Weekly Broker Wrap: Telcos, REITs, Registries, Wagering And Media

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

-Growth slowing for telcos
-Valuation key to GPT, Charter Hall
-Shareholder numbers decreasing
-William Hill threat to retail wagering
-Media outlook improving

By Eva Brocklehurst

CIMB contends there's no such thing as normal in the telco sector. Conditions change with the seasons. Still, the broker notes several abnormal issues influenced performance over the recent reporting period and these seem to be diminishing. The broker thinks the mobile sector is promising more competition, while organic growth in broadband is slowing and there are fewer acquisitions available to improve scale. Telstra ((TLS)) is well priced and offers reliable earnings and dividend with sheer scale enabling it to withstand market conditions. Smaller telcos are priced for growth or acquisitions, opportunities that CIMB thinks are receding. Growth will still happen, the broker maintains, but it will be a return to low service revenue growth in mobile and a maturing, hence slowing, of fixed broadband growth. The broker is generally neutral on the sector. Among the Aussie telcos the broker covers, CIMB has a Hold rating on Telstra and a Reduce rating for both M2 Telecommunications ((MTU)) and iiNet ((IIN)).

Are GPT Group ((GPT)) and Charter Hall Group ((CHC)) starting to resemble each other? That's the question CLSA is asking. Both have high growing property funds in the same three asset classes with near-identical margins. The broker notes Charter Hall has greater leverage to funds management growth while GPT's balance sheet capacity is a huge comparative advantage. So, which one gets the bigger tick? The starkest difference, CLSA observes, is in valuation.

The broker estimates the market places a 20 times earnings valuation on Charter Hall and no premium for GPT. In valuing Charter Hall, CLSA notes the company has outperformed Australian real estate investment trusts (A-REITs) by 13.4% versus 5.5% year-to-date, and is trading within 1% of the price target – $4.17. This means the stock is fair value, with the price target implying a 6% total return. Hence, the rating is downgraded to Underperform. In GPT's case, the stock has outperformed A-REITs by 10.3% year-to-date and the price target of $4.15 implies a 16.2% total return. The Outperform rating is maintained.

The JP Morgan registry survey, conducted in December and January, has found Computershare ((CPU)) and Link service 95% of the companies in the S&P/ASX200 index, although Boardroom doubled share to 4%. Of note, the rate of switching increased in 2013, with 4.6% of the market changing providers, up from 1-2% historically. There was also an increased tendency for respondents to put registry contracts out to tender.

Shareholder numbers continue to decrease, with 72% of companies reporting flat or decreasing shareholder numbers over past six months. Pricing was flat or falling, driven by, JP Morgan suspects, falling shareholder numbers, increased competition and a low number of contracts being renewed in any one year. Computershare received a higher positive response rate for performance compared with Link, but Link continues to outperform on cost. Another observation is that corporate activity was weaker for registrars in 2013 against 2012, while a stronger IPO market did not add material new shareholders. Secondary raisings decreased by 19% and the companies with a discounted dividend reinvestment plan fell to 17% from 26%.

Be warned. CIMB observes UK-based wagering business William Hill is talking up intentions for Australia. The company will land a vastly improved offering at the end of this month and intensify competition with the locals, Tabcorp Holdings ((TAH)) and Tatts ((TTS)). By the end of March William Hill will integrate Tom Waterhouse into Sportingbet and launch a new website, providing easier player registration and betting, with improved display and navigation. CIMB thinks this will have a significant impact on Australian online wagering. More so because it appears from the results season that online betting is cannibalising retail betting. William Hill is shifting its marketing mix towards online and the company expects to reach a 69:31 ratio in FY14. This leads to a lower cost per player acquired and will enable the business to continue to operate on considerably lower win margins than either of the local retail incumbents. It adds up to a loss of market share for both Tabcorp and Tatts, according to CIMB.

The latest results season was positive for the media. Finally, there are signs of improved trading and cost control. JP Morgan observes a bump up in share prices in response to the better outlook. It's early days but the broker is heartened by the improved second half outlook, with Fairfax Media ((FXJ)) being the stand out stock in that regard. Seven West Media ((SWM)) has increased TV guidance to low-to-mid single digit growth. The one area that remains subdued is regional markets, reflected in a more sober outlook for local revenue from Prime Media ((PRT)) and Southern Cross Media ((SXL)).

JP Morgan has Overweight recommendations on Carsales.com ((CRZ)), Seven West and Prime Media. Understood. The broker thinks the issues facing Carsales in new car inventory/manufacturer display are short/medium term. However, the broker is Underweight Ten Network ((TEN)) and Fairfax. The Underweight rating for Ten stems from the fact that JP Morgan thinks any rating/revenue recovery will take time and require significant reinvestment in programming. As for Fairfax, cost control and improved trading conditions are well and good but the broker is cautious about extrapolating this out too far. JP Morgan continues to believe that, excluding Domain, Fairfax lacks strong digital growth assets.
 

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