Tag Archives: Consumer Discretionary

article 3 months old

Sigma Pharma’s Expansion Strategy On Track

Sigma Pharmaceuticals is expanding its reach into hospital pharmacy while maintaining a stable base business. Brokers welcome the increased diversity.

-Non-PBS sales at 44% and an increasingly higher proportion of Sigma's business
-Capital releases may now be limited in scope
-Little visibility on supplier rebates and merchandising income


By Eva Brocklehurst

With its first half results, Sigma Pharmaceuticals ((SIP)) is seen spearheading its entry into the hospital pharmacy market amid expectations it will annualise $200m in sales by the end of the year.

The company ticked all the right boxes, Morgan Stanley asserts. Revenue growth was strong with like-for-like pharmacy brand sales up 7.2%. The company's confidence in its outlook is reflected in guidance being upgraded to 10% EBIT (earnings before interest and tax) growth for FY17 while estimates of over 5% growth are retained for FY18.

Yet the results produced a spate of changes to recommendations. UBS and Credit Suisse upgraded to Buy and Outperform respectively, while Citi downgraded to Sell. In sum, FNArena's database now has two Buy, one Hold and one Sell. The consensus target is $1.30 which suggests 7.5% downside to the last share price. Targets range from $1.15 (Morgan Stanley) to $1.40 (UBS).

UBS considers the results are a sign the inflection point has arrived for Sigma, in terms of new growth opportunities, at the same time the base business is steady and reliable. The broker acknowledges it underestimated the turnaround in underlying margins and, post the result, increases estimates for FY17 and FY18 by 7.3% and 9.7% respectively.

Non-PBS (Pharmaceutical Benefits Scheme) sales are now 44% and the company hopes to reach a 50:50 mix. PBS growth was reported as flat, with over-the-counter sales up 5%. Direct sales to China were not disclosed but the company suggests these are ahead of expectations, albeit modest.

The reported EBIT margin was diluted because of sales of the new drug Sofusbovir (hepatitis C), given the drug is high price but low margin. Inventory did build, affected by an additional $30-40m for the supply of Sofusbovir. UBS detects that the company is spending more time on expanding buying programs to extract higher rebates while at the same time investing in infrastructure.

The broker agrees that in terms of pharmacy wholesalers, the company has had lower exposure to the higher top line growth channels in the market, but observes an intention to grow the exposure to general retail. UBS notes the company has, nonetheless, also demonstrated an ability to manage its earnings mix and achieve a small margin uplift. The investment in hospital pharmacy is expected to provide greater exposure to an attractive growth market.

Citi envisages the outlook somewhat differently. Given poor prospects for PBS revenue and the end of working capital benefits from a pull-back in customer credit terms, the company is investing to maintain its margins and diversify its revenue sources. Sigma has been successful in pulling extended credit terms and reducing working capital and this has meant capital has been released to fund its buy-back and other initiatives. There is now limited scope in this regard, Citi believes.

The broker expects the company to outperform on guidance and upgrades earnings per share estimates by 4% and 6% for FY17 and FY18 respectively. Citi considers the stock now overvalued in a challenging environment for its main business, along with the risks that come with significant capital expenditure on investments.

Rising “other revenues”, which include supplier rebates and merchandising income, are suspected as accounting for a large proportion of profits but the broker finds little visibility in this area and remains wary of the long-term sustainability as a result.

PBS revenue may remain under pressure but higher growth in non-PBS revenue as well as the winding back of trade discounts should sustain gross profit growth, in Credit Suisse's view. Moreover, incremental wholesale opportunities such as hospital pharmacy and distribution centre optimisation should underpin the long-term. The broker also notes an un-geared balance sheet and the potential to pursue suitable acquisition opportunities.

Goldman Sachs, not one of the eight stockbrokers monitored daily on the FNArena database, also upgrades, to Neutral from Sell, with a target of $1.30. The broker's prior Sell rating was based primarily on a lack of valuation support as well as long-dated regulatory risk. Given the upgrades to FY17 and FY18 estimates, this situation has improved and, while long-dated regulatory risk remains, the broker does not believe it to be a near-term catalyst

Goldman Sachs believes the long-dated agreement with market leading Chemist Warehouse provides an ability to grow market share and underpins margins. There is also scope to leverage the balance sheet with further acquisitions share buy-backs and internal projects with an attractive pay-back time frame.

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article 3 months old

Weekly Broker Wrap: Earnings, Apartments, Consumer, Wellard And Telstra

Earnings season wrap up; apartment approvals spike; consumer spending growth; harsh outlook for Wellard; Telstra's dividend dilemma.

-Ord Minnett scales back financials and health care, increasingly favours metals & mining
-UBS suspects market vulnerable to a set back but any correction likely to be shallow
-Developing oversupply of apartments to gain momentum in 2017 and 2018
-Weaker wealth trend seen reducing spending growth in 2017
-Wellard in breach of facilities and may be forced to sell assets
-Does Telstra need to change its dividend policy?


By Eva Brocklehurst

Reporting Season Wrap

Ord Minnett is disappointed with reporting season. FY17 earnings projections have slipped by 1.3%, and only 24% of the S&P/ASX 200 index beat expectations for FY16. The broker has scaled back its position in financials and health care, after the two sectors fell 2.5% and 3.7% respectively in the month.

In contrast, Ord Minnett observes the metals & mining sector is increasingly favourable and moves its weighting to Neutral. The broker is also encouraged by the positive aspects of the consumer discretionary sector and reinstates it to Overweight.

The broker contends that two stalwarts of the yield play have languished, with telecommunications edging out insurance to claim the wooden spoon. Ord Minnett observes the slide in utilities in the month also looks to be underpinned by fundamentals with AGL Energy ((AGL)) exerting the most drag, and its FY17 earnings estimates scaled back 3.5%.

Meanwhile, energy was resilient, up 2.8%, and materials and staples were up 1.9% and 2.6% respectively in the month. The broker shifts its materials weighting to Neutral and remains Underweight on staples.

UBS suspects a degree of complacency has crept back into the investment landscape and the market could be vulnerable to a setback. Nevertheless, recession risks for the US and Australia are low, in the broker's opinion. Hence any correction may again be shallow and present a buying opportunity.

The broker remains cautious, but not outright bearish, about the market and continues to believe stocks offer better prospects than bonds and cash on a 6-12 month view. UBS is, on balance, underweight on the defensive yield trade, envisaging it is overvalued versus other parts of the equity market.

The broker considers the market is likely under-pricing a tightening from the US Federal Reserve. Still, the Fed remains constrained by a lacklustre global economy and any bond yield back up is expected to be moderate.

Australian Apartments

Building approvals sustained the largest monthly rise in 2.5 years in July, Citi notes, and the gain was led by NSW, followed by Western Australian and then Queensland. The broker also observes the rise was completely driven by a large spike in apartments, extending the trend in the medium and high density segment of the market. It also underlines the emerging trend of softly falling owner-occupier approvals on the headline result.

Citi suspects the risk that a number of approvals do not turn into dwelling starts is growing. Apartment completions lag starts by 1-2 years so the developing oversupply should continue to build in 2017 and 2018, with the broker estimating completions will probably double across the eastern states.

Relative to underlying demand, Brisbane is considered oversupplied as is inner Melbourne. Sydney is still catching up and the broker can only suspect that the underlying demand in Sydney is able to absorb such a large impact from building approvals in the supply chain.

Citi does not envisage conditions are sufficient for contagion from projected apartment price declines in some areas to spill into broader house price declines.

Wealth And Consumer Spending

UBS argues that the pick-up in consumer spending since 2013 is sustainable and, so far, solid jobs growth and better consumer cash flow from low inflation have driven stronger real spending, despite low wages growth.

UBS updates its model to calculate how a flatter outlook for housing & equity prices, and record low wages growth, weighs on the consumer, despite recent reductions to interest rates. The lagged impacts of this weaker wealth trend is conspiring to drag spending growth lower in 2017, in the broker's opinion.

Hence, UBS trims consumer growth forecasts to 2.5% from 2.8% for 2017, with 2016 little changed at 2.9% from 3.0%. For retail sales, a near-term boost to household cash flow from lower petrol prices, tax and rate cuts should mean a return to the growth range of 4-5% from the current level under 3%.


Deutsche Bank downgrades Wellard ((WLD)) to Hold from Buy in the wake of the FY16 results, which signalled the company is in breach of its working capital facility and may be in breach of certain financial covenants. The broker reduces the target to 30c from 75c. Deutsche Bank observes that earnings have been affected by the inability to pass through the historically high cattle prices to traditional customers in Indonesia and Vietnam.

Morgans observes, should Wellard be unable to renegotiate its loan facilities, the business will not continue as a going concern and it may be forced to sell assets. Given conditions have deteriorated further in FY17, the broker has little confidence in forecasts. Morgans maintains a Reduce rating and considers the stock a high-risk investment. Target is 25c.


Credit Suisse believes Telstra ((TLS)) has an emerging dilemma over its dividend. The earnings gap as NBN payments roll off is rapidly approaching and will result in core recurring earnings per share (EPS) falling significantly over the next 2-3 years. This core EPS is forecast to fall as low as 23.2c per share in FY19.

Credit Suisse maintains that if Telstra sticks with its current dividend policy, the dividend would likely need to be cut in the outer years. If Telstra changes its policy and pays a dividend above EPS for a period, earnings from areas such as mobile and network access could have time to catch up with the pay-out, the broker contends.

There is no near-term dividend risk, as NBN payments should support cash flow and reported earnings, but Credit Suisse envisages dividend sustainability will start to worry investors in the medium term. Moreover, history shows that Telstra's yield tends to rise, ie the share price declines, when there is concern about the long-term sustainability of its dividend.

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article 3 months old

RCG Corp Confident In New Avenues For Growth

Multi-brand footwear distributor and retailer RCG Corp has seen a soft start to FY17 trading but management is confident in initiatives.

-Competitive pricing pressure for The Athlete's Foot envisaged easing
-HypeDC expected to diversify portfolio and underpin leading position
-Strategy to focus on performance footwear expected to drive growth

By Eva Brocklehurst

Multi-brand footwear distributor and retailer, RCG Corp ((RCG)), has suffered a soft start to FY17, the company's trading update suggests, despite a robust performance in FY16. Management has flagged a number of initiatives taking place in FY17 which could lead to new avenues of growth and attract new, younger customers to its brands.

Morgans observes competitive pricing pressure which affected The Athlete’s Foot in July has since eased and recently-acquired HypeDC should improve as further exclusive products hit the stores. The main disappointment for Morgans is margin (EBITDA) guidance within the Accent division, which is expected to be flat. RCG has guided to gross profit margins expanding 2-3% in FY17 but flat EBITDA margins as investments are made to support its growing infrastructure.

Morgans sees value in RCG at current prices but accepts patience is now required until forthcoming updates from the company confirm momentum in sales has accelerated. The broker retains an Add rating and $1.92 target.

The company announced a new concept store at Chadstone, Victoria, will open in October and another four of The Athlete’s Foot performance stores will open before Christmas. Moelis expects HypeDC should diversify the company’s portfolio and cement its position as a regional leader in retailing and distribution of footwear. The broker lauds management’s track record, even in challenging conditions.

Management cites evidence that the global athletic/leisure trend is continuing globally, with overseas luxury brands investing in innovation and high end, premium casual footwear. RCG has guided to Accent like-for-like sales growth in FY17 of 7%.  Whilst 7% growth in LFL sales is a decrease from the 15% experienced in the second half of FY16, Moelis suspects this is due to Accent cycling tough comparables rather than the end of the trend towards casual footwear.

Moelis considers the share price reaction on the back of the weaker-than-expected start to FY17 trading was excessive, as management has reiterated guidance for full year operating metrics, albeit with a skew to the second half in HypeDC and The Athlete's Foot. The broker considers the decline in the shares a buying opportunity and retains a Buy rating and $2.05 target.

Group gross margins improved to 51.2% in FY16, which beat Citi’s expectations. In analysing HypeDC’s initial trading under RCG’s ownership, Citi found the update for the first eight weeks of FY17 was, on balance, disappointing considering HypeDC grew sales at a compound rate of 24% over FY11-16. Admittedly sales in the first quarter of FY17 were affected by delayed delivery of key product lines and synergies are expected to mount.

Citi notes a significant component of growth for HypeDC over the last two years has been the strength in athletics and leisure footwear but is cautious about the maintenance of global athletic/leisure footwear growth rates. The broker expects athletics/leisure categories to outperform other footwear in the short term because of innovation and new technology – coinciding with an Olympics year -- but does not believe this constitutes a permanent shift in consumer behaviour.

Citi has a Neutral rating and $1.64 target. The broker concludes that the company has a strong, but slowing, like-for-like growth profile while maintaining a material roll out plan for its stores. The broker also notes the stock is trading at a 61% premium to domestic discretionary retail peers.

The start to FY17 was solid, Bell Potter contends, despite the bumpy entry for HypeDC. Accent achieved impressive growth and the broker believes there is significant scope for store network expansion and leverage from The Athlete’s Foot IT and scale benefits. Skechers remains the most important brand for the Accent division, Bell Potter contends, with a planned footprint of 120-150 stores in Australasia.

The broker applauds RCG’s decision not to indulge in discounting at The Athlete’s Foot and believes the strategy to focus more on the consumer of performance footwear will drive growth from repeat purchases and be accretive to store margins. Bell Potter has a Buy rating and $2.15 target.

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article 3 months old

Domino’s Pizza Delivers Upbeat Outlook

Domino's Pizza produced characteristically strong results in FY16 and brokers are upbeat about the outlook, yet several question the lofty valuation that now prevails.

-Highest level of growth ever forecast by management so early in the year
-Long-term store targets in Australasia raised to 1,200 and existing stores moving to capacity
-Rise in Australian labour costs a risk, given elevated trading multiple leaves little room for slowdown

By Eva Brocklehurst

Domino’s Pizza Enterprises ((DMP))  delivered  characteristically strong earnings growth in FY16 and more is expected. The company expects earnings growth in FY17 of over 25%.

Macquarie forecasts growth to be 5% ahead of the company’s estimates, noting historically Domino’s has taken a conservative approach towards guidance, which usually results in several upgrades throughout the year. The long-term store target for the Australasian business is increased by 300 to 1,200 stores by 2025, a result of existing stores moving to capacity faster than expected.

The company’s Project 3/10, which targets pick-up of orders in three minutes and delivery in ten, is expected to be the largest contributor to long-term growth. Reducing consumer perceptions around timing should help increase its share of the market, Macquarie maintains.

Automated delivery in some stores is expected by the end of FY17 and information regarding maintenance and costs will be used to develop a roll-out strategy. Meanwhile, European markets are presenting significant opportunities. Macquarie observes the contribution from offshore earnings has now reached a point where the company can no longer fully frank dividends, reducing its franking on FY16 dividends to 70%. Still, given the low dividend yield this is not expected to be material to the share price.

What is there not to like? Management expects a significant increase in Australian labour costs and, while an agreement is yet to be reached, envisages franchisee profitability will grow despite wage increases. Also, the weak economy in Japan and the roll-out of IT projects across that country suggests trading will continue to be tough.

Deutsche Bank envisages an opportunity to improve returns in Japan through store conversions and momentum maintained via continued product and digital innovation. The broker considers the increase in Australian labour costs a risk, particularly given the stock’s elevated trading multiple leaves little room for a slowdown. Deutsche Bank now expects underlying FY17 profit growth of 37.4%.

The broker asserts that while franchisees have become accustomed to the earnings benefit stemming from rapid sales growth - a reason they have been willing to invest in new stores, refurbishment and marketing - the risk is that even if profit growth slows for just one year, their appetite for this investment may diminish. Moreover, profitability varies significantly across the portfolio.

The broker finds it interesting the company did not discuss price increases as a method of offsetting the impact of wage costs. Deutsche Bank perceives there are risks in using price, given aggressive pricing has been a key driver of the company’s success.

On the subject of the stores moving to capacity faster than expected, the broker believes part of the rationale for expanding the number of stores is to enable the group to achieve its 3/10 target by locating stores closer to the customer. Deutsche Bank’s main concern is that the profitability of existing franchisees may be affected if the catchment is split.

The growth story is intact, long term, in Morgan Stanley’s view. The broker projects a 10-year earnings growth rate of 19%. With leverage to fixed costs and scale, earnings margins on network sales are expected to expand to 13.5% from 9.2% by FY26. Growth in Europe is accelerating and the store upgrades could imply 7,500-13,000 stores long term, versus the existing target of 4,550, the broker maintains.

Further upside is envisaged should the company exceed its current store targets and maintain same store sales growth for a prolonged period. Needless to say the broker retains its bullish estimates and an Overweight rating.

Despite all the positives, the share price presents a very elevated price/earnings ratio and enterprise value/earnings multiple in Ord Minnett’s view, with limited room for tolerance of any performance that does not materially exceed the market’s expectations.

While the guidance provided is the highest level of growth ever forecast by management this early in a year, Morgans still expects it to prove conservative. The broker is convinced of the longevity of the growth story, with a store footprint that could more than double and margin upside from scale and leveraging the digital platforms offshore.

The multiple has never been so high or so demanding but Morgans retains an Add rating, given FY17 is the year the highly successful digital platforms will be exported to Japan, France and Germany.

The consensus target on FNArena’s database is $71.03, suggesting 8.8% downside to the last share price. This compares with $61.69 ahead of the results. Targets range from $56 (UBS, yet to update on the results) to $82.01 (Morgans). There are two Buy ratings and four Hold.

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article 3 months old

Orora Packages A Perfect Outlook

After a strong FY16, brokers laud the outlook for packaging company Orora, which is targeting organic growth as well as further investment in innovation and acquisitions.

-IntegraColor providing opportunities in US PoP market and vertical integration
-Australasian cost benefits on track, with lower AUD delivering tailwinds
-US target market fragmented, with small bolt-on acquisitions more likely


By Eva Brocklehurst

Orora ((ORA)) has deftly packaged broker confidence in its outlook, with FY16 results that were driven by strong organic growth, cost reductions and the contributions from recent acquisitions. FY17 earnings are forecast to be higher, with the company targeting organic growth as well as further investment in innovation.

North American acquisitions contributed heavily to the result, providing market share gains and margin expansion, while Australasia benefitted from improved volumes and cost improvements despite generally flat conditions. The company established two new distribution centres in the US and increased its glass forming line capacity in South Australia. The acquisitions of Jakait, IntegraColor and a Californian supplier of flexible packaging were also completed.

UBS believes there is further upside potential for the company, expecting Orora should deliver around 10% growth per annum over the next two years with reasonable confidence. Scope to pursue its acquisition-led strategy in North America also continues, as net debt is expected to moderate to 1.4 times earnings by the end of FY17. The broker expects that deploying capital in North America will create long-term shareholder value.

While the market may have largely factored in muted organic growth for the domestic business, UBS envisages potential margin accretion over time, underpinned by a duopoly industry structure in fibre and glass industries and a sustained lower Australian dollar providing tailwinds for domestic exports such as wine.

In North America, the broker envisages IntegraColor is more than just a printing business but will provide an entry point and further exposure to the fast-growing convenience channel. Over time UBS believes IntegraColor provides an opportunity to vertically integrate the entire packaging value chain, from design to procurement to logistics and marketing.

Morgans is increasingly confident in the company’s ability to drive organic growth, extract operational efficiencies and execute on acquisitions. The stock is not cheap, hence a Hold rating, but the broker believes it deserves a premium multiple given its defensive characteristics and strong market position.

Citi also remains a holder of the stock because of the benefits of the robust earnings outlook, attractive cash flow and highly regarded management. The broker considers the stock’s multiples already reflect this to a large extent so upside from current levels may be driven by events.

The results were almost faultless, Ord Minnett contends, expecting the delivery of top line synergies and further acquisitions, particularly in the point-of-purchase (PoP) area, which offers scope for earnings upside. Given the share price spike in the wake of the results the broker reduces its recommendation to Accumulate from Buy.

North America delivered underlying revenue growth of 6.0% and management remains confident in its ability to deliver growth at a rate of twice GDP. Ord Minnett notes further investment will be required to achieve this growth but, with cost increases tracking below revenue growth, this paves the way for margin expansion. Ord Minnett now assumes North America reaches a peak margin of 6.0% by FY22.

In Australasia, while the company is on track to deliver the benefits of its cost savings from the B9 paper mill, Ord Minnett notes electricity, gas and soda ash input costs will likely experience continued pressures into FY17. Earnings growth will therefore depend on organic sales and operating efficiencies. The Australasian business margin is expected to gradually improve to 11.3% by FY22.

