Weekly Broker Wrap: Aldi, Oz Equity, Builders And Aged Care

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-Coles best at countering Aldi
-Oz market driven by PE re-rating
-Difficult investment case in building
-Confidence in aged care continues
-Maiden FY17 profit expected from NAN
-HUO benefits from major supplier problems
 

By Eva Brocklehurst

Aldi

Is Aldi unstoppable? This is the question UBS asks in assessing the opportunities in Australia for the disruptive supermarket chain. Based on its analysis, Aldi appears to be obtaining new customers at an accelerating rate. Driving the lift in penetration is increasing volumes of wealthier shoppers.

Despite this feature, the chain's share of basket has fallen, as shoppers express a view that Aldi is good for some things but not a main shop. The fresh category appears to be the main impediment to Aldi lifting its share of main shopping trips.

UBS expects Aldi will reach $10.6bn in sales by 2019, equivalent to a 15% compound growth rate and a doubling of sales since 2013. This will be supported by like-for-like sales growth of 3.0% per annum, further roll-out in the east coast and new regions in South Australia and Western Australia.

UBS forecasts, as a base case, Aldi's market share reaching 10% by 2019. The broker believes Aldi is winning sales from all retailers, but its like-for-like growth has slowed over the past 12 months driven by the “Every Day Value” strategy from Coles ((WES)).

Coles is judged to have grown both trips and share of main shop among Aldi shoppers over this period. In contrast, Woolworths ((WOW)) has seen both measures deteriorate. This suggests to UBS that Coles has been successful in minimising its share loss to Aldi. The broker also notes that even the independent grocers appear to have benefitted from the issues at Woolworths.

Australian Equity

Australia has outperformed global peers in the past six months and the market is up more than 10% from its February lows, Deutsche Bank observes, and this is largely driven by a price/earnings (PE) ratio re-rating rather than earnings. The stocks are now seen becoming a little expensive.

Resources appear to have driven a lot of the rise, with improved momentum in China. While high PE stocks have been key contributors, Deutsche Bank notes the PE re-rating has been largely in stocks which were not expensive relative to others in 2015 but broke away in 2016 to be 15% more expensive relative to history.

In screening defensive stocks and ranking them in terms of PE ratio relative to a six-year average, earnings revision momentum and dividend yield the broker highlights AGL Energy ((AGL)), Suncorp ((SUN)), Healthscope ((HSO)) and Stockland ((SGP)). Others that screen attractively are Coca-Cola Amatil ((CCL)), Estia Health ((EHE)), Mirvac Group ((MGR)) and Duet ((DUE)).

Builders

A more normal housing market is developing, Macquarie contends, compared with the conditions in 2015 when the fear of missing out featured in consumer behaviour. Underlying demand still is firm, despite some evidence of a pre-election lull emerging. The broker notes affordability remains an issue but positive fundamentals are underpinning growth.

In canvassing builder viewpoints the broker notes a peak in construction activity is still in the future with all citing good visibility for the next 12-18 months. Consulting engineers were starting to see a slowing in the early stages of the supply chain. Supply constraints are also broadening. While bricklaying capacity was under pressure a year ago this seems to have been alleviated.

Trades in short supply now include painters, formwork and joinery. In terms of the location, momentum in NSW is on par with 2015 while there remains some strength in pockets of the regional markets, the broker observes. One participant reported increasingly buoyant conditions in Queensland and expressed confidence in the Victorian detached market.

Materials pricing appears to be growing 4-6%. The overall investment case remains difficult, Macquarie maintains, as cyclical risks continue to grow. The broker continues to prefer offshore exposure with James Hardie ((JHX)), and maintains an Underperform rating on CSR ((CSR)) and Brickworks ((BKW)).

Aged Care

UBS is encouraged by the long-term prospects for the aged care sector despite the short-term earnings pressure. The broker calculates that a bed shortage over the next two years will drive occupancy rates up 200 basis points and occupancy is not expected to fall below 93% before 2020.

The broker expects financial pressure from the 2016 federal budget will stymie bed growth, with the larger operators continuing to invest but the smaller end likely to reduce planned investment as a means to conserve capital.

Industry operators are likely to react to the government's cuts to funding by increasing the co-payment for residents, via accommodation payments and additional services charges. UBS expects the tight supply will mean residential accommodation deposits (RADs) will continue to show strong value appreciation and suspects estimates of 5% annual growth are looking increasingly conservative.

Morgan Stanley expects low organic growth, noting the listed operators are confident that additional services revenue, scale benefits and cost management will partly offset the lower government funding and enable margins to be maintained. Still, the broker incorporates a small amount of negative leverage into its base case.

The broker observes there is a fair amount of time to deal with the budget changes but remains cautious and desires more confidence that the strategies to manage the difficulties in the sector are working.

Morgan Stanley prefers Aveo Group ((AOG)) in the sector, as the company is most advanced with its strategy in Australia, having had success previously in New Zealand. The broker also expects higher returns over the long term if the Aveo Way contract with Stockland becomes the norm, although does not incorporate this into its base case.

Nanosonics

Nanosonics ((NAN)) has now established Trophon as the standard of care for high level disinfection of ultrasound probes in Australia and Bell Potter observes it is quickly reaching a similar status in the US. The installed base of Trophon in the US is approaching 25% of the market.

The company is expected to generate a maiden full-year profit in FY17. Beyond the US and Australia a start has been made on key markets in Europe and the broker anticipates revenues will accelerate as the regulatory environment changes to embrace the broad adoption of Trophon.

The company is not expected to require further cash from shareholders, given Bell Potter expects it to be positive on cash flow in FY17, but the broker cautions that the investment does warrant a higher risk rating than more established industrial stocks. Bell Potter initiates with a Buy rating and $2.25 target.

Huon Aquaculture

A contraction of salmon biomass at sea in Norway and Chile, where major suppliers are confronted by algal blooms, sea lice and lower stocking rates, has resulted in a material contraction in global supply. Production is forecast to be down by 5-8% in 2016.

Huon Aquaculture ((HUO)) generated 90% of its revenue in export and domestic wholesale markets in FY15 which Bell Potter notes is where pricing has had a reasonable correlation to global import parity levels. Hence, the broker envisages Huon Aquaculture providing leverage to the continued improvement in global salmon prices.

Bell Potter retains a Buy rating, which it believes is supported by the completion of a significant investment in the asset base to deliver growth towards 25,000 tonnes of fish and a reduction in operating costs from the benefits of the recent capex program, as well as a more favourable pricing environment. The broker's target is $4.05.
 

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