Weekly Broker Wrap: Electronics, Supermarkets, Insurers, A-REITs, House Building And 3P Learning

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

-Citi lowers economic forecasts
-JBH, DSH benefit from Apple boost
-IAG stands out in personal lines
-Moderation in housing, building likely
-Oz advantage as players shy from Macau
 

By Eva Brocklehurst

Leading Indicators

Citi's domestic economic barometer has shown signs of deterioration over the last three months in keeping with global leading indicators which have also softened. The broker's economists have reduced growth forecasts for a wide range of countries, the fourth consecutive downgrade to year-ahead forecasts. In Australia, the interest rate-sensitive housing sector appears to be peaking and there remains more downside to come for mining capex.

In contrast, labour indicators are more positive and confidence measures are lifting with the change of Prime Minister, so these more favourable signs should limit downside risk to growth, in Citi's view. Inflation is expected to stay low and a tentative bottoming in the rate of decline in the terms of trade could signal the downward momentum in profit growth is peaking.

The broker's leading indicators suggest more downward adjustment in the Australian dollar and no further change in the cash rate.

Consumer Electronics

Apple has apparently sold more than 13m units of the new iPhone worldwide in the three days post its launch. This is a new record, Deutsche Bank observes, and bodes well for the retailers. The Australian Bureau of Statistics in September last year specifically called out the launch of the iPhone as factor in the 10.6% increase in electronics retail sales.

JB Hi-Fi ((JBH)) and Dick Smith ((DSH)) are considered to be the primary beneficiaries but Harvey Norman ((HVN)) should also gain a fillip.

Supermarkets

Deutsche Bank observes that the Woolworths ((WOW)) store network has aged considerably over the past few years and become older than the Coles ((WES)) network. In addition to price and value perceptions, the broker believes this is a key reason behind the underperformance of Woolworths.

Deutsche Bank's analysis suggests that the 80-plus per annum refurbishment target will modestly improve the situation but there needs to be around 120 per year to restore the network to where it was 3-4 years ago. Around 41% of Woolworths' stores are less than five years old while around 60% of Coles stores fall into that bracket. This is even more acute when considering that Woolworths has rolled out new stores more rapidly.

Australian Insurers

Morgan Stanley has surveyed 3,700 motor and home insurance customers. Strength in personal lines stands out for Insurance Australia Group ((IAG)). To date the company is successfully managing the risk of dilution from Coles to its incumbent brands. IAG locks in customers with multi-policy discounts and has the best cross-sell in home and motor. Its customers are also the least likely to shop around on renewal and it takes greater discounts to persuade them.

Suncorp ((SUN)) has a lower cost strategy but appears challenged, given recent 3-4% price reductions have failed to deliver a higher share of new business, Morgan Stanley observes. Rate increases are now being sought but this risks opening the door to challengers.

Next to IAG, Suncorp's main source of growth is its own brands. As the company simplifies its platform and extracts scale from vertical integration Morgan Stanley suspects it risk further diluting the multi-brand strategy.

After building a reputation for sharp pricing the challengers have delivered lower than average savings, with Youi seen holding back on discounting in 2015. The impressive growth in motor insurance share has paused, stagnant at 13%. Still, the challengers are well placed to advance their share, Morgan Stanley observes, particularly as Suncorp raises rates. Meanwhile, online brokers remain with just 5.0% of sales in both home and motor insurance.

A-REITs

Australian real estate investment trusts (A-REITs) performed strongly over the past week, in contrast to the broader market weakness. Credit Suisse observes the index generated a 0.6% return compared with the broader markets 2.5% decline.

The best performers were Goodman Group ((GMG)), Mirvac Group ((MGR)) and Federation Centres ((FDC)). The worst performers were National Storage REIT ((NSR)), Abacus Property ((ABP)) and Growthpoint Properties ((GOZ)). Credit Suisse expects sector earnings growth to remain stable at 4.4% over FY15-17 with the greatest acceleration from Westfield Corp ((WFD)) and the greatest deceleration from Dexus Property ((DXS)) and GPT Group ((GPT)).

Housing

UBS finds the question in the recent consumer sentiment survey of whether now is a good time to buy a dwelling worrying. This measure has slumped to a 5-year low while, when asked where the wisest place for savings are, the share of respondents citing real estate rebounded to a 12-year high.

Residential approvals are near a record high so, even as commencements ease back in 2016, dwelling investment should lift in coming quarters before flattening in the second half of 2016.

Price growth has likely peaked but UBS does not expect a large drop, given record low interest rates. Adding auction clearance rates into the mix, these are seen falling amid tighter macro-prudential policy and enforcement of foreign investment rules. Still, clearance rates are at solid levels and hardly indicative of a weak market. Overall, the UBS economists expect a moderation in housing strength rather than a downturn.

Building Materials

UBS explores the question of when the housing market does eventual turn. The broker calculates 10% decline in detached housing starts and 35% decline in the number of high rise, which would take total starts back to around 150-160,000 from the current level around 220,000. Boral ((BLD)) and CSR ((CSR)) are the most sensitive to this scenario.

Gypsum wallboard is most vulnerable in terms of product as its sells well into both high rise and detached housing. Data on product segments suggests only 20% of concrete/cement/aggregate volumes are sourced for housing which, if true, would make Boral less vulnerable, comparatively.

Bricks, tiles, insulation and glass would also be negatively affected much more by detached housing changes than by high rise. Land profits would be delayed by a fall in property markets.

For Boral, the US and Asia are expected to continue ongoing growth. For CSR, the aluminum business is the main problem and biggest concern for UBS. Both companies are likely to be looking at how they can invest to ease the exposure to Australian housing as the cycle inevitably moves on.

Gaming

Macquarie is confident that Australian operators can gain a greater share of the Asian VIP market, boosting domestic mass and VIP gaming revenue. The broker is negative regarding the Chinese VIP market, as tightening credit conditions weigh on the high rollers but regional destinations should pick up the players that are shying away from Macau.

The depreciating Australian dollar should support more visits from Chinese tourists, with excess capacity in most properties encouraging more junkets. Macquarie expects Chinese tourists will account for 32% of domestic gross gambling revenue.

Echo Entertainment ((EGP))) is consider the biggest beneficiary of an increase in VIP share. Macquarie estimates, if Echo Entertainment was to hold its current share and Australia lifted its share of the Asian VIP market by a further 1.0%, there is 4.6% upside to earnings estimates. For Crown Resorts ((CWN)) this calculation would boost base earnings forecasts by around 4.0%.

3P Learning

3P Learning ((3PL)) is an online education company with a suite of software products for students in grades up to year 12. The stock has fallen 30% since mid May and provides an attractive entry point in Goldman Sachs' opinion. The broker suspects investors may have over-reacted to the lower FY15 licence numbers.

The move away from textbook learning to online and increased public spending on education supports a positive view of the stock. Goldman Sachs initiates coverage with a Buy rating and $2.49 target.

FY15-18 earnings growth is expected at a compound 27%, underpinned by the company's ability to increase prices increase penetration and cross-sell its products. The broker suspects the market is underestimating the growth potential in the US and UK as well as the upside in Australia.

Competition is substantial, given there are thousands of online education providers around the world. The risk is one could make a significant move into the markets where 3P Learning currently enjoys precedence.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms