Tag Archives: Consumer Discretionary

article 3 months old

Baby Bunting’s Growth Spurt To Slow, A Little

Baby goods retailer Baby Bunting is investing in price & customer service, and brokers believe this is paying off in terms of market share.

-Gross margins soft in first half but attributed to shift in sales mix
-Sales growth to moderate over the second half
-Medium-term growth outlook seen captured in share price


By Eva Brocklehurst

Baby Bunting ((BBN)) is growing strongly. First half results were broadly in line with broker estimates although gross margins were soft. Morgans believes the company's strategy of investing some of its top line back into prices and customer service is the right one and should confirm the company's proposition as a category killer in the baby/nursery goods segment.

Baby Bunting delivered 8.2% sales growth in the first half. Morgans notes this implies like-for-like sales growth over the last seven weeks of around 3.1%, given 10% was reported for the first 20 weeks. This represents, in the broker's view, a reasonable slowdown towards year and. Gross margins were below expectations because of the focus on price and customers. Online investment is observed to be paying off, and now comprises 5.9% of group sales.

Store Footprint To Double

The main attraction for Morgans is the fact that around 43% of the stores are less than three years old and the company has a net cash position. In the meantime, the competition is struggling to remain viable. The broker believes the company can assert its ascendancy over competitors in coming years and its store footprint can double. The broker downgrades its recommendation to Hold from Add on valuation grounds only.

The company reports trading in FY17 to date shows sales growth of 8%, implying around 7.6% like-for-like growth in the first six weeks of the second half. The trend, Morgans observes, continues to be solid. Management expects sales growth will moderate over the balance of the second half as the group cycle stronger comparables.

Gross margins were slightly softer than Macquarie expected too and, as also expected, like-for-like sales growth is moderating throughout the year as the previous corresponding period becomes increasingly tougher to beat. FY17 operating earnings guidance (EBITDA) of $21.5-24.5m represents growth of 15-31%, the broker calculates.

Macquarie's previous forecasts were at the top end of the guidance range and this now appears a stretch. The broker revises estimates to assume around 7% like-for-like growth with less operating leverage in the second half.

While lowering near-term forecasts, Macquarie emphasises the medium-term growth outlook is attractive but this is currently captured in the stock's price, given a 50% price/earnings ratio premium to the market. Hence, Macquarie downgrades to Neutral from Outperform.

The medium-term outlook remains intact in the broker's view. Three new stores are to be opened in the second half and the broker notes the group is only around half way to meeting its medium-term store target of around 80.

The result was just below Morgan Stanley's estimates but the miss is not considered material, considering the difficulty in forecasting six months for a company in a strong growth phase. The broker envisages both new and maturing stores are an opportunity for revenue growth and margin expansion.

With potential to more than double its store count and the benefits from scale, Baby Bunting should be able to maintain earnings growth above the market rate for a long time, Morgan Stanley suggests. The decline in the gross margin was unexpected but the broker attributes this to a shift in mix that resulted in higher sales, and believes this shows how the company continues to invest in price to expand its market share.

The industry is highly fragmented and the broker believes the competitive advantage of Baby Bunting will only strengthen as it extracts the benefits of scale.

Risks to the outlook include a competitive threat from online and international retailers and a depreciation in the Australian dollar which increases buying prices. Morgan Stanley also notes there is a risk the retailing of baby goods proves too hard to corporatise effectively while the Australian consumer environment remains challenging.

Baby Bunting has one Buy rating (Morgan Stanley) and two Hold on FNArena's database. The consensus target is $2.81, suggesting 22.3% upside to the last share price.

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article 3 months old

JB Hi-Fi Reliant On Good Guys

Several brokers question whether electronics retailer JB Hi-Fi is too reliant on a smooth integration of The Good Guys in its outlook.

-Near-term outlook supported by strong housing but how long will the tailwind last?
-Closure of Dick Smith provided benefits in the first half which will dissipate
-Positioned well to compete with any potential offshore entrant

By Eva Brocklehurst

Electronics retailer JB Hi-Fi ((JBH)) posted a strong first half result, but several brokers question whether there is too much reliance on the successful integration of The Good Guys and synergy targets in the outlook.

Like-for-like sales rose 9% in the Australian business, supported by market share gains and margin improvement. The Good Guys, in JB Hi-Fi hands since November, delivered sales growth of 1%, a result lauded by brokers given the disruption from the acquisition and transition. The main disappointment was the New Zealand business, although UBS notes the impact was relatively light.

The broker upgrades forecast by 6-9% for FY17-19 to reflect the results and the industry consolidation. A more rational competitive backdrop is expected, given the closure of Masters and Dick Smith. The broker's forecasts are now in line with revised revenue guidance and slightly ahead of the top end of net profit guidance of $200-206m.

Uncertainty Over The Good Guys

The near-term outlook is supported by tailwinds from housing, market consolidation and potential upside to synergy targets from the integration of The Good Guys. UBS believes earnings risk remains to the upside and reiterates a Buy rating. The main risk on the downside is a sharp correction in housing, an aggressive new entrant in the market such as Amazon, or a hiccup in the integration of The Good Guys.

These are the very uncertainties that Credit Suisse highlights. Concerns centre on the extent to which the closure of Dick Smith provided benefits in the first half, the magnitude and potential longevity of the recent housing tailwind and the profitability of The Good Guys on a sustainable basis. The broker suspects it will take some time to become confident in the earnings trajectory for The Good Guys.

FY17 guidance is for $5.58m in sales, with a strong start observed in the second half, as January like-for-like sales are up 7.2% for JB Hi-Fi and up 3.5% for The Good Guys. Morgans is unconcerned about the integration of The Good Guys, or that like-for-like sales growth may moderate as the demise of Dick Smith is cycled.

Ord Minnett, too, has few qualms. The broker cites upgraded sales guidance and upside risks to FY17 net profit guidance. The acquisition of The Good Guys provides valuation support for the stock and earnings growth is forecast to be strong in the medium term as synergies are realised. Despite execution risks, especially with a significant number of joint-venture partners that are leaving the business, Ord Minnett is confident the transition can be well managed and retains an Accumulate rating.

Morgan Stanley is not so sure that the numbers for The Good Guys add up. Analysis of the metrics on a per-day basis shows costs have likely been pulled forward. JB Hi-Fi has indicated no synergies were booked during the period of ownership and the broker believes this will be an issue in 12-18 months time when this period is lapped.

Valuation Considered Full

The company's sales guidance implies that comparable store sales growth slows to 5.5% on average in the second half and Credit Suisse moderates its growth estimates further, to 2.6% and 2.0% for FY18 and FY19 respectively. Given recent share price appreciation, the broker downgrades to Underperform from Neutral.

Morgans believes the company's low-cost model and the increased power of the combined group positions it well to compete domestically against any potential offshore entrant. Hence, the broker finds nothing to fault in the stock's performance and downgrades to Hold from Add simply on valuation.

Citi suspects growth will be challenging to match in the second half and FY18, as the benefit from Dick Smith fades. The broker suspects the first half was the likely peak in like-for-like sales growth and believes this rate will halve for JB Hi-Fi Australia in the second half, to around 4.4% on its calculations.

The broker also expects the uplift in gross margins will not be repeated in the second half. The lift in gross margin was the largest first half increase since the first half of FY11 and gross margin stands at the highest level since the first half of FY06.

Morgan Stanley is another that believes the stock's valuation is full as margins are approaching the peak of the cycle. The broker compares JB Hi-Fi's operations with world class retailers and believes it will take a long time for this business to be usurped. There is little concern, therefore, about any entry by Amazon into Australia, although the broker acknowledges consumer electronics changes can happen quickly.

Macquarie expects The Good Guys should begin to contribute to the longer term earnings outlook from mid-year and forecasts JB Hi-Fi to deliver three-year compound growth in earnings per share of 11.8% to FY19. Evidence of strong ongoing sales growth has partially dampened concerns about the sustainability of growth as the benefits from Dick Smith are cycled, although the broker accepts this will not be confirmed until the fourth quarter of FY17.

Moreover, comparable store sales growth and growth in January suggest additional sources of growth are there beyond the closure of a competitor. Online sales continue to experience strong growth in the first half, up 40.4% and now represent 3.8% of total sales for JB Hi-Fi Australia. This is up from 3.0% in the first half, Macquarie observes.

FNArena's database shows three Buy ratings, four Hold and one Sell (Credit Suisse). For consensus target is $30.76, suggesting 7.1% upside to the last share price. Targets range from $26.49 (Credit Suisse) to $32.80 (Macquarie). Week what The dividend yield on FY17 and FY18 forecasts is 4.1% and 4.6% respectively.

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article 3 months old

Treasure Chest: Is Treasury Wine Under-Appreciated?

One broker believes the market is underestimating the opportunity available for Treasury Wine Estate as the Chinese discover Australian wine.

- Morgan Stanley upgrades
- China under-appreciated
- Americas to turn around


By Greg Peel

A couple of years ago, Treasury Wine Estates ((TWE)) was unloved. It has not been a great journey for the company both before and after it came into existence as an individually listed entity.

Many moons ago, wine conglomerate Southcorp though it was on a winner in consolidating many well-known Australian wine brands and jumping on the bandwagon of popularity of Aussie wines overseas. Unfortunately for Southcorp, that race had already been run. Aussie wines were already becoming “so last year” in the likes of the US and the UK.

Southcorp responded by "merging" with beer giant Foster’s – a move which was to ultimately bring down the company’s CEO and force Southcorp to be broken up. The more valuable beer business was sold off to a multinational. The remaining, out-of-favour rump of a wine business became Treasury Wine Estate.

Even in its early life, Treasury suffered from excess inventory issues, particularly in the US. The market refused to get behind the company, despite one analyst famously suggesting the stock was worth $10 on the strength of the Penfolds brand alone (the share price was half that at the time). That analyst eventually conceded defeat, around about the time Treasury decided to pour all its excess inventory of cheap coiffers down the sink.

That move signalled the beginning of a recovery. The share price has since exceeded $10, no doubt leaving one analyst torn between being bitter and smug. While cheap and cheerful Aussie wine retains a level of balanced popularity in the US and UK, among domestic and other imported offerings (including from South America and Eastern Europe), premium Aussie wine sales have failed to excite. But then along came China.

The average Chinaman’s tipple of choice has to date been beer or baijiu, the latter being a grain-based spirit boasting 40-60% alcohol by volume. But as the well-known tale of the growing Chinese middle and upper class plays out, the Chinese are now embracing wine. And in particular, Aussie wine.

According to a survey conducted by the analysts at Morgan Stanley, Chinese consumer preference is undergoing a long-term gradual shift from beer/baijiu to wine. And the Chinese are not like the Yanks and Poms who lean towards those cheap and cheerfuls. The Chinese prefer wine priced abovef RMB1000. When Aussie wine first hit England, it was all about keeping the price point under ten pounds.

The survey also found Aussie wine is growing in popularity at the expense of French wine. All this is pointing to potential growth upside for Treasury Wine exports. The company is further supported by Aussie wine as yet being hard to find in China, and by a broad-based presence in the country that can help alleviate that issue.

Having conducted the survey, Morgan Stanley now believes the market is under-appreciating the upside available for Treasury Wine in China.

There has been little new news out of the company since its AGM in November. No trading update or specific guidance was provided at the meeting but management was very upbeat, probably because, brokers suggested at the time, wine prices were on the rise. Management introduced a long term aspirational earnings margin of 30%. The general feeling among analysts was that this was a bit pie in the sky.

The biggest problem for Treasury Wine remained the underperforming Americas. On this subject, Morgan Stanley notes the company is now placing a greater focus on “priority” brands, cost discipline, and divestment of commercial volumes. The analysts believe the Americas business is well placed to turn around.

As a comparison, Treasury Wine generates 17% higher sales per litre than global beverage giant Constellation Brands, the analysts note, but 37% less profit per litre. Constellation is generating the sort of margins Treasury is aspiring too, and Constellation is thus showing it’s not beyond the realms.

Coming back to recent price rises for Aussie wine, Morgan Stanley notes the company is highly leveraged, such that a price rise for Penfolds falls mostly to the bottom line. Treasury lifted prices by 8-17% in October. If similar 25-30% mark-ups are assumed, retail prices in China and Hong Kong are at a 20-60% premium to Australia, the analysts note.

Morgan Stanley has upgraded its recommendation on Treasury Wine Estate to Overweight from Equal-weight, lifting its share price target to $13 from $10. This puts Morgan Stanley’s target well ahead of the pack (of FNArena database brokers) that have not reviewed their numbers since November. The consensus target rises to $10.41.

Ord Minnett is the only other database broker to have a positive rating on the stock, albeit Accumulate, which is a shade less committed than Buy. All other brokers are sitting on Hold or equivalent ratings other than Citi (Sell), who sees the aspirational 30% margin goal as overly optimistic (or at least did so last year).

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article 3 months old

The Wrap: Online, Wealth Mgmt, Automotive

Domestic online media; Amazon in Australia; regulatory oversight of financial advisers; risks for automotive dealerships; booming electric vehicle sales.

-Are returns on invested capital sustainable for Australia's online media sector?
-Amazon entering Australia with a retail offering considered negative for incumbents
-Independent investment admin platform providers positioning as threats to incumbents
-Caution prevails as automotive dealer lending practices under scrutiny
-Lithium in strong demand in electric vehicles but excess supply still likely


By Eva Brocklehurst

Online Media

UBS is seeking answers to the question of investing in the online classifieds sector. The issue is about whether domestic online businesses are ex-growth and whether returns on invested capital are sustainable. Is there upside from international expansion?

REA Group ((REA)) may disappoint the market in FY17, UBS asserts. Performance versus expectations relies on second half volume outcomes, which are difficult to predict. The broker believes investors may not fully appreciate the potential for Australian residential revenue to re-accelerate in FY18, even without a rebound in volumes. UBS upgrades to Buy from Neutral and elevates the target to $56 from $52.

The broker notes Carsales.com's ((CAR)) domestic business is perceived as well entrenched, offsetting a lower earnings growth profile. Core domestic revenue growth has slowed to 5% in FY13-16 from 21% in FY10-13. The broker envisages incremental headwinds from retreating dealer profitability pools and competitive threats, and suspects recent initiatives may only be a partial offset. Rating is upgraded to Neutral from Sell with a $10.50 target.

The broker retains a Sell rating for Seek ((SEK)) and a $14.00 target. Drivers of domestic growth include yield, volume and new investments. UBS envisages limited near-term financial contributions from new earnings streams and, instead, expects initiatives will bolster the company's value for its two key stakeholders: hirers & applicants.

A strengthening of the network potentially adds placements but monetisation of a greater market share will be long-dated and the broker suspects consensus expectations for an expansion in margins of 8% in FY18 are unrealistic.

The broker believes, if the three companies could replicate their domestic models overseas, upside would be material, given the penetration of smart devices and rising wealth and urbanisation. On the other hand, market structures are also less favourable elsewhere and competition fiercer.


There is speculation that Amazon will enter Australia. Citi believes the probability has increased albeit this could be 2-3 years away, but the impact on Australian retailers could entail more than a 20% cut to earnings. The broker notes more detailed information has been forthcoming about the company's entry to Singapore in early 2017, with reports signalling Amazon is looking for a retail CEO.

Reports suggest more than 250 trademark applications across a wide range of retail categories have been made by Amazon. This could relate to the export of Australian brands to Asian markets. The broker conceives an entry in 2019 as more probable, given the need to build distribution centres and secure branded supply in Australia.

Citi expects electronics will be the most affected, with earnings declines of 23% predicted for JB Hi-Fi ((JBH)) and 19% for Harvey Norman ((HVN)). This would be closely followed by Myer ((MYR)) at 18% and Super Retail ((SUL)) at 17%.

Wealth Management

Shaw and Partners notes the consequences of increased regulatory oversight has meant Australian financial advisers need to evaluate their business models and, most probably, implement a fee-for-service, and annuity-style business model rather one based on transactions. The main beneficiary from the changing landscape is the customer, with cheaper fees, upgraded transparency and improving advisor education for giving retail advice.

The broker notes a number of independent investment administration platform providers which generate revenue through fees, such as HUB24((HUB)), Praemium ((PPS)), OneVue ((OVH)) and the unlisted Netwealth have experienced notable growth in recent times, positioning as competitive threats to the incumbents such as the banks, AMP ((AMP)) and Macquarie Group ((MQG)).

The broker believes their success has been driven by regulation favouring independent financial advice, competitive pricing and the growth in separately managed accounts (SMAs). Most importantly, their nimble technology has resonated with the advisor community. Nevertheless, the broker believes future growth will be hard to come by, as competitive pressures intensify and pricing models evolve.

The broker believes administration fees will evolve to a flat structure as platform technology becomes commoditised. As well. regulatory burdens will weigh on profit margins and achieving economies of scale will be hugely important for the longevity of the business and industry. The broker initiates coverage of Fiducian ((FID)) with a Buy rating and $4.60 target, Managed Accounts Holdings ((MGP)) with Hold and target of $0.33 and HUB24 with a Sell rating and $4.10 target.

Automotive Dealerships

Further data has reinforced some of the risks facing automotive dealerships. Morgan Stanley also notes BMW Finance will pay $77m to compensate customers for lending failures, which should act as a warning to other finance companies. VFACTS data has shown further underperformance in Western Australia, which is a negative for Automotive Holdings ((AHG)).

Concerns about lending practices have been underscored by the update from Carsales.com at its AGM, where the company indicated its financial services arm sustained borrowing capacity reductions in the fourth quarter of FY16 which continued into FY17. While this is mainly from BMW Finance, which provides finance through Strattons, Morgan Stanley suspects other lenders have been more cautious as well.

The broker believes tightening consumer credit will pose a headwind to new car sales, which are normally financed. The broker is uncertain of the outcome from the pending update on regulation changes from ASIC (Australian Securities and Investments Commission) but believes it will change the way finance is sold at dealerships, which will result in a period of instability as changes are implemented.

Electric Vehicles

Macquarie observes electric car sales are booming and will soon enjoy a large market share. This will have implications for a range of commodities. In 2015, China, North America, Japan and Europe, where the vast majority of such cars are purchased, accounted for 664,000 electric vehicle purchases, more than double the number of 2014. Between January and October this year Macquarie estimates year-on-year growth was another 48%.

The broker believes such sales growth can only be maintained with some difficulty. In 2015 in Europe the increase owed a lot to customers buying ahead of the expiration of generous subsidy schemes in markets such as the Netherlands and Sweden. This year, although many incentives remain, some appear to be expiring at the end of the year. Still, the impact of the burgeoning market is expected to be felt over a long period.

What are the commodities being impacted? So far electric vehicles are pitched at the small end of the market, with limited range or, as with Tesla, a decent range at a higher price point. None are cost-effective compared with standard vehicles as yet. Macquarie estimates around 14% of global lithium demand will be accounted for by electric vehicles this year. Over the long term, average battery capacity should grow.

Chinese lithium spot prices have been falling since May following a substantial rally. Inventory overhang has been blamed. The broker does not believe growth in the electric vehicle market will be fast enough to absorb a wave of supply coming from Australia and elsewhere over the next few years. Nickel, unlike lithium, is used in two of the five prevailing lithium ion battery chemistries.

The demand case for nickel is much less compelling. Assuming that around 50% of electric batteries contain nickel, nickel demand could grow to 38,000t in 2021 from around 10,000t in 2016. Macquarie expects strong growth, but from a low base.

Cobalt is more tied to consumer electronics and China's moves to secure raw material. Given a dependence on Democratic Republic of Congo for supply, there are challenges for its use in electric vehicles and the broker suspects substitution risk is high. Macquarie assumes global cobalt demand for batteries grows at around 5% compound to reach 53,000t by 2020.

Platinum group metals derive most of their demand from autocatalysts, which are found in vehicles with internal combustion engines. The situation is bleak for these metals as both platinum and palladium are expected to experience significant declines in volumes, as autocatalysts from scrapped cars are recycled.

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article 3 months old

Outlook Weakens Significantly For Bellamy’s

Infant formula distributor Bellamy's Australia issued a substantial downgrade to forecasts and brokers shave large chunks off growth expectations, while defending a2 Milk.

-Management attributes downgrade to market being flooded with discounted stock
-Share price reflects some assumption of a return to growth in FY18
-Yet, is volume dislocation the whole story?


By Eva Brocklehurst

Infant formula and food product distributor Bellamy's Australia ((BAL)) disappointed the market with a substantial downgrade to FY17 revenue forecasts at its trading update. Brokers have shaved large chunks off their growth expectations and several have downgraded the stock.

China's Singles Day and associated sales did not pan out to the company's expectations. There was also a belief that Singles Day would absorb excess competitor inventory, which was being heavily discounted in the market, and this did not occur. Regulatory changes are also having an impact, having been successfully managed in the second half FY16.

Morgans downgrades FY17 profit estimates by 45% and now expects FY17 net profit to fall 12%. The company has a strong brand, leveraged to favourable industry dynamics, but while short-term uncertainty prevails the broker downgrades to Hold from Add and reduces its target substantially, to $7.55 from $16.65.

Regulatory changes in China are causing brands which will not meet the December 31, 2017 CFDA (China Food and Drug Administration) approval deadline to heavily discount excess stock. Morgans accepts the company's guidance may prove conservative, recognising Bellamy's is expanding its distribution points in China while its formula shelf space at Coles ((WES)) has more than doubled.

The broker anticipates earnings growth will resume in FY18 but stresses that accuracy in forecasting is low at this point. The main upside risk to forecasts is corporate activity or sales in the second half coming in stronger than expected.

China remains a large opportunity. From January 1, 2018, following a reduction in the number of brands a manufacturer can produce, industry experts expect that around 2,000 infant formula brands will be reduced to around 300. This will create barriers to entry, and suggests that the company's products will receive more shop space. Management continues to expect temporary volume dislocation until regulatory registrations are completed in China.

As momentum has slowed materially and the market dislocation from regulatory changes continues, Ord Minnett also lowers its recommendation to Hold from Buy. Brands unlikely to gain registration are liquidating inventory and flooding the market with discounted stock, while the company is progressing well with its preparation for registration. Ultimately, Bellamy's Australia expects the changes and reduction in brands will have a positive effect on its premium product offer.

With the company guiding for profit to decline in FY17, the broker expects the stock will stand still for a period. Ord Minnett downgrades forecasts for earnings per share by 50-60%. Its target declines to $7.26 from $20.00.

Bell Potter was disappointed with the update. The broker downgrades net profit forecasts for FY17 by 42% and FY18 by 45% and reduces its target to $7.64 from $16.06. Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, downgrades to Hold from Buy.

Bell POtter envisages that with sales growth slowing, a step-change in marketing is likely to be ongoing rather than be a one-off. The company had previously highlighted investment of $15-20m in FY17. The broker believes the share price is reflecting, to some degree, an assumption of success in turning the business back to growth in FY18-19.

Citi has a Sell rating, lowering its target to $6.00 from $12.10. The broker believes investors should wait for cheaper entry points to the stock, having initiated coverage in late October with the same rating. The broker would want to witness an improvement in brand momentum and Chinese industry conditions before turning more positive.

Relatively, a2 Milk ((A2M)), which also provides infant formula to China, is doing better. Credit Suisse, which does not cover Bellamy's, noted a2 Milk has lifted its revenue run rate in the first half and also demonstrated stronger margin guidance for FY17. While the stock has felt the impact of the downgrade from Bellamy's, this now represents a buying opportunity for a2 Milk, in the broker's opinion.

CLSA also maintains a preference for a2 Milk and is wary of blaming the whole picture on channel disruptions, suspecting the downgrade to Bellamy's outlook is reflecting market share losses while a2 Milk was unhindered by the regulation-led market dislocation. Moreover, a2 Milk has a more differentiated product line and a unique proposition to the market. CLSA, not one of the eight brokers monitored daily on the database, retains an Outperform rating for Bellamy's.

Goldman Sachs is another broker that believes the majority of the downgrade is because the company lost share to other brands in China, particularly to a2 Milk, as signalled by Tmall/Taobao data and feedback from industry participants. Given the company's cost disadvantage versus regular infant formula brands, because of higher costs for organic labelling, the broker believes its ability to compete effectively in a falling price environment is challenged.

Goldman envisages limited catalysts for a significamt recovery in volumes or margins. The broker, not one of the eight monitored daily on the database, has Neutral rating and $6.20 target (reduced by 53%).

Bellamy’s Australia is a Tasmanian company which distributes and markets certified organic infant formula and food products through Australia, China and South East Asia. It sells three infant formula products and 47 food products and is principally a brand manager, with processing and, in some instances ingredient procurement, outsourced to processors.

The FNArena database shows two Hold ratings and one Sell. The consensus target is $6.94, suggesting 3.4% upside to the last share price. This compares with $16.25 ahead of the update.

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article 3 months old

RCG Corp Treading Water In FY17

Footwear retailer and distributor RCG Corp has reiterated earnings guidance for FY17, signalling low growth in its key brands.

-Accelerated roll out of Accent and Hype DC stores counters slow like-for-like sales at The Athlete's Foot and Hype DC
-Growth in The Athlete's Foot affected by decline in "lifestyle" categories and cool start to spring
-Advantages in vertical integration, platform synergies but several brokers consider the stock fully valued


By Eva Brocklehurst

Footwear retailer and distributor, RCG Corp ((RCG)), is treading carefully in FY17, reiterating its earnings guidance and signalling margins are likely to expand in the Accent division. Brokers believe the company is largely on track to achieve earnings guidance of $90m.

Slow like-for-like sales for the Hype DC and The Athlete's Foot divisions are countered by the accelerated roll-out of stores for Accent and Hype DC. Accent, which is around 60% of group earnings, has posted year-to-date like-for-like sales growth of 7%. Earnings margins are expected to be 0.5-1% higher. The company is now guiding to an increased 41 new Accent stores in FY17, of which 21 have already opened.

While the increase in new store guidance is positive for the FY17 outlook for Accent, Morgans believes this is simply a pull-forward of earnings for future years, assuming long-term store targets are unchanged at 249 by 2020. Gross margin strength has led management to upgrade its earnings margin guidance for Accent from flat to 50-100 basis points higher from FY16 and the broker believes the division is well placed to achieve an increase of 100 basis points.

The broker lowers like-for-like sales assumptions for The Athlete's Foot. The company expects sales to reveal low single-digit growth over the remainder of FY17. Sales are in line with expectations over the year to date, but growth has been trammelled by a decline in lifestyle categories, such as running shoes, Moelis observes.

This is both a function of the re-positioning of the business and also cooler-than-usual start to spring/summer which has affected sales of sandals. The broker estimates flat like-for-like sales in the first half and 2.5% sales growth in the second half, taking into account the importance of the "back to school" period.

RCG brands, meanwhile, have experienced flat wholesale sales and this is expected to be the case for the remainder of FY17. Moelis, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $2.00 target.

Morgans anticipates RCG brands will grow by low single digits. The company is still guiding to like-for-like sales growth in FY17 of 5% for Hype DC, which implies a strong Christmas period and second half. Growth in this division the most heavily skewed to the second half, and therefore the most questionable in terms of the ability to achieve the target, Morgans calculates. The broker assumes 3.5% like-for-like sales growth in FY17, which requires 7% growth in the second half.

Morgans downgrades RCG Corp to Hold from Add, reducing its FY17 forecast price/earnings (PE) estimate and moving to a 50:50 PE/DCF (discounted cash flow) weighting on the stock. Target falls to $1.62 from $1.94.

The main risks envisaged are the integration of Hype DC, a slowing in consumer spending, increased and irrational competition, as well as a further material decline in the Australian dollar. Also, Morgans notes risks include a potential loss of distribution licences with Wolverine World Wide and VF.

Bell Potter observes trading is solid across the main retail platforms and the business is well-positioned for Christmas and the critical month of January. The company's advantages lie in its vertical integration, the growth prospects in its main markets and the synergies between its platforms. These support the broker's Buy rating. Bell Potter, not one of the eight stockbrokers monitored daily on FNArena's database, retain a $2.15 target.

Citi trims its FY18 estimates by around 4%, to reflect expectations that growth will slow. The broker retains a Neutral rating, noting the stock is trading at 18 times FY17 estimates for earnings per share, which represents a 30% premium to domestic discretionary retail peers. The broker's target is $1.64.

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article 3 months old

Positive First Quarter For Myer But Headwinds Prevail

Department store Myer flagged a positive performance in the first quarter but most brokers are wary of the headwinds prevailing in retailing.

