The Wrap: China, Telcos, Penalty Rates, A-REITs

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Weekly Broker Wrap: Chinese policy; Superloop; telco mobile subscribers; penalty rates judgment; and A-REITs outlook.

-China's government expected to downplay official targets for growth and inflation
-Superloop readying to monetise its assets
-Mobile subscriber rates accelerating
-Penalty rates decision beneficiaries likely to be JBH, MYR and WES
-Operating fundamentals and capital positions strong for A-REITs
 

By Eva Brocklehurst

China

ANZ Bank analysis notes that structural reforms are now a priority of government policy in China. This message is expected to be reinforced at the country's National People's Congress meeting on March 5. The analysts expect the government to embrace a risk management attitude and downplay the importance of official targets on growth and inflation. The analysts also believe the government has attempted to prevent a financial bubble and strong credit growth is not welcome.

The Chinese economy has become more market-driven and its performance is relatively insensitive to global and domestic events. Adopting targets for growth can introduce some flexibility but allow policy makers to adjust actions accordingly and the ANZ analysts expect the headline growth target range to be widened to 6.0-7.0%.

Meanwhile, monetary policy appears to have reached its limit in boosting real economic growth. The analysts believe policy makers should also question the effectiveness of monetary policy in serving the real economy. Credit extended to financial institutions now represents 25% of bank total assets versus 12% in 2017. Financial services contributed 8.3% to GDP in 2016 compared with just 4.5% a decade ago.

The analysts believe a key item to watch will be the official target for M2 money supply. Last year, targets were set at 13% for both M2 and TSF (social financing). With nominal GDP growth of just 8%, an expansion of TSF by 12.8% has exaggerated the credit burden. Therefore, lowering the M2 and TSF targets to 11-12% should confirm the government's intention to taper this in 2017

 The analysts believe such action would be seen as monetary policy tightening and likely to trigger some liquidity concerns in the interbank market, with a sell-off in the rates markets.

Superloop

Superloop ((SLC)) has completed core parts of its initial roll-out of its regional network. In Hong Kong it has built a 110 km fibre-optic network that has connected 30 strategic sites. In Singapore, the network reaches over 30 key buildings, giving the business access to over 1000 enterprises. The company has signed a deal with Vocus Communications ((VOC)) for international, inter-capital, regional ethernet access and metropolitan fibre capacity in Australia, valued in excess of $20m over 15 years.

Brokers observe, given the progress, the company can now shift to monetising its assets. Hence, Superloop has been scaling up its sales teams. Brokers also note the company is achieving synergy targets from its BigAir acquisition.

Morgans is impressed with the network coverage in Australia, Singapore and Hong Kong and the unique value proposition. The company is the only owner/operator of telecommunications and digital services. Looking forward, sales execution is the next area of focus.

The stock trades at a premium to telecommunications peers and, in the broker's view, to justify this it needs to grow at a faster rate. On current forecasts this remains the case, but Morgans requires evidence that the sales strategy is working. Hence, a Hold rating. Target is $2.74. The main upside and downside risk for the stock relates to the rate of sales.

Telecommunications

Total telecommunications mobile subscriptions increased by 2.4% in the first half of FY17, to 31.2m. UBS notes mobile is Telstra's ((TLS)) largest individual segment, generating 42% of FY16 operating earnings (EBITDA). While market share has come under pressure in the first half, particularly in post-paid, where Optus took share in the first half, the company did manage to grow its overall subscriber base.

The next catalysts are the outcome of the company's capital allocation review and the regional mobile review conducted by the consumer regulator, the ACCC. The broker estimates for the half-year to December 2016, total mobile industry subscribers lifted around 560,000. This represents an acceleration on recent industry trends. The broker concludes from headline data, that mobile subscriber share now sits at 49.5% for Telstra, 31.9% for Optus and 18.6% for Vodafone.

Net additions were much stronger than Ord Minnett expected at both Optus and Telstra, while Optus is observed taking a greater share of post-paid mobile as a result of its EPL exclusivity. Ord Minnett observes amaysim ((AYS)) intends to launch its own NBN offering in the next 90 days, although does not plan to be a price disruptor as an NBN retail service provider.

Shaw and Partners believes Telstra will struggle to grow its core business, given the $2-3bn hit from the NBN. TPG Telecom ((TPM)) is expected to be driven by moves into mobile and spectrum auction, while Vocus appears to have stabilised, although the broker believes it needs to address operating cash flow and a stretched balance sheet.

Penalty Rates

The Australian Fair Work Commission has brought down a judgment to reduce penalty rates. The implications for the retail industry are that Sunday penalty rates will be reduced to time-and-a-half from double-time. Base wage and public holiday loading rates are reduced to double-time-and-a-quarter from double-time-and-a-half.

Citi observes the impact on retailers is varied. Some have lower-than-award Sunday rates in enterprise agreements. The broker expects the biggest beneficiaries will be JB Hi-Fi ((JBH)) and Myer ((MYR)). There is also a meaningful benefit for Wesfarmers ((WES)).

Retailers will probably add additional staff on Sunday as a result and may pass some of the gains back through lower prices. The Fair Work Commission is currently seeking submissions on implementation. A provisional judgment has suggested instalments commencing from July 1, 2017. Changes to public holiday rates will take effect from July 1, 2017. Hence, the broker observes the likely impact is in FY18 and FY19.

A-REITs

Shaw and Partners forecasts total shareholder returns of 9.3% over the 12 months for the Australian real estate investment trust sector on a weighted average basis. The distribution yield spread over bonds is 2.2% on the same basis. The broker believes the sector, clearly, remains an attractive investment proposition relative to cash.

Overall, operating fundamentals appear healthy and capital positions strong. Sector gearing has trended lower to around 27.7% from 28.8% last June, in part from asset revaluation gains but also because of asset sales.

The broker's main real estate Buy ideas are Centuria Capital ((CNI)), Gateway Lifestyle ((GTY)), Lend Lease ((LLC)) and Mirvac ((MGR)). Within the pure A-REIT sector the broker also has a Buy rating on Abacus Property ((ABP)) and Centuria Metropolitan ((CMA)). While retaining a Hold rating for Vicinity Centres ((VCX)), the broker notes the stock is looking increasingly compelling. On a relative basis, Dexus ((DXS)) and Folkestone Education ((FET)) are screening expensive.

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