Weekly Broker Wrap: Oz Tax, Banks, M&A Targets, Telcos And Retail

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This story features REGIS RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: RRL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-FY14 and capital losses
-Optimism for asset managers
-Are Oz banks really expensive?
-Large number of potential M&As
-Optus ramps up mobile competition
-Which retailers benefit in the current climate?
 

By Eva Brocklehurst

As the Australian financial year draws to a close investor decisions are influenced by attempts to minimise capital gains in some instances. Macquarie highlights typical tax loss selling and notes stocks with shareholders sitting on large capital losses typically experience further selling pressure over the next month, as these losses are crystallised before June 30. Such ASX 100 stocks sitting on capital losses include Regis Resources ((RRL)), Graincorp ((GNC)), QBE Insurance ((QBE)) and Coca-Cola Amatil ((CCL)). Those sitting on strong capital gains, where there is likely to be less selling pressure over the next month, include SEEK ((SEEK)), Challenger ((CGF)), REA Group ((REA)) and Lend Lease ((LLC)). Macquarie observes that nearly 80% of ASX stocks are sitting on capital gains since July 1 2013.

Macquarie is optimistic about the outlook for equities, both Australian and global. Despite the prospect of rising US interest rates the broker thinks the cycle will be quite muted. Stocks which are positively leveraged to the equity market outlook should perform well. Emerging leader asset managers have sold off substantially in recent weeks but the broker thinks the fundamentals are sound. From this sector Macquarie rates Magellan Financial ((MFG)) as a top pick, on Outperform. The business has potential from an improving investment performance and within the wholesale distribution segment. Platinum Asset Management ((PTM)) is another stock in the sector rated Outperform, for which the broker observes improved momentum. The third is BT Asset Management ((BTT)). This stock is coming off a particularly strong FY14, in which performance fees feature prominently, so growth is under pressure going forward. Still valuations are attractive thus while lower in the pecking order, the broker has upgraded to Outperform.

***

Australia's banks are not as expensive as they look, in Deutsche Bank's view. The broker thinks a simplistic analysis that looks only at the headline price/earnings ratio is misleading. From a comparison of relative valuations with historical levels the banks are slightly cheap or fair value. Moreover, dividend yields are supportive and the certainty of relative earnings favours the banks. The broker thinks the banks' PEs are based on very conservative forecasts and this relative conservatism could be inflating the ratios by around 2% for FY15 and 4% for FY16. Relative valuations show the banks are trading at a 3-4% discount to historical levels, based on the broker's forecasts. Deutsche Bank notes ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) offer the greatest upside but given NAB's poor first half, its discount is likely to remain for some time. The ANZ discount is hard to justify, in the broker's view, given the bank's above-peer earnings growth profile for the next three years.

***

CIMB observes the macro backdrop to equity investing reveals pent-up demand, currency weakness and stronger business confidence. Deal flows continue to be driven by cross-border interest and the US remains Australia's main source of offshore equity capital. Mergers and acquisitions could be underpinned by weak revenue growth and low interest rates continuing for some years. The broker estimates that around 48 stocks within the ASX 200 are actively considering M&A or asset divestment. The broker assesses the prospects for M&A based on balance sheet strength and valuation and expects more of this activity in healthcare, online media, food and staples. Prospects for M&A in capital goods, metals and mining look relatively low.

This research translates into potential targets, or those stocks likely to offload non-performing assets, such as Ten Network ((TEN)), OZ Minerals ((OZL)), National Australia Bank, Cabcharge ((CAB)) and Wotif.com ((WTF). Conversely, stocks like Telstra ((TLS)), Brambles ((BXB)), SEEK, Ramsay Health Care ((RHC)), CSL ((CSL)), New Hope ((NHC)), Wesfarmers ((WES)) and Myer ((MYR)) all look to be on the hunt, although the broker acknowledges that the deals need to be good for shareholders, with a skew towards cash or debt funding rather than equity.

***

Singapore Telecom ((SGT)) has reiterated its intention to revitalise customer growth at Optus. JP Morgan suspects competition will heat up in the Australian telco market, particularly in mobiles. The broker thinks the plans for Optus to share data among devices challenges Telstra's hopes for growth in the mobile broadband network. Optus is not under intense pressure but the broker suspects the main brand lost significant ground in mobile in 2013. JP Morgan considers the company's strategy has two elements, addressing the value end of the market in order to head off a recovery in Vodafone ((HTA)), and tackling Telstra on what Optus perceives as its weaknesses. One of the tactics exploits shared data. Optus will allow up to five SIMs to be linked to the same data allowance. From this JP Morgan implies that any cannibalisation of Optus' own base is expected to be outweighed by gains from Telstra and Vodafone. Management has also reiterated a commitment to lower pricing in data roaming, an area in which Optus thinks Telstra is vulnerable.

***

Citi observes retail sales data from the Australian Bureau of Statistics is very important for the information it provides regarding listed retailers. The accuracy of the data varies and online leakage is large but the broker still finds it useful for benchmarking the likes of Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Wesfarmers and Woolworths ((WOW)). Recent sales trends are not encouraging for electronics retailers and the broker has set Sell ratings on the former two stocks. The broker observes the relevance of the data is far higher for food & liquor, hardware, electronics and department stores and warns investors should avoid relying on ABS data for clothing, recreational goods and takeaway food.

UBS finds the themes across the retail sector have been consistent for the past six months, with housing related categories performing strongly and the major stores winning market share. Sales at supermarkets have now out-paced other specialised food providers for seven consecutive months. The broker is cautious in the near term for apparel names, particularly following recent downgrades from Retail Cube ((RCG)) and Noni B ((NBL)). UBS reiterates a preference for Woolworths because of its grocery exposure. This broker likes Harvey Norman and JB Hi-Fi for housing exposure, and highlights near-term earnings risk for apparel-weighted stocks Myer and David Jones ((DJS)), should the trends from May persist through June and July.
 

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