Weekly Broker Wrap: Carbon Tax; Banks; Gaming Gambles

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– Which stocks benefit from no carbon tax?
– Merrills sour on Oz economy and bad debts
– Fixed odds threaten tote operators
– Barangaroo battle tough for Echo
 

By Greg Peel

The Coalition has promised to repeal the carbon tax and it is assumed the Coalition will form the new government post the September election. Depending on the upper house result, the tax could be repealed quickly or may need to wait for a double-dissolution election in mid-2015, Citi surmises.

By all accounts, the introduction of the carbon tax has had little impact on the Australian economy to date, and the Coalition will have an even greater task in reining in the budget deficit if the tax is repealed. But, a politician’s promise is a promise.

Stop laughing.

Were the tax to be repealed, various sectors and stocks on the Australian market would benefit on a discounted cash flow basis. Citi has made some calculations and provided some indicative estimates of DCF gains.

Among the miners, copper and gold stocks won’t see much joy but Alumina ((AWC)) could see an 8% gain and 3% gains await for BHP Billiton ((BHP)), Rio Tinto ((RIO)), Atlas Iron ((AGO)), Whitehaven Coal ((WHC)) and Iluka Resources ((ILU)). Greater gains are estimated for Gindalbie Metals ((GBG)) and Yancoal ((YAL)).

Beach Energy ((BPT)) would be a 5% winner among the energy stocks with Woodside Petroleum ((WPL)) and Santos ((STO)) looking at 2%. Downstream, Origin Energy ((ORG)) will see a neutral impact while AGL Energy ((AGK)) should benefit although Loy Yang will lose its compensation.

There will be minimal benefits for developers & contractors but building materials stocks Adelaide Brighton ((ABC)), Boral ((BLD)) and CSR ((CSR)) should see 1-4% gains. Transport stocks may be the big winners, not Asciano ((AIO)) and Aurizon ((AZJ)) but Qantas ((QAN)) should see a positive profit impact of 15% and Virgin Australia ((VAH)) 27%.

There will be little impact on REITs but retailers should enjoy the benefits of consumers with more money to spend, assuming no other taxes are introduced instead.

The carbon tax may not have impacted on the Australian economy but that is not to say the Australian economy is in rude health at present. The transition from mining-driven to non-mining-driven is offering up a lag despite easy policy from the RBA. The now weaker currency will provide benefits but in the meantime BA-Merrill Lynch is expecting GDP growth to slow to below 2% in 2015-16 and unemployment to peak at 6.75% in 2016.

Credit demand has remained subdued since the GFC but the level of bad debts has been steadily falling as the immediate impact of the GFC fades. The banks made large bad debt provisions as a precaution in 2009 and since then earnings have been supplemented by being able to return provisions incrementally to the bottom line. But Merrill’s suggests bad debts will again rise in a weaker economy and more so were the economy actually to fall into recession, to which Merrills ascribes a 25% chance.

The analysts remained negative on the banking sector early last week despite share price falls. ANZ Bank ((ANZ)) remains the broker’s top pick amongst the banks given its exposure outside Australia. Bank share prices have fallen quite a deal further since.

Australian consumers may still be holding back post-GFC but they are having no trouble throwing their money away instead, as the recent Waterhousegate controversy has highlighted. The rise of highly publicised internet-based betting at fixed odds is taking its toll on the traditional bastion of wagering on the tote. CIMB estimates fixed odd betting’s share of wagering revenue will reach 24% in FY13, up from 11% in FY10.

Alongside the familiar betting shop names now prevalent, highly sophisticated UK players have now entered the market. CIMB sees fixed odds as commanding 34% market share by FY16 and 43% by FY19. Fixed odd bookies operate on win margins of around 12% while tote margins average 18-19%. Not only will the totes be losing market share on the growth of fixed odds, their win margins will be under pressure as well.

CIBM has Underperform ratings on both Tabcorp ((TAH)) and Tatts ((TTS)).

At the higher end of town, beyond the Red Hots, Dish-Lickers and Footy, is the high roller casino planned for Barangaroo in Sydney. James Packer is lobbying hard for his Crown ((CWN)) to build a hotel and VIP casino on the site and is willing to commit $1bn.

Crown’s plans put rival Echo Entertainment ((EGP)) in a difficult position, notes Citi. As operator of the existing Star Casino across the water at Darling Harbour, Echo’s earnings would be threatened by the competition of a Crown operation nearby. To block Crown, Echo would need to counterbid which means also committing at least $1bn. And if Echo were to win the bid, and build another Sydney Casino, Citi estimates up to $52m of earnings lost in the first year due to cannibalisation.

Citi believes Echo has sufficient balance sheet capacity to complete its major development in Brisbane and in Sydney if it came to that, but despite strong cashflow and a relatively attractive valuation, Sydney uncertainty means Echo only attracts a Neutral rating from Citi. Crown’s Macau exposure underpins an Outperform rating.

In late news, Echo has approached the NSW government with two options, one involving Echo winning the bid and the other conceding high rollers only to Crown.

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