Tag Archives: Media

article 3 months old

The Long And Short View Of REA

By Michael Gable 

Several weeks ago, we spoke of opportunities opening up in the market with it having fallen to attractive levels. We saw our shares in Veda Group (VED) receive a takeover offer, our holding in M2 Group (MTU) receive a merger proposal, and now our tip in iProperty Group (IPP) from a few weeks back is subject to a nice offer from REA Group ((REA)). Speaking of REA, it has done very well in the last few months while the market was falling, returning over 14% in that time excluding dividends. I think you have to be a bit active in this market, so we've been happy to take another profit there and move on. We have an updated chart in today's report.
 


The longer-term trend for REA is still looking bullish, but it is now hitting some strong resistance and there is a good probability that it will pull back here, despite yesterday's bid for IPP. We can see that REA has moved to the top of the range, as predicted a number of months back. If the stock breaks here it could make a quick move into the low $50's. However, if we count the moves made within this flag formation, then we are likely to see one more dip down about half way to the mid $40's. Traders can consider taking some easy profits here and buy back in on that dip, or wait for the eventual break to the upside.


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

Disclaimer

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

Weekly Broker Wrap: Oz Economy, Profits, Drought, Housing, Hardware, Hospitals And Insurers

-Low non-financial profit growth
-Drought in a vulnerable economy
-Westpac move may impact housing
-Operating theatres key to performance
-Online earnings forecasts diverging
-Insurance margin correction factored in
 

By Eva Brocklehurst

Australian Economy

Financial conditions suggest to Citi that Australia's economic growth is weak. The influence of lower official interest rates is waning and the recent moves by Westpac ((WBC)), if followed by other banks, could work to tighten conditions. The broker cites recent sales activity in the property market which supports a view that house price growth has peaked.

The broker forecasts GDP growth at 2.3% by the end of 2015 and averaging 2.4% over 2016. Citi suspects the Reserve Bank will shave 25 basis points off its growth forecasts in its November statement on monetary policy.

Corporate Profits

Non-financial company profit share of GDP has declined by over 3.5% since 2011, Citi maintains. Lower commodity prices are not the only reason for the weakness as, stripping out mining profits, the decline is still noticeable and the profits have underperformed the US. Citi suspects this could, at least partly, reflect lower productivity growth. Consensus has profits recovering strongly, at around 10%, in 2017 whereas Citi is more cautious, expecting around 6.0%.

The broker believes the longer-term outlook is predicated on how successfully the economy re-balances and diversifies its export base. Still, the broker believes the combination of low profit growth and high dividend pay-out ratios is toxic for investment spending and should maintain the prospect of further easing from the Reserve Bank.

Drought

Goldman Sachs wonders whether drought will be the straw that breaks the camel's back for Australia. A rare combination of an intense El Nino event in the eastern seaboard is coinciding with a strong positive phase for the Indian Ocean temperatures which has occurred on only seven other occasions since the 1950's and is consistent with severe deficiencies in rainfall and high temperatures.

Currently, government forecasts assume flat farm production in 2015-16 compared with the median decline of 20% during a drought year. Goldman notes, fortuitously, the severe droughts of 2002-03 and 2006-07 coincided with robust economic growth.

While identification of a drought does not in itself provide a rationale to ease monetary policy it appears to the broker that, in a period where non-farm growth is already below trend and inflation contained, it may be sufficient reason to warrant additional monetary easing.

Housing & Property

Morgan Stanley believes the 20 basis point increase to Westpac's mortgage portfolio will put a dent in housing sentiment. New investors face higher rates and tighter lending standards and this strengthens the broker's belief that the housing boom has peaked. Already, there is evidence of softening auction clearance rates and investor activity, amid weaker house price forecasts.

Morgan Stanley's forecast for a looming oversupply to housing makes the prospect of rental growth and capital gains particularly uncertain. This is all part of what the broker believes is a deliberate macro prudential strategy to rein in the housing market.

Against this backdrop the broker believes there is limited re-rating potential for the residential Australian Real Estate Investment Trusts (A-REITs).  Based on Morgan Stanley's analysis, interest rates are the dominant driver of house prices and house price growth is the key driver of Mirvac Group ((MGR)) and Stockland ((SGP)), in terms of their free funds from operations.

The two stocks have de-rated over the past 6-9 months. Hence, the broker expects further de-rating is questionable, given merger & acquisition pre-conditions are strong, balance sheets can support buy-backs and there are supportive distribution yields.

Hardware

Hardware retailing sales are robust, with the strongest growth in Sydney and Melbourne, Morgan Stanley observes. At a recent industry conference the broker noted the shift to multi-residential developments is creating a headwind for the sector because these developments are large enough to source product offshore and bypass the retail/wholesale channel in Australia.

Participants at the conference also signalled to Morgan Stanley that Bunnings market share is being understated at around 18% and it is more likely closer to 40-50%, given the Wesfarmers' ((WES)) owned business overstates its addressable market.

Morgan Stanley notes the general view that margins at Bunnings have held up despite like-for-like sale growth because of the extent of new store openings, as the business over-services customers in the first six months of opening. As sales increase and customers become aware of where products are within stores, labour is reduced and, hence, margins improve.

