Weekly Broker Wrap: Banks, Newspapers, Building And Cost Cutting

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This story features NEWS CORPORATION, and other companies.
For more info SHARE ANALYSIS: NWS
The company is included in ASX200, ASX300 and ALL-ORDS

-Oz householder wealth highly concentrated
-Newspaper circulations still declining
-Building upturn needs labour
-Cost cutting can continue
 

By Eva Brocklehurst

The thought for the week is from UBS. How exposed are Australian households to their banks? The broker estimates that household exposure to the major Australian banks' securities, directly and indirectly, has now reach $500 billion. Putting this in perspective, it compares with $762bn in householder deposits but the exposure is growing. Exposure to bank securities now represents 21% of all Australian household financial assets excluding deposits – up from 13% a decade ago. This is an indication of the success of the sector, but also highlights a significant wealth concentration. The broker asks whether it is appropriate that so much of the householder net worth, apart from property and deposits, is tied up with four highly correlated banks.

One of the differences between Aussie banks and global peers is the shareholder registers are highly concentrated in domestic investors. UBS estimates 77% of the Australian banks are owned by either retail shareholders, or domestic institutions which are primarily managing superannuation money. The broker believes that as fund trustees and financial planners review portfolios the large exposure to bank securities may become a concentration risk and this could lead to some reallocation away from banks. Moreover, while many retail investors are reluctant to sell winning stocks or crystallise capital gains tax, concentration risk is an issue that needs to be addressed.

The banking regulator, APRA, has flagged intentions to introduce additional system capital requirements. An announcement is expected by the end of the year. UBS considers the banks are well capitalised but, because of the privileged position in the economy, concentrated credit exposures and the significant exposure of the household to the banks, the debate regarding the adequacy of system capital is vitally important.

The second quarter of 2013 was bad for newspaper circulation. It's now worse. June quarter numbers declined 11.0% and now September has shown a year-on-year decline of 12.1%. Citi notes the decline in weekday editions of the newspapers exceeded the fall in weekend editions for the second successive quarter. Fairfax Media ((FXJ)) was the weakest, although the rate of decline had improved to 13.5% from 15.8% in the June quarter. News Corp ((NWS)) is facing accelerating declines in circulation, with the metro titles showing weighted average fall of 12.1% compared with 10.0% in the June quarter and 8.7% in the March quarter.

The Australian newspaper held up best, while The Daily Telegraph was the weakest. Seven West Media's ((SWM)) West Australian weighted average circulation was down 9.1%. For Citi, the implications are simple. The accelerating declines in printed newspaper circulation, coupled with increased preference for online access, implies structural headwinds for the print media and questions about the longevity of newspaper as an advertising medium. On the strength of their digital and TV assets, News Corp and Seven West are rated Buy. Fairfax is rated Neutral.

Credit Suisse observes the news purveyors' digital subscription numbers are growing strongly but not fully offsetting print declines. Total digital sales grew 37% over the year to September, on a like-for-like basis. The broker also notes that regional newspaper circulation suffered the same fate as metro, declining 12% in the quarter. It all adds up to a challenging market for advertising. Fairfax has a stated a strategy to reduce unprofitable circulation and push higher margin digital subscriptions but, while this may stabilise circulation margins, accelerating volume declines place further pressure on advertising revenue because of the lower yields for online display ads, according to Credit Suisse. Credit Suisse rates Seven West and News Corp as Outperform with an Underperform rating on APN News & Media ((APN)) and Fairfax.

Residential building approvals may have risen strongly in September, driven by low interest rates, but unless the labour market follows suit it will be hard to sustain. BA-Merrill Lynch has noted that without strong job creation household formation levels will stay depressed and underlying demand for recently completed homes will be soft. Most companies in the building materials sector expect some improvement in earnings over the next year. Outside of Australia, Fletcher Building ((FBU)) will drive growth through rebuilding after the Christchurch earthquake and James Hardie ((JHX)) will continue to benefit from the recovery in the US market. Merrills notes Adelaide Brighton ((ABC)) and Fletcher are the cheapest in the sector on 16 times one-year forward earnings. Adelaide Brighton also offers the highest dividend yield in the sector but faces a flat to declining earnings growth profile. The broker believes James Hardie deserves to trade at a premium and the multiple is affected by asbestos.

Macquarie has taken the magnifier to cost cutting. This has been the focus of many industrial stocks over the past year or so but the broker believes there's still some further margin opportunity to be had. Moreover, with the sombre nature of current operating conditions there is the risk that current revenue forecasts could be downgraded over the year and higher margins may have to do the heavy lifting in protecting returns. The broker observes that a feature of various FY14 earnings forecasts is for revenue growth to make a more meaningful contribution. This is most pronounced in resources but also evident across industrials, property trust and banks. So, which stocks have the potential to cut costs more? Macquarie's list includes ANZ Bank ((ANZ)), Amcor ((AMC)), Brambles ((BXB)), SEEK ((SEK)), Fairfax Media, Kathmandu ((KMD)), Flight Centre ((FLT)), SAI Global ((SAI)), Henderson Group ((HGG)) and BC Iron ((BCI)).
 

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