Weekly Broker Wrap: Will The Builders Come To Save The Day?

This story features BORAL LIMITED, and other companies. For more info SHARE ANALYSIS: BLD

By Andrew Nelson

With resources companies no longer supplying Australia the same levels of GDP contribution they have been over the past few years, market watchers have become increasingly concerned about what might fill the gap. There’s been a lot of hope hung ‘round the necks of building supply companies, with a cyclical upturn now being prayed for in both the US and Australia.

If you’re a subscriber to the Building And Construction Can Replace The Miners For A While Theory, then analysts at Goldman Sachs have a bit of good news for you. That’s unless you’re one of those hoping for help from the resource sector Construction Industry, in which case there’s really not that much good news. But in terms of residential and commercial markets, Bob may soon be all of our uncles once more, with builders building, building supply companies supplying and maybe soon even resources company will be providing resources for materials companies to turn into more materials. And so it goes….

As I was saying, Goldman Sachs have done a bit of a whip ‘round of the US housing market. While it may be only a piece of Construction Can Replace The Miners For A While pie, it’s one of the biggest pieces as far as international materials companies are concerned. So good news from there is pretty much good news for all.

Last week, the US Census bureau published its US housing starts numbers for October, with total monthly starts 3.6% higher than September and up 41.9% on last October. More importantly this is the highest reading since July 2008, the month before we all learned what GFC meant. Here’s the hitch, much of the upside came from an 11.9% monthly increase in multi-dwelling starts. Single-family housing starts, which the broker finds a more reliable housing activity indicator was pretty much unchanged on the prior month, although still up 35.3% on last October.

US building permits for October were also strong, with the read up 29.8% on this time last year, with single-family housing permits up 2.2% on last month and 26.6% over the last 12-months. Data from the US National Association of Home Builders is even more promising, with the index posting a five point increase to 46. The broker notes this is the seventh consecutive monthly gain and is now at its highest level since May 2006. According to the NAHB, “builders are reporting increasing demand for new homes as inventories of foreclosed and distressed properties being to shrink”.

Says Goldman Sachs, “This data continues to suggest a recovery in the US housing market.”

To give you an idea about a read-through for Australian investors, Goldman’s points out that a 5% change in US housing starts has a 3.3% and 3.0% impact on its forecast FY13 earnings for Boral ((BLD)) and James Hardie ((JHX)), respectively.

Meanwhile, analysts at Deutsche Bank have some good news about the domestic insurers, noting they have been enjoying an extended period of reserve releases on the back of both tort and CTP reforms. While the broker admits an eventual normalisation of releases is inevitable, currently conservative reserving practices and low superimposed inflation in key long-tail classes indicate releases should actually exceed guidance in FY13.

However, Deutsche warns investors to not get too carried away, noting that when combined with the potential for below budget catastrophe outcomes and investment gains from equities and credit spreads, management may look to boost capital strength via higher risk margins, rather than giving the profit back to investors. Either way, support from reserves adds to the broker’s view of attractive upside risk to consensus margin expectations for Insurance Australia Group ((IAG)) and Suncorp ((SUN)). QBE Insurance ((QBE)) comes in a distant third, given a more stretched balance sheet, more limited pricing power and less of a benefit from both conservative catastrophe budgets and reserves.

Switching to the banks, Deutsche notes the US Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency, citing industry calls to delay the implementation deadline, announced they do not expect any of the US Basel III proposals to become effective on the global implementation deadline of 1 January 2013. Further, the US agencies want a new and more considered deadline, although there was no schedule laid out for any new draft proposals. European lawmakers have also jumped on the bandwagon, saying they doubt anyone will meet January deadline, noting the same concerns as the US and the fact there seems to be no consensus on some of the major issues.

Analysts at CIMB believe Australian banks will take a conservative approach to capital given the volatility now inherent within Basel III requirements. While the broker is comfortable about the amount of provisioning being taken on, it sees limited opportunity for capital management in FY13. The year after, once positions are constructed and paid for, capital management should begin once again begin in earnest. Fingers crossed.

Analysts at Goldman Sachs also touched on the domestic telco industry last week, providing insight on how we’re going on getting a viable third operator to compete with the seeming duopoly being built by Telstra ((TLS)) and Optus ((SGT)). Anyone following this sector can likely tell you all about the beating that has been taken by Hutchison Telecommunications ((HTA)) in its bid to try and keep up with the bigger boys. And there’s still a long way to go, notes the broker.

What Goldmans believes needs to happen is parents Vodafone and Hutchison Whampoa will have to invest some serious capital to fund the company’s much touted multi-year turnaround strategy and to arrest the ensuing free cash burn. There are three steps the broker sees: $2bn in network investments, fixing the cost base, and then investing in customer acquisition. A far from impossible task, but it will take several years.

In the meantime, predicts Goldman, Telstra will continue to take advantage in the near term given its strong competitive positioning. The broker has even been kind enough to spell out the upside, seeing respective 1.1%, 2.1% and 2.2% increases to FY13-15 EPS forecasts and a higher price target. Longer term, however, the broker believes there will be an ever increasing risk of some stiff, price based competition, especially given the presence of a subscale Vodaphone (Hutchison).
 

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