Tag Archives: Banks

article 3 months old

Brokers Laud Henderson’s Potential

-Moves to capital surplus
-Costs rise but so does revenue
-Capital initiatives likely
 

By Eva Brocklehurst

Asset manager Henderson Group's ((HGG)) flow momentum accelerated in 2014 and performance fees were stronger. The outlook is particularly encouraging in JP Morgan's view, with management indicating retail flows are already ahead of the average for last year. Surplus capital is rebuilding faster and without recourse to the waiver. The business appears on track to double assets under management and achieve its target of a 40% operating margin by 2018.

The institutional business experienced net outflows during the fourth quarter but this included redemptions from the recent acquisition of Geneva, which principally related to one client. Excluding this amount the flows would have been positive. Geneva contributed GBP2m in earnings for its first quarter under Henderson. Henderson also flagged the fact it will now be sole manager of a mandate that was co-managed previously, although revenue impact is expected to be neutral as the company has agreed to a lower fee for exclusive management.

Brokers laud the fact that Henderson has rebuilt its capital position to where it provides increased flexibility in the medium term. A capital surplus has been achieved ahead of schedule, despite the recent Geneva acquisition. This allows the company to stop issuing shares as part of compensation, repay debt from cash and commit to a progressive dividend.

Macquarie likes the outlook, retaining an Outperform rating, as the company continues to perform well against key benchmarks. Henderson has demonstrated consistency and this suggests to the broker it has the capacity to deliver for shareholders. Henderson has noted an increased appetite in Australia for its global equity income product in the low cash rate environment. It is also broadening the US client offer as funds reach their three-year track records.

Still, Macquarie observes part of the positive performance was the FX impact in the second half which may not be maintained, while fixed staff costs are rising in the current environment. Tax rates are expected to rise too, with some risk around tax rate harmonisation globally.

UBS considers the drivers should remain positive over the short term but there is now reduced potential for a positive earnings surprise, given persistent high cost growth. Hence, UBS has downgraded to Neutral from Buy.

Henderson still trades at a modest discount to its closest UK peers on Citi's FY16 estimates. The broker's Australian equity strategists continue to call the equity market higher and European equities are also seen benefitting from quantitative easing. This supports the broker's valuation and Buy rating. Citi believes an attractive opportunity exists to access a solid medium-term growth story, provided equity markets are supportive. Citi also cites fixed cost increases as a negative but, given the company is flagging an improvement in its operating margin, this suggests strong revenue growth and higher performance fees will outrun the cost increases.

The company has reiterated its strategy, targeting global growth over five years and building out its presence in North America and Asia Pacific. Citi continues to believe the strategy is feasible, albeit small bolt-on acquisitions will be required to reach the 2018 targets. There are also several elements in the result that make Citi optimistic about future dividends. As the company does not expect to need any capital above its target - although not sharing the actual figure with the broker - it suggests to Citi that any excess will be distributed to shareholders. Further capital initiatives, in addition to an ordinary dividend, are suspected to be on the cards no later than the second half of 2016.

 In sum, there are now three Buy ratings and one Hold for Henderson on the FNArena database. Consensus target is $5.48, suggesting 8% upside.
 

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article 3 months old

Weekly Broker Wrap: East Coast Gas, Credit, Banks, Macquarie Group And Appen

-Several players well positioned in gas
-RBA may need to act further
-Major banks unlikely to match past
-Citi downgrades Macquarie Group
-Appen offers unique ASX exposure
 

By Eva Brocklehurst

Eastern Australia Gas

As conventional gas fields currently in production become depleted and long-term domestic gas supply contracts are due to conclude, demand for gas is seen growing in Queensland with the ramp-up of LNG projects. Morgans ascertains that, by the end of 2015, six LNG trains are likely to be in operation at Gladstone with a total gas consumption of up to 1,500 PJ per year. This compares to total Queensland gas consumption, including gas power generation, of around 240 PJ per year and total eastern Australian gas consumption of around 700 PJ.

Japan is the primary consumer of LNG in the region, with demand growing sharply since the Fukushima melt down in 2011. China is also expected to increase its demand significantly out to 2033 as it targets lower energy emissions.

The broker observes a number of companies exploring for gas that could potentially provide additional gas to this market. Companies located in the Northern Territory include Armour Energy ((AJQ)) and Central Petroleum ((CTP)), which could benefit if the proposed NT pipeline development occurs. Blue Energy ((BUL)) and Senex Energy ((SXY)) in Queensland also have reserves located near existing and proposed pipeline infrastructure which could be brought to market. Elsewhere, the Cooper players Beach Energy ((BPT)), Cooper Energy ((COE)) and Drillsearch Energy ((DLS)) are considered well positioned for increased gas demand and pricing. The broker also notes that the natural decline in conventional gas production has been more than offset by the significant increase in Queensland's CSG production.

Credit Demand

While the Reserve Bank was worried about the investor-driven surge in Sydney house prices in 2013-14 and chose not to reduce official rates further, Credit Suisse observes official commentary suggests that the central bank is now prepared to risk inflating the Sydney property market further for the sake of stimulating growth outside of Sydney. Despite the surge in gross housing investor loan approvals, overall approvals net of refinancing are actually falling. Leading indicators suggest that loan demand may weaken further in the short term, dragging down credit and money supply growth.

Credit Suisse observes signs commercial loan demand is getting weaker, thwarting efforts to re-balance the economy away from mining. Amid this scenario the broker considers fiscal austerity is poorly timed. Historically, the Reserve Bank tends to reduce official rates in response to weakness in loan demand. Given the federal government is yet to formally reverse its austerity stance the broker suspects the RBA may be forced to act. Credit Suisse remains of the view that the RBA needs to reduce its cash rate further this year to boost money supply growth.

Banking Bubble

Australian banks now account for around one third of the market's capitalisation, the proportion increasing dramatically in the past five years. Citi asks whether this proportion is valid or a banking bubble. There is some conflicting evidence. During the tech and resources booms valuations were toppy in the broader market, with the market price to earnings ratio at over 20:1 in the tech boom and the market price to book ratio at 3:1 in both the resources and tech booms. Neither ratio is looking as extreme at present, in Citi's view.

What occurred during these former booms was that the sectors ultimately priced in unsustainable earnings whereas, in the case of the banks presently, neither ratio is high and the shares have not moved much beyond earnings nor earnings beyond assets.

The question still remains about the large rise in the banks' assets that has taken them to a third or more of market cap. At the current level of credit in the economy the banks' growth outlook appears limited, while renewed competition for market share could threaten bank assets and profitability over time. Hence, Citi has decided to place Sell recommendations on all four major banks. The broker suspects bank returns in coming years will be unlikely to match what they delivered previously.

Focus List

Cit has downgraded Macquarie Group ((MQG)) to Neutral from Buy and removed the stock from its Australia/New Zealand focus list because it has rallied strongly since mid January. The broker increased its target to $70 from $66 because the business fundamentally strong, has a high quality an diversified earnings stream and a competitive position with distinctive product offerings.

Appen Ltd

Appen ((APX)) is a global provider of language technology data and services to enterprise and government customers. Bell Potter has initiated coverage of the stock with a Buy rating and 80c target. Appen has a diverse client base, including companies such as Microsoft. The specialist stock provides the only exposure on ASX to a large and growing language services industry. The industry was worth around US$37bn in 2014. Bell Potter expects the stock to perform ahead of prospectus forecasts for 2014 and 2015 because of stronger operational results and a lower Australian dollar/US dollar rate.
 

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article 3 months old

Brokers Attracted To Flexigroup

-Moderate growth still ahead
-Good value despite the rally
-Acquisition opportunities
 

By Eva Brocklehurst

Specialist finance business Flexigroup ((FXL)) delivered a firm interim result that was largely in line, or a little ahead of, expectations. Despite the certainty in the stock, brokers were somewhat mystified at the further rally in reaction to the results.

Credit Suisse suspects the unwinding of short positions was behind the response but, rally aside, considers the stock is attractively valued relative to its growth profile. The company has the means to deliver on expectations with increasingly diversified business lines, strong top line momentum, customer and product growth. The broker notes strong volumes in Certegy, the card payments business, while a change in strategy in enterprise leasing may be a headwind but makes long-term sense. There is increased competition in SME leasing too but the consumer segment, which is higher yield, should offset this in the broker's opinion.

Nevertheless, Credit Suisse is not expecting high growth, just 7-9% on average over the next few years. The stock offers relative earnings certainty at a reasonable price, although the broker does point out that impairments are likely to be "as good as they can get" and allows for a gradual increase over time.

The company has significant opportunities ahead with an ability to execute well, in Deutsche Bank's view. That said, the broker suspects growth may become harder to achieve than the impressive 14% compound rate witnessed since FY09. The valuation metrics are still undemanding so Deutsche Bank retains a Buy rating.  Morgans concedes multiple drivers for earnings but believes subdued receivables growth will restrict the near term outlook. Earnings may be high quality but growth in organic terms is likely to be modest. Upside risk is via an acquisition but the broker is prepared to wait and see on that score.

Citi outlines four reasons to buy the stock. Firstly, diversification, which should drive profit growth. Next is the company's risk management expertise which has lowered funding costs. Flexigroup has completed six securitisations over the past four years which has meant its average cost of funds has fallen to 5.8% from 9.4%. Acquisitions providing both scope and scale are the third reason and the final is the strong correlation between receivables and earnings, which heightens visibility.

UBS found the results clean and expects the stock to be supported by the attractive yield, low funding costs and benign bad debt environment, although margin compression and competition remain issues. Visibility on the company's book should provide downside support as well. The broker notes the consumer financial basket re-rated considerably in the past three months but Flexigroup was left behind - even accounting for the recent rally - and earnings growth remains at the lower end of  peer comparables on an FY15 and FY14-17 basis.

Flexigroup is good value in Macquarie's opinion, despite a 30% rally from recent lows. Earnings are typically weighted to the second half and the mid point of the guidance range suggest to Macquarie there is some head room, which may prove necessary if enterprise and SME volumes decline. The company has several products on the drawing board with a focus on digitisation, which the broker observes is cost effective and also improves the end user - customer and retailer - experience.

Goldman Sachs also envisages further upside as the company tailors its digital marketing, with VIP penetration a key profit driver for "No Interest Ever" (Certegy Ezi-Pay) . The VIP program now contributes 31% of Certegy's deal value.

The stock has four Buy ratings and two Hold on the FNArena database. The consensus target of $4.04 suggests 17% upside to the last share price. Targets range from $3.45 to $4.66. The dividend yield on FY15 and FY16 forecasts is 5.1% and 5.5% respectively.
 

