Weekly Broker Wrap: Budget, Renewables, Aged Care, Classifieds, Outdoor And Telstra

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

-Mixed impact from federal budget
-Key solar agreement at wind parity
-Lower organic growth probable for EHE, JHC
-APO, OML on track for upgrades?
-National listings to offset Sydney weakness
-Telstra losing regional share
 

By Eva Brocklehurst

Commonwealth Budget

Good for property, bad for equities is how Credit Suisse describes the 2016 budget. The absence of an expansionary budget, with the deficit forecast to shrink to 2.2% of GDP from 2.4%, is expected to put pressure on the Reserve Bank to cut the cash rate further and be a positive for the bond market.

The broker considers the impact on the Australian dollar is mixed, with lower interest rates a negative but a tighter fiscal position a positive. The budget does provide some positives for equity investors, the broker acknowledges, but this is likely to be offset by planned changes to superannuation. Credit Suisse envisages less money flowing into the Australian pension pool and, hence, less flowing into equities.

The sectors most set to benefit from the budget's proposals include: building materials – renewed demand for investment property and infrastructure spending; retailers – personal income tax cuts and small business write-offs; and media – a reduction in licence fees.

The sectors likely to suffer include: fund managers – super changes; health care – changes to Medicare; and banks – associated costs for the Australian Securities and Investments Commission and less self-managed super fund demand.

Utilities And Renewables

Origin Energy ((ORG)) has signed a power purchase agreement (PPA) with the first non-government backed, large solar project at a price below parity with wind power, which Credit Suisse suspects signals an important stage in the transition to renewables.

The 13-year agreement with the 100MW Care solar farm is for the purchase of energy output plus renewable certificates for a bundled price around $80/MWh. This is roughly half the cost of AGL Energy's ((AGL)) Broken Hill and Nyngan solar projects.

The broker envisages the developments for both Origin and AGL are an opportunity to increase near-term earnings. With the pair having a stated target of over 1,000MW in renewables projects the near-term uplift could be 5-6% or more, the broker maintains.

Credit Suisse believes the drop in PPA solar prices does put a cap on how far wholesale electricity prices can rise, yet retains a view that tighter climate policy will necessarily lead to higher wholesale electricity prices which will benefit the companies' existing portfolios.

Aged Care

The federal government has flagged changes to the Aged Care Funding Instrument (ACFI) as expenses have grown ahead of forecasts, driven by higher complex health care claims, largely because of an increase in frailty.

To cut the rate of growth the government plans to halve the indexing for complex health care funding, saving $1.2bn over four years. The budget papers indicate the government will look to further strengthen the way care funding is determined, separating resident needs from service provision.

The changes support Morgan Stanley's view of lower organic growth for listed operators in aged care and are slightly negative for Estia Health ((EHE)) and Japara Healthcare ((JHC)).

Outdoor Media

Growth in outdoor media hit 17% in the first four months of the year. This suggests to CLSA that APN Outdoor ((APO)) and oOh!Media ((OML)) are on track for upgrades to 2016 guidance. The broker upgrades earnings forecasts for APN Outdoor by 7.0% and by 4.0% for oOh!Media.

The broker believes the growth has been driven entirely by digital revenue and billboards have taken over retail as the strongest growing outdoor segment. Retail and billboards represent 80% of oOh!Media's earnings. APN Outdoor is not involved in retail but billboards represent 50% of earnings.

While roadside transit, street furniture and transport (train stations and airports) advertising declined in April, the broker is cautious about extrapolating this data further. Year to date these segments are still showing solid growth.

Real Estate Classifieds

New listings for the Australian property market grew 2.0% in April following 1.0% growth in March. Deutsche Bank suggests the lack of a significant rebound, despite easy comparables, is attributable to weaker volumes in the Sydney market.

The broker continues to expect the national market will grow in the June quarter, with other capitals and regional areas offsetting the Sydney declines. Given the significance of the Sydney market the broker continues to forecast lower revenue growth in the second half for REA Group's ((REA)) domestic operations as well as Fairfax Media's ((FXJ)) Domain.

Telstra And NBN

What is happening to Telstra's ((TLS)) NBN share? This is the question UBS asks after Australian Competition and Consumer Commission (ACCC) data revealed Telstra had 47% of NBN services in operation as of March 31, broadly consistent with its existing fixed data share. Yet, of the 941,000 NBN subscribers to date, 53% are regional.

UBS estimates that in regional Australia Telstra currently enjoys a 70% share, given the lack of unbundling from peers affords it an input cost advantage. Yet the ACCC data shows Telstra's regional NBN share is 52%, and this implies Telstra is losing regional market share as access costs equalise.

On the other hand, product differentiation and the Belong brand, which taps into value oriented metro subscribers, appear to be buoying Telstra's metro share. Its NBN metro share is currently 41% and outer metro share 46%. UBS believes Telstra needs to execute further on a lean operating model and differentiated product to hold a 50% fixed data share.
 

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