Weekly Broker Wrap: Yield, Focus Stocks, Equity Strategy, Travel And NBN

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-Macquarie: high quality yield prevails
-Goldman adds MMS, ISD to focus list
-WES, CSR, AZJ more interesting to DB
-Strong inbound tourism growth from China
-NBN connectivity charges in spotlight
 

By Eva Brocklehurst

Yield

Macquarie suspects stronger growth, not higher yields, poses the largest threat to relative performance of Australian yield stocks. If economic growth assumptions are correct, the broker does not expect bond yields will rise enough to unwind the desire for high quality yield.

Still there is a de-rating risk for stocks where earnings growth is not enough to offset a higher cost of capital. These stocks may have been mispriced on questionable dividend or distribution policies and/or may have undergone expansion in multiples even if growth concerns were easing.

The broker does not have a timeframe in mind for a turning point but suspects it is too early to take a strong cyclical view versus a defensive one. In contrast to some, Macquarie is not overly concerned about the risk to bank dividends and would be a buyer on price/earnings expansion, while considering Telstra ((TLS)) has potential to raise its dividend and should be purchased for yield.

In the cases of infrastructure and utilities the broker believes while distribution trends can be maintained valuations are largely borne out and these should be purchased for yield. Energy, materials and domestic cyclicals are expected to take market leadership with the greatest price/earnings expansion in 2016.

Focus List

Goldman Sachs adds McMillan Shakespeare ((MMS)) and Isentia ((ISD)) to its Australia Small & Mid Caps focus list. In November the list was up 1.3% while the ASX Small Ordinaries Accumulation index was flat.

The main performers on the list in November were Costa Group ((CGC)), Blackmores ((BKL)) and Super Retail ((SUL)) which outperformed by 10.3%, 9.5% and 7.7% respectively. The main detractors were 3P Learning ((3PL)), Austbrokers ((AUB)) and Genworth Mortgage ((GMA)), which underperformed 13.5%, 7.9% and 5.9% respectively.

Equity Strategy

Deutsche Bank believes the environment is now more fertile for stock picking. There are fewer macro issues and more space to assess stocks on their merits. The broker runs a simple screen on earnings, valuation and quality metrics.

The names that become more interesting and have not been in the broker's model portfolio include Wesfarmers ((WES)), considered cheap versus history with good momentum, CSR ((CSR)) as its price/earnings ratio is 10x and housing exposure is still attractive, and Aurizon ((AZJ)) as it offers solid growth driven by cost cutting.

With the US Fed funds rate set to rise, Deutsche Bank notes this is positive for QBE Insurance ((QBE)) and Computershare ((CPU)). When it comes to the yield trade the broker does not believe short term rates will rise a lot and long rate may not move much at all. Moreover, the broker does not believe earnings growth is likely to be so robust that yields of 4-5% can be ignored.

Deutsche Bank does not envisage a need to chase traditional yield plays that have already re-rated and offer limited growth such as telcos, real estate investment trusts and infrastructure. Instead, the broker sticks with choosing stocks with yield and some achievable growth, noting yields of more than 5.0% are on offer from CSR, Stockland ((SGP)), Fletcher Building ((FBU)), AMP ((AMP)), Harvey Norman ((HVN)) and Spotless ((SPO)).

High Conviction Stocks

Morgans removes Challenger ((CGF)) and BHP Billiton ((BHP)) from its list of high conviction stocks. The broker notes Challenger has outperformed since being included in the list three months ago, returning 21% in an otherwise volatile market. The stock is now considered fair value but still representing a solid investment in the current climate.

BHP has drifted into oversold territory in the broker's view, following the tragic incident at the Samarco mine, but the stock is considered a long-term investment prospect because of its diversification, operating performance and free cash flow leverage to a recovery.

The broker suggests investors stick to stocks with higher levels of conviction and those that have shown resilience in a rising interest rate environment.

Travel

Inbound tourism for the year to September 2015 grew 6.6% to a new high of 6.7m visitors, Tourism Research Australia has revealed. International visitor spending on trips to Australia grew by 13.5%. Growth was strongest from China, with Chinese visitors now accounting for 22% of total expenditure by international visitors on trips to Australia.

Bell Potter likes Amalgamated Holdings ((AHD)) in this sector given its hotels and resorts are exposed to the Sydney and Melbourne markets, gateways to international visitors. Ardent Leisure ((AAD)) is also considered attractively priced given growth in its Main Event business and exposure to Chinese visitors through its theme park assets.

Corporate Travel Management ((CTD)) is expected to enjoy further share price upside with gains in market share supplemented by acquisitions while the slowing outbound travel and lower currency headwinds that plague Cover-More ((CVO)) are expected to turn around as the domestic economy recovers.

NBN Charges

A spike in data usage with the launch of Streamed Video On Demand (SVOD) has caused the service providers to lobby NBN Co to reduce the current charges for the connectivity virtual circuit (CVC). This is the capacity required to serve a collection of end user premises as defined by NBN Co. NBN Co has commenced an industry consultation process on the issue.

The current charge for CVC is $17.50/month/mbps. Speculation suggests the NBN will trial a new dimension based discount which would scale up with the amount of CVC capacity provided to the end user by the service provider and would not disadvantage smaller players.

Savings would depend on how much CVC capacity is currently provided per end user. UBS considers the implementation of new pricing could result in NBN cost savings per user of $1.30 a month.

Despite this development, the broker still believes the NBN is a negative inflection point for fixed returns. Unbundling regulation has traditionally lowered fixed input costs for the service providers but NBN now assumes control of the last mile and, as a result, marginal cost curves lift materially for Telstra and service providers such as TPG Telecom ((TPM)), UBS maintains.
 

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