Packaging

Morgan Stanley has initiated coverage on the Australian paper and packaging market with a counter-consensus Cautious industry view. The broker expects structural headwinds will cause Amcor ((AMC)) to underperform while progressive reallocation of capital will mean Orora ((ORA)) outperforms.

Amcor has been rewarded in recent years for its defensive characteristics and high returns but delivering the earnings required to support its premium multiple and value-creation target is becoming harder, Morgan Stanley maintains. In contrast, Orora has a largely unencumbered balance sheet and potential to deliver upside through optimisation of its capital allocation strategy.

Australian Online

Pure online classified companies such as Carsales.com ((CAR)), Seek ((SEK)) and REA Group ((REA)) have experienced two years of price/earnings de-rating although Citi notes they are still trading above the historical valuation lows experienced just after the global financial crisis. Meanwhile, Fairfax Media ((FXJ)) and Trade Me ((TME)) have re-rated recently.

The broker finds REA Group the most attractive in value terms, despite a premium multiple, while Carsales.com, Seek and Trade Me are seen trading near peak relative valuations. At the same time most earnings expectations have been deteriorating, with Seek suffering the largest downgrades but Fairfax enjoying incremental upgrades in earnings expectations. Citi now observes a large divergence in earnings growth expectations across the sub sector.

Private Hospitals

The efficiency of operating theatres is a key component in the overall financial performance of a private hospital, Credit Suisse contends. The broker's analysis suggests Ramsay Health Care ((RHC)) generates 35% more earnings per operating theatre than does Healthscope ((HSO)), for several reasons. These include higher case payments, lower operating costs and more efficient processing of patients, as well as more complex surgical patients which generate higher earnings per case.

The broker believes a reduction in operating costs through procurement and workforce de-leveraging is achievable for Healthscope in the short to medium term and this should facilitate a modest uplift in earnings. Other factors citied above are harder to achieve, Credit Suisse acknowledges, and benefits accrue over a longer term.

Insurance

UBS finds more widespread evidence of personal lines claims inflation and modest price increases. Commercial lines appear soft, still. The broker believes, while the picture is mixed, a healthy underlying correction in margins is now reflected in FY16 estimates. Even if margins trough at 20-30% below their peak, with a subsequent 10% hit to earnings, this could increasingly be tolerated by investors.

Challengers have pulled back share in the highly contested motor class, to 12.7% from 13.4% in the broker's previous review. While the challengers continue to generate superior growth at 18% compared with 3.4% for Suncorp ((SUN)) and 0.4% for Insurance Australia Group ((IAG)) there are some signs of consolidation, UBS observes.
 

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article 3 months old

iProperty Set For A Run?

By Michael Gable 

Last week we wrote about our market finding a low. The S&P/ASX200 Index stuck to the script and gave us the best weekly return (4.5%) in nearly four years. It will be slow going from here but expect a recovery through to Christmas.

A stock that is looking very interesting is a smaller disruptive company called iProperty Group ((IPP)). It is doing similar things to REA Group ((REA)) but in Asia - so much so that REA is creeping up on the register with a shareholding of over 22%. Softness over the next few days or so will see us pick up a few more interesting opportunities that have been relegated to the sidelines during the recent market drop.

 


For the nine months from mid 2013, IPP rallied from less than 80c to over $4. A year and half later has seen the share price track sideways in a large band. It has been using up time to absorb such a big move but you will notice that the range has tightened. This shows us that it is just a continuation pattern which means when the time is right, IPP could break out of this sideways band and resume the uptrend. That breakout appears to have occurred last week on the back of some news to the market. As a result, IPP should continue heading higher, ultimately surpassing the 2013 high above $4.
 

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

Disclaimer

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

Weekly Broker Wrap: Ad Blockers, Outdoor, R/E, Debt, Global Growth, Bonds And Surfstitch

-Online ads accelerating move to mobile
-Outdoor ad share of media spending rises
-Debt collector returns under pressure
-Extended emerging market weakness
-Means US tightening pace pared back
-Bond yields disconnect from growth
 

By Eva Brocklehurst

Ad Blockers

Ad blocker software, which prevents websites from loading advertising content, is gaining ground. Citi notes the global adoption rate of Ad blockers is growing at around 41% per annum. Primary usage is at the desktop level but the Apple iOS9 update now allows ad blockers on mobile, threatening to reach the mass market.

Citi cites statistics which reveal ad blocker use in Australia is 18% of the internet-using population with the potential lost advertising dollars reaching $1.4bn in 2016. The most at risk media companies are those which have high exposure to desktop display advertising such as Fairfax Media ((FXJ)), News Corp ((NWS)) and Nine Entertainment ((NEC)).

Ad blockers are accelerating the move in online advertising to mobile from desktop, in Citi's observation. The higher penetration of ad blockers is expected to curtail market growth rather than destroy the current value of online display. Publisher strategies to address the risks include native advertising content and renewed attention to subscription models and applications.

Citi estimates a 10 percentage point increase in the penetration of ad blockers would negatively affect Fairfax by 8.0%, News Corp by 6.0%, Nine Entertainment by 5.0% and APN News & Media ((APN)) by 3.0%, in terms of the percentage of profit in FY16.

Outdoor Media

Outdoor advertising revenue grew 23.1% in September, bringing the third quarter growth rate to 13%. UBS observes growth occurred across all vertical markets. The latest data suggests outdoor continues to capture market share from other media. The outdoor share of traditional media spending increased to 7.8% in FY15 from 6.6% in FY14.

UBS suggests the next catalysts will be the digital roll-outs with APN Outdoor ((APO)) targeting 14 large format boards in the second half of the year and the conversion of two large format boards on Sydney's Military Road. AdShel has flagged the roll-out of its national roadside digital network of 270 screens from this month and oOh!Media ((OML)) has recently won a contract for 26 large format Sydney boards.

Real Estate Classifieds

New listings in the Australian property market stabilised in September with growth similar to the 4.0% rate seen in August, Deutsche Bank observes.  Sydney volumes remain strong with its growth rate continuing in the mid teens (16%). While Sydney and Melbourne accounted for 37% of the new national listings in September, the broker estimates they contributed well over 50% of the revenues for property classifieds.

With data now available for the first quarter of FY16 the broker estimates volumes were up 6.0% year on year and should support both REA Group ((REA)) and the Fairfax site, Domain. This reinforces Deutsche Bank's Buy ratings for both stocks.

Debt Collection

Encore Capital is a US debt collection house and the world's largest debt purchaser and is buying a 50.25% stake in Australia's debt recovery agency Baycorp. Oceania Capital Partners and SAS Trustee Capital have sold the stake but will remain shareholders.

The transaction implies a valuation of Baycorp of around $66m. The industry is largely led by price and unlikely to grow materially over the coming years,  Ord Minnett observes. Hence, the broker envisages significant risk that returns on equity will decline in the medium term.

The broker believes it would have been difficult for Encore, or indeed another foreign player, to enter the market on an organic basis. The acquisition of the Baycorp stake provides the company with access to historical data and systems in Australia.

Nevertheless, Ord Minnett has concerns that the cost of capital Encore enjoys and the relatively smaller presence that Baycorp has in the Australian purchased debt ledger (PDL) market could mean substantial pressure on returns for all incumbents over the medium term.

Global Growth

Commonwealth Bank economists have reduced global economic growth forecasts for 2016 to 3.1% from 3.5%. This is well below the the long-run average of 3.7%. An extended period of weakness in the large emerging market economies is considered the main reason behind the reduction.

Brazil and Russia are in recession and central banks in China and India are easing monetary policy to combat weak growth and low inflation. The economists expect more easing by these central banks before the end of this year.

As well, the economists reduce their US GDP forecast because that economy is expected to hit capacity constraints in 2016. They still expect the US Federal Reserve will begin tightening monetary policy in December. That said, the pace of tightening in 2016 is pared back, given global growth prospects. The commencement of higher interest rates in the US will be a watershed, as the last policy tightening cycle started over a decade ago.

Meanwhile the 10-year surge in global mining investment is easing but continues to deliver an increase in supply. This is expected to pressure prices and maintain low inflation in most economies in 2016. The economists expect only the central banks in the US and UK will tighten policy in 2016. They flag the risk of a 1.5% official cash rate in Australia and 2.0% in New Zealand.

Fixed Income

The impact of the global financial crisis is still being felt some seven years after it was spearheaded by the Lehman Bros collapse. Long-term government bond yields in the advanced economies are well below levels that can be explained by the outlook for growth and inflation alone, Standard Life analysts contend.

External headwinds are also affecting the US Fed's ability to steer its own path on interest rates. Still, the analysts expect that as long as the recoveries in the advanced economies become more self-sustaining and emerging market economic conditions do not deteriorate further, a gradual normalisation of monetary policy in the US will materialise.

The analysts suggest the benchmark US 10-year government bond yield will peak at 3-4% during the current economic expansion, well below the peak in previous cycles. The disconnect between yields and domestic growth is also not confined to the US. Bond yields in Japan, Germany and the UK have diverged significantly from growth.

Standard Life analysts also contend that, just as policies in the US, Europe and Japan are gaining traction, emerging markets are faltering. China has loosened its monetary policy and allowed its currency to depreciate. This is pulling commodity prices and global inflation lower and putting upward pressure on the US dollar. Any further deterioration in emerging market conditions would pose a significant barrier to higher long-term rates in the US, the analysts believe.

Surfstitch

Surfstitch ((SRF)) remains a key pick for Bell Potter. The broker expects 40% revenue growth in FY16, with continued strength in customer engagement and improving gross margins. Margin expansion is expected to flow into FY17 from the $12.5m in earnings and capex synergies extracted from the global re-branding and integration.

The broker judges the stock to be relatively good value when compared with its overseas peers on metrics such as enterprise value/sales, enterprise value/earnings or price/earnings. The broker believes the current discount at which the stock is trading is far too steep for a business where earnings growth is forecast at over 100% for the next two years. Bell Potter has a Buy rating and $2.25 target.
 

