Weekly Broker Wrap: Ad Blockers, Outdoor, R/E, Debt, Global Growth, Bonds And Surfstitch

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-Online ads accelerating move to mobile
-Outdoor ad share of media spending rises
-Debt collector returns under pressure
-Extended emerging market weakness
-Means US tightening pace pared back
-Bond yields disconnect from growth
 

By Eva Brocklehurst

Ad Blockers

Ad blocker software, which prevents websites from loading advertising content, is gaining ground. Citi notes the global adoption rate of Ad blockers is growing at around 41% per annum. Primary usage is at the desktop level but the Apple iOS9 update now allows ad blockers on mobile, threatening to reach the mass market.

Citi cites statistics which reveal ad blocker use in Australia is 18% of the internet-using population with the potential lost advertising dollars reaching $1.4bn in 2016. The most at risk media companies are those which have high exposure to desktop display advertising such as Fairfax Media ((FXJ)), News Corp ((NWS)) and Nine Entertainment ((NEC)).

Ad blockers are accelerating the move in online advertising to mobile from desktop, in Citi's observation. The higher penetration of ad blockers is expected to curtail market growth rather than destroy the current value of online display. Publisher strategies to address the risks include native advertising content and renewed attention to subscription models and applications.

Citi estimates a 10 percentage point increase in the penetration of ad blockers would negatively affect Fairfax by 8.0%, News Corp by 6.0%, Nine Entertainment by 5.0% and APN News & Media ((APN)) by 3.0%, in terms of the percentage of profit in FY16.

Outdoor Media

Outdoor advertising revenue grew 23.1% in September, bringing the third quarter growth rate to 13%. UBS observes growth occurred across all vertical markets. The latest data suggests outdoor continues to capture market share from other media. The outdoor share of traditional media spending increased to 7.8% in FY15 from 6.6% in FY14.

UBS suggests the next catalysts will be the digital roll-outs with APN Outdoor ((APO)) targeting 14 large format boards in the second half of the year and the conversion of two large format boards on Sydney's Military Road. AdShel has flagged the roll-out of its national roadside digital network of 270 screens from this month and oOh!Media ((OML)) has recently won a contract for 26 large format Sydney boards.

Real Estate Classifieds

New listings in the Australian property market stabilised in September with growth similar to the 4.0% rate seen in August, Deutsche Bank observes.  Sydney volumes remain strong with its growth rate continuing in the mid teens (16%). While Sydney and Melbourne accounted for 37% of the new national listings in September, the broker estimates they contributed well over 50% of the revenues for property classifieds.

With data now available for the first quarter of FY16 the broker estimates volumes were up 6.0% year on year and should support both REA Group ((REA)) and the Fairfax site, Domain. This reinforces Deutsche Bank's Buy ratings for both stocks.

Debt Collection

Encore Capital is a US debt collection house and the world's largest debt purchaser and is buying a 50.25% stake in Australia's debt recovery agency Baycorp. Oceania Capital Partners and SAS Trustee Capital have sold the stake but will remain shareholders.

The transaction implies a valuation of Baycorp of around $66m. The industry is largely led by price and unlikely to grow materially over the coming years,  Ord Minnett observes. Hence, the broker envisages significant risk that returns on equity will decline in the medium term.

The broker believes it would have been difficult for Encore, or indeed another foreign player, to enter the market on an organic basis. The acquisition of the Baycorp stake provides the company with access to historical data and systems in Australia.

Nevertheless, Ord Minnett has concerns that the cost of capital Encore enjoys and the relatively smaller presence that Baycorp has in the Australian purchased debt ledger (PDL) market could mean substantial pressure on returns for all incumbents over the medium term.

Global Growth

Commonwealth Bank economists have reduced global economic growth forecasts for 2016 to 3.1% from 3.5%. This is well below the the long-run average of 3.7%. An extended period of weakness in the large emerging market economies is considered the main reason behind the reduction.

Brazil and Russia are in recession and central banks in China and India are easing monetary policy to combat weak growth and low inflation. The economists expect more easing by these central banks before the end of this year.

As well, the economists reduce their US GDP forecast because that economy is expected to hit capacity constraints in 2016. They still expect the US Federal Reserve will begin tightening monetary policy in December. That said, the pace of tightening in 2016 is pared back, given global growth prospects. The commencement of higher interest rates in the US will be a watershed, as the last policy tightening cycle started over a decade ago.

Meanwhile the 10-year surge in global mining investment is easing but continues to deliver an increase in supply. This is expected to pressure prices and maintain low inflation in most economies in 2016. The economists expect only the central banks in the US and UK will tighten policy in 2016. They flag the risk of a 1.5% official cash rate in Australia and 2.0% in New Zealand.

Fixed Income

The impact of the global financial crisis is still being felt some seven years after it was spearheaded by the Lehman Bros collapse. Long-term government bond yields in the advanced economies are well below levels that can be explained by the outlook for growth and inflation alone, Standard Life analysts contend.

External headwinds are also affecting the US Fed's ability to steer its own path on interest rates. Still, the analysts expect that as long as the recoveries in the advanced economies become more self-sustaining and emerging market economic conditions do not deteriorate further, a gradual normalisation of monetary policy in the US will materialise.

The analysts suggest the benchmark US 10-year government bond yield will peak at 3-4% during the current economic expansion, well below the peak in previous cycles. The disconnect between yields and domestic growth is also not confined to the US. Bond yields in Japan, Germany and the UK have diverged significantly from growth.

Standard Life analysts also contend that, just as policies in the US, Europe and Japan are gaining traction, emerging markets are faltering. China has loosened its monetary policy and allowed its currency to depreciate. This is pulling commodity prices and global inflation lower and putting upward pressure on the US dollar. Any further deterioration in emerging market conditions would pose a significant barrier to higher long-term rates in the US, the analysts believe.

Surfstitch

Surfstitch ((SRF)) remains a key pick for Bell Potter. The broker expects 40% revenue growth in FY16, with continued strength in customer engagement and improving gross margins. Margin expansion is expected to flow into FY17 from the $12.5m in earnings and capex synergies extracted from the global re-branding and integration.

The broker judges the stock to be relatively good value when compared with its overseas peers on metrics such as enterprise value/sales, enterprise value/earnings or price/earnings. The broker believes the current discount at which the stock is trading is far too steep for a business where earnings growth is forecast at over 100% for the next two years. Bell Potter has a Buy rating and $2.25 target.
 

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