating and $15.06 target.

The holding structure may be complicated but Morgans likes the cross holding options with SOL, which provide some counter-balance to building products as earnings are supported by property development and investments. That said, this broker, too, believes the stock is trading near full value and downgrades to Hold from Add. Any share price weakness would be used as a basis to accumulate the stock again.

FNArena's database has one Buy and three Hold ratings for Brickworks. The consensus target is $15.69, suggesting 3.8% upside to the last share price. This compares with $15.61 ahead of the results. Targets range from $14.90 (Citi) to $16.54 (Deutsche Bank).
 

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article 3 months old

What Will Drive Growth For James Hardie?

-More conservative outlook in US
-Volume growth difficult
-Margin vs share, or both?
 

By Eva Brocklehurst

James Hardie Industries ((JHX)) was at pains to define the US market to investors at its recent briefings. At the time of the first quarter results, the absence of primary demand growth was a concern for brokers and the question was whether this reflected a weaker state of play ahead in FY16.

Management's recent presentations suggest to brokers that while primary demand is likely to be below the 8.0% recorded in FY15, there are other levers which will drive growth such as margins, market penetration and pricing.

UBS suspects the company is finding it more and more difficult to achieve volume growth. That said, FY16 profit guidance is unchanged at $240-270m and the company presented a conservative outlook for US housing starts. This conservative view means market penetration could be the key, in the broker's view. 

James Hardie has framed its conservative outlook in terms of the increasing numbers of 18-34 year-olds staying at home with their parents, as saving for a down-payment on a home becomes more difficult than previously was the case. While the softness in primary demand growth may be temporary, it needs to be watched, UBS maintains, because it is the main driver of shareholder value.

In this environment, UBS still finds it difficult to ascribe value to the company's FY17 price/earnings ratio of 25x. Profits are expected to ultimately be competed away and will remain a toss-up between market share or margins.

On the other hand, Deutsche Bank does not find growth paths for the two impossible to conceive. There is potential upside to assumptions in FY16 and FY17 from higher margins, derived from lower costs and higher prices. The company has programs in place to capture market share and Deutsche Bank expects this will be supportive in FY17, despite the likelihood of lower primary demand growth.

Given US housing starts have been slower than previously expected, the broker suspects James Hardie will not bring idled capacity back on line until FY18, with new capacity decisions unlikely before FY22. This should have a positive impact on US margins in FY16 and FY17.

In the end, the company is in a comfortable position vis-a-vis FY16, Citi maintains. The company has a normalised dividend pay-out ratio of 50-70% and balance sheet capacity for around US$100m to be returned to shareholders. There is also leverage to a recovering US housing market, albeit more gradual, as well as the less volatile renovations market.

Credit Suisse also debates the earnings and valuation drivers. The broker suspects achieving market share growth is proving much harder, but believes a step-change in margins should provide the necessary offset. Moreover, the valuation should be cushioned by the falling Australian dollar.

The broker describes the company's strategy as a rainbow - there is a pot of gold at the end but it may never end up being found. This is not a criticism, Credit Suisse is keen to assert, but simply  a view that growing market share is harder than previously thought.

Continuing to launch products that differentiate James Hardie's offering is a means to not only defend a market but to grow, in the broker's opinion. While the way forward will not be smooth, increasing opportunity is expected to come via a declining wood and vinyl market. The company is also at the forefront of educating contractors to make its product as a preferred choice.

JP Morgan believes inefficiencies in the manufacturing operations, now largely resolved, meant the company took its attention away from demand in order to resolve the problems. Now, the broker expects a redoubling of efforts towards growth and targets. James Hardie is targeting fibre cement to become 35% of the siding market (currently 18%), of which it aims to have a 90% share.

FNArena's database has three Buy ratings, three Hold and one Sell (UBS). The consensus target is $18.70, suggesting 0.2% upside to the last share price. Targets range from $17.28 to $20.50.

See also, Is James Hardie Overvalued? on August 17 2015.
 

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article 3 months old

Good News Builds For CSR

-Growing capacity for returns, M&A
-Aluminium downside priced in
-Expands commercial exposure
 

By Eva Brocklehurst

Good news stories flowed from CSR Ltd's ((CSR)) investor briefing. The building materials business is taking advantage of a buoyant housing construction industry.

The company expects housing should remain strong until FY17, given the lag between approvals and completions has extended to nine months. Price increases of 8.0% and 4.0% in bricks and plasterboard, respectively, have been implemented. This, combined with the likely operating leverage, underpins broker expectations.

FNArena's database has six Buy ratings and one Hold (Credit Suisse). The consensus target is $4.17, signalling 31% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 6.9% and 7.8% respectively.

Citi was impressed with the outlook and the capacity in cash flow and the balance sheet. At an assumed gearing level of 30% this provides $1 per share in capability for capital returns or acquisitions, by the broker's calculation. However, Citi acknowledges that negotiations over the Tomago power contract may take precedent.

Aluminium remains the vulnerable division and recent share price weakness suggests expectations for lower ingot premiums are well and truly factored in. The proportion of net aluminium exposure hedged remains at 59%.

Negotiations over the electricity supply at Tomago have not yet formally commenced for 2017 but lower aluminum earnings may, Citi suspects, provide a catalyst for these discussions. UBS highlights welcome news that the higher cost for aluminium electricity from FY18 only covers part of the electricity contract.

Reinvestment in the Viridian glass business is underway, property earnings are expected to grow substantially in Sydney, the brick JV is working and there is good growth in innovative products such as Hebel and AFS walling. Demand is increasing faster than expected for Hebel product, which is driving the capacity expansion at Somersby. This should be completed by the end of the year.

Citi also observes a material reduction in the asbestos liability over the past three years that suggests, inclusive of M&A opportunities, an ability to accelerate shareholder returns. This is in spite of the looming end to seven years (Dec 2017) of required external oversight of repatriating capital to shareholders which, to protect potential asbestos victims, meant the balance sheet was significantly under-leveraged.

Deutsche Bank is more cautious, believing an external transaction is unlikely. The broker envisages the company could raise dividends but highlights its stated preference to invest in AFS and continue the value chain integration of Viridian. CSR has traditionally made 60-70% of glass sales to the residential market but, with commercial making up 45% of total processed glass consumption, the company is targeting growth in this segment.

Re-development works at the Schofields and Horsley Park plants continue. Schofields is expected to generate $400-450m in revenue post re-development at a 25% earnings margin.

UBS notes load-bearing formwork sales are up 250% over three years. CSR is also at the forefront of online sales and services customers with a mix of manufactured and imported sources. UBS still suspects the market will use housing approvals as its main indicator. Lags in work done may help profits for a year but then, the broker suspects, could just confuse the market.

CSR has a lead in developing these lightweight, fast-erecting building products and Macquarie observes this has enabled it to expand exposure to multi-residential activity. It also positions CSR well for structural trends. While aluminium weighs on the story, it only comprises 19% of Macquarie's valuation. Hence, the stock remains attractive and the broker retains an Outperform rating.

Macquarie believes the diversity of the offering and position in the market are key attractions, even from this late point in the cycle. Excluding aluminium from the valuation altogether still yields value.
 

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article 3 months old

Is James Hardie Overvalued?

-Is market overpaying?
-Softness sector wide
-Growth story intact
 

By Eva Brocklehurst

After another soft first quarter analysts are running the ruler over James Hardie ((JHX)). Last year started in a similar vein but the results ended up beating expectations so most brokers are not unduly concerned.

UBS is an exception, downgrading the stock to Sell from Neutral. The broker believes the market is overpaying for the company's attributes. Undoubtedly James Hardie has strong exposure to growth in US family homes, given pricing power and low fixed costs. Still, these features are all priced in and UBS maintains cost performance can only achieve so much. Pushing up prices eventually means volume growth becomes critical and UBS warns investors not to be too dismissive of this fact.

The company has proven to be one of the most defensive building materials companies exposed to US housing, enjoying a dominant share of fibre cement. Still, UBS cannot avoid the impression the market is pricing in super-normal profits as well as a high market share over the long term and profits could ultimately be competed away, with either margins or market share maintained at the expense of the other.

While acknowledging one quarter does not make a case, UBS believes, as long as James Hardie demonstrates ongoing growth in primary demand and margins are in line with its strategy, then investors are unlikely to discount longer-term valuation issues. Still, whenever it becomes apparent that management is having difficulty achieving on targets then investors are likely to become more cautious.

The US and Europe were operationally strong in the quarter, Macquarie contends. The broker believes more than half of the margin improvement came from plant efficiencies and this should provide a base for leverage as the cycle recovers and utilisation improves. For that reason lower primary demand growth, while disappointing, should not be permanent. Meanwhile, the US housing cycle continues to accelerate.

The first quarter may have been light but Morgan Stanley considers growth was good enough when compared with peers. That said, the broker considers the stock is fairly valued. Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, observes competitor Louisiana Pacific also reported weak volumes in the January quarter. Hence, Goldman attributes much of the volume weakness to broader market issues such as weather, not to company-specific problems.

The cost predicament that faced the company in the prior first quarter (FY15) was dealt with swiftly. This time around revenue is the culprit, JP Morgan observes, and the failure of market initiatives to gain traction has exacerbated the softness. Still, the broker does not believe there has been a sharp change in fundamental demand growth, so the headwinds should abate.

The growth story remains intact. That is the most important aspect for Deutsche Bank. The first quarter fell short because of lower US sales relating to a pulling forward of demand to the fourth quarter of FY15. The broker also believes the FY16 profit guidance of US$240-70m, which implies a reduction of 5.0% to consensus estimates, is largely related to a higher effective tax rate.

Deutsche Bank's analysis reveals that a higher US fibre cement margin is more important than primary demand growth although, obviously, both moving in the right direction would be preferable.

Citi does not believe management is shying away from the fact that primary demand is lacklustre, given expectations have been lowered for FY16. However, the floods in Texas and the FY15 price rise have likely been key factors. Texas represents an estimated 22% of North American volumes while the March 1 price rise would have pulled demand forward. Hence, the broker is not unduly worried but, given the stock is fair value, retains a Neutral rating.

FNArena's database has three Buy ratings, three Hold and one Sell. The consensus target is $18.65, suggesting 2.3% upside to the last share price. Targets range from $17.28 (Morgan Stanley) to $20.50 (Macquarie).
 

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article 3 months old

Australia’s Building Boom Has Peaked

- Residential starts peaking
- Apartments to lead decline
- Non-res to provide some offset
 

By Greg Peel

Strong growth in the past few years has seen total dwelling starts in Australia reach to just over 210,000 in 2014-15 to mark a record all-time high, according to analysis conducted by research group BIS Shrapnel. From this level, activity is expected to begin trending down over the next three years, led by the previously surging apartment segment.

A sizeable deficiency in dwelling stock, coupled with historically low interest rates, drove building activity to its highs, but the market will shift into mild oversupply by 2018. Construction activity remains strong but population growth will slow, gradually eroding deficiency in key markets.

Net overseas migration is expected to continue its downward trend, easing in response to lower economic and employment growth. Building activity is estimated to have pushed above the underlying demand trend in 2014-15 for the first time since 2011. BIS Shrapnel estimates deficiency of building stock hit a peak in June 2014 of 108,000, but at June 2015 this had fallen back to 85,000.

Investors and upgraders/downsizers will continue to provide enough momentum to sustain construction at historical levels, resulting in deficiency being satisfied by 2018. The fall from the current peak will mostly be felt in the apartment segment, BIS Shrapnel suggests. Detached houses, which have seen a late run in the cycle, will prove more resilient, holding up until 2015-16 before beginning a more subdued decline.

From 2014-15, only NSW is expected to maintain current growth into 2015-16 on the back of a strengthening economy and a persistent deficiency of dwellings. Queensland will remain relatively flat around current levels as its market moves into balance, but Victoria will see a 7% decline, with Melbourne having seen over-building relative to demand. Western Australia is suffering a sharp slowing in population growth at the end of the mining and thus will suffer a 13% decline.