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article 3 months old

Weekly Broker Wrap: Equity Strategy, Financials And Steel Stocks

-Industrials the market mainstay
-New lenders threaten major banks
-Regional banks to struggle
-Pressure may mount on insurers
-What if Suncorp bought nib?
-Sims Metal a top pick in steel
 

By Eva Brocklehurst

Equity Strategy

Steady growth in industrials earnings has featured in recent years but it has been overshadowed by the swings and roundabouts of the resources sector. Citi suspects that the industrial sector will be the mainstay of the market again in FY16. The broker notes dramatic shifts in relative performance of  ASX200 stocks, despite the market ending 2014 on a flat note. The most compelling consideration for Citi is the current pricing of the market, as bond yields move back to prior lows and commodity prices remain well below prior peaks.

Hence, the broker persists with low exposures to the "fixed income proxies", such real estate investment trusts (A-REITs), infrastructure and telecoms, because of their extended outperformance and favours the more modestly valued cyclicals such as energy, managing risk with modest positions in neutral sectors such as banks and mining.

Goldman Sachs, heading into the results season, looks for stocks where there are greater opportunities for outsized moves and potential for surprises regarding earnings or outlook, or capital management. Included in this focus list are Dick Smith ((DSH)), Harvey Norman ((HVN)), Genworth Australia ((GMA)), Medibank Private ((MPL)), Sydney Airport ((SYD)), Leighton Holdings ((LEI)), SAI Global ((SAI)), Dexus ((DXS)), Caltex ((CTX)), Fortescue Metals ((FMG)), Seek ((SEK)) and Crown Resorts ((CWN)). Those stocks the broker suspects have the greatest potential to disappoint include Sonic Healthcare ((SHL)), Macquarie Atlas Roads ((MQA)), Beach Energy ((BPT)), UGL ((UGL)), GWA ((GWA)) and BWP Trust ((BWP)).

Top Picks

Credit Suisse has added WorleyParsons ((WOR)) to its top picks for Australia. The stock is now trading at an all-time low relative to the market. Earnings risks remain considerable but the broker believes the price/earnings ratio and free cash flow yield have become too compelling to ignore. The broker also believes the company has capacity to implement a buyback and this would be materially earnings-per-share accretive.

Banks

The margins the major banks have enjoyed on credit card and personal loan products are under threat in Macquarie's opinion, as yet another lender in the form of MoneyPlace establishes itself. MoneyPlace joins the ranks of SocietyOne and RateSetter. While not certain of the rate of growth these lenders will enjoy, the broker observes momentum continues to build. Based on the current retail revenue pool, Macquarie estimates around $12bn in revenue is at risk. The broker continues to prefer those banks that can best respond to these "new world" threats such as Commonwealth Bank ((CBA)), given a proven track record in project execution and National Australia Bank ((NAB)) as it embarks on the final steps of its NextGen upgrade.

The strong operating environment that exists for regional banks is fading, in Morgans' view. This positive environment includes deposit pricing, asset quality and strong housing markets. The broker believes, despite some improvement in profitability, that the regionals will still struggle to generate meaningful organic capital. Earnings growth is expected to weaken into FY15/16, although the regionals are still expected to be stronger relative to the majors.

These banks obtained some benefit from the Financial System Inquiry although they did not secure a lot of what they wished for. Their request for a less onerous path to advanced accreditation was rejected by the regulators' (APRA and RBA) submissions. Much now depends on how APRA (Australian Prudential Regulation Authority) will interpret the findings. Morgans experts the mortgage capital intensity gap between the majors and regionals will ultimately become tighter but, until the regionals move to advanced accreditation, their low returns will likely be a ceiling on growth, sustainable pay-outs and valuation. Still, the broker continues to prefer the regionals over the majors given the relentless regulatory backdrop.

Insurance and Diversified Financials

Morgan Stanley explores potential surprises for this sector in 2015. The broker does not expect these developments to occur, just that there is probably a greater chance than is widely appreciated. The market remains optimistic regarding QBE Insurance's ((QBE)) top line recovery but the stock may surprise on the downside if premiums fall. A stronger US dollar is adding to top line pressure.Morgan Stanley believes the market is dismissing AMP's ((AMP)) efforts to drive growth in wealth and the stock could surprise in this regard, with net flows contributing to a price/earnings re-rating.

The broker notes that capital return prospects for Suncorp ((SUN)) mask the growth challenges in the portfolio. Perhaps it may exit banking, buy nib Holdings ((NHF)) and create a pure insurance play. Suncorp could also surprise the market by hitting its 10% returns target in FY15. Underlying margins could disappoint while reported margins still beat expectations for Medibank Private ((MPL)) as the broker flags two risks - a rise in claims and acquisition costs. The market may be discounting the probability of IOOF ((IFL)) rationalising its platform but buying a new platform is viable in Morgan Stanley's opinion, insulating profit margins and setting up the company for a new wave of growth.

Computershare ((CPU)) would be a surprise if it delivered negative growth but Morgan Stanley suspects the fundamental risks are building and corporate activity is not as supportive as the market believes. ASX ((ASX)) has also attracted 75 managed funds products for its new ASX mFunds service since May 2014. This may surprise if it wins a greater share of new monies, particularly self-managed super funds, and adds a new direct-to-consumer earnings stream. The market expects Perpetual's ((PPT)) global share fund to be a slow fire but it could surprise and reach its target of $1bn funds under management much earlier, given the strength of the company's retail brand and distribution.

Steel

Deutsche Bank considers Sims Metal Management  ((SGM)) well positioned to benefit from the uptick in US economic activity, a weaker Australian dollar and continued strength in the Asia Pacific business. Hence, the stock is the broker's top pick for the sector. There is considerable upside for BlueScope ((BSL)) as well and the broker retains a Buy rating based on strength in the Australian housing market, the weaker Australian dollar and firm spreads domestically and in the US. The broker has a Hold rating on Arrium ((ARI)), suspecting the balance sheet is at risk given the significant exposure to iron ore prices. Arrium will need to convince Deutsche Bank that the recovery in steel manufacturing earnings is real and cost reductions in iron ore are happening.
 

