Weekly Broker Wrap: How Goes The Consumer-Led Recovery?

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-Travel sector accelerating
-David Jones turnaround
-Coles' lead undermined
-Metcash needs new strategy
 

By Eva Brocklehurst

Bell Potter expects a further acceleration this year in Australians holidaying overseas. This is the strongest growth segment for Australian short-term departures, as a snapshot from the Australian Bureau of Statistics on overseas arrivals and departures shows. The analysts believe international travel rates, particularly for holidays, will be helped along by improving household confidence as a result of the positive wealth effect from property and equity markets. The analysts note that international travel bottomed in March 2013 at a time when a weak domestic economy undermined household consumption. The broker's top picks in the travel sector are Flight Centre ((FLT)) and Corporate Travel Management ((CTD)).

Morgan Stanley prefers discretionary consumer stocks to the staples. Driving this view is a better retail environment, as the consumer benefits from low interest rates and the improving housing market. The lower Australian dollar is also slowing online leakage and improving tourism spending. The broker is avoiding exposure to supermarkets, as the publicly-stated store roll-out plans seem very bullish. Morgan Stanley points out that industry space growth will be 3.5% per annum over the next three years, well ahead of population growth of 1.6%.

The broker thinks David Jones ((DJS)) has a turnaround story in the making and a possible merger with Myer ((MYR)) provides potential upside. Super Retail Group ((SUL)) is considered a premium business, given market share gain and margin potential, while Flight Centre has multiple drivers for double digit earnings growth. David Jones, Super Retail and Flight Centre are key consumer picks for the broker. Morgan Stanley is Underweight Coca-Cola Amatil ((CCL)) as earnings risks remain with a slowing in carbonated soft drink sales. On the point of earnings risk the broker is Equal Weight Treasury Wine Estate ((TWE)), but does think the asset backing will provide support.

Commonwealth Bank analysts have always considered targeting residential construction to transition growth as mining capex wanes is smart policy. It's relatively easy, the analysts assert – you just cut interest rates and wait. It's also smart because there is a genuine demand for new housing. There are some factors that differentiate the story this time around, adding intensity. Competition with mining and infrastructure for skilled labour and materials has limited the supply of new dwellings so the demand for housing has become quite urgent. The focus on skilled migrants who are cashed up tends to add to housing demand more quickly. Education visas are also lifting, and these students need somewhere to live, even if not settling permanently. Finally, real estate investment is attracting, anecdotally at least, a high level of interest from foreign investors.

Consensus earnings for consumer stocks were downgraded for around 50% of the companies that reported in the recent earnings season, Goldman Sachs notes, and momentum will need to accelerate for most in the second half in order to meet estimates for FY14. Food and beverage companies and the discount department stores were materially downgraded. The broker notes major supermarkets will continue to focus on value and seem to be winning at the expense of wholesalers and consumer product companies. Goods, apparel and department stores remain cautious. The most upbeat are consumer electrical businesses.

Goldman is selective and retains Buy ratings for Wesfarmers ((WES)) and Harvey Norman ((HVN)). Woolworths ((WOW)) is rated Sell as it is reliant on growth in trading areas and gross profit margin expansion. Goldman notes online sales are driving a disproportionate share of like-for-like sales for those that disclose the data. Super Retail and Specialty Fashion ((SFH)) are two which are showing a welcome ramping up of online, IT and supply chain investment.

UBS observes that Coles' momentum is on the wane. From the broker's latest supermarket tracker survey, the analysts explored issues in supermarket operations. For Coles the scores were weaker across marketing, creating in-store theatre and pricing strategy compared to the prior surveys. Coles had been leading in innovation, price and in-store initiatives but this survey finds both Woolworths and Aldi are making inroads. Woolworths' scores improved across most key measures in the survey. The survey signalled performance is converging and differentiation is less visible. Woolworths is the broker's preferred exposure in the Australian grocery space.

Food and grocery wholesaler/distributor Metcash ((MTS)) is losing market share and if the company is to turn around the earnings decline, it must engage better with the retailers in the network, according to CLSA. The independent supermarkets – the IGA brand – are critical and, if Metcash is to lead a resurgence in the independents it must confront improvements to the in-store experience, evolving a differentiated branding structure, easing the challenges for suppliers and addressing the poor private label offering – to name a few of the items on CLSA's agenda for change. Enabling online shopping would also be a bonus.

The broker does not believe tinkering at the edges will be enough. Metcash spent several years hoping price deflation was a cyclical issue that would be alleviated by a fall in the Australian dollar, CLSA observes. Aldi's increasing presence and continuing conservative consumer attitudes have dashed that hope. CLSA believes, if the company implements the required strategy, the stock could reach $4.50 on a three-year view, if Metcash is to re-rates back to a 20% discount to Woolworths. Right now, CLSA has a Sell rating and $2.80 target.
 

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