Tag Archives: Media

article 3 months old

Advertising Shines Outdoors

-Positive trends seen for 2-3 years
-Upgrades to APO, OML outlook
-What if retailers decide to in-source?


By Eva Brocklehurst

The growth in advertising outside the home – outdoor or out-of-home – has been exponential and brokers expect more to come in this regard. Credit Suisse describes the sector as a rare structural growth story inside a sluggish domestic economy. The process of digitising billboards has several more years to run and provides an additional tailwind for the sector.

Audiences are growing and inventory is being significantly improved in terms of presentation. Meanwhile, traditional media is being fragmented with advertising dollars seeking out destinations more likely to capture attention. Credit Suisse estimates advertising spending in the outdoor category now carves out 5.6% of the total advertising pie.

Morgans expects positive trends will continue for at least 2-3 years and the strength in demand across the industry will enable around 7.0% like-for-like yield growth. The broker upgrades forecasts for APN Outdoor ((APO)) following a very strong March quarter. Industry-wide revenue growth was 18.2%, and for the three segments in which APN Outdoor participates, first quarter growth was 16.9%, driven by the uptake of digital.

APN Outdoor is the largest player in the domestic market with a 30% market share. Its key areas are billboards and rail/transit advertising. Morgans upgrades FY16 and FY17 earnings forecasts by 11.1% and 12.3% respectively.

Credit Suisse finds a number of aspects of the stock are attractive, including a broad roadside inventory in metropolitan areas, which supports a sustained roll out of digital billboards at high conversion multiples. The company's 83% market share in transit also provides advertisers with exposure to higher domestic passenger movements.

Credit Suisse estimates growth in roadside billboards accounts for over 60% of company-wide growth forecasts of 10.5%. The broker initiates coverage with an Outperform rating and $7.05 target. While the stock's valuation may appear to be a stretch to some, it still looks appealing against industry peers both domestically and offshore, the broker contends.

While the company has not disclosed its lease maturity profile to any extent, commentary suggests 2016 represents a low point in the re-leasing cycle with a step up in expiries from late 2017. Nevertheless, the majority of the company's lease relationships have been in place for at least 10 years and Credit Suisse suggests this, plus the form of media, represents a barrier to entry.

Potential near-term catalysts, in Morgans' view, include a further strengthening of demand for outdoor advertising, a successful roll-out of new digital spaces and accretive acquisitions. Risks for APN Outdoor centre on a sudden drop in overall consumer demand, a slowing in the rate of digital roll-out and acquisitions that stretch the balance sheet.

APN Outdoor has four Buy ratings on FNArena's database with UBS retaining the one Neutral rating. UBS believes that despite beating estimates in 2015, the stock is fairly valued. The consensus target on the database is $6.77, suggesting 0.6% upside to the last share price. Targets range from $6.00 (UBS) to $7.24 (Morgans).

oOh!media ((OML)) is the second largest player, with 29% overall market share but a more substantial presence in its key markets of billboards (36%) and retail precincts (62%). Credit Suisse forecasts an additional 15 digital roadside screens in FY16, taking the company's inventory to 40, with 15 per annum thereafter.

Given the amount of self help that is driving revenue momentum the broker has a high degree of confidence in forecasts for a two-year earnings compound growth rate of 14%. Credit Suisse believes forecast risks are skewed to the upside, modelling 6-8% revenue growth beyond 2016.

Moreover, the benefits of the company's data strategy are considered to be overlooked by the market, should its efforts in this area gain traction. This may be the driver of the next leg of growth in the sector. The data potentially provides advertisers with information on who they are reaching, over and above mere numbers. At present this capability is limited to select retail inventory operated by oOh!media but if rolled out into broader categories could drive further advertising dollars.

In the case of upcoming lease expiries, Credit Suisse suspects 2015-16 is a relatively quiet period. The company's commentary at the FY15 result release signalled work has been done to improve the lease profile, with 73% of road revenue and 64% of retail revenue having maturities beyond FY18.

Credit Suisse considers the stock at an attractive entry point and the discount to peers excessive, despite some reservations such as the exposure to retail in-sourcing and relatively higher gearing and regional presence. The broker initiates with an Outperform rating and $4.95 target.

The FNArena database has two Buy ratings for oOh!media with Macquarie retaining a Neutral rating. The broker believes that with the stock trading near its target, earnings upgrades will be needed to drive share price upside. The consensus target is $4.62, suggesting 1.4% downside to the last share price. Targets range from $3.80 (Macquarie) to $5.10 (Ord Minnett).

One area of concern has become more pronounced since Westfield ((WFD)) decided to in-source the operations of the panel inventory in its shopping centres, previously administered by oOh!media. Westfield, being a global business, has significant inventory and a close relationship with a large number of retailers as well as its own dedicated marketing team.

Credit Suisse believes this is the important distinction when assessing asset owner ability to in-source. In the case of roadside billboards the ownership is highly fragmented while the state-run transport departments would have challenges internalising this function.

Elsewhere, retail/office are the most likely to internalise and, in this instance, oOh!media is the most exposed with 40% of FY16 revenue expected to emanate from retail and its InLink businesses. Again, on the positive side, the InLink business has a substantial amount of revenue tied up in long-term contracts.

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article 3 months old

Weekly Broker Wrap: Queensland Coal, Equity Strategies, Focus Lists And Real Estate

-Who will buy Anglo American's assets?
-Large caps drag on headline growth
-Appeal still found in domestic cyclicals
-New real estate listings growth on positive trend


By Eva Brocklehurst

Queensland Coal

The Australian assets of Anglo American which have been put up for sale include Moranbah and Grosvenor, the most valuable parts of the disposal program. Yet, Deutsche Bank notes the commodity, coal, is one that few are excited about. Achieving an acceptable valuation for shareholders may prove challenging.

The two logical buyers are Rio Tinto ((RIO)) and BHP Billiton ((BHP)) as both can extract operating synergies. The broker also suspects Japanese trading houses may take a look. From BHP's standpoint the acquisition of Anglo coal assets would provide operational synergies around Goonyella and Caval Ridge.

Furthermore, with only around 10% of production from underground the company may be tempted to add more capacity. On the other hand, regulators may investigate any acquisition as it would increase the company's controlled production to 80mtpa in the 225mtpa seaborne hard coking coal market. BHP has also stated its preferred area of investment is copper and oil.

Rio Tinto expressed interest some time ago in increasing its metallurgical coal exposure and the two Anglo American assets would raise its production to 18mtpa from 7-8mtpa, making Rio Tinto a significant producer. The question Deutsche Bank asks is: Does Rio Tinto want to assist in Anglo American's balance sheet repair or does it envisage other assets may be up for grabs if the environment deteriorates further?

Equity Strategies

Equities continued to be weak in February, falling a further 2.5% on top of the 5.5% decline in January, Macquarie observes. Volatility remains elevated in the equity market and, while the reporting season was slightly better than the broker expected, expectations had been lowered substantially in the lead-up to the results. Approximately 70% of companies reported in line or results above expectations.

The broker notes domestic cyclicals were solid and materials in line while health care was mixed. Large caps underperformed versus small caps. Improving commodity prices helped underpin energy stocks as oil rallied strongly over the month while banks were hit hard by fears of tightening credit markets.

In the materials space Newcrest Mining ((NCM)), Alumina ((AWC)), South32 ((S32)) and Iluka Resources ((ILU)) stood out for Macquarie.

UBS suspects the Australian equity market is on track for its second successive year of negative earnings growth. Growth ex resources is better but still an anaemic 3-4%. The broker notes earnings trends for a “typical” company remain reasonable but headline growth is being dragged down by the large-cap end of the market.

The broker remains overweight on banks and underweight mining while neutral on energy. While the broker is concerned about the high price of growth in a range of stocks there are still some appealing defensive ones. Sandfire Resources ((SFR)) and Iluka Resources are removed from the model portfolio while Heathscope ((HSO)) is added.

The broker continues to hold some selected domestically exposed stocks on a mix of relative valuation appeal. Defensive growth stocks held include Aristocrat Leisure ((ALL )), CSL ((CSL)), Healthscope and Transurban ((TCL)) as well as Estia Health ((EHE)), Virtus Health ((VRT)0 and G8 Education ((GEM)) in small caps.

Some growth is also envisaged for those exposed to US dollar earnings such as Aristocrat Leisure, CSL, Incitec Pivot ((IPL)) and Macquarie Group ((MQG)) and are held on this basis.

Small & Mid Caps

Goldman Sachs removes 3P Learning ((3PL)) and Sirtex Medical ((SRX)) from its Small & Mid Cap Focus List. In February the list was down 12.3% while the ASX Small Ordinaries Accumulation index was up 0.9%, implying 13.2% underperformance.

Over the year to February the list was up 10.5% while the ASX comparable was down 3.6%, implying 14% outperformance.

Best performers in February were Austbrokers ((AUB)), Sky City Entertainment ((SKC)) and Fisher & Paykel Healthcare ((FPH)), outperforming 2.5%, 2.6% and 2.7% respectively. The key detractors on the list were amaysim ((AYS)), Blackmores ((BKL)) and 3P Learning, underperforming 37.9%, 17.6% and 17.0% respectively.

Real Estate Classifieds

New listings in the Australian property market grew 6.0% year on year in February, indicating solid trading conditions in the second half to date. Deutsche Bank considers the February data, showing lower growth than January, as a more reliable indicator of market trends.

New listings growth in the capitals showed a similar trend to the national numbers. Sydney volumes turned around and Melbourne also produced solid growth in the month. The broker views these two markets as most important for online classifieds and for premium listings, likely contributing well over 50% of revenues.

The broker expects volumes to grow for the remainder of the second half and this will benefit the earnings of REA Group ((REA)) and the Fairfax Media ((FXJ)) Domain business.

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article 3 months old

REA Group: Buying Opportunity Or Fully Valued?

-Strong depth sales, margins in H1
-But costs to rise in H2
-Acquistions, expansions key to upside


By Eva Brocklehurst

REA Group ((REA)) delivered a firm set of numbers in the first half but the market was not overly impressed, which Morgans blames on management avoiding commentary on a planned May price rise, amid a warning that second half margins would be lower.

Neither issue bothers the broker, as depth advertising volumes are up 28% on the prior year and telegraphing price increases to competitors in advance would be ill advised.

The results were driven by Premier Property listings, with record sales of depth advertising. Most Premiere All subscribers were not loaded onto the system until the December quarter so the revenue uplift will be stronger in the second half, Morgans calculates.

The subsequent sell-off in the share price provides an opportunity to buy a long-term growth story at a discount to intrinsic value, the broker asserts, and upgrades to Add from Hold. Despite an increase in spending in the second half the company is on track to deliver earnings growth of 28% or better, Morgans contends.

Ord Minnett also considers the reaction in the share price overdone, slightly. The broker likes the online real estate industry but, given REA Group trades on a FY16 price earnings multiple around 28x, prefers to stick with a Hold rating.

Credit Suisse takes a similar view to Morgans, in that the dip in the share price is an opportunity to buy. The broker considers the online property sector offers significant scope for longer term revenue growth and upgrades Outperform from Neutral.

Credit Suisse does not believe that a further mild slowing in property market conditions would materially impact on the numbers. The main risk is a major cyclical slowdown which affects vendor willingness to spend on advertising.

When adjusting the result for timing differences in costs, Morgan Stanley considers the results in line, but current growth rates need to be maintained at around 25% in the second half to fulfill expectations.

The core Australian business drove the results with earnings margins rising to an all-time high of 66% versus 61% previously. International division contributions were small and not drivers of the share price, in Morgan Stanley's view. In aggregate these earnings declined because of investment in new regions.

The company did not provide an outlook, in line with usual practice. Macquarie envisages earnings growth of 19.3% in the second half and believes the company is well positioned. The broker estimates the Premiere business accounts for well over half of the depth revenues, with the majority under the Premiere All contracts.

The broker likes the business with its multi-year growth prospects but suggests the price is full. Macquarie finds the growth-value trade off is better at Seek ((SEK)) or, to a lesser extent, Carsales ((CAR)).

As margin expansion was the main reason the first half beat estimates, and with management indicating cost growth will be much higher in the second half, Deutsche Bank is reluctant to expect higher revenue growth at this stage.

Management suggests the start to 2016 has been slow from a listings perspective, which appears at odds with Deutsche Bank’s analysis that signals listings were strong in January. Nevertheless, as this is usually a slower month and a minor movement in the number can influence the growth rate, the broker looks for February's data to provide a more reliable indicator of market trends.

In Deutsche Bank's view, price increases are unlikely until the start of FY17, with the take-up of Premiere All to support growth in FY16. The company emphasised the significant opportunity in South East Asia and the US, with the iProperty acquisition expected to be completed mid February. Deutsche Bank expects this transaction, yet to be incorporated into estimates, to be 3-4% dilutive to earnings on a pro-forma basis.

Unlocking value from recent acquisitions is one of the key catalysts for upside, UBS maintains. The broker believes stock is fairly valued and, while growth prospects are positive, further catalysts such as new products and unlocking value in Italy and Europe are needed as well.

FNArena's database contains four Buy ratings and four Hold. The consensus target is $51.24, suggesting 1.8% upside to the last share price.

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article 3 months old

Weekly Broker Wrap: Retail, Energy, Outdoor Media, Banks, Internet Consumers And IVE Group

-Morgans sees upside for ADH, RCG and BBN
-Brace for large energy stock impairments
-Outdoor media outlook remains strong
-Bank risks balanced for 2016
-Data intelligence the next internet frontier


By Eva Brocklehurst

Retail Previews

Most retailers enjoyed a buoyant Christmas trading season and Morgans expects first half results will be strong. Where the going is likely to get tough is the second half. The broker is cautious, as FX pressure on costs is expected to peak going into FY17, based on hedging profiles, and the housing market is cooling.

Add to this the volatility in equity markets, with little or no wage inflation and fragile consumer sentiment, and the negatives could outweigh such positives as lower interest rates and fuel prices. Hence, Morgans emphasises earnings certainty is critical in the current market.

Where upside earnings risk among retailers exists, the broker maintains, is with Adairs ((ADH)), RCG Corp ((RCG)) and Baby Bunting ((BBN)). Others the broker believes will perform well in the current market are Burson Group ((BAP)) and Super Retail ((SUL)).

The broker notes Lovisa ((LOV)) and G.U.D. Holdings ((GUD)) have already missed expectations and been treated harshly as a result. The broker suspects Ardent Leisure ((AAD)) is in line for a miss this reporting season, given the prolonged rout in the oil price and the impact on its Main Event business.

Energy Previews

Macquarie suspects the energy sector is in for an ugly impairment cycle, to be witnessed at the upcoming results. Sector earnings are projected to fall 58% year on year. The broker expects the large cap oil stocks, including Beach Energy ((BPT)), will announce aggregate pre-tax impairments totalling US$3.5bn. Reserve downgrades are also possible.

Woodside Petroleum ((WPL)), while sustaining a relatively resilient earnings base, is expected to cut its final dividend with a 60% decline in earnings year on year. Santos ((STO)) is expected to report a 75% fall in 2015 profit and its balance sheet will attract further scrutiny at the results. Oil Search ((OSH)) is expected to report a 21% decline in profit.

Outdoor Media

Outdoor media revenues have grown 13.7% in the year to January and UBS expects the pace of growth could continue, although remains hesitant to infer too much from one month's data. While roadside billboard growth slowed to 6.0%, as it cycled strong comparables, other outdoor placements such as street furniture, taxis, and small formats grew 23%. Transport revenues were up 6% while the retail/lifestyle categories of outdoor media lifted 24%.

Key developments including APN Outdoor ((APO)) securing a long-term partnership with the Australian Olympic Committee. UBS retains a Neutral rating on the stock and considers it fairly valued, although, given the outdoor market trends, earnings risk is to the upside.

Banking Outlook

Earnings momentum is expected to improve to 8.5% growth on average for the major banks in FY16, Deutsche Bank contends. The broker forecasts an expected total return of almost 10%, a rate considered reasonable in a low-growth economy.

A number of regulatory issues were settled in 2015 but there are some outstanding, including the Basel 4 proposals and a firming up of what "unquestionably strong” capital ratios mean. The broker interprets industry commentary so far as suggesting capital requirements will not be lifted beyond the sector's ability to absorb the changes in an orderly fashion.

Asset quality remains an issue and while the non-mining books appear well positioned Deutsche Bank envisages a risk of provisions in the oil & gas sector. Still, the issue appears relatively manageable for the banks. Strong loan growth is considered a positive but does present a challenge, the broker maintains, if the sector chases lending growth too vigorously. Overall, Deutsche Bank considers the risks to the sector evenly balanced.

Internet Consumers

This is the largest global consumer group, with almost half the world's population having access to the internet and two billion smart phone users. Credit Suisse notes, from a macro view, the automation of services is not capital intensive but driven by software innovation. This is likely to restrain consumer prices and jobs and translates to low inflation and rates, at least for the near term.

The broker advises investors to adequately capture the positive and negative impacts of this investment theme. Many companies are taking advantage of the benefits of data mining the cloud and “deep learning” algorithms. For example, the artificial intelligence used to achieve traffic management adaptations is advantageous to Transurban ((TCL)). Brambles ((BXB)) has also invested in trucking technology to establish supply chain efficiencies.

Sydney Airport ((SYD)) delivers tailored content to its mobile app users while Qantas ((QAN)) is collating data from its loyalty program to better understand customers. In health care, the broker notes Capital Health ((CAJ)) is applying deep learning to improve the accuracy of diagnostic imaging.

Even in the currently troubled resources sector there are opportunities to exploit. Woodside has teamed with IBM Watson to transform 30 year of historical data into relevant predictive data that should facilitate faster and better decision making. Other segments well ahead in mining the advantages of the net are the gaming sector, financials and retailers.

Smart meters are moving into the utilities sector and, in this case, the broker suspects new entrants could disrupt the market. For example, Powershop is an online power company which allows consumers to track usage and costs and purchase a combination of products to meet their needs.

Insurers are yet to embrace the opportunity fully, the broker notes, but in embracing big data they should gain a better understanding of their customers and this should contribute to higher selling rates.

IVE Group

IVE Group ((IGL)) has charted a course over the last 20 years towards a diversified marketing and print communications business, away from traditional commercial printing.

Bell Potter expects high single digit earnings growth over the medium term, with organic revenue growth and margin expansion through productivity, workplace efficiencies and further investment in capital equipment.

The company is underpinned by a vertically integrated product and service offering and a unique market position in multiple segments in the print and communications industry. This is aided by a track record of accretive acquisitions. Bell Potter initiates coverage with a Buy rating and $2.62 target.

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article 3 months old

Weekly Broker Wrap: Retail, Consumers, Listed Property, Media And Hospitals

-Consumer spending picks up
-But food inflation weakens
-Macquarie retains confidence in A-REITs
-Are regional malls too cheap?
-Traditional media doldrums worsen
-Long term outlook positive for hospitals 


By Eva Brocklehurst


Credit Suisse proffers some “left of field” ideas for 2016. These are low probability, but events which, if they occurred, would have a material impact. One is the de-merging of Coles by Wesfarmers ((WES)) due to a declining valuation from increased supermarket competition.

Credit Suisse would be a seller of the stock in this event. Credit Suisse would also be a seller of Wesfarmers if a global home improvement company bought Masters from Woolworths ((WOW)) and earnings from Bunnings fell as a result of a more capable competitor.

Offshore players targeting Myer ((MYR)) or Metcash ((MTS)) is a low probability event but the stocks do meet several criteria for triggering buyer interest, including underperformance, synergies and an open share register. The broker also considers the prospect that Metcash reorganises into a co-operative. The potential for a retailer buy-out would create a floor under that stock's share price.


Consumer spending has picked up over the past two years. UBS observes the main areas of strength in communications, household goods, insurance & financial services, health, entertainment and cars. Weaker trends are noted in food, education and transport.

While spending may pick up toward 3.0% early this year, its fastest pace in two years, the broker’s model forecasts year-average growth of a little over 2.5% and a little below that level in 2017. The main risk to the outlook is from surprises in the labour market and residential property, as well as sharp changes to equity wealth.

The December quarter CPI reveals a sustained slowing in food inflation, which is a reasonable proxy for supermarket inflation, Morgan Stanley contends. Competition among the players appears to be depressing prices. Prices in core categories were reduced in the December quarter. Deflation is occurring despite a weaker Australian dollar. A lower Australian dollar, all things equal, should lead to higher price inflation but the link appear to have broken down, the broker observes.

UBS surveyed 48 suppliers across the grocery sector and found, on average, they expected prices to rise by 0.7% over the next 12 months. This is below 2015 levels. The survey suggest the growth outlook for groceries is slowing, underpinned by lower inflation, consumers eating less and modest levels of population growth.

With this in mind UBS expects the grocery market to grow at 3.4% over the next 12 months. The softer near-term outlook also points towards an increasingly competitive Australian supermarket sector. The broker believes Woolworths is most at risk but Metcash is also losing share to both Aldi and Coles. UBS finds it difficult to envisage upside in the medium term.

Listed Property

Macquarie admits it was unexcited by the Australian Real Estate Investment Trust (A-REIT) sector late last year as the first rise in nearly 10 years was heralded for US interest rates amid expectations for global bond yields to rise this year. The broker retains a high level of confidence in near-term earnings forecasts for A-REITs because of the fixed nature of rental increases and a high proportion of pre-sales in development businesses.

The broker reviews the office market and whilst Perth and Brisbane remain problematic, conditions have improved in Sydney. The positives for A-REITs are their better asset duration and relative simplicity compared with utilities or infrastructure sectors, and greater income security via contracted rents.

Credit Suisse believes regional shopping centres are too cheap. Direct market valuations and A-REIT carrying values of major malls reflect a significant mispricing versus other asset classes, the broker asserts. As this has been the case for 20 year Credit Suisse does not expect it to change soon.

Still, the degree of mispricing has increased of late. The broker believes office and logistics assets now trade well above estimated replacement costs and values for these classes have peaked, whereas upside remains for the top malls.

The broker envisages plenty of value in Scentre Group ((SCG)), both from the development perspective and existing assets. Credit Suisse upgrades Westfield Corp ((WFD)) to Outperform, as it is expected to deliver the highest rate of cash-flow growth out to FY20 of any A-REIT.


Google, Facebook and others are squeezing the revenue pool from Australian TV, newspaper and radio companies, Morgan Stanley believes, as advertising becomes more internet/digital and data based. The rate of structural change in the industry, if anything, has quickened over the last 12 months, the broker adds.

While the industry is acutely aware of this trend Morgan Stanley emphasises the implications are very negative because the more dollars are spent on new media the more funds shift offshore to global media/tech companies.

If the addressable market for local traditional media is shrinking into perpetuity, as the broker believes it is, stocks such as Seven West Media ((SWM)), Nine Entertainment ((NEC)), Southern Cross Media ((SXL)) and Prime Media ((PRT)) warrant a substantial discount to historical and market valuations. Morgan Stanley is Underweight on all four. The broker believes the market underestimates the risk to advertising revenue, margins and returns on a five-year view.

Private Hospitals

UBS maintains a positive long-term view on private hospitals, expecting over 6.0% in 10-year forward compound growth. Underlying growth drivers are unchanged. The broker does not believe the Medical Benefits Schedule review challenges the fundamentals of the business model.

Some moderation in first half growth is likely but, UBS observes, history suggests there are periods when growth slows from time to time. The broker flags weak first half data and prostheses pricing as providing near-term risk but against the long-term outlook such volatility is considered transient.

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article 3 months old

Weekly Broker Wrap: Equity Strategy, Wealth, Media, Rhipe, SpeedCast And A-REITs

-More growth outside top 20 stocks
-AMP, IOOF managing costs better
-Nine more likely acquirer of regionals
-GPT a leader in retail A-REITs


By Eva Brocklehurst

Equity Strategy

Deutsche Bank contends that policy uncertainty has eased in China and this uncertainty has been previously one of the negatives for equities. With growth expectations now pared back there is scope for some upside surprise for equities.

The broker considers Australian equities are reasonably valued, with the market having already experienced a large correction this year. History suggests that, at this point, a solid bounce will occur, should no recession ensue.

Stock picking should matter more now and Deutsche Bank highlights five conviction picks: AGL Energy ((AGL)), Aristocrat Leisure ((ALL)), Iress ((IRE)), James Hardie ((JHX)) and Qantas ((QAN)).

The broker's contrarian idea – defined as unloved stocks screened for valuation and performance – includes WorleyParsons ((WPL)), Navitas ((NVT)), Computershare ((CPU)) and Nine Entertainment ((NEC)).

UBS finds considerably more growth exists outside of the top 20 in the ASX200. The top 20 leaders may notionally have attractive dividend yields but the question is whether there is enough growth. This suggests less reliance on indexing the Australian market and more on active equity positioning, the broker believes.

Growth outside the top 20 does come with a higher price/earnings ratio and lower dividend yield, admittedly, but UBS notes attractive themes, such as US dollar earnings, are also well represented in the 21-100 segment of the index.


UBS reviews key metrics for wealth management and life insurance stocks in the wake of the bank earnings reports. Both AMP ((AMP)) and IOOF ((IFL)) are subject to similar margin pressure but the broker observes they are managing the cost side with greater success. The broker continues to like AMP given reasonably defensive earnings and fewer headwinds versus other financials.

Specific commentary on claims and lapses remains mixed. The broker suspects different levels of conservatism are represented across many company and analyst assumptions, amid persistent volatility. In this context, AMP's hike in income protection claims in the September quarter is unsettling but not yet raising material concerns.

Media Ownership

With press speculation around potential media law reform, UBS takes a look at the two main rules which may be tweaked or abandoned and the impact on key stocks.

The 75% reach rule, which prevents consolidation of metro and regional TV broadcasters, if abolished, would likely put the spotlight on regionals, given the synergies if they were to merge with metro counterparts.

Nine Entertainment with its strong balance sheet is considered a more likely acquirer of regional TV than either Seven West Media ((SWM)) or Ten Network ((TEN)).

The 2-out-of-3 rule (cross media ownership) limits certain operators from acquiring a third regulated media platform and, if this were abolished, certain parties would gain greater merger flexibility. Nevertheless, UBS questions whether print/radio players would be that interested in acquiring TV assets or vice versa.

Rhipe Ltd

Ord Minnett initiates coverage on Rhipe ((RHP)) with a Buy rating and $1.95 target. The specialist software distributor sells cloud licences to IT service providers. The stock offers capital-light leverage to the transfer of software consumption to the cloud.

The broker considers the company has an early mover advantage and key vendor relationships (Microsoft) which will enable it to participate well in the sector and gain market share.

Rhipe also has a deep understanding of the market and this provides greater confidence in a scalable business where the target market is growing at around 27%. Ord Minnett expects a 38% compound growth rate over the next eight years.

SpeedCast International

Canaccord Genuity recently visited the US to gain an insight into the satellite communications industry, specifically in terms of the oil & gas industry, meeting with players involved such as equipment suppliers and technology developers.

The broker is now excited about the opportunity before SpeedCast International ((SDA)), believing the company can maintain strong organic growth which should continue to be supported by acquisitions. Reflecting the beneficial trends, Canaccord Genuity maintains a Buy rating and increases the target to $5.27 from $4.40.

Retail A-REITs

Quality and location continue to drive the retail segment of Australian Real Estate Investment Trusts (A-REITs), Credit Suisse maintains. The broker asks, if system growth decelerates, where is the relatively better performance going to come from?

Victoria and NSW remain the main regions for growth. Discretionary spending remains elevated versus staples, so apparel is to the fore while supermarkets are on the back burner.

As a result, GPT Group ((GPT)), with its skew to higher quality assets and 84% exposure to the above two states, is considered the leader in the field. Credit Suisse expects GPT and Scentre Group ((SCG)) to have higher comparable net operating income growth into 2016.

The broker notes Charter Hall Retail ((CQR)) is in the process of acquiring a sub-regional asset in NSW on a 6.7% cap rate – the ratio of asset value to producing income - and this presents some value. The avoidance of stamp duty, given it is a related party transaction, is considered highly beneficial.

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article 3 months old

Mixed Trends Continue For News Corp

-Online real estate business key to upside
-Competitive risks at Foxtel
-Print headwinds continue


By Eva Brocklehurst

News Corp ((NWS))  continues to be a variable-speed company, highlighted by a first quarter result which revealed strong growth for the two online real estate businesses countered by FX headwinds and a struggling print division.

The company is a majority owner of Australian-based online real estate portal REA Group ((REA)) and also holds a majority stake in the US online realtor, Move, purchased last year in joint venture (NWS 80%) with REA. News Corp expects Move will become earnings positive in FY16.

Citi remains willing to consider News Corp from a positive angle, largely because of the REA contribution to revenue, on which a substantial portion of its value lies. As well, cable networks - Fox Sports earnings were up 10% in local currency terms - offer potential. Other brokers concur. Print, meanwhile, is in the doldrums, with advertising seen weakening in Australia and the UK.

First quarter earnings fell 18% on a reported basis and 7.0% on an underlying basis, adjusted for currency and acquisitions. Revenue at the company's largest division, news and information services, fell 11%, and the rate of decline in the advertising base in Australia accelerated. Book publishing was also soft. There is no doubt at Credit Suisse the overall result was weak

Credit Suisse believes the stock has had a solid run and the scope for near-term upside is limited. Hence, the broker downgrades to Neutral from Outperform. Credit Suisse's target of $23.40 reflects a 10% discount to valuation, on which the broker expects News Corp will continue to trade given its current structure.

One aspect of news & information services that the market may be too dismissive of is the Dow Jones service, with both Citi and Morgan Stanley suspecting this could be the case. The latter also notes higher circulation revenues for The Wall Street Journal. The biggest surprise for Morgan Stanley was Foxtel, which reported an earnings drop of 37%, largely stemming from higher programming costs.

News Corp is interesting on a "sum of the parts" basis but Morgan Stanley highlights negative earnings momentum and unclear capital allocation priorities. With a company still in transition, the broker retains an Equal-weight rating.

Foxtel may be increasing its subscriber base but Macquarie warns this is founded on lower prices and increased costs. Guidance for growth at Foxtel in FY16 is maintained, despite a 21% decline in the quarter, with management indicating that expenses associated with the triple play launch will roll off over the course of the year.

Some negative trends will continue into the second quarter, namely the FX and e-book comparables, but this situation should ease as the year progresses, in Deutsche Bank's view.

The Foxtel business is considered a key source of risk, despite the company's assurances, as the decline in the current quarter is severe. Deutsche Bank expects competitive pressure in the Australian market will impact on Foxtel, despite the recent attempts to adjust pricing. The broker now values it at five times earnings.

Management has confirmed the Amplify business has now been sold and any future costs associated with the digital education venture will be minimal. This confirmation boosts Deutsche Bank's earnings forecasts, partly offset by the weak trends in news & information services and publishing.

JP Morgan acknowledges parts of the print business are withstanding the headwinds better, such as the Wall Street Journal, but this is more than offset by the challenges elsewhere. While encouraged by the recent moves to sell Amplify and deliver on capital returns earlier in the year, the broker considers the poor visibility on earnings growth and the subdued longer term outlook for print prevents a more positive view of the stock.

FNArena's database has three Buy ratings and three Hold. The consensus target is $24.44, suggesting 15.5% upside to the last share price. Targets range from $23.40 (Credit Suisse) to $26.00 (Deutsche Bank).

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article 3 months old

REA Group On A Strong Growth Path

-Clarity sought over revenue deferrals
-Strong growth despite softer market
-Ad upgrades on firm upward path


By Eva Brocklehurst

REA Group ((REA)) posted a robust September quarter update, with brokers welcoming the 21% growth in revenue. The results should help to ease concerns around top line growth and any slowdown on the back of a softer real estate market, or increased competition from the Fairfax Media ((FXJ)) Domain site. At least for the time being, Morgan Stanley maintains.

The company confirmed that all key revenue segments grew strongly while cost growth was contained at 10%. Margins expanded to 56.2% from 52.1% a year ago. No explicit earnings guidance was provided but the company remarked that it has not witnessed any negative impact on earnings following softer auction clearance rates in Sydney and Melbourne in recent weeks.

Macquarie observes Premiere listings almost tripled in the quarter.  Partly this represents transfers from other depth categories but, in addition to an improved mix, the broker highlights the trend is firmly upward. Revenue momentum is expected to pick up in the December quarter, a critical period, but Macquarie expects this to be balanced by higher costs.

While the numbers are tracking ahead of Deutsche Bank's growth estimates, first half earnings are now re-weighted, rather than upgraded, given the full year will be dependent on volume outcomes. First half revenue and earnings growth is expected to be 17% and 20% respectively.

The broker does expect some slowing of revenue growth  in the second quarter, as the company cycles tougher volume growth. Heading into the rest of the year Deutsche Bank expects this rate will pick up as the company benefits from easier comparables and increased prices.

Credit Suisse tends to the view that the second quarter will be even better than the first. Some residential agent revenue has been deferred and will be enumerated in the second quarter, as revenue has to be recognised over the period of the listing, which is 45 days for most Premiere listings.

The short-term growth profile is strong and the broker believes there is significant opportunity long term, as online portals continue to take a larger share of property transactions.

The increasing percentage of upgrades in advertisements and/or the adoption of the Premiere All ads on the site drove the revenue increase in what was a solid new listings environment, JP Morgan maintains. The broker suspects this was the major component of the residential revenue growth, observing industry listings are more subdued at the start of the second quarter. The broker also expects limiting cost growth to 10% is also unlikely.

The deferral of depth revenues is also noted by UBS. The company has commented that, ex deferrals, its residential revenue outpaced Domain.  The broker suspects that these are exit growth rates, given September was particularly strong. Otherwise the underlying growth rate would have been over 30%, which UBS considers unrealistic. The broker moves to Neutral from Buy on valuation, but remains positive on the long-term structural outlook.

It may be so far, so good, in terms of first quarter revenue growth but Morgans wonders whether REA Group is protecting its market share by offering deep discounts off listing prices. Re-balancing Australian residential revenue away from subscription and towards paid depth ads has made the allocation of revenue more seasonal, the broker observes.

The spike in depth listings in the quarter revealed a significant amount of deferred revenue. Moreover, the mix shift to 45-day from 30-day adds has accentuated this. All up, the broker expects that the quantum of this shift will not be revealed until the December quarter numbers.

Regardless, Morgans makes no changes to its investment view, retaining a Hold rating, and believing the company offers the opportunity for investors to enjoy earnings growth from a long-term structural trend.

FNArena's database has four Buy ratings and four Hold. The consensus target is $49.08, signalling 0.4% downside to the last share price. Targets range from $44.10 (JP Morgan) to $53.50 (Credit Suisse).

See also, Brokers Upbeat Over REA Move On iProperty on November 3, 2015.

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article 3 months old

Weekly Broker Wrap: Outdoor Media, Retail, Property And Classifieds

-Digital driving outdoor media growth
-Macquarie more negative on retail
-Chinese interest in Oz property wanes
-Sydney nears "bubble risk" in UBS' view
-New real estate listings volume turns negative


By Eva Brocklehurst

Outdoor Media

Revenue in outdoor advertising continues to surge with UBS noting October was the tenth consecutive month of growth. Digital revenue is the main driver and now comprises 25.3% of industry revenue in the year to date.

Going forward, the broker highlights the tougher comparables being cycled but remains positive on the industry's growth prospects.

Ord Minnett also upgrades expectations for the sector, taking the view that momentum is set to extend for the next few years. The broker is increasingly confident that this is only the beginning of a sustained period of strong growth.

While growth rates may ease from the highs of the last 18 months the broker still expects low double digit growth per annum and both APN Outdoor ((APO)) and oOh!media ((OML)) should meet or exceed this.

Oz Retail

Macquarie suspects Australian retailers face a more challenging Christmas period, given there is no offset from the Reserve Bank, as yet, to the mortgage rate hikes from the major lenders.

The broker acknowledges a cut to the cash rate is possible in December and may be enough to provide a supportive backdrop to the key Christmas/New Year trading but suspects February is the more likely timing.

The broker is becoming increasingly negative on the outlook for retailers with the deteriorating housing cycle, the evidence of margin pressure in consumer electronics in the Dick Smith ((DSH)) downgrade and the de-facto tightening of monetary policy with mortgage rate hikes.

Wesfarmers ((WES)) is the broker's only Outperform rated stock in the large cap consumer sector.

China & Oz Property

Credit Suisse observes purchases by Chinese bidders of Australian property have lost momentum, despite official data suggesting capital outflow from China has accelerated. This outflow, in turn, has tightened credit conditions in China and dampened the purchasing power of Chinese residents.

Meanwhile, local demand for housing is seen being held back by macro-prudential regulation and poor affordability. Hence, in this environment, Credit Suisse believes the Reserve Bank needs to lower the cash rate further and fiscal policy needs to provide an alternative growth path to housing and mining.

Real Estate

UBS observes real estate prices in many global cities have doubled since 1998 in real terms on the back of favourable fundamentals and capital inflows from abroad. Loose monetary policy has also prevented a normalisation of housing markets and encouraged the risks of a bubble forming

Cities near the “bubble zone” face a higher risk of a large price correction. The most at risk, in the broker's analysis, are London and Hong Kong. Significantly overvalued markets include Sydney, Vancouver, Amsterdam and San Francisco.

Valuations are also considered stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore.

R/E Classifieds

New listings volume growth in the Australian property market turned negative in October, Deutsche Bank observe. This is not altogether unsurprising, given the cycling of tough comparables.

Still, the broker expects this will impact on online classified earnings over the December quarter. That said, volumes are expected to return to growth after December and the broker remains comfortable with full year growth forecasts.

Mint Payments

Canaccord Genuity makes modest increases to earnings growth estimates for Mint Payments ((MNW)), after the company's quarterly update provided quantitative evidence that the platform is accelerating.

This reflects the product launch by key distribution partners. The broker believes the scalability of the company's payments platform is yet to be widely acknowledged by investors.


While remaining positive regarding Blackmores ((BKL)) growth opportunities in China, Goldman Sachs suspects new draft proposals from authorities to increase oversight of the cross-border channel may have an impact.

As it is difficult to quantify the risks the broker removes Blackmores from its Australasian conviction list but retains a Buy rating. The broker's target is raised to $195 from $150.

SeaLink Travel

Bell Potter suspects shares in SeaLink Travel ((SLK)) will take a breather after a strong performance, having increased 50% since the placement in mid September. The broker believes the upward move was justified but finds no obvious near-term catalysts. Rating is downgraded to Hold from Buy and the target is $3.61.


Bell Potter also downgrades its recommendation for data security solutions firm Senetas ((SEN)) to Hold from Buy following a strong rise in the share price and now envisages it is fair value. The price target is raised to 17c from 15c. The broker does not expect specific guidance to emanate from the upcoming AGM but rather expects a confirmation of profit growth and cash flow.

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article 3 months old

Brokers Upbeat Over REA Move On iProperty

-Familiarity de-risks proposition
-But material growth is required
-Initially dilutive to REA EPS


By Eva Brocklehurst

Online real estate classified market players are consolidating, with REA Group ((REA)) signalling an intention to acquire iProperty ((IPP)), a company in which it already holds a 22.7% stake. iProperty owns portals in Malaysia, Hong Kong, Thailand, Indonesia and Singapore.

The initial cash consideration will range from $430-500m, UBS calculates, funded by $480m in new debt and cash. iProperty is expected to enjoy revenue growth at a compound rate of 30% in FY15-18 with growth drivers being rising internet and smartphone penetration, migration of advertising spending online and product innovation.

Risks centre on the extent to which advertising spending migrates online and competition from other players in the sphere. The merger will dilute earnings by around 3.0% in FY17, the broker estimates. In tandem, UBS also lifts REA Group's Australian forecasts, expecting 20% revenue growth in FY17, ex merger impacts.

So, how will the deal be progressed? For the shares it does not yet own REA Group is offering $4.00 cash or $1.20 cash plus 0.7 shares in an unlisted entity, which will hold a 10.7-20.0% indirect interest in iProperty. This will enable iProperty shareholders to retain exposure to its growth for two years. Put options will be attached to the shares and exercisable in 2017/18, with REA Group retaining a call option in 2018 in the event the puts are not exercised.

The familiarity with iProperty may de-risk the acquisition somewhat, in JP Morgan's view, but material growth is required to justify the price paid, at around 29 times the last 12 months revenue, given iProperty is currently breaking even. The broker likes the exposure to the Asian real estate classifieds market. Nevertheless, while REA Group has a strong track record and the intellectual property to succeed, it is unclear as to whether Asia's move to online will evolve the same way as it has in Australia.

Credit Suisse was not surprised by the bid and considers the price is worth paying. The offer is 14% above the broker's base case valuation of iProperty but still below the $5.70 a share bull case valuation. REA Group is familiar with the company so the transaction is a manageable risk in the context of its market cap, Credit Suisse asserts.

The move is also considered timely, as domestic growth is re-accelerating. A strategic expansion in Asia makes sense to many brokers too, as there is some customer overlap and the market opportunity is sizeable with digital penetration at an early stage. Moreover, iProperty is number one in four out of the five markets in which it operates.

Credit Suisse envisages potential synergies if REA Group shifts some of its IT development spending to lower-cost Asian markets. Little probability is assigned to a competing bid, given REA Group's blocking stake and the rationale in combining the two businesses.

A similar view is held by Deutsche Bank, given the significant longer term growth potential of iProperty. REA Group will fund the acquisition through a combination of cash and new debt and the broker believes the debt/earnings ratio will remain undemanding. That said, Deutsche Bank considers it unlikely the company will pursue other acquisitions in the near term. The downside risk, in the broker's opinion, lies with a severe downturn in the the property market.

The development is positive, in Macquarie's assessment, as it provides REA Group with another driver outside its core operations and there is scope to leverage products an experience into a wider market. The transition to online from print in Asia lags Australia and there may be opportunities down the track for REA Group to strengthen its position in the region. Macquarie envisages limited synergies up front, mostly in terms of corporate and shared development costs.

Morgan Stanley believes this was a decision REA Group had to make - whether to expand internationally in a meaningful way, or remain a domestic oriented business, highly profitable, but with slowing growth prospects as the industry matures. While aware of the higher risk profile, the broker believes the acquisition makes strategic an financial sense and expects it to be accretive in three years time.

FNArena's database contains five Buy ratings for REA Group and three Hold. The consensus target is $48.03, suggesting 1.8% downside to the last share price. Targets range from $41.40 (JP Morgan) to $53.50 (Credit Suisse). There is one Buy rating and two Hold for iProperty on the database with the consensus target of $3.95 signalling 2.7% upside to the last share price.

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