Tag Archives: Telecom/Technology

article 3 months old

Weekly Broker Wrap: Coal Economy, Telcos, Food And Infrastructure

CPI outlook; Oz economy and coal prices; telcos under an NBN; Ardent Leisure; food inflation; big infrastructure projects.

-Perceptions the RBA's easing cycle is over are misplaced in Macquarie's, Morgan Stanley's view
-Coal price spike sets Australia up for possible trade surplus
-Trading multiples seen unwinding for telcos as the benefits of structural tailwinds dissipate 
-Sugar price rises spearheading likely inflation in some packaged grocery
-Goldman Sachs considers Lend Lease well placed for new major infrastructure projects

 

By Eva Brocklehurst

Macro Outlook

Australia's headline consumer price index (CPI) in the September quarter was better than Macquarie expected and the outcome removes the trigger for a November cut to the Reserve Bank's cash rate. That said, perceptions that the potential inflection point evident in the headline CPI could mean the easing cycle is over are misplaced in the broker's view.

For its outlook on the cash rate to be derailed, Macquarie believes inflation prospects need to be boosted to the point where the central bank is concerned about containing a sharp break-out in inflation. Morgan Stanley also envisages little change in the low inflation trend.

Core measures of inflation edged down to 1.5% year on year, leaving room for further cuts to official rates in the broker's opinion, if the labour market weakens over 2017. Morgan Stanley expects the slowdown in the housing cycle will impact growth and the labour market over 2017 and into 2018, ultimately prompting the RBA to lower rates another 50 basis points to 1.00% in the second half.

The broker highlights the risk of a hard landing within apartment construction and argues that a broad downturn in housing would put up to 200,000 jobs at risk and mean unemployment would rise to 6.5%.

Oz Economy And Coal

Cuts to coal supply in China have meant coal prices have surged. Initial contracts for hard coking prices spiked by 116% in the June quarter to US$200 and spot prices rose another 20% to around US$240. Thermal spot and semi-soft contract prices also rebounded around 50%.

Together, coal prices, weighted by Australia's export share, have more than doubled and UBS observes this spike adds around $3bn per month to export values. The broker suspects the country's trade deficit will probably disappear in coming months, and may even turn to surplus.

If the price spike is sustained through the December quarter, total export prices are likely to rise around 5%, quarter on quarter. Assuming broadly flat import prices, it would also mean the terms of trade turn up 5%. Hence, even with some retracement of coal prices next year, nominal GDP appears set to grow 5% in 2017.

At face value, the spike in coal prices is a positive for government budgets but the broker's channel checks suggest the Commonwealth's MYEFO (mid year economic and fiscal outlook) will largely look through the price hike, given the May budget already projected nominal GDP of 4.25% in 2016/17 and 5% from 2017/18 onwards.

Telcos

The easy money has been made in tier 2 telcos over the last ten years, Morgans asserts, as the sector has enjoyed structural tailwinds and the benefits of many acquisitions. More diverse companies, combined with low interest rates and strong earnings growth, have resulted in trading multiples virtually doubling from long-term averages of 6 to 12 times enterprise value/EBITDA (earnings before interest, tax, depreciation and amortisation).

This is now unwinding and the broker expects while Telstra ((TLS)) has never re-rated and it has most to lose under the National Broadband Network, it remains well hedged against this loss. The stock is considered relatively safe and holding up with respect to NBN market share.

Morgans expects TPG Telecom ((TPM)) could de-rate further, as unlike Telstra it is not compensated for NBN losses. The company needs to either double its consumer customer numbers, grow corporate share or reduce costs from iiNet.

Vocus Communications ((VOC)) has de-rated and now looks interesting to the broker. There is little risk to NBN earnings as the company already pays the higher access prices. Still, Morgans suspects investors will want to witness the integration of recent acquisitions and the cash flowing before revisiting the stock.

All the above three carry Hold ratings from the broker. Morgans prefers global satellite re-seller Speedcast International ((SDA)) in the sector, rating it Add, as it has a much larger addressable market and therefore a substantially longer pathway for growth.

Ardent Leisure

The Dreamworld fun park has been closed until further notice after four fatalities at the site. Theme parks previously represented 33% of Ardent Leisure's ((AAD)) FY16 group EBITDA  excluding health clubs, Citi observes.

The broker invokes lessons from the UK where Merlin had an accident in its Alton Towers park in June 2015 at the start of its peak trading season. There were two serious injuries but no fatalities. The principal cost to the group was a fine of GBP5 million. Citi calculates that attendance fell 20-30% at the park following the incident and the share price has now recovered to levels at which it was trading prior to the incident.

Based on the Merlin experience, Dreamworld attendance is expected to be adversely impacted over the upcoming peak Christmas period. Revised forecasts assume Dreamworld continues to trade but at lower attendances over FY17, and maintenance capex increases over the short term.

FY17 and FY18 EBIT (earnings before interest and tax) forecasts fall by 27% and 18%, respectively. The broker requires more clarity surrounding the cause of the incident and the duration of the park closure before returning to a Buy recommendation, and downgrades to Neutral.

Food

The Australian supermarket sector has languished with industry growth of 3.2% over the past year but Citi believes low inflation will not last forever and fresh produce inflation is likely to rise. In 2017, some packaged grocery categories could also experience higher inflation.

Using wholesale data, banana prices were up 25% on the east coast and potatoes, tomatoes and lettuce have seen inflation of 18-52%. Fresh produce is about 10% of supermarket sales and recent inflation could add 1.0-1.5% to industry sales growth in the September quarter.

While there is clearly more supermarket competition with Aldi's growth and profile, Citi assesses most of the low inflation is a reflection of lower raw material prices. Many packaged groceries have experienced deflation such as in beverages, bakery and cereals, pet food and toiletries. However, the basket of soft commodities in these products is starting to rise, the broker observes, particularly for sugar. Sugar prices are up 85% for September 2016.

Infrastructure

Goldman Sachs updates its infrastructure construction tracker to reflect the latest high priority projects and also for the recent awards of rail rolling stock contracts. The broker now estimates a pipeline of over $38bn in major infrastructure projects. From a top down perspective, a 3.4% compound growth rate in infrastructure construction investment is estimated over 2016-19.

Four mega projects underpin the pipeline, these being the Sydney metro rail city & south west phase, the Melbourne metro rail tunnel, the WestConnex (Sydney) and Western Distributor (Melbourne) road projects. These four represent 90% of the project pipeline and are due to be awarded in late 2017.

The broker notes Lend Lease ((LLC)) and Cimic ((CIM)) have the capability to participate as equity investors in public-private partnerships, which have been increasingly deployed in Australian infrastructure projects. Lend Lease has won 40% of the $5bn of projects awarded since the start of 2016, compared to its 12% market share in 2015.

This compares favourably to Cimic, where market share declined to 30% in 2016 from 73% in 2015. Goldman Sachs expects the recent momentum in market share will underpin growth in Lend Lease's Australian construction business.


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article 3 months old

Potential Re-Rating For Aconex?

Construction management software service, Aconex, has taken time out to explain its revenue model amid concerns in the investment community and a sell off in its shares.

-Clarity on revenue and cash collections should ensure a re-rating in Morgan Stanley's view
-Conject expected to improve as the transition to the Aconex platform progresses
-Deutsche Bank prefers more evidence of moderating costs before applying higher margin assumptions

 

By Eva Brocklehurst

Construction management software service, Aconex ((ACX)), took time out at the AGM to explain its revenue model, given disquiet in some investor quarters and the sharp decline in the share price since the company's FY16 result. Aconex has actively moved away from up-front invoicing towards quarterly and annual contracts invoiced in advance. The transition explains to brokers why un-geared operating cash flow to earnings ratio has been at the least, underwhelming.

Aconex hosts a global cloud collaboration platform which enables clients to improve the efficiency and productivity as well as the accountability of their various projects. The company set a positive tone at its AGM and added clarity on revenue and cash collections should ensure a re-rating in Morgan Stanley's view.

The stock has been under immense pressure, the broker notes, heading into the annual meeting, but fears were mostly allayed by guidance on both revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) along with a clear explanation of the cash flow status. FY18-19 revenue growth and EBITDA margin guidance was also provided at 20-25% and 17-22% respectively. Once the removal of discounts for up-front payments has washed through, cash collection is expected to realign and track ahead of revenue. Morgan Stanley expects cash flow to fully normalise in FY19.

FY17 guidance for revenue of $172-180m is below the range implied at the FY16 result, Credit Suisse observes, but EBITDA guidance of $22-25m is broadly in line with expectations, and this implies stronger margins. The broker believes the 30% decline in the share price post the FY16 result has been driven by slowing short-term organic growth, largely attributable to recent acquisition, Conject.

The broker expects the performance of Conject will improve into FY18 as the transition to developing, selling and supporting the Aconex platform progresses. This underpins the broker's confidence in the company's forecast for an acceleration in organic revenue growth in FY18 and FY19. Credit Suisse upgrades to Outperform from Neutral. The main risks envisaged are an inability to improve the Conject sales pipeline, further macro challenges and increasing competition.

Management has noted a lack of will amongst clients to make purchasing decisions amid uncertainty in Europe and the Middle East, given the Brexit decision affecting the former and falling oil prices the latter. Morgan Stanley also notes the fear, or perception, of change with the Conject acquisition appears to have had a material impact on Conject's pipeline of new business opportunities.

Aconex believes confidence has largely been restored, with the Aconex product rather than Conject. The broker suspects the market is underestimating the power and certainty of the company's earnings stream.

Deutsche Bank is more cautious. While accepting the move to quarterly and annual contracts and fewer associated discounts is a key reason for the mismatch in earnings and cash, the broker still expected cash flow would have been stronger in the first quarter given the spike in deferred revenue in FY16. The broker also highlights the unusual practice of providing FY18 guidance at this stage, but suspects this is partly in response to the market's apparent frustration at the modest operating leverage delivered by the revenue model.

This is particularly so, the broker believes, in the context of a well-established software business that should be delivering very high incremental margins. Incremental EBITDA margins of 26% in FY16 and 19% in FY17 appear low to Deutsche Bank, especially considering the higher rate of R&D capitalisation. FY18 guidance for incremental margins of 49% appears more consistent with expectations for a scalable software business. Nevertheless, the broker would like evidence of moderating costs before applying higher margin assumptions.

Given typical seasonality favouring the third and fourth quarters, and annual bonus payments paid in the second quarter, Macquarie considers it likely that operating cash flow will remain subdued until at least the third quarter of FY17. While cash flow is a good indication of recent sales conversion, the broker flags the fact that cash can be lumpy as the group cycles away from up-front billing.

Longer term, the broker believes Aconex is positioned to deliver the margin expansion that is typical of software-as-a-service (SaaS) businesses once scale is achieved. The broker awaits further clarification on the headwinds confronting Europe and the Middle East.

The ambiguity that exists while the revenue versus cash flow issue plays out is a good buying opportunity, in Citi's view. The company has significantly increased its investment in R&D on products such as bill collaboration, field inspections, cost management and analytics and the broker notes Australasia, the Americas and Asia have ongoing sales momentum.

The broker envisages three primary growth drivers in the medium term: attractive dynamics as the construction collaboration industry is under penetrated; network penetration as the company expands and converts per-user clients to enterprise agreements; and acquisitions in a highly fragmented industry along with expansion into other sectors.

FNArena's database shows three Buy ratings and three Hold. The consensus target is $7.72, suggesting 29.4% upside to the last share price. This compares with $8.19 ahead of the AGM. Targets range from $6.70 (Macquarie) to $9.30 (Morgan Stanley).
 

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article 3 months old

Telstra: Downside Trend Remains


Bottom Line 11/10/16

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: $4.92
Resistance Levels: $5.85 - $6.06 / $6.53 - $6.73

Technical Discussion

Telstra Corporation ((TLS)) is a telecommunications and information services company providing services for domestic and international customers. It is Australia's most prominent telecommunications company with brand recognition across all segments of the industry.  On January 21st 2014 it acquired O2 Networks, a developer of data networking and network security software. In May 2014 the Company completed the sale of its Hong Kong based mobiles business CSL to HKT Limited. In July 2014, Telstra acquired an undisclosed minority stake in Telesign Corp. For the year ending the 30th of June 2016 revenues increased 2% to A$25.91B. Net income before extraordinary items decreased 7% to A$3.76B. Revenues reveal the Global enterprise and services (GES) section increase of 11% to A$6.25B and the Telstra Operation section increase of 29% to A$342M.  The dividend yield is currently 6.2%.  Broker/Analyst consensus is “Sell”.
 
Reasons to be cautious:
→ A potential cut in the dividend is now worrying investors and analysts.
→ EPS could fall significantly over the coming years.
→ Mobile competition remains high with prices reduced for theiPhone7.
→ A capital management program in FY17 will commence.
→ Hovering around an area of support.
 
The potency of the prior downtrend strongly suggested that the lower boundary of the trading range was going to come under pressure following our last review and in that regard we haven’t been disappointed. In fact, the lower boundary was overcome by the slimmest of margins although a few buyers did step up to the plate at those lower levels. There was even a decent increase in volume at the recent pivot lows just under $5.00 although once again momentum has run out of steam almost immediately. The difference in the retracement this time around, is that it doesn’t appear to be a corrective pattern with price heading down in a straight line movement off the late July high. As such, we have to be extremely cautious in regard to any sort of bounce lasting more than a few weeks. Although the line of support goes all the way back to 2007 it’s by no means a foregone conclusion that it’s going to hold.

Sentiment in the sector has taken a bit of a pounding recently and there’s no reason to suggest why it should suddenly take a turn for the better any time soon. Apart from the line of support as shown, there’s also a large expanding triangle to consider which has been forming since October of last year. This is quite a rare pattern but it needs watching carefully as a push beneath the lower boundary would be major reason for concern and portend another significant leg South. Should the recent pivot low at $4.92 be overcome then the lower trend line of the triangle is going to be within touching distance which means an inflection point will have been reached with potential bearish consequences to follow. It would take an immediate and impulsive push up through the recent pivot high at $5.22 to suggest a deeper retracement is going to be avoided although at this stage it isn’t looking likely.
 

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

Wait For Opportunity In Vocus

By Michael Gable 

Last week was a positive one for markets, but we remain cautious and do not expect them to kick on from here. We still expect a revisit of 5200 for the S&P/ASX 200 Index and a potential drop towards 5100. The US markets in our opinion, still look weak. There are some bright spots however and our SAI trade from several weeks ago has received a takeover offer, representing a 40 per cent premium to our entry price, excluding the recent dividend. It is one of those stocks that 90 per cent of people have not heard of, let alone contemplated investing in. This further confirms our opinion that opportunities always exist, you just need to spend the time looking for them.

In today's report we have an updated chart on Vocus Communications ((VOC)) which is one stock that we like but have been keeping an eye on before pulling the trigger.
 



Our report on VOC three weeks ago was a positive one, but our charting commentary suggested we be patient and wait for cheaper levels. We were eyeing $7 as an entry point but the stock quickly fell through that. Given the severity of the move, we expect that any short-term bounce would be sold into. Resistance is therefore likely to be strong here in the mid $6's. Over time, we expect the shares to drift back down towards $5.50 again. This may take several weeks but buyers should remain patient and wait for those cheaper levels. So our view on VOC is Neutral for the short term in respect of the chart, but we are still positive on the company's future and our charting view would turn positive again down near $5.50.


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

Brokers Split On TPG Telecom

TPG Telecom's surprisingly weak guidance has some, but not all, brokers worried.

-Earnings per subscriber to decline as NBN rolls out, expected to be offset by subscriber growth
-Acquisition and retention costs from NBN occurring earlier than previously expected
-Potential for another leg of long-term growth if Singapore licence bid successful

 

By Eva Brocklehurst

TPG Telecom ((TPM)) has issued its usual conservative guidance in updating its FY17 outlook, but this has not stopped some brokers being disappointed. Organic growth is strong, from both the consumer and corporate segments, but pressures from the rolling out of the National Broadband Network (NBN) are mounting.

Citi expects the guidance will be upgraded at the first half results and envisages near-term NBN costs will be more than offset by subscriber growth, and iiNet acquisition synergies. The broker's forecast for FY17 EBITDA (earnings before interest, tax, depreciation and amortisation) is $850m, 3% above the top of the company's guidance. Citi calculates that over FY11-15, the company's average guidance upgrade at the half year announcement was 6% and the final outcome beat initial guidance by an average of 8%.

NBN charges will rise slowly, the broker believes. The company had 15% of its subscribers on the NBN in July and by FY17 end this should hit 24%, with 100% by FY21. Average access costs are expected to rise to $19, or thereabouts, in FY17 from $15.50 per month in FY16, ending up near NBN's forecast for average revenue per user (ARPU) of $57 in FY21.

