Weekly Broker Wrap: AGMs, Investment, Advertising, Electricity And Telcos

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-Some likely AGM surprises 
-Bullish investor sentiment rises
-Online beats print advertising
-Electricity competition ebbs
-Telstra grows market share
 

By Eva Brocklehurst

It's that time of year again. Companies are fronting shareholders for the annual reporting of their hits and misses. Hopefully, missing most of the missiles that shareholders are likely to throw around. Macquarie has taken a look at where the surprises may spring from this year.

Starting with residential A-REITs, don't expect upgrades is Macquarie's advice. Despite "amazing" house prices being reportedly achieved at auction, guidance is likely to be merely reiterated. Macquarie singles out Stockland ((SGP)) and Mirvac ((MGR)) as doing well. A large portion of FY14 residential sales revenue was already bedded down back in June through pre-sales. Moreover, up to one fifth of any improved volumes will be the sale of impaired inventory and this does not contribute to operating profit. Macquarie reminds investors that residential earnings are but a small proportion of these businesses and the majority involves rent collection.

On the industrial front, the broker highlights the potential for an upgrade for Ansell ((ANN)). Existing guidance of 10% earnings growth in FY14 is considered conservative, given how the second half of FY13 panned out. Recent strong industrial activity could provide a tail wind and, even if management steers clear of specific figures, generally positive commentary would be well received by the market. Toll Holdings ((TOL)) is not expected to provide an indication of earnings growth and this will underscore Macquarie's suspicions that business conditions have not improved. Meanwhile, news about the Maule's Creek mine approval should be a positive for Whitehaven ((WHC)) by the time the AGM is held on November 4.

Another focus for AGMs is the two strike rule on executive remuneration. Macquarie notes 10 companies are on watch for a second strike, after incurring the first in 2012. A second consecutive strike – when more than 25% of shareholders vote against adopting the remuneration report – triggers a spill motion on the board. The companies in line for a second strike are Lend Lease ((LLC)), Fairfax Media ((FXJ)), Kingsgate Consolidated ((KCN)), Cabcharge ((CAB)), Peet ((PPC)), Austal ((ASB)), Macmahon Holdings ((MAH)), Redflex ((RDF)) Rialto Energy ((RIA)) and Cochlear ((COH)).

Macquarie is wary of Cochlear. Cochlear doesn't usually give guidance but there is a possibility for some negative commentary and downgrades to market expectations because of weak underlying trends. Cochlear is also one of the companies that Goldman Sachs has removed from its global SUSTAIN Focus list. Stock selection for the list is driven by returns on capital, momentum, strength of  the industry position and the level of management engagement. Cochlear was removed from the global list as competition intensified and, relative to global medical technology peers, returns declined alongside market share. Goldman continues to believe Cochlear as a well positioned company in an attractive industry, with a market leading position in a segment with high barriers to entry. As it is one of the highest returning companies within the broker's Australian coverage the stock is still on the regional SUSTAIN Focus list.

[Note: Cochlear is the most shorted stock on the ASX at present – Ed]

Russell Investments'  Investment Manager Outlook survey shows bullish sentiment is rising for both international and Australian shares, with managers preferring international shares (71%) over Australian shares (65%). It means there's greater confidence in the global recovery. Russell remains cautiously optimistic on the domestic share market in the near term. The survey also reveals the exporting sector of the market to be a major beneficiary of Australian dollar depreciation over the past six months. A total of 81% of managers believe the currency will settle between US81c and US90c in the next 12 months. Managers expect declining commodity prices, economic growth and diverging interest rate movements will drive the Australian dollar going forward.

The managers' preference continues to be cyclical assets on a sector level, with the biggest shifts in bullish sentiment seen in energy, moving up to 77% from 42% in the last survey, and materials, up to 58% from 39%. The energy sector has benefited from recent oil price gains. Bearishness prevails for A-REITs, domestic bonds, cash and the Australian dollar. Share markets hold the best investment opportunities both domestically and overseas, according to the participants.

Online classifieds have overtaken Australian print advertising in terms of spending for the first time, growing 10% in FY13 while print declined 23%. Online now represents 50% of total classified advertising revenue. JP Morgan estimates that the online classifieds market was around $705m in FY13 versus $702m for print. News Corp ((NWS)) and Fairfax are most exposed to the material decline in print classifieds. Newspapers are spearheading the decline. Since FY08 the loss, or migration, in print classifieds has primarily occurred at the metro (-15%) and suburban (-28%) levels. Real estate is the largest migration opportunity and here REA Group ((REA)) and Fairfax's Domain online will best benefit. The broker is more comfortable about REA's depth price increases and favours this stock (Neutral) above Fairfax (Underweight).

What is apparent to JP Morgan is the deflationary impact from the migration of advertising dollars online, particularly in regard to employment. Despite the strong growth in online advertising, total classified expenditure has declined by around a compound 8% over the past five years. Given the migration of job classifieds, government policy changes on job advertising and weak employment conditions JP Morgan estimates the print employment classifieds market has fallen below $100m for the first time.

Churn eased substantially in the electricity retail market in September, with 20,000 fewer accounts switching suppliers compared with August. At 19.9% the churn rate is below 20% for the first time since February 2012. Underpinning the ebbing in churn is the cessation of door-knocking by the large players, as well as diminished activity in the second tier of the market. Despite the fall, the local market's churn rates remain well above other comparable markets overseas and other industries such as telcos and insurance. The sharpest contraction was registered in NSW, as churn dropped to 15.5%, a 20-month low. Victoria is still the national market's most competitive region, with churn around 700 basis points higher. JP Morgan thinks a number of factors are coming into play which should bring some relief to the electricity retail market. It may be too early to call a sustained decline in churn but there is sufficient evidence that the competitive intensity is easing.

The Australian telco sector revenue went backwards in FY13 (-1.3%). This is the first time a decline has been witnessed since FY06, according to JP Morgan's estimates. Mobile was the cause (-2.5%) and not fixed products (0.1%). There were mitigating circumstances behind the drop in mobile spending but the broker observes growth in subscriptions has become more skewed to lower-revenue categories such as wireless broadband. This could mark an inflection point for mobile revenue growth. With handset and wireless broadband subscriber growth maturing, revenue upside from here will depend on price, and to some extent on subscribers which do not use too much scarce capacity.

Telstra ((TLS)) remains well placed and grew its share of spending in FY13 for the second year running. To JP Morgan this is a signal of the company's ability to extract value from the consumer appetite for network quality. The question is whether the others can do the same in such a way that grows revenue. Telstra also benefited from the rebound in fixed broadband revenue and increased its share in the product. JP Morgan retains a Neutral rating on Telstra on the grounds that not much more can go right, even if there is no sign of much going wrong.

In the case of Optus ((SGT)) the company has been prioritising margin over share but the broker suspects that, if it loses too much revenue, then the trade-off will simply not work. TPG Telecom ((TPM)) had another good year for share growth and this underlines how well the business is run. Nevertheless, in JP Morgan's view, the current valuation understates the threat to margins from the NBN. iiNet ((IIN)) faces a similar challenge from the NBN but here the operating momentum is weaker with the broker noting a slippage in subscriber share.
 

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