Weekly Broker Wrap: Housing, Gaming, Retail, Media, Fertilisers And Energy

This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NEC

-Will housing boom lead to bad debts?
-Risks rising for Hong/Kong Macau gaming
-Changes loom for operating leases
-Possible SXL merger accretive to NEC?
-High US dollar headwind for potash
-QCLNG shows CSG to LNG success
 

By Eva Brocklehurst

Housing Boom

The housing boom in Australia and New Zealand is entrenched, with dwelling prices now up 57% in Sydney, 42% in Melbourne and 63% in Auckland from pre-global financial crisis levels in 2007. Sydney median dwelling prices are now 10.3 times median household disposable income, with Melbourne at 8.2 times and Auckland at 9.8 times. UBS observe increasing evidence house price inflation is being fuelled by speculative activity.

Given low rental yields are unlikely to cover interest payments and ongoing expenses, the economics of these housing purchases for investment rely on an assumption of full occupancy, favourable tax treatment and ongoing appreciation in house prices. UBS observes the Reserve Bank appears less concerned about house price rises because they are primarily isolated to Sydney and Melbourne.

If house price multiples continue to expand there are implications for not only bank mortgage books but other parts of the economy. New loans written against expensive housing assets may deliver poorer credit outcomes in the event of an economic downturn. UBS suspects further supervisory intervention is inevitable in the current scenario. Elevated bad debts for the mortgage banks will become more likely in the event of a future economic shock, in the broker’s view.

Gaming

Morgan Stanley remains cautious about the Hong Kong/Macau gaming industry because of regulatory pressures, oversupply and negative earnings revisions, along with rich valuations. If there is a short term rally on the back of the opening of Galaxy the broker recommends selling into the rally. Sequential improvement in fourth quarter revenue may not be enough to drive outperformance since higher-than-expected operating expenses and lower-than-expected demand mean earnings revisions are yet to find a base. The broker remains concerned about recent data on hotel room rates and occupancy in Macau. Moreover the policy risks are numerous and point to a slower recovery in demand.

Retail

There are implications for retailers from the treatment of operating leases, as the International Accounting Standards Board proposal to bring operating leases onto balance sheets appears to be progressing towards inclusion in the new standards. New standards typically require implementation within one to two years. The proposal has met widespread opposition from the retail industry. Instead of recognising rental payments as incurred, retailers will be required to expense theoretical depreciation and financing costs. This will result in higher earnings at the EBITDA level but also higher interest and depreciation charges.

Morgan Stanley notes, theoretically, there should be no impact on valuation for retail stocks as the changes have no direct effect on cash flow. Nevertheless, leverage, returns on capital expenditure calculations, and trading multiples will be affected. At this stage the broker does not have the information to identify winners and losers or as to how tax authorities will treat the changes.

Media

Deutsche Bank has looked at the potential of a merger between Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)), given the continued speculation. Southern Cross is not currently Nine’s regional TV affiliate and an acquisition of WIN TV would likely to be easier to implement, but the broker’s analysis demonstrates that acquisition of Southern Cross could be highly accretive to Nine shareholders.

The base case scenario suggests earnings accretion of 10-20% over the first two years following a transaction. The driver would be the substantial revenue synergy potential, as Southern Cross moves to broadcast Nine’s content in place of its Ten Network ((TEN)) broadcast in regional areas where Nine doe not directly operate. Additionally, the sale of Nine Live puts Nine Entertainment in a favourable negotiating position as it can now offer a significant cash component for Southern Cross stock. Deutsche Bank attributes Southern Cross’s lower trading multiple to its higher level of gearing but, if the merged entity maintains a more reasonable gearing ratio, this discount is unlikely to persist.

The latest online rating figures for March from Nielsen suggest there is no let up in the consumer engagement for REA Goup ((REA)), Carsales.com ((CAR)) and Seek ((SEK)) in domestic markets, despite the presence of challengers. The real estate segment highlights the strength in the property market with a material step-up in audience and no change to REA dominance. Automotive enquiry volumes improved and while Carsales.com is dominant, Gumtree is encroaching. Seek benefitted from a bounce in employment volumes and improved key usage metrics, but Citi notes Indeed and LinkedIn are expanding in the category.

Fertilisers

Citi considers the outlook for nitrogen, phosphate and potash is weak. Ample supply, a strong US dollar and the potential for adverse weather to limit the planting of corn in the US is the reason. During a late spring season in the US the farmer tend to apply more urea and less ammonia, and skip potash and phosphate applications. Supply pressures are continuing to affect urea in the broker’s view but lower exports from China may help stabilise prices later in the year. The analysts note the stronger US dollar is a headwind for potash, particularly in India and South East Asia, where potash imports are used on some crops that are not exported.

Australian Energy

The performance of QCLNG, the first project in the world to liquefy gas from CSG fields for export as LNG, has rivetted the attention of energy market participants. The central Queensland project entered production late in 2014. A second train will be filled towards the end of this year. Morgan Stanley notes industry participants are watching with interest given the relevance of this project for others such as GLNG and APLNG, both of which are expected to start production mid year. The production performance of QCLNG is considered a positive read through for Santos‘ ((STO)) GLNG and Origin Energy‘s ((ORG)) APLNG and illustrates that successful conversion of CSG to LNG can be achieved.
 

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