The Wrap: Banks, Amazon And Automotive

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This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies.
For more info SHARE ANALYSIS: BEN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Bank regulation reform; regional bank outlook; IVF; Amazon and the media; automotive sales trends; Kogan.com.

-Pause in new initiatives from Basel likely to be welcomed by bank industry
-Regional banks seen well-placed to navigate changing mortgage market
-Significant impacts for Australian traditional media expected from Amazon
-Weak market conditions continue in automotive sector
 

By Eva Brocklehurst

Banks

Shaw and Partners observes the Australian Prudential Regulation Authority now on its own in regard to tightening capital requirements, as global banking reforms are halted until 2019 so the Basel Committee can complete its assessment of the impact of reforms post the global financial crisis.

The lack of major new initiatives by Basel is expected to be welcomed by the industry, which is trying to grapple with the prospect of regulatory uncertainty in the wake of Brexit and the deregulatory push of the US President Donald Trump.

Shaw and Partners suggests less regulation globally will be a positive for global bank shares and flow into Australian bank share prices and it will, at the margin, probably weaken APRA's ability to be tough on Australian banks regarding capital levels.

Macquarie observes Australian banks have long been beneficiaries of strong and uninterrupted economic growth with ongoing increases in household leverage. The broker envisages limited scope for further re-pricing and expects mortgage volume growth to revert to sub-nominal GDP levels by the end of FY18, as the backlog of recent construction activity settles.

In the short term, the broker believes bank stocks offer relatively defensive earnings supported by recent re-pricing initiatives and low bad debts. Nevertheless, Macquarie envisages medium-term risk around housing-related earnings growth. As a result, the broker does not believe there is a justification for banks to trade at premium price/earnings multiples versus historical ranges. Hence, Macquarie maintains a neutral stance on the sector.

Regional Banks

Morgan Stanley believes that regional banks are relatively well-placed to navigate the changing mortgage market, as there is less impact from lower loan growth and more leverage to re-pricing. The broker upgrades Bendigo & Adelaide Bank ((BEN)) to Equal-weight, given its stronger earnings momentum versus Bank of Queensland ((BOQ)) and believes it is better placed to navigate the new mortgage market.

The broker suspects Bendigo & Adelaide still needs to improve its return on equity and costs as well as de-risk via a partial sale of Homesafe, which is considered to be a key earnings risk the FY18. The broker retains a Equal-weight on Bank of Queensland, noting a dividend in yield of 6.5%.

Bell Potter considers it opportune to revisit the potential tie-up of Suncorp's ((SUN)) banking arm with Bendigo & Adelaide. The analysts believe merger benefits should go a long way towards mitigating scale constraints and levelling the playing field. The two regionals are envisaged to be highly compatible in terms of culture, understanding of regional markets and familiarity with multi-brand distribution.

In addition to the usual cost synergies, Bell Potter believes a merger would provide scale in key specialist segments, a strengthening of the credit rating and geographic diversity.

IVF

UBS observes a significant re-bound in IVF cycle growth rates in the March quarter and attributes this to the step change from the structural shift of some industry participants towards a bulk-billing model.

The main issue is how much of this growth is being driven by bulk-billing stimulation and how much is attributable to full service. If the majority is flowing to bulk billing the impact for listed players is different, although UBS suspects neither aspects are particularly positive.

Virtus Health ((VRT)), which has begun to transition its low-cost business to bulk bill, will be participating in growth but cannibalising its historical volumes with lower-margin patients. Meanwhile, Monash IVF ((MVF)), which has moved a relatively smaller low-cost business to full service will not be participating in the growth in bulk billing at all.

Amazon And Media

Morgan Stanley ponders the outlook for traditional media and the impact of Amazon, which has confirmed it will launch a local retailing business in Australia. Starting with an online marketplace the company plans to build a fulfilment centre.

While the implications for Australia's retail sector are being widely scruitinised, the broker believes there will also be secondary impacts in a range of other industries, on which the market has not yet given much thought. The impact on Australian media companies is expected to be negative and potentially very significant.

The broker emphasises this likely be gradual over multiple years. Retail is the largest advertiser group in Australia and accounted for 20-30% of total expenditure in 2016. The major risk Morgan Stanley envisages is disruption, if traditional Australian retailers lose market share and suffer lower sales they will spend less on advertising.

The broker notes Amazon spends very differently to Australian retailer, using keyword searches and online instruments and not TV/radio/print. This may be a catalyst for Australian retailers to review how they spend their advertising dollars, bringing up the point about substitution. Amazon's own advertising platform could emerge as an attractive alternative for online advertising by Australian retailers and consumer brands.

Automotive

Moelis observes weak market conditions continue for the automotive sector. Queensland and Western Australian sales trends remain weak, with sales observed to be down -5.2% and -9.2% respectively in the March quarter. Enforcement of responsible lending conditions is partly to blame for the softer volumes, the broker suspects, as increased scrutiny by ASIC of lending traffic has led to tighter conditions from the financiers.

As a result, some high credit risk customers can no longer obtain finance. The outcome for insurance regulation is still unclear but the broker observes discussions with insurers appear positive. Increased competition in the market from private equity backed groups suggests to Moelis that acquisition multiples are elevated and, in light of this, expects both AP Eagers ((APE)) and Automotive Holdings ((AHG)) to remain disciplined in their approach to acquisitions.

Kogan.com

Kogan.com ((KGN)) has upgraded FY17 earnings expectations for the fourth time since its IPO in July 2016. While details are limited as to the drivers of the upgrade, Canaccord Genuity suspects strong sales of its private label products as well as strong subscriber growth for Kogan Mobile.

The broker estimates Kogan Mobile is now one of the fastest-growing mobile virtual network providers in Australia. Earnings estimates for FY17 and FY18 are revised up 13% and 2% respectively. Short-term upgrades to private-label revenue forecasts are partially offset by a reduction in the broker's medium-term forecast for the company's third-party domestic revenue. Canaccord Genuity has a Buy rating and target of $2.33.

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