Macquarie was also impressed with the results. The broker has run a re-investment scenario to quantify the potential earnings impact from the balance sheet options. Management envisages $100-150m per annum in deployable capital. Assuming targeted returns of 20% are delivered over three years the broker calculates there is 10-21% in theoretical upside to profit forecasts by years four to five.

Macquarie also notes the acquisition of IntegraColor has strengthened the company’s offering and improved its ability to participate across the customer value chain. The company has stated IntegraColor provides a new path for growth in PoP and targets are being developed, with the next stage being to expand the US geographic footprint from its current holding in Texas.

Credit Suisse observes the company may have US$300-400m of firepower for acquisitions, which could potentially add over 10% to earnings, but there are few targets which could consume that capacity. IntegraColor holds a 1% market share in a fragmented US$10bn market, the broker notes, with the top four holding just 20% of the market. All up, Credit Suisse believes Orora may need to string together several small acquisitions rather than make a “transformational” deal and the earnings contribution from each would only be modest.

FNArena’s database has five Buy ratings and three Hold. The consensus target is $3.08, suggesting 2.8% downside to the last share price. Targets range from $2.75 (Deutsche Bank) to $3.40 (UBS).

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article 3 months old

Ansell On An Improving Trend

Ansell beat low expectations in its FY16 results and its outlook for FY17 has re-ignited confidence, demonstrating some positive growth trends.

-Reviewing options for sexual wellness business and M&A opportunities
-Emerging markets stabilising and medical expected to return to growth
-Portfolio optimisation provides capital management potential

By Eva Brocklehurst

Ansell ((ANN)) beat low broker expectations for FY16, with the issues that drove a downgrade back in February appearing transient and largely attributable to manufacturing problems at the Malaysian facilities that are now fixed.

Guidance has built broker confidence in the FY17 outlook, with indications conditions are improving in the US and Europe and emerging markets are stabilising. That said, brokers note organic sales continued to contract, although management expects a return to modest growth as the impact from the offloading of legacy products diminishes.

The company has hired an investment bank to review the options on the sexual wellness business as well as opportunities to enhance its position in the industrial and medical spheres. The sexual wellness division was the best performer in FY16, with sales growth of 8.2%. The single-use division grew strongly at the earnings line but sales growth was non existent because of the passing on of raw material price increases and the exit of non-core product lines.

Macquarie observes organic sales declined for the third straight half but notes management is aiming to deliver organic growth of 2-4% in FY17, supported by a stabilising of emerging market exposures and a return to growth in the medical division, which was the weakest performer in FY16. Sales in Russia were affected by the falling oil price and currency while Brazil was also weak from macro economic issues in FY16. Excluding the two, emerging market growth was 7.7%.

While the outlook may be improving the broker believes, with the stock rallying around 18% after the results and significant uncertainty still surrounding the operating environment, much of the upside is now captured in the price. Macquarie's rating is downgraded to Neutral from Outperform.

The broker expects a sale of the sexual wellness business could free up capital for some larger acquisitions or capital management in FY17, while noting that M&A opportunities have improved globally. Given the company has historically relied on acquisitions to drive growth, this is considered positive news. Meanwhile, global manufacturing activity is seen improving and considered important given around 50% of earnings are derived from the sale of protective equipment.

The sale of the sexual wellness division makes strategic sense to Ord Minnett, if a premium price can be achieved. Management has indicated a preference for further acquisitions versus returning funds to shareholders. The broker’s analysis indicates that Ansell, ex sexual wellness, is trading near fair value after the recent move up in the share price. Ord Minnett suggests FY17 guidance, which implies earnings growth of 2-17% and sales growth of 2-4%, is wide ranging to reflect the board’s cautious outlook.

Credit Suisse maintains the upper end of the guidance range is realistic and suspects the potential divestment of the sexual wellness division would be well received, assuming, too, that a favourable sales price is achieved, and that the capital is invested in accretive acquisitions.

The broker also notes management’s comment that the company’s end customers are largely business and not consumers and, thus, a review of the sexual wellness division makes sense. That said, given the division generates the highest returns of Ansell’s four operating divisions a divestment would only be logical at the appropriate price, the broker warns.

UBS calculates the divestment, at an enterprise value to earnings ratio of 17 could add around $1.60 per share to the target price. The broker ‘s outlook suggests a stronger US market recovery than guidance implies and that Ansell is on the cusp of improvement, having moved through a 12-18 month period of headwinds for currency and operations. UBS envisages upside risk to FY17 guidance and retains a Buy rating.

The worst is behind the company, Morgan Stanley agrees, although recent competitor and distributor results signal operating conditions remain challenging. With FY17 guidance now to hand the broker suspects the stock could re-rate, as the results provide confidence on execution and demonstrate some positive growth trends. In addition there is now potential for portfolio optimisation and this could lead to further capital management.

Citi remains the more pessimistic broker on FNArena’s database, believing the outlook for the industrial business is weak, based on feedback from key customers, and this represents downside risk for the stock.

Morgans believes growth needs to come from areas other than acquisitions. The broker highlights the growth via acquisition strategy is compromised by the need to constantly rationalise overlapping products, and weighs on the company’s ability to drive organic growth across the entire portfolio. Hence, any sign this trend is slowing is to be welcomed. Furthermore, upside requires execution across a number of fronts in the face of continuing weak conditions.