As residential construction surged over 2014-15, non-residential construction fell by 13%, BIS Shrapnel estimates. However non-res is expected to bounce back by 10%-plus in 2015-16. Growth will be driven by the commercial and industrial sectors (+17%) with retail in particular performing well (+29%). The overall profile for non-res out to 2018 nevertheless remains relatively flat, albeit typically lumpy, given economic conditions will remain subdued and it will take time for capacity constraints to build to underpin a new round of development.

BIS Shrapnel thus sees further 6% improvement in 2016-17 before a slip-back in 2017-18. Thereafter, a healthy upward trend should return as improved economic conditions begin to set in.


Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Weekly Broker Wrap: Oz Housing, Jobs, Wagering, Telecoms And Utilities

-Is Oz house construction peaking?
-RBA's cash rate key to housing
-Strong jobs, weak wages
-Wagering set for solid growth
-Accelerating mobile revenues
-GS prefers SKI, DUE for yield
 

By Eva Brocklehurst

Australian Housing

Housing is one of the few bright spots in the economy but this is set to change. Much attention has been given to price rises in Sydney but construction, too, is in a sizeable upswing. Dwelling construction has added half a percentage point to GDP growth over the past year, offsetting part of the percentage point drag from weaker business investment. Alliance Bernstein suspects this might be as good as it gets. Underlying demand for new housing to meet population growth has slowed to 120,000 per annum from 180,000. While there was a prolonged period of under-building this has now swung to over-building. At the end of the year it is likely that housing construction will be running above 6.0% of GDP, a level not seen since the early 2000's.

Rental growth has slowed to just 2.0% now from mid to high single digits in 2008/09. House price growth outside Sydney has slowed too. Growth in Perth and Brisbane is now negative. Alliance Bernstein also believes there is a technical "wild card" to consider. An historically disproportionate share of the upswing is multi-storey apartments and a lot of this activity is driven by foreign investors. With greater scrutiny of the rules there is potential for a change in this area. Alliance Bernstein is not suggesting a housing collapse, particularly as the upswing has not been accompanied by rampant growth in credit. Still, it is considered inevitable that there will be a downturn by mid next year.

UBS also grapples the issue of whether housing is in a bubble. In the broker's opinion the main driver of a stronger-for-longer home building boom is the Reserve Bank's cash rate staying at current levels for another year. It remains at a record low 2.0%. This is the key catalyst for housing approvals, not supply or unemployment, UBS maintains. UBS expects record commencements in 2015 and 2016, which should allow supply to catch up to demand but only making a small dent in the under-building which has accumulated over some years.

UBS agrees that the record high investor/medium-density share of the upswing is a risk but believes this is suppressing rents rather than prices, as unemployment is not spiking. Regulation is also not seen as a material dampener of demand in the months ahead. Moreover, amid record low interest rates, the mortgage repayment share of income is around average. Hence, while there are bubble-like features in the current cycle, UBS does not observe any trigger that will pop them in the near term.

Employment

UBS asks the question whether the latest data on employment from the Australian Bureau of Statistics can be believed. As this is a survey covering only 0.32% of the population the 95% confidence interval range on jobs is large at 166,000 month on month. In May, jobs growth doubled and unemployment fell to a one-year low of 6.0%. Hours worked were flat and strong growth in Western Australia meant its unemployment rate fell back to the lowest among the major states, which does not fit with the mining downturn. Gains have also been unusually concentrated by industry.

UBS suspects, amid the negative income shock from the terms of trade, labour market flexibility is allowing for much of the necessary adjustment via wages rather than job numbers. Wage rates are growing at a record low rate, GDP-based employee compensation is below 2.0% and company profits are flat, which indicates a large degree of labour market slack. However, it suggests unemployment should be rising not falling. The broker suspects the reality is somewhere in between. The US experience after the GFC revealed there an be a prolonged period of job retention coinciding with weak wages.

Wagering

Morgan Stanley lifts medium-term wagering growth assumptions. The broker believes the market is underestimating the positive changes occurring in the industry. This include mobile usage, competitor consolidation, race field fees and fixed odds betting, with operators intent on innovation instead of price wars. The broker expects the industry to grow at 7.0% for 2016 and 2017 versus a rate over previous years more like 3-4%.

Product innovation and advertising spending should drive both penetration and spending frequency. Morgan Stanley's survey also suggest younger players are more likely to bet online on sports. Tabcorp ((TAH)) and Sportsbet will be the main beneficiaries of improved industry economics, in the broker's opinion. 

The introduction of "in-play" betting via the internet should grow total turnover and revenue in Australia's wagering market, in Macquarie's opinion, given evidence from European operators that it can generate increases in sports wagering. Macquarie believes online corporate bookmakers have been gradually eroding the retail advantage of Tabcorp and Tatts ((TTS)). While a relaxation of the rules is considered inevitable, Macquarie does not factor this into forecasts at this stage. Still the whole industry is well positioned for the uplift from online and this underpins the broker's Outperform ratings on the latter two stocks.

Mobile Services

After some years of low returns the Australian mobile industry is delivering returns approaching the cost of capital. All operators appear to be participating in accelerating revenues. Capital intensity has continue to rise but the industry has benefitted from cost cutting and improved pricing power following consolidation.Goldman Sachs expects operators to retain their price discipline. The broker's analysis provides greater confidence in continued multi-year mobile industry growth. Telstra's ((TLS)) service revenue forecasts are retained and this is expected to underpin low single digit group earnings growth over FY15-16.

Utilities

Goldman Sachs recently met management from five Sydney-based utilities.The broker notes Origin Energy ((ORG)) has been volatile with an increased focus on the potential for LNG oversupply. The company is upbeat about its retail margin outlook and increased pricing power in NSW. The broker continues to believe oil prices and the start of Sinopec deliveries will be key for the company. AGL Energy ((AGL)) is optimistic on electricity pool prices as Gladstone LNG will ramp up exports through FY16. Goldman notes there is too much regulatory uncertainty for the company to confidently invest in more wind capacity.

APA Group ((APA)) is considered well positioned to take advantage of its opportunities, although growth appears priced in. Spark Infrastructure ((SKI)) plans to bid on the three NSW network utilities and any transaction here would be highly material to growth, although Goldman Sachs emphasises the multiples paid will be important. DUET Group ((DUE)), meanwhile, has been short listed for the NT link project and could be in a position to buy Chevron's Gorgon domestic gas pipeline if sold. The broker prefers the latter two stocks because of the superior near-term yield.
 

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article 3 months old

GWA Cleans Its Slate Ready For FY16

-More comfortable outlook
-Restructuring, FX risks remain
-Need to revamp Gainsborough
 

By Eva Brocklehurst

GWA Group ((GWA)) has moved further along the road to becoming a pure investment in the domestic renovation market, confining its business to specialist building supplies for kitchens, bathrooms and door fittings. The company has now shifted most of its manufacturing offshore.

The company has finalised the sale of its Gliderol garage door business for $7m, the last remaining divestment in its plan to simplify its offering. The business has underperformed over the past 18 months and brokers welcome the sale. A non-cash impairment charge of $25m is booked for Gliderol and pre-tax one-off restructuring costs of $7-9m will be taken to re-set the cost base. Deutsche Bank expects this announcement will clear the decks for FY16 and, while not expecting a final dividend in FY15, expects dividends will be reinstated from FY16. GWA has tightened trading earnings guidance for FY15 to $67-69m, compared with prior guidance of "around $70m".

UBS welcomes the sale and believes the recent sell-off in the stock was overdone. FY16 is now in focus and the slate looks cleaner. The broker upgrades to Buy from Neutral, given the sell off in the stock. UBS is now more comfortable with the earnings profile into FY16 but acknowledges there are still risks in terms of restructuring, FX headwinds and underperformance in the Gainsborough business.

Citi concurs, suspecting investors are likely to be fatigued by the restructuring charges. The broker estimates GWA has announced "one-off" restructuring charges in eight of the past 10 years, totalling $90m. In Citi's opinion, limited success in its "adjacent business" diversification strategy may hinder further diversification by the incoming senior management - with a new CFO recently installed and a new CEO from June 2016.