Citi expects EBITDA per subscriber will decline by around 50% but be almost entirely offset by subscriber growth. Meanwhile, mobiles are a clear focus for the company, via regional spectrum acquisitions in Australia, and the company intends to bid for the fourth licencee in Singapore. This has potential to add another leg of growth in the long term.

The reason Macquarie is disappointed stems from the fact there are a number of factors in FY17 which should drive higher growth, including a full year of iiNet ownership and the benefit of lower copper access pricing. The broker also envisages upside from the take up of fibre-to-the-building (FTTB) services

Incorporating these factors implies that the company's core broadband EBITDA is down by $15m and Macquarie interprets this as a further deterioration in the EBITDA per subscriber. The broker suspects the impact of acquisition and retention costs from the NBN is occurring earlier than previously expected and this is in addition to the pressures on gross profit and margins the NBN is bringing.

In terms of the opportunity in Singapore, the broker notes there is strong regulatory support for a fourth player and if TPG is successful in getting pre-clearance for the auction it will be aggressive in setting up its local management team, funding the investment from debt and cash from the Australian business. This is considered the next catalyst, with an update due on the auction process in the December quarter. Macquarie believes the stock's trading multiples will remain under pressure until there is further clarity on the medium term and retains a Neutral rating.

Deutsche Bank, in initiating coverage of the stock with a Buy rating, has a positive outlook based on forecasts of 13% compound earnings-per-share (EPS) growth over the next five years. This should stem from NBN-led market share gains and growth in high margin FTTB services. The broker expects TPG's overall broadband market share to increase to 29% in FY20 from 27% in FY15. Group margins are forecast to fall in FY17 and then steadily expand as the higher margin services are sold.

Guidance disappoints Credit Suisse too. The broker considers the outlook a reality check on the extent of the earnings pressure the company faces as the NBN rolls out. This headwind will stiffen in FY18 and FY19 and the broker forecasts a compound EPS growth rate of just 2.5% over the next four years. Credit Suisse also suspects market share has slipped in the second half of FY17, reflecting increased competitive intensity, particularly from Telstra ((TLS)).

Average revenue per unit (ARPU) is expected to come under increasing pressure as well, as TPG's base moves onto new lower-priced plans and the uptake of voice call bundles declines. Credit Suisse calculates TPG faces a $200m EBITDA headwind in consumer business as the subscriber base migrates to NBN.

The broker believes the stock's price/earnings multiple in FY17 is still relative high at 20.7x, given the weaker earnings growth now forecast as well as the high risk profile of consumer broadband. The stock is trading at a significant premium to Vocus Communications ((VOC)) and Credit Suisse retains an Underperform rating.

Morgans takes up a similar stance, downgrading to Reduce from Hold. The broker finds it hard to dismiss the advancing headwinds and lowers its earnings estimates and terminal value for the stock because of margin pressure. The main risk/reward relates to the company's ability to offset the NBN margin and therefore the reductions to earnings.

NBN is now the main feature of the industry and, as the addressable market more than doubles in FY17, Morgans believes the impact will become increasingly obvious. The broker believes the company needs to either double its customer numbers, bypass the NBN using wireless spectrum, or cut costs to offset the pressure. In sum, a period of structural change and intense competition makes profitable growth hard to come by.

Morgan Stanley is a little kinder in its analysis, highlighting the company's track record of issuing conservative guidance and meeting or exceeding it. Still, the broker is aware of the rising competition in retail broadband that increases the risk profile around future growth but notes this is the case for all participants.

FNArena's database shows three Buy ratings, two Hold and two Sell. The consensus target price is $10.32, suggesting 14.7% upside to the last share price. This target compares with $11.54 ahead of the results. Targets range from $7.49 (Morgans) to $13.35 (Citi).
 

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article 3 months old

Surging Demand Sets NextDC On Course For S2

Data centre owner operator NextDC has altered tack, bringing forward its plans to build a second Sydney data centre after a large contract win.

-Company now targeting three new data centres to be built in three cities over 12 months
-Demand surging on the back of a proliferation in devices and content storage needs
-Capex requirements high but operational risk considered limited


By Eva Brocklehurst

Data centre owner and operator NextDC ((NXT)) is being nimble, changing tack to capture the strengthening winds that are driving demand for data storage. The company was expected to deploy most of its cash balance in FY17 on the building of new data centres in Brisbane (B2) and Melbourne (M2). However, an existing international customer has purchased a further slice of the Sydney data centre (S1), pushing up contracted capacity to 82%.