The database has two Buy ratings, five Hold and one Sell (Citi) for Ansell. The consensus target is $21.66, suggesting 3.0% downside to the last share price. This compares with $19.27 ahead of the report. Targets range from $16.50 (Deutsche Bank, yet to update on the results) to $24.50 (Ord Minnett, UBS).

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article 3 months old

Growth Spurt Ahead For Baby Bunting

Baby Bunting impresses brokers with its maiden FY16 results and strong growth path.

-Strong comparables to be cycled in FY17
-Stock considered expensive but offering attractive outlook
-Margins below expectations due to sales mix


By Eva Brocklehurst

Baby goods retailer Baby Bunting ((BBN)) is on the verge of adding further scale to its business, with brokers lauding its attractive growth path. Results for its maiden FY16 report were at the top end of the upgraded guidance issued in February.

Brokers observe the results exhibit strong sales and operating leverage, with sales growth accelerating to 15.7% in the second half and up 12.5% for the year. Consumers are increasingly aware of the brand, with the folding of My Baby Warehouse in the first half contributing to the strong sales and Baby Bunting also investing heavily in IT, personnel and marketing during this period.

Morgans contends the stock is far from cheap, trading on 27 times FY17 forecasts but offers one of the most attractive, long-dated growth profiles in its retail sector coverage.

Baby Bunting is a dominant player in a defensive sector and 45% of its stores are less than three years old, while the competition is struggling. Yet, with less than 10% upside to the price target, raised to $3.14 from $2.86, the broker maintains a Hold rating.

Brokers note five new stores opened in FY16, four the south east Queensland market. Growth in private and exclusive ranges, now 10%, along with increased purchasing scale have offset higher sourcing costs from a weaker Australian dollar.

Macquarie believes the stock has one of the most attractive outlooks versus peers from both a revenue and a growth perspective. Nevertheless, the broker maintains the stock is trading at a substantial premium and can afford no mistakes.

Margins were the one aspect of FY16 which came in below expectations, being flat on the prior year, a result of strength in lower margin products such as prams, car seats and nappies and not something brokers are particularly perturbed about.

The company does forecast like-for-like sales to moderate over the balance of FY17 to mid single digits as stronger comparables are cycled. Guidance is for sales growth of 15-31% in FY17, an extension of the stores target to over 80 and the private label mix to 15% from 10%.

The outlook reinforces Morgan Stanley’s view regarding the long-term opportunity. The broker expects like-for-like sales growth of 6% in FY17 and a 40 basis point expansion in margins off the elevated metrics achieved in FY16. Hence, estimates are upgraded by 7.2% and 8.9% for FY17 and FY18 respectively.

This broker, too, finds the track record and strong balance sheet highly attractive and increases its target by 20% to $3.30. The main risks envisaged are pressure on margins from Australian dollar depreciation, increased competition from online competitors, and softer consumer spending.

There are two Buy ratings and one Hold on FNArena’s database. The consensus target is $3.21, suggesting 5.0% upside to the last share price and compares with $2.78 ahead of the results. Targets range from $3.14 (Morgans) to $3.30 (Morgan Stanley).

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article 3 months old

Weekly Broker Wrap: Lithium, Amazon, Strategy And Cash Rates

Supply surge in lithium; disruption from Amazon; more difficult period ahead for equities; RBA cash rate outlook.

-Supply expansion likely to meet the significant demand for lithium in China 
-Potential for Amazon to make inroads in electronics and media sales in Oz
-More difficult period for equities ahead but can accommodate some rise in bond yields
-Case for further official rate cuts mounts as risks seen increasing going into 2018

By Eva Brocklehurst


A supply wave is building in lithium. The supply of lithium from existing brine producers is accelerating and Australia’s two new hard rock mines at Mt Marion and Mt Cattlin are about to begin production, targeting immediate expansions. Macquarie expects Australian production of spodumene will double over the next 12 months.

Yet, the broker suspects incumbent producers may become more motivated to keep new supply out of the market. Higher production from the two new mines means demand will be satisfied out to 2021, the broker suspects, but the turning point for lithium pricing could arrive earlier than previously expected. Even in the context of China’s rapid growth in electric vehicles it appears unlikely the required growth will materialise quickly enough to absorb the supply.

Significant conversion capacity is being built in China and this is expected to be the main driver of demand. Yet the low barriers to entry for hard rock mines and ability of existing producers to ramp up suggests to Macquarie that supply will always be able to meet demand or even outstrip it.

Orocobre ((ORE)) remains the broker’s preferred pick in the lithium sector as it is already in production and has been able to realise current off-contract pricing. The broker envisages the Mineral Resources ((MIN)) and Neometals ((NMT)) joint venture at Mt Marion is the largest and lowest risk addition to hard rock supply.

The broker is also positive about the Galaxy Resources ((GXY)) Mt Cattlin mine, but believes the stock is factoring in a premium to long-term price forecasts. In light of the expansion plans for Mt Cattlin and Mt Marion Macquarie finds the outlook for Pilbara Minerals ((PLS)) and Altura Mining ((AJM)) more challenging.


Amazon has disrupted a number of retail markets around the world and, given its product overlap, the Australian retailer most likely to be affected in Citi’s view is JB Hi-Fi ((JBH)), where earnings are estimated to potentially fall 23%.

Amazon already has a large digital presence in Australia with the only limiting factor in expansion being logistics, but Citi maintains that the recent investment in the US, with its regionally-based fulfilment centres, should provide solutions for the vast distances experienced in Australia.

The broker estimates Amazon could reach $3.5-4.0bn in sales in Australia. Its biggest categories are electronics and media. That said, the same penetration enjoyed in the US is not considered likely given the strong presence of eBay in Australia. Amazon Fresh could also find it more difficult in Australia because capital city population density is low.

Still, Amazon could capture up to 7% of the electronics market based on its success in the US and UK and Citi maintains retailers such as JB Hi-Fi and Harvey Norman ((HVN)) would have to deal with a loss of sales and risk to overall margins, given Amazon’s pricing.

Equity Strategy

Credit Suisse’s indicators suggest bond yields should start to rise and equity markets could enter a more difficult period in the second half of 2017. At that point investors could be confronted by sharply accelerating US wages growth and China unable to roll over loans without printing money, with the market having discounted by that stage much more in the way of fiscal easing.

The broker anticipates a sell-off in equity markets in the second half of 2017, noting equity risk premium is too high and while there may be a sell-off in credit, the broker struggles to envisage it being meaningful. Most of the fall so far in bond yields has been offset by a rise in the equity risk premium and cost of equity. This now ensures an environment where many fixed income assets and parts of real estate appear expensive.

The broker believes central banks will err on the side of caution and risk an overshooting of inflation rather than risk a recession. This in turn remains supportive for equities.

The broker notes US equity mutual fund selling has been extreme with the corporate sector the only buyer, resulting in low equity weightings by institutions. Of note too, Credit Suisse observes, most bull markets end on a clear over-valuation of the sector and a bubble in growth stocks, of which neither has been witnessed so far.

The risk for the near term is that bond yields rise more than expected, given net long positions in bonds are extreme and the financial and economic proxies for cyclicality are improving. The broker believes equity valuations can accommodate a 50-75 basis point rise in bond yields.

Cash Rate Forecasts

National Australia Bank economists expect underlying inflation to remain below the Reserve Bank’s 2-3% target band until mid 2018. Factors suppressing inflation are expected to persist, being strong retail competition, low wages growth and low commodity prices. The RBA forecasts CPI inflation of 1.5-2.5% out to 2018.

The economists observe the RBA is less worried than they previously thought about using up some of its remaining monetary policy ammunition and the case for further reductions in the cash rate appears to be mounting. Despite the central bank’s focus on downside risks in the near term, it has maintained its expectations for economic growth to lift well above trend by 2018.

The economists envisage a firm economy in the near term, supported by an improvement in the non-mining sector and increased hard commodity production but believe the risks going into 2018 are becoming increasingly apparent as LNG exports flatten from a high level and the dwelling construction cycle turns lower.

Consequently, these forecasts are factoring headwinds for GDP growth forecasts and the spread between the economists’ outlook and that of the RBA is widening, to around 1.5 percentage points by late 2018.

The economists expect the RBA will include two more 25 basis points reductions to the cash rate in May and August 2017 to a new low of 1%, to stabilise the unemployment rate at just over 5.5% and prevent economic growth from dropping below the NAB forecast of 2.6% in 2018.

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Carsales Impresses But Looks Expensive

Carsales.com impressed brokers with a solid set of numbers in FY16 but several consider the stock expensive relative to the medium-term outlook.

-Strong dealer volume growth in second half
-OEMs still imposing restrictions but not overly contentious
-Meaningful progress in international required for more bullish outlook


By Eva Brocklehurst

Carsales.com ((CAR)) produced a strong result in FY16 while investment in Brazil is expected to provide earnings growth going forward and an uplift in South Korea, Chile and Mexico is also considered likely. A more detailed update is expected at the AGM in October.

Dealer revenues rose 10%, reflecting the impact of two price rises in used car listings and a 15% rise in new car listings, while private revenue rose 22.5% as the company consolidates the Redbook Inspect and Tyresales businesses.

The main surprise for Morgans was very strong dealer enquiries in the second half, represening the best volume growth in three years. Growth in depth products and pricing improvements continue to expand yields, the broker observes.

Morgans likes the business but the implied shareholder return suggested by its target of $13.01 is less than the 10% hurdle needed for an Add rating, and a Hold is maintained. Nevertheless, the broker would be a buyer on any weakness.

Despite Carsales' high quality domestic business and number one position in Australia, UBS maintains a Sell rating on valuation grounds and believes the stock is expensive relative to its medium-term growth outlook.

Brokers note the change in the competitive environment, with US-based Cox Enterprises becoming the primary shareholder in rival Carsguide.com.au, but remain confident in Carsales' strong brand. Morgan Stanley highlights the fact that the business has negotiated multiple challenges to its leadership position successfully over the years.

Earnings were lower than Deutsche Bank expected, primarily because of a weaker contribution from Stratton. Still, given Stratton is 50.1% owned the impact was less pronounced. Deutsche Bank expects the impact to be temporary. Meanwhile, international operations are considered to be tracking well, and Webmotors stood out with a 18% profit growth despite the subdued economic backdrop.

Management has confirmed recent issues with original equipment manufacturers (OEMs) imposing restrictions on advertising with third party sites. Carsales remains in discussions with them and expects the issues will be resolved. Given most OEMs seem to return to the fold after a withdrawal, the broker is not overly worried but will monitor inventory levels closely.

