The Wrap: Secular Stagnation, REITs, Online Wagering & Gas Supplies

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Weekly Broker Wrap: Worrying macroeconomic data; REITs versus infrastructure stocks; online wagering; and potential gas supply shortage.

-Weak consumer sentiment may signal a return to secular stagnation
-After recent infrastructure takeovers, the focus turns to real estate companies 
-Horse race wagering to benefit from online adoption 
-Potential shortfalls in East Coast gas supply?

By Mark Woodruff

Worrying Macroeconomic Data

The lack of a stronger manufacturing recovery and less optimistic consumer sentiment might be a sign that we will soon be back to the secular stagnation world of the pre-pandemic.

Such a prospect was drawn from recent macroeconomic data reviewed by Oxford Economics.

At this stage manufacturing has remained buoyant globally throughout the northern summer. Although manufacturing purchasing managers are reporting lower optimism since late spring, the current survey results are still reasonably optimistic.

Global trade is also performing strongly as bottlenecks in shipping capacity and the consequent persistent rise in shipping costs don’t seem to be hampering volumes. Indeed, China’s exports have far surpassed pre-pandemic levels, and most advanced economies (with the exception of the UK) have also at least reached the levels of exports seen just prior to the pandemic.

However, a shortage of labour is currently being cited as the biggest problem facing businesses. Both labour and goods shortages are a consequence of pandemic-related disruption to the movement of people and goods. Some believe that as the effects of the pandemic subside, these problems should recede.

An international comparison by Oxford Economics of average wage data shows a trend of rising hourly wages across advanced economies this year and last. Some of this might be due to a temporary misalignment of demand and supply in the labour market, which would explain a rise in vacancies and reports of businesses’ inability to fill them. However, the less optimistic global consumer sentiment is suggesting rising wages may be misleading.

This has led Oxford Economics to coin the term secular stagnation-light to describe the former low-growth normal. Unfortunately, it’s thought this scenario may reappear after temporary misalignments (and consequent price rises) recede. 

REITs versus infrastructure stocks

After a series of recent takeover offers for listed Australian infrastructure companies, Morgan Stanley analysts have undertaken a comparison of takeover multiples to where real estate investment trusts (REIT) are trading. This is considered appropriate as both sectors contain bond-proxy-type stocks.

The purpose of the comparison was not to speculate on the potential corporate appeal of REITs, but rather as to guide towards establishing a valuation benchmark. The exercise is aided by the similarities between real estate and infrastructure, which include traditionally stable income, large up-front costs followed by long-dated cash flows and utilisation of debt.

However, the comparison is also hampered by differences peculiar to the infrastructure stocks studied, namely Sydney Airport ((SYD)), AusNet Services ((AST)) and Spark Infrastructure Group ((SKI)). For example, the latter has only minority stakes in assets and one has to allow for price regulation in energy infrastructure.

Nonetheless, the broker concludes that listed passive REITs are trading in-line with the infrastructure takeover offers though on a price-to-cash earnings basis, the REITs are around -10% below the infrastructure offer price.

Vicinity Centres ((VCX)), Scentre Group ((SCG)) and Stockland ((SGP)) are the only three passive REITs under Morgan Stanley's coverage that have relevant multiples trading below the average of the respective infrastructure takeover multiples. Of the three, only Stockland is rated Overweight by the broker.

As infrastructure stocks are de-listed, the universe of listed bond proxy-type stocks will shrink, meaning real estate companies could well become more in focus, point out the analysts.

Online horse race wagering

Despite decades of headwinds, horse race wagering is expected to benefit from online adoption.

While there is no true pure-play, publicly-traded horse racing company on world markets, online sports betting and race wagering have been around in Europe and Australia for decades.

While recent Macquarie research largely relates to the US, there is some relevance for ASX-listed companies. This includes the Wagering and Media segment of Tabcorp Holdings ((TAH)), the corporate bookmaker operations of PointsBet Holdings ((PBH)) and the data and analytics business of Betmakers Technology Group ((BET)).

Online race wagering actually grew around 50% in the US during 2020 despite the number of races declining by -23%. However, growth had increased in recent years, even before the covid-induced jump.

Now that restrictions are easing across the US, online demand continues to be at or above mid-2020 levels. The industry also experienced user growth during covid from both younger customers and an older wealthier customer.

Overall, online has helped offset in-person wagering and the broker expects this trend to continue. In addition, high barriers-to-entry makes horse racing an attractive segment for those with exposure to the industry.

Macquarie believes many under-appreciate the value of the pari-mutuel wagering model, a staple in the industry. In short, this means customers wager against each other with dynamic payouts determined at race time, while operators earn a low-risk, fixed percentage from the wagering pool.

The recent signing of a bill in New Jersey makes the state the first to establish regulations for fixed odds betting. This may be strongly resisted. US horse racing officials have been reluctant to move toward fixed odds, given the uncertainty that comes with this form of wagering when compared to the pari-mutuel wagering model.

Management of the Monmouth Park racetrack in New Jersey is working with BetMakers Technology Group to supply fixed odds at the track following the new law. The company has seen what an impact this style of wagering can have on a market. Australia moved to fixed odds over a decade ago, and the BetMakers CEO has seen “prize money levels double over the past 7-10 years.”

Upon initiation of research coverage for Pointsbet Holdings in early 2020, Ord Minnett noted the experience garnered from Australian operations would be a huge advantage for its operations in the US/New Jersey. For many years sports betting and horse race wagering in Australia grew in parallel. The CEO of Pointsbet Holdings Sam Swannell believes this is due in part to the introduction of fixed odds wagering, points out Macquarie.

Potential gas supply shortage

During August, the ACCC warned that potential shortfalls in East Coast gas supply could occur as early as 2022.

This comes as gas prices declined to more sustainable levels, according to JP Morgan, from their record highs during July. The regulatory body also noted that commercial and industrial users are “struggling to obtain offers for supply beyond 2022” and “where supply is offered, prices are often at $9-$10/GJ”.

The broker continues to believe Queensland CSG requires $8-$10/GJ to make an appropriate economic return on field development.

While the average spot price of $8.42/GJ during August represented a -47% decline, the price was materially higher than for the same period last year.

Based on LNG contract prices JP Morgan estimates the average LNG netback price during August was $9.91/GJ. Assuming availability of import terminals, it’s estimated that it would cost $13.47/GJ to import spot LNG from the US, representing a premium of 60% to the average domestic price. It would cost $23.66/GJ to import spot LNG from Asia, implying a 181% premium to domestic prices.

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