Weekly Broker Wrap: FY15 Preview, TV, Fund Managers, Retail And Cancer

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-Few catalysts for rally seen in 2015
-Some offsets to negative TV trend
-Earnings growth can occur in mobile
-Goldman Sachs picks Oz retailer trends
-Bell Potter lines up oncology stocks
 

By Eva Brocklehurst

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Aggregate Australian market earnings for FY15 are expected to be relatively flat but when viewed ex resources the outlook is for a more solid 9.0% growth rate, UBS maintains. Excluding resources and financials, industrials are expected to grow 13%, boosted by the fall in the Australian dollar.

Key themes in the upcoming reporting season are expected to include soft revenue but ongoing cost cutting gains. Evidence is likely to emerge of tougher conditions in consumer staples and general insurance, in UBS' view. Profit tailwinds from the housing sector should ensue.

The broker does not expect the results to be a catalyst for either a market surge or a market correction. A rally into the end of 2015 is constrained by upward pressure on bond yields and potential headwinds from bank capital requirements. Tailwinds for the FY16 outlook are likely to come from low expectations and a soft Australian dollar.

Any potential surprises? UBS suspects, on the positive side, Downer EDI ((DOW)), Echo Entertainment ((EGP)), James Hardie ((JHX)), Mirvac Group ((MGR)), Harvey Norman ((HVN)) and Qantas ((QAN)) could surprise. Conversely, on the negative side the candidates are Brambles ((BXB)), Coca-Cola Amatil ((CCL)), REA Group  ((REA)), Seek ((SEK)), Suncorp ((SUN)) and Wesfarmers ((WES)).

FTA TV

UBS believes near-term structural weakness in the free-to-air TV market has been overplayed. Metro TV lifted 0.7% year to date in the second half of FY15. Nevertheless, long-term structural concerns appear valid and the broker has lowered its forecasts.

Total video viewing is increasing but the traditional TV share of video consumption is falling and these headwinds may accelerate as audiences age. SVOD – streamed video on demand – and smart device penetration is expected to increase.

The broker observes growth in digital revenue, content sales and cost cutting are providing the offsets to these negative trends. UBS believes Nine Entertainment ((NEC)) looks cheap, with a 9.0% net dividend yield and further capital management likely. Similarly, Seven West Media ((SWM)) appeals, although gearing is higher. The broker maintains Buy ratings on the two stocks despite a negative view on the structural outlook.

Mobile Telcos

First half results from Vodafone Australia illustrate to Morgan Stanley the difficulty in taking market share from Telstra ((TLS)). Vodafone Australia's revenue grew 2.9% but subscribers returned to negative territory, down 47,000 in the half. That said, the losses were all due to losses in MVNO as the company's own subscribers actually rose slightly.

MVNO – or mobile virtual network operator – is a wireless communications services provider that does not own infrastructure over which it provides services to customers.

The broker will be watching results from Optus ((SGT)) and Telstra closely to further ascertain changes to market share. There remains no doubt competitive pressure in the industry is high as the cost of mobile data has fallen significantly.

Still, Morgan Stanley believes earnings growth can occur even with flat subscriber growth and Vodafone Australia's results support this thesis, which is a positive for the industry.

Fund Managers

Macquarie has reviewed its rankings of Australian fund managers. On the basis of capacity, performance, distribution and valuation the broker ranks Henderson Group ((HGG)) as number one with an Outperform rating and $6.70 target. The company has positive net flows and an attractive valuation.

Number two is BT Investment Management ((BTT)) with an Outperform rating and $10.27 target. Its growth outlook continues to rely on a strong performance from its JO Hambro business.

Number three is Perpetual ((PPT)) which is also rated Outperform at current levels, with a $51.50 target, despite recent dents to investor confidence. Bringing up the rear is Platinum Asset Management ((PTM)) which is rated Neutral with a $7.41 target. Macquarie continues to believe current valuation metrics on this stock are full.

Australian Consumer Trends

Goldman Sachs observes Australian consumers spend differently to their Asian neighbours or those in the US. Less is spent on food and clothing and more on homes, lifestyle and entertainment.

The broker initiatives coverage on ten consumer stocks and the two Buy rated stocks – Dick Smith ((DSH)) and Wesfarmers ((WES)) are leveraged to the home/entertainment sectors. The recent pull back is considered an opportunity to buy Wesfarmers' leading retail franchises while Dick Smith is a strong brand, leveraged to the trends.

The Sell rated stock, Harvey Norman ((HVN)) is also leveraged to the trends as it is a key beneficiary of the housing cycle but Goldman Sachs considers this uptick has been capitalised already.

The broker believes international discretionary retailer plans for increasing footprints in Australia will not erode profitability, given the unique dynamics in the local market. Health and wellness are on the agenda with increased growth in food and drink, clothing and gadgets that meet this trend.

Oncology

Bell Potter singles out three ASX-listed companies which are developing novel therapies for cancer. All have varying approaches but are well positioned to take part in cancer treatments. All are Buy rated (speculative).

Viralytics ((VLA)) is developing CAVATAK for the treatment of late stage cancers. Its first target is melanoma. The drug is being targeted in combination with other treatments and may have significant commercial appeal to partners in the immuno-oncology area, in the broker's opinion. A 96c target is maintained.

Starpharma ((SPL)) is using dendrimer nanotechnology to reformulate established cancer medicines with the objective of improving delivery and making them safer and more effective. Bell Potter retains a $1.00 target.

Bionomics ((BNO)) has novel drugs such as BNC105, which has potential to enhance the efficacy of immunotherapies, and BNC101, which involves a cancer stem cell antibody that is expected to enter phase 1 trials this year. Target is $1.09.
 

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