Weekly Broker Wrap: Fashion, Utilities, Power, Wagering And Supermarkets

This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV

-Online shopping fatigue 
-Utilities offer strong yields
-Electricity capacity for 10 years
-Merger potential of TAH and TTS
-Supermarket profit impetus waning
 

By Eva Brocklehurst

Retail sales trends in Australia have diverged. Electronics and department stores remain slow but clothing, hardware and furniture are strong. Citi considers Specialty Fashion ((SFH)) and Premier Investments ((PMV)) are the best exposed to this trend. Clothing sales are showing the effects of pent up demand after three lean years. The broker notes fashion trends are more positive and the consumer is revealing some fatigue with online shopping. Australian online growth has slowed to 9% this year from 19% a year ago. It appears consumers are back seeking that instant gratification that the store experience offers.

Citi expects sales growth will slow from October onwards as the industry laps good trends and higher house prices from the prior year. Yes, house prices. The broker notes the correlation of higher house prices with fashion trends is even better than for furniture. Specialty Fashion also offers margin growth opportunity and upside into FY15 is significant. The broker retains a Buy rating on that stock.

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Utilities have been strong performers in the Australian market for some years. UBS forecasts Origin Energy ((ORG)) will offer the best total return in the sector, subject to completing APLNG on time and on budget and assuming improvement in electricity margins. The broker also likes Spark Infrastructure ((SKI)), with 10% upside along with a fully funded 6% yield. DUET ((DUE)) also offers a strong yield at 7% and is a potential candidate for consolidation. But It now trades in line with valuation and there are some asset debt concerns so UBS is more comfortable with a Neutral rating.

For the first time in the history of Australia's National Electricity Market no new capacity is required in any region for the next 10 years. JP Morgan notes that supply adequacy has reached the point where significant capacity can be removed and still meet reliability standards, based on the market operator's test report. The broker notes AGL Energy ((AGK)) and Origin Energy have made significant investment in generation assets in recent years. The acquisition of MacGen tips the scales against AGL in a declining wholesale price environment but JP Morgan expects that hedging arrangements will limit the near-term impact and a high level of operating leverage will benefit the company should the cycle turn. The broker retains an Overweight rating for Origin and Neutral rating for AGL.

The Australian market operator has released electricity churn statistics for July which showed headline churn increased 2.7% to 20.7%. Churn has oscillated around 19% since late last year, having trended down after the cessation of door knocking. It now appears to be stabilising. Victoria continues to be the most competitive market, with churn rising 4.5% to 29.8% in July. NSW remains lowest of the four states in the database, with churn of 15.6%.

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Goldman Sachs has added Ozforex ((OFX)) to its Australian small & mid cap focus list. To date the list is performing 0.5% better than the ASX Small Ordinaries Accumulation Index. However, when viewed on a rolling 12 months basis the list is underperforming the index by around 1.5%. Best performers on the list to date are Fonterra Shareholders Fund ((FSF)), Austbrokers ((AUB)) and SG Fleet ((SGF)).

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In the wagering industry, talk of consolidation has put the spotlight on the implications of a tie-up between Tabcorp ((TAH)) and Tatts ((TTS)). BA-Merrill Lynch has put various scenarios under the microscope and finds there is some strategic merit in the idea. Potential synergies suggest Tabcorp could pay at least 10-12 times earnings for Tatts' wagering business, and still create material accretive value. This could also be attractive from Tatts' perspective as well, suggesting to Merrills an equity valuation range of $3.61 to $3.85 a share. Recent changes to race field fees and minimum bet obligations appear to be putting pressure on corporate bookmakers. A combined wagering business could further strengthen the domestic incumbents given their strong market share and broad portfolios.

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Turning to supermarkets, Merrills observes the two majors in Australia have substantially increased profitability. Coles has increased earnings by a compound rate of 16.5% since 2009, while Woolworths ((WOW)) supermarkets have increased by a compound 8.5%. With the cost of goods for food retailers being 70-75%, and with fixed cost to sales being around 10% of sales, Merrills consider it logical to conclude that suppliers have funded the majority of the growth in earnings for the retailers. Australian supermarket margins are high compared with global peers, perhaps by as much as 2.5 times if adjustments are made for the fact Australian retailers lease their properties whereas the majority of global retailers own theirs.

What may be changing? Claims the supermarkets have abused market power have grown over the past four years and Merrills notes the competition regulator, ACCC, has recently taken some action. This signals to Merrills that the opportunity to extract better buying terms from suppliers is ending and this is likely to have a material impact on the earnings growth of Wesfarmers ((WES)), the owner of Coles, and Woolworths in coming years.
 

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