Tag Archives: Media

article 3 months old

Weekly Broker Wrap: FY15 Preview, TV, Fund Managers, Retail And Cancer

-Few catalysts for rally seen in 2015
-Some offsets to negative TV trend
-Earnings growth can occur in mobile
-Goldman Sachs picks Oz retailer trends
-Bell Potter lines up oncology stocks
 

By Eva Brocklehurst

Results Preview

Aggregate Australian market earnings for FY15 are expected to be relatively flat but when viewed ex resources the outlook is for a more solid 9.0% growth rate, UBS maintains. Excluding resources and financials, industrials are expected to grow 13%, boosted by the fall in the Australian dollar.

Key themes in the upcoming reporting season are expected to include soft revenue but ongoing cost cutting gains. Evidence is likely to emerge of tougher conditions in consumer staples and general insurance, in UBS' view. Profit tailwinds from the housing sector should ensue.

The broker does not expect the results to be a catalyst for either a market surge or a market correction. A rally into the end of 2015 is constrained by upward pressure on bond yields and potential headwinds from bank capital requirements. Tailwinds for the FY16 outlook are likely to come from low expectations and a soft Australian dollar.

Any potential surprises? UBS suspects, on the positive side, Downer EDI ((DOW)), Echo Entertainment ((EGP)), James Hardie ((JHX)), Mirvac Group ((MGR)), Harvey Norman ((HVN)) and Qantas ((QAN)) could surprise. Conversely, on the negative side the candidates are Brambles ((BXB)), Coca-Cola Amatil ((CCL)), REA Group  ((REA)), Seek ((SEK)), Suncorp ((SUN)) and Wesfarmers ((WES)).

FTA TV

UBS believes near-term structural weakness in the free-to-air TV market has been overplayed. Metro TV lifted 0.7% year to date in the second half of FY15. Nevertheless, long-term structural concerns appear valid and the broker has lowered its forecasts.

Total video viewing is increasing but the traditional TV share of video consumption is falling and these headwinds may accelerate as audiences age. SVOD - streamed video on demand - and smart device penetration is expected to increase.

The broker observes growth in digital revenue, content sales and cost cutting are providing the offsets to these negative trends. UBS believes Nine Entertainment ((NEC)) looks cheap, with a 9.0% net dividend yield and further capital management likely. Similarly, Seven West Media ((SWM)) appeals, although gearing is higher. The broker maintains Buy ratings on the two stocks despite a negative view on the structural outlook.

Mobile Telcos

First half results from Vodafone Australia illustrate to Morgan Stanley the difficulty in taking market share from Telstra ((TLS)). Vodafone Australia's revenue grew 2.9% but subscribers returned to negative territory, down 47,000 in the half. That said, the losses were all due to losses in MVNO as the company's own subscribers actually rose slightly.

MVNO - or mobile virtual network operator - is a wireless communications services provider that does not own infrastructure over which it provides services to customers.

The broker will be watching results from Optus ((SGT)) and Telstra closely to further ascertain changes to market share. There remains no doubt competitive pressure in the industry is high as the cost of mobile data has fallen significantly.

Still, Morgan Stanley believes earnings growth can occur even with flat subscriber growth and Vodafone Australia's results support this thesis, which is a positive for the industry.

Fund Managers

Macquarie has reviewed its rankings of Australian fund managers. On the basis of capacity, performance, distribution and valuation the broker ranks Henderson Group ((HGG)) as number one with an Outperform rating and $6.70 target. The company has positive net flows and an attractive valuation.

Number two is BT Investment Management ((BTT)) with an Outperform rating and $10.27 target. Its growth outlook continues to rely on a strong performance from its JO Hambro business.

Number three is Perpetual ((PPT)) which is also rated Outperform at current levels, with a $51.50 target, despite recent dents to investor confidence. Bringing up the rear is Platinum Asset Management ((PTM)) which is rated Neutral with a $7.41 target. Macquarie continues to believe current valuation metrics on this stock are full.

Australian Consumer Trends

Goldman Sachs observes Australian consumers spend differently to their Asian neighbours or those in the US. Less is spent on food and clothing and more on homes, lifestyle and entertainment.

The broker initiatives coverage on ten consumer stocks and the two Buy rated stocks - Dick Smith ((DSH)) and Wesfarmers ((WES)) are leveraged to the home/entertainment sectors. The recent pull back is considered an opportunity to buy Wesfarmers' leading retail franchises while Dick Smith is a strong brand, leveraged to the trends.

The Sell rated stock, Harvey Norman ((HVN)) is also leveraged to the trends as it is a key beneficiary of the housing cycle but Goldman Sachs considers this uptick has been capitalised already.

The broker believes international discretionary retailer plans for increasing footprints in Australia will not erode profitability, given the unique dynamics in the local market. Health and wellness are on the agenda with increased growth in food and drink, clothing and gadgets that meet this trend.

Oncology

Bell Potter singles out three ASX-listed companies which are developing novel therapies for cancer. All have varying approaches but are well positioned to take part in cancer treatments. All are Buy rated (speculative).

Viralytics ((VLA)) is developing CAVATAK for the treatment of late stage cancers. Its first target is melanoma. The drug is being targeted in combination with other treatments and may have significant commercial appeal to partners in the immuno-oncology area, in the broker's opinion. A 96c target is maintained.

Starpharma ((SPL)) is using dendrimer nanotechnology to reformulate established cancer medicines with the objective of improving delivery and making them safer and more effective. Bell Potter retains a $1.00 target.

Bionomics ((BNO)) has novel drugs such as BNC105, which has potential to enhance the efficacy of immunotherapies, and BNC101, which involves a cancer stem cell antibody that is expected to enter phase 1 trials this year. Target is $1.09.
 

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article 3 months old

Seek Sell-Off Excessive

-Downgrade largely in Learning
-Still robust growth ahead
-Job ads underpin the business
 

By Eva Brocklehurst

Seek ((SEK)) has learned a hard lesson from its online vocational education business as technology issues at a major supplier have caused it to downgrade earnings forecasts for FY15. Seek now expects the second half to be in line with the first, having previously expected moderate growth. Furthermore, the company has also moderated its outlook for FY16, stating it expects to make aggressive re-investment in its brands.

That may be the case but Morgans believes the subsequent sell-off in the share price was excessive, as expectations were already being scaled back for FY16 onwards. The broker reduces profit forecasts over FY16-20 but believes downside is limited as long as the Australian employment market holds its current levels. Seek remains one of the fastest growing Australian multinationals in Morgans' view, with the potential to deliver a further 5-10 years of earnings growth, and this justifies an Add rating.

The revenue shortfall emerging in the learning business in FY15 has been partly caused by a new platform for enrolment and administration introduced by TAFE NSW, which is Seek's second largest provider of courses. Moreover, heightened competition for student enrolments in the vocational education space has also had a material impact. Morgans observes the downgrade in learning has been offset in other segments, notably domestic employment, Zhaopin and Brazil Online.

Weakness in learning was not unexpected but the magnitude of the downgrade surprised Citi. Also, the company's statement regarding aggressive re-investment in FY16 exceeded the broker's expectations. Citi believes the challenges facing the tertiary education sector are being widely felt and, while the TAFE contract is specific to Seek and problems could abate in FY16, there is the prospect of diminishing returns because of competition and government reforms.

While the argument for a need to spend to defend its market share can be made, Citi believes the long lead times on the strategy and escalating costs raises the risks. With the share trading at fair value the broker retains a Neutral rating.

To Macquarie the company's robust outlook is far from lost. Years of strong growth have been hit at the one time by increased competition, structural risks and the one-off impact of the IT problems. FY15 is considered a consolidation, or stagnant, year. The broker accepts the outlook is more precarious because of competition and industry reforms, and, taking a more conservative view, downgrades earnings estimates to account for the learning division downgrade and some softer projections for Zhaopin. Nevertheless, Macquarie maintains an Outperform rating.

The broker believes the learning business needed to be de-rated materially but this appears priced in with the aggressive sell-off of the stock. Over time, the market should regain confidence in core assets that are well positioned for growth. The broker also observes Seek has always invested aggressively in its businesses, albeit causing some frustration for investors. Current momentum remains strong for job ads while Seek Asia can capitalise on the benefits of merging JobsDB and JobStreet. Macquarie expects double digit revenue growth in this segment as revenue synergies begin to come through.

The extent of the wound inflicted by TAFE NSW was of particular surprise to Deutsche Bank and, even when considering the IT problems will likely be a one off, the company has also cited the vocational education fee reforms as another factor which will inhibit earnings. The reforms, which prohibit providers from levying all fees in a single transaction, are likely to impact timing as payments are spread over a longer period, while some students may withdraw if they do not progress. Given earnings for the learning business have historically been very lumpy the broker expects a near-term decline while the issues are being managed.

UBS also believes the market has been too short-sighted in its reaction, with the downgrades largely confined to the learning business and the short-term re-investment designed to tap new opportunities. Despite this view, the broker maintains a Sell rating as the stock still appears expensive despite the fall in its price.

FNArena's database has three Buy, three Hold and two Sell ratings. The consensus target is $16.29, suggesting 12.2% upside to the last share price. This compares with $17.13 ahead of the announcement. Targets range from $13.40 (UBS) to $19.12 (Morgans).
 

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article 3 months old

Can Nine Entertainment Achieve Market Share Target?

-TV audience in decline
-Market share target difficult
-Predator or target?

By Eva Brocklehurst

Nine Entertainment ((NEC)) has revealed what many brokers suspected. Free-to-air (FTA) TV advertising is currently very soft and conditions remain difficult. TV is diminishing as media audiences fragment and this has weighed on advertising revenue.

The company has downgraded FY15 earnings guidance to $285-290m from prior expectations of "at least in line with" 2014, which was $311m. The guidance suggests advertising markets in May and June have been materially weak. JP Morgan retains a Neutral outlook as the company's position in any industry consolidation is expected to be acquisitive and gearing is moderate versus its peers. Still, the broker remains concerned about the emerging audience decline for FTA TV.

JP Morgan has identified a decline in prime time audience of around 7.5% at the start of 2015. Rather than an actual decline in Nine Entertainment's advertising income in the second half, the broker forecasts a flat outcome but suspects guidance has been impacted by lower-than-expected market share (at around 38.5%), which compares with the company's target of 40% by the end of 2015.

Citi echoes this suspicion. The broker's view is that the market is soft, but not that bad. A flat second half for advertising revenue is also expected. Reading between the lines Citi's take is that operational issues are more to the fore than the company acknowledges. The share of commercial FTA TV ratings is 36% year to date, which is down from an average of 38% in 2014. Citi expects a bounce in ratings in the first half of FY16 because of the Ashes and World Cup Rugby, to 39%, before revenue share drops back to 38% in the second half.

While TV is not dying, Citi believes earnings growth will be tough to achieve, aggravated by soft economic conditions and a structural decline in audience. Citi considers Nine Entertainment a potential acquisition target as a pure play FTA TV operator.

Nine Entertainment has increased its advertising revenue share to 39% from 33% over the last five years, which Morgan Stanley considers is impressive. Nevertheless, this broker now believes further gains are likely to be difficult to achieve and lowers forecasts for market share in FY16 to 38.5% from 40%. Morgan Stanley is bearish on FTA TV asset values in Australia and has been for some time. Advertising as a percentage of GDP is trending lower and audiences are falling, while sports costs are rising and industry margins are lower. While retaining a positive view on the company's stock over the last 18 months the broker has wondered whether market share has been peaking.

There are strategic advantages, none the least being Nine Entertainment is the only FTA TV network in a net cash position, but Morgan Stanley points to history, which suggests a TV network losing audience and advertising market share is unlikely to outperform. Hence, rating is downgraded to Underweight from Overweight. Goldman Sachs also downgrades, to Neutral from Buy, with a target of $1.98. The broker notes the sizeable deceleration in momentum and attributes the underperformance to concerns over the structural headwinds facing TV.

While it remains difficult to judge whether the deterioration is across the board in the TV advertising market, Goldman Sachs suspects this is the case. Reductions to TV market forecasts result in downgrades to forecasts for Nine Entertainment of 8.9% in FY16, 20.7% in FY16 and 21.5% in FY17. Goldman Sachs has a bearish outlook for TV advertising spending and believes fragmentation in terms of delivery and consumption in media is likely to drive an intense battle for audience. This will in turn place upward pressure on content costs. This is likely to be a negative for TV industry profitability.

While allowing for some share losses to Ten Network ((TEN)), given the strength in MasterChef ratings, Deutsche Bank now expects revenue share for Nine at 39.2% in the second half. The broker recognises the company will continue to rely on advertising market movements but the broker is mindful that balance sheet strength presents options. UBS is also more positive, although tempers FY16 growth assumptions to 2.0% from 3.0%. The broker notes the company has flagged capital management as a possibility, with the balance sheet now net cash.

UBS has a Buy rating on valuation grounds and positive catalysts include a likely step up in the affiliate fee at the end of FY15 and savings from the Warner Bros contract renegotiation. There is also the potential for reductions in TV licence fees over time, although UBS does not factor this into valuation. The broker expects the advertising market to decline by 1.3% over the second half which implies a decline in May and June of 4-5% in aggregate.

FNArena's database contains six Buy ratings, one Hold (JP Morgan) and one Sell (Morgan Stanley). The consensus target is $2.26, suggesting 35.1% upside to the last share price, and compares with $2.46 ahead of the update. The dividend yield on FY15 and FY16 forecasts is 5.4% and 8.8% respectively.

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article 3 months old

Weekly Broker Wrap: Oz Insurers, Techs, Advertising, Papers And Solar

-Insurer challengers resilient
-Global advertising robust
-But big clients review accounts
-Questions re print advertising
-AGL, ORG need to respond to solar
 

By Eva Brocklehurst

Australian Insurers

As Insurance Australia Group ((IAG)) and Suncorp ((SUN)) have quantified natural peril losses for FY15, UBS suspects it will turn out to be the worst year for weather events in a decade. The broker disagrees with emerging bullish views which believe pricing in general insurance will firm up and the challenger brands will fall by the wayside. Despite appealing valuations, UBS retains a cautious outlook until margins re-base to more sustainable levels.

Since 2010/11 the challenger brands have been able to grow without operational strain or financial cost associated with significant weather events. 2014/15 was the test. UBS estimates Youi incurred around $110m in gross catastrophe losses in FY14, with $40m retained and $70m passed on to reinsurers. While this will hurt it is unlikely to undermine the business model, in the broker's view. Concerns around the challengers' service levels are overstated, UBS maintains, as Auto & General and Hollard continued to deliver premium growth of 15-20% over 2010/11, despite elevated levels of complaints to the financial ombudsman over that period.

Techs, Media & Telcos

Bell Potter has updated its key picks in the emerging tech space with Integrated Research ((IRI)), Empired ((EPD)) and Appen ((APX)) the top three. The broker now has two Sell rated stocks in the segment - Technology One ((TNE)), as it now looks expensive, and Vocus Communications ((VOC)), for which the first half showed slowing growth in the core data business. The broker hastens to add that neither of these Sell ratings suggest there is anything fundamentally wrong with these businesses. The ratings are driven by valuation.

Advertising & Newspapers

Citi has reviewed the commentary from over 40 global advertisers and concluded that the outlook is robust, although agencies are under pressure from clients with a number of large accounts being reviewed. Traditional media owners are also pressured by changing consumer behaviour. Of note, promotion levels are declining in the US although price increases are managing to pass through.