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article 3 months old

Turnbull And Anticpated Media Reforms

-Need for industry consensus
-NEC probably most advantaged
-TV licence fee reduction most likely
 

By Eva Brocklehurst

Will changes to Australian media be more likely now former communications minister, Malcolm Turnbull, is Prime Minister? This is the question brokers are asking, as Mr Turnbull has pursued a reform agenda.

Reforms were put on the back burner because of a lack of consensus among media companies but it remains widely known that Mr Turnbull is keen to address regulation in the sector, which many argue has become out of date with the advent of the internet.

The two main themes, in Citi's view, are TV regulations and the cross media ownership laws. TV licensing has a "reach" rule regulating the extent of licence coverage. There are also issues regarding local content requirements and the anti-siphoning list - which protects sport on free-to-air TV (FTA). Cross media rules prevent mergers between traditional media assets of TV, radio and newspapers.

Citi suspects that TV reforms could benefit Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)) should they pursue a merger if the reach rule is removed. However, as consensus remains a requirement among broadcasters, Citi considers a change unlikely.

Removing cross media ownership rules is also unlikely any time soon, in Citi's view. In any case, cross media mergers evolve out of necessity because of structural challenges and, therefore, share price upside is limited.

The probability of reform increases with the new PM but this does not make it highly likely, JP Morgan contends. The most probable area is TV licences, given the support in the past from industry CEOs for a reduction in the 4.5% FTA fee and, secondly, a scrapping of the 75% reach rule.

This would trigger regional and metro TV consolidation. This broker, too, envisages Nine Entertainment the most likely to acquire another station, given its strong balance sheet. Southern Cross is the most likely target. Modelling a 1.0% reduction in the FTA licence fee provides a potential upgrade to FY17 earnings for Nine Entertainment of 6.0%, for Seven West Media ((SWM)) of 4.0% and for Ten Network ((TEN)) of 13.6%.

While agreeing the reach rule is redundant, given the advent of the internet and converging media, JP Morgan believes its removal presents more of a challenge. This requires consensus among both politicians and the industry. The prospect of an election in the next 12 months also suggests the timing of any change might be further into the future.

The case is about "when" not "if", Credit Suisse asserts. The broker believes Malcolm Turnbull would be willing to push ahead with reform without media proprietor consensus. There is also likely to be bipartisan support for removing the reach rule and reducing TV licence fees. Moreover, the broker envisages no issue with putting a package forward ahead of the election.

Again, Nine Entertainment is considered the best positioned, able to merge with Southern Cross or WIN Corp depending on the risk/reward. There remains a possibility of a tie up between Southern Cross and Ten Network, but Credit Suisse believes this option offers less upside to the Southern Cross shareholders. If other deals go ahead the broker expects Seven West would consider acquiring Prime Media ((PRT)) so that it is not at a reach disadvantage.

The broker is even more confident in a reduction in the TV licence fee and notes every 1.0% reduction in this fee adds $30m to the sector's earnings. Removal of the cross media ownership rule, or 2-out-of-3 rule, would provide additional opportunities but, as this only currently restricts transactions involving radio assets, Credit Suisse does not believe it is a game changer.

If removed, it would allow Fairfax Media ((FXJ)) to merge with Nine Entertainment, for example, without having to divest its 54% stake in Macquarie Radio. In a similar way, Seven West could acquire a radio asset without having to divest any assets in Western Australia.
 

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article 3 months old

Weekly Broker Wrap: GDP, State Economies, Banks, Classifieds And Key Picks

-Economic growth soft and narrow
-NSW's lead extends further
-Westpac's productivity potential 
-Sydney, Melbourne underpin R/E
-Buying opportunity in CGF, GBT?
 

By Eva Brocklehurst

Economy

Australia's GDP growth was 0.2% in the June quarter to be 2.0% for FY15. The Australian Bureau of Statistics noted nominal GDP growth of 0.3%, 1.8% higher over the year, is the weakest since 1961-62.

The national accounts reveal an economy which is struggling to lift demand in a sustainable fashion, Macquarie observes. Hours worked are increasing, employment is holding up but income per person is flat, so to lift consumption in the quarter households were relying on lower debt servicing costs and insurance pay-outs.

Macquarie suggests the one-off nature of several supports for growth in the quarter means a potential reversal is likely over coming quarters. A significant lift in demand is needed to raise output to a level to sustain spending and the broker asserts that recent concerns over global growth will not help.

Expenditure-side growth was driven by government and this cannot be relied on indefinitely, Citi maintains. Moreover, households are adding more disposable income to savings, with less expenditure on discretionary items. Financial services are the bright spot in the economy, growing by 1.3% in the quarter.

Citi notes the yearly growth rate was in line with the Reserve Bank's forecast, but the composition is narrow and the increase in the household savings ratio was not what the central bank was expecting. Citi continue to forecast a 25 basis point reduction to the cash rate at the November board meeting.

State Economies

ANZ's inaugural economic "stateometer" reveals NSW and Victoria are improving, with NSW extending its lead. The other states are firmly below trend. Mining states have arrested the slowdown in activity, for now, while South Australia is falling behind.

Tasmania and Queensland share some of the strong characteristics, with solid housing and private consumption and a benefit from the depreciating Australian dollar. Economic activity in Western Australia and South Australia is on a downtrend. For WA it is the fall in resources investment while for SA the analysts note a broader malaise in industrial activity.

Given the strong interlinkage between NSW and Victoria and the rest of the country the analysts believe the performance of these most populous states bodes well for an ongoing, albeit slow, recovery.

Banks

Greater functionality in online and mobiles has driven a dramatic decrease in branch-based transactions at banks. The role of the branch is now centred on complex transactions and advice. Macquarie also observes, with increasing population density in cities, there is less need for multiple branches. The broker's research indicates a clear opportunity for branch closures.

Westpac ((WBC)) has the best opportunity to reduce numbers, given its larger network and many branches in close proximity to each other. The size of the cost reduction opportunity varies between 0.5% of earnings for Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) and 2.0% for Westpac over three years, Macquarie calculates. Macquarie has upgraded Westpac to Outperform.

Credit Suisse has also upgraded Westpac to the same rating, elevating the bank to its number one pick among the majors. The broker expects Westpac to lead the industry in structural productivity initiatives. The reasons for the upgrade include the bank's leverage to ongoing mortgage customer re-pricing and productivity enhancement.

Conversely, Credit Suisse downgrades National Australia Bank ((NAB)) to Neutral, reducing it to number four pick. The story is one of mature cost restructuring which is now approaching completion. The stock's P/E multiple has now re-rated compared to its peer group.

The sector has now moderated its capital accumulation task, the broker observes, although Westpac may have to underwrite another dividend reinvestment plan.

Real Estate Classifieds

Real estate new listings growth eased in August, to around 4.0% by the end of the month, but this is not a surprise to Deutsche Bank. Comparables are likely to be difficult for the remainder of this half year. Capital city listings growth was slightly higher than the national trend, with Sydney ahead of the pack. Growth in total listings is expected to continue in the first quarter of FY16.

Despite the moderation in the growth rate the data remains supportive of REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain in FY16, Deutsche Bank contends. While Sydney and Melbourne constitute around 39% of national listings, these two cities contribute well over 50% of revenue for property classifieds.

High Conviction Stocks

Low expectations heading into reporting season were largely met, Morgans maintains. The broker calculates, in terms of the ASX200, FY15 earnings declined 2.0% while expectations for FY16 were revised down by 1.0%. Still, the broker is not swayed from a cautious approach over the next few months as global events take the spotlight.

Re-visiting key stocks post the results, Morgans adds Challenger ((CGF)) and GBST ((GBT)) to its list and removes Qube Holdings ((QUB)) and Admedus ((AHZ)). Challenger provides solid mid to high earnings growth over the medium term while GBST offers exposure to increasing demand for wealth management and capital markets systems. The recent sell-off is considered a buying opportunity.

While retaining a long-term positive view on Qube, earnings risk in FY16 and limited catalysts mean Morgans suspects the stock will trade at current levels for 6-12 months. Admedus has achieved a number of milestones over the past 12 months and, while removing it from the list, the broker will use its active opportunities portfolio as a way of highlighting share price catalysts.
 

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article 3 months old

APN Outdoor Expands Prospects Substantially

-Upgraded growth outlook
-Which suggests re-rating
-Margins set to widen
 

By Eva Brocklehurst

APN Outdoor ((APO)) beat prospectus forecasts in its first half results and lifted guidance substantially. The company's billboards are winning advertising revenue share from other forms of media as well as other outdoor operators.

The company is not going out on a limb just yet, emphasising the most important months of the year for advertising are ahead. Nevertheless, it has revised pro forma earnings forecasts for 2015 to an increase in the "mid teens" percentage above prospectus. Morgan Stanley calculates this to mean earnings of around $62m for 2015.

Morgan Stanley believes the results support the longer term positive investment thesis. While it is clear is investment in digital screens is delivering top line growth, it is also significant that traditional static billboard earnings remain in positive territory.

The future is all about winning ad market revenue from other media and increasing market share, Morgan Stanley maintains. The broker expects earnings margins and returns will rise substantially over the next 2-3 years.

All categories outperformed in the half. Billboard revenue was up 21%, rail up 72% and airport 69%. The first half also signals to Ord Minnett the company will exceed prospectus forecasts by a substantial margin. An interim dividend of 4.5c was declared.

Digital revenue was up 174.9% on the prior corresponding half. As of June 30, 2015, the company had 37 operational large format digital billboards and intends to have 51 by the end of the year. Ord Minnett notes the stock was inexplicably weak leading into the result and this could be the start of a more sustained re-rating.

The broker expects solid earnings growth to continue beyond 2015 because of the digitisation of static billboards and potential for improving yields. Ord Minnett, not one of the eight brokers monitored daily on FNArena's database, has upgraded the stock to Buy from Accumulate, with a target of $4.05.

UBS expects second half revenue growth will slow to 12.5% as Australian industry growth is also observed to be slowing. The broker expects modest 2016 earnings growth of 12%, given the company will cycle the uplift from the Sydney-Melbourne XTrack contract.

The stock remains inexpensive relative to the growth rates, UBS acknowledges. Risks centre on yield pressure emanating from an increase in inventory and competition from other players, as well as the risk of cyclical downturn in advertising spending. NZ revenue also outperformed UBS expectations, with revenue up 42%. The increase reflected contributions from the new Auckland airport.

