Weekly Broker Wrap: Agriculture, Small Caps, Health Care, TV And Online

This story features SUPER RETAIL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUL

-Value in Oz small caps?
-Wages growth weakens
-Risks for diagnostics, pharma
-Decline in FTA TV audience
– Domain catching REA
 

By Eva Brocklehurst

Agriculture

It’s official. Morgan Stanley notes the Australian Bureau of Meteorology has observed the tropical Pacific is in the early stages of an El Nino. This means abnormally warm sea surface temperatures have been noted in all five regions monitored by meteorologists. An El Nino phase signals drier than normal conditions are likely to prevail over the coming winter-spring on Australia’s east coast, a negative indicator for agricultural production.

Small Caps And Strategy

Citi asks if there is value in small cap stocks, as lower interest rates and higher equity multiples make it more challenging to find value in the market. Australian small cap indices have underperformed in recent years and while this is not a certain indicator of value, it may at time be a sign of unduly difficult conditions that will eventually pass. Overall, the broker observes small industrials do not appear much cheaper than their larger siblings. The reason is because of the mixed performance of the domestic economy, on which they are more dependent, which limits small cap earnings.

Still, sub-par growth in the domestic economy means some may be under-earning and offer more value than their price/earnings ratios imply. The stocks Citi finds most interesting in this regard are Super Retail ((SUL)), Skycity Entertainment ((SKC)), Flexigroup ((FXL)), McMillan Shakespeare ((MMS)), Brickworks ((BKW)) and GUD Holdings ((GUD)). The first four are rated Buy.

Given the latest dip in the equity market, Deutsche Bank suggests buying for four reasons. Firstly, the fall reflects normal volatility rather than anything more sinister. The market had rallied 16% since the most recent trough so, given an average 10% gain between falls, a dip was due. Valuations also appear reasonable and Australia’s price/earnings relative to global peers is back to average after being slightly expensive. Meanwhile, earnings momentum continues and the earnings revision ratio is above average, which suggests the recent fall in forward estimates may soon be stemmed. Lastly, poor analyst sentiment, while a risk near term, is positively correlated to market performance over the medium term.

Wages

Australian wages growth, as indicated by the Australian Bureau of Statistics’ wage price index, was 0.5% in the March quarter, equalling the lowest quarterly growth on record, UBS observes. The year-on-year rate dropped further to 2.3%, also a record low. UBS notes the slowdown of wages growth is very broad based and suggests household income is subdued and inflation pressures low. Despite this, the broker notes CPI data showed core inflation actually ticked higher in the quarter, to above 2.25%. As the Reserve Bank has already reduced its cash rate to a record low of 2.0% the broker doubts it will feel compelled to cut again, given a strong housing market, unless weaker wages lead to lower outcomes for core CPI.

Health Care

Key pointers from the federal government’s budget for 2015/16 include a review of the Medicare Benefits Scheme. Credit Suisse believes the government will reduce spending on diagnostics tests and reform GP attendance outlays. This could mean funding cuts emerge in the medium term. The review presents the main medium-term fiscal risk for diagnostic service providers. The government will also remove duplication between certain health assessments under the MBS and child health assessments already provided by the states and territories. On a positive note, a reduction in short GP consultation rebates will not go ahead.

No specific new measures for private health insurers and hospitals were announced but the government remains committed to restoring the rebate on private health insurance. Restoration of the rebate will be of benefit to private hospitals, in the broker’s view, but the timing is unclear. Meanwhile, the sixth community pharmacy agreement is being negotiated. Credit Suisse notes Pharmaceutical Benefits Scheme co-pay safety net thresholds will be increased on January 1 2016. Partly offsetting this, savings will be achieved from price amendments for certain medicines. The redistribution of PBS revenues remains the key risk for pharmaceutical wholesalers, in the broker’s view.

TV

Easter appeared to be good for Ten Network ((TEN)) as UBS observes MasterChef rated strongly. Ten has improved the most among the FTA networks year on year to April. Nine Entertainment ((NEC)) is still winning in key demographics while Seven West Media ((SWM)) retains the overall ratings crown with a 41% share of the monthly free-to-air ratings. Forecasts are unchanged but the broker notes metro FTA audiences appear to have weakened over 2015.

JP Morgan is also cautious about the metro FTA sector, noting a material decline in 2015 prime time audience, which is the critical signal in terms of advertising dollars. The broker estimates 75% of the $2.5bn FTA revenue pie is prime time, and the audience has declined 7.5% since the start of the year. Why? The broker observes two trends of concern. Younger audiences are turning off, with the 16-39 demographic down by 14% in prime time. The second is the material decline in the main channel prime time audience, which represents 85% of industry revenue and 70% of audience.

The broker is downgrading FTA advertising expectations with industry forecasts now seen down 1.5% and 1.0% respectively for FY16 and FY17. Hence, JP Morgan has reduced recommendations on Nine and Seven to Neutral and remains Underweight on Ten. Prime Media ((PRT)) has an Overweight rating given its long-dated affiliation agreement and the relative defensive nature of regional TV revenue.

Online

The latest online data shows a rise in listings volumes in recent months. Citi notes Carsales.com ((CAR)) is back at the top of the automotive segment while the Fairfax Media ((FXJ)) online property portal Domain is bearing down on REA Group ((REA)). Listing volumes on REA are down year-on-year over 2015 while Domain has steadily climbed. REA remains a comfortable leader in the rental property market.

Citi retains a Buy rating for REA, despite the rate of growth being curtailed, and for Carsales.com as well. The broker rates Fairfax as Neutral, with robust growth in Domain countered by structural print pressures and a premium valuation.
 

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