Weekly Broker Wrap: Oz Housing, Jobs, Wagering, Telecoms And Utilities

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-Is Oz house construction peaking?
-RBA’s cash rate key to housing
-Strong jobs, weak wages
-Wagering set for solid growth
-Accelerating mobile revenues
-GS prefers SKI, DUE for yield
 

By Eva Brocklehurst

Australian Housing

Housing is one of the few bright spots in the economy but this is set to change. Much attention has been given to price rises in Sydney but construction, too, is in a sizeable upswing. Dwelling construction has added half a percentage point to GDP growth over the past year, offsetting part of the percentage point drag from weaker business investment. Alliance Bernstein suspects this might be as good as it gets. Underlying demand for new housing to meet population growth has slowed to 120,000 per annum from 180,000. While there was a prolonged period of under-building this has now swung to over-building. At the end of the year it is likely that housing construction will be running above 6.0% of GDP, a level not seen since the early 2000’s.

Rental growth has slowed to just 2.0% now from mid to high single digits in 2008/09. House price growth outside Sydney has slowed too. Growth in Perth and Brisbane is now negative. Alliance Bernstein also believes there is a technical “wild card” to consider. An historically disproportionate share of the upswing is multi-storey apartments and a lot of this activity is driven by foreign investors. With greater scrutiny of the rules there is potential for a change in this area. Alliance Bernstein is not suggesting a housing collapse, particularly as the upswing has not been accompanied by rampant growth in credit. Still, it is considered inevitable that there will be a downturn by mid next year.

UBS also grapples the issue of whether housing is in a bubble. In the broker’s opinion the main driver of a stronger-for-longer home building boom is the Reserve Bank’s cash rate staying at current levels for another year. It remains at a record low 2.0%. This is the key catalyst for housing approvals, not supply or unemployment, UBS maintains. UBS expects record commencements in 2015 and 2016, which should allow supply to catch up to demand but only making a small dent in the under-building which has accumulated over some years.

UBS agrees that the record high investor/medium-density share of the upswing is a risk but believes this is suppressing rents rather than prices, as unemployment is not spiking. Regulation is also not seen as a material dampener of demand in the months ahead. Moreover, amid record low interest rates, the mortgage repayment share of income is around average. Hence, while there are bubble-like features in the current cycle, UBS does not observe any trigger that will pop them in the near term.

Employment

UBS asks the question whether the latest data on employment from the Australian Bureau of Statistics can be believed. As this is a survey covering only 0.32% of the population the 95% confidence interval range on jobs is large at 166,000 month on month. In May, jobs growth doubled and unemployment fell to a one-year low of 6.0%. Hours worked were flat and strong growth in Western Australia meant its unemployment rate fell back to the lowest among the major states, which does not fit with the mining downturn. Gains have also been unusually concentrated by industry.

UBS suspects, amid the negative income shock from the terms of trade, labour market flexibility is allowing for much of the necessary adjustment via wages rather than job numbers. Wage rates are growing at a record low rate, GDP-based employee compensation is below 2.0% and company profits are flat, which indicates a large degree of labour market slack. However, it suggests unemployment should be rising not falling. The broker suspects the reality is somewhere in between. The US experience after the GFC revealed there an be a prolonged period of job retention coinciding with weak wages.

Wagering

Morgan Stanley lifts medium-term wagering growth assumptions. The broker believes the market is underestimating the positive changes occurring in the industry. This include mobile usage, competitor consolidation, race field fees and fixed odds betting, with operators intent on innovation instead of price wars. The broker expects the industry to grow at 7.0% for 2016 and 2017 versus a rate over previous years more like 3-4%.

Product innovation and advertising spending should drive both penetration and spending frequency. Morgan Stanley’s survey also suggest younger players are more likely to bet online on sports. Tabcorp ((TAH)) and Sportsbet will be the main beneficiaries of improved industry economics, in the broker’s opinion. 

The introduction of “in-play” betting via the internet should grow total turnover and revenue in Australia’s wagering market, in Macquarie’s opinion, given evidence from European operators that it can generate increases in sports wagering. Macquarie believes online corporate bookmakers have been gradually eroding the retail advantage of Tabcorp and Tatts ((TTS)). While a relaxation of the rules is considered inevitable, Macquarie does not factor this into forecasts at this stage. Still the whole industry is well positioned for the uplift from online and this underpins the broker’s Outperform ratings on the latter two stocks.

Mobile Services

After some years of low returns the Australian mobile industry is delivering returns approaching the cost of capital. All operators appear to be participating in accelerating revenues. Capital intensity has continue to rise but the industry has benefitted from cost cutting and improved pricing power following consolidation.Goldman Sachs expects operators to retain their price discipline. The broker’s analysis provides greater confidence in continued multi-year mobile industry growth. Telstra‘s ((TLS)) service revenue forecasts are retained and this is expected to underpin low single digit group earnings growth over FY15-16.

Utilities

Goldman Sachs recently met management from five Sydney-based utilities.The broker notes Origin Energy ((ORG)) has been volatile with an increased focus on the potential for LNG oversupply. The company is upbeat about its retail margin outlook and increased pricing power in NSW. The broker continues to believe oil prices and the start of Sinopec deliveries will be key for the company. AGL Energy ((AGL)) is optimistic on electricity pool prices as Gladstone LNG will ramp up exports through FY16. Goldman notes there is too much regulatory uncertainty for the company to confidently invest in more wind capacity.

APA Group ((APA)) is considered well positioned to take advantage of its opportunities, although growth appears priced in. Spark Infrastructure ((SKI)) plans to bid on the three NSW network utilities and any transaction here would be highly material to growth, although Goldman Sachs emphasises the multiples paid will be important. DUET Group ((DUE)), meanwhile, has been short listed for the NT link project and could be in a position to buy Chevron’s Gorgon domestic gas pipeline if sold. The broker prefers the latter two stocks because of the superior near-term yield.
 

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