Weekly Broker Wrap: Media, A-REITs, Life Insurance, Tourism And Food

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-Digital media to outperform
-Bell Potter upgrades My Net Fone
-Impact of closing some MYR stores
-Implications from Trowbridge report
-Inbound tourists staying longer
-Oz food companies perform strongly
 

By Eva Brocklehurst

Media

Morgan Stanley acknowledges a conundrum in its media coverage. The broker has never been more bearish on the medium term outlook for newspaper, TV and radio earnings and asset values yet it is upgrading the industry view to Attractive from Cautious. The reason is the composition of the stocks under cover have changed dramatically. In 2008 traditional media accounted for 90% of the value in the broker’s coverage. Today, that has declined to 40% and internet and digital assets account for 60%. Looking forward, in aggregate, the broker expects the sector will outgrow and outperform the broader Australian market. Hence the relative Attractive rating.

Morgan Stanley’s order of preference in internet/digital media is Seek ((SEK)), REA Group ((REA)) and Carsales.com ((CAR)). Among traditional media the broker’s highest conviction Overweight stocks are market share winners such as Nine Entertainment ((NEC)) and APN Outdoor ((APO)) and those with undervalued turnaround potential such as Fairfax Media ((FXJ)) and APN News & Media ((APN)).

My Net Fone

My Net Fone ((MNF)) has acquired the global wholesale voice business of Telecom NZ ((TEL)) for consideration of NZ$22.4m to be initially funded with a $25m bank facility. The acquisition is forecast to generate revenue in FY16 of $90-100m and earnings of $3.5m before synergies. Revenue synergies are largely expected from providing wholesale managed services and software products to Telecom NZ International customers.

Included in the revenue forecast is a 3-year exclusive trading agreement with Spark New Zealand for international minutes, which the company estimates will generate annual revenue of around $10m. Bell Potter upgrades FY16 and FY17 estimates by 4.0% and 11% respectively on the back of the acquisitions but downgrades FY15 by 2.0%, largely because of acquisition costs. The broker increases the MNF price target to $4.00 from $3.00 and upgrades its recommendation to Buy from Hold.

Myer and A-REITs

Macquarie has looked at the implications for Australian Real Estate Investment Trusts (A-REITs) of closing underperforming Myer ((MYR)) stores. To date Myer has typically been handing back space at lower quality malls at the expiry of leases, rather than breaking leases early. Macquarie suspects, with a weighted average lease expiry of 15 years or so for the network, this will likely remain a slow burn for retail A-REITs. International retailers may spur a forecast 215,000 square metres in incremental demand in Australia but this will be centred on CBDs and high quality regional malls, which makes the redevelopment of lower quality centres post any Myer departure problematic, in the broker’s view.

Any departure by Myer may be positive on the rent front but the capex outlay required to refit the space is more often value destructive for the retail landlords, Macquarie contends. An example is Dandenong, where JB Hi-Fi ((JBH)), Aldi, Daiso and Trade Secret took part of the old Myer space but factoring the $30m development cost, it was destructive to net present value. The broker considers the impact of any Myer departure on the existing discretionary retailers in the centres is negative as well. Hence, coupled with a general expectation for modest earnings and distribution growth for certain retail landlords, Macquarie remains Underweight on the retail A-REIT segment.

Life Insurance

The government is ramping up the pressure on the life insurance industry to adopt the recommendations of the Trowbridge report. The federal assistant treasurer, Josh Frydenberg, has said the extent to which government intervention is required will depend ultimately on the industry’s own actions. The most significant concern is the upfront commission model which has misaligned the interests of insurers, advisers and clients, creating significant churn. JP Morgan considers the assistant treasurer’s words a threat to the planning industry and life insurers. 

JP Morgan expects that if the remuneration measures outlined in the report are adopted, it would likely release capital in the industry and lead to improving returns if margins were not competed away. The broker also observes there has not been any strong response from the Financial Services Council, a co-sponsor of the report, although it appears to tacitly support the report. The Association of Financial Advisors, which also co-sponsored, has not supported the findings in the current form. JP Morgan believes there is still some way to go but addressing churn in the industry would be a positive for listed life insurers such as AMP ((AMP)) and Clearview Wealth ((CVW)).

Tourism

Are tourists responding to the weaker Australia dollar? That’s the question ANZ analysts ask as the mining boom peters out. The analysts note statistics which show a weaker Australian dollar is encouraging more overseas visitors and they are staying longer and spending more. There were record visitor numbers from 15 key markets last year with China leading the way. Despite the increased cost of international holidays, the number of Australians travelling abroad remains strong. Domestic tourism is also robust, but underpinned by business travel and visits to family and friends. Hence, the analysts suggest the economy will gain most from incoming tourist arrivals and these should continue to strengthen, assisted by further falls in the currency and stronger economic growth in key offshore markets.

Food

Canaccord Genuity Australia has reviewed a number of factors which are driving the strong performance of ASX-listed food and agricultural companies. Domestic and global population growth, specifically the expansion of the Asian middle classes, and a subsequent increase in demand from Asia for Australian agricultural exports are supportive. The lower Australian dollar will also drive increased competitiveness in exports. Australia has a reliable history in the sector and strong “clean and green” credentials, which should continue to play out favourably, in the analysts’ view. There is also increased focus and fund allocation to these stocks from investment managers.

The five companies covered by Canaccord Genuity within this area have delivered mean returns of 104.5% from the time of the broker’s initiation on the stock (three years or less). Coverage to date includes dairy companies such as Bega Cheese (BGA)) and Warrnambool Cheese & Butter ((WCB)), sandalwood oil producer TFS Corp ((TFC)), almond producer Select Harvests ((SHV)) and honey producer Capilano ((CZZ)).
 

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