Weekly Broker Wrap: Elections, Aussie Dollar And Retailing

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– Weaker AUD not a universal blessing for Australia
– Times predicted to remain tough for retailers in Australia
– A new paradigm for energy retailers
– Qube Logistics could be a winner post federal elections
 

By Rudi Filapek-Vandyck

It is easy to get carried away by assuming that a weaker Aussie dollar must have positive implications for the Australian economy and for profits of Australian listed companies, warned Tim Toohey and his fellow-economists at Goldman Sachs this week.

Sure, there are foreign companies that sell a lot overseas and the translation of those profits will be beneficial for Australian shareholders at a lower AUD, but beyond this translation impact any assessment is much more difficult to make. There's more at work than simply a one-on-one translation.

One thing the Goldman Sachs economists do not deny is that recent weakness for AUD will have been welcomed inside RBA headquarters. It takes off the pressure to put even more monetary stimulus into what arguably is a still weak and further weakening economy.

Such a view is supported by peers at Macquarie who this week reported a 10% fall in the AUD should boost domestic economic growth by 0.25ppt after a year and inflation by 0.50ppt. With the RBA previously forecasting inflation at 2% by the end of 2013, and 2.5% in mid 2014, Macquarie believes it remains quite plausible that inflation will remain inside the RBA's target band over that period. This despite other voices elsewhere suggesting higher inflation might become the new threat.

As per always, the devil remains in the detail and both economists at Goldmans and Macquarie agree the present uncertainties are related to the reasons behind the weakness for the domestic currency. Is it because China's growth will disappoint even more? Is it because the RBA will have to cut the cash rate even further (which would imply weaker than anticipated domestic momentum)? Or is it solely because of a stronger-than-expected US economy?

Within these parameters, there's a plethora of variations possible and all have different implications for Australia's economy and for corporate profits. It really is tough to be an economist these days. Maybe, just maybe, being the sitting Prime Minister in Canberra might be worse.

One sector that will be impacted by the weaker AUD are the local retailers, and it will be negative at first. This because most retailers source produce from overseas. These imports are now quickly becoming more expensive, hence triggering pressure on margins.

It gets even worse. Goldman Sachs this week also pushed out its anticipated pick-up in domestic retail spending. Not that expectations were high in the first place, but the pending pick-up is now anticipated to be more of a 2014 story. Combine the two factors and it should be no surprise as to why earnings estimates for retailers have taken another hit during the week.

Wesfarmers ((WES)), which partially sells in USD, remains Goldmans' favourite in the consumer staples space, while Harvey Norman ((HVN)) is preferred among discretionary retailers.

Adding further grist to the mill for the shorters in the Australian share market (and retail remains a favourite target), Citi analysts are anticipating rather dismal results for fashion retailers in August. After a strong month in January, sales have been poor in the first six months of calendar 2013 for the clothing, footwear and accessories segments, note Citi analysts. Retailers all blame warm weather and politics, but electronics retailers seem to be trading fine with the same economic backdrop, the analysts add.

Their verdict: consensus estimates are too high. Investors better prepare for disappointments.

Both Goldman Sachs and Citi rate David Jones ((DJS)) as a Sell. They are far from the only ones. Half of all stockbrokers in the FNArena universe currently rates David Jones a sell or equivalent rating. The other half doesn't dare to go further than Neutral/Hold.

The week past opened with yet another sector update by Citi which allowed the analysts to identify one extra disadvantage for bricks and mortar retailers vis-a-vis their online competition: Australian laws that prevent retailers from trading long hours on Sundays and certain public holidays. Online retail does not have such limitations. Citi does believe relief will come via changing laws, and lesser restrictions, but it also believes the eventual upside for retailers from this will remain limited to something like 1% in profits. Hardly the kind of stuff that causes investors' hearts to skip a beat.

Other items that featured prominently in broker research throughout the weak included (even) lower price forecasts for commodities, with gold featuring prominently in what appears to be the new $64 million question in and around Sydney's Bridge Street: how low can it go? Note also that on Citi's latest research, no less than 90% of all goldminers across the globe are not making any money at present prices (see Friday's story "Treasure Chest: Gold Miners In Survival Struggle"). US president Obama's strong support for climate change action also triggered research responses, all painting a potentially favourable background for natural gas in the decade ahead.

Analysts at BA-ML announced the beginning of a new era ("paradigm") for energy retailers in Australia. The trigger was provided by Origin Energy ((ORG)) announcing it will cease door-to-door sales from September onwards. BA-ML analysts believe the industry as a whole can now look forward to a period of stabilising margins and steady churn. If you happen to think this is not exceptionally attractive, then consider the past era comprised of declining margins, growing churn, and aggressive discounting. While margins are expected to remain on the low side, there might be additional upside from further deregulation in Queensland and NSW, predicts BA-ML.

The analysts have started to remove carbon tax impacts from their modeling. This actually reduces AGL Energy's ((AGK)) profit estimate for FY15 by some 14%. Origin Energy's estimates have fallen too, but in smaller numbers.

The real benefits from rising margins, suggests the BA-ML analysis, won't be seen until FY16 and beyond.

Replacing Julia Gillard with Kevin Rudd has substantially improved Labor's chances at the upcoming federal elections, note strategists at CIMB Securities. They still maintain the Opposition holds the upper hand and a change in government should have a more positive impact for the local share market.

CIMB has singled out Qube Logistics ((QUB)) as the most likely clear beneficiary of a change in government this year. The company could benefit from a private sector development at Sydney's Moorebank intermodal freight terminal, point out the analysts.

Others could see marginal benefits, including BHP Billiton ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and Qantas ((QAN)) from the coalition's plan to repeal the carbon tax if elected. In addition, Coca-Cola Amatil ((CCL)) may well benefit from any subsidy a new government might pay the food manufacturing industry.

Regardless of any Rudd-inspired miracles, CIMB analysts suggest the best possible outcome will be a clear majority winner at the ballot box, because a minority government hasn't really worked for Australia.

A high number of research reports were directed towards China this week, and not only because the interbank lending rate spiked higher, triggering worldwide concerns about a credit squeeze, or worse, in the world's second largest economy. As said earlier, forecasts for commodity prices are undergoing yet another wave of downgrades and those economists still holding on to GDP forecasts of 8% or higher for this year and next are quickly becoming a rare breed. Lower projections for China have been a drag on growth projections in general for Emerging Markets.

Finally, Citi's commodity analysts re-adjusted their longer term projections for China, trying to account for what is widely viewed as the necessary re-balancing towards a more consumption-oriented domestic Chinese economy. While such exercises are always full of simplistic inaccuracies, the end result nevertheless would have come as a shock to most China-watchers. Citi's calculations revealed copper consumption in China by 2020 could actually be up to 20-35% lower than consensus expectations while steel fares worse with up to 30-55% potential downside.

It was famous US baseball legend Yogi Berra who once said: "It's tough to make predictions, especially about the future."

He also said: "In theory there is no difference between theory and practice. In practice there is."
 

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