Weekly Broker Wrap: Oz Retailers, Liquor, Macro Views, Media And Credit

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

-Are Oz retailers appropriately priced?
-Coles wants to improve liquor business
-Morgan Stanley cautions on Oz equities
-Goldman selects winners in media
-Is commercial property credit a problem?
 

By Eva Brocklehurst

A warm start to winter has not pleased Australian retailers. A number of them have downgraded expectations and Deutsche Bank believes, of those that are yet to downgrade forecasts, Myer ((MYR)), Premier Investments ((PMV)) and Specialty Fashion ((SFH)) carry the most risk. Weakness in spending after a federal budget is not unusual in the broker's opinion. Property and equity markets are buoyant and this has historically supported improvements in sentiment. Thus, the broker believes the sector is appropriately priced after the recent contraction in multiples. Moreover, while the drop in sentiment has been across the board, the lower socioeconomic consumers are more affected. Hence, the broker envisages considerable risk to Specialty Fashion earnings, with Premier Investments and Myer being under more pressure than David Jones ((DJS)).

Upside risk is present for Flight Centre ((FLT)). Deutsche Bank thinks trends should improve as travel continues to be a structurally strong category. The broker likes Harvey Norman ((HVN)) for its exposure to the property cycle and potential for operating leverage, although acknowledges the stock is not immune to soft consumer sentiment. JB Hi-Fi ((JBH)) sales have probably been affected by the weak trends but the broker thinks robust margins should provide some reprieve. Myer may carry downside risk for FY14 but, longer term, free cash flow yield suggests the stock is cheap and there is potential for multiples to expand on even modestly positive news. Kathmandu ((KMD)) is also considered inexpensive, given its growth profile, and Deutsche Bank believes it offers substantial brand equity and offshore expansion.

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The incoming Coles CEO, John Durkan, signalled his disappointment with the liquor business at the Wesfarmers ((WES)) strategy briefing. His principal concern was the lack of customer awareness and engagement. Coles operates Australia's third largest liquor business behind Woolworths ((WOW)) and Metcash ((MTS)). UBS estimates Coles liquor has an earnings margin of around 2%, which is below the industry leaders at over 6%. The broker estimates the earnings opportunity for Coles in liquor equates to a 4% uplift to Wesfarmers' FY15 pro-forma earnings.

The key to driving this uplift involves productivity, lifting traffic through brand and marketing, and increasing private labels in wine. That said, the broker believes Mr Durkan has a hard task ahead and margin growth, in the absence of an accelerated lift in liquor penetration, will slow in the medium term. The company has said it does not aspire to Woolworths' food and liquor margins, despite the market often touting the difference – 280 basis points on FY13 numbers – as a major opportunity. UBS believes this reflects the fact that the opportunity is not as big as it first seems.

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Morgan Stanley has updated key macro views and model portfolio recommendations, becoming more cautious on the short-term outlook for Australian equities in the face of a weaker iron ore outlook and a stubbornly high Australian dollar. The federal budget has also created a mini crisis of confidence and, combined with the former two factors, increases the risk of earnings forecasts being delivered in FY14, and growth rate forecasts for FY15. A sustained recovery in housing will be crucial to achieving the transition from the resources boom and, should the recovery stagnate, the broker expects the Reserve Bank of Australia to consider a change in both rhetoric and action. Morgan Stanley does not rule out reductions in official interest rates should condition deteriorate more sharply.

In the model portfolio the broker adds Stockland ((SGP)) to enhance domestic housing links and switches to Henderson Group (((HGG)) from Perpetual ((PPT)) to gain exposure to a call on stronger European equities. Both James Hardie (JHX)) and ALS ((ALQ)) are added, as globally-exposed stocks with strong business models. Treasury Wine Estate ((TWE)) is removed, given recent movement in the share price, and DUET ((DUE)) is added for defensive exposure. The broker adds weight to high quality growth stocks such as Domino's Pizza ((DMP)), Navitas ((NVT)) and REA Group ((REA)).

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The latest data on agency advertising confirms to Goldman Sachs that the strong market in the second half of 2013 did not continue into 2014. Total agency ad bookings fell 2.8% in May and all main media types endured declines except metro TV and online display. A lack of a rebound in May from April's decline of 6.5% suggests momentum has softened. The data reflects poor consumer confidence and patchy business conditions, in the broker's view. Goldman has downgraded ad market growth forecasts for 2014 to 1.6% from 3.6%, and for 2015 to 4.0% from 4.7%.

In the current environment Goldman is focused on winners, either structural winners taking market share or audience winners taking revenue share. In the former camp the broker prefers SEEK ((SEK)) and Carsales.com ((CRZ)) and in the latter Nine Entertainment ((NEC)) and Seven West Media ((SWM)). The broker is cautious about traditional media that is experiencing market share and audience losses such as Fairfax Media ((FXJ)) and Ten Network ((TEN)). JP Morgan thinks this latest advertising data signals a softer revenue outlook for the first half of FY15. This means leverage for traditional media and capital allocation for online media will be foremost in investors' minds. The broker is Overweight Carsales.com, Seven West and Prime Media ((PRT)) and Underweight on Fairfax and Ten.

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UBS observes that a large portion of business credit is being allocated to commercial property. Data from APRA for the major banks indicates that, during the last year, exposures to office commercial property have grown by 9.1%, retail by 9.2% and industrial by 10.3%. Westpac ((WBC)) and ANZ Bank ((ANZ)) have shown the biggest increase in commercial property exposure, growing exposures 11.1% and 9.3% respectively over the last 12 months. The broker does not believe the growth in the major banks' exposure to credit in this area is a bad thing per se, especially as Australian property players have been de-leveraging since the GFC. Nevertheless, if underwriting begins to slow, leverage ratios rise, or occupancy and rental yields come under pressure, it may again become an issue for the banks. For now, with improvements in asset quality, the banks' earnings outlook remains robust and the recent rally in bonds provides a further tailwind.
 

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