Weekly Broker Wrap: Retail, Energy, Newspapers, Real Estate Ads And Top Picks

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

-Retail concentrates in housing
-Survival measures continue in oil
-Less support likely for oil & gas deals
-US print spin-offs reveal some value
-FY15 key catalyst for Vocus
 

By Eva Brocklehurst

Retail

The latest retail sales data suggest growth is increasingly concentrated, Macquarie observes. The home improvement sector, supported by housing growth and fiscal stimulus, may be positive but fails to offset the headwinds in food and liquor.

Supermarket growth was soft in June and Macquarie estimates Woolworths ((WOW)) lost 1.4 percentage points of market share over the year to June. Rival Coles ((WES)) likely gained 0.7 percentage points on the same basis. Liquor growth is weak and consistent with trade feedback that signals domestic consumption, particularly of beer, is softening.

Macquarie is cautious about the sector overall, outside of housing-related categories. Wesfarmers is the preferred consumer staples exposure while JB Hi-Fi ((JBH)) is the preferred discretionary exposure.

Energy Stocks

The energy sector has re-positioned for lower oil prices largely via redundancies and deferring discretionary expenditure. This should be the theme in the upcoming reporting season, in Citi's opinion. Further measures to survive these lower prices are likely.

The broker expects Woodside Petroleum ((WPL)) will move forward with the Browse project but still needs to win over the market on expected returns. Santos ((STO)) needs to reassure the broker regarding an equity raising, as it has previously been adamant one is not required. For Oil Search ((OSH)), the result will present another opportunity to look at how PNG LNG stacks up.

The question asked about Caltex ((CTX)) is one of how does it maximise value of its customers and infrastructure in the wake of the exit from Kurnell. Smaller stocks such as Beach Energy ((BPT)), AWE ((AWE)) and Senex Energy ((SXY)) need to provide an indication of their strategic direction in a low oil price environment.

Macquarie agrees with the need to to respond to the current low oil environment with production efficiencies and reductions in head count. With the industry anticipating a recovery in the medium term and the market pricing in a recovery, albeit modest, in oil prices, the broker suspects future LNG transactions will become harder to justify.

Deals are likely to be less well supported and Australian oil & gas stocks cannot rely on the premium value previous transactions have implied. Instead, future deals could act as a reminder of the marginal returns on offer from Australian LNG projects, the broker maintains.

Macquarie still expects merger & acquisitions will be on the agenda but finds none of the large caps are obvious takeover targets in their own right. To get a deal across the table may require innovation, such as separation and divestment of infrastructure-like assets.

At face value, the broker considers Woodside a more likely takeover target than it was in the past as it still holds strategic, long-life LNG interests. Still, the limited life of reserves and a premium valuation could deter bidders.

Santos appears cheaper, given its lingering funding concerns, and has attractive interests in the Cooper and GLNG. Still the long tail of assets may dissuade potential buyers. Oil Search's takeover appeal is clouded, in Macquarie's view, by the complicating stake held by the PNG government and PNG's takeover code, although it offers an unmatched growth outlook.

BHP Billiton's ((BHP)) petroleum assets are now more important to the company as a whole. While Macquarie does not expect the company to pursue corporate acquisitions, faced with declines in conventional production it may look to acquire liquids reserves.

Interoil ((IOC)) has a greater upstream focus and this simplifies its story. Macquarie believes the company's outlook will now be determined by the improved prospects for an Elk/Antelope development. The broker envisages value emerging in the stock since the end of June and upgrades to Outperform from Neutral.

The broker considers Beach Energy may not be a takeover target in its own right but its strategic review seems to be visiting a number of options to create value through acquisitions and divestments.

Newspapers

Over the last two years, several US media companies have separated their print assets into standalone listed entities. Credit Suisse considers these developments offer a good indication of newspaper valuations generally. While low sector multiples reflect ongoing revenue headwinds, the broker maintains US newspaper assets are at least finding some equity investor support.

Translating this theme to the Australian scene the broker values the Australian newspaper assets of Fairfax Media ((FXJ)), News Corp ((NWS)) APN News & Media ((APN)) and Seven West Media ((SWM)) at around 4.0-4.5 times FY16 earnings. The broker expects revenue declines will continue but be mitigated somewhat by strong cost control.

Real Estate Classifieds

Deutsche Bank tracks new listing volumes in the Australian property market and finds a significant improvement in July from the trend in the June quarter. Sydney and Melbourne remain the drivers behind the national growth rate in listings.

This points to a strong start to FY16 for Fairfax's Domain and REA Group ((REA)), with REA likely to be more leveraged to underlying volumes given its greater penetration. REA remains the broker's preferred exposure.

Top Picks

Credit Suisse has updated its top picks and now includes Vocus Communications ((VOC)). The company's FY15 result is expected to be an important catalyst as the market is concerned around the second half performance of newly-merged Amcom.

The most exciting opportunity, in the broker's view, is Vocus successfully executing revenue upside from the merged group. Credit Suisse believes consensus expectations underestimate the growth potential in Vocus fibre, ethernet and internet businesses.

Morgans adds Burson Group ((BAP)) to its list of high conviction stocks. The broker likes the comapny's highly defensive earnings stream and the acquisition of the Metcash ((MTS)) automobile business. Further growth is expected from expansion in the WA market and the company could accelerate its roll out following the acquisition of Covs.

Morgans removes Federation Centres ((FDC)), National Storage ((NSR)) and Impedimed ((IPD)) from the list. Now the merger with Novion has been achieved there are few catalysts for Federation Centres. The other two have share prices which have appreciated recently, and the broker also envisages few opportunities in the short term for those stocks to re-rate.
 

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