Weekly Broker Wrap: Mortgages, Financial System, TV, Consoles And IPOs

This story features SEVEN WEST MEDIA LIMITED, and other companies. For more info SHARE ANALYSIS: SWM

-House price, credit growth diverge
-Mortgage standards loosened
-Do banks have too much power?
-FTA TV should be resilient
-New consoles don't excite Citi
-Recent IPOs perform strongly
 

By Eva Brocklehurst

House prices and credit growth are diverging. What's driving this scenario? JP Morgan has found that higher transaction activity on the housing front is not fuelling credit growth. Although the average loan-to-valuation (LVR) ratio is little changed there are big differences in categories.

The first time buyers of homes are not increasing in percentage, despite their focus on house prices where there's a higher LVR. So that's reducing credit growth. Those that are at the other end of the market, downsizing from from the family home, are growing in number but they're reducing debt. They're using the equity released from their homes to move into the investor category and the drag on credit growth they create is greater than the credit growth that's primarily being driven by the investor segment. As has been widely talked about – it's the investor segment that's responsible for pushing up house prices. Those owner-occupiers that are upgrading homes may be taking on more debt when buying more expensive housing, but JP Morgan notes the LVR uplift is less substantial than it has been historically.

In all, JP Morgan believes the rapid rise in house prices, in Sydney in particular, cannot go on. At some stage affordability will become a structural issue for the market. Perhaps there are some changes needed on the political or regulatory front. The broker's report canvases LVR limits, as they apply in New Zealand, and explores the taxation, incentives and regulatory environment.

UBS has looked at mortgage underwriting statistics which APRA has provided. The trend of loosening underwriting standards for mortgages continued in the September quarter. Interest only loans rose, hitting 40% of major bank mortgage approvals. Many were for investment property but also increasingly popular with owner-occupied borrowers. Those approvals that are outside serviceability – they fail the interest rate sensitivity/affordability test but still get approved – have grown by 36% and now represent 3.3% of all mortgage approvals. High LVR loans are relatively high at 34% of approvals but are down from the 37% peak that was seen during the period of first home buyer grants in FY09. Investment property mortgages are at record levels, at 35%. The figures show an improvement in asset quality and balance sheets but UBS suggests the looser standards are worth scrutiny, as these are potentially the impaired assets of the next cycle. This is especially the case with loans "outside serviceability" in this very low rate environment.

The Murray review of the financial system is at an early stage but JP Morgan has looked at what the issues are. What could affect share prices? This review will find the system much more heavily controlled by the big four banks than when the Wallis inquiry took place, and there is a risk they could be seen to have too much market power. This is a similar theme in general insurance as well. Wealth management has much stronger competition. Another focus is on the costs of regulation and this may result in some winding back of quite significant increases in regulation of the financial sector. This, in turn, could reduce compliance costs land lead to a more dynamic sector. Also, the new government's focus on infrastructure investment could procure some attention to encouraging retail super funds to reduce holdings of liquid assets. As for the choice to head the inquiry, former Commonwealth Bank CEO David Murray, JP Morgan suspects Mr Murray's strong prior involvement in the financial services may increase the likelihood he will listen to the views of existing providers.

Rumours of the death of television have been greatly exaggerated. That's Citi's view. Nevertheless, TV is changing. Consumers now have multiple devices for content and they're booking their time. Rather than being enslaved by live TV the tendency is to spend appointed time, which is growing at 1% per annum while live TV declines at 1% per annum. Appointment viewing, as Citi describes it, is now 14% of total TV watching, up from just 1% five years ago. Citi thinks broadcasters need to be aware that fragmentation of the viewing audience is growing. TV broadcasters need to deliver hits on a regular basis. The broker retains Buy ratings for Seven West Media ((SWM)) and Ten Network ((TEN)).

Goldman Sachs has reviewed the outlook for Free-To-Air TV and concluded that, despite facing headwinds similar to print media, the industry should be more resilient. Forecasts have been raised for this segment's advertising market share. There will be some leakage to new media but the analysts expect it to be modest. TV should be underpinned by the quality of the content and the ability to draw a large, mass market audience, as well as the regulatory protection in place and the expansion of the broadcast footprint to multi-channel. The defensive position on FTA TV is concentrated in the Seven and Nine networks, the broker believes. The analysts don't believe FTA TV will lose that much advertising market share. Goldman forecasts FTA TV ad market growth of 3.6% over 2013-18 versus the greater advertising market forecast for 4.3%. The broker likes the structural winners in the sector and has raised Seven West to a Buy rating.

New games consoles are about to be launched. Citi is not that excited.The broker has Sell ratings on JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). JB Hi-Fi could generate a 1.4% comparable store sales boost in FY14 but this could be followed by a 2.0% fall in FY15. There's likely to be negligible impact on Harvey Norman as the retailer does not have a strong presence in the category. Citi thinks long-term unit growth may disappoint and price deflation will erode any gains. These new consoles also provide an easier digital download for games, reducing an important category for JB Hi-Fi. The important growth is in games software, as gross margins are higher. This should fade as earlier version sales collapse and the games category will be dilutive to gross margins, in Citi's view.

What's a positive? The timing. It's been six years since an upgrade to consoles and it's just before Christmas. The most significant upgrade is graphics capability and there's a cheaper price point. In Australia pricing is 17-27% higher than in the US so this is a negative, in Citi's view. There's no step-change in innovation either. These new devices may appeal to mainstream game players but are unlikely to covert others, so there's no increase in penetration. Moreover, the analysts note, casual gaming has now moved to tablets and smart phones. Enter the fragmentation word again.

Finally, Macquarie observes the performance or stocks that have recently listed. There has been a raft of new IPOs and this is often an indicator of market sentiment, as they signal investor appetite for equity. The performance in 2013 has been strong, with average returns after one week of 3.8% and a stag profit of 4.64%. The larger IPOs had positive returns over the first week and this diverges from history where the aggregate performance is less compelling. The broker highlights Virtus Health ((VRT)) and Steadfast (SDF)) as two recent IPOs that continue to perform strongly. Volume is often considered a good proxy for investor attention too. The larger IPOs, with a deal size of more than $100m, are more likely to receive investor attention and are a better gauge of market sentiment. Stocks with high volume and high momentum tend to typically outperform.
 

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