Weekly Broker Wrap: Inflation, Accommodation, Gambling And NZ Building

This story features TABCORP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: TAH

-Low inflation is problematic
-Wotif.com battles competition
-More upside for Tabcorp?
-Echo Entertainment vulnerable
-Fletcher favoured in NZ residential
 

By Eva Brocklehurst

Low inflation. Is it good? Macquarie tackles the subject, noting that a structural legacy of the global financial crisis has been the onset of low inflation in many of the major developed economies. Low inflation becomes a problem when it turns into a deflationary spiral. The broker's analysis finds those countries which have specific numerical inflation targets prevent declines in short term inflation expectations from becoming entrenched. Ultra low inflation is considered a current problem in the eur zone and for financially stressed countries, as it implies higher real debt levels and higher real interest rates, less relative price adjustment and higher unemployment.

In Australia's case, the inflation targeting regime of the Reserve Bank means inflation expectations longer-term consistently stay within 0.1-0.2 percentage points of the mid point of the central bank's target 2-3% band. The recent strong and sustained appreciation of the Australian dollar has also played a key role in anchoring longer-term inflation expectations. Macquarie believes global investors should be alert to the risks of low inflation and should assess country/regional risks according to measures adopted by central banks to ensure inflation expectations remain well anchored.

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Feedback from the accommodation industry conference suggests to JP Morgan that Australia's tourism environment is stagnant and the cycle is not supporting listed travel agents. This means the competition remains intense and there is pressure to increase spending on marketing, which in turn pressures margins. The broker observes the majority of global online travel agents are pursuing traditional advertising such as TV to complement their search engine marketing. This is seen as a better way to build brand awareness.

Global tourism operators are spending more on marketing and JP Morgan thinks this may continue to erode Wotif.com's ((WTF)) market share, despite the company's market-leading brand. The broker notes Wotif has mounted initiatives to regain share but thinks there's a clear need to preserve the relationship with hotel and accommodation providers to protect advantages, such as last room availability. Another observation was that room supply growth was flat in FY13 and room supply in FY14 is forecast to grow 2.7%. Despite little in the way of increased supply the average room rate has risen by just 1.5%. The broker notes the four main capitals – Brisbane, Sydney, Melbourne and Perth – are outperforming the national average on revenue per available room, while the leisure centres of Cairns and the Gold Coast are underperforming.

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Australia's gambling sector can be classed as "mature". That view, combined with a more reserved consumer and modest top line growth, suggests to Morgan Stanley that investment opportunities remain very stock specific. The broker breaks from consensus on Tabcorp ((TAH)), expecting there's upside to earnings and distributions. Expanding margins are expected to offset lower turnover and provide for growth in wagering. A structural change delivers the most benefit, as customers increasingly bet online and on fixed odds. Turnover may decline, as UK bookmakers take share, but the broker still thinks Tabcorp can generate 14% 3-year compound earnings growth rates and raise the pay-out ratio to 100% from 80%.

Another area where the broker diverges from consensus is on casino operators Crown Resorts ((CWN)) versus Echo Entertainment ((EGP)). The broker believes Echo is more exposed to the swings in VIP table business, despite Crown having the larger VIP market share in Australia. This is because Crown's VIP business dominance is only on an absolute basis. VIP makes a larger relative contribution to Echo's earnings. Given the greater VIP earnings volatility experienced by Echo's domestic casinos, the stock deserves to trade at a valuation discount to Crown in Morgan Stanley's view. This is potentially offset if Echo can take some share of this market away from Crown. Crown will face earnings upside if it gains a foothold in the Queensland casino market, with up to three additional licences being issued. As a result, Echo faces significant risk as its Queensland dominance is set to be diluted. This will be compounded in 2019 when Echo loses NSW dominance with the opening of Crown's Barangaroo.

Morgan Stanley does not think the market has fully considered the possible impact of privatisation of Western Australia's TAB and/or lotteries. These are some of the last government-owned gambling businesses in Australia. There are opportunities and risks for both Tabcorp and Tatts ((TTS)). Morgan Stanley thinks opportunities for Tatts in the core lotteries division is limited. Tatts has lotteries exclusivity in NSW and Queensland until at least 2050. The Victorian licence is up for renewal in 2018. The broker does not think a potential WA transaction would be positive for Tatts, as there's limited scope for cost reduction. In wagering, Tabcorp has successfully renewed its licence in both NSW and Victoria and secured retail exclusivity. There could be upside to earnings if it is able to acquire WA TAB because of the cost reduction potential, in the broker's view.

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CIMB has extended the home building survey to New Zealand, noting the rebuilding of Christchurch continues to gain momentum and is coinciding with a cyclical recovery in other major cities. The analysts have revised NZ residential construction forecasts and now expect 16% growth in 2014. In contrast to the nascent recovery in Australia, NZ's residential recovery is continuing at a rapid rate. CIMB believes there's further upside to come. Builder commentary suggests, while Christchurch and Auckland have been the drivers of the improvement so far, this is now filtering through to other cities and regions. All this leads CIMB to prefer Fletcher Building ((FBU)) in the building materials sector with the three C's – Cyclical leverage, Christchurch rebuild and Cost reductions – seen providing many years of earnings growth.
 

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