A number of companies spoke positively about European improvement, France in particular. Citi suspects, if Europe follows the US, the first quarter of 2016 could be a key one for advertising. In the US, traditional media benefited from early stages of the recovery and then reverted back to trend after a year as structural developments came to the fore. This is a factor the broker suggests should not be ignored in Europe. Mindful of these structural risks Citi takes a selective approach to Europe, preferring to play any recovery via those media owners where expectations are lower and/or valuations are not extreme.

Newspaper circulation data in Australia in the first quarter reveals a slowing of the decline in print. Citi notes this is now the sixth such quarter in a row. Despite this, declines are still double digit in some cases. The rate of decline was lower for Fairfax Media ((FXJ)) and Seven West Media ((SWM)) but up slightly for News Corp ((NWS)). The pace of digital subscription uptake has slowed.

Metro newspaper circulation is down 8.3% on a weighted average, the fourth consecutive quarter of single digit falls. Weekend editions performed slightly better than weekday editions. The reduced pace of circulation decline offers some hope but also raises further questions over the ability of newspapers to attract advertising in the long run, Citi maintains. The broker remains cautious about print publishers but rates News Corp a Buy, because of the digital and TV assets, and retains Neutral ratings for Fairfax and Seven West.

Household Solar

There is a large opportunity for household solar and batteries, in Morgan Stanley's view. From a survey of around 1,600 households in the National Electricity Market (NEM) the broker found a strong level of interest in such product, with a clear $10,000 price point and 10-year pay-back period. Around 1.1m households in the NEM already have solar panels which could be retrofitted with batteries. As yet, there are no clear winners in this market.

Morgan Stanley downgrades its utilities view to Cautious from In-Line. Australia's solar resource, high retail tariffs and early adopter culture means it is one of the forerunners in the global shift from centralised electricity. The broker expects debates round tariff structures, stranded assets and pool prices. Moreover, the broker estimates AGL Energy ((AGL)) and Origin Energy ((ORG)) could each witness earnings reductions of $30-40m in FY17, rising to $90-100m in FY20, absent a competitive response to this issue.

Early indications are that Tesla, the manufacturer of the PowerWall product expected to arrive in early 2016, will ignite the sector and this will lead to rapid take up of the batteries. What could go wrong? Morgan Stanley suspects Tesla may not be able to supply all Australian demand, potentially delaying take up. Technical issues, or a lower Australian dollar making the product more expensive, could also delay take up.
 

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article 3 months old

iProperty Growing Profile With Asian Exposure

-Positive earnings likely in 2015
-REA Group has blocking stake
-Developers a key advantage
 

By Eva Brocklehurst

Credit Suisse considers property classifieds the most attractive vertical online market and the networking effects provide a strong early-mover advantage for iProperty Group ((IPP)). Across iProperty's Asian markets (Hong Kong, Malaysia, Singapore, Thailand, Indonesia) which, combined, are estimated to be larger than Australia's, the company has a competitive position, able to take advantage of the structural shift as developer and agent advertising expenditure moves online.

Credit Suisse expects iProperty will generate 20% compound annual growth in revenue through to 2023 because attention is now on monetising the advertising business, from a start-up focus on growing the customer base. The business is expected to become earnings positive this year.

Until recently the company had been growing audience and signing up agents and developers. Hence, given the early stage of monetising its target markets, valuation of the stock requires long-term assumptions. Assumptions necessarily include the speed of online migration, eventual pricing power and potential competition. Given these inputs, Credit Suisse observes forecasts vary significantly and there is a large variation in the valuation range for the stock.

The broker's base case assumes the Malaysian business accounts for the majority of value. Given the uncertainty in projecting the future growth profile for a company yet to reach break even, Credit Suisse believes the risk/reward is balanced and initiates coverage with a Neutral rating and $2.90 target. If the company were to make quicker progress towards profitability this would be a catalyst for a more positive view. The broker does have some concerns about the board's independence, and related party transactions, but does not apply any discount to the valuation at this stage.

Using more bullish assumptions, albeit ones which Credit Suisse considers are achievable, a price of up to $5.35 could be justified. On FNArena's database there are two other brokers covering iProperty. Morgans has an Add rating and $3.65 target. The broker remains cautious about projecting a short history but, if the trends in the March quarter are anything to go by, the company should produce revenues near the upper end of its $30-36m guidance for 2015. Morgan Stanley has an Overweight rating and $4.20 target, believing the company is on track to meet its guidance. The consensus target is therefore $3.58, signalling 37.3% upside to the last share price.

The company has leading property portals in Malaysia, Hong Kong, Thailand and Indonesia and is number two in Singapore. Singapore is the more mature market and PropertyGuru is the market leader. Australia's market leader, REA Group ((REA)), owns 19.9% of iProperty, having become a substantial shareholder when it bought SeLoger's stake in July last year. Credit Suisse compares the value gap between the two. REA Group is capitalised at $5.5bn compared with iProperty at $489m.

The broker considers a bid for iProperty unlikely in the near term, suspecting REA Group would prefer to wait until the company is further down the path to profitability. Also, a takeover in the near term would be dilutive to REA Group's earnings, and to its controlling shareholder, News Corp ((NWS)). Nevertheless, the current shareholding is likely to be a sufficient blocking stake to prevent other interested parties taking over iProperty in the near to medium term.

Credit Suisse expects the macro dynamics in the countries of operation will be the key to growth in real estate and accelerate the transition to online. Moreover, with broadband and smartphone penetration at only 17% and 35% respectively in the region, increased connectivity should drive higher traffic to real estate portals and generate an increasing proportion of advertising dollars online.

Despite the technological supremacy, the mix of real estate advertising even in Hong Kong and Singapore is heavily tilted towards old media. Credit Suisse estimates online represents only 5.5% of total real estate advertising in iProperty's main countries of operation in 2014, well below the Australian estimated online share of 53.0%.  However, the broker expects the market will grow faster in Asia than in Australia, driven by higher population and income growth.

Overall, Credit Suisse forecasts the combined real estate advertising market across iProperty's primary countries of operation to be worth $1.6bn by 2019, versus $1.1bn for Australia. The main difference between Australian and Asian markets is the developers. Developers are responsible for around 75% of total real estate advertising spending across target markets, the company maintains. In contrast, developer revenue accounted for only 11% of REA Group's listing revenue in Australia in FY14.

There are several advantages for a skew towards developers rather than agents. Developers do not view online portals a a potential threat to their business model in the way real estate agents do as intermediaries. Also, developers have a greater ability and willingness to pay for advertising and the internationalisation of the developer market is a competitive advantage for a company such as iProperty with a multi-national network.

The company recently acquired Squarefoot in Hong Kong and ThinkOfLiving in Thailand. Credit Suisse considers the Hong Kong business has become more interesting now. Squarefoot is primarily an English language site, complementing the company's existing GoHome site. Also subscription rates are substantially higher. Singapore is one region where the online market is more difficult for iProperty. Revenue in that market fell 30% in 2014 as the company re-weighted the business towards developers. Credit Suisse forecasts Singapore will remain loss making in the near term.

See also iProperty Starts 2015 In A Strong Position on April 13 2015.

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article 3 months old

Weekly Broker Wrap: Agriculture, Small Caps, Health Care, TV And Online

-Value in Oz small caps?
-Wages growth weakens
-Risks for diagnostics, pharma
-Decline in FTA TV audience
- Domain catching REA
 

By Eva Brocklehurst

Agriculture

It's official. Morgan Stanley notes the Australian Bureau of Meteorology has observed the tropical Pacific is in the early stages of an El Nino. This means abnormally warm sea surface temperatures have been noted in all five regions monitored by meteorologists. An El Nino phase signals drier than normal conditions are likely to prevail over the coming winter-spring on Australia's east coast, a negative indicator for agricultural production.

Small Caps And Strategy

Citi asks if there is value in small cap stocks, as lower interest rates and higher equity multiples make it more challenging to find value in the market. Australian small cap indices have underperformed in recent years and while this is not a certain indicator of value, it may at time be a sign of unduly difficult conditions that will eventually pass. Overall, the broker observes small industrials do not appear much cheaper than their larger siblings. The reason is because of the mixed performance of the domestic economy, on which they are more dependent, which limits small cap earnings.

Still, sub-par growth in the domestic economy means some may be under-earning and offer more value than their price/earnings ratios imply. The stocks Citi finds most interesting in this regard are Super Retail ((SUL)), Skycity Entertainment ((SKC)), Flexigroup ((FXL)), McMillan Shakespeare ((MMS)), Brickworks ((BKW)) and GUD Holdings ((GUD)). The first four are rated Buy.

Given the latest dip in the equity market, Deutsche Bank suggests buying for four reasons. Firstly, the fall reflects normal volatility rather than anything more sinister. The market had rallied 16% since the most recent trough so, given an average 10% gain between falls, a dip was due. Valuations also appear reasonable and Australia's price/earnings relative to global peers is back to average after being slightly expensive. Meanwhile, earnings momentum continues and the earnings revision ratio is above average, which suggests the recent fall in forward estimates may soon be stemmed. Lastly, poor analyst sentiment, while a risk near term, is positively correlated to market performance over the medium term.

Wages

Australian wages growth, as indicated by the Australian Bureau of Statistics' wage price index, was 0.5% in the March quarter, equalling the lowest quarterly growth on record, UBS observes. The year-on-year rate dropped further to 2.3%, also a record low. UBS notes the slowdown of wages growth is very broad based and suggests household income is subdued and inflation pressures low. Despite this, the broker notes CPI data showed core inflation actually ticked higher in the quarter, to above 2.25%. As the Reserve Bank has already reduced its cash rate to a record low of 2.0% the broker doubts it will feel compelled to cut again, given a strong housing market, unless weaker wages lead to lower outcomes for core CPI.

Health Care

Key pointers from the federal government's budget for 2015/16 include a review of the Medicare Benefits Scheme. Credit Suisse believes the government will reduce spending on diagnostics tests and reform GP attendance outlays. This could mean funding cuts emerge in the medium term. The review presents the main medium-term fiscal risk for diagnostic service providers. The government will also remove duplication between certain health assessments under the MBS and child health assessments already provided by the states and territories. On a positive note, a reduction in short GP consultation rebates will not go ahead.

No specific new measures for private health insurers and hospitals were announced but the government remains committed to restoring the rebate on private health insurance. Restoration of the rebate will be of benefit to private hospitals, in the broker's view, but the timing is unclear. Meanwhile, the sixth community pharmacy agreement is being negotiated. Credit Suisse notes Pharmaceutical Benefits Scheme co-pay safety net thresholds will be increased on January 1 2016. Partly offsetting this, savings will be achieved from price amendments for certain medicines. The redistribution of PBS revenues remains the key risk for pharmaceutical wholesalers, in the broker's view.

TV

Easter appeared to be good for Ten Network ((TEN)) as UBS observes MasterChef rated strongly. Ten has improved the most among the FTA networks year on year to April. Nine Entertainment ((NEC)) is still winning in key demographics while Seven West Media ((SWM)) retains the overall ratings crown with a 41% share of the monthly free-to-air ratings. Forecasts are unchanged but the broker notes metro FTA audiences appear to have weakened over 2015.

JP Morgan is also cautious about the metro FTA sector, noting a material decline in 2015 prime time audience, which is the critical signal in terms of advertising dollars. The broker estimates 75% of the $2.5bn FTA revenue pie is prime time, and the audience has declined 7.5% since the start of the year. Why? The broker observes two trends of concern. Younger audiences are turning off, with the 16-39 demographic down by 14% in prime time. The second is the material decline in the main channel prime time audience, which represents 85% of industry revenue and 70% of audience.

The broker is downgrading FTA advertising expectations with industry forecasts now seen down 1.5% and 1.0% respectively for FY16 and FY17. Hence, JP Morgan has reduced recommendations on Nine and Seven to Neutral and remains Underweight on Ten. Prime Media ((PRT)) has an Overweight rating given its long-dated affiliation agreement and the relative defensive nature of regional TV revenue.

Online

The latest online data shows a rise in listings volumes in recent months. Citi notes Carsales.com ((CAR)) is back at the top of the automotive segment while the Fairfax Media ((FXJ)) online property portal Domain is bearing down on REA Group ((REA)). Listing volumes on REA are down year-on-year over 2015 while Domain has steadily climbed. REA remains a comfortable leader in the rental property market.

Citi retains a Buy rating for REA, despite the rate of growth being curtailed, and for Carsales.com as well. The broker rates Fairfax as Neutral, with robust growth in Domain countered by structural print pressures and a premium valuation.
 

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article 3 months old

Weekly Broker Wrap: Stock Picks, Travel, TV And Telecoms

-Credit Suisse positive on Oz housing stocks
-Qube tops Morgan Stanley's transport list
-Is market underestimating Sydney Airport?
-Decline in outbound travel subsides
-Flat outlook for TV advertising
-Telecoms line up in data war
 

By Eva Brocklehurst

Stock Picks

Investors based in China and new immigrants from China purchased $8.7bn of Australian residential property in 2013-14, up 60% over the year. This statistic is equivalent to 15% of the national housing supply, Credit Suisse maintains. Purchases are concentrated in Sydney and Melbourne, where Chinese demand is the equivalent of 23% and 20% of new supply, respectively. Credit Suisse expects the next six years will witness a doubling of Chinese demand for Australian housing.

New foreign investment proposals are not expected to erode demand by very much. Added to low interest rates, this means the outlook should remain positive for housing-related stocks such as developers, building material companies and property web sites, in the broker's view.

Demand for infrastructure stocks is typically resilient through economic cycles. Morgans observes the sector has rewarded investors, boosted by falling interest rates. However, Australian investors are constrained by the number of ASX-listed infrastructure stocks and investing globally may provide investors with a far larger choice and greater asset diversity, where values may be cheaper than ASX-listed entities.

Meanwhile, the broker has updated coverage on the transport sector with a neutral view as valuations appear toppy. The long-term pick in the sector is Qube Logistics ((QUB)), as while the stock appears expensive, it is building out a profitable business that should be substantially larger in a few years time. The broker also suspects the market is underestimating the amount of cost savings Sydney Airport ((SYD)) can achieve in 2016-17, as expensive interest rate swaps expire and are replaced at far lower rates. The company's credit metrics may improve faster than expected, increasing the potential for capital management initiatives.

The broker considers the insurance sector is expensive at present but QBE Insurance ((QBE)) is a preferred pick, given the upside from its transformation program. QBE is also able to benefit from any fall in the Australian dollar and retains a strong leverage to any rise in US interest rates. Morgans has made changes to its top 100 high conviction list this month, adding Carsales.com ((CAR)), Qantas ((QAN)) and Sydney Airport. Macquarie Group ((MQG)) and Transurban ((TCL)) have been removed because of strong share price appreciation while Seek ((SEK)) is removed because of a lack of short-term re-rating catalysts.

Travel

Preliminary arrivals and departures data from the Australian Bureau of Statistics signals the consistent decline in the rate of outbound travel over the last 12 months has stalled. Bell Potter suspects this points to improving household consumption, given this variable is the most important driver of outbound travel. The data also lines up with the broker's analysis which suggests that the declining currency and soft economy have not resulted in a shift in market share to domestic holidays. Still, Bell Potter is only expecting a modest steady improvement in the rate of outbound travel. CoverMore ((CVO)) and Flight Centre ((FLT)) remain the broker's preferred ways to play the improving outlook for outbound travel.

TV

Citi has reviewed audience ratings for free-to-air broadcasters with the data showing Nine Entertainment ((NEC)) is struggling to replicate its 2014 performance. Seven West Media's ((SWM)) channel has retained its leadership position while Ten Network ((TEN)) has improved. Meanwhile, PayTV audiences reached their second highest level in share terms in March. The broker recently lowered medium-term forecasts for advertising to no growth, because of growing structural pressures from alternative viewing platforms.

Citi rates Nine Entertainment as a Buy and considers it is a potential M&A target, with a net long cash position and option value on affiliate deals. Seven West Media is rated Neutral as it is cheap but has no earnings growth, while Ten is Neutral High Risk, trading at fair value based on the value of its TV license.

Telecoms

Macquarie has developed a new monthly mobile phone plan tracker for the Australian market, which compares calling and data inclusions between the three major operators for post-paid handset plans. There were material increases in data inclusions by all players in April with Telstra ((TLS)) lifting by as much as 6 gigabytes per month. SingTel's ((SGT)) Optus lifted data inclusions by up to two gig and moved to offer unlimited voice for $40/month. Vodafone ((HTA)) responded with the return of its double data promotions.

Macquarie observes competition is heating up but believes mobile service revenues can continue to grow, given the increased demand for data. Still attention is warranted to trends with regard to average revenue per unit and handset subsidies.

Morgan Stanley has observed the data value war continues but finds little evidence of a price war. Value has increased via the data gains with no decreases in prices. Optus actually increased plan prices over the month, by 14-20%. Morgan Stanley expects industry prices will rise 2-3% in 2015 and 2016. Optus has also added six months free in Netflix to new subscribers. This usage is not unmetered. As the consumer watches Netflix the mobile data allowance is consumed and they can potentially exceed allowances.
 

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article 3 months old

Seek Looking For Upside


Bottom Line 05/05/15

Daily Trend: Neutral
Weekly Trend: Neutral
Monthly Trend: Neutral
Support levels: $15.17 / $11.76
Resistance levels: $18.99

Technical Discussion

Seek ((SEK)) runs an online employment business which now operates in 12 countries including Australia, New Zealand and Hong Kong to name just a few.  It functions in three sections; online employment classified advertising, running and executing training courses and investments in overseas online employment marketplaces.  The company provides online employment classified advertising via the SEEK website.  In 2014 it acquired a 25% stake in Bangladesh's online employment marketplace bdjobs.com.  The company was founded in Melbourne in 1997 and now employs over 6000 people working globally.  It has over 30 million monthly visits and accounts for around 70% of all online Jobs. For the six months ending the 31st of December 2014 revenues increased 17% to A$401.6M. Net income before extraordinary items increased from A$86.6M to A$182.8M. The dividend yield is 1.8%.  Broker/Analyst consensus is currently "Sell".

Reasons to be ready to buy:
? The 38% share in Babajob, an Indian online employment player provides long-term growth prospects.
? The JobStreet acquisition should be a major contributor to second half results.
? The growth story continues with the domestic market also looking brighter.
? Its affiliate Zhaopin in China recently reported robust quarterly results.
? SEEK Learning and Swinburne Online are performing strongly.

Looking at the weekly chart here shows why some analysts and brokers have been leaning toward a "sell" recommendation.  Price has basically meandered sideways for just over a year now with no decent trend in sight.  However, we see no reason to be bearish; in fact we are viewing the consolidation pattern as being extremely healthy in the bigger scheme of things.  What we have to take into account is the potency of the trend that kicked into gear in late 2011 with the end result being a gain of almost 290% to the recent pivot high.  This is exceptional whichever way you look at it.  It's also worth remembering that nothing goes up in a straight line indefinitely which again reiterates that the lacklustre price action of late is nothing out of the ordinary and could well set the stage for the next leg higher. 

The only problem with consolidation patterns like this is trying to determine when they are going to draw to a conclusion and right here and now there is no indication that the strong prior uptrend is about to reignite.  In fact it would come as no great surprise to head down to the recent pivot low around $15.00 though we'd fully expect buyers to reappear at those slightly lower levels.  Over the short term there is scope for a bounce which is due to Type-A bullish divergence being in position.  It also triggered today which as a minimum suggests the recent pivot low at $16.04 will not come under pressure until our oscillator rotates back up into the overbought position.  The best case scenario is that a decent rally unfolds though we can't get overly optimistic until we start to see some strong impulsive price action again.

Trading Strategy

As mentioned above we retain a bullish stance over the longer time frame though the time for jumping on isn't right here and now.  If you really do like the company you could accumulate partial positions in this region though I wouldn't go the full hog until the upper boundary of the congestion pattern is penetrated.  That means we need to see a close above $18.99 before being fully committed.  It would take a break beneath $15.17 to suggest a significant top is in position although it isn't our highest expectation to attain those lower levels.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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

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article 3 months old

Weekly Broker Wrap: Housing, Gaming, Retail, Media, Fertilisers And Energy

-Will housing boom lead to bad debts?
-Risks rising for Hong/Kong Macau gaming
-Changes loom for operating leases
-Possible SXL merger accretive to NEC?
-High US dollar headwind for potash
-QCLNG shows CSG to LNG success
 

By Eva Brocklehurst

Housing Boom

The housing boom in Australia and New Zealand is entrenched, with dwelling prices now up 57% in Sydney, 42% in Melbourne and 63% in Auckland from pre-global financial crisis levels in 2007. Sydney median dwelling prices are now 10.3 times median household disposable income, with Melbourne at 8.2 times and Auckland at 9.8 times. UBS observe increasing evidence house price inflation is being fuelled by speculative activity.

Given low rental yields are unlikely to cover interest payments and ongoing expenses, the economics of these housing purchases for investment rely on an assumption of full occupancy, favourable tax treatment and ongoing appreciation in house prices. UBS observes the Reserve Bank appears less concerned about house price rises because they are primarily isolated to Sydney and Melbourne.

If house price multiples continue to expand there are implications for not only bank mortgage books but other parts of the economy. New loans written against expensive housing assets may deliver poorer credit outcomes in the event of an economic downturn. UBS suspects further supervisory intervention is inevitable in the current scenario. Elevated bad debts for the mortgage banks will become more likely in the event of a future economic shock, in the broker's view.

Gaming

Morgan Stanley remains cautious about the Hong Kong/Macau gaming industry because of regulatory pressures, oversupply and negative earnings revisions, along with rich valuations. If there is a short term rally on the back of the opening of Galaxy the broker recommends selling into the rally. Sequential improvement in fourth quarter revenue may not be enough to drive outperformance since higher-than-expected operating expenses and lower-than-expected demand mean earnings revisions are yet to find a base. The broker remains concerned about recent data on hotel room rates and occupancy in Macau. Moreover the policy risks are numerous and point to a slower recovery in demand.

Retail

There are implications for retailers from the treatment of operating leases, as the International Accounting Standards Board proposal to bring operating leases onto balance sheets appears to be progressing towards inclusion in the new standards. New standards typically require implementation within one to two years. The proposal has met widespread opposition from the retail industry. Instead of recognising rental payments as incurred, retailers will be required to expense theoretical depreciation and financing costs. This will result in higher earnings at the EBITDA level but also higher interest and depreciation charges.

Morgan Stanley notes, theoretically, there should be no impact on valuation for retail stocks as the changes have no direct effect on cash flow. Nevertheless, leverage, returns on capital expenditure calculations, and trading multiples will be affected. At this stage the broker does not have the information to identify winners and losers or as to how tax authorities will treat the changes.

Media

Deutsche Bank has looked at the potential of a merger between Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)), given the continued speculation. Southern Cross is not currently Nine's regional TV affiliate and an acquisition of WIN TV would likely to be easier to implement, but the broker's analysis demonstrates that acquisition of Southern Cross could be highly accretive to Nine shareholders.

The base case scenario suggests earnings accretion of 10-20% over the first two years following a transaction. The driver would be the substantial revenue synergy potential, as Southern Cross moves to broadcast Nine's content in place of its Ten Network ((TEN)) broadcast in regional areas where Nine doe not directly operate. Additionally, the sale of Nine Live puts Nine Entertainment in a favourable negotiating position as it can now offer a significant cash component for Southern Cross stock. Deutsche Bank attributes Southern Cross's lower trading multiple to its higher level of gearing but, if the merged entity maintains a more reasonable gearing ratio, this discount is unlikely to persist.

The latest online rating figures for March from Nielsen suggest there is no let up in the consumer engagement for REA Goup ((REA)), Carsales.com ((CAR)) and Seek ((SEK)) in domestic markets, despite the presence of challengers. The real estate segment highlights the strength in the property market with a material step-up in audience and no change to REA dominance. Automotive enquiry volumes improved and while Carsales.com is dominant, Gumtree is encroaching. Seek benefitted from a bounce in employment volumes and improved key usage metrics, but Citi notes Indeed and LinkedIn are expanding in the category.

Fertilisers

Citi considers the outlook for nitrogen, phosphate and potash is weak. Ample supply, a strong US dollar and the potential for adverse weather to limit the planting of corn in the US is the reason. During a late spring season in the US the farmer tend to apply more urea and less ammonia, and skip potash and phosphate applications. Supply pressures are continuing to affect urea in the broker's view but lower exports from China may help stabilise prices later in the year. The analysts note the stronger US dollar is a headwind for potash, particularly in India and South East Asia, where potash imports are used on some crops that are not exported.

Australian Energy

The performance of QCLNG, the first project in the world to liquefy gas from CSG fields for export as LNG, has rivetted the attention of energy market participants. The central Queensland project entered production late in 2014. A second train will be filled towards the end of this year. Morgan Stanley notes industry participants are watching with interest given the relevance of this project for others such as GLNG and APLNG, both of which are expected to start production mid year. The production performance of QCLNG is considered a positive read through for Santos' ((STO)) GLNG and Origin Energy's ((ORG)) APLNG and illustrates that successful conversion of CSG to LNG can be achieved.
 

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article 3 months old

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

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

By Eva Brocklehurst

Technology

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

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

Wagering

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

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

Health

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

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

TV

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

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

Insurers

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

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

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