Weekly Broker Wrap: LNG Strikes, Telcos, Banks And Iron Ore M&A

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

-Industrial debate over shorter rosters
-Tensions as LNG projects reach start up
-ISPs subscriber growth rates slow
-Citi downshifts on Oz banks
-Morgans likes a BCI merger with IOH
 

By Eva Brocklehurst

Risk of industrial action on the Curtis Island LNG terminal at Gladstone, QLD, have diminished, with the majority of workers voting for the enterprise bargaining agreement (EBA), the third attempt to approve a new EBA. This majority was only 54%, with more than 3,100 workers voting no and raising a question about productivity. Credit Suisse is curious that 474 more workers voted last week compared with the initial vote in May. Employer Bechtel stated back in February that the labour force had peaked and the broker observes the construction work on train one at BG's QCLNG is effectively completed. So why the extra staff? QCLNG is seven months late so the broker speculates pressure might be increasing regarding getting the job done.

There may be more action to come. Productivity is an issue that will not dissipate and Credit Suisse observes Chevron's Gorgon project is next in line for EBA renewal in December. Other project managers may not get away as lightly as Bechtel has done. There is a campaign among workers for a roster of 20 days on, 10 days off. This compares with the four weeks on, one week off in Gorgon's current agreement. Wheatstone (Chevron) and Ichthys (Total) project EBA renewals are also due down the track. There is debate as to the financial impact of shorter rosters on new projects, as higher productivity could offset higher associated costs from more staff, but Credit Suisse believes changing mid project would be a disaster. The broker suspects Big Oil needs to be sure that Australian EBAs will run for the entire construction phase of the project.

UBS attributes some of the recent price weakness in Santos ((STO)) and Origin Energy ((ORG)) to the EBA unrest. Overall, the strike had minimal impact on construction and the broker estimates 2-3 days of lost productivity. The market was concerned that extended strike action could impact on completion of the three big Gladstone LNG projects. QCLNG, viewed as a setting a benchmark, is on track for first production at the end of the year, while GLNG and APLNG are looking to be starting up mid 2015.

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Citi has reviewed the implications for internet service providers (ISPs) such as iiNet ((IIN)) and TPG Telecom ((TPM)) based on Telstra's ((TLS)) reporting of subscriber numbers. Telstra's wholesale broadband subscriber base rose in the second half, implying continued growth among ISPs. Netting out the latest Optus ((SGT)) figures and M2 Communications' ((MTU)) recent update leaves subscriber growth distributed amongst IIN, TPM and smaller ISPs suggesting the slowest net growth rate in two years. Citi notes as background that a major portion of on-net growth – areas where ISPs have their own infrastructure – is going to TPM and IIN. MTU appears to be dominating off-net growth – where ISPs do not have infrastructure – that is mainly in regional areas. The broker takes comfort in the implication that no ISP has gone backwards. Telstra also continues to gain market share in copper broadband connections, now back above 50%.

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Citi suggests the bull run in Australian banks is coming to an end. The broker has downgraded Commonwealth Bank ((CBA)) to Neutral from Buy, leaving Macquarie Group ((MQG)) as the only Buy rated bank in the broker's coverage. As competition re-emerges, pricing for risk is re-established and credit cost improvement slows, the major banks are likely to face significant challenges to maintain returns. Major bank average return on equity (ROE) is expected to decline to 12% from the the current 25-year peak levels of 16%. This is still well above the banks' current 10% cost of capital. Over the longer term, Citi expects to encounter different ROE outcomes from the major banks, as their differences are revealed and heightened in terms of geographic mix, products and relative starting capital positions.

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BC Iron's ((BCI)) plan to acquire Iron Ore Holdings ((IOH)) is making more sense to Morgans the longer the broker dwells on the idea. If the company can gain access to additional infrastructure through Fortescue Metals ((FMG)) for Iron Valley and via Aquila Resources ((AQA)) for West Pilbara, BC Iron could become a significant player in Western Australia's iron ore sector. The broker's interest in the stock is driven by its potential production growth, rather than iron ore markets. Within 12 months the company will ramp up to 11mtpa, which about equals that of Atlas Iron ((AGO)), and could be over 20mtpa within the next few years if a joint venture deal with Aquila eventuates. This would make BC Iron the fourth largest producer after Fortescue. The broker suggests this represents formidable upside if investors have the patience for the events to play out.
 

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