Tag Archives: Gaming

article 3 months old

Weekly Broker Wrap: Technology, Wagering, Healthcare, TV And Insurers

-Upgrade potential for tech stock Appen
-Tabcorp success in mobile strategy
-Cuts to medical testing rebates probable
-Harder to deliver growth in TV
- Insurers likely call on reinsurance


By Eva Brocklehurst


Microsoft has been a customer of language technology consultant Appen ((APX)) for over 20 years and contracts under the master vendor agreement are due for renewal at the end of June. Bell Potter expects the renewals will occur, albeit there is usually some changes in the statements of work, because of Microsoft's requirements and the markets or languages which are covered. The dollar value also tends to change. The renewals will warrant a statement to the market, the broker suspects, given the size of Microsoft, and such an announcement could be a catalyst for the share price.

The renewals could also prompt an update or upgrade of prospectus forecasts for 2015, given the work would be secured for the second half. Bell Potter maintains a Buy rating and 85c target for Appen. At this target the total expected return is over 20%.


Industry data suggests mobile applications are driving renewed growth in wagering and Tabcorp ((TAH)) and Sportsbet are consolidating their share. Morgan Stanley believes rational pricing and operating leverage are improving the profitability of the industry, while the risk of material near-term racefield fee increases is limited. Mobile is growing the market by expanding the customer base for wagering and product depth is improving, while incentives are driving first time audiences. Customer retention is coming from data driven analytics. The broker expects the penetration of wagering via mobile is likely to keep improving with the popularity of US sports and mobile streaming vision.

Industry participants expect Tabcorp's multi-channel strategy across retail/online and recent use of offers will be key to its success. Retail growth is positive and Morgan Stanley envisages the business will also benefit from lower oil prices. Tabcorp remains the broker's key wagering pick with an Overweight rating.


The Commonwealth will conduct a review of Medicare and any future reforms will prioritise patient outcomes and budget sustainability. Deutsche Bank accepts the implications of the review are difficult to assess at this stage but it appears the government is seeking savings and this raises the risk for providers such as Primary Health Care ((PRY)) and, to a lesser degree, Sonic Healthcare ((SHL)). The minister has signalled the government is open to a future review of the current indexation freeze. The rebate freeze removes the 2.0% annual indexation and delivers savings of $1.3bn over four years. Deutsche Bank suspects savings equal to, or greater than, the 2.0% will be required to offset this.

The broker cautions that the review could lead to cuts to pathology and diagnostic test funding on the grounds that these services can now be offered more efficiently than was the case when the medical benefits scheme items were first established. Examples of the reforms mentioned by the minister include vitamin-D, B12 and foliate testing plus X-rays for lower back pain.


The list of viewing options for consumers is growing. Citi assesses the potential impact of Netflix and Pay TV penetration on audiences and free-to-air (FTA) broadcasters. The broker concludes that advertising growth could prove challenging as audiences fragment. TV is not dying but it is getting tougher to deliver growth. Video consumption is increasing in Australia, boosted exclusively by online. This means FTA TV audiences are declining in percentage terms. Citi expects FTA TV audiences will decline by around 2.0% year on year for the next three years and there will be no growth in advertising, ex special events.

For Pay TV providers such as Foxtel the focus is on premium and niche content and superior technologies. For video platforms such as Netflix a lack of scale, high content costs and churn represent risks which could limit profitable returns to two players. Citi rates News Corp ((NWS)) as a Buy, with Foxtel delivering growth under a new pricing model. Nine Entertainment ((NEC)) is also rated Buy, and is viewed as a potential M&A target for content owners. Seven West Media ((SWM)) is considered cheap but risks are growing which will likely weigh on earnings and the share price. Citi has a Neutral rating on Seven West Media.


A severe storm in NSW, where significant damage was sustained in the Hunter, Central Coast and Sydney, has led JP Morgan to review the probable impact on Insurance Australia Group ((IAG)) and Suncorp ((SUN)). Insurance Australia has 24.9% of the premium in NSW while Suncorp has 18.4%. The broker estimates IAG's natural perils experience for FY15 ahead of these storms, and including a full half year's expected additional perils allowance, to be $646m. The company has an allowance of $700m in guidance but also has reinsurance protection of $150m above that figure, which the broker suspects may be called upon.

In the case of Suncorp, JP Morgan notes the company said it would miss the 10% return target post Cyclone Marcia in March, having flagged event costs to that period of $690-720m. Some of the aggregate reinsurance protections are close to kicking in for Suncorp. As such, JP Morgan suspects, including aggregate reinsurance protection, the cost of the storm is capped at $65m for Suncorp. The broker observes markets tend to react adversely to the peril events in the near term but eventually tend to look through them.