This has necessitated the company bringing plans for a second Sydney centre (S2) into play. NextDC will now be developing the three facilities concurrently. The company has undertaken a capital raising to fund the investment with a $50m placement completed at $4.06 a share, and a 1-for-9.1 accelerated non renounceable entitlement offer, at $3.74 a share, to raise $100m.

The decision was sparked by a contract with a major customer for over 1.5MW capacity at S1. The company is sourcing the land, which it will own, with initial capacity envisaged at 2MW rising to 30MW, making S2 almost twice the size of S1. The cost of the land, building and first 2MW is expected to be around $140-150m.

Credit Suisse notes that while the announcement removes one uncertainty about the timing of the next Sydney centre, development risk is heightened. The company is targeting building times of 12 months but previous facilities have taken 18-24 months. There is also enhanced competition risk. NextDC will have 55MW of capacity to sell in both S2 and M2, with a newcomer potentially entering these markets. Should the new entrant proceed the broker expects pricing is likely to come under pressure.

Nevertheless, in its pre-sales announcement, the company was confident about the potential across the three new centres and Credit Suisse also notes NextDC is able to refinance $160m in senior notes every six months from December. The valuation remains attractive to the broker and, whilst a discount may be necessary given lower occupancy and a weaker capital structure, Credit Suisse believes this cautious view is overdone.

Citi envisages global industry demand in this industry is a consistent set of waves, with growth driven by the proliferation of the number of devices on which to consume data, and the vast amount of content being created both personally and professionally. The transition to the cloud, which NextDC is enabling via its co-location and carrier-neutral data centres, should continue to support the business.

FY17 is expected to show the company flexing its operating leverage across its main 42MW footprint while profitability should mature at these assets. The maintenance of M2 and B2 time frames is encouraging for the broker, as is the S2 development, notwithstanding competitor Equinix formally opened its 26MW asset on August 21.

The broker believes there is room for more than one professional data centre provider and NextDC captured sufficient demand to fully fit out the S1 centre's 14MW within three years of opening despite Equinix being up and running. In observing Equinix' operations, Citi notes that solid returns can still be generated from assets that have reached an operationally viable maximum. In Equinix's case its mature data centres were still growing revenue at over 7% and gross profit at over 8% with rent increases, uptake of inter-connection and increased power density.

Timing of the new facility means the cost base will, in the short term, step up more than revenue until utilisation reaches a tipping point from which strong returns should emanate, Morgans asserts. With the exception of B2, the broker's forecasts do not currently include any large up-front deals and this means initial costs of new centres will be worn by NextDC, but securing enough up-front customers could change the dynamics quite quickly.

Morgans observes the S2 is well funded and, while the capital intensity of building data centres is very high, there should be limited operational risk. The main risk to the share price, in the broker's view, relates to the rate of sales and whether this plateaus, slows or accelerates. Morgans reduces forecasts for the short term but upgrades these meaningfully over the longer term. A Hold rating is maintained for now but the broker recommends investors participate in the entitlement offer.

There are five Buy ratings and one Hold on FNArena's database. The consensus target is $4.60, suggesting 12.2% upside to the last share price. This compares with $4.29 ahead of the announcement. Targets range from $4.30 to $4.90.

See also, NextDC Ramping Up Developments on August 24 2016.
 

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article 3 months old

No Rush To Buy Vocus

By Michael Gable 

The US markets were closed last night and we have the RBA interest rate decision today, but our view is that the Australian index should continue to show a little more weakness from these levels with September likely to be a negative month for the market. Today we look at Vocus Communications ((VOC)) which is one of the "popular stocks" out there in the market.
 


VOC has clearly eased back since the May high, but what is interesting is the amount of volume that has gone through in the last few weeks. This volume has pushed the stock down almost another $1 since they reported. This weakness means that we could see VOC retest the longer term uptrend line in the low $7's. Also, if VOC is pulling back in 3 waves, and wave 3 is 1.6 times the size of wave 1 (which is often the case), then that also means a target of the low $7's. Buyers can therefore wait for a little more weakness before expecting support to come back in.