 Deutsche Bank views the introduction of Carsales' lead-based model as an important catalyst, with this model in place in Brazil and to be implemented shortly in South Korea.

Credit Suisse notes the solid progress in international markets but expects the monetisation process to take time and near-term earnings are likely to be affected by continued investment. Ord Minnett, too, expects upside from the international business but would prefer to witness more meaningful progress before pricing in a more bullish scenario and downgrades to Hold.

Stratton underperformed Ord Minnett’s expectations, even though earnings grew 36%, as volumes were hit in the fourth quarter as a result of a regulatory review of a preferred lender. This broker, too, expects the impact to be temporary.

The broker expects more modest growth in dealer revenue, with small yield increases while enquiry volumes appear to be maturing. Ord Minnett estimates private classified revenue was flat and the space is becoming increasingly competitive, although Carsales is well positioned.

The business performed better than Macquarie expected, particularly in regards to display advertising where the broker had envisaged growth might remain difficult. Moreover, domestic margins expanded to 60.8%, with operating leverage offsetting the drag which comes from a bias in growth to lower margin segments.

Macquarie also notes international trends are improving and expects this to provide a boost to medium term growth. The broker takes the opposite tack and upgrades to Outperform from Neutral.

There are two Buy ratings, four Hold and one Sell on FNArena’s database. The consensus target is $12.05, suggesting 6.9% downside to the last share price. Targets range from $10.00 (UBS) to $13.40 (Macquarie).

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Significant Opportunity Awaits Car Retailers

Significant opportunity awaits Automotive Holdings and AP Eagers if they can successfully clear several near-term obstacles, brokers suggest.

-Strength in car retailing offers acquisition potential for APE, AHG
-APE's Carzoos considered an attractive, supportive proposition
-Automobile segment eclipses negatives for AHG's refrigerated logistics

By Eva Brocklehurst

There is a significant opportunity for consolidation in the automotive industry, given a large and fragmented market. Moreover, UBS contends, 2016 is likely to be a record for the automotive retailing industry in Australia, with sales of new and used cars travelling well in 2016.

Of note, there are two significant issues to be negotiated for the sector’s key operators. The first is the Australian securities and Investments Commission (ASIC) investigation into dealer finance income.

Moelis suspects this could lead to a reduction in finance earnings and hit the income of Automotive Holdings ((AHG)) and AP Eagers ((APE)) by 20% and 14% respectively, if there is no corrective action from management. ASIC has proposed abolishing flex commissions above the base rate. While management may be able to counter some of the impact, the broker still expects some downside to earnings.

The other headwind is the changing consumer attitude towards car ownership, with new vehicle sales potentially slowing to 1.5-2% growth per annum from 2.5-3%. Moelis observes that as ride sharing models increase in popularity, the car/ride sharing component could comprise 10% of a total car park and potentially involve a higher proportion of total rides.

The broker quotes research which indicates every shared vehicle replaces ten vehicles previously purchased while the traditional replacement cycle is ten years. Hence, the expectation that new vehicle sales could slow to the above rate.

Aside from these headwinds, Moelis believes AP Eagers and Automotive Holdings are well placed to make acquisitions, as both have an ability to negotiate a lower cost of debt and move excess inventory across their dealer network.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Hold rating on AP Eagers, with a $13.28 target, believing the stock is a well capitalised long-term growth story with the means to make $67m in acquisitions through cash flow, supplemented by a corporate debt facility.

The company’s Carzoos used vehicle sale/purchase concept, with extended warranty and capped price servicing to all customers, could also increase customer retention, the broker maintains, and there are low operating costs and little up-front capex required.

The broker believes Automotive Holdings is priced for underperformance, but maintains a Hold rating and $4.70 target given the weakness in WA and the uncertainty around the ASIC inquiry.

Moelis does not expect management will sell the refrigerated logistics business in the near term and if it were sold, this would lead to a purer business and warrant a higher market multiple. Furthermore, the sale could provide sufficient capital to pursue an acquisition strategy similar to AP Eagers, allowing Automotive Holdings to move to a 10% market share by 2025.

UBS suspects it might be time to buy Automotive Holdings. New car sales have continued to grow, with UBS noting growth has been driven by increasing affordability and rising wealth, a function of lower price points, low interest rates and affordable financing options. As the largest automotive retailer in Australia the company is expected to benefit, with organic growth supplemented by acquisitions.

The stock has underperformed the Small Ordinaries index by 20% over the past 12 month as its refrigerated logistics division is expected to reveal a decline in earnings over FY16, because of increased competition and customer in-sourcing.

This division is unlikely to deliver a positive return on assets over the weighted average cost of capital, but with momentum in the automobile segment likely to continue any improvement in refrigerated logistics would be well received, UBS maintains. The broker upgrades the stock to Buy from Neutral.

FNArena’s database contains five Buy ratings and two Hold for AHG, with a consensus target of $4.44 suggesting 2.1% upside to the last share price. Targets range from $4.34 (Ord Minnett) to $4.63 (UBS). The dividend yield on FY16 and FY17 forecasts is 5.2% and 5.5% respectively.

There are two Buy ratings and two Hold for APE. The consensus target is $11.86, suggesting 1.5% downside to the last share price. Targets range from $10.89 (Ord Minnett) to $13.00 (Credit Suisse).

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