Weekly Broker Wrap: Blockchain, Dividends, A-REITs, Insurers And Miners

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This story features ASX LIMITED, and other companies.
For more info SHARE ANALYSIS: ASX
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

-ASX pioneers Blockchain testing
-Candidates for dividend upgrades
-CS seeks value in A-REITs
-Insurer margins under threat?
-Slower, lower, weaker for miners
 

By Eva Brocklehurst

ASX & Blockchain

ASX ((ASX)) is pioneering a blockchain proof of concept, with a decision whether to take up the innovation scheduled for mid 2017. Morgan Stanley observes this represents the first attempt to implement the technology in a large-scale market. Deployment is expected to reduce market costs, defend the clearing monopoly and grow new revenue streams.

If ASX proceeds, the broker expects the exchange to increase the pace of innovation and disruption risk to the post-trade securities market. The technology has implications for the US$750bn global securities value chain over the next decade, with many exchanges piloting its use to assess benefits.

The risk is that blockchain could simplify processes, reduce revenue pools and remove barriers for new entrants, which the broker suspects could lead to disruption. The chance of early adoption in Hong Kong is considered lower than in Singapore or Australia, where growth and relevance are greater risks.

Dividend Growth

In screening stocks which have greater potential to grow their dividends, Morgans takes a look at the ASX300 industrials to screen stocks where consensus earnings growth is outstripping distribution growth, as these are likely candidates for dividend upgrades over the next few years.

The broker observes the chase for yield is being called out to investors given the low rate environment but the historical valuations of these stocks are beginning to look stretched, as share prices continue to rally.

Stockland ((SGP)) and Westpac ((WBC)) are screening favourably on this account, with strong earnings upgrades outpacing dividends. Others topping the broker's analysis include SAI Global ((SAI)), Mirvac Group ((MGR)), Coca-Cola Amatil ((CCL)), Retail Food Group ((RFG)), Wesfarmers ((WES)), Scentre Group ((SCG)), Investa Office ((IOF)), Amcor ((AMC)) and Computershare ((CPU)).

The broker notes it is no coincidence that Australian Real Estate Investment Trusts (A-REITs) are showing up well based on the parameters, as the lower-for-longer interest rates will provide a tailwind over the short to medium term as cheap debt and high demand continues to fuel developments.

A-REITs

Credit Suisse believes it is always a good time for real estate. During periods of high inflation it provides a hedge. When inflation is low it can be seen as a bond proxy. If sustained, record low interest rates should drive a further tightening in discount rates but this should also be accompanied by a reduction in growth expectations, the broker maintains.

Credit Suisse calculates that implied growth rates suggest some relative mis-pricing among stocks. When using extremely low risk-free rates as a starting point for applied discount rates, small changes to terminal growth rate can have a big impact, the broker asserts.

The broker believes Stockland, Westfield ((WFD)), Mirvac, Goodman Group ((GMG)) and GDI Property ((GDI)) offer the best relative value, while Shopping Centres Australasia ((SCP)), Charter Hall ((CHC)), Investa Office, Cromwell Property ((CMW)), Dexus Property ((DXS)) and BWP Trust ((BWP)) appear the most stretched.

Insurance

Credit Suisse analyses the key drivers of growth across the general insurance market. Overall, growth in gross written premiums (GWP) across the Australian market increased slightly in 2015, to 1.7% from 1.2% in 2014, although well below the 2013 rate of 7.3%. 2016 is expected to be positive but likely below 2%.

The GWP growth for the market remains above that of Insurance Australia Group ((IAG)) and Suncorp ((SUN)), although Credit Suisse observes the differential for Suncorp is reducing. The broker observes some large premium rate increases being achieved in CTP (green slips) but commercial lines remain under pressure, while personal lines appear to be capped at what can be achieved in rate increases.

The broker believes insurers will need to focus on expense savings or portfolio remediation to hold their margins in 2016. Credit Suisse has recently taken a more neutral stance on the sector. While premium rate pressure was evident in recent times investment income is now becoming an increasing headwind for insurers.

Based on current share prices the broker's top three in order of preference are AMP ((AMP)), Suncorp and IAG.

Appen

Appen ((APX)) is central to Bell Potter's view that the next "big thing” in computing will be virtual assistants. These are phones, homes, cars and other devices which respond to voice instructions. The Big Five technology companies are launching voice-controlled devices and there is a race to develop a true virtual assistant with conversational abilities. There is no device as yet, but to the broker it seems only a matter of time.

The one company on the ASX that provides voice data and is a global leader is Appen. The broker finds it unsurprising that Appen's revenue with Facebook have been growing so rapidly. Bell Potter retains a Buy rating on the stock and $2.80 target and believes the exposure to the potential material uplift in demand for voice data provides extra appeal.

Codan

Moelis reviews its assumptions for Codan ((CDA)), after the company upgraded FY16 profit guidance. The broker's estimated FY16 profit has increased 35% to $20m and upside to management's guidance is probable following signficant momentum observed in the metal detection business.

The company has usually been reluctant to provide earnings guidance so Moelis believes a greater level of comfort was required to break with this tradition. The broker retains a Buy rating and $1.40 target and expects momentum into the second half should drive positive operating cash flows, further reducing net debt towards gearing of less than 15%.

Sunk development costs are now setting the scene for the radio communications products that will allow the company to expand into new markets. Moelis is of the view that, despite the recent price appreciation, that the stock still presents value and there are risks to the upside on FY16 and FY17 profit estimates.

Miners

PricewaterhouseCoopers (PwC) observes 2015 was a race to the bottom for miners, with its Top 40 cohort experiencing their first ever collective net loss, their lowest return on capital employed and unprecedented capex containment.

Whether this is a turning point remains to be seen but the analysts do not believe the sector is defeated, rather that its outlook can be described as slower, lower and weaker. One aspect of the 2015 downturn has revealed to PwC that the market cannot be as dependent on China as it once was.

Significant restructuring needs to continue. PwC analysts have no doubt the energy landscape is changing and new world disrupters have a role to play. The favourite commodity that has emerged in 2015 is lithium, with the acceleration of the battery boom. For the first time a lithium company makes it into the PwC Top 40 miners.

Thermal coal has sustained the greatest casualties with former Top 40 names such as Peabody Coal and Arch Coal seeking bankruptcy relief over the past year.
 

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