Weekly Broker Wrap: Oz Tourism, TV Ads, Retailing, Credit And Gold

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-Few catalysts for domestic travel
-Myer, DJs likely to disappoint
-Discretionary shopping hit
-Will credit growth recover?
-US$1000/oz a new gold cost rule?
 

By Eva Brocklehurst

Inbound tourism looks solid, but what about domestic travel? Domestic air seat capacity and passenger growth slowed in the second half of FY14 and UBS believes capacity growth into FY15 is 2-3% at best. Online traffic trends for the Australian travel agency sites look, at the very least, flat in recent months. The broker notes the speculation that Wotif.com ((WTF)) and Webjet ((WEB)) could be acquired by major players, for instance by Priceline or Expedia, given there is some strategic appeal and accretive value for these two as acquirers. UBS thinks the real question they would ponder concerns incremental returns: whether to win share via spending more organically or via an acquisition. The numbers suggest signals to the broker that, at current prices, M&A is unlikely to be on the agenda yet while positive catalysts for Wotif.com and Webjet are limited. A Neutral call on both stocks is retained.

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The metro TV advertising market produced a modest rate of growth in the March quarter but Deutsche Bank's channel checks suggest there was a double digit decline in April due to the timing of Easter and a reduction in spending by advertisers ahead of the federal budget. This pull-back does not seem to have been fully retraced in May. Hence, the broker has downgraded second half metro TV ad market growth forecasts to negative 0.3% from 2.9%, and this takes FY14 growth projections to 2.5% from 3.5% previously.

Nine Entertainment ((NEC)) remains the broker's preference as it pursues a subscriber video-on-demand offering. While this may be a potential long-term opportunity it could also be a drag in the short term as Nine increases investment. Deutsche Bank reduces Seven West Media ((SWM)) forecasts for FY14 by 3% to account for lower TV ad market growth and also expects Ten Network ((TEN)) will take time and more investment to turn around. Deutsche Bank does not factor in a material revenue share recovery at this stage.

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The federal budget has been blamed for poor retail results over recent weeks, compounded by a warm start to winter. Macquarie thinks Myer ((MYR)) and David Jones ((DJS)) could disappoint the market in the current half year. To date Kathmandu ((KMD)), Super Retail ((SUL)), The Reject Shop ((TRS)), Noni B ((NBL)), RCG Corp ((RCG)) and Pacific Brands ((PBG)) have all announced downgrades, citing warmer weather and reduced confidence. Macquarie thinks the outlook remains unfavourable for apparel retailers, with above average temperatures forecast for both Sydney and Brisbane in the final week of the financial year.

From a real estate perspective, Macquarie expects shopping centres owned by Scentre Group ((SCG)), GPT ((GPT)) and CFS Retail ((CFX)) will record more subdued sales relative to the centres occupied by less discretionary businesses, such as those of Charter Hall Retail ((CQR)), Stockland ((SGP)) and Federation Centres ((FDC)).

Macquarie suspects that the softer economic climate in May, as a result of the public counting the cost of the federal budget, is also likely to translate into softer credit growth. This may not necessarily be a cause for concern, unless it persists. New governments usually make their first budgets tough by introducing unpopular measures early in their term. Macquarie's analysis shows that it is normal for credit growth to fall after such a budget. Credit growth immediately after the Howard government's first budget in 1996 showed the largest drop in the sample. The more significant issue emanating from the analysis is that credit growth usually normalises in the two months after the budget, that is over June and July.

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Gold prices have jumped above US$1300/oz in reaction to the conflict in Iraq and a weaker US currency, reacting to geopolitical events for the first time in 12 months. Morgans thinks sentiment is improving overall and miners are seeing value from a positive news flow. The broker also reviews production costs and, taking the outlook for global gold heavyweight, Newmont Mining, on board, suspects US$1000/oz is the new benchmark for all-in sustaining costs. It appears Newmont is working hard to maintain production, let alone increase it. Investors are in turn demanding returns while risk capital is being deferred. The result is a focus on high quality, low cost assets.

Morgans expected that, as costs rose and margins were squeezed, gold miners would lift grade and increase production. However, it appears that as costs are rising production is falling, or going sideways at best, and this is lending support to the physical metal in the medium term, setting up the market for a squeeze. In the meantime, M&A deals are flowing. The broker observes corporates are finding value in cheap valuations and the promise of securing longer term production at costs below US$1000/oz.
 

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