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article 3 months old

Weekly Broker Wrap: AUD, Banks, 2015 Surprises, Aged Care And Key Picks

-Is AUD heading below US80c?
-UBS re-rates Oz banks
-What if credit markets crashed?
-What if Oz companies raised capex?
-REG Macquarie's top pick in aged care
-GS removes ORL from list after warning


By Eva Brocklehurst

Australian Dollar

ANZ forex analysts consider the decision to ease official interest rates by the Canadian central bank is a signal for the Australian dollar. The significance of the central bank's action lies in the fact the macro case for the easing was not clear cut. The Canadian economy has more leverage to the negative impact of the decline in oil prices compared with Australia's but the fall in oil is matched by the descent of iron ore prices. Simply put, oil is 22% of Canada's export basket while iron ore and coal make up 34% of Australia's. The analysts contend that weak growth and low inflation provide space for easier rate settings. Australian data in the next week - business confidence and CPI numbers - is likely to be soft and the analysts believe a more sustained easing cycle from Australia's Reserve Bank will be further priced in. The Australian dollar is likely spending its final days above US80c.

Bank Outlook

Australia's economy is patchy and market volatility has risen so UBS envisages many investors will be struggling for high conviction investment alternatives. High quality franchises which offer reasonable growth have become crowded trades with stretched valuations. Australian bond yields are now near record lows and the market is pricing in rate cuts. In this environment the broker believes the strong dividend yields of the banks make them relatively attractive. UBS acknowledges the absolute valuations of the banks are not cheap but believes a further re-rating is possible.

With this in mind, the broker considers the outlook for Australia's banks is benign. Trading income is expected to bounce back, given the increased volatility in the Australian dollar. This could provide the biggest leverage for both ANZ Bank ((ANZ)) and Westpac ((WBC)) in the near term. UBS upgrades Westpac and National Australia Bank ((NAB)) to Buy. The broker cites Westpac's solid momentum in retail and business banking and support for NAB's turnaround strategy. ANZ is downgraded to Neutral however, as UBS suspects returns from its Asian wholesale banking arm will continue to be pressured.

What Could Surprise in 2015?

Credit Suisse has singled out some developments that, while not core views, may have a disproportionate impact on stocks if they materialise. The surprises include a sharp increase in global stock markets consistent with the late stages of a bull market, a hard landing in China, with repercussions for Australian miners in particular, a lack of action on the expected US Fed rate hike, supporting the Australian dollar and forcing the RBA to ease, and a crash in global credit markets. The main reason the broker is positive about Australian equities is because credit remains a cheap source of financing for companies. Capital raised in the credit market is expected to be used to retire equity. A credit crash would stop this and stock indices would struggle to make gains.

Specifically for Australia, surprises for 2015 would include a reversal of the federal government's austerity policy and a reduction in foreign demand for property. Weaker foreign demand would remove an important margin buyer of Australian property and make it harder to re-balance the economy away from mining investment, in the broker's view. Another surprise would be if self-managed super funds develop more appetite for international equity holdings. Much of their money - they control a third of Australian super assets - is funnelled into the Australian equity market where the post-tax yield is considerably higher.

Another surprise would be Australian companies raising capital expenditure significantly. Capex-heavy companies have a poor history of returns and, while a pick up in capex may be positive for economic activity and job creation, it would be negative for shareholders as the investment would be made at the expense of capital returns.

Aged Care

Macquarie has assessed the Australian aged care providers and considers Regis Healthcare ((REG)) is ahead in terms of growth capability. The broker concedes the stock is not cheap but argues that in a sector where value is created by development and acquisition, it remains the safest and most attractive option. Macquarie has initiated coverage of Estia Health ((EHE)) with an Underperform rating. The stock offers operational improvements over the next 18 months but the broker finds plenty of risk in the outlook, given the quantum of uplift that is forecast and the need to integrate a large number of acquisitions. Japara Healthcare ((JHC)) has been downgraded to Neutral from Outperform. It remains the most attractive of the three under cover in terms of valuation but carries meaningful near-term earnings risk, in Macquarie's view.

Top Picks

Credit Suisse has updated its top picks to include a constructive view on Macquarie Group ((MQG)), based on the scope for positive capital markets and a rebound in equity related income. Compared with the average global investment bank, the broker considers Macquarie relatively clean of regulatory, political and litigation risks. Credit Suisse considers Computershare ((CPU)) is undervalued relative to its historical trading range, offering an attractive entry point. Guidance for FY15 is considered easily achievable.

Syrah Resources ((SYR)) is another added to the top picks as recent graphite transaction prices for the quality that Syrah is likely to produce are materially above the prices assumed in valuation. Asaleo Care ((AHY)) is expected to retain stable revenue. Rising costs spurred by the fall in the Australian dollar are not factored into the share price in Credit Suisse's view. Harvey Norman ((HVN)) is another addition as it stands to benefit from the implementation of new stock management systems this year, which should lower cost and improve franchise profitability.

Small & Mid Caps

Goldman Sachs has added SAI Global ((SAI)) to its Australian small and mid cap focus list. The broker believes the company-specific risks have been reduced. A new CEO has been appointed and the Compliance tech platform is nearing completion. OrotonGroup ((ORL)) has been removed from the list following its profit warning, with Goldman Sachs downgrading to Neutral from Buy.
 

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article 3 months old

Macquarie Group Likes Markets In Turmoil

-Positive aspects of volatility to prevail
-Relief from concerns over exposures
-FY16 considered more challenging
-Stock's valuation not overly stretched, analysts find
 

By Eva Brocklehurst

More volatile commodity prices means more clients seeking hedging, which means more trading revenues for Macquarie Group ((MQG)). The investment bank has firmed up FY15 guidance to 10-20% growth compared with prior guidance which mentioned earnings being "slightly up on FY14".

Fixed income, commodity and currency (FICC) trading revenue and a stronger US dollar have contributed to the upgrade and Citi increases its earnings estimates by 2.3% for FY15 and 10.9% for FY16. Unlike during prior periods of commodity price volatility, Citi suspects this time the unsettled market will persist longer, into FY16. The broker continues to observe momentum in M&A deal completions and an increase in the value of the M&As, a positive for Macquarie.

The new guidance range does not include any abnormal performance fees from the Macquarie European Infrastructure Fund 1 (MEIF-1) in the second half. With a sale agreement evident for only one of the remaining three assets, Citi moves two thirds of its remaining MEIF 1 performance fee forecast into the first half of FY16.

JP Morgan had expected Macquarie would have to balance the positive aspects of FX and market volatility with the risk of higher FICC impairment charges. The update confirms the positive aspects but eliminates the near-term risk from the latter. Impairment charges remain a longer term concern in the event of further commodity price weakness. JP Morgan observes a strong share price reaction to the stronger guidance, likely emanating from the unwinding of weakness seen over recent weeks and relief from concerns that were building over the health of the bank's resource related equity and lending exposures.

With Macquarie's $400m resource equity portfolio having taken around $200m in impairments since FY14, JP Morgan's focus has been on the related $2.5bn lending book. The broker suspects the hedging profile of borrowing corporates has protected profitability, but the risk remains if commodity prices fall further and as hedges roll off. The broker highlights the bank's conservative estimate of MEIF 1 performance fees for the remaining assets, taken at the first half result. The aggregate of around $550m in FY15 performance fees signals a challenging task for earnings in FY16, when JP Morgan forecasts double digit underlying earnings growth will contrast with flat headline growth.

Goldman Sachs also considers the update will resolve concerns around exposure to recent commodity market volatility, particularly as the client business appears to have more than offset any risks. The broker considers the stock's valuation is fair, given a business that is expected to deliver a sustainable return of around 14% and pay partly franked dividends of $3.18 over the next 12 months. Goldman Sachs retains a Neutral rating.

The energy trading business and metals and agriculture segments are likely to deliver strong results, as UBS notes the update was based on numbers through to the end of December and the March quarter is the seasonally stronger. Moreover, ongoing falls in bond yields and increasing volatility will be supportive so the broker upgrades Macquarie Group to Buy from Neutral. UBS highlights the fact that Macquarie is highly leveraged to the falling Australian dollar, given around 70% of its revenue is generated outside of Australia. As a result a 10% reduction in the local currency's value leads to around a 7.0% increase in earnings with translation benefits.

Morgans also upgrades the stock, to Add from Hold. The broker considers Macquarie offers strong leverage to financial markets, rebounding corporate activity and Australian dollar weakness, all the while offering a 5.0% dividend yield. The bank is also traditionally conservative when it comes to its outlook. Hence, Morgans believes the weakening Australian dollar and ongoing volatility puts the earnings risk to the upside. Trading on 12.3 times the broker's upgraded FY16 earnings forecast and 1.5 times book value, the stock's valuation is not considered overly stretched. Another positive for Morgans is that the improved guidance does not appear to be driven by lumpy performance fees.

On FNArena's database there are four Buy ratings and three Hold. The consensus target price is $62.48, suggesting 7.3% upside to the last share price, and compares with $61.97 ahead of the update. Targets range from $57.00 (UBS) to $68.00 (Credit Suisse). The consensus dividend yield on FY15 and FY16 forecasts is 5.3% and 5.7% respectively.

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article 3 months old

Weekly Broker Wrap: Key Picks, Media, Retail And A-REITs

-Credit Suisse more positive on NAB
-Upside potential for MTU, CRZ and NEC
-Can WOW meet profit growth guidance?
- JBH still under pressure?
-Is there more upside for A-REITs?

 

By Eva Brocklehurst

Top Picks

Credit Suisse has kicked off 2015 by including National Australia Bank ((NAB)) in its top picks for Australia. The broker hails the restructuring that is underway at the bank, while macro leverage to the Australian dollar depreciation and a recovery in the UK market add to the positive underpinnings. There are divestment opportunities which could release substantial capital, in the broker's view.

Another stock to watch is Primary Health Care ((PRY)). The company is facing some structural headwinds around its GP workforce, which needs to be reinvigorated. Younger GPs are not considered as productive as their more experienced peers. As well, recent Medicare schedule changes planned by the government suggest a price cut for PRY, which has a significant bulk billing component.  A key call for 2015 is M2 Communications ((MTU)), which Credit Suisse expects to outperform through the February results season. The broker believes the stock can deliver a 3-year earnings growth rate of 15% through to FY17.

Media

Carsales.com ((CRZ)) takes the top position in the online classified segment for Credit Suisse with REA Group ((REA)) in second. The broker observes carsales.com has no upside priced in for its early-stage offshore operations. An Outperform rating on REA reflects the broker's opinion that strong revenue growth will ensue as the company takes a larger share of property transaction spending. Seek ((SEK)) is rated Underperform, as Credit Suisse considers the stock expensive with high valuations already priced in for its offshore business.