It is this Auckland airport contribution, the increase in the number of XTrack billboards and the Sydney airport contract which suggest that double digit second half growth is inevitable regardless of the overall media market, Morgans maintains.

A relatively high level of fixed costs and recent contract wins enabled the company's operating margin to expand to 19.2% from 11.6%. The change in mix to digital signs also helped, the broker observes.

There are three Buy ratings on FNArena's database. The consensus target is $3.72, suggesting 9.4% upside to the last share price. This compares with $3.35 ahead of the results. Targets range from $3.52 (Morgan Stanley) to $4.04 (Morgans).
 

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article 3 months old

Weekly Broker Wrap: Trends, Tourism, TV, Clothes, China Steel And A-REITs

-New confidence in tourism, farming
-AFL deal has downside for SWM
-Summer less bright for clothiers
-China facing steel overcapacity
 

By Eva Brocklehurst

Corporate Trends

Analysts at ANZ Bank have recently held meetings with corporates across the country and found certain themes are being widely discussed. The lower Australian dollar is clearly supporting non-resource exports while importers are struggling to pass on costs.

Discussions with the agricultural sector were uniformly positive, supported by the lower Australian dollar and higher prices. Offshore demand appears mixed, with grain traders reporting strong demand but meat and dairy facing difficulties with contract enforcement.

There was a clear divergence in views between the mining states and the industrial states. The analysts found conditions in Victoria positive while South Australia was more sombre. The property market remains patchy across the states. Feedback suggests activity continues to be concentrated in the major capitals while the regions remain lacklustre.

Concerns were raised about the implications of a slowing of growth in China on foreign investor demand for new housing. A view also emerged among Victorians that property market conditions were more sustainable than in Sydney.

The implications for gas prices from the burgeoning LNG export industry was also a key point of conjecture. A combination of international pricing, demand from projects and high development costs are expected to push domestic gas prices substantially higher.

Tourism

While the mining industry investment boom is ending, Australia's tourism industry is benefitting from a lower currency. Trends in the data show arrivals have lifted and the monthly tourism trade balance is in positive territory. The national accounts signal that as the Australian dollar has headed lower, spending on hotels, restaurants and cafes has lifted considerably, particularly in Queensland.

Commonwealth Bank analysts welcome the decline in the Australian currency for those sectors with a high export propensity such as tourism and expect the trend to continue. Tourists from Asia and China in particular are the major growth area. In 2014/15 the number of short-term arrivals from China rose to 935,000 from 770,000 the prior year. This is also partly a result of rising income in China and some softening of travel controls.

The impact of the lower currency is expected to be most notable for inbound tourists from the UK and US. The analysts note those states which benefit the most are those with the highest tourism specialisation which includes Queensland's Barrier Reef and Sydney in NSW. Other areas such as Canberra and the Northern Territory's Kakadu and Uluru are also important.

TV

The Australian Football League has negotiated a 6-year rights package from 2017 to 2022 across free-to-air TV, payTV and digital streaming, doubling the value of the current deal to $2.51bn. The bidding process appears to be uncontested, highlighting to Citi analysts the plight of TV broadcasters forced into negative value deals to protect the viability of their companies.

Seven West Media ((SWM)) has a deal worth $950m, while Foxtel's deal is reportedly worth $1.25bn. Based on the revised deal as reported by industry press, Citi estimates the potential earnings downside for Seven West of 10-16% in FY17 and 20-25% in FY18.

Clothing

ASX-listed clothing retailers have reported mixed trading in the 2015 winter season. Sales appear to have been good, helped by colder than usual weather, and Citi analysts believe Premier Investments ((PMV)) brands such as Just Jeans and Jay Jays have traded well, helped by good denim sales.

Looking ahead to summer, the analysts are less impressed with the offering. and do not expect shoppers will be inspired to update their wardrobes.

Citi upgrades current earnings forecasts for Premier Investments, Pacific Brands ((PBG)) - the stock upgraded to Buy from Neutral as well - and OrotonGroup ((ORL)), downgrading forecasts for Specialty Fashion ((SFH)).

Chinese Steel

Chinese steel exports are up 26% so far this year, despite a 10% export rebate being removed in January. ANZ analysts observe China's steel exports will total 14% of domestic production this year.

The wave of cheaper exports has triggered a rise in anti-dumping duties with European steel producers leading the way and the US now considering similar initiatives. The analysts believe the short term implications for raw materials such as coking coal and iron ore are negative, either dragging steel prices lower or lowering overall demand.

The overcapacity of steel making in China is expected to weigh heavily with a slowdown in consumption triggering heavy price discounting. The analyst predict China's steel demand will fall for the second year in a row in 2015, after 35 years of consistent growth.

A-REITs

In the year to date, Australian Real Estate Investment Trusts (A-REITs) have delivered a 10.6% total return versus 1.2% in the US and the global sector's negative return of 0.5%, Credit Suisse observes. Of note, the Australian dollar has depreciated by 9.8% against the US dollar, 10.2% against the British pound and 2.3% against the euro.

