Tag Archives: Banks

article 3 months old

Weekly Broker Wrap: Oz Economy, Profits, Drought, Housing, Hardware, Hospitals And Insurers

-Low non-financial profit growth
-Drought in a vulnerable economy
-Westpac move may impact housing
-Operating theatres key to performance
-Online earnings forecasts diverging
-Insurance margin correction factored in
 

By Eva Brocklehurst

Australian Economy

Financial conditions suggest to Citi that Australia's economic growth is weak. The influence of lower official interest rates is waning and the recent moves by Westpac ((WBC)), if followed by other banks, could work to tighten conditions. The broker cites recent sales activity in the property market which supports a view that house price growth has peaked.

The broker forecasts GDP growth at 2.3% by the end of 2015 and averaging 2.4% over 2016. Citi suspects the Reserve Bank will shave 25 basis points off its growth forecasts in its November statement on monetary policy.

Corporate Profits

Non-financial company profit share of GDP has declined by over 3.5% since 2011, Citi maintains. Lower commodity prices are not the only reason for the weakness as, stripping out mining profits, the decline is still noticeable and the profits have underperformed the US. Citi suspects this could, at least partly, reflect lower productivity growth. Consensus has profits recovering strongly, at around 10%, in 2017 whereas Citi is more cautious, expecting around 6.0%.

The broker believes the longer-term outlook is predicated on how successfully the economy re-balances and diversifies its export base. Still, the broker believes the combination of low profit growth and high dividend pay-out ratios is toxic for investment spending and should maintain the prospect of further easing from the Reserve Bank.

Drought

Goldman Sachs wonders whether drought will be the straw that breaks the camel's back for Australia. A rare combination of an intense El Nino event in the eastern seaboard is coinciding with a strong positive phase for the Indian Ocean temperatures which has occurred on only seven other occasions since the 1950's and is consistent with severe deficiencies in rainfall and high temperatures.

Currently, government forecasts assume flat farm production in 2015-16 compared with the median decline of 20% during a drought year. Goldman notes, fortuitously, the severe droughts of 2002-03 and 2006-07 coincided with robust economic growth.

While identification of a drought does not in itself provide a rationale to ease monetary policy it appears to the broker that, in a period where non-farm growth is already below trend and inflation contained, it may be sufficient reason to warrant additional monetary easing.

Housing & Property

Morgan Stanley believes the 20 basis point increase to Westpac's mortgage portfolio will put a dent in housing sentiment. New investors face higher rates and tighter lending standards and this strengthens the broker's belief that the housing boom has peaked. Already, there is evidence of softening auction clearance rates and investor activity, amid weaker house price forecasts.

Morgan Stanley's forecast for a looming oversupply to housing makes the prospect of rental growth and capital gains particularly uncertain. This is all part of what the broker believes is a deliberate macro prudential strategy to rein in the housing market.

Against this backdrop the broker believes there is limited re-rating potential for the residential Australian Real Estate Investment Trusts (A-REITs).  Based on Morgan Stanley's analysis, interest rates are the dominant driver of house prices and house price growth is the key driver of Mirvac Group ((MGR)) and Stockland ((SGP)), in terms of their free funds from operations.

The two stocks have de-rated over the past 6-9 months. Hence, the broker expects further de-rating is questionable, given merger & acquisition pre-conditions are strong, balance sheets can support buy-backs and there are supportive distribution yields.

Hardware

Hardware retailing sales are robust, with the strongest growth in Sydney and Melbourne, Morgan Stanley observes. At a recent industry conference the broker noted the shift to multi-residential developments is creating a headwind for the sector because these developments are large enough to source product offshore and bypass the retail/wholesale channel in Australia.

Participants at the conference also signalled to Morgan Stanley that Bunnings market share is being understated at around 18% and it is more likely closer to 40-50%, given the Wesfarmers' ((WES)) owned business overstates its addressable market.

Morgan Stanley notes the general view that margins at Bunnings have held up despite like-for-like sale growth because of the extent of new store openings, as the business over-services customers in the first six months of opening. As sales increase and customers become aware of where products are within stores, labour is reduced and, hence, margins improve.

Packaging

Morgan Stanley has initiated coverage on the Australian paper and packaging market with a counter-consensus Cautious industry view. The broker expects structural headwinds will cause Amcor ((AMC)) to underperform while progressive reallocation of capital will mean Orora ((ORA)) outperforms.

Amcor has been rewarded in recent years for its defensive characteristics and high returns but delivering the earnings required to support its premium multiple and value-creation target is becoming harder, Morgan Stanley maintains. In contrast, Orora has a largely unencumbered balance sheet and potential to deliver upside through optimisation of its capital allocation strategy.

Australian Online

Pure online classified companies such as Carsales.com ((CAR)), Seek ((SEK)) and REA Group ((REA)) have experienced two years of price/earnings de-rating although Citi notes they are still trading above the historical valuation lows experienced just after the global financial crisis. Meanwhile, Fairfax Media ((FXJ)) and Trade Me ((TME)) have re-rated recently.

The broker finds REA Group the most attractive in value terms, despite a premium multiple, while Carsales.com, Seek and Trade Me are seen trading near peak relative valuations. At the same time most earnings expectations have been deteriorating, with Seek suffering the largest downgrades but Fairfax enjoying incremental upgrades in earnings expectations. Citi now observes a large divergence in earnings growth expectations across the sub sector.

Private Hospitals

The efficiency of operating theatres is a key component in the overall financial performance of a private hospital, Credit Suisse contends. The broker's analysis suggests Ramsay Health Care ((RHC)) generates 35% more earnings per operating theatre than does Healthscope ((HSO)), for several reasons. These include higher case payments, lower operating costs and more efficient processing of patients, as well as more complex surgical patients which generate higher earnings per case.

The broker believes a reduction in operating costs through procurement and workforce de-leveraging is achievable for Healthscope in the short to medium term and this should facilitate a modest uplift in earnings. Other factors citied above are harder to achieve, Credit Suisse acknowledges, and benefits accrue over a longer term.

Insurance

UBS finds more widespread evidence of personal lines claims inflation and modest price increases. Commercial lines appear soft, still. The broker believes, while the picture is mixed, a healthy underlying correction in margins is now reflected in FY16 estimates. Even if margins trough at 20-30% below their peak, with a subsequent 10% hit to earnings, this could increasingly be tolerated by investors.

Challengers have pulled back share in the highly contested motor class, to 12.7% from 13.4% in the broker's previous review. While the challengers continue to generate superior growth at 18% compared with 3.4% for Suncorp ((SUN)) and 0.4% for Insurance Australia Group ((IAG)) there are some signs of consolidation, UBS observes.
 

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.

article 3 months old

Macquarie In A Sweet Spot

- Macquarie acquires accretive Esanda portfolio
- Upgrades FY16 guidance
- Enjoying positive trading conditions


By Greg Peel

Macquarie Group ((MQG)) has announced the acquisition of the Esanda dealer finance portfolio from ANZ Bank ((ANZ)) for $8.2bn. The deal increases Macquarie’s motor finance portfolio to $17bn from $9bn. ANZ had ascribed a book value of $7.8bn to the portfolio, but Macquarie will be required to revalue in a lower interest rate environment.

Macquarie has suggested the deal will be immediately earnings accretive, adding around 1.7% or 10cps to earnings per share in the first year. While management has also declared the deal to be accretive to the return on equity (ROE) of Macquarie Leasing, no mention was made of the impact on group ROE.

UBS estimates the deal itself represents a return on equity of 10%, while Macquarie’s group ROE is running at 14%.

If this is at all a negative, a coincident profit guidance upgrade alongside the deal announcement should have shareholders eager to take participate in the capital raising Macquarie will implement to help fund the $8.2bn purchase. Macquarie will place $400m with institutions and offer a related retail share price purchase plan (SPP).

Macquarie management has upgraded its first half FY16 profit growth guidance to 55% from a previous 40%. Brokers are surprised, given the 40% figure was offered only a month ago. While the bulk of the upgrade relates to a performance fee payment on a single-asset infrastructure fund that is both a lot earlier and bigger than brokers had assumed, management also gave a nod to better than expected market trading conditions in the meantime.

As global interest rates continue to remain low, market conditions for “asset recycling” – divesting of older assets funded at a higher cost and acquiring new assets, such as the Esanda portfolio, on a lower funding cost – remain ideal, Citi notes. Meanwhile, trading desks are supported by the activity that market volatility provides.

While Morgan Stanley holds some concern that the group’s profit contribution from “lumpy” items such as performance fees, gains on sale and write-downs is at record levels, the broker believes operating leverage in asset management, accretive acquisitions, flexibility with the group’s approach to the staff compensation ratio and forex benefits are all providing tailwinds.

The risk as analysts look towards FY17 is of course that such positive conditions begin to fade, but Morgan Stanley estimates that following the integration of acquisitions, and a moderation in the contribution from lumpy performance fees, “annuity-style” businesses (stable and predictable recurring revenues) will account for some 62% of operating profit.

Brokers have upgraded their earnings forecasts for Macquarie in the wake of the guidance upgrade. Resultant upgrades to valuation are offset by the dilution of the capital raising, hence the FNArena database consensus target price has actually fallen, but only slightly, to $86.32 from $86.60. As one or more of the FNArena brokers are participating in the capital raising, they are restricted from offering a price target or a recommendation at this time.

The database otherwise shows three Buy or equivalent ratings and two Hold.

On a side note, Credit Suisse suggests the sale of the Esanda portfolio offers benefits to ANZ. Given motor leasing carries a higher risk-weighting in the loan book than, for example, mortgages, the divestment of the Esanda portfolio effectively increases ANZ’s tier one capital ratio while at the same time the bank books a profit on sale.

This profit would provide ANZ with the opportunity to go down the same path as Westpac ((WBC)) and impair its own (burgeoning, as Credit Suisse suggests) capitalised software balance in FY16. Furthermore, the redeployment of the $8.2bn in released capital should ultimately enhance ANZ’s return on equity, the broker notes.
 

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.

article 3 months old

Broker Confidence Improves In Bank Of Queensland

-Managing asset quality, costs
-Margins stabilise
-Potential in mortgage re-pricing
-Confidence in dividend growth
 

By Eva Brocklehurst

Bank of Queensland's ((BOQ)) FY15 results were a further confirmation for brokers that the bank has made good on its turnaround commitments, demonstrating several positive trends. Opinions on the bank have improved over the last year or so, with Buy ratings appearing on the FNArena database where previously there were none.

The database has three Buy ratings, four Hold and one Sell (JP Morgan). The consensus price target is $13.53, suggesting 4.4% upside to the last share price. Targets range from $12.40 (JPM) to $14.50 (Citi). The dividend yield on FY16 and FY17 forecasts is 6.0% and 6.3% respectively.

Citi upgrades its rating to Buy from Neutral on the back of the results, believing there is valuation appeal in a stock that has beaten expectations. The broker notes the Investec acquisition delivered earnings that were around 13% above management's guidance at the time of acquisition (July 2014).

Citi retains some questions regarding growth in future earnings, given there will be no tailwinds from acquisitions and a likely step up in expenses growth. Bank of Queensland's performance in FY16 is likely to be symptomatic of the sector, with limited earnings growth, the broker suspects.

Still, Citi envisages fewer headwinds from regulatory hurdles and highlights the bank's capital strength. Higher capital requirements for the major banks are levelling the playing field for the regionals and the implementation of the Basel 4 requirements is also likely to underpin regional bank returns and share price outperformance.

Deutsche Bank has a Buy rating on the stock, flagging the return of lending momentum, growth in non-interest income and well-contained costs. The broker increases earnings forecasts by 2-3% over FY16-18 on the basis of better banking fees and investor mortgage re-pricing. While returns on equity have expanded rapidly over recent years, Deutsche Bank envisages further upside potential from mortgage re-pricing.

The Queensland base is also expected to a potential tailwind in the medium term. The bank's specialist business is exposed to fast-growing areas of the economy, which are likely to be lower risk than most commercial lending segments.

In all there were more positives than negatives in the result from Credit Suisse's perspective. There was no actual earnings guidance but the company did flag the move to a more conventional dividend profile, implying a skew to a final dividend. The broker notes asset quality stress in the mining-exposed states appears to be manageable and, at this stage, confined to business exposures rather than consumer/mortgage exposures.

The stability of the net interest margin was better than Credit Suisse expected in the second half and this is encouraging for prospective re-pricing benefits in FY16. UBS flagged the hard work that has been done to turn the business around over the past three years.

While there have been issues regarding asset quality, particularly in Queensland and Western Australia, the broker is pleased the bank's impairments are improving. Bank of Queensland has made a considerable effort to clean up its book and as a result the risk profile has reduced substantially. Hence while the overall environment remains challenging, UBS believes the book is well positioned.

FY15 results were in line with JP Morgan's estimates, with weaker net interest income offset by improvements in fee income. Around 18 bank branches were closed and there is a similar expectation for the current year. The broker observes, as an offset to this saving,  the bank does expect amortisation for capitalised software to double over the next two years.

Bank of Queensland may not be short on capital but JP Morgan highlights the challenges of funding growth at a low return on tangible equity. This is a theme echoed by Macquarie. The strong specialist segment, a well managed margin and re-pricing benefits were strong enough to offset a core franchise that is still struggling for growth.

That aside, Macquarie has become more optimistic, enough to upgrade to Neutral from Underperform. The broker considers the result was reasonable but not outstanding. This still bodes well for the rest of the sector in upcoming results.

Simply put, if a bank can manage its margin and deliver some asset growth, the market is likely to reward it, given current sector multiples. Macquarie retains some concerns about the core business outlook, amid expectations of revenue headwinds from a normalisation of non-interest income.

Morgan Stanley is more confident in the bank's ability to lift its margins, re-invigorate growth and manage credit risk. Bank of Queensland is its preferred Australian bank exposure because of the dividend growth profile and relatively strong capital position, as well as leverage to home loan re-pricing.

The strong capital position stems from a pro-forma CET1 (common equity tier 1) ratio that is in line with the major banks, but Bank of Queensland is not a D-SIB (domestic systemically important bank) and its current mortgage risk weightings make it less vulnerable to potential changes under Basel 4 requirements.

The broker is confident the bank can hold the pay-out ratio at around 74%, maintain its CET1 ratio near the top of its target range of 8-9% and grow the dividend by 5.0% over the next two years.
 

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.

article 3 months old

Weekly Broker Wrap: Ad Blockers, Outdoor, R/E, Debt, Global Growth, Bonds And Surfstitch

-Online ads accelerating move to mobile
-Outdoor ad share of media spending rises
-Debt collector returns under pressure
-Extended emerging market weakness
-Means US tightening pace pared back
-Bond yields disconnect from growth
 

By Eva Brocklehurst

Ad Blockers

Ad blocker software, which prevents websites from loading advertising content, is gaining ground. Citi notes the global adoption rate of Ad blockers is growing at around 41% per annum. Primary usage is at the desktop level but the Apple iOS9 update now allows ad blockers on mobile, threatening to reach the mass market.

Citi cites statistics which reveal ad blocker use in Australia is 18% of the internet-using population with the potential lost advertising dollars reaching $1.4bn in 2016. The most at risk media companies are those which have high exposure to desktop display advertising such as Fairfax Media ((FXJ)), News Corp ((NWS)) and Nine Entertainment ((NEC)).

Ad blockers are accelerating the move in online advertising to mobile from desktop, in Citi's observation. The higher penetration of ad blockers is expected to curtail market growth rather than destroy the current value of online display. Publisher strategies to address the risks include native advertising content and renewed attention to subscription models and applications.

Citi estimates a 10 percentage point increase in the penetration of ad blockers would negatively affect Fairfax by 8.0%, News Corp by 6.0%, Nine Entertainment by 5.0% and APN News & Media ((APN)) by 3.0%, in terms of the percentage of profit in FY16.

Outdoor Media

Outdoor advertising revenue grew 23.1% in September, bringing the third quarter growth rate to 13%. UBS observes growth occurred across all vertical markets. The latest data suggests outdoor continues to capture market share from other media. The outdoor share of traditional media spending increased to 7.8% in FY15 from 6.6% in FY14.

UBS suggests the next catalysts will be the digital roll-outs with APN Outdoor ((APO)) targeting 14 large format boards in the second half of the year and the conversion of two large format boards on Sydney's Military Road. AdShel has flagged the roll-out of its national roadside digital network of 270 screens from this month and oOh!Media ((OML)) has recently won a contract for 26 large format Sydney boards.

Real Estate Classifieds

New listings in the Australian property market stabilised in September with growth similar to the 4.0% rate seen in August, Deutsche Bank observes.  Sydney volumes remain strong with its growth rate continuing in the mid teens (16%). While Sydney and Melbourne accounted for 37% of the new national listings in September, the broker estimates they contributed well over 50% of the revenues for property classifieds.

With data now available for the first quarter of FY16 the broker estimates volumes were up 6.0% year on year and should support both REA Group ((REA)) and the Fairfax site, Domain. This reinforces Deutsche Bank's Buy ratings for both stocks.

Debt Collection

Encore Capital is a US debt collection house and the world's largest debt purchaser and is buying a 50.25% stake in Australia's debt recovery agency Baycorp. Oceania Capital Partners and SAS Trustee Capital have sold the stake but will remain shareholders.

The transaction implies a valuation of Baycorp of around $66m. The industry is largely led by price and unlikely to grow materially over the coming years,  Ord Minnett observes. Hence, the broker envisages significant risk that returns on equity will decline in the medium term.

The broker believes it would have been difficult for Encore, or indeed another foreign player, to enter the market on an organic basis. The acquisition of the Baycorp stake provides the company with access to historical data and systems in Australia.

Nevertheless, Ord Minnett has concerns that the cost of capital Encore enjoys and the relatively smaller presence that Baycorp has in the Australian purchased debt ledger (PDL) market could mean substantial pressure on returns for all incumbents over the medium term.

Global Growth

Commonwealth Bank economists have reduced global economic growth forecasts for 2016 to 3.1% from 3.5%. This is well below the the long-run average of 3.7%. An extended period of weakness in the large emerging market economies is considered the main reason behind the reduction.

Brazil and Russia are in recession and central banks in China and India are easing monetary policy to combat weak growth and low inflation. The economists expect more easing by these central banks before the end of this year.

As well, the economists reduce their US GDP forecast because that economy is expected to hit capacity constraints in 2016. They still expect the US Federal Reserve will begin tightening monetary policy in December. That said, the pace of tightening in 2016 is pared back, given global growth prospects. The commencement of higher interest rates in the US will be a watershed, as the last policy tightening cycle started over a decade ago.

Meanwhile the 10-year surge in global mining investment is easing but continues to deliver an increase in supply. This is expected to pressure prices and maintain low inflation in most economies in 2016. The economists expect only the central banks in the US and UK will tighten policy in 2016. They flag the risk of a 1.5% official cash rate in Australia and 2.0% in New Zealand.

Fixed Income

The impact of the global financial crisis is still being felt some seven years after it was spearheaded by the Lehman Bros collapse. Long-term government bond yields in the advanced economies are well below levels that can be explained by the outlook for growth and inflation alone, Standard Life analysts contend.

External headwinds are also affecting the US Fed's ability to steer its own path on interest rates. Still, the analysts expect that as long as the recoveries in the advanced economies become more self-sustaining and emerging market economic conditions do not deteriorate further, a gradual normalisation of monetary policy in the US will materialise.

The analysts suggest the benchmark US 10-year government bond yield will peak at 3-4% during the current economic expansion, well below the peak in previous cycles. The disconnect between yields and domestic growth is also not confined to the US. Bond yields in Japan, Germany and the UK have diverged significantly from growth.

Standard Life analysts also contend that, just as policies in the US, Europe and Japan are gaining traction, emerging markets are faltering. China has loosened its monetary policy and allowed its currency to depreciate. This is pulling commodity prices and global inflation lower and putting upward pressure on the US dollar. Any further deterioration in emerging market conditions would pose a significant barrier to higher long-term rates in the US, the analysts believe.

Surfstitch

Surfstitch ((SRF)) remains a key pick for Bell Potter. The broker expects 40% revenue growth in FY16, with continued strength in customer engagement and improving gross margins. Margin expansion is expected to flow into FY17 from the $12.5m in earnings and capex synergies extracted from the global re-branding and integration.

The broker judges the stock to be relatively good value when compared with its overseas peers on metrics such as enterprise value/sales, enterprise value/earnings or price/earnings. The broker believes the current discount at which the stock is trading is far too steep for a business where earnings growth is forecast at over 100% for the next two years. Bell Potter has a Buy rating and $2.25 target.
 

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.

article 3 months old

Weekly Broker Wrap: Electronics, Supermarkets, Insurers, A-REITs, House Building And 3P Learning

-Citi lowers economic forecasts
-JBH, DSH benefit from Apple boost
-IAG stands out in personal lines
-Moderation in housing, building likely
-Oz advantage as players shy from Macau
 

By Eva Brocklehurst

Leading Indicators

Citi's domestic economic barometer has shown signs of deterioration over the last three months in keeping with global leading indicators which have also softened. The broker's economists have reduced growth forecasts for a wide range of countries, the fourth consecutive downgrade to year-ahead forecasts. In Australia, the interest rate-sensitive housing sector appears to be peaking and there remains more downside to come for mining capex.

In contrast, labour indicators are more positive and confidence measures are lifting with the change of Prime Minister, so these more favourable signs should limit downside risk to growth, in Citi's view. Inflation is expected to stay low and a tentative bottoming in the rate of decline in the terms of trade could signal the downward momentum in profit growth is peaking.

The broker's leading indicators suggest more downward adjustment in the Australian dollar and no further change in the cash rate.

Consumer Electronics

Apple has apparently sold more than 13m units of the new iPhone worldwide in the three days post its launch. This is a new record, Deutsche Bank observes, and bodes well for the retailers. The Australian Bureau of Statistics in September last year specifically called out the launch of the iPhone as factor in the 10.6% increase in electronics retail sales.

JB Hi-Fi ((JBH)) and Dick Smith ((DSH)) are considered to be the primary beneficiaries but Harvey Norman ((HVN)) should also gain a fillip.

Supermarkets

Deutsche Bank observes that the Woolworths ((WOW)) store network has aged considerably over the past few years and become older than the Coles ((WES)) network. In addition to price and value perceptions, the broker believes this is a key reason behind the underperformance of Woolworths.

Deutsche Bank's analysis suggests that the 80-plus per annum refurbishment target will modestly improve the situation but there needs to be around 120 per year to restore the network to where it was 3-4 years ago. Around 41% of Woolworths' stores are less than five years old while around 60% of Coles stores fall into that bracket. This is even more acute when considering that Woolworths has rolled out new stores more rapidly.

Australian Insurers

Morgan Stanley has surveyed 3,700 motor and home insurance customers. Strength in personal lines stands out for Insurance Australia Group ((IAG)). To date the company is successfully managing the risk of dilution from Coles to its incumbent brands. IAG locks in customers with multi-policy discounts and has the best cross-sell in home and motor. Its customers are also the least likely to shop around on renewal and it takes greater discounts to persuade them.

Suncorp ((SUN)) has a lower cost strategy but appears challenged, given recent 3-4% price reductions have failed to deliver a higher share of new business, Morgan Stanley observes. Rate increases are now being sought but this risks opening the door to challengers.

Next to IAG, Suncorp's main source of growth is its own brands. As the company simplifies its platform and extracts scale from vertical integration Morgan Stanley suspects it risk further diluting the multi-brand strategy.

After building a reputation for sharp pricing the challengers have delivered lower than average savings, with Youi seen holding back on discounting in 2015. The impressive growth in motor insurance share has paused, stagnant at 13%. Still, the challengers are well placed to advance their share, Morgan Stanley observes, particularly as Suncorp raises rates. Meanwhile, online brokers remain with just 5.0% of sales in both home and motor insurance.

A-REITs

Australian real estate investment trusts (A-REITs) performed strongly over the past week, in contrast to the broader market weakness. Credit Suisse observes the index generated a 0.6% return compared with the broader markets 2.5% decline.

The best performers were Goodman Group ((GMG)), Mirvac Group ((MGR)) and Federation Centres ((FDC)). The worst performers were National Storage REIT ((NSR)), Abacus Property ((ABP)) and Growthpoint Properties ((GOZ)). Credit Suisse expects sector earnings growth to remain stable at 4.4% over FY15-17 with the greatest acceleration from Westfield Corp ((WFD)) and the greatest deceleration from Dexus Property ((DXS)) and GPT Group ((GPT)).

Housing

UBS finds the question in the recent consumer sentiment survey of whether now is a good time to buy a dwelling worrying. This measure has slumped to a 5-year low while, when asked where the wisest place for savings are, the share of respondents citing real estate rebounded to a 12-year high.

Residential approvals are near a record high so, even as commencements ease back in 2016, dwelling investment should lift in coming quarters before flattening in the second half of 2016.

Price growth has likely peaked but UBS does not expect a large drop, given record low interest rates. Adding auction clearance rates into the mix, these are seen falling amid tighter macro-prudential policy and enforcement of foreign investment rules. Still, clearance rates are at solid levels and hardly indicative of a weak market. Overall, the UBS economists expect a moderation in housing strength rather than a downturn.

Building Materials

UBS explores the question of when the housing market does eventual turn. The broker calculates 10% decline in detached housing starts and 35% decline in the number of high rise, which would take total starts back to around 150-160,000 from the current level around 220,000. Boral ((BLD)) and CSR ((CSR)) are the most sensitive to this scenario.

Gypsum wallboard is most vulnerable in terms of product as its sells well into both high rise and detached housing. Data on product segments suggests only 20% of concrete/cement/aggregate volumes are sourced for housing which, if true, would make Boral less vulnerable, comparatively.

Bricks, tiles, insulation and glass would also be negatively affected much more by detached housing changes than by high rise. Land profits would be delayed by a fall in property markets.

For Boral, the US and Asia are expected to continue ongoing growth. For CSR, the aluminum business is the main problem and biggest concern for UBS. Both companies are likely to be looking at how they can invest to ease the exposure to Australian housing as the cycle inevitably moves on.

Gaming

Macquarie is confident that Australian operators can gain a greater share of the Asian VIP market, boosting domestic mass and VIP gaming revenue. The broker is negative regarding the Chinese VIP market, as tightening credit conditions weigh on the high rollers but regional destinations should pick up the players that are shying away from Macau.

The depreciating Australian dollar should support more visits from Chinese tourists, with excess capacity in most properties encouraging more junkets. Macquarie expects Chinese tourists will account for 32% of domestic gross gambling revenue.

Echo Entertainment ((EGP))) is consider the biggest beneficiary of an increase in VIP share. Macquarie estimates, if Echo Entertainment was to hold its current share and Australia lifted its share of the Asian VIP market by a further 1.0%, there is 4.6% upside to earnings estimates. For Crown Resorts ((CWN)) this calculation would boost base earnings forecasts by around 4.0%.

3P Learning

3P Learning ((3PL)) is an online education company with a suite of software products for students in grades up to year 12. The stock has fallen 30% since mid May and provides an attractive entry point in Goldman Sachs' opinion. The broker suspects investors may have over-reacted to the lower FY15 licence numbers.

The move away from textbook learning to online and increased public spending on education supports a positive view of the stock. Goldman Sachs initiates coverage with a Buy rating and $2.49 target.

FY15-18 earnings growth is expected at a compound 27%, underpinned by the company's ability to increase prices increase penetration and cross-sell its products. The broker suspects the market is underestimating the growth potential in the US and UK as well as the upside in Australia.

Competition is substantial, given there are thousands of online education providers around the world. The risk is one could make a significant move into the markets where 3P Learning currently enjoys precedence.
 

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.

article 3 months old

Treasure Chest: Waiting For a New Bid For Veda

By Greg Peel

Veda Group ((VED)) is the dominant player in consumer and commercial credit data in Australia and New Zealand. When the company listed in late 2013 brokers saw significant upside potential down the track on the adoption of comprehensive credit reporting (CCR) in the region, which in simple terms records positive credit histories as well as the negative-only histories relied on in the lending and other industries.

But it’s a very long track. When Veda reported FY15 earnings back in August, the results were in line with broker expectations but FY16 guidance fell short of Macquarie’s forecast, leading the broker to downgrade its recommendation to Neutral from Outperform.

The issue for Macquarie is that while the earnings benefits of CCR are undeniable, much investment needs to be made before a launch is possible. Hence Veda will be in spending mode for some time before such costs are reflected in earnings growth.

That said, UBS countered Macquarie’s downgrade on the same day with an upgrade to Buy from Neutral, noting a commitment to dividend policy removed uncertainty and while acknowledging the cost issue, suggested upside potential was not sufficiently priced in.

The questions of Veda’s true value has now been brought into the spotlight once more following a takeover bid for the company at $2.70 per share from US credit reporting giant Equifax, made late last week. The bid is non-binding and subject to conditions.

The price ignores the upside potential of the company, Deutsche Bank (Buy) has since suggested. For existing shareholders to give up that potential at this point it would require a more substantial premium, the broker believes.

Citi (Buy) does not rule out a counter-bid, noting not only the synergies Veda would offer an offshore suitor but the currency benefit as well.

Moelis believes the two strategic parties likely to benefit most from a transaction with Veda are Equifax and rival Experian. Neither have any great A&NZ exposure. Veda’s consumer credit business represents 33% of group sales on an A&NZ market share of 85%. Veda’s commercial bureau represents 40% of sales and is the largest broker of ASIC data in the region.

Not only could either party bring their existing credit platforms to the game, both have experience in positive credit reporting environments, Moelis notes, which is a new frontier downunder. Moelis calculates that at an offer of $2.90 per share, up from Equifax’s opening $2.70, both would achieve earnings accretion on forward estimates before any synergies are factored in.

Given both Equifax and Experian have limited existing A&NZ exposure Moelis does not see there being any issue with either the ACCC or FIRB. And the broker believes the new Turnbull government will likely be supportive of such foreign investment.

Moelis, which is not one of the eight brokers represented in the FNArena database, rates Veda as a Buy with a $2.90 target.

Database brokers are largely waiting to see how things play out from here and are holding a consensus $2.49 target, on two Buys and a Hold (Macquarie).
 

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.

article 3 months old

Sweetener Required For Veda?

-Appeal in Oz move to comprehensive reporting
-Takeover provides access vs building share
-Shareholders likely to want more
 

By Eva Brocklehurst

Veda Group ((VED)) has been pounced on by Equifax, a US-listed credit bureau and related information services provider. A conditional, non-binding offer has been made at $2.70 a share, cash. This is subject to due diligence and will require Australian Foreign Investment Review Board approval, among others.

The offer implies a FY16 price/earnings ratio of 26.6x and represents a 35% premium to the last close for Veda. Deutsche Bank notes an 8.0% premium to its valuation. Equifax does not compete in Veda's markets - at present - but has a similar business, with a focus on credit information and fraud as well as debt recovery analysis and employment verification.

Growth initiatives are in the same areas, leveraging increased demand for authentication in the online environment. The strong strategic and financial appeal of Veda, with the move to comprehensive credit reporting in Australasia and the company's leading market share, is clearly apparent, Deutsche Bank maintains.

The offer price represents a slight premium to the broker's valuation but ignores upside potential. For shareholders to forgo the upside a substantially stronger premium would be required. Deutsche Bank maintains a Buy rating and raises its target to $2.70.

The approach represents a way of buying into Australia's consumer credit bureau market, in Citi's opinion, as opposed to the move by Experian to actively build its own position directly. The consideration in the two approaches, Citi observes, comes down to the fact that Veda has a 85% market share and, while displacing a dominant incumbent is difficult, a genuine challenger can eke out a share.

Also, Australia's move to a comprehensive credit environment changes the way in which industry participants compete. There is a lack of visibility as to when such credit reporting will gain critical mass and whether the status quo, vis-a-vis Veda's dominance, remains intact. On this subject, Citi also flags the fact that Dun & Bradstreet's Australasian business was recently sold to private equity, which may result in more competition in due course.

Challenger brands may win volume over time but Citi believes the transition will be slow. The broker cannot rule out a counter bid, with currency movements and synergies the primary drivers, and retains a Buy rating and $2.46 target.

Veda intends to evaluate the proposal and update the market in due course. FNArena's database has three Buy ratings and one Hold. The consensus target is $2.49, signalling 5.2% downside to the last share price.
 

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.

article 3 months old

Weekly Broker Wrap: Dairy, Strategy, Pathology, Tourism, Oil And Banks

-Dairies benefit as milk prices surge
-What is attractive as risk aversion fades?
-PRY more sensitive to pathology growth
-Tourism benefit flows to retail
-Discretionary retail benefit from lower oil
-Pressure continues on major banks
 

By Eva Brocklehurst

Dairy

The global dairy price index has risen 48% since the beginning of August. Macquarie believes the main driver of the price response at recent auctions is a significant reduction in Fonterra's offer volumes. These have fallen because of changes to product mix and more product being sold outside the auction marketplace. There is also a 2-3% reduction in forecasts for New Zealand's milk collection.

Macquarie believes Fonterra's reduction in its 12-month offer quantities for a third time last week amplifies worries about a shortage in global supply. Buyers that are only able to access the auction platform are being squeezed, the broker suggests, and may be bidding up the price to cover forward requirements.

A further recovery in dairy prices is good news for NZ farmers and could ease unit holder concerns about Fonterra providing further support to farmers. The problem for Fonterra, the broker maintains, is that the pass-through benefits of lower costs are eroded as input prices rise and this translates to lower earnings. Macquarie's preferred play on the dairy recovery story is Murray Goulburn ((MGC)), with a target of $2.70.

Movements in global dairy ingredient prices have a high correlation to Australian farm gate milk prices. Bell Potter notes Murray Goulburn, Australian Dairy Farms ((AHF)) and Bega Cheese ((BGA)) are positively correlated to rising dairy prices. Average forward curve prices in Australian dollars are implying gains of 10-11% for whole milk powder and butter, while skimmed milk powder is likely to be flat in FY16.

Strategy

Goldman Sachs adds Blackmores ((BKL)), Costa Group ((CGC)) and M2 Telecommunications ((MTU)) to its small and mid cap focus list. In September to date the list has performed in line with the ASX small ordinaries accumulation index. Over the past 12 months the list is up 1.8% while that index is down 10.6%.

Key performers in September have been Ebos Group ((EBO)), amaysim Australia ((AYS)) and Tassal Group ((TGR)), outperforming by 7.5%, 4.2% and 4.0% respectively. Detractors were Genworth Mortgage Insurance ((GMA)), Austbrokers ((AUB)) and Dick Smith ((DSH)), underperforming by 6.2%, 5.4% and 4.6% respectively.

Australia's equity market is down around 15% from its April 27 peak and has performed more in line with emerging rather than developed markets, UBS observes. This is probably because of Australia's relatively high commodity exposure and associated economic links to China. However, some of the apparent correlation may be countered by the banking sector, which has corrected under its own specific issues.

Taking out resources and banks the market appears closer aligned to the developed market, with pressure coming just in the last six weeks. UBS expects market growth to be around the low single digits in FY16 but it could rebound in the next few months on fading risk aversion in relation to China and the US Federal Reserve.

Stocks that have emerged with value and appear attractive to UBS include AMP ((AMP)), ANZ Bank ((ANZ)), Harvey Norman ((HVN)), Incitec Pivot ((IPL)), Lend Lease ((LLC)), Macquarie Group ((MQG)), Mirvac ((MGR)), Perpetual ((PPT)), Qantas ((QAN)), ResMed ((RMD)), Stockland ((SGP)) and Westpac ((WBC)).

Pathology

Credit Suisse is shifting attention for cost inflation to the main drivers of pathology volume growth. Long term, the correlation with Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)) in terms of pathology revenue growth and Medicare pathology outlays growth is high.

The broker notes utilisation was the major contributor over the past five years, accounting for about half of the growth in pathology. This includes increased disease prevalence/test offering and collections. This is followed by population growth. The growth in the aged population is not a material driver.

Calculation of valuation sensitivity to utilisation growth suggests the risk to Primary Health Care is greater because of its higher weighting to pathology earnings. Tempering the broker's enthusiasm is the outcome of the Medical Benefits Schedule review, which could mean removal of certain pathology items. Sonic Healthcare presents as a better investment option in the broker's view because of a more geographically diverse business model.

Tourism

One of the brighter spots in Australia's economy is tourism, as it benefits for the steady move lower of the Australian dollar. Year on year growth in overseas departures has halved to around 3.5% in the first half of 2015, UBS observes. Arrivals have picked up, to be up 6.0% year on year. The broker expects this income from tourism should contribute more than 25 basis points to GDP growth over the past year.

UBS also notes that upswings in tourism contribute to improvements in retail sales, reflecting not only more inbound tourists but also more locals choosing to holiday domestically. The broker expects an increasingly positive impact on the tourism sector from the Australian dollar's decline with support for retail spending, non-mining capex and GDP growth over time.

Oil

Oil price declines should detract from global headline inflation around 0.5-1.5 percentage points in 2015-16, Commonwealth Bank analysts maintain. Australia is a net energy exporter and lower oil prices may lead to lower coal and LNG prices. The analysts calculate the negative terms of trade effect is equal to around 0.5% of GDP. 

The most positive impact is expected to come for those companies which are large consumers of energy, such as manufacturing, electrical and transport. The other positive impact is the boost to household spending. Oil prices are expected to remain at low levels over the next two years. At this stage, firms in the domestic market have not signalled a major intent to pass on lower oil prices to consumers and the analysts suspect lower prices will be absorbed in margins.

The analysts calculate the income gain for householders should equate to around 0.3% of household income from the drop over the past year in average petrol prices. There is also a second round benefit if lower transport costs are passed on. Discretionary retailers are also usually the first to benefit from a sizeable fall in petrol prices.

Banks

Recent commentary from the Australian Prudential Regulation Authority (APRA) chairman has suggested major banks still have some work to do to achieve the financial system enquiry's recommendations to be unquestionably strong.

JP Morgan does not believe this will translate into another round of capital raising, but does expect continued dividend reinvestment plan (DRP) support will be required. The more challenging task is to meet the broader benchmarks.

The leverage ratio, created as a simple metric by which regulators could assess appropriate balance sheets size, is recommended as a minimum range of 3-5%. Australia's major banks are currently at around 5.0%, lagging their top quartile global rivals which average a 6.0% ratio. JP Morgan expects returns on equity will remain under pressure, as the majors rely on further re-pricing initiatives to sustain returns.
 

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.

article 3 months old

Macquarie Group Upgrades Guidance, Again

-AUD downtrend supportive
-Possible upside on rejigging costs
-Cheap or fully valued?
 

By Eva Brocklehurst

Macquarie Group ((MQG)) has raised its earnings guidance - again. Brokers have suspected for some time the diversified financial group has erred on the side of caution. Weakness in the Australian dollar and improved trading conditions in equities and asset management means a 40% hike in first half earnings is forecast.

Given the second half of the company's financial year - the six months to March - is usually seasonally stronger, offset by fewer performance fees, the company expects a flat outcome. This implies FY16 profit of around $1.9bn.

Macquarie Group has the advantage of around 70% of its earnings being generated outside Australia, with the resultant translation benefits. Few other listed investments in the Australian market provide as much leverage, UBS observes. UBS expects Macquarie group's cost-to-income ratio to fall to 71.5% from 73.9%.

Despite its development into a globally diverse financial institution over the last 20 or more years, the broker observes the  group's cost-to-income ratio has been relatively stable over that time. Macquarie now has more "annuity" style income but still has an investment bank cost structure. Structurally addressing its cost base could provide substantial upside to shareholder returns over the medium term. UBS calculates that every 5.0% reduction in the ratio could add 18% to earnings per share.

