Weekly Broker Wrap: East Coast Gas, Credit, Banks, Macquarie Group And Appen

This story features ARMOUR ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AJQ

-Several players well positioned in gas
-RBA may need to act further
-Major banks unlikely to match past
-Citi downgrades Macquarie Group
-Appen offers unique ASX exposure
 

By Eva Brocklehurst

Eastern Australia Gas

As conventional gas fields currently in production become depleted and long-term domestic gas supply contracts are due to conclude, demand for gas is seen growing in Queensland with the ramp-up of LNG projects. Morgans ascertains that, by the end of 2015, six LNG trains are likely to be in operation at Gladstone with a total gas consumption of up to 1,500 PJ per year. This compares to total Queensland gas consumption, including gas power generation, of around 240 PJ per year and total eastern Australian gas consumption of around 700 PJ.

Japan is the primary consumer of LNG in the region, with demand growing sharply since the Fukushima melt down in 2011. China is also expected to increase its demand significantly out to 2033 as it targets lower energy emissions.

The broker observes a number of companies exploring for gas that could potentially provide additional gas to this market. Companies located in the Northern Territory include Armour Energy ((AJQ)) and Central Petroleum ((CTP)), which could benefit if the proposed NT pipeline development occurs. Blue Energy ((BUL)) and Senex Energy ((SXY)) in Queensland also have reserves located near existing and proposed pipeline infrastructure which could be brought to market. Elsewhere, the Cooper players Beach Energy ((BPT)), Cooper Energy ((COE)) and Drillsearch Energy ((DLS)) are considered well positioned for increased gas demand and pricing. The broker also notes that the natural decline in conventional gas production has been more than offset by the significant increase in Queensland's CSG production.

Credit Demand

While the Reserve Bank was worried about the investor-driven surge in Sydney house prices in 2013-14 and chose not to reduce official rates further, Credit Suisse observes official commentary suggests that the central bank is now prepared to risk inflating the Sydney property market further for the sake of stimulating growth outside of Sydney. Despite the surge in gross housing investor loan approvals, overall approvals net of refinancing are actually falling. Leading indicators suggest that loan demand may weaken further in the short term, dragging down credit and money supply growth.

Credit Suisse observes signs commercial loan demand is getting weaker, thwarting efforts to re-balance the economy away from mining. Amid this scenario the broker considers fiscal austerity is poorly timed. Historically, the Reserve Bank tends to reduce official rates in response to weakness in loan demand. Given the federal government is yet to formally reverse its austerity stance the broker suspects the RBA may be forced to act. Credit Suisse remains of the view that the RBA needs to reduce its cash rate further this year to boost money supply growth.

Banking Bubble

Australian banks now account for around one third of the market's capitalisation, the proportion increasing dramatically in the past five years. Citi asks whether this proportion is valid or a banking bubble. There is some conflicting evidence. During the tech and resources booms valuations were toppy in the broader market, with the market price to earnings ratio at over 20:1 in the tech boom and the market price to book ratio at 3:1 in both the resources and tech booms. Neither ratio is looking as extreme at present, in Citi's view.

What occurred during these former booms was that the sectors ultimately priced in unsustainable earnings whereas, in the case of the banks presently, neither ratio is high and the shares have not moved much beyond earnings nor earnings beyond assets.

The question still remains about the large rise in the banks' assets that has taken them to a third or more of market cap. At the current level of credit in the economy the banks' growth outlook appears limited, while renewed competition for market share could threaten bank assets and profitability over time. Hence, Citi has decided to place Sell recommendations on all four major banks. The broker suspects bank returns in coming years will be unlikely to match what they delivered previously.

Focus List

Cit has downgraded Macquarie Group ((MQG)) to Neutral from Buy and removed the stock from its Australia/New Zealand focus list because it has rallied strongly since mid January. The broker increased its target to $70 from $66 because the business fundamentally strong, has a high quality an diversified earnings stream and a competitive position with distinctive product offerings.

Appen Ltd

Appen ((APX)) is a global provider of language technology data and services to enterprise and government customers. Bell Potter has initiated coverage of the stock with a Buy rating and 80c target. Appen has a diverse client base, including companies such as Microsoft. The specialist stock provides the only exposure on ASX to a large and growing language services industry. The industry was worth around US$37bn in 2014. Bell Potter expects the stock to perform ahead of prospectus forecasts for 2014 and 2015 because of stronger operational results and a lower Australian dollar/US dollar rate.
 

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