Weekly Broker Wrap: Oz Equities, Building, Telcos, Grocers, Aussie And Oil

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

-Headwinds stronger in some sectors
-Benefit of infra spend more so in FY16
-Focus on telco pay-outs, stable earnings
-Risk to Woolworths' guidance
-Another cut to cash rates likely?
-Negative wealth offsets to lower oil
 

By Eva Brocklehurst

Equity Strategy

As earnings season gets underway Citi notes expectations are being tempered and becoming more realistic. The broker expects large moves in global markets over the past three to six months will continue to impact earnings estimates, with downside risks to resources earnings from commodity prices and upside risk to offshore industrial earnings from the Australian dollar.

Domestically, the outlook is mixed. The improvement in the economy outside of resources is still concentrated in housing, which has been good for developers, construction materials and, less directly, retailers. It has not yet buoyed areas such as logistics or advertising. In Citi's view, some of the larger sectors now seem to be facing stronger headwinds. These include the banks, insurers and food retailers.

A reluctance to invest and a preference for distributing profits to shareholders does appear entrenched at this juncture and the broker considers it still too early for management to be talking much about FY16, so the main outcome from reporting season could be just the continued erosion of FY15 earnings, for which growth forecasts were already downgraded late last year. If so, the broker suspects this may stymie the recent gains in the market.

Building

JP Morgan believes the construction sector is emerging into a smoother period which should underpin reasonable growth over the next five years. Residential construction remains the bright spot, with an ongoing high level of approvals supporting the stronger-for-longer theme. The non-residential and engineering construction outlook looks bleaker. The broker finds some evidence to suggest road infrastructure will go a way to offsetting the headwinds from a declining spend in resources and energy, but the benefit of these projects is unlikely to be felt until well into FY16.

Telcos

Macquarie finds two themes for the telecoms sector over 2015, including the impact of the digital dividend amid the shifting dynamics of fixed line competition. Digital spectrum is now online and the broker expects it will have the greatest positive impact on Optus as it covers a prior deficiency in the company's low-frequency spectrum holdings. Both Telstra ((TLS)) and Optus are placed to benefit from improved coverage and capacity in the spectrum.

Macquarie expects a positive impact on financial for mobile players form consumer data consumption and a more competitive fixed line segment, reflecting a more aggressive Optus and rising customer acquisition cost in NBN areas. M&A is expected to remain on the agenda. The focus on liquid, cash generating businesses with high pay-out ratios, franking credits and stable earnings will continue to attract investors to Telstra. Optus will also be an important driver of growth for SingTel ((SGT)), should it succeed in reinvigorating its brand and customer growth trends.

Supermarkets

Recent reports from Australian real estate investment trusts have highlighted slowing growth in supermarket sales. The landlords, SCA Property ((SCP)), Novion ((NVN)) and Federation Centres ((FDC)) collectively control of 10% of Woolworths ((WOW)) and Coles ((WES)), stores. Morgan Stanley believes the trends are relevant for these two and risk of a soft sales performance in supermarkets is growing.

Tobacco accounts for 7-8% of supermarket category sales, so given the timing of excise increases in December 2013 and September 2014, this should have contributed to a net acceleration in growth in the second quarter versus the first quarter of FY15. According to Australian Bureau of Statistics data however, supermarket category growth slowed in the second quarter to 5.9% from 6.3%, highlighting for the broker the underlying weakness and the risk to Woolworth's 4-7% profit growth guidance.

Australian Dollar

Australia's economy is struggling to gain traction and the central bank is easing official rates. High yield advantage is becoming negligible and volatility is rising. Thus, ANZ analysts expect further erosion of investor confidence in the Australian dollar. High net worth individuals are reportedly shying away from AUD instruments The downgrading of iron ore price forecasts by the ANZ commodity team only adds to this story. To the analysts, it means pressure remains not only on the AUD's risk premium but on the valuation level as well.

The analysts expect another downshift in the Australian currency is coming. The US dollar is starting to look more resilient while, technically, numerous tests in the AUD above US78c recently have all been rejected. Moreover, US dollar strength is broadening into emerging market currencies and its break-out against the yen has set a direction which will be important for the AUD. A weaker yen will reduce the appetite of Japanese investors to buy yielding assets in Australia, by keeping the AUD above 90 yen.

As Chinese New Year approaches the analysts also expect Australian bond issuance is likely to lighten, as major centres of demand close, and this will take away some of the marginal support for the currency. A final reason for the prospect of a mark down in the AUD is that it would be unusual for the Reserve Bank not to following up its February cash rate reduction with another cut in March. On this note, ANZ analysts expect a cut next month, while observing the market is only factoring in a 40% probability.

Oil In Australia

In the short term, falling oil prices are likely to mean lower inflation and lower interest rates in Australia, in the view of National Australia Bank analysts. The impact will also be contingent on the degree to which second round price effects are passed through to consumers and, ultimately, household spending. The analysts suspect that the windfall opportunity is limited, reflecting the offsets to higher disposable income from negative wealth effects in terms of lower equity prices (energy) and greater contraction in business investment, namely mining, that will weigh on the labour market.

Moreover, less inflationary pressures along with lower global interest suggest lower official domestic rates. The NAB analysts also expect the RBA to move again in coming months. Lower rates will be instrumental in the anticipated recovery in consumption and dwelling investment into 2016.

NAB analysts have revised the profile of their oil price forecasts lower through 2015-16, but expect a recovery to pick up pace later this year. The oil futures curve has moved into contango – where forward prices are higher than spot prices – since last October. This typically indicates excessive downward adjustments to prices in a short time frame alongside the lowering of longer-term expectations. Still, the analysts note contangos in commodity markets tend to be short-lived.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms