Tabcorp Good, REITs Bad, Economy Good Especially For Media

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

By Greg Peel

BA-Merrill Lynch's Australia Focus One portfolio is similar to GSJB Were's Conviction List in that it specifically selects “best buy” recommendations from among those stocks already rated Buy by the Merrills analysts. Today Merrills has added wagering company Tabcorp Holdings ((TAH)) to that list.

The broker believes Tabcorp is offering compelling value. The analysts' sum-of-the-parts valuation puts the stock at $8.00 compared with its current price of around $7.00, and another dollar of value is up for grabs, they suggest, if the company is successful in delivering on the wagering turnaround story and can achieve the targeted 13% return on Project STAR.

What's more, TAH is offering an 8% fully-franked yield which the analysts suggest can be maintained after the 2012 Victorian licence expiry.

If Tabcorp loses the Victorian licence in 2012, Merrills sees 60c worth of downside but at least that issue, which seems to have been hanging over the market since Phar Lap won the Cup, will have been resolved. There is also 40c of downside surrounding a settlement with Racing NSW over something to do with Tabcorp publishing race fields when it shouldn't.

But either of those factors could go the other way, and Merrills likes a bet.

GSJB Weres recently travelled to Asia to see if it could get anyone interested in having a bet on Australian real estate investment trusts (A-REIT) but found only rampant disinterest.

The A-REITs have been underperforming their global counterparts of late, “quite meaningfully”, the analysts note. But given investors require decent yields to draw money away from stocks and into property trusts, the A-REITs' lack of enticing distribution means no one wants to play.

To that end Weres has reduced its expected June 30 level for the A-REIT index (XJP) from 925 to 908 which would imply little capital upside from January 1. The analysts have moved the 925 target out to December 31.

But Weres doesn't mind having a bet and has been seeking REITs with sustainable earnings per share growth and an attractive price on a comparison with net tangible asset valuation. To that end it likes Goodman Group ((GMG)) and Stockland ((SGP)) along with Charter Hall Office ((CQO)) and Charter Hall Retail ((CQR)).

Weres doesn't like Westfield ((WDC)), Dexus ((DXS)) or GPT Group ((GPT)).

Citi likes the Australian economy in general, suggesting the analysts' own leading indicators are pointing to more upside to the recovery.

Among the positive “leads” are financial conditions in Australia (and in the US), the upward sloping yield curve, high levels of business and consumer confidence, encouraging plans amongst businesses for hiring and capital expenditure, strong commodity prices and strong Chinese industrial production.

The analysts are keeping an eye on Australian house prices, given the indicators are suggesting a “much needed” moderation but there's simply no sign of one just yet. Consumer lead indicators are overstating the strength of spending, they say, and signals are for moderate interest rate rises but mixed on the Aussie dollar.

Watch out for inflation pressure, suggests Citi, and note that upward momentum in both consumer sentiment and stock prices has likely peaked, meaning prices are not going to continue running as hard as they have.

But it's a different story in the advertising market, Citi finds, where everything is going gangbusters. Ad agencies have been raising their growth forecasts and Citi is now expecting market growth of 7.2% in 2010 and 6.4% in 2011. If there is one thing ad agencies like more than the recovery from a recession, it's an election year.

The bulk of the ad-spend is going into television with on-line continuing to benefit from the secular shift in ad placement. Radio has seen some renewed optimism but newspapers will lag, says Citi.

As a result, Citi remains positive on Fairfax ((FXJ)) and News Corp ((NWS)) while expecting Seek ((SEK)) to benefit from both increasing ad-spend and the shift to on-line.

The market has big expectations for the Ten Network ((TEN)) and West Australian Newspapers ((WAN)) but the broker believes the good news is already priced in. APN News & Media ((APN)) looks cheap but will lag in the ad recovery.

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