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article 3 months old

Strong Outlook For Oz Gaming Stocks

-Australia taking VIP revenue share
-Benefit from China's corruption crack down
-Mass market growth highest in 5 years


By Eva Brocklehurst

VIP turnover exceeded expectations for all casino operators and was the main beat in terms of earnings estimates for the gambling sector in the latest reporting season.This resulted in Goldman Sachs upgrading its outlook for Crown Resorts ((CWN)), Echo Entertainment ((EGP)) and Skycity Entertainment ((SKC)). The broker envisages material upside potential in VIP returns, as Australia gains share in the Asian region.

Crown continues to dominate the Australian VIP market but the broker suspects Echo Entertainment has grown its share since the renovation of The Star, and now accounts for around 40% of Australian VIP. With increased focus on regulations in Macau, and potential for 100% smoking bans to commence from 2016, Goldman believes Australia is well positioned to take further share of the Asian VIP revenue pool.

Deutsche Bank is also positive on the sector, which is seen underpinned by sound balance sheets, good cash flow and reasonable dividend yields. The VIP segment is expected to benefit from the corruption crack down in China as well as recent investments and higher commission rates. Lower revenue from Macau may impact somewhat on Crown. The Australian VIP market was up strongly in the first half and the broker suspects both Crown and Echo Entertainment have increased share following the Chinese crack down. Crown is expected to explore both capital and bank markets to finance anticipated growth projects, including a potential issuance of an ASX-listed hybrid.

In terms of the mass market, main gaming floor revenues were driven by lower petrol prices, rejuvenated loyalty offerings and regulatory change in Queensland. These factors resulted in the highest growth rates in five years, Goldman maintains. The second half of FY15 appears to have started well too, with Victoria posting strong growth and momentum continuing in Queensland. The industry is also benefitting from the investments made in prior years.

While yield is attractive in a low interest rate environment, the broker believes both Tatts ((TTS)) and Tabcorp ((TAH)) are trading at the top of the "defensives" on a FY15 price/earnings ratio basis, which means they may be factoring in the potential for more special dividends in the next six months.

Deutsche Bank expects benefits to continue to accrue from lower petrol prices and rates, underpinned by rising net wealth on the back of property and equity market gains. Domestic gambling expenditure is strong but Deutsche Bank observes the rate of improvement is mixed in both segment and geography. Casinos and gaming machines in Queensland and NSW remain the highest growth segments. Wagering is also strong in NSW and Victoria, while lotteries and Keno continue to lag. 

The ability to outperform in Australia's mature gaming industry will come down to having the right exposure to structural change, in Morgan Stanley's view. The broker believes Tabcorp, Skycity and Crown offer the most attractive risk/return metrics. The broker expects revenue to grow in line with household disposable income, while no regulatory or legislative changes are expected in the medium term.

Online/mobile betting is expected to continue to grow strong and shift the industry to fixed odds and away from pari-mutuel betting. Tabcorp is considered to be the main beneficiary of online growth ahead of Tatts because of its advanced offering. Echo Entertainment's loyalty program and Skycity's Auckland and Adelaide expansions are set to drive improved market share, in Morgan Stanley's opinion. The broker concurs that in VIP, all three casino operators are currently benefitting from the crackdown in China, taking market share away from Macau. Meanwhile, Crown is seen having the strongest exposure to the long-term growth in the Chinese mass market. 

Morgan Stanley does not believe, despite its larger VIP market share, that Crown will be more affected by swings in these numbers than Echo Entertainment. Rather, Echo has improved its share of the Australian market and, therefore, has been the key beneficiary of that geography's outperformance relative to Macau. This impact is magnified as VIP made a larger relative contribution to Echo Entertainment's earnings in 2014. The broker also expects, longer term, that Skycity will generate the best project return profile because of its Auckland and Adelaide redevelopments, which are focused on monopolistic, mass market opportunities.

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article 3 months old

Weekly Broker Wrap: Equities, Banks And Greyhounds

-Oz equities remain attractive
-Selfies abandoning cash
-Bank performances polarise
-Bank upgrade cycle ending?
-More stringent greyhound rules?

By Eva Brocklehurst

Oz Strategy

After a stumble at the beginning of 2015, Australian equity markets have advanced strongly, spurred by the latest cut to the Reserve Bank's cash rate. Citi notes the impetus has come from domestic investors responding to the low rates and adjusting their required return from equities. Foreign investors, too, are finding the market more attractive with the decline in the Australian dollar.

Citi does not believe a new paradigm is emerging. Since the GFC the perceived risk in equities has been heightened and equities have not closely reflected bond yields, until now. The broker suspects, as yields fall more and the GFC recedes into the background, the required returns from equities may edge down a little to below normal and reflect a return to the cycle.

Although wary of expecting the market to maintain a higher rating for equities, the broker suspects it could persist for a while as the economy continues to adjust to the end of the resources boom and rates stay low. The broker raises its target for the ASX200 to 6300 by end 2015.

Credit Suisse suggests the supply/demand situation for Australian equities is tight and there is more upside for index levels. Self managed super funds own 16% of the Australian equity market and their equity allocations are at 42%, but the cash allocation has declined to less than 28%. Lower rates suggest the cash component will come down further. The declining returns on cash raise the prospect of an income deficit.

Credit Suisse estimates that each 25 basis point rate reduction lowers the cash interest payments for these super funds by $500m. To maintain income levels they would need to switch $11bn out of cash and into equities. More dollars into the equity market will further support the dividend trade. Higher-than-median dividend yielders with better-than-median growth include Rio Tinto ((RIO)), Macquarie Group ((MQG)), Flight Centre ((FLT)) and Duluxgroup ((DLX)).

Bank Wrap

While bank revenues benefitted from the depreciation in the Australian dollar in the latest reporting season, Credit Suisse observes performances polarised in terms of financial markets income. Commonwealth Bank ((CBA)) and National Australia Bank ((NAB)) strengthened while Westpac ((WBC)) and ANZ Bank ((ANZ)) softened. System credit growth edged higher but customer repayment levels were again cited as a headwind to momentum. Net interest margins disappointed the broker, with intensifying asset price competition now outpacing fading funding cost advantages.

Cost growth also appears uncomfortably high relative to the revenue being generated, in Credit Suisse's view. The broker notes risk weighted asset growth was high and the spectre of regulatory risks has re-surfaced. In this instance, Credit Suisse points to Westpac's announcement regarding the treatment of mortgages, which underscores a need to not become complacent about regulatory capital.

The best days are behind the major banks, in Citi's view. Investors need to be careful about what they construe but the broker highlights disclosures which reveal evidence that capital generation has peaked and revenue growth is slowing, as mortgage competition builds. Credit quality is improving but credit costs no longer drive the improvement in earnings. Citi now has all four majors on a Sell recommendation, reflecting a more challenging outlook and the strong rally in share prices as investors have unambiguously sought yield in a falling interest rate environment. The broker prefers the regionals, rating Bank of Queensland ((BOQ)) as Buy and Bendigo & Adelaide Bank ((BEN)) as Neutral.

Mining sector exposures make up less than 2% of the major banks' loan portfolios. Morgan Stanley still suspects they could lead to a material increase in group loan losses from the "bottom of the cycle" levels. This is one reason why the broker suspects the earnings upgrade cycle has ended. Westpac highlighted in its first quarter update that stressed mining exposures had roughly doubled in the past nine months. Morgan Stanley notes ANZ has the largest relative mining exposure, with around 2.2% of total commitments, of which around 0.8% was non-performing in FY14.

ANZ's loan portfolio has growth over he past two years, largely because of oil & gas lending which now accounts for 39% of the mining portfolio. ANZ also has exposure to metal ore, mining services and coal and the broker observes the portfolio is around 64% investment grade and the remainder sub-investment grade. Commonwealth Bank's mining exposure is also weighted to oil & gas, with mining credit exposures at around 1.9% of total credit exposures. NAB has the least exposure to mining amongst its peers as a proportion of commitments, at around 1.0% of total.


The greyhound industry has suspended thirty trainers, owners and stewards in the wake of the investigation into live baiting. While only several may be prosecuted, more stringent regulation may ensue and/or punters may forego betting on greyhounds. Credit Suisse believes a 5% decline in turnover would affect both Tatts' ((TTS)) and Tabcorp's ((TAH)) wagering earnings by less than 1.5%. Greyhound racing is around 12-15% of total wagering turnover but margins in this industry are low, as most turnover is through high-fee pari-mutuel betting.

Higher racefield fees are possible, should the industry need to counteract falling turnover or require funds for additional regulatory oversight. While still early days, the broker suspects the impact may be greater for Tabcorp than Tatts, as Tatts has most of its fees reimbursed by Queensland racing.

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article 3 months old

Trend Up For Echo

By Michael Gable 

The Australian market recorded 12 straight days of gains, the longest winning streak since 1986. Naturally, you would expect the next 12 days to be less spectacular. Particularly pleasing was the rally in the banks, especially after confirmation of that interest rate cut that we have been expecting. There should be another rate cut on the way also.

Given the gravity-defying move in the market here, the probability of a short-term move down is very high and therefore provides opportunities for shorting the market, or hedging stocks that have rallied hard through the use of strategies such as covered call writing. Having said that, a couple of companies that we like: McMillan Shakespeare ((MMS)) and Veda Group ((VED)); appear to be breaking out to higher levels. We review Echo Entertainment Group ((EGP)) after some pleasing half year results.

For the last year EGP has been trending very strongly. The only negative we can see on this weekly chart is some divergence between the price and momentum (as measured by the RSI and indicated by the solid blue lines on the chart). Because of this, there may be a shorter term correction, but as long as it respects the uptrend (by staying above the green line), then any dips can be bought.

Content included in this article is not by association the view of FNArena (see our disclaimer).
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2


Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Brokers Upbeat On Crown Despite Macau Weakness

-Changes add to Macau volatility
-China's rate cut a positive
-Crown well placed domestically


By Eva Brocklehurst

When reports from gambling haven Macau suggest a downturn in the sector, anxious eyes turn to Australia's Crown Resorts ((CWN)). The company's profitability is significantly driven by its Macau joint venture with Melco, MPEL. Moreover, VIPs at Crown's Australian properties now account for 26% of Australian revenue and high value player visits are notably more volatile.

In November, Macau's gross gaming revenue fell by 19.6%, while year-to-date revenue is now up just 0.3%. Moreover, Deutsche Bank expects December revenue to fall 25-30%. Nevertheless, the broker takes heart in signs VIP revenue has stabilised. Mass market revenue has borne the brunt of the decline as several factors are affecting Macau's market. Classifications have changed some tables to VIP from mass market, which accounts for around one third of the revenue decline in November. The other cause is centred on premium mass players who are frequenting less often, or they are switching to VIP rooms in order to smoke. The smoking ban is envisaged having a much worse impact on mass gambling than was previously expected.

Deutsche Bank suspects the pressures will continue to weigh on Crown's share price, but recommends investors buy gaming stocks if they fall after the mass data from Macau comes out later this week. This is ahead of an expected recovery in VIP attendance, given the positive impact on junket activity that is expected to come after China's recent interest rate cuts.

Macquarie, too, favours MPEL above its Macau peers. The broker finds that the slowing down in Macau is not driven by the much publicised corruption crackdown but rather by a structural tightening in shadow bank lending. This restricts the liquidity that is available to small and medium Chinese enterprises. Executives from these businesses account for a major portion of Macau's premium/VIP players.

Macquarie does not expect a sharp recovery in the market, such as occurred in 2009 and 2012, but believes that selective monetary easing will slowly stabilise China's economy. This should relieve funding needs for SMEs and prepare the scene for a recovery in Macau's gaming market. Goldman Sachs recently portrayed Crown as a competitive global challenger. Cash returns screen below many peers at present because of the high costs from recent renovations domestically. Upon completion of projects such as Perth Hotel in 2015, Crown Las Vegas in 2018 and Crown Sydney in 2019, the broker expects this position to improve.

Despite current weakness Macquarie believes there is upside in Macau for Crown, while the domestic properties are also poised to provide a recovery in revenue. The broker estimates the domestic properties are trading at 8.5 times FY15 multiples, at the bottom end of the 8.5-9.5 through-the-cycle range. A return to the mid point of this range for Crown's domestic properties should combine with meaningful upside in the MPEL valuation and offer returns to Crown shareholders approaching 25%, in Macquarie's view. JP Morgan recently downgraded forecasts to account for the softness in Macau's market but retained an Overweight rating given the stock is trading on attractive multiples. Citi took a slightly different tack, preferring to stay at Neutral because of the near term volatility in Macau earnings.

On FNArena's database there are six Buy ratings and two Hold. The consensus target is $16.91, signalling 21.1% upside to the last share price. Targets range from $15.20 to $20.00.

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article 3 months old

Weekly Broker Wrap: Casinos, Consumers, Insurers, Travel And Pulse Health

-Casino demand grows in Asia
-Oz consumers want an experience
-Christmas spending plans are weak
-Few positives in home, motor insurance
-Better times ahead for corporate travel
-Pulse Health set for game changer


By Eva Brocklehurst

Citi is upbeat about the Macau market after its investor conference, with all presenters signalling strong demand is still out there. Despite a decline in gross gambling revenue and wage inflation, Citi cites 98-100% occupancy at major properties in the September quarter as the main reason for a recent deceleration in mass market growth. The operators also reiterate a view that Macau remains a supply-driven market and growth should turn positive when new hotel property comes on board in mid 2015.

Goldman Sachs has outlined some themes it expects will shape the global gaming industry longer term. Demand in Asia is being fueled by more Chinese from the mainland travelling abroad, with construction of large casinos set to serve sophisticated customers. New jurisdictions are opening up and regulation is evolving in newer markets. The broker identifies those best positioned to capture the growth potential are operators that have access to less mature markets, along with more capacity, financial strength and operating efficiency. The leaders in the market that are able to capture the potential include ASX-listed Crown Resorts ((CWN)), rated as a Buy. Goldman Sachs expects Asia, by 2018, will account for nearly 50% of the global casino market compared with 40% currently, and gross gaming revenue will grow at 9% compound until 2018, versus just 2% for the saturated US market.


Consumer spending is improving and services that provide an experience are best placed compared with traditional retailing. The improvement in sentiment is likely to be modest, in Morgans' view, as weaker income growth and aversion to borrowing has characterised the period since the global financial crisis. Households are now spending more on services such as sporting and cultural activities, hobbies and tourism. Department stores are expected to remain under pressure while household goods will obtain some relief from the upswing in housing construction. The aging population provides opportunities for operators in the health sphere, in Morgans' view, while education is also expected to benefit from stronger consumer spending over the longer term.

The November Westpac-Melbourne Institute survey of consumer sentiment included an additional question on Christmas spending plans. Breaking down the numbers reveals Western Australia, Victoria and Queensland have the most restrained consumers, planning to spend less on the whole, but spending plans in NSW have been marked down sharply against 2013. Those most inclined to reduce spending are the 50-54 and 35-44 age groups, recording their weakest readings since the survey question was first asked in 2009. Moreover, men have sharply downgraded spending plans while women are only marginally more restrained.

Those with mortgages are significantly more subdued and, interestingly, a more restrained view was heavily concentrated among those with annual incomes over $100,000. In summary, Westpac senior economist, Matthew Hassan, notes sentiment is not nearly as bleak as it was in 2008 and remains comparable with 2011, but there is a clear intention to economise.


The latest data on home and motor insurance trends provides few positives in Credit Suisse's view. Premium rates have continued to slow and top line growth will come under pressure for both Insurance Australia ((IAG)) and Suncorp ((SUN)) as personal lines present 60% of their gross written premium. The data show average premium rates in motor insurance were flat in the September quarter, implying a decline of 0.4% over the year, versus a 3.1% average rate increase in the prior comparable period. In home building the average premium rate gain was 0.6% in the quarter while a negative 0.1% for contents, implying an average premium increase over the year to date of 4%. Credit Suisse prefers AMP ((AMP)) over the general insurers in the current climate and QBE Insurance ((QBE)) over the pure domestic players.


Domestic airfares are improving, slowly. The latest data shows business class fares rose 11.7% in November, while full economy fares eased 1.3%. Restricted economy fares rose 5.0% and discount fares fell 5.6%. Bell Potter cites the data as evidence of a better period ahead for the Australian corporate travel segment, which has suffered from both declining domestic airfares and client activity levels over the past two years. Two stocks best leveraged to benefit from this theme are Corporate Travel ((CTD)) and, to a lesser extent, Flight Centre ((FLT)). Bell Potter remains positive on the outbound segment, despite the fragile consumer environment.

The broker views the shift to international from domestic as structural and the slowing of outbound growth rates as temporary. Cover-More ((CVO)) and Flight Centre are considered the best stocks for the inevitable recovery and the broker also likes SeaLink Travel ((SLK)), despite its domestic focus, as it has sole operator status on the bulk of its routes.


Bell Potter likes Pulse Health ((PHG)), which will lease a new specialist surgical hospital on Queensland's Gold Coast. The hospital is expected to open late in 2015 and contribute earnings of $2m within three years of opening. This will be the first larger scale facility to be operated by Pulse Health in an urban area and may be a game changer, in Bell Potter's view. The company mainly operates specialist rehab hospitals and smaller regional hospitals. The investment in the new hospital will be funded from cash and debt. The broker expects the company will also pursue further acquisition opportunities. The investment is not expected to affect the company's ability to pay dividends in FY15.

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article 3 months old

Weekly Broker Wrap: Oil Price, Property, Aust Dollar And Wagering

-Reduced demand for coal, gas?
-Authorities target property investors
-Aust dollar weakness likely preferred
-State, industry racing revenue broadens


By Eva Brocklehurst

What does a lower oil price mean for Australia? It is positive for household spending and Commonwealth Bank analysts calculate the fall of 20% since mid year equates to a lift of around 0.2% in household income. IMF calculations suggest that a 10% fall in the oil price equates to an increase in global GDP growth of around 0.2%. The current downtrend is not just about higher supply but also weaker demand. The supply-side shock is occurring as US output lifts from non-conventional sources. Supply has also surprised on the upside from countries such as Libya. On the demand side, there are indications growth from India and China will be lower than expected over the coming year.

For Australian households, secondary effects could occur as lower transport costs are passed on. Discretionary retail, where price elasticity is high, is usually a major beneficiary of a fall in petrol prices. The analysts point out a lower oil price has dampened inflation expectations and bond yields, and is already showing up in the inflation data. From a national perspective, lower oil prices will decrease demand for other substitute energy sources, namely coal and gas. This could result in a trade shock with some rough calculations suggesting a 20% fall in oil prices equates to a terms of trade reduction worth around 0.4% of nominal GDP.

There will be some offsets. Fuel makes up a considerable proportion of business costs and the industries with the highest consumption are transport, manufacturing and electricity. These will likely benefit. The choice of improving margins and profitability or passing on lower costs will come down to the competitive pressures, in the analysts' view.


Domestic housing-linked stocks have been affected by concerns about macro prudential policies being tightened and a resultant pullback in housing approvals. Morgan Stanley is not overly worried, as the relevant authorities, the Reserve Bank of Australia and Australian Prudential Regulation Authority, will likely be scrutinising investors in established property. The broker anticipates higher serviceability buffers and capital requirements such as risk weights or capital ratios are most likely.

The RBA has described the housing market as becoming unbalanced but its concerns lie specifically with investors in established housing in Sydney and Melbourne and inner city apartments in Melbourne. Morgan Stanley observes Australia is along way from an oversupply in housing while a sustained construction cycle is helpful in boosting supply. Hence, the broker envisages building stocks can still outperform, even as more difficult comparables are cycled.

