Weekly Broker Wrap: Telecoms, Lending And Retail

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-Broadband pricing moves higher
-Unlimited data plans unprofitable?
-Opportunities arising in banks
-UBS prefers SUL, BRG in small retail
-Consumers resisting higher TV prices
 

By Eva Brocklehurst

Telecoms

Optus ((SGT)) has moved towards increasing its broadband pricing, having been aggressive over the last six months with an unlimited data plan at $90 per month. This has now increased to $95, and on the NBN plans are now $105 per month. Morgan Stanley expects positive subscriber growth in FY15-16 as a result of Optus' aggressive promotional campaign. Meanwhile, Telstra ((TLS)) is lowering prices on triple play plans by $9/month and raising data allowances by 25% and 100% for medium and large plans respectively. Morgan Stanley suggests these changes will have little impact as its plans remain more expensive than peers. Telstra is expected to lose market share in metro but gain ground in regional markets.

For the NBN, the cost of providing unlimited data plans continues to be an issue. The broker expects, under the current NBN pricing, telecoms could become unprofitable at current price points, or consumers will need to pay more for broadband products. Hence, Morgan Stanley expects the current bandwidth charge will be need to change over time. The broker considers TPG Telecom ((TPM)) one of the best value providers in both ADSL broadband and NBN and expects it will continue taking market share.

Credit Suisse also notes the price increases coming from Optus and concludes there is more rationality emerging in pricing behaviour among the five major providers. Optus has also rationalised entry level plans and ended its free Netflix offer. The broker cites industry feedback which indicates market participants were concerned about how long this promotion would continue. Telstra has also ended its $20/month promotional discount as of June 30 while iiNet ((IIN)) no longer includes Fetch TV in its bundling. Lower promotional activity is considered a positive for the sector and Credit Suisse expects low-cost providers are best positioned to take market share in this environment. The broker's pick in the sector is M2 Telecommunications ((MTU)).

In mobile, competition has increased in the last six months but Morgan Stanley believes value has also increased with more data allowances and entertainment deals. Optus, again, is seen as the most aggressive player, with 3.4% post-paid average revenue per unit (ARPU) growth in the March quarter compared with 1.6% in the December quarter. Telstra reported 4.4% post-paid ARPU growth in the first half but the broker expects this to slow in the second half, while still being positive. There remains significant excess capacity in the mobile network for each operator. Morgan Stanley therefore discounts capacity as a reason for operators to move to a price war from a value war in mobile.

Lending

Major banks have taken further steps to ensure growth in investment property loans will ease below the regulator's 10% threshold. UBS observes new loan-to-value-ratio caps are as low as 80% in some areas. The majority of investment property loans are being originated with a ratio below 80% to avoid onerous mortgage insurance or low-deposit premiums, and to maximise returns. Still cross collateralisation may enable those with multiple properties to avoid the restrictions. Speculative first home buyer investors have been contributing up to 40% of first home buyer demand and 10% of overall demand for new developments and these segments appear, the broker suggests, to be most affected by the restrictions.

A slowing housing market is expected to help the banks as, given the levels of housing debt in Australia, margin is considered a far more important consideration than volume. UBS also suspects banks may have to raise capital sooner rather than later in response to increases in capital requirements. This, and associated re-pricing, is expected to provide opportunities to invest in the banks in order to benefit from the ensuing build-up in returns.

Retail

UBS observes, in the small retail sector, there has been significant variability in returns. The broker's residual income model suggests there is relative value in Pacific Brands ((PBG)), The Reject Shop ((TRS)), Myer ((MYR)), Super Retail ((SUL)) and Breville Group ((BRG)), although there are structural threats to the first three which may not be fully reflected in the model. Separately, the broker increases Premier Investments' ((PMV)) longer-term earnings forecasts by 5-9% based on a higher gross margin forecast as a result of the company's increased focus on direct sourcing. Still, based on forecast shareholder returns, UBS rates the stock Neutral. UBS prefers Breville, believing its obstacles in North America are now behind it, and Super Retail, where there is upside risk to sales margins.

Credit Suisse takes a closer look at electrical retailers and finds the introduction of new TV models at the end of April and into May has resulted in a lift in the average selling price but also higher-than-expected promotional activity has followed soon after. This suggests some consumer resistance to higher price points and downside risk to volumes. A discounting of new models soon after introduction would be consistent with some consumer resistance to prices. The broker's survey signals price is becoming more important as a determinant of electrical retail sales than was the case in 2014. A reliance on price to drive sales revenue is therefore likely to test the resilience of retailers.

The TV category comprises 25%, 20% and 20% of sales revenue at JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Dick Smith ((DSH)) respectively. A shift to higher average priced products and a more inflationary environment would be more favourable for Harvey Norman, in the broker's opinion. This is Credit Suisse's preferred retail exposure because of the strength in household goods and a number of system improvements, which should reduce labour costs and inventory through 2016 and 2017.
 

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