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: Earnings, Apartments, Consumer, Wellard And Telstra

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

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

 

By Eva Brocklehurst

Reporting Season Wrap

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

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

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

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

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

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

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

Australian Apartments

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

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

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

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

Wealth And Consumer Spending

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

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

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

Wellard

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

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

Telstra

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

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

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

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article 3 months old

NextDC Ramping Up Developments

Data centre developer and operator NextDC impressed brokers with its FY16 result, revealing top line growth, margin expansion and a maiden full year profit.

-Capital intensive business so ability to access funds and utilise debt the key risk
-Outsourcing and cloud technology to increase data centre demand materially
-Company relaxed about competition and data centre supply


By Eva Brocklehurst

NextDC ((NXT))  impressed with a solid FY16 result, revealing top line growth, margin expansion and a maiden full year profit. The company is expected to deploy most of its cash balance in FY17 in the expansion of its existing footprint and the building of the new data centres in Brisbane (B2) and Melbourne (M2), which should be operational at the end of FY17.

Morgans continues to find the outlook positive with the catalysts ahead relating to the potential for large white space deals and the possibility of inclusion in the ASX200. The broker makes material changes to capital expenditure estimates, largely in relation to timing, which does not change the overall valuation materially. The shares have had a strong run, hence the broker downgrades to Hold from Add as there is now less than 10% upside to valuation.

Morgans does highlight the fact the business is capital intensive and the ability to access funds on an ongoing basis and effectively utilise debt is a key risk. That said, the broker believes NextDC has the capacity to handle more debt and self fund expansion through operating cash flow.

UBS is also confident NextDC can fund the entire roll out of the second data centres in the two capitals. A second one in Sydney (S2) is considered the next likely development. Assuming 80% of contracted capacity is the trigger, the broker estimates NextDC could acquire land in Sydney the second half of FY17 and build over FY18.

UBS does not expect increasing supply from data centres will result in price deflation over the next five years. The broker estimates that less than 20% of the required capacity has shifted to outsourced data centres and the adoption of cloud technology is likely to increase demand substantially.

Macquarie observes the results were helped by a significant lift in billing utilisation, up 66% on the prior year. Contracted utilisation sold at an average rate of $3.98m per megawatt in the second half, which represented as small decrease on the first half as billing commenced for the leading corporation and federal government contracts.

The broker anticipates the company will benefit from exponential growth in internet traffic and the trend towards outsourcing. Macquarie assumes total R&D spending between FY17 and FY23 of around $400m, including the fit-out of B2 and M2.

The discount at which the stock currently trades stems from lower occupancy, Credit Suisse notes, with a risk allowance for achieving expected returns and the business being in the throes of moving from development to infrastructure-like assets. The broker also notes the sub-optimal capital structure.

Yet, as these features are a function of the immaturity of the business, Credit Suisse expects they should be resolved in two to three years. In FY17 the broker believes the primary catalysts will be the calling of $160m in notes and reducing the cost of debt while increasing gearing.

 Deutsche Bank sticks by its Buy rating because of an improving risk profile, leverage to structural demand and the valuation. The broker notes the main downside risks include oversupply, given data centre development requires significant lead times. As a result, the signals such as returns on investment and demand for capacity are subject to change upon these centres actually reaching completion.

A loss in sales momentum is also a particularly pronounced risk for NextDC, given revenue misses meaningfully affect earnings, owing to the high operating leverage. Deutsche Bank notes the Canberra market remains soft, with the C1 contracted utilisation remaining at only 4% of total megawatts planned and 27% of built capacity, while there are early signs momentum in Perth has improved.

CLSA does not believe NextDC will need to raise equity to fund S2 now that it has generated a profit and there is little execution risk given the high operating leverage. Moreover, several funding options are available in the debt market. At worst, the company could sell its land holdings in M2 and B2 to release capital.

The broker also notes the company is relaxed about the competition created by players such as Airtrunk, founded by the former CFO of NextDC. Industry feedback suggests to the broker that operators are rational about expansion plans and oversupply is not a concern at present. CLSA, not one of the eight brokers monitored daily on the FNArena database, has a Buy rating and $4.70 target.

FNArena’s database has five Buy ratings and two Hold. The consensus target is $3.94, level pegging with the last share price. Targets range from $2.95 (Ord Minnett, yet to update on results) to $4.40 (UBS).
 

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article 3 months old

Telstra Investment Leaves Brokers Unsure

Telstra has surprised the market with the announcement of an additional capital injection of $3bn across its network. A $1.5bn share buy-back program is also planned.

-Capex needed to defend market share and deliver new earnings streams
-Without NBN payments core earnings would be lower to flat
-Will risks around future earnings growth offset positives from buy-backs?

 

By Eva Brocklehurst

The focal point and main surprise in Telstra’s ((TLS)) FY16 results was the announcement of an additional capital injection of $3bn to be spread across the network. As a percentage of sales, capex will lift to 18% over FY17-19 and result in free cash flow in FY17 slipping to $3.5-4.0bn.

Additionally, Telstra announced it would buy back shares to the tune of $1.5bn, with $1.25bn in off-market purchases and $250m on market, reflecting the gain on the sale of its stake in China’s Autohome classifieds.

The company is aiming for a return on its increased investment via a defence of existing earnings and market share, trading operational expenditure for capital expenditure and delivering new revenue streams, UBS notes. The expenditure can help underpin existing mobile network share without having to materially re-price the back book and the broker estimates mobile margins will hold up at 41% in the medium term.

This investment decision draws a parallel with FY10, UBS recalls, when Telstra aggressively targeted market share by provisioning for a high single digit earnings decline. This time the lever is via capital expenditure.

While the market’s response to the decision was muted, if the new investment cannot fill the $2-3bn earnings hole created by the NBN, or if the higher capex profile does not normalise, then UBS believes the stock would be fundamentally overvalued.

Telstra has identified new earnings streams such as in Asia, health and software but these are either at an early stage or contribute only a small amount to earnings. Risks to the upside appear limited, in the broker’s view, unless there is more visibility regarding a return to positive mobile momentum, success in new revenue initiatives and/or greater certainty around the ability to lift dividends.

Macquarie also considers the return profile from the investment is unclear. The ability to differentiate on products, deepen client integration and improve customer service is expected to ultimately determine the incremental return Telstra can achieve.

The investment does send a signal to competitors and the broker expects this to have implications for other participants such as Optus. It may cause others to increase investment if they feel the need to compete in some areas.

Critically, the broker observes, subscriber trends are robust and this provides some confidence heading into FY17, and offers support for existing price premiums. Excluding NBN payments, core earnings would be lower or flat. This is the reality, Macquarie maintains, given the challenges and impact of the NBN. The broker expects mobiles should complete a re-basing in FY17 and return to more robust growth after that.

Morgans was impressed with the headline result, noting customer additions were better than expected and more mobile customers were added in the second half despite the network challenges, which proves to the broker there is a loyal customer base which values the network dominance, prepared to put up with the short term challenges.

On the negative side fixed earnings deteriorated 4.5% and data and IP earnings declined 5.5%. The broker observes, with the NBN now servicing around 10% of households there is still a way to go. The broker suggets that if Telstra is not able to replace the lost income with new business, it will simply look to buy back share to ensure that earnings per share are not adversely affected by lower overall income.

From a share price perspective the broker finds the stock attractive on a relative basis, arguing that based on the fact the stock is not far from its long-term average trading multiple, it is not as heavily enmeshed in the asset inflation bubble and, consequently, has lower downside risk.

Dividend support is strong, but Ord Minnett also questions just how difficult it will be for margins in the longer term with the NBN in place. Regardless, the broker notes the company has a leading position in the Australian mobile market and a clean balance sheet which affords some flexibility.

Morgan Stanley expects the company’s monopoly returns to ease and profit margins and returns on equity to decline as competition increases across 75% of its revenue base. The broker contends the risk profile around future earnings growth is widening and the increased capital intensity underscores these concerns. This largely offsets the positive aspects of the share buy-backs.

The broker believes the new capital expenditure is consistent with a view that Telstra faces additional competitive pressure in a mature industry and needs to invest to defend its share and find new revenue to fill the earnings gap.

FNArena’s database has six Hold ratings and two Sell for Telstra. The consensus target is $5.41, suggesting 1.4% downside to the last share price. Targets range from $4.99 (Deutsche Bank) to $5.72 (Morgans, Citi). The dividend yield on FY17 and FY18 forecasts is 5.8% and 6.0% respectively.
 

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