Weekly Broker Wrap: PayPal & SMEs, FX Outlook And Gambling

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-Will PayPal capture SME value?
-Euro biggest loser against USD
-AUD, NZD also seen easing further
-TAH, TTS wagering share stabilising
-Strategic focus important for casinos
 

By Eva Brocklehurst

PayPal is offering online working capital loans to assist small-medium enterprises in Australia to capture greater volumes on their payment networks. This targeting of SME credit is not a surprise to JP Morgan, given this is high yielding and more profitable than even domestic mortgages. The broker notes banks globally are also embracing large technology entrants to develop their own offerings, or save costs.

PayPal will offer working capital facilities up to 8% of annual revenue to a ceiling of $20,000. Repayment will involve an up front fee and repayment of between 10% and 30% of all transactions conducted over PayPal until the loan is paid. Incentives for a borrower to use the PayPal facility relative to standard bank credit include shorter application times and no credit checks or pre-payment fees.

A longer-term risk in the broker's view is that the new entrants may capture the profitable elements of the value chain as banks are left with the "pipes". The $200bn domestic SME market is attractive for banks because of the higher yields and deposit-rich nature of the association. Moreover, funding for working capital is the single most important driver of borrowing needs for these businesses and the need has increased over 2014, with the main driver being longer credit cycles and tax/GST bills.

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Citi observes the risk asset correction in October led to expectations of a more dovish US Federal Reserve and some consolidation in the US dollar strength over the medium term. For six to 12 months ahead the analysts at Citi expect 8-9% gains for the US dollar versus the average G10 currency. The European currencies will be the biggest losers, in the broker's view, as dangerously low inflation leaves the European Central Bank with little choice but to use euro depreciation as a key policy tool, achieving this by balance sheet expansion. The British pound could be supported near term by the strong economy and repricing of rates but the broker considers political risk premia will rise in that geography ahead of the general elections in May. Meanwhile, in Japan, further money base expansion is expected to lead to a lower yen rate against the US dollar over the medium term. Citi pencils in 115 yen in the medium term and 120 yen in the longer term for the US dollar.

The broker's view is based on a divergence in economic performance and policy. The ECB and Bank of Japan remain in asset purchasing mode while at the other end of the scale the market still envisages the US Fed will start normalising interest rates over the next year. With fairly weak trends for terms of trade for dollar bloc countries and the tendency for both Australia's and New Zealand's Reserve Banks to jawbone their currencies lower, Citi envisages the US dollar will continue to strengthen against respective currencies in the medium term. The broker forecasts an Australian dollar rate of US86c in three months and US80c in six months respectively. The NZ dollar is forecast to be US77c and US72c respectively over the same time horizons.

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Morgan Stanley finds investment opportunities in Australia's gambling sector are stock specific. Two key structural themes support positive recommendations. These are wagering margin expansion, related to a transition to online from retail betting, and the growth of fixed odds in place of pari-mutuel betting. The second theme is the casino operators' focus on either mass market or VIP as a driver of value. The broker retains an In-Line industry view and recommends investors maintain an Equal-weight positions in Australian gambling. This is a mature industry, which is expected to grow in line with household disposable income. Participation across products has not changed significantly in recent times, although the penetration of online audiences does pose some upside risk.

The broker expects the wagering market share for both Tabcorp ((TAH)) and Tatts ((TTS)) will decline. That said, past concerns around the threat of corporate bookmakers, while valid, appear less severe than initially feared. Morgan Stanley estimates Tabcorp's overall market share of wagering turnover has stabilised at 44-45% while Tatts has declined to 14% from 15%. It seems the newcomers have taken share from smaller players, which indicates that scale is important in this market.

In casinos, Morgan Stanley believes the ability to drive value through accretive projects will be important in this capital intensive industry. The broker considers the strategic focus is also important and Sky City Entertainment ((SKC)) will generate stronger incremental returns than Crown Resorts ((CWN)) or Echo Entertainment ((EGP)) because it has the strongest suite of Australian licences. The broker notes the latter two have attended to growing the VIP representation in Asia, despite continuing to take mass market share away form pubs and clubs. VIP is lower margin than mass market and requires the casinos offer incentives for players to visit.

On the subject of the regulatory environment, Morgan Stanley believes Sky City, Crown and Tabcorp are better positioned than Echo Entertainment and Tatts in terms of risk and opportunity in the face of regulatory changes, which can be unpredictable.

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