Weekly Broker Wrap: GDP, State Economies, Banks, Classifieds And Key Picks

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

-Economic growth soft and narrow
-NSW’s lead extends further
-Westpac’s productivity potential 
-Sydney, Melbourne underpin R/E
-Buying opportunity in CGF, GBT?
 

By Eva Brocklehurst

Economy

Australia’s GDP growth was 0.2% in the June quarter to be 2.0% for FY15. The Australian Bureau of Statistics noted nominal GDP growth of 0.3%, 1.8% higher over the year, is the weakest since 1961-62.

The national accounts reveal an economy which is struggling to lift demand in a sustainable fashion, Macquarie observes. Hours worked are increasing, employment is holding up but income per person is flat, so to lift consumption in the quarter households were relying on lower debt servicing costs and insurance pay-outs.

Macquarie suggests the one-off nature of several supports for growth in the quarter means a potential reversal is likely over coming quarters. A significant lift in demand is needed to raise output to a level to sustain spending and the broker asserts that recent concerns over global growth will not help.

Expenditure-side growth was driven by government and this cannot be relied on indefinitely, Citi maintains. Moreover, households are adding more disposable income to savings, with less expenditure on discretionary items. Financial services are the bright spot in the economy, growing by 1.3% in the quarter.

Citi notes the yearly growth rate was in line with the Reserve Bank’s forecast, but the composition is narrow and the increase in the household savings ratio was not what the central bank was expecting. Citi continue to forecast a 25 basis point reduction to the cash rate at the November board meeting.

State Economies

ANZ’s inaugural economic “stateometer” reveals NSW and Victoria are improving, with NSW extending its lead. The other states are firmly below trend. Mining states have arrested the slowdown in activity, for now, while South Australia is falling behind.

Tasmania and Queensland share some of the strong characteristics, with solid housing and private consumption and a benefit from the depreciating Australian dollar. Economic activity in Western Australia and South Australia is on a downtrend. For WA it is the fall in resources investment while for SA the analysts note a broader malaise in industrial activity.

Given the strong interlinkage between NSW and Victoria and the rest of the country the analysts believe the performance of these most populous states bodes well for an ongoing, albeit slow, recovery.

Banks

Greater functionality in online and mobiles has driven a dramatic decrease in branch-based transactions at banks. The role of the branch is now centred on complex transactions and advice. Macquarie also observes, with increasing population density in cities, there is less need for multiple branches. The broker’s research indicates a clear opportunity for branch closures.

Westpac ((WBC)) has the best opportunity to reduce numbers, given its larger network and many branches in close proximity to each other. The size of the cost reduction opportunity varies between 0.5% of earnings for Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) and 2.0% for Westpac over three years, Macquarie calculates. Macquarie has upgraded Westpac to Outperform.

Credit Suisse has also upgraded Westpac to the same rating, elevating the bank to its number one pick among the majors. The broker expects Westpac to lead the industry in structural productivity initiatives. The reasons for the upgrade include the bank’s leverage to ongoing mortgage customer re-pricing and productivity enhancement.

Conversely, Credit Suisse downgrades National Australia Bank ((NAB)) to Neutral, reducing it to number four pick. The story is one of mature cost restructuring which is now approaching completion. The stock’s P/E multiple has now re-rated compared to its peer group.

The sector has now moderated its capital accumulation task, the broker observes, although Westpac may have to underwrite another dividend reinvestment plan.

Real Estate Classifieds

Real estate new listings growth eased in August, to around 4.0% by the end of the month, but this is not a surprise to Deutsche Bank. Comparables are likely to be difficult for the remainder of this half year. Capital city listings growth was slightly higher than the national trend, with Sydney ahead of the pack. Growth in total listings is expected to continue in the first quarter of FY16.

Despite the moderation in the growth rate the data remains supportive of REA Group ((REA)) and Fairfax Media‘s ((FXJ)) Domain in FY16, Deutsche Bank contends. While Sydney and Melbourne constitute around 39% of national listings, these two cities contribute well over 50% of revenue for property classifieds.

High Conviction Stocks

Low expectations heading into reporting season were largely met, Morgans maintains. The broker calculates, in terms of the ASX200, FY15 earnings declined 2.0% while expectations for FY16 were revised down by 1.0%. Still, the broker is not swayed from a cautious approach over the next few months as global events take the spotlight.

Re-visiting key stocks post the results, Morgans adds Challenger ((CGF)) and GBST ((GBT)) to its list and removes Qube Holdings ((QUB)) and Admedus ((AHZ)). Challenger provides solid mid to high earnings growth over the medium term while GBST offers exposure to increasing demand for wealth management and capital markets systems. The recent sell-off is considered a buying opportunity.

While retaining a long-term positive view on Qube, earnings risk in FY16 and limited catalysts mean Morgans suspects the stock will trade at current levels for 6-12 months. Admedus has achieved a number of milestones over the past 12 months and, while removing it from the list, the broker will use its active opportunities portfolio as a way of highlighting share price catalysts.
 

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