Weekly Broker Wrap: Equity Strategy, Wealth, Media, Rhipe, SpeedCast And A-REITs

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-More growth outside top 20 stocks
-AMP, IOOF managing costs better
-Nine more likely acquirer of regionals
-GPT a leader in retail A-REITs
 

By Eva Brocklehurst

Equity Strategy

Deutsche Bank contends that policy uncertainty has eased in China and this uncertainty has been previously one of the negatives for equities. With growth expectations now pared back there is scope for some upside surprise for equities.

The broker considers Australian equities are reasonably valued, with the market having already experienced a large correction this year. History suggests that, at this point, a solid bounce will occur, should no recession ensue.

Stock picking should matter more now and Deutsche Bank highlights five conviction picks: AGL Energy ((AGL)), Aristocrat Leisure ((ALL)), Iress ((IRE)), James Hardie ((JHX)) and Qantas ((QAN)).

The broker's contrarian idea – defined as unloved stocks screened for valuation and performance – includes WorleyParsons ((WPL)), Navitas ((NVT)), Computershare ((CPU)) and Nine Entertainment ((NEC)).

UBS finds considerably more growth exists outside of the top 20 in the ASX200. The top 20 leaders may notionally have attractive dividend yields but the question is whether there is enough growth. This suggests less reliance on indexing the Australian market and more on active equity positioning, the broker believes.

Growth outside the top 20 does come with a higher price/earnings ratio and lower dividend yield, admittedly, but UBS notes attractive themes, such as US dollar earnings, are also well represented in the 21-100 segment of the index.

Insurance

UBS reviews key metrics for wealth management and life insurance stocks in the wake of the bank earnings reports. Both AMP ((AMP)) and IOOF ((IFL)) are subject to similar margin pressure but the broker observes they are managing the cost side with greater success. The broker continues to like AMP given reasonably defensive earnings and fewer headwinds versus other financials.

Specific commentary on claims and lapses remains mixed. The broker suspects different levels of conservatism are represented across many company and analyst assumptions, amid persistent volatility. In this context, AMP's hike in income protection claims in the September quarter is unsettling but not yet raising material concerns.

Media Ownership

With press speculation around potential media law reform, UBS takes a look at the two main rules which may be tweaked or abandoned and the impact on key stocks.

The 75% reach rule, which prevents consolidation of metro and regional TV broadcasters, if abolished, would likely put the spotlight on regionals, given the synergies if they were to merge with metro counterparts.

Nine Entertainment with its strong balance sheet is considered a more likely acquirer of regional TV than either Seven West Media ((SWM)) or Ten Network ((TEN)).

The 2-out-of-3 rule (cross media ownership) limits certain operators from acquiring a third regulated media platform and, if this were abolished, certain parties would gain greater merger flexibility. Nevertheless, UBS questions whether print/radio players would be that interested in acquiring TV assets or vice versa.

Rhipe Ltd

Ord Minnett initiates coverage on Rhipe ((RHP)) with a Buy rating and $1.95 target. The specialist software distributor sells cloud licences to IT service providers. The stock offers capital-light leverage to the transfer of software consumption to the cloud.

The broker considers the company has an early mover advantage and key vendor relationships (Microsoft) which will enable it to participate well in the sector and gain market share.

Rhipe also has a deep understanding of the market and this provides greater confidence in a scalable business where the target market is growing at around 27%. Ord Minnett expects a 38% compound growth rate over the next eight years.

SpeedCast International

Canaccord Genuity recently visited the US to gain an insight into the satellite communications industry, specifically in terms of the oil & gas industry, meeting with players involved such as equipment suppliers and technology developers.

The broker is now excited about the opportunity before SpeedCast International ((SDA)), believing the company can maintain strong organic growth which should continue to be supported by acquisitions. Reflecting the beneficial trends, Canaccord Genuity maintains a Buy rating and increases the target to $5.27 from $4.40.

Retail A-REITs

Quality and location continue to drive the retail segment of Australian Real Estate Investment Trusts (A-REITs), Credit Suisse maintains. The broker asks, if system growth decelerates, where is the relatively better performance going to come from?

Victoria and NSW remain the main regions for growth. Discretionary spending remains elevated versus staples, so apparel is to the fore while supermarkets are on the back burner.

As a result, GPT Group ((GPT)), with its skew to higher quality assets and 84% exposure to the above two states, is considered the leader in the field. Credit Suisse expects GPT and Scentre Group ((SCG)) to have higher comparable net operating income growth into 2016.

The broker notes Charter Hall Retail ((CQR)) is in the process of acquiring a sub-regional asset in NSW on a 6.7% cap rate – the ratio of asset value to producing income – and this presents some value. The avoidance of stamp duty, given it is a related party transaction, is considered highly beneficial.
 

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