The Wrap: Retail, Waste, Telcos And Gas

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

Weekly Broker Wrap: retail; waste management; telcos; east coast gas; and Elixinol Global.

-Retail space grows ahead of population while luxury goods appear insulated from retail woes
-Queensland plans to re-introduce a waste levy to combat waste transfer from NSW
-UBS puts some concerns regarding mobiles and NBN under scrutiny
-Can east coast gas demand be met without imports?
 

By Eva Brocklehurst

Retail

Growth in the Australian retail space is expected to continue ahead of population growth, Citi suggests. While supermarkets are the best placed in this situation, furniture retailers are worst placed and need to deal with large increases in available space over the next 18 months. Analysis points to the 40 Home Co sites that will be looking to secure tenants over the next two years.

The research reinforces the broker's Buy rating for Woolworths ((WOW)) and Sell rating for Harvey Norman ((HVN)). The most challenged area has been large format retail stores where space growth historically is very high relative to sales growth. The analysts note most mature retailers have revised down store roll-out numbers.

Planned shopping centre developments signal space growth is near 2% but higher growth in online retailing and weaker demand means like-for-like sales growth for bricks and mortar retailers is closer to 1.5%. Citi observes a challenge for retailers in making online sales incremental without diluted margins.

Meanwhile, luxury retailing has grown at a rapid pace over the past five years despite the majority of retailers suffering from rising competition in online-only traders and weak consumer sentiment. It seems luxury retailing is relatively insulated, in that growth has largely been driven by inbound tourism in Australia, particularly Asian tourists.

IBISWorld analysts suggest changes in marketing techniques by many luxury houses have also contributed to revenue growth, as companies concentrate on becoming a one-stop shop for consumers and providing a special shopping experience.

Chinese visitors to Australia are estimated to have the largest tourism expenditure of any international market and the inbound market is traditionally drawn to heritage luxury labels and large flagship stores rather than niche brands.

Waste Management

Queensland's government intends to re-introduce a landfill levy after abolishing it in 2012, indicating the levy would be at least $35/t. The levy has been driven by mounting pressure to reduce the amount of waste Queensland receives from NSW.

NSW has been steadily increasing its landfill levies and the price differential with Queensland has increased to $136/t, assisting the economics of cross-border transporting of waste. Ord Minnett suspects a mechanism may be put in place whereby some levies are rebated back to Queensland councils and businesses.

While the Cleanaway Waste Management ((CWY)) facility near the Queensland border has been a beneficiary of the interstate trade, the broker does not expect a Queensland levy will have a material impact on earnings.

Additionally, on the basis of the potential acquisition of Toxfree Solutions ((TOX)), Cleanaway's exposure to the NSW/Queensland transfer of waste could be diluted further, although the Toxfree Wanless business in south-east Queensland has likely been a net beneficiary of cheap disposal costs.

Bingo Industries ((BIN)) believes a reintroduced levy would be positive, as its recycling activities would benefit from increased volumes. Ord Minnett suggests a lack of unity among state-based environmental regulators is one of the major issues for waste management and harmonisation of regulation across the country would benefit national, vertically integrated operators.

Telcos

UBS suggests the market could be overestimating the pace of mobile decline at Telstra ((TLS)). While, at face value, post-paid average revenue per unit (ARPU) fell -4% in the first half, almost half of the fall related to revenue reversal. Underlying post-paid ARPU only fell -1-2%. Declines are therefore expected to moderate in the second half.

Another assumption, the broker discounts, is that NBN economics are declining for both Vocus Group ((VOC)) and TPG Telecom ((TPM)). For Vocus, and potentially TPG, promotional NBN pricing is driving migration to 50mbps plans where the ARPU is around $10 or more higher and costs only marginally so. The broker acknowledges the NBN under its current guise still offers limited profitability for fixed providers over the long-term.

UBS analyses core costs for Telstra, too, and suggests there is more to come in the fixed and mobile bases. The bulk of first half cost reductions came from the mobile business, the broker notes.

Telstra may never match the overhead costs per subscriber metrics of its value-lead peers but UBS suspects it may not need to as even assuming implied fixed overheads per subscriber are roughly double that of value-lead peers, Telstra should still achieve its $1.5bn net productivity program.

East Coast Gas

With the announcement of a proposed LNG import terminal in NSW, Credit Suisse looks at the current supply outlook on the east coast gas market. In assessing the market, without LNG imports, the broker canvases a range of potential outcomes, not many of which are good and, on a 3-5 year view, struggles with the concept that new supply can fix the shortage that will continue to grow.

With LNG projects making volumes available locally and scrutiny on wholesale suppliers, prices have dropped to below $15/GJ in most cases from around $20/GJ seen at times in 2017. What has not changed is the tenure of contracts being offered and the broker notes these are still one-year terms.

Credit Suisse also questions the huge proportion of CSG reserves that are in lower quality areas, as fields start to be drilled out. The broker acknowledges that CSG projects do not know what well productivity will look like a year so ahead, making it hard to predict the supply picture.

In terms of equity markets, the broker suggests there are relatively few direct beneficiaries that have meaningful leverage to the east coast gas price. The purest plays include Senex Energy ((SXY)) and Beach Energy ((BPT)), while Santos ((STO)) has potential but requires both organic reserve additions or acquisitions.

For APA Group ((APA)) the broker believes there is potentially negative consequences from imports circumventing the need for its pipelines.

Elixinol Global

Elixinol Global ((EXL)) operates in the industrial hemp and emerging medical cannabis sectors with three business units in Australia and the US. The category is currently experiencing strong revenue growth following recent regulatory changes to legalise the cultivation of hemp in the US, amid a growing acceptance of the clinical benefit from the products in controlling symptoms of numerous chronic medical conditions.

Bell Potter notes, while Elixinol Australia is yet to commence operations, the legal framework is now established for the medicinal cannabis industry in this country. Following IPO, chief executive Paul Benhaim retains 53% of the listed entity. Bell Potter commences coverage with a Buy rating and $2.12 valuation.

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