Weekly Broker Wrap: Consumer, Automotive, Infrastructure And Aged Care

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            [8] => ((MMS))
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            [10] => ((WOW))
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This story features CREDIT CORP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: CCP
The company is included in ASX300 and ALL-ORDS

Transaction Capital enters Oz; weak Xmas ahead?; regulatory settings for automotive; Woolworths; infrastructure downgrades; volatility in aged care.

-South Africa's Transaction Capital takes aim at Australia's debt collection industry
-Morgan Stanley suspects support for Australian retailers is ebbing
-Caution warranted on automotive-linked sector in face of regulatory reviews
-Deutsche Bank believes infrastructure stocks need to trade lower before value emerges
-Aged care stock estimates suggest little value assigned to future growth
 

By Eva Brocklehurst

Transaction Capital

South African diversified financial services provider, Transaction Capital, has entered the Australian receivables management industry with the acquisition of Recoveries Corporation for $33m. Transaction Capital has an enterprise value of around $1.3bn. The company envisages the acquisition as an opportunity to actively acquire debt portfolios in Australia.

Telco and utility debt appear the obvious target to Canaccord Genuity, given the ability to purchase small parcels from brokers rather than trying to make inroads into the forward-flow tenders with the big banks.

Hence, the broker does not believe there is an imminent competitive threat to the credit debt purchasing operations of the four major players, which include Credit Corp ((CCP)), Baycorp, Pioneer Credit ((PNC)) and Collection House ((CLH)). Transaction Capital has highlighted the fragmented nature of the Australian debt collection industry and expects this will provide an opportunity to expand.

Australian Consumer

Morgan Stanley is positioning for a weak Christmas trading period, with its only non-food retail stock rated Overweight being Super Retail ((SUL)). The broker remains cautious in the current environment, noting the petrol tailwind is reversing, housing volumes are declining and headwinds online are accelerating. The broker lowers its valuations for Myer ((MYR)) and Harvey Norman ((HVN)) as well.

The broker believes the stimulatory impact of a lower petrol price is often under-appreciated, given the high purchase frequency and direct cash saving. Meanwhile, as fewer consumers take the keys to new homes, spending on categories like furniture and home appliances will also suffer.

Online purchasing activity has also accelerated over the last six months. Australian retailers generate a lower share of sales from online in their respective categories and, as a result, Morgan Stanley believes the growth in online is a headwind.

Automotive Linked Companies

Morgan Stanley observes the regulatory setting for automotive stocks or for those linked to the industry is set to change, with ASIC reviewing commissions and financing practices at dealerships.

The broker does not discount the risks to fringe benefits tax/novated leasing. Australia's robust, but housing-linked and debt-intensive, growth over the last four years has been a substantial tailwind that appears to be subsiding. The broker highlights that car sales are very sensitive to indicators that are at risk, including household wealth, house prices and employment.

This warrants caution on the sector. Automotive dealers are most at risk and the broker downgrades Automotive Holdings ((AHG)) to Underweight, reflecting the fact that it also has an unfavourable geographic spread versus its rival AP Eagers ((APE)), rated Equal-weight.

McMillan Shakespeare ((MMS)) is downgraded to Underweight from Overweight, as the broker believes the earnings pressure is not entirely appreciated by the market and there is a lack of positive catalysts. SG Fleet's ((SGF)) outlook is weaker than the broker previously thought. A larger proportion of up-front commissions and exposure to corporate novated leasing makes the stock a higher risk proposition. Morgan Stanley downgrades to Equal-weight.

Supermarkets

Deutsche Bank's proprietary shopper survey signals a turnaround for Woolworths ((WOW)), with its large investment to re-start growth showing early results. Namely, Woolworth shoppers report improvement in price and execution and are buying more groceries. The broker's survey also signals the damage done by the company's mistake on its loyalty program is being reversed.

Deutsche Bank upgrades Woolworths to Buy. On that basis Metcash ((MTS)) is downgraded to Sell as the broker expects its growth to erode as Woolworths improves. A Sell rating is maintained for Wesfarmers ((WES)) and the broker expects sales growth at Coles will come under pressure, particularly in a market constrained by food deflation.

Infrastructure

Deutsche Bank has no Buy recommendations in the infrastructure sector. The broker downgrades its exposure to the sector as a whole, reducing Sydney Airport ((SYD)) and Macquarie Atlas ((MQA)) to Hold. The broker has concluded that despite the recent falls across the sector, the stocks are arguably only trading at fair value. A Hold rating is retained for Transurban ((TCL)).

Despite growth options and solid operations, as well as favourable longer term trends, the broker believes the macro bond environment has overwhelmed these positive issues. If Deutsche Bank's forecast for a reduction in the local cash rate in May 2017 –  because of lower inflation – materialises, this could be a worst case scenario for these stocks, given lower short-term revenue drivers and higher long-term discount rates.

Given the broker envisages the sector as fair value using a 3% bond rate it would need to witness the stocks trading lower before value is deemed to be emerging.

Aged Care

A Senate inquiry is reviewing the government's proposed cuts to the aged care funding instrument (ACFI) but UBS notes a motion to overturn the changes has already failed. The broker attributes the extraordinary volatility in the aged care segment over 2016 to the government's cuts announced in May and its later clarification of these, which was negative for asset replacement/refurbishment.

UBS is optimistic the planned cuts may be moderated and is confident in the ability of operators to mitigate the impact. Given the government is now re-examining the cuts the broker believes the regulatory risk can only moderate from this point. Possible alternatives include reductions to indexation which spreads the burden to savings target.

Since the reforms were announced consensus expectations for FY17-19 earnings have been reduced by around 17%. UBS estimates that stock prices currently imply a further 18% cut to the earnings outlook, which suggests that investors assign little value to future growth.
 

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