Nine Entertainment ((NEC)) is the top pick in the traditional media segment. TV advertising is subdued but stable and the broker expects a significant re-rating with any sign conditions are improving. Credit Suisse retains an Outperform rating for News Corp ((NWS)) on valuation and a Neutral recommendation is in place for Fairfax ((FXJ)). The latter is considered cheap based on the valuation of its Domain asset but Credit Suisse believes Nine offers more upside.

The main theme for online advertising, which overtook TV as the largest Australian advertising category last year, is continued strong growth in video and mobile. Retail companies are expected to increase the percentage of online advertising spending. JP Morgan is also most positive on carsales.com, given its valuation upside, while Neutral on REA and Seek, where the upside is considered limited despite the broker liking their business models. JP Morgan notes online advertising expenditure has come at the expense of more traditional advertising and this trend is likely to continue in the near term.

Retail

There were concerns heading into Christmas that trading may be disappointing after downgrades early in December from Flight Centre ((FLT)), Kathmandu ((KMD)) and OrotonGroup ((ORL)). However, UBS has feedback which suggests that Christmas activity was late starting but turned out to be good, with sales progressively improving over the month. Boxing Day sales were also strong. Discounting prevailed but the broker did not find it more significant that the previous year. Leisure and fashion stood out, while feedback from the electronics and household categories was mixed. The broker believes, while discounting was aggressive, it was more targeted in categories such as apparel.

Based on early trade feedback and web traffic in December, UBS believes Wesfarmers ((WES)), Harvey Norman ((HVN)) and Myer ((MYR)) are poised to deliver the strongest top line results among retailers in February. The broker highlights risks for JB Hi-Fi ((JBH)), Pacific Brands ((PBG)), Woolworths ((WOW)) and Metcash ((MTS)). JP Morgan also notes issues for these four stocks. Woolworths is at a key decision point for investors. Some question whether Woolworths can meet its FY15 profit growth guidance of 4-7%. JP Morgan believes it can, even if the like-for-like sales gap with rival Coles remains wide and losses in home improvement increase. It is the long-term outlook that is challenged, in the broker's view, as 8.0% margins in food & liquor earnings are arguably unsustainable.

JP Morgan also questions whether the transformation program at Metcash will provide a boost this year, or even achieve a stabilising of earnings. The other issue is how the weaker Australian dollar and petrol prices will affect discretionary retailers. The broker suggests, while lower petrol prices are a positive, the sales mix is likely to shift more to fresh food and premium products. In this instance, the broker wonders whether Myer will be rewarded if it meets FY15 guidance.

The broker asks whether the new CEO will deliver the goods for JB Hi-Fi and suspects that near-term announcements may continue to be negative, as software sales remain a drag and Dick Smith ((DSH)) continues to be an aggressive competitor. Can the sale of several divisions by Pacific Brands last year help in managing rising costs? JP Morgan suggests the path ahead will continue to be difficult.

Online Retail

Australian online retail sales rose 12% in the year to November 2014 and now make up around 7.0% of all retail sales in Australia. UBS observes, despite sales outpacing the broader market, online growth is slowing. The weaker Australian dollar and better execution by local retailers is the reason why international sales growth is slowing. UBS has identified trends such as momentum accelerating at Myer and Dick Smith winning share by aggressive pricing and promotions. Growth at Flight Centre has accelerated as the travel market rebounded in December, while UBS also observes traffic on the web for DIY names such as Bunnings is also increasing.

A-REITs

After outperforming last year Australian Real Estate Investment Trusts (A-REITs) may look less appealing but Morgan Stanley suspects there could be more upside. If the broker's view of lower bond yields is correct, multiples could expand further as valuations and earnings continue to grow. The differential between US And Australian bond yields continues to narrow and this suggests the relative discount in current price/free funds multiples for A-REITs is overdone.

Morgan Stanley expects valuations will gradually move towards its bull case scenario, which signals 28% upside. The broker is cautious about the rental fundamentals, as operating income is relatively stable and the lower cost of debt could drive up to 2-3% upside for selected stocks.

As earnings revisions get harder to come by in the wider market the broker believes the A-REIT sector's momentum will be attractive. The exception to this expected outperformance is Westfield ((WFD)). The broker prefers Goodman Group ((GMG)), Lend Lease ((LLC)), Mirvac ((MGR)) and Scentre Group ((SCG)). The least preferred, including Westfield, are Stockland ((SGP)) and Novion ((NVN)).

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article 3 months old

Weekly Broker Wrap: Commodities And Equities in 2015, Banks and Media

By Greg Peel

Commodities in 2015

After a decade of cost inflation and currency headwinds for the Australian mining sector, costs and the Aussie are now starting to follow commodity prices down, Deutsche Bank notes, albeit on a lag. While commodity price falls are hurting higher cost producers, lower cost producers are the greatest beneficiaries of a lower cost curve. The falling oil price is contributing to lower costs.

Deutsche expects the Aussie to fall to US70c by 2016. Those mining stocks best exposed to the falling Aussie and oil price, in the broker’s view, are Alumina Ltd ((AWC)), OZ Minerals ((OZL)), Rio Tinto ((RIO)), BHP Billiton ((BHP)), Whitehaven Coal ((WHC)), Independence Group ((IGO)) and Regis Resources ((RRL)).

The hardest hit commodities in 2014 have been iron ore, thermal coal, copper and oil, Deutsche notes. Aside from lower costs and currency, the broker sees 2015 as being a year of M&A and asset sales in the sector as the gap between low and high cost producers widen. Price-wise, the bulks should begin to rebalance and base metals strengthen. Deutsche’ top sector picks for 2015 are Rio, BHP, Alumina, Independence, Sirius Resources ((SIR)), Sandfire Resources ((SFR)) and PanAust ((PNA)).

The broker is bullish base metals but especially nickel, zinc and aluminium/alumina. Copper will remain in surplus but the impact will be dampened by falling grades in some of the world’s biggest mines. Bulk commodities remain in oversupply so market rebalance will take some time.

Morgan Stanley has downgraded its long term commodity price forecasts substantially heading into 2015. Iron ore and the coals (thermal and met) see 26-33% reductions while base metal reductions are a more modest 5-12%.

The broker notes that market commentary around commodities, in the wake of 2014’s big falls, is “overwhelmingly bearish”, with China’s moderating demand growth the primary cause of concern. Morgan Stanley nevertheless highlights that relentless supply growth sparked by higher prices in the boom has come home to roost, and once rebalancing starts occurring, opportunities will emerge in commodities markets.

Morgan Stanley likes metals. China’s multi-decade, materials-intensive cycle is maturing in a way that requires less bulks and more metals, the broker suggests, and this demand will compete with demand in an improving US economy. The broker prefers nickel, copper and zinc.

Equity Strategy

2014 was a year featuring outperformance of defensive stocks in the Australian market, UBS notes, and high-yielding defensives in particular, albeit the banks lagged on capital concerns. Beyond the yield story, foreign currency earners also performed well, with defensive healthcare a particular favourite. Those high yielders have for the most part now run up against the broker’s target prices.

Resource sector stocks and resource sector service providers made up 14 of the bottom 20 places, performance wise, for the ASX100 in 2014, UBS notes. No surprise there. But the broker believes 2015 offers better prospects for a price “basing” in base metals and oil, particularly if global growth can show some signs of life.

UBS believes Bluescope Steel ((BSL)) and Sims Metal Management ((SGM)) are the best positioned resource-related companies for a turnaround in 2015. Among the yielders, Spark Infrastructure ((SKI)) still offers upside in the broker’s view, while Aristocrat Leisure ((ALL)) is offering positive earnings momentum among the foreign currency earners. Among local industrials, UBS believes Crown Resorts ((CWN)) is oversold.

The Banks

It could have been a lot worse, suggests Macquarie, in reference to the Murray Inquiry. The banks copped one specific capital impost in the form of higher mortgage risk weightings but avoided a direct impost on a “too big to fail” (TBTF) basis. However, the more vague recommendation that Australia’s big banks should maintain capital ratios within the “top quartile” of international bank ratios creates its own problems.

ANZ Bank ((ANZ)) and Westpac ((WBC)) were the two banks most likely to be hurt if a specific TBTF buffer were applied given Commonwealth Bank ((CBA)) is already well capitalised and National Bank ((NAB)) has the luxury of being able to sell assets. But all the banks will be needing some $6-7bn of additional capital as it is, Macquarie suggests.

The problem with “top quartile” is that it is potentially a moveable feast of a measure, dependent on what the rest of the world’s banks are up to. Thus while specific TBTF buffer would have hurt, at least it would be a “known”. Macquarie believes the vague “top quartile” guideline will create great uncertainty.

Of course it’s all just recommendations at this point.

And it is still uncertain exactly how the regional banks will be impacted, Deutsche Bank suggests. The broker’s base case is for a capital benefit to the smaller banks, bringing their return on equity measures into line with, or to a premium over, the big banks.

What we do know is that the individual litigation clouds hanging over each of the big two regionals have now parted. The Federal Court has approved a settlement between bank of Queensland ((BOQ)) and investors in Storm Financial and the Victorian Court has approved a settlement between Bendigo & Adelaide Bank ((BEN)) and investors in Great Southern.

Media

Advertising data suggest a flat first half of FY15 to date, with mid-single digit improvement noted in November driven by digital and a lumpy jump in outdoor, JP Morgan notes. Metro TV booking have declined by 4.4%, FY-to-date, and newspaper/magazines have declined by around 10%. Metro radio is up 5.7%.

Traditional media revenue trends remain subdued, JP Morgan suggests, and there remains downside risk to consensus earnings forecasts among stocks in the sector. The broker is Overweight Carsales.com ((CRZ)), Seven West Media ((SWM)) and Prime Media ((PRT)) and Underweight Fairfax Media ((FXJ)) and Ten Network ((TEN)).
 

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article 3 months old

Banks Reaching Support

By Michael Gable 

Our cautiousness remains warranted as the market continues to ease back. Our first downside target has been hit however, so we have an updated chart of the S&P/ASX 200 Index in our charting section. Whilst resources and energy stocks are very “cheap” here, the more conservative plays will continue to be stocks with some US dollar earnings and stocks that will benefit from lower interest rates.

As a result, we have updated the chart for National Australia Bank ((NAB)). The banks are likely to find renewed support due to their very high yield in comparison to the cash rate.

 


NAB is not our preferred bank, but it is at an attractive level now, as are ANZ Bank ((ANZ)) and Westpac ((WBC)). We can see on this weekly chart here that the stock is at the bottom of its recent range. Since peaking 13 months ago, the stock has drifted back to form a flag formation. It is taking a breather before a continuation of the overall uptrend. With interest rates likely to head south again, and investors taking on a more defensive attitude, NAB and the rest of the banks will start to see some buying again. Next year’s forecast yield, grossed up to include franking, sits at ~9%. Now that NAB is at the bottom of the recent range, we expect a move up towards resistance in the mid $34’s. A breach of that will see NAB push beyond last year’s high.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Storms, Skydiving, Banks, Christmas, Interest Rates And The Budget

-Suncorp most exposed to storm
-Skydiving captures Moelis' attention
-NZ contribution to Aust banks slowing
-Joblessness counteracts petrol win
-RBA easing bias implied for 2015
-Budget surplus outlook fading
 

by Eva Brocklehurst

Brisbane Storm

A catastrophic event has been declared by the Insurance Council of Australia for the recent storm in Brisbane, the first such catastrophe for FY15. Losses are yet to be confirmed but to brokers, Suncorp ((SUN)) is the most exposed to this event, given its large Queensland market share. The company has signalled its maximum event retention figure of $250m is likely to be hit. Given this is the first event, downside risks to first half earnings are relatively moderate, in Deutsche Bank's estimates, given healthy allowances and assuming no other major events occur before December 31 2014. UBS observes the storm is a timely reminder of the assistance that benign weather has provided to both Suncorp and Insurance Australia Group's ((IAG)) profits in recent years.

At this stage losses appear absorbable in FY15 allowances, but UBS considers Suncorp's margins are likely to be affected. Suncorp's general insurance division needs to deliver a 17% insurance margin to comfortably achieve returns of more than 10% in FY15. This event has, in the broker's view, shifted the focus to reserve releases in order for this target to be achieved. JP Morgan observes that, generally, insurance stocks underperform soon after big events and often overshoot.

Indoor Skydive

An Australian-based operator of indoor skydiving has listed on ASX. Indoor Skydive Australia ((IDZ)) has captured the attention of Moelis, who initiated coverage with a Hold rating and 56c target. The company has no direct listed comparisons. A high barrier to entry is one of the core investment drivers of the stock, Moelis observes. The company has an exclusive supply agreement with SkyVenture, a global wind tunnel supplier. Its facility, at Penrith on the outskirts of Sydney, commenced operations in FY14 and expansion to both Gold Coast and Perth is underway. Evidence of traction at the Penrith centre and progress on the Gold Coast development should help support an increase in the share price, in the broker's view. Such facilities allow users to experience human flight by simulating the free-fall experience when skydiving. Customers include tourists, skydiving enthusiasts and military organisations.

Australian Banks In New Zealand

The contribution from the NZ divisions of Australian banks is expected to slow. Falling bad debts and improving cost efficiency has meant NZ divisions have been strong contributors to group results since the GFC. The NZ economy is robust, driven by the rebuilding of Christchurch and strong immigration, while Citi observes there is a lesser reliance on key Asian economies compared with Australia. This should lead to continued strong credit growth, with few emerging quality issues.

Nevertheless, New Zealand's significant dairy industry is enduring some pain. Fonterra's farm gate milk price is forecast to fall substantially in 2015. Citi has met with NZ management at the major banks and all are expecting that, given a delay in the cash flow impact on farmers, milk prices can only stay at these levels for 12 months before lending books are impacted. Among other considerations for the NZ banks, increased confidence has led to a more competitive banking sector and mortgage volumes have slowed, while cost efficiency improvements have largely played out. Citi suspects cost-to-income ratios may stagnate. The broker considers ANZ Bank ((ANZ)) the most attractive of the majors in New Zealand, benefiting from its scale.

Christmas Cheer

With the much publicised slump in oil prices, and Australian petrol prices likely to fall despite the weaker currency, Morgan Stanley believes expectations are still too high regarding Christmas trading. Petrol prices have retraced to $1.35/litre from $1.53/lire last December. Nevertheless, not all savings at the bowser will be spent on the retail market. Assuming savings in petrol are spent in line with overall consumption the uplift to retail is just 0.4%. Assuming all savings are spent on discretionary retail, the uplift would only rise to 1.2%. Sorry folks, but Morgan Stanley believes rising unemployment is a far more malevolent trend, not only in terms of income for those that lose their jobs but for making those in work more fearful. The broker notes the unemployment rate is 6.2% compared with 5.9% last Christmas, and theoretically, according to Morgan Stanley's calculations, such an impact largely offsets the petrol price movement.

Cash Rate

Australia's Reserve Bank left its cash rate on hold at 2.5% for the 16th consecutive month at its last meeting for 2014. Governor Glenn Stevens retained the line regarding a period of stability in the outlook. This reinforces Morgan Stanley's view that the central bank will not be pre-emptive in easing monetary policy further, despite fears Australia's growth transition is stalling. The RBA emphasised the accommodative financial conditions in play globally and the recent policy easing in China, which should support growth. The RBA also signalled a lower exchange rate may be needed to achieve balanced growth. Morgan Stanley takes the shift in the bank's rhetoric to signal that, if the Australian dollar were to stabilise at current levels rather than continue depreciating, there may be room to consider rate cuts next year.

The broker also believes the upcoming mid year economic and fiscal report (MYEFO) from the Commonwealth government will be difficult to reconcile with existing commitments to return to surplus and reiterates a view that neither monetary nor fiscal policy will react quickly to stalling growth.

MYEFO

UBS expects a deterioration in the budget is likely to be revealed in the mid year statement, from a combination of delayed and stalled policies as well as lower-than-expected nominal growth. Hopes for a surplus in 2018/19 appear to be fading. Outside of any new policies that might be announced, the budget is considered likely to be a cumulative $29bn worse over the four out years. The broker concludes that the government is unlikely to drop all the policies not yet passed into law and a number will be re-fashioned for re-release at the next budget. UBS also doubts the government will attempt to recoup lost monies at the MYEFO by further leaning on the economy. Still, there is some risk of additional tightening at the 2015/16 budget next year.
 

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