Weekly Broker Wrap: Winter Gas, A-REITs, Telcos And Advertising

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

-Modest impact on gas retailers
-Stockland favoured by UBS versus GPT
-Optus needs to get more aggressive
-Politics dominates ad spending
 

By Eva Brocklehurst

It's been a mild winter so far in the eastern states, especially for July. Sydney recorded 20% less "heating degree days" and Brisbane 40% less, relative to the average over the past decade. Historically, gas consumption has correlated with the number of heating degree days throughout winter, more so than electricity. This is particularly evident in Victoria where a larger share of the population has access to piped gas for heating. Goldman Sachs suspects fewer days may weigh against earnings for gas distributors and retailers and this may reduce margins in late FY13 and early FY14.

For Sydney, Brisbane and Adelaide the winter to date has been the warmest since 2005. Heating degree days is defined as the cumulative difference between the average daily temperature and a comfort level, which the Bureau of Meteorology defines as 18 degrees Celsius. For example, if the average temperature is 15 degrees, that day will contribute three heating degree days to the total. The impact on the energy retailers and distributors may be there but it is expected to be minor. Goldman Sachs highlights volume risks for AGL Energy ((AGK)) Origin Energy ((ORG)) and Envestra ((ENV)) in the approach to the FY13 results. First half risks are there for AGL, Origin, Envestra and SP AusNet ((SPN)). FY13-14 earnings estimates have been revised down slightly. AGL is down 0-1%, Origin is negligible, Envestra down 0-2% and SP AusNet down 0-3%.

UBS has compared GPT ((GPT)) and Stockland's ((SGP)) results and performance with consideration as to the drivers of shopping centre portfolio growth, office expiry profiles and the impact of capitalised interest and debt costs on FY14. Non-discretionary anchored shopping centres continue to outperform discretionary anchored shopping centres and tenant churn is increasing across both companies' portfolios. GPT has a higher quality office portfolio but faces higher near-term income headwinds because of the impending vacancy at MLC. Office vacancy will increase to 12% on expiration of MLC with a further 11% in FY14. This compares to Stockland with 7% current vacancy and 8% expiring in FY14.

Capitalised interest represents a drag to Stockland earnings into FY14, given the annualised impact of residential projects written down. UBS estimates this is a 1.5-2.0% headwind in FY14. GPT, on the other hand, may benefit from a capitalised interest tailwind on the basis that the Erskine Park land base is activated and the company proceeds with three industrial pre-commitments. The remaining issue, debt costs, is seen as a drag for Stockland, given they increase to 7.1% because of legacy positions and no hedge break costs. GPT spend $330m in breaking hedges over the past three yeas and this has resulted in cost of debt at 5.2% in June 2013. All up, the broker prefers Stockland and rates it a Buy over GPT which it rates Neutral.

The Optus result in Singapore Telecom's ((SGT)) first quarter release confirms for JP Morgan that Telstra ((TLS)) continues to outperform its peers. Optus appears to have a strategy of not fighting too hard. Eventually, Optus may have to become more aggressive. Optus lost 59,000 subscribers in June quarter with pre-paid bearing the brunt. In fixed broadband 9,000 were lost in the June half and Telstra gained market share. Cost reduction was the highlight for Optus in June, as earnings margins rose to 27.0% from 24.4% a year ago, despite a 5.4% revenue fall. One reason given for this was low-margin revenue losses but cost control also played a part.

To JP Morgan this is reminiscent of Telstra in 2010, still growing earnings while losing share. A strategy of losing revenue while taking out costs can hit a point where the trade-off turns negative. Optus may have had only moderate losses so far but this owes a lot to Vodafone's ((HTA)) troubles and the broker thinks Optus may be more vulnerable to a Vodafone revival than Telstra. JP Morgan thinks the recent decision to take a revenue hit by replacing excess use charges with a plan step up may be evidence the trade off is losing importance at Optus. The upshot is that Telstra may not enjoy such a benign competitive environment for long.

JP Morgan and Credit Suisse have taken a look at advertising data for July. An increase in the month of 5.9% was driven by government and political advertising, but this is one-off and masks weaker underlying trends. JP Morgan's feedback suggest that the FY14 advertising outlook is quite uncertain and this may herald downgrades in earnings expectations. TV reigns. Metro TV ad bookings increased 7.9%, following June's 4.7% increase and total TV revenue grew by 9.2%. Excluding government, TV revenue still increased 3.6%. Newspaper and magazine advertising spending continues to decline while digital is increasing. JP Morgan remains Overweight on Seven West ((SWM)) and Prime Media ((PRT)) and Underweight on Fairfax ((FXJ)) and SEEK ((SEK)).

Credit Suisse forecasts total ad market growth of 3% for 2013, with growth to pick up in the second half of the year. July’s result marked an acceleration from the modest growth seen in June and follows a soft start to the year. The broker expects stronger growth in the second half of the year as weaker comparatives are cycled. While some advertisers may stay on the sidelines during the weeks preceding September's election, with political ad spending crowding out other categories, Credit Suisse expects a pick up after the election to compensate.

TV ad spend grew 9.2% year to date in June, benefiting from the political advertising as well as a surplus of premium sport. This growth was strong across both broadcast and subscription TV and should be the main driver of a recovery in advertising spending, in Credit Suisse's view. Agency revenue from print is a comparatively small proportion as local and classified advertising is not booked through them but the data provides a representation of trend. It's a predictable outlook. Newspaper ad spending declined 14.3% in 2012 and momentum has deteriorated further in 2013. Newspaper bookings were down 14% in July and magazines down 28%. Credit Suisse currently forecasts a 10% decline in newspaper display advertising for 2013, suggesting further downside to newspaper advertising forecasts. Meanwhile, digital ad spending continues to take up the slack, up 17.8% in July.
 

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