Of paramount importance is the need to regain market share for Gainsborough, Citi maintains, which was lost because of supply-chain issues in China. The company also needs to respond swiftly to the change in mix towards apartments from detached housing and improve its supply chain now it is almost a pure importer. Hedging strategies may also need to be checked, given increased exposure to Australian dollar volatility.

Detached housing completions, where GWA benefits the most, are likely to rise over 2015, Macquarie observes. Also the company recently sold its Wetherill Park facility for $33m. In terms of returning excess funds to shareholders, the broker notes the total in the first capital return was equal to the net sale proceeds from Dux and Brivis. Ahead of a potential second return, the broker estimates the balance sheet is in a solid position.

Goldman Sachs estimates bathrooms & kitchens will now generate 91% of group earnings. There are opportunities to regain market share of major customers but the broker remains concerned about the margins, given the top three customers are likely to reach nearly 50% of the company's sales in FY16. Goldman incorporates the updated guidance, sale of Gliderol and restructuring costs into forecasts. The broker's price target is reduced 4.0% to $2.33 as market movements offset the minor earnings upgrades.

If gearing were to return to long-term averages, this implies around $50m available for distribution to shareholders, or around 18c per share, in Goldman's calculations. The company has minimal franking credits following the special paid in May 2015. Therefore, the broker believe funds may be returned through an on-market share buy-back or capital return as well as via normal dividends. Goldman Sachs, not included in the FNArena database calculations, retains a Neutral rating.

The database has one Buy rating (UBS), four Hold and one Sell (Credit Suisse, yet to update on the divestment). The consensus target is $2.51, suggesting 8.4% upside to the last share price. The dividend yield implied in FY16 forecasts is 5.9%.
 

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article 3 months old

Weekly Broker Wrap: Property Portals, WA Miners, Builders And A-REITs

-Farmers stay focused in Ukraine
-REA Group retains upper hand
-Streamlining continues for WA
-Labour scarcity for builders
-Turnover rent pressures for A-REITs
 

By Eva Brocklehurst

Ukraine Crops

Macquarie has conducted its first ever tour of crops in Ukraine. The broker had expected difficult macro economic conditions would force farmers to withdraw marginal land from corn production and limit investment in inputs. In reality, only corn acreage is reduced. Grains and oilseeds producers have continued operating as usual and sought to improve yield efficiency. The main problem for producers has been the rise in the cost of inputs. Nevertheless, farmers were still planning to keep up applications of crop protection and fertiliser. With the usual weather related caveats Macquarie has higher production expectations for corn and wheat in the country's 2015/16 season.

Property Portal Wars

There has been conjecture about the relative performance of REA Group ((REA)) and the Fairfax Media ((FXJ)) portal, Domain. Citi observes REA Group continues to beat Domain in terms of absolute growth. Agent numbers may have risen for Domain but the online metrics remain skewed in REA Group's favour. The broker observes Domain's rate of revenue growth is set to pass REA Group in the second half of FY15, albeit Domain is still a minnow in terms of its revenue base. 

Domain has now reached parity with REA Group in terms of agent numbers and property listings and has lifted consumer awareness. The broker finds REA Group is extending its lead on audience engagement, implying it is more cost effective for driving sales to vendors. Competitive attention from Domain has centred on Sydney, Melbourne and South Australia but the broker's inspection of online usage suggests there has been little visible impact on REA Group. Citi finds no evidence that REA Group is losing market share although the slowdown in property transaction volumes has curtailed its growth rates.

Western Australian Miners

Morgan Stanley recently visited resources businesses in the west and found four main themes prevail. A search for cost reductions is the most common, given the slump in commodity prices. Lower staff turnover rates have allowed the miners to push through more economic rosters and savings are also coming via attrition, with new workers on lower awards. Another theme is the increase in corporate activity. Independence Group (((IGO)) and Evolution Mining ((EVN)) are cases where strong balance sheets have been used to pursue mergers.

Many bulk miners are adapting their mine plans to suit the commodity price outlook in order to reduce capital outlays and operating costs. Fortescue Metals ((FMG)) described its actions of running lower strip ratios as targeted mine planning rather than "high grading". Hence, the company does not expect its actions will have a long-term impact on reserves. Morgan Stanley is not sure this can be sustained, particularly where strip ratios have progressively declined below the five-year mine plan over the last 12 months.

Lastly, office market data has reflected the tough environment in Perth, with that city showing a vacancy rate of 12% to January 2015, with a rising trend. The broker suspects vacancy rates could be in the vicinity of 15% by mid 2015, a level not seen since the mid 1990s.

Home Builders

Macquarie has met with a number of home builders to develop a view of the current state of the market. The broker notes exceptionally strong pre-sale demand with expectations the market will stay firm for another two years at least. Availability of land remains a recurring issue. Approval processes are banking up, with notable areas being the north west and south west of Sydney. The ability of the trades to deliver on the opportunity remains a concern for builders. Some are importing bricklaying skills to overcome shortages with the hoped-for return of capacity away from mining not developing as expected.

The extent of home price growth has heightened nervousness regarding settlement risks emerging for builders, although there is no evidence of increased risk at this stage in pre-sales of detached homes. The price increases in materials did not appear to bother the builders but the broker did note labour costs growth were a concern, with rates increasing as much as 25% for some trades such as bricklaying. All up, the broker considers the fundamentals are good for building material producers.

Nib Holdings

Nib Holdings ((NHF)) may provide a surprise in its upcoming earnings report. Bell Potter contends the stock is a potential underperformer. Recent presentations confirm earnings are likely to be near the lower end of the guidance range of $75-82m, still slightly ahead of FY14's $72m. Bell Potter suspects earnings growth will more than likely be flat. Data from aggregator iSelect ((ISU)), an important sales channel for Nib Holdings, shows many younger people are looking for better value in health insurance.

The broker is increasingly of the view that relying on this demographic for policy sales is not an avenue to profitability. The company has an 8.0% share of the private health insurance market but earnings from its core business have been declining. Bell Potter expects the international student and workers segment will support some earnings growth in FY16 but retains a Sell rating and $3.30 target.

Yowie Group

Yowie Group ((YOW)) has announced that Walmart will roll out the brand fully to its US stores, all 4,300 of them. This announcement confirms the trial has been successful and Walmart expects the product to sell well. Canaccord Genuity had assumed that Walmart would need to place purchase orders at the end of May or early June for Christmas delivery but Walmart has requested delivery for an August date, well in advance of expectations. Hence, the broker upgrades assumptions for the first half of FY16, noting that when Walmart commits to a product other retailers take notice. This could be a catalyst for Yowie in the US market. The company has a patent in the US for "chocolates with a toy inside" for another three years. Canaccord Genuity has a Speculative Buy rating on the stock and $1.80 target.

A-REITs Outlook

Woolworths ((WOW)) has indicated no improvement in sales at supermarkets in May and June to date and this is signalling a negative for turnover rental growth for supermarket-anchored shopping centres, in Macquarie's opinion. Charter Hall Retail's ((CQR)) largest tenant is Woolworths, at 26.4% of base rent. For Shopping Centres Australasia ((SCP)), Woolworths and Wesfarmers ((WES)) contribute a combined 61% of gross rent.

With general merchandising also struggling, and competitive pressures from new international retailers, Macquarie envisages significant disruption to returns in the Australian real estate investment trust (A-REIT) sector. The broker remains underweight on the sector but expects reasonable overall sales conditions will continue. Still, several major tenant categories are undergoing structural change and A-REITs appear expensive.
 

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article 3 months old

James Hardie Excels But Is More Upside Possible?

-Margins could exceed target
-Decline in pulp costs helps
-Outpacing competitors
 

By Eva Brocklehurst

After a soft first quarter James Hardie ((JHX)) excelled for the rest of FY15, exceeding expectations and raising the level of confidence amongst brokers. US margins increased significantly, driven by improved performance and higher volumes, and the company expects these to remain within its target range of 20-25%. A special dividend of US22c was declared and a new share buy-back program announced, with the intention to acquire up to 5.0% of issued capital to May 2016.

Management did indicate a special dividend was not a preference, given a lack of franking credits, and the focus will be on buying back shares going forward. Small acquisitions may still feature, Deutsche Bank contends, prior to utilising capital for the share buy-back. The broker considers there is potential for the company to buy back between 3-11% of its shares on issue in FY16. In the US, management expects growth rates in line with FY15 which, in Deutsche Bank's calculations, translates to an increase to US fibre cement earnings margins to at least 25%. In Asia Pacific fibre cement growth in line with the market is expected.

Goldman Sachs already has a significant increase in margins factored into FY16 and FY17 forecasts for the US and Europe so the better-than-expected FY15 result is largely implied in forward estimates. The broker expects strong earnings growth from a combination of higher prices and increasing market penetration in the US and maintains James Hardie offers investors the best mix of earnings growth, dividends and capital management opportunities within its building materials coverage. Goldman Sachs has a Buy rating and $17.36 target.

The highlight was the strong US operations and given positive momentum in housing starts and robust renovations growth, the environment remains supportive, in Macquarie's view. The stock has reacted strongly on the back of the FY15 results but the broker expects additional support from the ongoing US recovery and a weaker Australian dollar. The one question for Macquarie is the competitive impact of Louisiana Pacific and James Hardie's investments in order to address this challenge. The company appears confident it has the upper hand, and while a strategic issue longer term, the broker accepts this does not have a significant bearing on the current investment case. Macquarie retains an Outperform rating.

James Hardie has enjoyed a stellar rebound from a subdued first quarter and still offers an attractive and predictable growth profile, in JP Morgan's view. Now that the rebound is largely priced in the broker downgrades to Neutral from Overweight. The company has confirmed demand is growing around 7-8% and expects growth of 10% in FY16. Orders are running slightly behind target, JP Morgan observes, and may temper first quarter earnings but any impact is expected to be offset by lower unit manufacturing costs. Margins are expected to increase to the top end of the target range and the broker would not be surprised if they exceeded 25% in the first two quarters of FY16.

Credit Suisse found the results a strong positive signal on the outlook and suspects margin forecasts could be exceeded. Margins are most sensitive to the cost of pulp and, with benchmark prices in decline, the broker wonders just where FY16 margins could end up. The growth story and market penetration are intact and the proactive buy-back is underpinning the share price. Still, Credit Suisse awaits a more attractive entry point and retains a Neutral rating.

The cost of pulp did not impress UBS as much as the efficiencies achieved in the company's US factories. The broker calculates earnings per square metre are near the 2010 peak, on volumes that are still 20% lower than in 2006. Management has advised not to expect too much volume growth in the short term but UBS believes the outstanding cost performance will be sustained until new capacity starts up in 2017.

Further ahead the rating of the stock does depend on volume growth, the broker acknowledges, but the operational excellence demonstrated in the past decade should be supportive. Again, UBS believes it is hard for an increasingly mature business to justify the current earnings multiple and retains a Neutral rating.

Morgan Stanley does not consider the stock expensive on a relative basis and suspects this could drive near-term upside, although admittedly it appears fully priced at current levels. The broker notes, on a relative basis, James Hardie has averaged a 30% premium to the S&P ASX200 industrials ex financials over the past five years. Calculations suggest that after the latest move and update to estimates, the stock will trade at a 20% premium which implies further 10% upside in order to re-rate back to the five-year average.

In Citi's view the best is yet to come in the US. While not discounting competitive responses, sustainable alternative products to those of James Hardie appear limited by the lack of additional capacity installed at the bottom of a historically low US housing cycle. Hence, competition has an uphill battle to gain traction against the company. The market has also efficiently priced in the implied earnings upgrade so Citi, too, retains a Neutral rating.

FNArena's database has two Buy (Macquarie, Deutsche Bank) and five Hold ratings. The consensus target is $17.20, which suggests 2.5% upside to the last share price and compares with $15.16 ahead of the results. Targets range from $15.46 (UBS) to $20.11 (Deutsche Bank).
 

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