Weekly Broker Wrap: Small Caps, El Nino, Telcos, Slots And Warehousing

This story features IPH LIMITED, and other companies. For more info SHARE ANALYSIS: IPH

-Domestic economic tailwinds elusive
-Insurers benefit from El Nino
-Value adding to mobile plans continues
-Aristocrat dominates slot machines
-Warehousing growth to benefit GMG
 

By Eva Brocklehurst

Queensland Conference

Morgans notes domestic tailwinds are more elusive than usual at its Queensland conference, which featured 36 companies across several sectors. Housing and service sectors are working hard to take up the reins after the mining boom while Australia is navigating a period of soft growth.

Several businesses, such as IPH Ltd ((IPH)), Silver Chef ((SIV)) and Lovisa ((LOV)) are looking to grow offshore, while AP Eagers ((APE)) is seeking innovative digital strategies to grow its market share in the automotive industry. Meanwhile, enablers of digital technology such as Rhipe ((RHP)) and NextDC ((NXT)) are obtaining benefit from the way corporates handle and store data.

The broker notes Australian food products are being sought from exporters such as Capilano ((CZZ)) and, indirectly, Elders ((ELD)). Inbound tourism also appears to be thriving and driving expansion for Echo Entertainment ((EGP)) and Mantra Group ((MTR)).

Morgans believes, over the next 40 years, as the population ages, demand will increase substantially for health care, travel and wealth management. Servicing this model are Flight Centre ((FLT)), Gateway Lifestyle ((GTY)) and Japara Health Care ((JHC)).

Morgans highlights AP Eagers, Aveo Group ((AOG)), IPH and Vitaco ((VIT)) as its key selections from the conference.

El Nino

This summer promises one of the strongest El Nino events since 1950, with a large negative impact being widely canvassed for eastern seaboard harvests. The impact of El Nino on rain and temperatures varies by region but Macquarie highlights, with a few notable exceptions, the insurance sector is more favourably placed.

In general, capital goods companies are negatively impacted, regardless of region, while materials sector companies have mixed fortunes. This does mask differences, the broker concedes, between those companies with exposure to hard commodities and those with exposure to agriculture.

Specifically, companies facing downside risk include Incitec Pivot ((IPL)) and Nufarm ((NUF)) as materials suppliers. GrainCorp ((GNC)) and Murray Goulburn Unit Trust ((MGC)) would be adversely impacted by reduced yields.

Bell Potter suggests the good news from an El Nino event is for lower insurance losses and the strong event that is forecast for this summer may signal loss ratios could be down to almost 60%. The event means lower rainfall and delayed tropical monsoons .This signals increased bushfire risk but fewer cyclones.

The broker also observes there is very little correlation between El Nino and bad debts in agribusiness. While isolating flood and drought impacts is difficult, Bell Potter believes floods tend to have a larger adverse impact on banks.

Assuming the El Nino arrives and increased hail activity, which is also a feature, is not concentrated in metro/CBD regions, the broker's analysis indicates very little impact on the insurers and banks in general.

Telco Pricing

Telstra ((TLS)) has raised handset subsidies on 24-month plans this week, by reducing iPhone 6S handset pricing. Goldman Sachs believes Telstra is responding to increased competition since the iPhone 6S was launched. This heightened competition, if sustained, could be negative for industry margins, the broker suspects.

Telstra also continues to add value to its plans in fixed broadband, with bonus data and the inclusion of Telstra TV on $119/$149 plans. The broker observes telco advertising spending grew 12.5% in September, versus a slump of 2.8% for the broader advertising market.

Slot Machines

Aristocrat Leisure ((ALL)) continues to dominate gaming machine performance in the September quarter, with UBS noting it was performing well ahead of its peers. The company appears to be retaining its installed base market share across the eastern seaboard.

New products from Ainsworth Game Technology ((AGI)), IGT and Sci-Games have entered the market and it seems to the broker, while early days, that Ainsworth's games are gaining traction ahead of the other new entrants. Ainsworth is growing its installed base share at the fastest pace relative to peers, although UBS observes momentum has slowed.

UBS estimates Australia will represent around 16% of Aristocrat's segment earnings in FY16, versus 27% in FY14, but it remains an important market, being the second largest regulated class III video slot market behind North America.

Warehousing

Demand for modern warehousing is a global growth trend which Macquarie notes is led by three key operators, Prologis, Global Logistic Properties and Goodman Group ((GMG)).

Goodman is Macquarie's preferred stock to play the theme as it has a well managed capital structure, geographic diversity and superior returns. 2016 supply additions in Japan will be at the highest level in 10 years.

Despite a spike in vacancy rates and decline in spot rents, Macquarie is not concerned about the impact because of Goodman's approach to staging additional supply. Similarly in China, while supply is set to accelerate, net absorption is also likely to remain high.

In the current environment, Macquarie observes Goodman offers higher free cash flow and dividend yield versus Global Logistic, which is listed in Singapore, although the latter is considered more attractive on a relative net asset valuation.
 

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