AllianceBernstein still believes the fundamentals are supporting capital markets even as investors express concern that valuations are stretched. The analysts observe that markets have been expensive before, even for lengthy periods, without enduring a calamity. Ordinarily, the analysts note, the Australian dollar would act as a shock absorber and fall to offset some of the income squeeze coming from lower iron ore and coal prices. As yet, the falls have only been modest relative to the slide in commodity prices and this is proving to be a headache for the central bank.

AllianceBernstein notes momentary easing was initially intended to boost the housing sector through construction activity but also resulted in a surge in lending to investors and in doing so may have been too successful. This highlights the potential for some form of policy restraint on the sector.

CIBC observes, despite attempts by the RBA to maintain a stable bias in rates, markets are pricing in easier policy amid uncertainties in the real economy and commodity market weakness. This points to underperformance by the Australian dollar. The analysts suspect the RBA may well prove to be another central bank that encourages a bout of currency weakness to counteract less-than-encouraging trends. The RBA would prefer conditions ease via the currency than via interest rates, as household debt levels remain high. The analysts acknowledge the currency does look rich when compared with other similarly based valuations and expect the Australian dollar to fall to US82c in the coming year.


Investor updates from the likes of Tabcorp ((TAH)), Paddy Power and William Hill suggest to Credit Suisse that wagering industry growth is being stimulated by smartphone technology, led by the Europeans. Still, regulatory change could level the field and enable all three operators to grow revenue. The broker observes Paddy Power and William Hill are over-indexed to market growth drivers of mobile, fixed odds and sports betting and their high gross profit margins, unburdened by state taxes, allow them to spend more in terms of marketing their product.

Meanwhile, Australian racing industry regulators have shown a willingness to devise new fee arrangements that selectively tax corporate bookmaker products and favour incumbent tote operators. There are potential headwinds as the industry and governments seek to broaden revenue sources away from lower growth totes.

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article 3 months old

Weekly Broker Wrap: PayPal & SMEs, FX Outlook And Gambling

-Will PayPal capture SME value?
-Euro biggest loser against USD
-AUD, NZD also seen easing further
-TAH, TTS wagering share stabilising
-Strategic focus important for casinos


By Eva Brocklehurst

PayPal is offering online working capital loans to assist small-medium enterprises in Australia to capture greater volumes on their payment networks. This targeting of SME credit is not a surprise to JP Morgan, given this is high yielding and more profitable than even domestic mortgages. The broker notes banks globally are also embracing large technology entrants to develop their own offerings, or save costs.

PayPal will offer working capital facilities up to 8% of annual revenue to a ceiling of $20,000. Repayment will involve an up front fee and repayment of between 10% and 30% of all transactions conducted over PayPal until the loan is paid. Incentives for a borrower to use the PayPal facility relative to standard bank credit include shorter application times and no credit checks or pre-payment fees.

A longer-term risk in the broker's view is that the new entrants may capture the profitable elements of the value chain as banks are left with the "pipes". The $200bn domestic SME market is attractive for banks because of the higher yields and deposit-rich nature of the association. Moreover, funding for working capital is the single most important driver of borrowing needs for these businesses and the need has increased over 2014, with the main driver being longer credit cycles and tax/GST bills.


Citi observes the risk asset correction in October led to expectations of a more dovish US Federal Reserve and some consolidation in the US dollar strength over the medium term. For six to 12 months ahead the analysts at Citi expect 8-9% gains for the US dollar versus the average G10 currency. The European currencies will be the biggest losers, in the broker's view, as dangerously low inflation leaves the European Central Bank with little choice but to use euro depreciation as a key policy tool, achieving this by balance sheet expansion. The British pound could be supported near term by the strong economy and repricing of rates but the broker considers political risk premia will rise in that geography ahead of the general elections in May. Meanwhile, in Japan, further money base expansion is expected to lead to a lower yen rate against the US dollar over the medium term. Citi pencils in 115 yen in the medium term and 120 yen in the longer term for the US dollar.

The broker's view is based on a divergence in economic performance and policy. The ECB and Bank of Japan remain in asset purchasing mode while at the other end of the scale the market still envisages the US Fed will start normalising interest rates over the next year. With fairly weak trends for terms of trade for dollar bloc countries and the tendency for both Australia's and New Zealand's Reserve Banks to jawbone their currencies lower, Citi envisages the US dollar will continue to strengthen against respective currencies in the medium term. The broker forecasts an Australian dollar rate of US86c in three months and US80c in six months respectively. The NZ dollar is forecast to be US77c and US72c respectively over the same time horizons.


Morgan Stanley finds investment opportunities in Australia's gambling sector are stock specific. Two key structural themes support positive recommendations. These are wagering margin expansion, related to a transition to online from retail betting, and the growth of fixed odds in place of pari-mutuel betting. The second theme is the casino operators' focus on either mass market or VIP as a driver of value. The broker retains an In-Line industry view and recommends investors maintain an Equal-weight positions in Australian gambling. This is a mature industry, which is expected to grow in line with household disposable income. Participation across products has not changed significantly in recent times, although the penetration of online audiences does pose some upside risk.

The broker expects the wagering market share for both Tabcorp ((TAH)) and Tatts ((TTS)) will decline. That said, past concerns around the threat of corporate bookmakers, while valid, appear less severe than initially feared. Morgan Stanley estimates Tabcorp's overall market share of wagering turnover has stabilised at 44-45% while Tatts has declined to 14% from 15%. It seems the newcomers have taken share from smaller players, which indicates that scale is important in this market.

In casinos, Morgan Stanley believes the ability to drive value through accretive projects will be important in this capital intensive industry. The broker considers the strategic focus is also important and Sky City Entertainment ((SKC)) will generate stronger incremental returns than Crown Resorts ((CWN)) or Echo Entertainment ((EGP)) because it has the strongest suite of Australian licences. The broker notes the latter two have attended to growing the VIP representation in Asia, despite continuing to take mass market share away form pubs and clubs. VIP is lower margin than mass market and requires the casinos offer incentives for players to visit.

On the subject of the regulatory environment, Morgan Stanley believes Sky City, Crown and Tabcorp are better positioned than Echo Entertainment and Tatts in terms of risk and opportunity in the face of regulatory changes, which can be unpredictable.

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article 3 months old

Oklahoma Sun Shines On Aristocrat Leisure

-Market share accelerating
-VGT key catalyst for upside
-But is US market shrinking?


By Eva Brocklehurst

CIMB has returned from a tour of the main casinos in Oklahoma, whistling the Aristocrat Leisure ((ALL)) tune. The gaming machine manufacturer's acquisition of Class II operator, Video Gaming Technologies, had concerned the broker when it was initially announced. CIMB feared VGT would be unlikely to achieve much growth and would lose younger players that were more attracted to the Class III game segment. This has all changed. The broker is now much more positive on both the outlook for VGT, as well as for Aristocrat's replacement product in Macau.

CIMB believes there is now significant opportunity for VGT to grow in the medium term. Success should come as Aristocrat leverages VGT's sales force to drive sales of Aristocrat product in Oklahoma. Moreover, should neighbouring Texas allow slot machines, that state would be a "natural" for VGT, in the broker's opinion.

The broker has raised earnings forecasts by 110% for FY15 and 126% for FY16 and elevates its target to $8.13 from $5.35, retaining an Add rating. Deutsche Bank believes North American market demand, product approvals and customer acceptance remain a key risk for the stock. Nonetheless, this broker has a Buy rating with a $7.75 target. Deutsche Bank takes its positive stance from another geography - NSW. Unit sales in NSW rose 21% in the September quarter while Aristocrat's market share increased to 41.8% over the year to September.

Deutsche Bank believes Australia remains a core region as it accounts for 22% of the company's earnings. Why NSW is so positive for the company is that the overall market was actually weaker in the September quarter, down 10%. All said, Deutsche Bank considers VGT will be a key driver of Aristocrat's share price but gains in market share in other geographies will be equally as important.

Macquarie retains a Neutral rating, having observed recently that Aristocrat has become a bigger fish in the US pool but that pool may be shrinking. The broker observes new unit sales are slowing in North America while the replacement market there is soft. Aside from overall market growth, Macquarie retains a positive outlook on operations in the US and considers Aristocrat's product performance is impressive. It is just that the broker envisages little potential for upgrades or share price upside at this juncture.

Credit Suisse is also more circumspect, having observed that the Japan's product launch has been delayed, which means zero Japanese revenue in the second half of 2014. Citi is inclined towards CIMB's view of the state of play, noting that market share gains are accelerating because casinos are embracing the wider product range and there are now new revenue opportunities through VGT. Moreover, regulatory changes in Macau are expected to spur replacement demand from early in the first half of FY15. Citi believes FY15 and FY16 will be stellar growth years for Aristocrat Leisure.

On FNArena's database there are five Buy ratings and two Hold. When FNArena reported on the stock after the VGT announcement there were five Buy, one Hold and two Sell, so views have shifted up somewhat. The consensus target has also ratcheted higher over the last couple of months. It is now $6.73, suggesting 5.9% upside to the last share price, and compares with $5.79 on July 9. Targets now range from $5.90 (UBS) to $8.13 (CIMB).

See also, Aristocrat Goes To Video on July 9 2014.

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article 3 months old

Weekly Broker Wrap: AGMs, AUD, Advertising, Capex, Gaming And ClearView

-Will there be a post AGM bounce?
-Aust dollar fall benefit more in Q215
-PayTV advertising first ever decline
-UBS wary about resource capex plans
-Opportunity in US gaming market?
-WilsonHTM advises caution on ClearView


By Eva Brocklehurst

What items will provoke interest at upcoming listed company Annual General Meetings? Macquarie observes AGMs often offer the first formal guidance regarding the unfolding financial year and, given the economic uncertainty and sell-down in equities in the past month, the broker considers any moderately positive news around trading activity is likely to push share prices higher. Those contenders for the most interesting AGMs in the broker's view include AGL Energy ((AGK)), with MacGen likely figuring in guidance for the first time, Ansell ((ANN)), with a narrower guidance range expected, and BHP Billiton ((BHP)), with shareholders on the alert for any mention of capital management and dividend policy. Others which may spark interest include Cochlear ((COH)), not for specific guidance but the potential impact of positive commentary and Carsales.com ((CRZ)), which has promised more detail on trading.

Macquarie's quantitative analysis team has run an event study on AGMs and this shows that on the day of the AGM, stocks experience substantially increased trading, with aggregate volumes some 44% higher in the sample of stocks under Macquarie's coverage. Stocks tend to marginally underperform the market after their AGMs for a period of two weeks.

Morgan Stanley also observes the market is hoping for the AGM season to bring about a bounce but is not confident this will occur, given the macro headwinds. Growth conviction regarding FY15 aggregate earnings is low and any AGM-induced negativity would challenge the pick-up that is factored into FY16 estimates and pressure valuations. The broker believes any break-out for stocks is biased to the downside. Investors are rotating out of banks and avoiding resources as the grind higher in industrials ex-banks valuations continues. Morgan Stanley envisages increased risk to PE levels should AGM presentations disappoint. The recent unwinding of the Australian dollar yields a cautionary note in that, for translators, the real benefit is in the second quarter of 2015 and, hence, may not feature strongly in AGM commentary.


Citi notes the depreciation of the Australian dollar will provide much needed assistance in re-balancing the economy, but the outlook will not be altered quickly. The currency's strength has been a major headwind for economic growth and there is some hope it will now align better with fundamentals. The trade weighted index has fallen 5.5% and the Australian dollar is now back at a four-year low. Nevertheless, Citi suspects the Australian dollar will probably need to decline further and forecasts US82c by the end of 2015. Citi doubts that even the recent fall will boost inflation or, for that matter, that the Reserve Bank will respond to a weaker currency by tightening monetary policy. The impact on inflation is likely to be mild and temporary, given the spare capacity in the economy and labour market.


Recent advertising data for the first half of 2014 suggests online/digital advertising is robust and still taking share from print. Metro also outperformed regional. Citi lowers total ad market forecasts to growth of 2.2% in 2014 and notes that, while total spending is still growing, it is very much a tale of two trends. Traditional media is down and online is on the up and up. There were a few segment surprises in the CEASA data. PayTV advertising declined for the first time ever, while print declines accelerated. Online sustained 21.5% growth in the half, helped by mobile display and strong classifieds. Outdoor also delivered robust growth. TV advertising was weaker than expected but grew overall on the back of a 1.2% increase in free-to-air metro growth.


Analysis by UBS of more than 500 companies in the energy, resources, utilities and chemicals sectors reveals that after peaking in 2013, capital expenditure is forecast to decline 2.0% year on year in 2014, followed by a 4.0% decline in 2015. Major oil company capex is forecast to decline by 3.0% in 2014 followed by a 1.0% increase in 2015. Mining capex is forecast to decline by 23.0% in 2014 followed by a 10.0% decline in 2015. The broker concludes that the soft patch for engineers and contractors will continue for some time and remains bearish on sector prospects, amidst weak commodity prices and an escalating push towards capital preservation and increased shareholder returns among oil majors.


BA-Merrill Lynch has upgraded Aristocrat Leisure ((ALL)) to Neutral from Sell. The broker conducted channel checks in the US recently and a field trip has provided more conference. That said, Merrills remains guarded on valuation and is aware that US market conditions remain challenging. Hence, the Neutral rating. Still, recent consolidation in the US market provides a potential disruption risk and this presents an opportunity for both Aristocrat and Ainsworth Game Technology ((AGI)). Across the Pacific, in Macau, the analysts note Golden Week visitations increased 10.0%, with mainland visits up 2.0%. Still, this data is not considered to be a good indicator as patronage largely comprised casual/mass and non-gamblers.


ClearView Wealth ((CVW)) has experienced a 35% re-rating over the past two months. WilsonHTM believes this is unusual for a defensive stock, given the predictability of life insurance earnings. The broker is mindful that the distribution of life insurance through planners is capital intensive, because of the need to pay up front commissions, and a further capital raising is probable within the next 12 months to support rapid growth. ClearView will buy the Matrix dealer group for $20.5m in cash and scrip, which will add 85 advisers but reduce reported earnings in FY15, and lower surplus capital to $15.5m once the deal is completed. Another issue the broker reminds investors of is, in the current low interest rate environment, private backers may be encouraged to sell down their combined 55.1% stake, otherwise slated for FY17.

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