Treasure Chest: Stock Picks For 2014

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By Greg Peel

UBS believes retail sales growth in Australia will accelerate through 2014 given the Australian consumer is wealthier and more willing to spend than has been the case over the past three years. The most recent retail sales figures, to November, suggest a three-month run rate increasing to around 4% from around 2%. Trade feedback from the Christmas/holiday period suggests improvement in both traffic and spending levels, the broker notes, particularly for luxury, mid to upper level specialty and department stores.

The broker thus prefers premium department store David Jones ((DJS)), which has a longstanding sales correlation with the equity market of around 60%. DJs is most leveraged to rising house prices, yet the market is currently pricing in no sales recovery. UBS sees the potential for 10% upside.

The likes of Myer ((MYR)), OrotonGroup ((ORL)) and Harvey Norman ((HVN)) nevertheless offer exposure to the same thematic, the broker notes.

Retail performance impacts on media performance through advertising, and Credit Suisse calculates the Australian metro free-to-air TV sector is being valued at multiples below overseas peers and other local cyclical sectors. The broker finds this valuation undemanding and sees upside from earnings and stronger PEs based on any improvement in ad-spend.

Current pricing suggest the market is expecting networks Nine ((NEC)) and Seven ((SWM)) to decline and Ten ((TEN)) to pick up the difference, with which the broker takes issue. The broker has initiated coverage on Nine Entertainment with an Outperform rating while maintaining Outperform on Seven West Media on the assumption the network will retain its leading market share. Ten Network thus scores Underperform, with the broker wondering where solid ratings may spring from once the successful Big Bash cricket coverage is over.

Deutsche Bank also expects an improving Australian consumer environment, backed by accelerating global GDP growth. Amongst the local real estate investment trusts (REIT), Deutsche thus has a preference for higher growth names. With construction data beginning to improve the easy call would be to back residential REITs Deutsche notes, but the broker sees limited value in this space with the exception of Stockland ((SGP)).

Deutsche has upgraded Stockland to Buy, as it has with Goodman Group ((GMG)), which is trading at a significant discount to historical PE despite having more visibility in funds under management growth and development funding than at “any other time in its history”.

Westfield ((WDC)) remains the broker’s overall preferred REIT, while Westfield Retail Trust ((WRT)) is the preferred domestic retail play. Deutsche believes it’s too early to get excited about office REITs at this stage, and hence has downgraded Investa Office ((IOF)) to Neutral.

In the wealth management space, CLSA believes the “old model” of vertically integrated wealth managers servicing clients from start to finish has failed to deliver and hence more specialised management is emerging, with greater emphasis on alpha (stock picking, as opposed to beta, the market in general). Three variances will allow newer players to usurp the once dominant financial conglomerates, CLSA suggests, being distribution platforms, investment management and performance.

On this basis, the broker prefers Platinum Asset Management ((PTM)) and Magellan Financial Group ((MFG)), which enjoy Buy ratings, while maintaining Outperform ratings on AMP ((AMP)), BT Investment Management ((BTT)) and Perpetual ((PPT)). IOOF ((IFL)) draws an Underperform rating.

Morgan Stanley also sees structural and cyclical support for wealth managers in 2014, and in order of preference likes Magellan, Platinum and Perpetual, all attracting Overweight ratings, followed by BT Investment on Equal-weight. Elsewhere in the diversified financials sector, Morgan Stanley has an Equal-weight on Challenger ((CGF)), Macquarie Group ((MQG)) and the ASX ((ASX)) and an Underweight on Computershare ((CPU)).

JB Were (Goldman Sachs) has looked at several themes in picking its preferred suite of stocks for the year.

On strong economic growth in New Zealand, much better than Australia presently, JBW likes Fletcher Building ((FBU)). High growth stocks that have suffered recent share price weakness, and are thus also offering value in the broker’s view, include ResMed ((RMD)) and Carsales.com ((CRZ)).

GPT Group ((GPT)) conceded the race to acquire Commonwealth Property ((CPA)) to Dexus ((DXS)) but has since been offered five of the assets by Dexus, which effectively splits the spoils, the broker notes. GPT has underperformed during the bidding war and the broker sees an attractive opportunity. Investment in FKP Property ((FKP)) provides exposure to retirement village housing company Aveo Group and an attractive entry point to the longer term theme of the ageing population, the broker suggests.

In the energy sector, JBW looks towards the approaching start-up of the PNG LNG and GLNG projects which will bump Santos ((STO)) up to a much higher level of cash flow and thus attract a wider investment base.

In the domestic cyclical space, JBW sees the new government as a positive for Asciano ((AIO)) while port automation will improve margins. A stronger balance sheet means Asciano should increase its dividend payout. Skilled Group ((SKE)) has suffered a tough environment but has grown market share and is leveraged to a strong non-mining recovery, the broker notes. Skilled is offering attractive value.

On a long term structural basis, the broker likes Tassal Group ((TGR)) on the company’s strong market share and the rising Australian consumption of salmon, which underpins the longer term story. The broker also notes the local headlines surrounding Crown ((CWN)) and Barangaroo have drawn attention away from the company’s MPEL joint venture in Macau, which is going from strength to strength.
 

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