Weekly Broker Wrap: Property Portals, WA Miners, Builders And A-REITs

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

-Farmers stay focused in Ukraine
-REA Group retains upper hand
-Streamlining continues for WA
-Labour scarcity for builders
-Turnover rent pressures for A-REITs
 

By Eva Brocklehurst

Ukraine Crops

Macquarie has conducted its first ever tour of crops in Ukraine. The broker had expected difficult macro economic conditions would force farmers to withdraw marginal land from corn production and limit investment in inputs. In reality, only corn acreage is reduced. Grains and oilseeds producers have continued operating as usual and sought to improve yield efficiency. The main problem for producers has been the rise in the cost of inputs. Nevertheless, farmers were still planning to keep up applications of crop protection and fertiliser. With the usual weather related caveats Macquarie has higher production expectations for corn and wheat in the country’s 2015/16 season.

Property Portal Wars

There has been conjecture about the relative performance of REA Group ((REA)) and the Fairfax Media ((FXJ)) portal, Domain. Citi observes REA Group continues to beat Domain in terms of absolute growth. Agent numbers may have risen for Domain but the online metrics remain skewed in REA Group’s favour. The broker observes Domain’s rate of revenue growth is set to pass REA Group in the second half of FY15, albeit Domain is still a minnow in terms of its revenue base. 

Domain has now reached parity with REA Group in terms of agent numbers and property listings and has lifted consumer awareness. The broker finds REA Group is extending its lead on audience engagement, implying it is more cost effective for driving sales to vendors. Competitive attention from Domain has centred on Sydney, Melbourne and South Australia but the broker’s inspection of online usage suggests there has been little visible impact on REA Group. Citi finds no evidence that REA Group is losing market share although the slowdown in property transaction volumes has curtailed its growth rates.

Western Australian Miners

Morgan Stanley recently visited resources businesses in the west and found four main themes prevail. A search for cost reductions is the most common, given the slump in commodity prices. Lower staff turnover rates have allowed the miners to push through more economic rosters and savings are also coming via attrition, with new workers on lower awards. Another theme is the increase in corporate activity. Independence Group (((IGO)) and Evolution Mining ((EVN)) are cases where strong balance sheets have been used to pursue mergers.

Many bulk miners are adapting their mine plans to suit the commodity price outlook in order to reduce capital outlays and operating costs. Fortescue Metals ((FMG)) described its actions of running lower strip ratios as targeted mine planning rather than “high grading”. Hence, the company does not expect its actions will have a long-term impact on reserves. Morgan Stanley is not sure this can be sustained, particularly where strip ratios have progressively declined below the five-year mine plan over the last 12 months.

Lastly, office market data has reflected the tough environment in Perth, with that city showing a vacancy rate of 12% to January 2015, with a rising trend. The broker suspects vacancy rates could be in the vicinity of 15% by mid 2015, a level not seen since the mid 1990s.

Home Builders

Macquarie has met with a number of home builders to develop a view of the current state of the market. The broker notes exceptionally strong pre-sale demand with expectations the market will stay firm for another two years at least. Availability of land remains a recurring issue. Approval processes are banking up, with notable areas being the north west and south west of Sydney. The ability of the trades to deliver on the opportunity remains a concern for builders. Some are importing bricklaying skills to overcome shortages with the hoped-for return of capacity away from mining not developing as expected.

The extent of home price growth has heightened nervousness regarding settlement risks emerging for builders, although there is no evidence of increased risk at this stage in pre-sales of detached homes. The price increases in materials did not appear to bother the builders but the broker did note labour costs growth were a concern, with rates increasing as much as 25% for some trades such as bricklaying. All up, the broker considers the fundamentals are good for building material producers.

Nib Holdings

Nib Holdings ((NHF)) may provide a surprise in its upcoming earnings report. Bell Potter contends the stock is a potential underperformer. Recent presentations confirm earnings are likely to be near the lower end of the guidance range of $75-82m, still slightly ahead of FY14’s $72m. Bell Potter suspects earnings growth will more than likely be flat. Data from aggregator iSelect ((ISU)), an important sales channel for Nib Holdings, shows many younger people are looking for better value in health insurance.

The broker is increasingly of the view that relying on this demographic for policy sales is not an avenue to profitability. The company has an 8.0% share of the private health insurance market but earnings from its core business have been declining. Bell Potter expects the international student and workers segment will support some earnings growth in FY16 but retains a Sell rating and $3.30 target.

Yowie Group

Yowie Group ((YOW)) has announced that Walmart will roll out the brand fully to its US stores, all 4,300 of them. This announcement confirms the trial has been successful and Walmart expects the product to sell well. Canaccord Genuity had assumed that Walmart would need to place purchase orders at the end of May or early June for Christmas delivery but Walmart has requested delivery for an August date, well in advance of expectations. Hence, the broker upgrades assumptions for the first half of FY16, noting that when Walmart commits to a product other retailers take notice. This could be a catalyst for Yowie in the US market. The company has a patent in the US for “chocolates with a toy inside” for another three years. Canaccord Genuity has a Speculative Buy rating on the stock and $1.80 target.

A-REITs Outlook

Woolworths ((WOW)) has indicated no improvement in sales at supermarkets in May and June to date and this is signalling a negative for turnover rental growth for supermarket-anchored shopping centres, in Macquarie’s opinion. Charter Hall Retail‘s ((CQR)) largest tenant is Woolworths, at 26.4% of base rent. For Shopping Centres Australasia ((SCP)), Woolworths and Wesfarmers ((WES)) contribute a combined 61% of gross rent.

With general merchandising also struggling, and competitive pressures from new international retailers, Macquarie envisages significant disruption to returns in the Australian real estate investment trust (A-REIT) sector. The broker remains underweight on the sector but expects reasonable overall sales conditions will continue. Still, several major tenant categories are undergoing structural change and A-REITs appear expensive.
 

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