The Wrap: Catalysts, A-REITs & Supermarkets

Array
(
    [0] => Array
        (
            [0] => ((BHP))
            [1] => ((CBA))
            [2] => ((SUN))
            [3] => ((ORA))
            [4] => ((WES))
            [5] => ((KSL))
            [6] => ((DMP))
            [7] => ((LOV))
            [8] => ((ADH))
            [9] => ((APO))
            [10] => ((BAP))
            [11] => ((ELD))
            [12] => ((IPL))
            [13] => ((ORI))
            [14] => ((CCL))
            [15] => ((TGA))
            [16] => ((QBE))
            [17] => ((ORG))
            [18] => ((STO))
            [19] => ((REA))
            [20] => ((SEK))
            [21] => ((CAR))
            [22] => ((WFD))
            [23] => ((GMG))
            [24] => ((IOF))
            [25] => ((CHC))
            [26] => ((VCX))
            [27] => ((SGP))
            [28] => ((WOW))
            [29] => ((WES))
            [30] => ((MTS))
            [31] => ((VRT))
            [32] => ((SHL))
            [33] => ((PRY))
        )

    [1] => Array
        (
            [0] => BHP
            [1] => CBA
            [2] => SUN
            [3] => ORA
            [4] => WES
            [5] => KSL
            [6] => DMP
            [7] => LOV
            [8] => ADH
            [9] => APO
            [10] => BAP
            [11] => ELD
            [12] => IPL
            [13] => ORI
            [14] => CCL
            [15] => TGA
            [16] => QBE
            [17] => ORG
            [18] => STO
            [19] => REA
            [20] => SEK
            [21] => CAR
            [22] => WFD
            [23] => GMG
            [24] => IOF
            [25] => CHC
            [26] => VCX
            [27] => SGP
            [28] => WOW
            [29] => WES
            [30] => MTS
            [31] => VRT
            [32] => SHL
            [33] => PRY
        )

)

This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Weekly Broker Wrap: Market catalysts; online classifieds; A-REITs; supermarkets; Medicare statistics.

-Fundamentals and stock-specific catalysts should provide a source for investors
-Residential listings weaken, job market listings strong
-Risks seen skewed to the downside for retail-exposed A-REITs
-Major supermarkets still expected to invest in price
-Data suggests solid growth for GPs, IVF but pathology weaker
 

By Eva Brocklehurst

Catalysts

Morgans suggests the Australian share market reflects an economy that has failed to break decisively out of its post-mining slump. Yet low volatility and a range-bound market can hide opportunities as well as threats. Without the necessary ingredients for another broad-based rally, the fundamentals and stock-specific catalysts should provide a source for investors over the next few months.

The fact that small cap stocks fared better in terms of absolute performance in the recent results suggest to the broker a change in leadership, and investors may again see growth outside of the market leaders.

Morgans nominates 36 upcoming stock-specific catalysts to either watch or avoid. These include potential positives for BHP Billiton ((BHP)), Commonwealth Bank ((CBA)), Suncorp ((SUN)), Orora ((ORA)), Wesfarmers ((WES)) Kina Securities ((KSL)), Domino's Pizza ((DMP)), Lovisa ((LOV)), Adairs ((ADH)), APN Outdoor ((APO)), Bapcor ((BAP)) and Elders ((ELD)).

Potential negative catalysts are in sight for Incitec Pivot ((IPL)), Orica ((ORI)), Coca-Cola Amatil ((CCL)) Thorn ((TGA)), Amcor ((AMC)), QBE ((QBE)), Origin Energy ((ORG)) and Santos ((STO)).

Online Classifieds

Residential listings have weakened given tougher previous comparables. Nationally, new listings are down -7.2% for the four weeks to September 24, while capital city new listings are down -4.3% year-on-year. UBS observes home unit growth is healthy, up 2.3%, but house volumes have fallen -5.2% and land volumes are particularly weak, down -39% year-on-year.