Credit Suisse expects sector earnings growth to remain stable at 4.6% over FY15-17 with a shift in composition. The broker envisages Westfield Corp ((WFD)) will deliver the most acceleration in FY16 earnings, to 4.0%, while Dexus Property Group ((DXS)) and GPT Group ((GPT)) should decelerate to 4.5% and 3.3% respectively.
 

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article 3 months old

Weekly Broker Wrap: Retail, Energy, Newspapers, Real Estate Ads And Top Picks

-Retail concentrates in housing
-Survival measures continue in oil
-Less support likely for oil & gas deals
-US print spin-offs reveal some value
-FY15 key catalyst for Vocus
 

By Eva Brocklehurst

Retail

The latest retail sales data suggest growth is increasingly concentrated, Macquarie observes. The home improvement sector, supported by housing growth and fiscal stimulus, may be positive but fails to offset the headwinds in food and liquor.

Supermarket growth was soft in June and Macquarie estimates Woolworths ((WOW)) lost 1.4 percentage points of market share over the year to June. Rival Coles ((WES)) likely gained 0.7 percentage points on the same basis. Liquor growth is weak and consistent with trade feedback that signals domestic consumption, particularly of beer, is softening.

Macquarie is cautious about the sector overall, outside of housing-related categories. Wesfarmers is the preferred consumer staples exposure while JB Hi-Fi ((JBH)) is the preferred discretionary exposure.

Energy Stocks

The energy sector has re-positioned for lower oil prices largely via redundancies and deferring discretionary expenditure. This should be the theme in the upcoming reporting season, in Citi's opinion. Further measures to survive these lower prices are likely.

The broker expects Woodside Petroleum ((WPL)) will move forward with the Browse project but still needs to win over the market on expected returns. Santos ((STO)) needs to reassure the broker regarding an equity raising, as it has previously been adamant one is not required. For Oil Search ((OSH)), the result will present another opportunity to look at how PNG LNG stacks up.

The question asked about Caltex ((CTX)) is one of how does it maximise value of its customers and infrastructure in the wake of the exit from Kurnell. Smaller stocks such as Beach Energy ((BPT)), AWE ((AWE)) and Senex Energy ((SXY)) need to provide an indication of their strategic direction in a low oil price environment.

Macquarie agrees with the need to to respond to the current low oil environment with production efficiencies and reductions in head count. With the industry anticipating a recovery in the medium term and the market pricing in a recovery, albeit modest, in oil prices, the broker suspects future LNG transactions will become harder to justify.

Deals are likely to be less well supported and Australian oil & gas stocks cannot rely on the premium value previous transactions have implied. Instead, future deals could act as a reminder of the marginal returns on offer from Australian LNG projects, the broker maintains.

Macquarie still expects merger & acquisitions will be on the agenda but finds none of the large caps are obvious takeover targets in their own right. To get a deal across the table may require innovation, such as separation and divestment of infrastructure-like assets.

At face value, the broker considers Woodside a more likely takeover target than it was in the past as it still holds strategic, long-life LNG interests. Still, the limited life of reserves and a premium valuation could deter bidders.

Santos appears cheaper, given its lingering funding concerns, and has attractive interests in the Cooper and GLNG. Still the long tail of assets may dissuade potential buyers. Oil Search's takeover appeal is clouded, in Macquarie's view, by the complicating stake held by the PNG government and PNG's takeover code, although it offers an unmatched growth outlook.

BHP Billiton's ((BHP)) petroleum assets are now more important to the company as a whole. While Macquarie does not expect the company to pursue corporate acquisitions, faced with declines in conventional production it may look to acquire liquids reserves.

Interoil ((IOC)) has a greater upstream focus and this simplifies its story. Macquarie believes the company's outlook will now be determined by the improved prospects for an Elk/Antelope development. The broker envisages value emerging in the stock since the end of June and upgrades to Outperform from Neutral.

The broker considers Beach Energy may not be a takeover target in its own right but its strategic review seems to be visiting a number of options to create value through acquisitions and divestments.

Newspapers

Over the last two years, several US media companies have separated their print assets into standalone listed entities. Credit Suisse considers these developments offer a good indication of newspaper valuations generally. While low sector multiples reflect ongoing revenue headwinds, the broker maintains US newspaper assets are at least finding some equity investor support.

Translating this theme to the Australian scene the broker values the Australian newspaper assets of Fairfax Media ((FXJ)), News Corp ((NWS)) APN News & Media ((APN)) and Seven West Media ((SWM)) at around 4.0-4.5 times FY16 earnings. The broker expects revenue declines will continue but be mitigated somewhat by strong cost control.

Real Estate Classifieds

Deutsche Bank tracks new listing volumes in the Australian property market and finds a significant improvement in July from the trend in the June quarter. Sydney and Melbourne remain the drivers behind the national growth rate in listings.

This points to a strong start to FY16 for Fairfax's Domain and REA Group ((REA)), with REA likely to be more leveraged to underlying volumes given its greater penetration. REA remains the broker's preferred exposure.

Top Picks

Credit Suisse has updated its top picks and now includes Vocus Communications ((VOC)). The company's FY15 result is expected to be an important catalyst as the market is concerned around the second half performance of newly-merged Amcom.

The most exciting opportunity, in the broker's view, is Vocus successfully executing revenue upside from the merged group. Credit Suisse believes consensus expectations underestimate the growth potential in Vocus fibre, ethernet and internet businesses.

Morgans adds Burson Group ((BAP)) to its list of high conviction stocks. The broker likes the comapny's highly defensive earnings stream and the acquisition of the Metcash ((MTS)) automobile business. Further growth is expected from expansion in the WA market and the company could accelerate its roll out following the acquisition of Covs.

Morgans removes Federation Centres ((FDC)), National Storage ((NSR)) and Impedimed ((IPD)) from the list. Now the merger with Novion has been achieved there are few catalysts for Federation Centres. The other two have share prices which have appreciated recently, and the broker also envisages few opportunities in the short term for those stocks to re-rate.
 

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article 3 months old

Weekly Broker Wrap: Insurers, Banks, Utilities, Online Portals And iSelect

-Insurer growth lacklustre
-More re-pricing from banks?
-Yield and growth in utilities?
-REA Group winning online
-ISelect now has cash
 

By Eva Brocklehurst

General Insurers

Macquarie has reviewed the general insurers under its coverage, ranking them in terms of premium growth, margin pressure and key issues such as currency and cost cutting. The broker's top pick is QBE Insurance ((QBE)) which enjoys positive currency and interest rate tailwinds relative to its peers. The capital re-build is complete and the company is focused on core business.

Next up is Suncorp ((SUN)), which has earnings momentum and the best expense ratio, well placed to access newly privatised markets in coming years. After that comes Insurance Australia Group ((IAG)), which appears to be constrained in terms of premium growth. Multiples are full and without the prospect of imminent capital returns. While insurance margins are the highest of the three this suggests to Macquarie a greater vulnerability to challenger brands.

UBS finds compelling reasons to be a seller of general insurers. The broker expects gross written premium to track sideways, with downside risks. Questions could be raised at the results around margin sustainability and the answers may only become clearer as FY16 progresses.

The broker considers many of the events of recent months have been a distraction and looks for answers as to why IAG needed to free up $1bn in capital through a deal with Berkshire Hathaway.

The broker is mildly optimistic that QBE will have fewer complicated issues this time around, with a positive message on dividends likely. The next 12 months are considered critical for Suncorp's investment case, largely because of the broker's more conservative view on general insurer margins as rate pressures flow through.

Banks

UBS has downgraded earnings forecasts for FY17 for the major banks in the wake of statements from APRA which provide more clarity on the capital shortfalls. Three of the four have re-priced investment property loans in order to slow credit growth to below the APRA macro prudential thresholds.

This suggests the banks are moving to pass on some of the costs of higher capital requirements to customers and UBS considers this a smart move. The broker expects the spread between owner-occupier and investor mortgages to widen further as the banks continue to re-price these loans.

The broker also considers it likely the banks will look to rights issues to improve capital requirements. This may be an opportunity to increase exposure to the banks and participate in re-pricing upside.

Utilities

UBS likes regulated utilities which offer yield and growth potential. On this basis the broker prefers APA Group ((APA)) and upgrades to Buy from Neutral. The stock offers the best quality in terms of distributions and these are more than covered by free cash flow. DUET ((DUE)) and Ausnet ((AST)) are best in terms of up-front returns. DUET is rated Buy, with good yield and growth prospects on the back of the proposed acquisition of Energy Developments ((ENE)).

Ausnet and Spark Infrastructure ((SKI)) are rated Neutral. The broker considers the grossed up distribution yield of 8.0% is factored into Ausnet's price. Spark Infrastructure ranks poorly on distribution coverage and is the least attractive on an enterprise value/regulated asset basis despite strong growth forecasts.

Portals

Citi reviews online usage metrics across the desktop and mobile sectors in order to determine winners in the battle between REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain portal. The broker looks closely at relative share, given the importance placed on being No 1 in online classified verticals.

Data from the Nielsen ratings shows Domain is closing the gap in terms of unique audience but on total page views the gap is actually increasing, which the broker considers is a better measure of engagement. This gap is widening despite Domain's push into new markets.

Mobile adds impact for both players and the gap appears constant. Mobile is driving increased engagement by consumers with the portals and is this is not unique to property. The discovery process appears to be via desk top mid week but reverting to mobile on the weekend. Nevertheless, it appears REA Group is retaining its number one position across online.

Citi rates REA Group as Buy and Fairfax as Neutral. Domain has a solid position in Sydney and Melbourne, supported by legacy print classifieds, and remains positioned for growth, which the broker considers is priced into the Fairfax valuation.

iSelect

ISelect ((ISU)) has agreed on a cash settlement for its outstanding NIA Health loan facility. Bell Potter welcomes the agreement and makes minor upgrades to forecasts because of changes in interest rate assumptions. The broker also adds a 15% premium to valuation to account for the prospect of capital management initiatives. As a result the price target is raised to $2.10 from $1.65. A Buy rating is retained.

The broker likes the agreement as the company can focus on its underlying business now the distraction has been removed. ISelect will have more than $100m in net cash on the balance sheet after settlement of the NIA deal.
 

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