-Guidance assumes no significant deterioration in consumer sentiment
-New Myer initiatives appear to be driving sales growth
-Clearance activity heightened after "poor" spring


By Eva Brocklehurst

Department store Myer ((MYR)) has outlined a rather upbeat first quarter performance and guided to an expansion of its operating earnings margin and growth in net profit in FY17.

Like-for-like sales rose 1.6% in the first quarter on a comparable store basis and 0.6% on a total sales basis, with the difference being the absence of the Warringah Mall, Hobart and Wollongong stores from the comparable sample.

While acknowledging an opportunity for management to re-shape Myer after a poor financial performance over many years, Ord Minnett still expects it will be a challenge in a difficult industry environment, as guidance assumes no significant deterioration in consumer sentiment. Credit Suisse concurs, suggesting that material downside risk in FY17 lies with the potential for consumer spending to slow further because of the weaker labour market.

The broker expects the impact of initiatives on merchandise and store refurbishment should be greater in FY17 and lead to an acceleration in reported sales growth. The broker believes it also likely that profit will grow at a faster pace than sales, because of the company's low profit margin.

Morgan Stanley observes the company has lapped a tough comparable period and that its performance was stronger than peers, which signals that the New Myer strategy is gaining traction. The broker envisages valuation support emerging, given the recent pull back in the share price, yet also remains cautious regarding Christmas trading, given the multiple headwinds for retailing.

Given cost growth to be in the range of 2-3%, Myer needs to accelerate its top line sales growth to achieve its targeted margin expansion, in the broker's calculations.

Deutsche Bank also considers the first quarter a reasonable result, especially as strong comparables were cycled. The broker's first half forecast implies 2.3% sales growth in the second quarter, which it acknowledges would require an acceleration, but the comparison will become easier, and the Warringah refurbishment should provide a tailwind.

The broker also believes like-for-like sales growth is reasonable in a context of the unfavourable weather over the period. The update provides further evidence that the new initiatives are driving sales growth, although Deutsche Bank expects gross margins will continue to decline as a result of the concession mix, with the cost of doing business being reduced to make up the difference.

While the stock is not expensive, in the discretionary retail space the broker prefers exposure to Harvey Norman ((HVN)), which trades is only a modest premium and offers strong earnings growth. Deutsche Bank reiterates a Hold rating.

Citi retains its Buy rating on Myer and believes the sales growth trajectory should improve, impressed that the underlying trend is better on a two-year stack basis. The broker also flags the fact that growth relative to David Jones has improved.

Sales growth was also more resilient than Macquarie expected and the recent sell-off in the stock is considered overdone. That said, clearance activity has been higher for the industry this spring and bodes poorly for margin risk over the first half, in the broker's opinion. The company has noted the first quarter included a “Spring Clean” clearance for brands which Myer no longer stocks and this took place at significant mark-downs in price.

UBS also found the result pleasing, given recent peer commentary suggests market trends have slowed. The positive impact from the continued rationalisation of unproductive space is also a positive. UBS lifts net profit estimates to reflect slight changes to guidance, and beyond FY17 expects around 11% compound growth in earnings per share, which is modestly below management's medium-term targets.

The broker has become incrementally more positive on the stock following the update and believes management is making good progress on the turnaround. However, risks remain around international players and more competition in the market, as well as rising costs and overall execution.

FNArena's database shows two Buy ratings and five Hold. The consensus target is $1.31, suggesting 7.5% upside to the last share price targets range from $1.00 (Morgan Stanley) to $1.50 (Ord Minnett). The dividend yield on FY17 and FY18 forecasts is 4.4% and 4.9% respectively.

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article 3 months old

Domino’s Pizza Dishes Up Strong Growth, Again

Domino's Pizza impressed most brokers with its AGM update, revising up long-term margin targets and earnings growth guidance.

-Persistent strong growth in Australasia a signal for success in Europe as digital platforms take hold
-New menu launched to capitalise on $700m milkshake/smoothie market in Australia
-Limited tolerance for any performance that does not keep up with market expectations


By Eva Brocklehurst

Domino’s Pizza Enterprises ((DMP)) impressed most brokers at its AGM indicating it has taken share in its category, with very strong sales and earnings growth persisting in Australasia.

The company has raised its guidance for operating earnings growth in FY17 to 30% from 25%, while its underlying profit guidance is unchanged at 30%. Domino's has increased its long-term margin and store network targets. Earnings margins in Australasia are now targeted for 45% within six years and in Europe for 25% within five years. The 2025 store target is increased to 4650, with 2600 envisaged for Europe, from the current store count of 2022.

Ord Minnett notes multiple growth drivers are being enabled by technology and product innovation, but the stock's valuation is elevated. This is key to the broker's Hold rating as earnings expectations are already high, leaving limited room for error, and there is reduced tolerance for any performance that does not materially exceed market expectations rather than Domino's guidance.

Deutsche Bank found the update more mixed, noting sales in Europe have slowed while Japan has improved just slightly, and attributes the very strong growth in sales in Australasia in the first 16 weeks of FY17 to the success of the new menu. Yet, the absence of an upgrade to profit guidance disappointed Deutsche Bank.

The broker is also more cautious about the expectations for growth in margins, believing wage pressures across the system will temper expansion. Still, Deutsche Bank expects sales growth will be strong and envisages considerable opportunities for rolling out new stores and efficiencies, particularly in Germany. Despite the strong momentum, risks to system profitability from rising wage costs means the broker maintains a Hold rating.

Morgans has fewer concerns, sticking with its Add rating. In a market devoid of much top line growth Domino's Pizza delivers in spades, the broker asserts. The most bullish aspect, in the broker's view, is the upgrade to long-term earnings margin targets in Australasia and Europe. The broker suspects unchanged net profit guidance was partially due to a higher tax rate being expected in FY17.

The persistence of strong growth in Australasia is expected to bode well for Europe and Japan as these territories start to benefit from digital platforms. The conversion of all Joey's Pizza stores is expected by the end of 2017 and Pizza Sprint is expected to be completed by FY17. Phase one of the new menu has been launched, which includes thick-shakes and ice cream. These items, to be rolled out fully in Australasia by July 2017, will attempt to capitalise on what Morgans calculates is a $700m milkshake/smoothie market in Australia.

The stock continues to be favoured by Morgan Stanley, which welcomes the update and believes this is only the start of the upgrade cycle. Long-term margin upgrades carry more significance than higher postulated earnings, the broker believes, and Australasia forms a blueprint for other regions, especially Europe given similar consumption patterns, competitive landscape and online propensity.

The broker believes Europe will develop at a faster rate because it is rolling out already-proven projects that have been optimised, rather than as in Australia where the company was a pioneer. The broker is also not concerned about the recent slowdown in Europe, where same-store sales growth has slowed to just over 3% in the past 11 weeks of FY17 from over 5.8% in the first five weeks. The unusually warm late summer could have impacted the outcome as much as 4-5%, the broker believes.

Macquarie observes the company is going from strength to strength in Australasia. The collapse of Eagle Boys Pizza in July this year probably provided the tailwind for the stronger-than-expected growth in the first 16 weeks of FY17. The collapse also provides an opportunity for the new owners of Pizza Hut in Australia, which will be looking to pick up a number of the stores.

While a reinvigorated competitor with deeper pockets may present a potential risk to Domino's Pizza, Macquarie expects Domino's investment in technology will help mitigate increased competition. The broker acknowledges the enterprise bargaining agreements currently in train will lead to a material increase in costs but suspects these will be largely incurred by franchisees.

Domino's Pizza expects the impact of wage rises to be absorbed by the technology it has introduced over the last two years. The company continues to invest in further growth and expects to continue rolling out new menus, and new stores (175-195 forecast in FY17).

Goldman Sachs envisages the company's leading online/digital capability and operational excellence will entrench its competitive edge and drive market share and support growth in new markets but believes these positives are largely factored into the stock. The broker, not one of the eight monitored daily on the FNArena database, retains a Neutral rating.

There are three Buy ratings and three Hold on the database. The consensus target is $75.23, suggesting 7.2% upside to the last share price. This compares with $77 ahead of the update. Targets range from $56 (UBS) to $95 (Morgan Stanley).

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article 3 months old

Weekly Broker Wrap: Jobs, Retail, Real Estate Listings, NBN And Equity Strategy

Employment numbers; consumer spending; slot manufacturers; real estate listings slowing; momentum in NBN share; is it too early to ditch yield stocks?

-Lower housing turnover foreshadowing weaker spending growth, Credit Suisse believes
-Aristocrat seen increasing share in North America, Ainsworth subdued
-Soft listings likely to have adverse impact on REA and Domain
-Telstra enjoying solid gains in NBN share, Vocus accelerating
-Bond yields unlikely to rise much and Deutsche Bank still values yield stocks


By Eva Brocklehurst


Commonwealth Bank analysts have examined monthly changes in employment, which show that annual employment growth has been propped up by two very big increases in October and November 2015. According to the Australian Bureau of Statistics, employment lifted by 49,000 in October and 65,000 in November. These very large monthly changes were both two standard deviation events, the analysts note.

While concerns abated about the reliability of the data with the passage of time, the analysts are reminded that these are now about to drop out of the annual calculations. They expect the annual pace of employment growth to slow to just 0.7% in November from 1.4% in September.

Such an outcome is expected to mean analysts and policy makers focus a little more on the pace of jobs growth and what this is likely to signal for output, inflation and rates.

Retail Consumption

Credit Suisse suggests, from its observations, that retail spending has stalled heading into the end of year despite official data that points to growth in labour income and solid gains in house prices. The broker believes the official data overstates the strength of the labour and housing markets and stagnation in consumer spending is consistent with an alternative view.

The broker observes a drop-off in housing turnover, even abstracting what is happening in house prices. Lower turnover foreshadows weaker spending growth, even if house prices do not fall. Credit Suisse suggests the Reserve Bank of Australia should pay more attention to the state of consumer spending. This is because the consumer still accounts for around 60% of GDP.

The broker's leading indicators point to slower spending growth in the foreseeable future, in part because labour and housing market conditions are softer than the official data suggests but also because turnover in housing is dropping away. Hence, Credit Suisse believes the RBA will need to cut rates further.

Slot Manufacturers

From a survey of the North American slot machine market in the September quarter, UBS notes that Aristocrat Leisure ((ALL)) added 815 leased games. The survey indicated that Aristocrat achieved 27% ship share in the quarter. This was 11% above its trailing 12-month ship share.

Ainsworth Game Technology ((AGI)) achieved 2.3% ship share in the quarter, 3% below its 12-month trailing average, which compares with 7% in the prior quarter based on the survey. The survey is consistent with the broker's view that Aristocrat is increasing its share in North America and provides further confirmation for Ainsworth's update regarding its soft quarter in the US.

Real Estate Listings

New listings in the national property market declined 3% in October, a slowing from the flat levels observed in September. This indicates a weak start to the second quarter and Deutsche Bank expects a continuation of this soft listing environment will have a further adverse impact on both REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain. The broker lowers forecasts and price targets for both stocks to take this into account.

New listings growth in the capital cities was slightly lower than the national numbers, with Sydney continuing to show the most significant decline, down 16%. Melbourne was down 4%. The broker acknowledges this may simply be a reflection of a low point in the volume cycle rather than because of any structural factors.

UBS also notes a post-election rebound in residential new listing volumes still has not eventuated. This means there is downside risk to this broker's estimates for REA. Relative weakness in Sydney and Melbourne may impact overall yields for REA, given the higher absolute prices of depth products in these markets.

