Weekly Broker Wrap: Trends, Tourism, TV, Clothes, China Steel And A-REITs

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-New confidence in tourism, farming
-AFL deal has downside for SWM
-Summer less bright for clothiers
-China facing steel overcapacity
 

By Eva Brocklehurst

Corporate Trends

Analysts at ANZ Bank have recently held meetings with corporates across the country and found certain themes are being widely discussed. The lower Australian dollar is clearly supporting non-resource exports while importers are struggling to pass on costs.

Discussions with the agricultural sector were uniformly positive, supported by the lower Australian dollar and higher prices. Offshore demand appears mixed, with grain traders reporting strong demand but meat and dairy facing difficulties with contract enforcement.

There was a clear divergence in views between the mining states and the industrial states. The analysts found conditions in Victoria positive while South Australia was more sombre. The property market remains patchy across the states. Feedback suggests activity continues to be concentrated in the major capitals while the regions remain lacklustre.

Concerns were raised about the implications of a slowing of growth in China on foreign investor demand for new housing. A view also emerged among Victorians that property market conditions were more sustainable than in Sydney.

The implications for gas prices from the burgeoning LNG export industry was also a key point of conjecture. A combination of international pricing, demand from projects and high development costs are expected to push domestic gas prices substantially higher.

Tourism

While the mining industry investment boom is ending, Australia’s tourism industry is benefitting from a lower currency. Trends in the data show arrivals have lifted and the monthly tourism trade balance is in positive territory. The national accounts signal that as the Australian dollar has headed lower, spending on hotels, restaurants and cafes has lifted considerably, particularly in Queensland.

Commonwealth Bank analysts welcome the decline in the Australian currency for those sectors with a high export propensity such as tourism and expect the trend to continue. Tourists from Asia and China in particular are the major growth area. In 2014/15 the number of short-term arrivals from China rose to 935,000 from 770,000 the prior year. This is also partly a result of rising income in China and some softening of travel controls.

The impact of the lower currency is expected to be most notable for inbound tourists from the UK and US. The analysts note those states which benefit the most are those with the highest tourism specialisation which includes Queensland’s Barrier Reef and Sydney in NSW. Other areas such as Canberra and the Northern Territory’s Kakadu and Uluru are also important.

TV

The Australian Football League has negotiated a 6-year rights package from 2017 to 2022 across free-to-air TV, payTV and digital streaming, doubling the value of the current deal to $2.51bn. The bidding process appears to be uncontested, highlighting to Citi analysts the plight of TV broadcasters forced into negative value deals to protect the viability of their companies.

Seven West Media ((SWM)) has a deal worth $950m, while Foxtel’s deal is reportedly worth $1.25bn. Based on the revised deal as reported by industry press, Citi estimates the potential earnings downside for Seven West of 10-16% in FY17 and 20-25% in FY18.

Clothing

ASX-listed clothing retailers have reported mixed trading in the 2015 winter season. Sales appear to have been good, helped by colder than usual weather, and Citi analysts believe Premier Investments ((PMV)) brands such as Just Jeans and Jay Jays have traded well, helped by good denim sales.

Looking ahead to summer, the analysts are less impressed with the offering. and do not expect shoppers will be inspired to update their wardrobes.

Citi upgrades current earnings forecasts for Premier Investments, Pacific Brands ((PBG)) – the stock upgraded to Buy from Neutral as well – and OrotonGroup ((ORL)), downgrading forecasts for Specialty Fashion ((SFH)).

Chinese Steel

Chinese steel exports are up 26% so far this year, despite a 10% export rebate being removed in January. ANZ analysts observe China’s steel exports will total 14% of domestic production this year.

The wave of cheaper exports has triggered a rise in anti-dumping duties with European steel producers leading the way and the US now considering similar initiatives. The analysts believe the short term implications for raw materials such as coking coal and iron ore are negative, either dragging steel prices lower or lowering overall demand.

The overcapacity of steel making in China is expected to weigh heavily with a slowdown in consumption triggering heavy price discounting. The analyst predict China’s steel demand will fall for the second year in a row in 2015, after 35 years of consistent growth.

A-REITs

In the year to date, Australian Real Estate Investment Trusts (A-REITs) have delivered a 10.6% total return versus 1.2% in the US and the global sector’s negative return of 0.5%, Credit Suisse observes. Of note, the Australian dollar has depreciated by 9.8% against the US dollar, 10.2% against the British pound and 2.3% against the euro.

Credit Suisse expects sector earnings growth to remain stable at 4.6% over FY15-17 with a shift in composition. The broker envisages Westfield Corp ((WFD)) will deliver the most acceleration in FY16 earnings, to 4.0%, while Dexus Property Group ((DXS)) and GPT Group ((GPT)) should decelerate to 4.5% and 3.3% respectively.
 

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