Weekly Broker Wrap: Patchy Conditions In Lead Up To Christmas

This story features WESFARMERS LIMITED, and other companies. For more info SHARE ANALYSIS: WES

-Sentiment improving slowly
-Consumer confidence diverging
-Life insurance profits soft
-Further upside to bank asset quality?
-Pathology dilemma continues
-TV advertising growth strongest
 

By Eva Brocklehurst

Citi notes a surge in confidence in Australian consumers in November but thinks, while there's no doubt the outlook is improving, it is too soon to be sure of a particularly strong Christmas for retailers. Moreover, wages growth is slowing, reducing the growth of disposable income available for spending, and consumers still hold concerns about their finances. Hence, it's the wealth effect – the sense of having more to spend – and confidence in their savings rather than income that will have to drive consumer spending in the short term. This is not unusual at this stage, as the labour market is normally the last part of the economy to turn around. The broker envisages the better times are ahead in 2014, when real consumer spending should move closer to trend after a disappointing 2013.

BA-Merrill Lynch is seeing a division emerge in consumer spending in Australia. Rising property prices, reduced interest rates and increased super seems to be driving improved confidence in certain social classes and these people are spending. Those not exposed to these drivers are feeling the effects of higher utility prices and are not so inclined to spend. Which are the stocks most exposed to the former? Merrills draws out Wesfarmers ((WES)), Crown ((CWN)) and Telstra ((TLS)). The broker expects top line growth in the consumer sector will remain tough in FY14 as income growth is below average and unemployment is rising.

Wesfarmers has defensive appeal in terms of spending and, through Bunnings, exposure to an improving housing cycle. The class of consumer that typically spends on table games, hotel, food and beverage products is the professional-middle class and this is where the improved spending will benefit Crown. Slot machine players, the choice of the less well off, is showing weakness. For Crown, growth in other revenue segments should insulate the business. In the case of Telstra it's the age demographics of the consumer – the 50-64 year-old segment that has the most disposable income and ability to spend – that's most influential.

Statistics on life insurance show weaker profits for the industry because of a worsening in group risk claims experience and lower investment earnings. JP Morgan thinks additional reserve strengthening in this insurance class may be needed and this could continue to depress industry profitability in the near term. The industry did report September quarter earnings were up 13% on the prior quarter but down 41% on the prior corresponding quarter. Much of the improvement on the June quarter was driven by increased investment income. What was encouraging was that individual risk trends were stable. Profitability levels remain low but at least they are not deteriorating.

The asset quality of major banks improved in the September quarter. This underpins the recent declines in bad debt charges but Credit Suisse is cautious about prospects for further moderation in debt charges. Key trends include a decrease in impaired business to 0.57% from 0.59%. The four industries which continue to have elevated level of impaired business are accommodation, agriculture, construction and property, although there's been some improvement in the latter two and the former appear to have stabilised.

The housing market is recovering, with the latest statistics showing a rise in both the number and value of commitments in September. Macquarie notes, one area that is soft is first home buyers, representing 12.5% of the market and down from the low 30% range in 2009. The data aligns with the broker's expectations for an improvement in credit growth next year.

With lower rates and rising asset prices Macquarie thinks asset quality at the the banks could further surprise to the upside. National Australia Bank ((NAB)) is best placed to benefit because its second half impairment charge in 2013 was 7-18 basis points above its peers. The broker thinks, on a 6-12 month basis NAB and Westpac ((WBC)) should perform the best, with exposure to improving business lending conditions in the SME/corporate segment.

The pathology industry and the federal government have been negotiating a further round of cuts in pathology outlays to reduce overspending. In FY13 the outlays exceeded the agreement by 3.3% and the discussions have probably negotiated the overspending closer to 2.1%. UBS understands that the industry would likely cede a cut of 2% from January 2014 but is seeking a political commitment on the resolution of broader issues, such as excessive rents paid to GPs for collection centre sites. The de-regulation of centres made by the prior government exacerbated the long standing issue of excess rents and the economics of many GP practices now rely on this rent, leaving the government with a funding dilemma. The industry is divided on the issue and the unwinding of excessive rents is expected to take some time.

Advertising agency markets have shown modest growth, up 1.6% in the year to October. TV advertising growth continues to be the strongest, with metro free-to-air spending up 5%. Pay TV goes from strength to strength, up 15% in October. Print is the weakling segment, although there are signs, according to Credit Suisse, that declines may be moderating. October's 14% fall was materially better than the declines of over 20% seen in the first half of the year. Magazines continue to struggle, down 23% in October.

Traditional digital display is slowing although still is the growth engine in the market. The digital market was flat in October and while total spending was still up 8%, growth was entirely driven by search and emerging platforms. In terms of categories, retail advertising returned to annualised growth for the first time this year as improved consumer confidence filters through to budgets. Finance was the strongest of the categories, with growth of 17% year on year.
 

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