NBN & Telcos

From its observation of ACCC data, UBS gauges Telstra ((TLS)) continues to enjoy solid gains, with its share in the September quarter helped by the acceleration of the FTTN roll out. Vocus Communications' ((VOC)) share of NBN market growth is accelerating and UBS believes this reflects a strong portion of industry additions. As the company's NBN subscriber base builds, reducing churn will become an increasingly important driver of share growth, in the broker's view.

Shaw & Partners notes Telstra is defending its market share aggressively, adding 61% of NBN subscribers in the September quarter versus its market share of around 47%. Vocus is also doing well, the broker observes, adding 11.3% of subscribers versus its market share of around 7%. TPG Telecom's ((TPM)) quarterly additions are below its natural market share, the broker notes, although it is doing well in metro areas.

Goldman Sachs agrees that Telstra is growing its overall NBN share, now considered to be over 50%, while Vocus is building momentum. The broker highlights the fact that the latter's overall share is continuing to increase despite the company not looking to actively migrate existing subscribers to the NBN.

The broker also notes a relatively soft subscriber performance from TPG Telecom, offset by improved plan mix. Goldman believes up-selling to high-speed plans is important for the company's profitability in an NBN world. That said, TPG's iiNet looks to have had a soft quarter, with TPG's share in Western Australia declining by around 115 basis points to 38%.

Equity Strategy

Deutsche Bank believes it is too early to ditch yield stocks even though these have come under pressure in the past three months, coinciding with the rise in bond yields. The broker is not convinced yield stocks will fall further and believes it is appropriate to include a selection of these in portfolios.

The broker's US strategist highlights the still-substantial gap between dividend yields and bond yields. A hike to the US Federal Reserve's funds rates in December is considered likely, but the broker does not believe this automatically means bond yields should move higher.

In 2004 bond yields barely moved when the US Fed was raising rates, weighed down by a glut in global savings. Now the broker observes there is a glut of central bank liquidity. Money is leaving Europe and going to the US, which can keep a lid on long rates.

The broker notes a divergence with Australia, as the US Fed seeks to hike rates while the RBA is likely to cut. Deutsche Bank also detects some recent softening in the Australian economy, slower growth across retail sales, hours worked and credit. The broker does not envisage bond yields rising much, removing a catalyst for more under performance.

Yield stocks may even trade a little rich, given their scarcity value in offering a decent real yield. The broker's portfolio has a selection of Stockland ((SGP)), Telstra, Sydney Airport ((SYD)) and APA Group ((APA)).

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article 3 months old

KFC Acquisition Fuels Collins Foods Potential

KFC franchisee, Collins Foods, has embarked on an expansion in Europe, acquiring 11 stores in Germany. Brokers are upbeat about the potential.

-Expansion provides potential for re-pricing of the company's growth profile
-Change in Yum! Brands strategy a spur for Collins Foods' growth ambitions
-Alleviates some concern over limited Australian opportunities


By Eva Brocklehurst

KFC franchisee, Collins Foods ((CKF)), has embarked on an expansion in Europe, acquiring 11 KFC restaurants in Germany for around $18.4m. The restaurants will be acquired directly from the franchisor, Yum! Brands, as part of that company's strategy to reduce direct equity interests in KFC restaurants.

Brokers observe, with a relatively small up-front investment, the acquisition provides Collins Foods with a growth option outside of its maturing Australian market. KFC is under-represented in Germany, with just 140 KFC restaurants in a country with a population of 82m compared with around 650 KFC restaurants in Australia with a population of 23m.

In Deutsche Bank's view, the acquisition has potential to cause a re-pricing of the company's growth profile, given there are some concerns regarding an ability to expand its portfolio since the entry of Restaurant Brands into the Australian market.

The broker assumes the acquired stores generate an earnings margin of 11% pre corporate costs. The broker does not incorporate more acquisitions in Germany into forecasts but notes the potential for further margin upside from increased scale. Deutsche Bank has a Buy rating and $5.20 target.

Canaccord Genuity has upgraded FY17 and FY18 earnings per share (EPS) estimates by 10% and 11%, respectively, following the inclusion of the acquisitions in its forecasts as well as an increased contribution from Sizzler Asia. This change in ownership strategy by Yum! Brands is considered to be a significant tailwind for Collins Foods. Yum! Brands intends to increase franchise restaurant ownership to 98% by FY18, from 77% currently.

Yum! Brands has 9,978 franchised and owned KFC restaurants, providing a significant opportunity for Collins Foods to scale up, in the broker's opinion.  Canaccord Genuity expects Collins Foods will benefit from compounding earnings accretion and expansion of its price/earnings ratio as the stock re-rates to a growth multiple.

Investors are expected to continue targeting companies with strong cash flows that are perceived to be defensive in relatively volatile times. The broker retains a Buy recommendation with a $5.66 target.

Moelis estimates the acquisition adds around 4% to EBITDA and 2% to EPS in FY17, with Europe making a progressively increasing contribution in subsequent years. This broker also envisages the acquisition alleviates some concern over limited growth opportunities in Australia. Evidence of a material number of new stores being added to the pipeline should provide the catalyst for further upside, in the broker's view. Moelis retains a Hold rating and $5.54 target.

UBS believes the entry into Germany will provide an opportunity to leverage the management experience of Collins Foods as well as improve margins. The broker notes that chicken-related fast food represents only 1.7% of the total market but is the strongest growing category.

The broker's initial analysis suggests accretion of around 2% on a full year basis, premised on revenue growth of 1.5% and earnings margins of 11%.  Nevertheless, in the domestic market UBS suspects the weakening macro environment in Western Australia could impact like-for-like sales growth for KFC in FY17. The broker maintains a Neutral rating and price target of $4.75.

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