Even with a reduction in performance fees in the second half JP Morgan still believes the guidance is conservative, given a traditional 40:60 skew in earnings towards the second half. In particular the fixed income, currencies and commodities trading business has traditionally benefited in the second half from a material increase in volatility. The prospects of a further depreciation of the Australian dollar may again provide a further boosts to earnings.

Goldman Sachs, not one of the eight brokers monitored daily on FNArena's database, now expects FY16 profit of $1.92bn and raises forecasts for FY16 and FY17 by 8.6% and 3.5% respectively. The broker reduces its target to $78.87 from $81.25 as a result of updating multiples on the back of recent market moves. The stock price, trading on around twice net tangible assets, appears to be factoring valuation, in the broker's opinion. Hence, a Neutral rating is maintained.

Credit Suisse is also of the view that the increased volatility in trading markets in the current market is positive for Macquarie, even if primary issuance volumes have pulled back. The broker estimates that just less than half of the expected 40% uplift in the first half could relate to currency translation. The main downside risk for investment banking earnings, that Credit Suisse can foresee, is that improved trading conditions may not persist if the volatility worsens.

Seasonality, which skews the earnings to the second half, derives in Macquarie Group's case from both the energy trading business that is geared to the northern hemisphere winter and equity investment gains which are crystallised in conjunction with the annual cycle of staff profit share arrangements. The broker, therefore, regards second half guidance cautiously and awaits clarity from the actual first half performance fee base.

The announcement supports Morgan Stanley's view that Macquarie Group remains in an earnings upgrade cycle and the business mix and return on equity in the mid teens justifies higher trading multiples. The broker forecasts FY16 profit of around $1.96bn and considers the stock cheap versus the Australian financials as well as the broader market.

In Deutsche Bank's view the momentum is also positive but has been priced into the current share price. Some risks are envisaged in the operating environment stemming from China and the expected lift in US interest rates at the end of this year/early next year. Hence Deutsche Bank prefers a Hold rating.

FNArena's database has four Buy ratings and three Hold. The consensus target is $84.73, which suggests 8.5% upside to the last share price. Macquarie's FY16 and FY17 forecast dividend yield is 4.7% and 4.9% respectively.
 

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.

article 3 months old

Strong Outlook For Leasing, Salary Packaging Sector

-Strong sector returns
-Expansion opportunities
-Residual legislative risk
 

By Eva Brocklehurst

There are now several stocks offering a combination of vehicle leasing, salary packaging and fleet management services listed on ASX. Two years ago there was pretty much just McMillan Shakespeare ((MMS)), which became caught up in the then federal government's proposed legislative changes, subsequently rescinded by the incoming government.

Although concerns about hastily contrived legislation have largely dissipated, brokers retain a heightened awareness of the key vulnerability of such stocks, given this contributed to McMillan Shakespeare's share price plunging around 50%.

This concern is particularly in regard to the Fringe Benefits Tax, which was the subject of the 2013 debacle, but UBS also flags a risk around potential modification to the Australian Prudential Regulation Authority's capital rule on warehousing. Nevertheless, there are strong returns across the sector on offer and Macquarie is the latest broker to initiate coverage of two more stocks.

SG Fleet ((SGF)) offers salary packaging and fleet management, operating in Australia, New Zealand and the UK. Vehicles are financed off balance sheet under principal and agency style agreements. The company has a spread across industries and a multi-pronged growth strategy. Macquarie expects the company's strategy should lead to earnings growth of near 10% in FY16, a target management underscored at the company's result release.

Macquarie has initiated with an Outperform rating and $2.92 target. On FNArena's database this now complements Citi, which has a Buy rating and $3.02 target, and Morgan Stanley, which recently downgraded to Equal-weight from Overweight with a $2.75 target. SG Fleet's FY15 result was ahead of prospectus forecasts. The reason Morgan Stanley downgraded was valuation, with the strong outlook now reflected in the share price.

A stable mate, Eclipx Group ((ECX)) listed in April. The company is a diverse operator, with its foundation business, FleetPartners, founded in 1987 as the vehicle leasing arm of Esanda Finance. The company's outlook has improved substantially over the past year, with Macquarie noting new management installed in January 2014 appearing to have turned around a previously stagnant business.

The company aims to renew and improve its vehicle offering and expand into commercial equipment finance. Eclipx funds on-balance sheet leases through a combination of warehouse facilities, asset-backed securities and corporate debt and cash. There are four Buy ratings for Eclipx on FNArena's database, with a consensus target of $3.27, suggesting 6.1% upside to the last share price.

McMillan Shakespeare has been a mainstay stock for the industry on ASX for some time. The company has pleased brokers in the wake of the FBT issue by diversifying its business base and reducing its reliance on FBT-linked packages.

Macquarie uses this stock to obtain a valuation range for SG Fleet of 15-16 times FY16 profit estimates and for Eclipx of 14-15 times FY16 estimates. The broker points out that McMillan Shakespeare retains an on-balance sheet lease book, as does Eclipx, while SG Fleet does not.

There are three Buy ratings for McMillan Shakespeare on the database. The consensus target is $15.09, suggesting 17.0% upside to the last share price. The dividend yield on FY16 is 4.7% and FY17 it is 5.0%.

Smartgroup Corp ((SIQ)), a fourth player in the sector, also maintains its lease book off balance sheet offering salary packaging and some fleet management. It has a salary packaging contract with the Department of Defence, its largest revenue contributor. Morgans expects its appointment to the Australian Bureau of Statistics and CSIRO provider panels should enable further contract wins in FY16.

First half results were quite strong, driven by top line growth and margin expansion. Macquarie expects FY16 revenue growth around 17.5%. There are two brokers covering the stock on FNArena's database. Morgans has a $2.95 target and Add rating and Macquarie a $2.82 target with Outperform.
 

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.