The Wrap: Wagering, Aged Care & Dept Stores

This story features TABCORP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: TAH

Wagering; life insurers; Sydney housing market; aged care; department stores; Pengana Capital; CCP Technology; Covata; US food deflation.

-Structural shift to digital wagering continues
-Local listed exposure to life insurance decreases significantly
-Reduction in Chinese capital flows affecting Sydney's housing market
-Changes to aged care funding will tighten distribution of payments
-Department stores may need to accelerate store closures to improve productivity
 

By Eva Brocklehurst

Wagering

UBS estimates that digital wagering turnover grew by 22% in FY17 and this represents a continuation of a structural shift, as retail turnover declined -6%. Sportsbet outperformed in the September quarter and achieved the highest online wagering turnover in the second half of FY17, outranking Tabcorp ((TAH)) for the first time.

?>,m  Ladbrokes and Crown Resorts' ((CWN)) CrownBet, with 9% market share each, continue to perform strongly, with both increasing their app download share. In contrast, UBET and William Hill lost download share in the September quarter.

Life Insurers

Credit Suisse observes the life insurance market has hit a level of saturation, with growth difficult to achieve. Four of the top five players are now under foreign ownership and potentially more of the tail will change hands over the next 12 months.

The broker envisages ongoing uncertainty and downside risk to profits in the life sector in the near-term but also notes, with Commonwealth Bank ((CBA)) and National Australia Bank ((NAB)) exiting life insurance and AMP ((AMP )) and Suncorp ((SUN)) implementing quota share reinsurance structures, the exposure of local listed operators to life insurance has decreased significantly in recent years.

Sydney Housing Market

Auction clearance rates in Sydney have fallen towards 60% and transactions and house prices have also started to fall. Credit Suisse observes policymakers view the current trend through the lens of a macro prudential tightening and, although lending caps may only be starting to affect investors, believes the real issue is a reduction in Chinese capital flows.

While there is a distinct absence of timely and accurate information about Chinese flows into Australia, the broker finds that stricter enforcement of capital controls has suppressed Chinese resident outflows over the past year and this foreshadows weakness in local housing demand over the next year. The downside risk from a slowdown in Chinese spending is material and Credit Suisse expects this to affect house prices and retail spending.

Aged Care

On balance, Macquarie ascertains uncertainty has been reduced following the release of three reviews evaluating the regulatory framework, funding structure and quality assurance processes of the aged care sector. The main concern the broker has is regarding funding.

While the proposed changes to the aged care funding instrument are designed to be neutral for the average operator, the changes will tighten the distribution of payments and that could lead to a reduction in payments to listed operators.

Changes to quality regulations may take a number of years to fully implement yet, once implemented, Macquarie suspects the quality of care will be more important for occupancy levels.

The third review, of the Living Longer, Living Better legislation, the main positive outcome was a recommendation to relax restrictions on daily care fees for non-concessional residents and increase the maximum accommodation price allowable without approval.

Department And Discount Department Stores

Macquarie finds it hard to be positive about Australian department stores. Expenditure at department stores, as a proportion of total retail expenditure, has eroded over the last three decades. As an indicator, retailers in the US have responded to the growth of e-commerce groups by shrinking their footprint through closing down stores and reducing space.

Meanwhile, the broker observes retail space and store count in Australia has crept higher since 2009 while productivity, on average, has trended lower. Industry sales per store a -6% below peaks, with only Kmart ((WES)) gaining productivity. Big W ((WOW)), at the other end, remains the overall underperformer of the sector and Macquarie expects a decline in top line growth to continue as deflation persists, and product mix fails to keep up with consumer demand.

The broker believes industry has to accelerate the pace of store closures in order to arrest the decline and restore profitability. Long leases, however, mean this will take years to play out. The broker notes that Wesfarmers has much shorter leases factoring in exposure to Target Country and Officeworks and is more actively managing its lease role versus Woolworths.

Myer ((MYR)) has a strategy to improve sales productivity by 20% as it continues to shrink its footprint. Macquarie observes a major impediment is a timely review of lease commitments, noting Myer has handed back 118,000 square metres of its footprint through either closing or downsizing since it announced the Myer One strategy in 2015.

The broker's analysis of the sector's extensive lease liabilities indicates that the cost of closure is greater than the cost of riding it out and hoping for small losses or breaking even in the future. Most leases have a sub-letting, assignment and sale of business clause which makes a change of control or operator a very difficult proposition without the consent of landlords. Tenants also don't want to open the door to competitive peers.

Pengana Capital

In June, Pengana merged with Hunter Hall to form Pengana Capital ((PCG)). Moelis believes the merged business offers a unique listed exposure to boutique retail funds management. The business generates premium management and performance fees because of the nature of its active, benchmark-unaware funds being sold via retail distribution.

The broker initiates coverage with a Buy rating and $3.45 target and expects the business to be able to grow funds under management with sector-leading accretion.

CCP Technologies

CCP Technologies ((CT1)) is commercialising proprietary remote monitoring technology to manage critical control points in customer venues, such as supermarkets, hospitals and petrol stations. The food and food services industry in the US and Australia is its first vertical, where the technology is being rolled out to monitor cool room, freezer and refrigerator temperatures.

Customers use CCP's product to lower food wastage, monitor costs and avoid health hazards. The platform provides a foundation for a range of applications which the company may decide to leverage in the future. TMT Analytics initiates coverage with a Buy rating and 4.6 cents target.

Covata

Covata ((CVT)) has completed a data security platform called CovataSecure which aims to provide a cybersecurity purity strategy in one platform, including data discovery, encryption, access management and privacy compliance. TMT Analytics believes the main problem with data security is that organisations still source disparate software tools from varying suppliers in an attempt to achieve all-encompassing data security.

Covata's target market is expected to grow by 11% and be worth US$232bn by 2022. The US government is expected to be remain a large spender on cybersecurity and this puts the company's US branch in a sweet spot, the broker suggests. Coverage is initiated with a Speculative Buy rating.

Food Deflation

Following the longest stretch of uninterrupted food deflation in the US since 1954, the numbers appear set to turn. Citi notes the CPI Food at Home index declined for 19 consecutive months but has experienced modest inflation over the past three months. As a result, the broker believes, with deflation turning to inflation, this creates opportunities in 2018 for US food manufacturers.

Expanding margins remains the key driver of an improving earnings outlook. With packaged food multiples already down significantly in 2017, the broker considers the bar is set low for a number of businesses and this re-emergence of inflation may serve as a positive catalyst. Retailers are also expected to begin passing through some of the cost inflation to their customers.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms