Weekly Broker Wrap: Stock Picks, Travel, TV And Telecoms

This story features QUBE HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: QUB

-Credit Suisse positive on Oz housing stocks
-Qube tops Morgan Stanley’s transport list
-Is market underestimating Sydney Airport?
-Decline in outbound travel subsides
-Flat outlook for TV advertising
-Telecoms line up in data war
 

By Eva Brocklehurst

Stock Picks

Investors based in China and new immigrants from China purchased $8.7bn of Australian residential property in 2013-14, up 60% over the year. This statistic is equivalent to 15% of the national housing supply, Credit Suisse maintains. Purchases are concentrated in Sydney and Melbourne, where Chinese demand is the equivalent of 23% and 20% of new supply, respectively. Credit Suisse expects the next six years will witness a doubling of Chinese demand for Australian housing.

New foreign investment proposals are not expected to erode demand by very much. Added to low interest rates, this means the outlook should remain positive for housing-related stocks such as developers, building material companies and property web sites, in the broker’s view.

Demand for infrastructure stocks is typically resilient through economic cycles. Morgans observes the sector has rewarded investors, boosted by falling interest rates. However, Australian investors are constrained by the number of ASX-listed infrastructure stocks and investing globally may provide investors with a far larger choice and greater asset diversity, where values may be cheaper than ASX-listed entities.

Meanwhile, the broker has updated coverage on the transport sector with a neutral view as valuations appear toppy. The long-term pick in the sector is Qube Logistics ((QUB)), as while the stock appears expensive, it is building out a profitable business that should be substantially larger in a few years time. The broker also suspects the market is underestimating the amount of cost savings Sydney Airport ((SYD)) can achieve in 2016-17, as expensive interest rate swaps expire and are replaced at far lower rates. The company’s credit metrics may improve faster than expected, increasing the potential for capital management initiatives.

The broker considers the insurance sector is expensive at present but QBE Insurance ((QBE)) is a preferred pick, given the upside from its transformation program. QBE is also able to benefit from any fall in the Australian dollar and retains a strong leverage to any rise in US interest rates. Morgans has made changes to its top 100 high conviction list this month, adding Carsales.com ((CAR)), Qantas ((QAN)) and Sydney Airport. Macquarie Group ((MQG)) and Transurban ((TCL)) have been removed because of strong share price appreciation while Seek ((SEK)) is removed because of a lack of short-term re-rating catalysts.

Travel

Preliminary arrivals and departures data from the Australian Bureau of Statistics signals the consistent decline in the rate of outbound travel over the last 12 months has stalled. Bell Potter suspects this points to improving household consumption, given this variable is the most important driver of outbound travel. The data also lines up with the broker’s analysis which suggests that the declining currency and soft economy have not resulted in a shift in market share to domestic holidays. Still, Bell Potter is only expecting a modest steady improvement in the rate of outbound travel. CoverMore ((CVO)) and Flight Centre ((FLT)) remain the broker’s preferred ways to play the improving outlook for outbound travel.

TV

Citi has reviewed audience ratings for free-to-air broadcasters with the data showing Nine Entertainment ((NEC)) is struggling to replicate its 2014 performance. Seven West Media‘s ((SWM)) channel has retained its leadership position while Ten Network ((TEN)) has improved. Meanwhile, PayTV audiences reached their second highest level in share terms in March. The broker recently lowered medium-term forecasts for advertising to no growth, because of growing structural pressures from alternative viewing platforms.

Citi rates Nine Entertainment as a Buy and considers it is a potential M&A target, with a net long cash position and option value on affiliate deals. Seven West Media is rated Neutral as it is cheap but has no earnings growth, while Ten is Neutral High Risk, trading at fair value based on the value of its TV license.

Telecoms

Macquarie has developed a new monthly mobile phone plan tracker for the Australian market, which compares calling and data inclusions between the three major operators for post-paid handset plans. There were material increases in data inclusions by all players in April with Telstra ((TLS)) lifting by as much as 6 gigabytes per month. SingTel‘s ((SGT)) Optus lifted data inclusions by up to two gig and moved to offer unlimited voice for $40/month. Vodafone ((HTA)) responded with the return of its double data promotions.

Macquarie observes competition is heating up but believes mobile service revenues can continue to grow, given the increased demand for data. Still attention is warranted to trends with regard to average revenue per unit and handset subsidies.

Morgan Stanley has observed the data value war continues but finds little evidence of a price war. Value has increased via the data gains with no decreases in prices. Optus actually increased plan prices over the month, by 14-20%. Morgan Stanley expects industry prices will rise 2-3% in 2015 and 2016. Optus has also added six months free in Netflix to new subscribers. This usage is not unmetered. As the consumer watches Netflix the mobile data allowance is consumed and they can potentially exceed allowances.
 

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