Weekly Broker Wrap: Queensland Election, Cooper Basin, AUD, Oil Price And Telcos

This story features SEVEN GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: SVW

-QLD building investment a concern
-What is Seven Group up to with Beach?
-AUD impact underestimated?
-More savings opportunities exist
-Relief over Foxtel’s new bundle
 

By Eva Brocklehurst

Queensland Election

Several outcomes are still at play after the Queensland election. The most conceivable on the current count is a minority Labor government, although it is possible the incumbent Liberal National coalition could retain government with a minority position. ANZ economists observe the most significant policy difference between the two major parties is the privatisation of public infrastructure. The LNP’s proposal to sell or lease electricity, port and water assets will not occur if Labor achieves government but is also considered unlikely if the LNG governs in a minority government. The majority of these funds were intended for paying down debt not new infrastructure. Labor’s proposal is to quarantine two third of the returns from the income-earning assets for sale in a trust from 2018-19.

Economists point out that fulfilling exact promises rarely occur given the negotiations necessary if there is minority government, and are most concerned about the building industry in Queensland as investment has been quite weak in that state outside of the mining sector. They consider it is likely that some Labor policies, such as the delay in the payroll tax threshold increase and loss of Commonwealth asset recycling funds, may also have negative impact on the economy relative to the LNP’s policies.

The economists draw limited implications for the upcoming NSW election. The NSW coalition government has a better budget position and higher credit rating than Queensland, which means it can devote most of the funds from its privatisation plans to new infrastructure. NSW also stands to benefit form a larger share of the Commonwealth asset recycling fund if Queensland is no longer a part of it.

Cooper Basin Producers

Seven Group’s ((SVW))  take up of a stake in Beach Energy ((BPT)) has caused investors to wonder if this is a prelude to something larger, or just a value play. What is on offer at Beach is cheap oil and a lot of gas. If consolidation in the Cooper Basin is on the cards, Credit Suisse observes there is also Drillsearch‘s ((DLS)) wet gas or the large resources of Senex Energy ((SXY)). The broker considers the list of potential buyers into this market is long, as there are plenty of oil, gas and unconventional gas resources available.

However, the list of obvious buyers is very short. Santos ((STO)) and Origin Energy ((ORG)) have little cash to spare and AGL Energy ((AGL)) would need to raise equity to buy a volatile business it has little experience with. The majors could afford to buy a company like Beach Energy, given it is net cash, but the broker suspects it would be hard to convince shareholders that now is the time to spend money on a desert in the middle of Australia, unless CSG reserves at GLNG or QCLNG are of lower quality than the market believes.

The broker suspects Seven Group is too small to swallow Beach Energy. If the stake is just a value play, Credit Suisse believes Drillsearch would offer better value and, if there is truly a buyer looking for an acquisition, it would make sense to grab this company as well. Credit Suisse speculates a really aggressive buyer might take Santos’ share of the SACB JV. On that note the broker decides enough is enough and pulls in the speculation horns.

Australian Dollar Impact

The impact of the Australian dollar’s fall on balance sheets may have been overlooked heading into the earnings season, analysts at Morgans reason. Stocks reporting in AUD with predominantly unhedged US dollar debt are at risk. The broker cites Newcrest Mining ((NCM)), Sonic Healthcare ((SHL)) and Transfield ((TSE)) among these. Stocks reporting in US dollars with debt in other currencies will find their debt falls and equity rises. This creates upside risk for the likes of Amcor ((AMC)).

The analysts observe several resource stocks recently reported lower cash costs, in part because of the weaker currency. This could mean the downgrade cycle is near maturity, particularly where the US dollar commodity price has stabilised. In this instance Morgans notes iron ore, copper and oil are still under downward pressure but coal has been relatively stable. While a protracted upgrade cycle is unlikely, a reduction in the size of price downgrades can be enough to allow stocks to re-rate.

The broker highlights those upgraded recently such as Oz Minerals ((OZL)), Alumina ((AWC), Perseus Mining ((PRU)), OceanaGold ((OGC)), Newcrest and Whitehaven Coal ((WHC)). Downgrade momentum is also seen easing for Rio Tinto ((RIO)), Iluka Resources ((ILU)), Atlas Iron ((AGO)), Sandfire Resources ((SFR)) and Mount Gibson Iron ((MGX)).

Small Caps and High Conviction Stocks

The Small Industrial and Resources Accumulation indices on ASX have posted gains over the first two months of this year for the first time since July 2014, in Citi’s observation. The broker highlights the impact of lower oil prices on capital and operating expenditure for exploration and production companies, estimating a 15% savings opportunity exists on both fronts. Marginal producers are expected to benefit most from this opportunity. The broker believes the market has been quick to price in current spot oil weakness but is yet to consider the secondary benefits of a low oil price.The broker believes cost cutting opportunities will feature in corporate strategies over the next 12 months.

Morgans observes market sentiment is lukewarm and investors will need to exercise a cautious approach in 2014, in the light of such events as the oil price collapse that threatens the re-priicing of risk. The broker expects Australian shares to surprise on the upside in 2015 with strong opportunities for highly selective investors. New additions to Morgans’ high conviction lists are Macquarie Group ((MQG)) and ResMed ((RMD)) as both enjoy a currency tailwind. ANZ Bank (ANZ)) is expected to benefit from rate cuts, while Corporate Travel ((CTD)) is expected to upgrade earnings forecasts.

The broker removes Brambles ((BXB)) and CSL ((CSL)) from the Buy list after strong share price appreciation and identifies strong contrarian opportunities in Woodside Petroleum ((WPL)), Origin Energy and Oil Search ((OSH)). However, conviction in the timing of a turnaround in oil has diminished and Origin and Oil Search have been removed from the list.

Telco Sector

Bell Potter’s key picks for stocks in this sector are Altium ((ALU)), Empired ((EPD)) and PS&C ((PSZ)). The common theme for each is strong earnings growth and positive outlook statements. There are also other catalysts over the next few months. As well, the broker experts good results from My Net Fone ((MNF)), nearmap ((NEA)) and Melbourne IT ((MLB)) but, for company-specific reasons, envisages less potential for a short-term re-rating in these share prices.

Citi has drawn implications for the industry from Foxtel’s new triple pay offer – payTV plus broadband plus phone. The bundles underwhelmed the broker, with no material discounting or attractive broadband pricing. Citi envisages little disruption to the broadband market from Foxtel’s plans. Citi expects the managements of iiNet ((IIN)), TPG Telecom ((TPM)) and M2 Telecommunications ((MTU)) will be relieved, because of the conservative pricing Foxtel has used. There was a risk Foxtel would come to the market with an aggressive strategy on broadband to lift the penetration of payTV subscriptions and increase average revenue per unit, but this has not happened.
 

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