Weekly Broker Wrap: Housing, NZ Banking, A-REITs, Retailers And Casinos

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-Slight easing of Oz investor housing finance
-Dairy, Auckland prices key to NZ bank outlook
-Low bond yields support A-REITs
-Key exclusions from supermarket LFL sales
-Strong cash profit likely for Donaco
 

By Eva Brocklehurst

Housing Lending

Tighter availability of housing credit and the removal of lending rate discounts should curb investor lending growth. Analysts at ANZ suggest the changes to investor lending practices are likely to have a marginal softening impact on house sales and price growth. A number of banks have adopted a more cautious approach recently as a result of APRA’s review of housing investment lending. The pullback in investor lending growth should provide some breathing space to the Reserve Bank, in the analysts’ view, enabling low rates to be maintained, and support a broadening of the recovery beyond housing in the non-mining parts of the economy.

Property statistics from Australia’s prudential regulator, APRA, reveal the major banks, in aggregate, grew investor housing loans by 12.2% in the year to March 2015. Deutsche Bank observes this figure is still above the 10% ceiling APRA would prefer. The broker expects a reduction in these growth rates in coming quarters given the recent actions by banks, such as the removal of pricing discretion for discounts and loan-to-value ratio caps for investor loans, as well as stricter loan criteria for non-resident lending.

Deutsche Bank observes, while the focus has been on investor housing growth, owner-occupied lending remains firm, up 6.8% in the year to March, and commercial property growth has increased to 6.5%.

New Zealand Banking

Citi observes there are two issues which are driving the banking outlook in New Zealand. One is the country’s largest export commodity, milk solids, which is experiencing the softest market conditions since 2007, and the other is the Auckland housing market, which is booming. For the banks it will make earnings growth a challenge over the next 12 months. The dairy sector is a large user of debt and the biggest concern for the major banks is the concentration of that debt, with 30% held by only 10% of farms. On an individual basis, ANZ Bank ((ANZ)) has the largest exposure to the NZ agricultural sector and an even bigger share of the dairy market courtesy of former subsidiary, NBNZ.

In terms of Auckland house prices, these have appreciated 18% in the last 12 months. The strength of the market has became a concern for regulators and the RBNZ has announced a new round of measures to cool the market. From an individual bank perspective, Citi notes ASB, owned by Commonwealth Bank ((CBA)), is heavily represented in the Auckland mortgage market and its mortgage volumes have slowed considerably since the first round of RBNZ measures.

Australian Real Estate Investment Trusts

A-REITs do not appear cheap compared with history but there is a likelihood they will remain expensive for some time to come. Citi notes low bond yields are providing the support for further upside in valuations. With the spread between the cost of debt funding and asset yields at decade highs, the broker suspects interest in Australian property assets will remain high, placing further upward pressure on values. Current concerns around macro-prudential controls in the residential sector, while valid, are not expected to significantly slow down the volumes, or reduce house prices.

The broker envisages Stockland ((SGP)) and Mirvac Group ((MGR)) are well placed in this regard but for different reasons. Stockland has low exposure to investor demand while Mirvac, given current pre-sales, offers a high degree of certainty. Mirvac is upgraded to Buy from Neutral.

In the office sector the broker envisages further compression in cap rates – the ratio of asset values to producing income. Recent channel checks confirm further transactions are likely to be biased towards lower cap rates and higher asset values. Dexus Property ((DXS)) is now more attractively priced and Citi upgrades to Neutral from Sell. In retail, the broker suspects the spill over in demand will eventually lead to further cap rate compression. Citi maintains a preference for residential developers and fund managers.

Australian Retailers

One of the more scrutinised statistics in the Australian retailer sector is like-for-like (LFL) sales growth. Morgan Stanley has reviewed the bases upon which the retailers calculate this growth and finds differences exist. Woolworths ((WOW)) and Wesfarmers ((WES)) exclude the impact of new store sales cannibalising existing store sales and, therefore, they overstate LFL sales growth by 0.5-0.8%, the broker suggests. The broker notes retailers in the UK and US do not adjust for new store cannibalisation and this suggesst Wesfarmers and Woolworths are in a minority by reporting this way.

When calculating “core” growth for Woolworths, Morgan Stanley finds it has been flat since FY12, although earnings margins rose to 8.0% from 7.4% over that period. Wesfarmers’ Coles has sustained a more rational store roll-out, which leads the broker to calculate core LFL sales growth is running at 2.2% for FY15. The tailwind from Western Australian deregulation, which added 0.3% growth for the major supermarkets between FY11 and FY14, is expected to fade as Aldi enters the market. Hence, Morgan Stanley finds the Australian supermarkets unattractive.

Wesfarmers’ Bunnings is perhaps better off for excluding cannibalisation, with core sales growth calculated at a robust 4.0%, on Morgan Stanley’s estimates. Retailers which do not adjust for this feature have higher quality LFL numbers, in the broker’s view. Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Burson Group ((BAP)), Super Retail ((SUL)) and Pas Group ((PGR)). Myer ((MYR)), Premier Investments ((PMV)), Kathmandu ((KMD)) and The Reject Shop ((TRS) adjust LFL sales growth for refurbishment activity which, all things equal, acts to improve LFL sales performance.

Donaco International

Bell Potter initiates coverage of Donaco International ((DNA)) with a Strong Buy recommendation and $1.15 target. The company is an integrated casino, hotel and entertainment provider in South East Asia. The broker believes the stock will re-rate positively over the next year as the company finalises its Star Vegas acquisition. Donaco operates in low tax rate jurisdictions and has little ongoing capex requirements as well as no major debt burden.

Bell Potter estimates that over 90% of the FY18 operating profit will convert to cash profit. This is around double the average conversion rate for Crown Resorts ((CWN)), Echo Entertainment ((EGP)) and Sky City Entertainment ((SKC)). Despite this the stock trades at a significant discount to peers. Bell Potter believes this discount should close over the year ahead.
 

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