Weekly Broker Wrap: Travel, Supermarkets, Financials And Housing

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-Local base supports Flight Centre
-Woolies winning back customers
-Less disruption in financial services
-What lies beyond a 1% cash rate?
-Moderation rather than slump in housing
-House affordability extending to professionals

By Eva Brocklehurst

Travel Insights

Credit Suisse notes several themes emerged from its travel conference in Sydney. Webjet ((WEB)) demonstrated the opportunity from integrating and developing Online Republic, which has a number of categories which are less well advanced in the gravitation to online booking channels.

Flight Centre's ((FLT)) corporate travel model is seen winning share in the Australian market because of its local support versus international competitors. Its mainstream corporate and specialist businesses appear well positioned for growth, the broker maintains.

Credit Suisse also notes inbound tourism is healthy and boosting retail and leisure segments in those regional centres which provide appropriate infrastructure and marketing. The conference indicated that time and financial constraints are likely to provide the tail wind to domestic travel growth. Word-of-mouth experiences from family and friends via social media are seen as key influences on travel decisions.

Strategy Catalysts

Morgans observes equity markets are still being driven by abnormal macro settings and making a bold decision in this environment is difficult. The upcoming federal election and UK referendum are adding to end-of-financial-year uncertainties.

The broker suggests a positive catalyst that could generate share price strength for CYBG ((CYB)) includes a play on the “stay” vote in the UK's referendum on leaving the European Union, while noting loan growth has continued to recover and synergies are on track for Kina Securities ((KSL)). SmartGroup ((SIQ)) has recently been appointed to two government contract panels and the broker envisages upside risk to guidance heading into the August result.

The broker suggests minimising the risk of short-term capital losses in MG Unit Trust ((MGC)), suspecting the impending announcement of the opening milk price for FY17 may be weaker than expected and result in downgrades to FY17 forecasts.

Also, ERM Power's ((EPW)) downgrade risk relates primarily to the US business, where guidance relies on gross margins rebounding in the second half. Morgans believes, if margins remain at the level of the first half, there is a risk of lower FY16 earnings.

Australian Consumer

Morgan Stanley's shopper survey signals changing times. The value focus of supermarket shoppers is increasing, while Woolworths ((WOW)) appears to be winning back customers. Coles ((WES)) has better price perception, while half the population of the survey would continue shop at Aldi for less than a 10% discount.

The broker notes changes to Woolworths' loyalty program last year appear to have affected its performance, as shoppers view the Coles program far more favourably. Around 48% of shoppers indicate value for money is a top reason for choice of supermarket, up from 39% a year ago.

The survey also shows that, despite Woolworths investing $1bn in price to date, Coles still has a better price perception. Analysis of the survey also suggests to Morgan Stanley that Aldi is moving mainstream as consumers are becoming more familiar with its offering.

Australian Financials

Morgan Stanley has observed from analysts at its financial innovation forum that the sector's incumbents do not appear as vulnerable to innovation disruptions as is the case in some other industries, highlighting the importance of regulation, risk, funding and capital.

Innovation that is disruptive, where an entrant creates true change in a market or value network and wins business has not yet been witnessed in the Australian financial services sector. Rather, the innovation that is occurring is described as sustaining, in that the new entrant may make an existing product better but ultimately the incumbents respond and win.

Blockchain

Blockchain technology is being tailored to suit a range of applications and TMT Analytics observes current testing will result in the roll out of multiple applications in 2017, noting that a failure to adopt this technology may mean some companies are caught out.

The technology, also known as Distributed Ledger, has evolved since the early days of the Bitcoin phenomenon. The analysts note this specific application has been driven at a relentless rate by some of the world's largest financial institutions as well as agile start-ups funded by venture capital.

TMT Analytics observes the advantages of blockchain include substantially faster execution, lower transaction costs, irrevocable audit trails, more transparency and automated contract execution. On the flip side, the analysts suggest disintermediation and loss of revenue opportunities can threaten companies' top line.

Cash Rates

ANZ analysts estimate the neutral nominal cash rate has fallen to a post global financial crisis (GFC) range of 2.25-3.25% from 4.75-5.75%, reflecting wider bank spreads, lower global rates and lower potential growth rates.

The analysts suspect the Reserve Bank of Australia has privately lowered its estimates from an immediate post-GFC estimate of 3.5-4.5%, and believe this estimate will stay low over the next two years, given little change is anticipated in the drivers.

A lower neutral cash rate suggests there is currently less stimulus in the economy than previously thought. The analysts conclude that a future crisis could mean the RBA reaches a 1% lower boundary for the cash rate and is forced to rely more on prudential measure to stop investors taking excessive risks.

Australian Housing

UBS suggests the outlook for housing is one of moderation rather than a downturn, as record low interest rates trump all other factors. The broker upgrades 2016 estimated dwelling starts to 217,000 and for 2017 to a still-high 190,000, but expects 2018 will correct to a pre-boom level.

In terms of prices, the broker upgrades 2016 forecasts, but expects 2017 to be flat with some chance of falling prices as record completions cause pockets of over supply, mainly in apartments. This would raise vacancy rates further and lower rents. A fading wealth effect would be a check on consumption and limit the RBA's willingness to normalise rates.

The better trend currently, likely boosted by the May rate cut, increases the risk of a worsening scenario later, especially given tightening finance conditions, and the broker suspects this will only become fully evident in the next year. The upside that is under appreciated, UBS asserts, is the secular strength of foreign demand.

Rental Affordability Index

The second release of the Rental Affordability Index suggests the lowest income households in Australia are paying up to 85% of their income on rent and the lack of housing affordability is extending to professional classes. The index is the creation of the National Shelter, Community Banking sector and SGS Economics & Planning.

National Shelter executive officer, Adrian Pisarski, observes the low and moderate income households are being forced out of inner city areas into fringe suburbs with less infrastructure and fewer opportunities, entrenching their disadvantage.

Essential service workers such as teachers, nurses and police are also being affected, potentially leaving service gaps in the suburbs where they are being priced out of the market. The CEO of Community Sector Banking, Andrew Cairns, has called for innovative financial models to support more affordable housing.

Economist Saul Eslake notes, in the current financial year, the share of total housing lending going to first time buyers is just 11% while the investor share is rising to 46%. He deduces that would-be home buyers are being squeezed out of the market by investors, and these convert dwellings that might otherwise have been acquired by owners into rental accommodation, creating a reverse supply/demand where these would-be home buyers are obliged instead to rent.
 

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