Weekly Broker Wrap: Key Picks, Media, Retail And A-REITs

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

-Credit Suisse more positive on NAB
-Upside potential for MTU, CRZ and NEC
-Can WOW meet profit growth guidance?
– JBH still under pressure?
-Is there more upside for A-REITs?

By Eva Brocklehurst

Top Picks

Credit Suisse has kicked off 2015 by including National Australia Bank ((NAB)) in its top picks for Australia. The broker hails the restructuring that is underway at the bank, while macro leverage to the Australian dollar depreciation and a recovery in the UK market add to the positive underpinnings. There are divestment opportunities which could release substantial capital, in the broker's view.

Another stock to watch is Primary Health Care ((PRY)). The company is facing some structural headwinds around its GP workforce, which needs to be reinvigorated. Younger GPs are not considered as productive as their more experienced peers. As well, recent Medicare schedule changes planned by the government suggest a price cut for PRY, which has a significant bulk billing component.  A key call for 2015 is M2 Communications ((MTU)), which Credit Suisse expects to outperform through the February results season. The broker believes the stock can deliver a 3-year earnings growth rate of 15% through to FY17.

Media

Carsales.com ((CRZ)) takes the top position in the online classified segment for Credit Suisse with REA Group ((REA)) in second. The broker observes carsales.com has no upside priced in for its early-stage offshore operations. An Outperform rating on REA reflects the broker's opinion that strong revenue growth will ensue as the company takes a larger share of property transaction spending. Seek ((SEK)) is rated Underperform, as Credit Suisse considers the stock expensive with high valuations already priced in for its offshore business.

Nine Entertainment ((NEC)) is the top pick in the traditional media segment. TV advertising is subdued but stable and the broker expects a significant re-rating with any sign conditions are improving. Credit Suisse retains an Outperform rating for News Corp ((NWS)) on valuation and a Neutral recommendation is in place for Fairfax ((FXJ)). The latter is considered cheap based on the valuation of its Domain asset but Credit Suisse believes Nine offers more upside.

The main theme for online advertising, which overtook TV as the largest Australian advertising category last year, is continued strong growth in video and mobile. Retail companies are expected to increase the percentage of online advertising spending. JP Morgan is also most positive on carsales.com, given its valuation upside, while Neutral on REA and Seek, where the upside is considered limited despite the broker liking their business models. JP Morgan notes online advertising expenditure has come at the expense of more traditional advertising and this trend is likely to continue in the near term.

Retail

There were concerns heading into Christmas that trading may be disappointing after downgrades early in December from Flight Centre ((FLT)), Kathmandu ((KMD)) and OrotonGroup ((ORL)). However, UBS has feedback which suggests that Christmas activity was late starting but turned out to be good, with sales progressively improving over the month. Boxing Day sales were also strong. Discounting prevailed but the broker did not find it more significant that the previous year. Leisure and fashion stood out, while feedback from the electronics and household categories was mixed. The broker believes, while discounting was aggressive, it was more targeted in categories such as apparel.

Based on early trade feedback and web traffic in December, UBS believes Wesfarmers ((WES)), Harvey Norman ((HVN)) and Myer ((MYR)) are poised to deliver the strongest top line results among retailers in February. The broker highlights risks for JB Hi-Fi ((JBH)), Pacific Brands ((PBG)), Woolworths ((WOW)) and Metcash ((MTS)). JP Morgan also notes issues for these four stocks. Woolworths is at a key decision point for investors. Some question whether Woolworths can meet its FY15 profit growth guidance of 4-7%. JP Morgan believes it can, even if the like-for-like sales gap with rival Coles remains wide and losses in home improvement increase. It is the long-term outlook that is challenged, in the broker's view, as 8.0% margins in food & liquor earnings are arguably unsustainable.

JP Morgan also questions whether the transformation program at Metcash will provide a boost this year, or even achieve a stabilising of earnings. The other issue is how the weaker Australian dollar and petrol prices will affect discretionary retailers. The broker suggests, while lower petrol prices are a positive, the sales mix is likely to shift more to fresh food and premium products. In this instance, the broker wonders whether Myer will be rewarded if it meets FY15 guidance.

The broker asks whether the new CEO will deliver the goods for JB Hi-Fi and suspects that near-term announcements may continue to be negative, as software sales remain a drag and Dick Smith ((DSH)) continues to be an aggressive competitor. Can the sale of several divisions by Pacific Brands last year help in managing rising costs? JP Morgan suggests the path ahead will continue to be difficult.

Online Retail

Australian online retail sales rose 12% in the year to November 2014 and now make up around 7.0% of all retail sales in Australia. UBS observes, despite sales outpacing the broader market, online growth is slowing. The weaker Australian dollar and better execution by local retailers is the reason why international sales growth is slowing. UBS has identified trends such as momentum accelerating at Myer and Dick Smith winning share by aggressive pricing and promotions. Growth at Flight Centre has accelerated as the travel market rebounded in December, while UBS also observes traffic on the web for DIY names such as Bunnings is also increasing.

A-REITs

After outperforming last year Australian Real Estate Investment Trusts (A-REITs) may look less appealing but Morgan Stanley suspects there could be more upside. If the broker's view of lower bond yields is correct, multiples could expand further as valuations and earnings continue to grow. The differential between US And Australian bond yields continues to narrow and this suggests the relative discount in current price/free funds multiples for A-REITs is overdone.

Morgan Stanley expects valuations will gradually move towards its bull case scenario, which signals 28% upside. The broker is cautious about the rental fundamentals, as operating income is relatively stable and the lower cost of debt could drive up to 2-3% upside for selected stocks.

As earnings revisions get harder to come by in the wider market the broker believes the A-REIT sector's momentum will be attractive. The exception to this expected outperformance is Westfield ((WFD)). The broker prefers Goodman Group ((GMG)), Lend Lease ((LLC)), Mirvac ((MGR)) and Scentre Group ((SCG)). The least preferred, including Westfield, are Stockland ((SGP)) and Novion ((NVN)).

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