The broker notes land sales have historically shown a correlation to building starts, which in turn lead REA Group's ((REA)) media/developer revenues. Sydney remains robust, up 4.9%, but the broker observes both Melbourne, down -7.8%, and Brisbane, down -6.3%, volumes are weaker.

In the job market, domestic volumes continue to be strong for Seek ((SEK)) and the company has noted an increase in mining exploration activities, particularly in Western Australia. Mining/gas/oil listings appear to be the key contributor to the strong growth in listings.

Meanwhile, Carsales.com ((CAR)) private inventory volumes appear to have softened. UBS cautions that there is no visibility regarding any increased penetration of depth products and the extent of the yield/mix offset with the introduction of new private pricing tiers in July.

A-REITs

Citi observes that post FY17 results, only retail-exposed A-REITs experienced negative FY18 earnings revisions, while all those with office and industrial exposure experienced positive revisions. This outcome, the broker suggests, is a key indication of a stock's potential relative performance.

Moreover, Citi is not convinced that retail earnings per share have bottomed. Several factors such as low-wage growth, a declining savings ratio, rising mortgage rates, store closures and fixed rental bumps that are greater than sales growth, continue to signal the risk is to the downside.

Westfield ((WFD)) is the stock considered to have the greatest downside risk versus consensus expectations. Citi prefers Goodman Group ((GMG)), Investa Office ((IOF)) and Charter Hall ((CHC)) for office and industrial exposure, and Vicinity Centres ((VCX)) and Stockland ((SGP)) as protection against a tactical rally in retail A-REITs.

Supermarkets

Morgan Stanley believes life will become harder for Woolworths ((WOW)), as the company's food business is about to lap the single biggest improvement in like-for-like sales growth the supermarket has ever experienced. The broker's analysis of Aldi's roll-out and refurbishment process provides greater conviction that growth will slow.

Also, Morgan Stanley believes Coles will either improve its performance following significant price investment or invest even further in price, forcing Woolworths to match. The broker contends that Woolworths is trading at its highest one-year forward price/earnings multiple in a decade and by any standard this is an expensive supermarket, especially when compared with global operators.

The market is considered too optimistic about a recovery and, if the business disappoints expectations, shares are expected fall. Wesfarmers ((WES)) also appears expensive but earnings have proven resilient because of its exposure to coal prices and the Bunnings Australasian business. Morgan Stanley retains an Overweight rating for Metcash ((MTS)), despite the pressure on its food business, believing the hardware and capital management/acquisition opportunity offsets this pressure.

Aldi has stated that its annualised run rate of price investment is running at 0.9% of sales. Given Aldi effectively sets the supermarket pricing agenda, Morgan Stanley believes Coles and Woolworths will need to continue to incrementally invest in price.

Medicare Stats

UBS observes Medicare data for August has shown solid growth for GPs, IVF and surgery although pathology was weaker. IVF industry growth has rebounded so far in FY18, albeit there were some particularly weak comparables. Geographically, Queensland was the strongest performer in August, recording total cycles growth of 26.0%.

While acknowledging the sector valuations are undemanding, the broker continues to envisage the Australian IVF industry as a two-speed market, in which the bulk bill/low-cost segment is driving the majority of growth. In the absence of a rebound in full-service volumes the broker finds it hard to get worked up about Virtus Health's ((VRT)) growth outlook.

Benefits paid to GPs were up 6% in August while pathology benefits were flat, Citi notes. FY18 guidance from Sonic Healthcare ((SHL)) assumes no regulatory changes. Yet risks loom, including the proposed fee cut just announced by US Medicare, and the broker does not believe the stock represents a favourable risk/reward for potential investors. The main upside risks would be accretive acquisitions and potential industry-initiated pullback in Australia pathology collection centre rents.

Primary Health Care ((PRY)) has provided no FY18 guidance, yet changes in the GP compensation model are creating revenue and margin headwinds for its medical centres division. Citi suggests these headwinds are likely to continue, given the greater proportion of billings paid to GPs and the continued challenges in recruiting.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms