Tag Archives: Consumer Discretionary

article 3 months old

JB Hi-Fi Well Supported

By Michael Gable 

The markets continue to look bullish here and our focus on stocks benefiting from low interest rates appears to be paying off with the banks performing spectacularly well and a nice market response to yesterday’s interim results from JB Hi-Fi ((JBH)). Despite a couple of negative leads from the US last week, our market has continued to power ahead.

We have the RBA interest rate decision today of course and markets appear to be pricing in another rate cut. Whether that occurs or not we wouldn’t be surprised to see today being a short-term high in the market while they take a much needed breather. Beyond the short-term movements, we still believe that focusing on companies exposed to lower interest rates, lower petrol prices, and a lower Aussie dollar is the key to making profits in 2015. This week we review the chart for JB Hi-Fi.
 


JBH has rallied nicely over the last few weeks and has now reached our first resistance level in the mid $17’s, which explains the intraday price action yesterday. We don’t view the sell-off form the high as a negative because of the fine run that it has had recently and it is most likely due to short-term profit taking. The short covering should continue in the stock and should continue to see it find more support. There is good support at $16.50, so any pullback there would represent a buying opportunity. A closing price above $17.50 would indicate a possible run up towards the high $19’s.
 

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

Mixed Outlook For Australia’s Retailers

-Myer's online appeal improves
-Flight Centre, Bunnings traffic grows
-Woolworths long-term is challenged
-Metcash faces more competition
-JB Hi-Fi, Super Retail, Pacific Brands struggle
-Lower petrol benefits food, gaming, travel
 

By Eva Brocklehurst

Christmas trading turned out to be not as bad as was feared heading into the silly season. UBS observes the influx of shoppers came late and had softened by early January. The broker's latest feedback suggests that sales progressively improved in December and were up around 8.0% and 16% year-on-year respectively in the final two weeks of 2014. By category, leisure and fashion stood out while electronics and household goods were mixed.

UBS has identified five trends from web traffic heading into Christmas. Momentum at Myer ((MYR)) accelerated, Dick Smith's ((DSH)) aggressive strategies won market share, offshore fashion names improved, growth at Flight Centre ((FLT)) accelerated as did web traffic at DIY names such as Wesfarmers' ((WES)) Bunnings. The broker observes Australian retailers are executing well and this should support sales growth over the next year. Online sales make up around 7.0% of all retail sales in Australia, although the rate of growth is slowing in UBS' analysis. A weaker Australian dollar and better execution by local retailers are given as reasons why international sales are ebbing.

Morgan Stanley's survey and analysis indicates Australian online retail spending will still be on the rise in 2019. The broker suggests 20% penetration is the critical point where adoption rates for prior technologies have accelerated. Morgan Stanley forecasts non-food online retail penetration at 12.9% in 2019, still some way of the aforesaid inflection point. While the search for cheaper products online is still the most important driver, this is diminishing. Only 53% of consumers stated that price was a top three factor in shopping online, down from 63% two years ago. Morgan Stanley attributes this to the efforts by Australian retailers to narrow price differentials.

The broker expects Myer to benefit most from increased online spending among the stocks under coverage. The online appeal of the brand appears to have improved significantly. Clothing and groceries are expected to be the categories to benefit most from the move to online shopping. Significantly, only 14% of those surveyed purchased fresh food online but 32% expected to do so in the next 12 months.

Store sales growth for the grocery category has improved but, as Morgan Stanley's analysis reveals, much of the improvement is from growth in the tobacco category, which is margin dilutive. The federal government announced four tobacco excise increases in 2013 to be implemented over four years. Tobacco consumption may have been in decline for many years but remains one of the largest supermarket categories, accounting for 7-8% of sales, so the timing of significant excise increases affect overall industry growth. After excluding the tobacco category Morgan Stanley observes supermarket sales growth only improved by 90 basis points compared with the headline data which suggests a 200bps improvement in 2014 against 2013.

Looking ahead, JP Morgan identifies some key issues facing investors in the retail sector. Woolworths' ((WOW)) share price has declined 22% from its all-time high in April last year and the question is about when it becomes attractive for the investor. While the current dividend yield of 4.8% appears attractive, because of a lack of large investment alternatives in the market JP Morgan considers the long-term outlook is challenged, with margins of 8.0% in food & liquor arguably unsustainable.

The broker also find it hard to determine just when Metcash ((MTS)) earnings will stabilise. The challenge is that its transition year of FY15 ends when the competitive environment in South Australia and Western Australia becomes more difficult, as Aldi expands in these markets where Metcash has its largest share. The risk in the broker's view is that FY15 may not be the base level and earnings could continue to fall. The broker suspects Myer may struggle to meet guidance as it faces more difficult comparables for the remainder of FY15.

JB Hi-Fi's ((JBH)) new CEO, Richard Murray, is also under scrutiny as to whether he can restore the premium price/earnings multiple the stock once enjoyed. JP Morgan suspects near-term announcements may continue to be negative. The broker is not optimistic about Super Retail ((SUL)) either, as its share price has fallen 43% from its peak in November 2013. Key issues in sports and leisure are unresolved and the ability of management to implement plans remains uncertain. Lastly, recovery continues to be fraught for Pacific Brands ((PBG)) which, while reducing complexity, continues to face rising sourcing costs.

The reduction in crude oil and the impact on petrol is a positive for consumers, in JP Morgan's view. The broker's analysis reveals the fall in the petrol price has more impact than a 25 basis point interest rate cut as more consumers buy fuel than have mortgages, the price is more visible than most other products and fuel is a higher proportion of spending for the less affluent consumer. The sectors likely to benefit from this are expected to be, gaming, restaurants and domestic travel while discretionary retailers are less likely to benefit.

Deutsche Bank does not believe lower petrol prices will "save" households. The big picture facing households has not changed and the broker believes this explains why the slide in petrol prices has had such a limited impact on sentiment. Wages growth is running only just ahead of inflation while tax bills are higher and employment growth is soft. None of this is likely to change, in the broker's opinion. Moreover, as a net energy exporter the other effects on Australia of lower oil prices are lower government revenues, which only adds to fiscal pressure. Ultimately a share of this pressure is borne by households.
 

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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

Upside For Wesfarmers


Bottom Line 17/12/14

Daily Trend: Up
Weekly Trend: Neutral
Monthly Trend: Neutral
Support levels: $39.61 / $36.66
Resistance levels: $43.01 / $45.75

Technical Discussion

Wesfarmers ((WES)) is engaged in retailing operations including supermarkets, general merchandise and specialty department stores. It is also involved in liquor and convenience outlets, retailing of home improvement and outdoor living products to name just a few. The Company operates in three main parts; Insurance, Industrial and retail. For the year ending the 30th of June 2014 revenues increased 4% to A$60.18B. Net income before extraordinary items decreased 25% to A$1.61B. Revenues echo a rise in demand for the Company's products and services due to encouraging market conditions. Broker/Analyst consensus is a comprehensive “Sell”. The dividend is 4.8%.

Reasons to remain bullish longer term:
→ Coles & Bunnings continue to perform well.
→ It has recently purchased Pacific Brands workwear division for $180m which should be a good fit for the industrial division.
→ Wes intends to open 70 new supermarkets over the next 3 years via Coles.
→ Returns could be boosted through the recent sale of its insurance business.
→ The company will benefit from any rise in the depleted price of coal.

Our headline last month was “Surged higher to take on resistance …” which meant we had to be on guard for an attempt at overcoming all-time highs.  Unfortunately buyers ran out of steam which has resulted in a significant retracement over the past few weeks.  Not that this moves us to a bearish stance over the longer term as it certainly doesn’t but it seems likely that further posturing is going to be required before another attempt at blue sky is seen.  That said, we do have bullish divergence on the daily time frame and the possibility of it developing on the weekly chart as well.  This is something we’ve started to see a lot of in various stocks over the past week or so.  It’s just a result of the broader market sell-off which has left many stocks looking severely oversold.  Like any pattern though the divergence needs to trigger before we can get too enthusiastic in regard to a decent rally unfolding.  Should it trigger on the weekly time frame a little further down the track then there is every chance that the zone of resistance just above $44.00 is going to be revisited which at the end of the day is exactly what we need to see before moving back to a bullish stance.  Bigger picture there is nothing not to like about Wesfarmers with a strong prior trend preceding the sideways consolidation that kicked in during October of last year.  All things being equal the next major move should be to the upside, albeit some patience is likely going to be required over the coming months.

Trading Strategy

An improvement in the coal market would be a big positive for WES and could well be the catalyst required to kick start the next leg higher.  We tend to focus more on the patterns and the technical side of the equation although when both fundamentals and the technicals align its time to sit up and take notice.  That isn’t the case yet but it’s something to look out for.  At this stage it’s still best to stand aside although more nimble traders could initiate positions following the bullish divergence triggering on the daily time frame.  The target at this stage is the lower boundary of the zone of resistance between $44.00 - $45.00.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Upside For JB Hi-Fi

By Michael Gable 

Last week saw a nice bounce in the Australian market, but we still maintain that there will be some more short term weakness before a more sustainable rally kicks back in. There is a growing feeling that further cuts in interest rates are just around the corner, with some economists predicting two rate cuts next year. This is clearly a long way from several months ago when there was consensus that rates would be going up in mid 2014. It’s a reflection of weakness in the economy of course, but attention needs to then focus on the beneficiaries of lower rates and that still remains high yielding stocks such as banks.

It also should benefit retailers such as JB Hi-Fi (we look at the chart in this week’s report). The Australian dollar dipped under US$0.83 this week and it appears to be heading towards support around US$0.80. Perhaps that would also signify a low in the Australian market as foreign money becomes comfortable investing back into Australian shares. So while many people are hoping that last week’s strength is the beginning of a Christmas rally, we may need to be a bit more patient and wait for a lower point in the market to get excited again.
 

JB Hi-Fi ((JBH))

Price action for JBH is looking very positive again. Since finding a low in October, the stock rocketed up 10% on the day of the AGM. Since that day, the stock has tracked sideways for several weeks. It is bullish if the market, despite some of the recent falls, cannot overcome one day’s worth of gains over several weeks of trying. The number of stocks sold short has also decreased so it appears as though short covering has taken hold and JBH should gravitate higher over time. The stock is currently at the bottom of its recent range which is attractive, but more conservative investors would like to see a break out of the top of this range (the recent range is indicated by the solid blue lines). Upside resistance can be found around $17.50, but a pushing through that level could see the stock head towards the high $19’s again.


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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article 3 months old

Weekly Broker Wrap: Casinos, Consumers, Insurers, Travel And Pulse Health

-Casino demand grows in Asia
-Oz consumers want an experience
-Christmas spending plans are weak
-Few positives in home, motor insurance
-Better times ahead for corporate travel
-Pulse Health set for game changer
 

By Eva Brocklehurst

Citi is upbeat about the Macau market after its investor conference, with all presenters signalling strong demand is still out there. Despite a decline in gross gambling revenue and wage inflation, Citi cites 98-100% occupancy at major properties in the September quarter as the main reason for a recent deceleration in mass market growth. The operators also reiterate a view that Macau remains a supply-driven market and growth should turn positive when new hotel property comes on board in mid 2015.

Goldman Sachs has outlined some themes it expects will shape the global gaming industry longer term. Demand in Asia is being fueled by more Chinese from the mainland travelling abroad, with construction of large casinos set to serve sophisticated customers. New jurisdictions are opening up and regulation is evolving in newer markets. The broker identifies those best positioned to capture the growth potential are operators that have access to less mature markets, along with more capacity, financial strength and operating efficiency. The leaders in the market that are able to capture the potential include ASX-listed Crown Resorts ((CWN)), rated as a Buy. Goldman Sachs expects Asia, by 2018, will account for nearly 50% of the global casino market compared with 40% currently, and gross gaming revenue will grow at 9% compound until 2018, versus just 2% for the saturated US market.

***

Consumer spending is improving and services that provide an experience are best placed compared with traditional retailing. The improvement in sentiment is likely to be modest, in Morgans' view, as weaker income growth and aversion to borrowing has characterised the period since the global financial crisis. Households are now spending more on services such as sporting and cultural activities, hobbies and tourism. Department stores are expected to remain under pressure while household goods will obtain some relief from the upswing in housing construction. The aging population provides opportunities for operators in the health sphere, in Morgans' view, while education is also expected to benefit from stronger consumer spending over the longer term.

The November Westpac-Melbourne Institute survey of consumer sentiment included an additional question on Christmas spending plans. Breaking down the numbers reveals Western Australia, Victoria and Queensland have the most restrained consumers, planning to spend less on the whole, but spending plans in NSW have been marked down sharply against 2013. Those most inclined to reduce spending are the 50-54 and 35-44 age groups, recording their weakest readings since the survey question was first asked in 2009. Moreover, men have sharply downgraded spending plans while women are only marginally more restrained.

Those with mortgages are significantly more subdued and, interestingly, a more restrained view was heavily concentrated among those with annual incomes over $100,000. In summary, Westpac senior economist, Matthew Hassan, notes sentiment is not nearly as bleak as it was in 2008 and remains comparable with 2011, but there is a clear intention to economise.

***

The latest data on home and motor insurance trends provides few positives in Credit Suisse's view. Premium rates have continued to slow and top line growth will come under pressure for both Insurance Australia ((IAG)) and Suncorp ((SUN)) as personal lines present 60% of their gross written premium. The data show average premium rates in motor insurance were flat in the September quarter, implying a decline of 0.4% over the year, versus a 3.1% average rate increase in the prior comparable period. In home building the average premium rate gain was 0.6% in the quarter while a negative 0.1% for contents, implying an average premium increase over the year to date of 4%. Credit Suisse prefers AMP ((AMP)) over the general insurers in the current climate and QBE Insurance ((QBE)) over the pure domestic players.

***

Domestic airfares are improving, slowly. The latest data shows business class fares rose 11.7% in November, while full economy fares eased 1.3%. Restricted economy fares rose 5.0% and discount fares fell 5.6%. Bell Potter cites the data as evidence of a better period ahead for the Australian corporate travel segment, which has suffered from both declining domestic airfares and client activity levels over the past two years. Two stocks best leveraged to benefit from this theme are Corporate Travel ((CTD)) and, to a lesser extent, Flight Centre ((FLT)). Bell Potter remains positive on the outbound segment, despite the fragile consumer environment.

The broker views the shift to international from domestic as structural and the slowing of outbound growth rates as temporary. Cover-More ((CVO)) and Flight Centre are considered the best stocks for the inevitable recovery and the broker also likes SeaLink Travel ((SLK)), despite its domestic focus, as it has sole operator status on the bulk of its routes.

***

Bell Potter likes Pulse Health ((PHG)), which will lease a new specialist surgical hospital on Queensland's Gold Coast. The hospital is expected to open late in 2015 and contribute earnings of $2m within three years of opening. This will be the first larger scale facility to be operated by Pulse Health in an urban area and may be a game changer, in Bell Potter's view. The company mainly operates specialist rehab hospitals and smaller regional hospitals. The investment in the new hospital will be funded from cash and debt. The broker expects the company will also pursue further acquisition opportunities. The investment is not expected to affect the company's ability to pay dividends in FY15.
 

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article 3 months old

Weekly Recommendation, Target Price, Earnings Forecast Changes

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday November 10 to Friday November 14, 2014
Total Upgrades: 5
Total Downgrades: 12
Net Ratings Breakdown: Buy 42.87%; Hold 39.87%; Sell 17.26%

It should come as no surprise that stock rating downgrades continue outnumbering upgrades as the local share market has bounced swiftly and sharply from a temporary fear-driven sell-off in September-October. Nor should it surprise that the negative side of the ledger carries a heavy contribution from the energy sector, given oil prices have fallen further than most investors and analysts would have expected them to.

For the week ending Friday, November 14, FNArena registered five recommendation upgrades but 12 downgrades, among which are four energy stocks and three iron ore producers.

This also sets the tone for what is happening with price targets and profit expectations. Throw mining services, engineers and contractors into the mix and it should not come as a surprise that negative adjustments look heavier on average than any positive revisions, with retailers also adding to the negative picture.

The positive side is dominated by industrials ex-financials with Qantas and Incitec Pivot in particular enjoying a noticeable reversal in trends.?

Upgrades

BlueScope Steel ((BSL)) upgraded to Hold from Reduce by Morgans. B/H/S: 5/2/1

The broker was cautious about the stock previously, based on how much of the FY14 financial performance was cyclical and how much was related to ACCC intervention on anti-dumping issues. In FY15, despite declining spreads, Morgans finds evidence of cyclical improvement, particularly in Australia, and this should provide a floor to the share price.The broker is not yet bullish on BlueScope but upgrades to Hold from Reduce. Target is unchanged at $5.11.

Computershare ((CPU)) upgraded to Neutral from Sell by UBS. B/H/S: 1/6/1

The company has signalled operating conditions are softer but still expects earnings to be up around 5% in FY15. UBS has been cautious about the weak organic growth profile of the core registry business amid concern that replacing revenue holes with growth and acquisitions is becoming an increasingly capital-intensive task. Valuation now reflects the softer outlook, in the broker's opinion, and the rating is upgraded to Neutral from Sell. Target is raised to $11.50 from $10.70.

Ethane Pipeline ((EPX)) upgraded to Add from Reduce by Morgans. B/H/S: 1/0/0

The company has agreed revised terms with Qenos regarding its sole contract, which removes termination risk and provides revenue until the end of 2018. This is a significant de-risking event for investors, in Morgans' opinion.Distribution guidance is 3.00-3.25c per quarter until end 2018. Broker's target is raised to $1.57 from 77c and the rating is upgraded to Add from Reduce.

Qantas ((QAN)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 5/1/0

Oil and jet fuel prices have declined rapidly since the start of FY15. Deutsche Bank increases earnings forecasts as a result. While it remains early in the recovery process, the broker is pleased to observe the main line is increasing load factors, both domestically and internationally. Rating is upgraded to Buy from Hold and the target to $2.30 from $1.40.

Treasury Wine Estates ((TWE)) upgraded to Neutral from Underperform by Macquarie. B/H/S: 0/3/5

Macquarie transfers coverage to a new analyst and examines the outlook for Australia's wine export market. The broker finds luxury wine exports to China have likely bottomed and look like returning to growth. The low end of the market is slow but the broker notes the rate of value decline is easing and growth could turn positive in coming months. Near-term earnings for Treasury Wine are supported by elevated luxury inventory but caution prevails because of the structural issues with the large commercial category. Rating is upgraded to Neutral from Underperform and the target to $4.70 from $3.90.

Downgrades

ALS ((ALQ)) downgraded to Sell from Neutral by Citi. B/H/S: 0/3/3

Despite the share price halving since its 2012 peak, Citi believes downside earnings risks remain. The pressures are overwhelming management's efforts to manage the business. The valuation appears attractive against global peers but in the broker's opinion that assumes similar market exposures and margin volatility and, unfortunately, that is not the case. The broker transfers coverage to a new analyst and downgrades to Sell from Neutral. Target is reduced to $5.00 from $9.75.

Atlas Iron ((AGO)) downgraded to Sell from Neutral by Citi. B/H/S: 0/4/4

Citi does not believe it has been bearish enough on the iron ore price. Forecasts are downgraded again as demand is weak and supply continues to surge. The broker suspects Atlas Iron's balance sheet is now in a precarious position, having tipped into net debt in FY14 because of the construction of the Mt Weber mine. Rating is downgraded to Sell from Neutral and the target to 14c from 55c.

AusNet Services ((AST)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 0/5/2

One-off costs meant AusNet's interim result fell short of the broker. Cash flow was better than expected nonetheless but still not enough to cover maintenance capex and the dividend, without a DRP, the broker notes. While the interim dividend is as expected, the risk is to the downside for the next distribution. AST has rallied lately in line with the infra/utilities sectors as the bond rate has fallen. This has lifted the share price to the broker's valuation and given there is little chance of dividend upside, the broker downgrades to Underperform, despite raising its target to $1.42 from $1.38.

Caltex Australia ((CTX)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/3/2

Caltex has set some aggressive targets for earnings and cost savings and the broker concedes the company has met every one of them to date. The broker remains extremely positive on the industry as a whole, and suggests surprisingly strong refining margins may lead to capital management opportunity. CTX is a high quality defensive business with further positive news flow to play out, the broker suggests, but a 90% share price rally since December is pushing things just a little too far. Target price lifted to $33.90 from $31.04 but rating downgraded to Neutral.

Fortescue Metals ((FMG)) downgraded to Neutral from Buy by Citi. B/H/S: 3/4/1

Citi does not believe it has been bearish enough on the iron ore price. Forecasts are downgraded again as demand is weak and supply continues to surge. The broker considers Fortescue the fittest of the iron ore plays, with the lowest cost and longest life assets, able to weather the downturn. Rating is downgraded to Neutral from Buy and the target to $3.20 from $4.50.

Isentia ((ISD)) downgrade to Neutral from Buy by UBS. B/H/S: 1/1/0

A number of deals are re-shaping the global media intelligence landscape and UBS explores the potential for Isentia. The broker still believes the company will benefit from Asian growth and has the first mover advantage. The company is unlikely to be an M&A target, in the broker's view. UBS downgrades to Neutral from Buy on valuation grounds after a 45% appreciation in the share price since listing. Target is raised to $3.00 from $2.90.

JB Hi-Fi ((JBH)) downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 3/4/1

The outlook for retail is deteriorating in Morgan Stanley's view as unemployment rises, income growth slows and the housing tailwind eases. The broker expects the headwinds for discretionary retailers are increasing and lowers FY15 estimates. JB Hi-Fi is downgraded to Equal-weight from Overweight on higher capex estimates and weaker gross margins. Target is reduced to $16.00 from $18.00.

M2 Telecommunications ((MU)) downgraded to Neutral from Buy by Citi. B/H/S: 1/4/0

Citi is downgrading to Neutral from Buy although raises the target to $8.60 from $7.82. This follows an upbeat presentation to investors and the broker believes the stock is now fairly priced. While Citi maintains FY15 earnings forecasts, FY16 estimates are raised by 3% to reflect new insights on the speed of the Dodo kiosk roll out. Valuation is rolled forward and the premiums allocated to consumer and business segments in the valuation are increased.

Mount Gibson ((MGX)) downgrade to Sell from Neutral by Citi. B/H/S: 3/3/2

Citi does not believe it has been bearish enough on the iron ore price. Forecasts are downgraded again as demand is weak and supply continues to surge. The broker notes Mount Gibson has already lowered FY15 sales guidance following further instability at Koolan Island and lowers forecasts accordingly. The rating is downgraded to Sell from Neutral and the target to 35c from 65c.

Oil Search ((OSH)) downgraded to Sell from Neutral by Citi. B/H/S: 5/1/1

Citi now believes there is a need for oil supply cuts to offset price declines and OPEC is unlikely to lead. Therefore, the outlook is for current lower pricing to remain in place for longer. The broker downgrades Oil Search to Sell from Neutral as the current share price exceeds the target and lowers the target to $8.01 from $8.80, based on a lower oil price and Australian dollar rate.

Origin Energy ((ORG)) downgraded to Neutral from Buy by Citi. B/H/S: 4/3/1

Citi now believes there is a need for oil supply cuts to offset price declines and OPEC is unlikely to lead. Therefore, the outlook is for current lower pricing to remain in place for longer. With a longer-term supply/demand balance the broker envisages little requirement for new supply sources to be developed. Target price is lowered to $14.92 from $16.92 based on a lower oil price and Australian dollar rate, and the rating is downgraded to Neutral from Buy.

Roc Oil ((ROC)) downgraded to Sell from Neutral by UBS. B/H/S: 1/2/1

Fosun launched its bid in August and has accumulated 80.4%, with the offer now unconditional. The only question in the broker's view is whether it will reach the 90%-plus interest before expiring November 14 at 7pm. UBS expects, if 90% is reached compulsory acquisition will take place. If less, then the stock will stay listed but liquidity will reduce substantially and the share price is expected to fall. The broker recommends shareholders accept the offer ahead of the bid expiry. Target is set at the bid price of 69c and the rating is downgraded to Sell from Neutral.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 BLUESCOPE STEEL LIMITED Sell Neutral Morgans
2 COMPUTERSHARE LIMITED Sell Neutral UBS
3 QANTAS AIRWAYS LIMITED Neutral Buy Deutsche Bank
4 TREASURY WINE ESTATES LIMITED Sell Neutral Macquarie
Downgrade
5 ALS LIMITED Neutral Sell Citi
6 ATLAS IRON LIMITED Neutral Sell Citi
7 AUSNET SERVICES Neutral Sell Macquarie
8 CALTEX AUSTRALIA LIMITED Buy Neutral Credit Suisse
9 FORTESCUE METALS GROUP LTD Buy Neutral Citi
10 ISENTIA GROUP LIMITED Buy Neutral UBS
11 JB HI-FI LIMITED Buy Neutral Morgan Stanley
12 M2 TELECOMMUNICATIONS GROUP LIMITED Buy Neutral Citi
13 Mount Gibson Iron Limited Neutral Sell Citi
14 OIL SEARCH LIMITED Neutral Sell Citi
15 ORIGIN ENERGY LIMITED Buy Neutral Citi
16 ROC OIL COMPANY LIMITED Neutral Sell UBS
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous Rating New Rating Change Recs
1 FDC FEDERATION CENTRES - 40.0% - 17.0% 23.0% 6
2 QAN QANTAS AIRWAYS LIMITED 67.0% 83.0% 16.0% 6
3 TWE TREASURY WINE ESTATES LIMITED - 75.0% - 63.0% 12.0% 8
4 BLD BORAL LIMITED 38.0% 50.0% 12.0% 8
5 BSL BLUESCOPE STEEL LIMITED 38.0% 50.0% 12.0% 8
6 AMC AMCOR LIMITED 33.0% 43.0% 10.0% 7
7 GNC GRAINCORP LIMITED - 20.0% - 17.0% 3.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous Rating New Rating Change Recs
1 MTU M2 TELECOMMUNICATIONS GROUP LIMITED 50.0% 20.0% - 30.0% 5
2 UGL UGL LIMITED - 29.0% - 50.0% - 21.0% 8
3 AGK AGL ENERGY LTD 57.0% 38.0% - 19.0% 8
4 HVN HARVEY NORMAN HOLDINGS LIMITED 43.0% 25.0% - 18.0% 8
5 OSH OIL SEARCH LIMITED 71.0% 57.0% - 14.0% 7
6 JBH JB HI-FI LIMITED 38.0% 25.0% - 13.0% 8
7 FMG FORTESCUE METALS GROUP LTD 38.0% 25.0% - 13.0% 8
8 CSR CSR LIMITED 25.0% 13.0% - 12.0% 8
9 AGO ATLAS IRON LIMITED - 38.0% - 50.0% - 12.0% 8
10 AST AUSNET SERVICES - 17.0% - 29.0% - 12.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous Target New Target Change Recs
1 QAN QANTAS AIRWAYS LIMITED 1.700 1.938 14.00% 6
2 MTU M2 TELECOMMUNICATIONS GROUP LIMITED 7.448 8.110 8.89% 5
3 AMC AMCOR LIMITED 11.265 11.534 2.39% 7
4 TWE TREASURY WINE ESTATES LIMITED 4.323 4.423 2.31% 8
5 FDC FEDERATION CENTRES 2.610 2.658 1.84% 6
6 AST AUSNET SERVICES 1.322 1.343 1.59% 7
7 CSR CSR LIMITED 3.660 3.673 0.36% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous Target New Target Change Recs
1 UGL UGL LIMITED 6.907 5.930 - 14.15% 8
2 AGO ATLAS IRON LIMITED 0.420 0.369 - 12.14% 8
3 MGX Mount Gibson Iron Limited 0.630 0.564 - 10.48% 8
4 BLY BOART LONGYEAR LIMITED 0.198 0.190 - 4.04% 4
5 FMG FORTESCUE METALS GROUP LTD 4.125 3.963 - 3.93% 8
6 ALQ ALS LIMITED 5.842 5.702 - 2.40% 6
7 ORG ORIGIN ENERGY LIMITED 15.790 15.423 - 2.32% 8
8 HVN HARVEY NORMAN HOLDINGS LIMITED 3.679 3.619 - 1.63% 8
9 JBH JB HI-FI LIMITED 18.140 17.890 - 1.38% 8
10 AGK AGL ENERGY LTD 14.893 14.746 - 0.99% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company Previous EF New EF Change Recs
1 QAN QANTAS AIRWAYS LIMITED 2.951 5.523 87.16% 6
2 IPL INCITEC PIVOT LIMITED 18.666 22.338 19.67% 8
3 AWC ALUMINA LIMITED 0.713 0.840 17.81% 8
4 NWS NEWS CORPORATION 50.152 53.993 7.66% 5
5 GMA GENWORTH MORTGAGE INSURANCE AUSTRALIA LIMITED 40.500 41.967 3.62% 3
6 ABC ADELAIDE BRIGHTON LIMITED 24.090 24.790 2.91% 8
7 REA REA GROUP LIMITED 147.823 151.214 2.29% 7
8 MTU M2 TELECOMMUNICATIONS GROUP LIMITED 53.113 53.980 1.63% 5
9 REC RECALL HOLDINGS LIMITED 25.509 25.837 1.29% 7
10 WOW WOOLWORTHS LIMITED 201.901 204.026 1.05% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company Previous EF New EF Change Recs
1 UGL UGL LIMITED 54.667 20.586 - 62.34% 8
2 AWE AWE LIMITED 6.633 5.467 - 17.58% 6
3 GNC GRAINCORP LIMITED 42.347 35.983 - 15.03% 6
4 DLS DRILLSEARCH ENERGY LIMITED 15.988 14.155 - 11.46% 6
5 SXY SENEX ENERGY LIMITED 3.533 3.200 - 9.43% 6
6 ALQ ALS LIMITED 43.948 40.673 - 7.45% 6
7 TRS THE REJECT SHOP LIMITED 61.517 57.017 - 7.32% 3
8 BPT BEACH ENERGY LIMITED 17.567 16.300 - 7.21% 6
9 FMG FORTESCUE METALS GROUP LTD 45.872 43.381 - 5.43% 8
10 ORG ORIGIN ENERGY LIMITED 68.281 65.644 - 3.86% 8
 

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Rough Ride Ahead For Oz Retailers

-What if housing cools?
-Structural concerns remain
-AUD key to labour competitiveness
 

By Eva Brocklehurst

Retail sales growth in Australia has steadily improved over the past 18 months, with a buoyant housing market underpinning consumer confidence as house prices rise. Several analysts consider this may be about to change.

The strongest categories in retail have been linked to housing, such as in furniture and hardware. Morgan Stanley notes trading has softened significantly since the federal budget in May. Conditions in the first quarter of FY15 have signalled to the broker that outlook for Australian retailing is not improving. Unemployment is rising and income growth is slowing and the broker calculates this weaker macro environment will lead to a 250 basis point headwind for discretionary retailers. Unemployment is expected to rise to 6.8% from 6.1% and household consumption growth to slow to 3.9% from 5.1%. Any cooling of the housing market or a flat savings rate prevailing for longer would make the broker even more bearish.

Staying with the bearish signals, the broker observes the Westpac consumer sentiment survey's Christmas spending indicator is the worst since 2008. Consumers are shifting their spending towards staples and services at the expense of discretionary retail and this trend is expected to continue. Structural issues facing discretionary retailers have been well known for some time, such as greater competition emanating from online and international operators. The broker observes the proportion of Australian consumption spent on retail continues to decline. Consumers are spending more on categories like education, communication, health, recreation, cafes and restaurants. This is also a structural issue which the broker believes is unlikely to change in the foreseeable future.

Morgan Stanley notes valuations for these retailers relative to the ASX appear fair rather than stretched and retains an In-Line industry view. Wesfarmers ((WES)) and Super Retail ((SUL)) are Morgan Stanley's only Overweight stocks in the Australian consumer sector. Super Retail is chosen because it is cheap and offers growth categories. Wesfarmers is justified as Bunnings continues to take share in the robust home improvement category and staple retailer Coles provides defensive qualities. At the other end of the spectrum Woolworths ((WOW)) and Harvey Norman ((HVN)) are the broker's highest conviction Underweight ratings under coverage in the retail sector.

The latest quarterly wages statistics revealed growth remained at a 16-year low, where it has been for more than a year. UBS observes public and public wages were subdued in the third quarter, although there was a seasonal jump in bonuses which lifted private wages. The broker considers this subdued growth is a positive for company profits and should help keep inflation in check over the coming year. The broker acknowledges that the figures signal that a forecast pick up in consumer spending growth, to 3% in 2015 from 2.5%, relies on further gains in confidence as well as low inflation. In terms of the Westpac consumer sentiment survey, UBS remarks that the headline sentiment number may have bounced in November to its highest level since August but remains down by 12.5% year on year and below its long-term average.

Wages growth may be slowing but there are benefits for business, in terms of reduced costs. ANZ economists note, as a result of the slower wages growth, Australia's international competitiveness has not deteriorated in the last couple of years. Nevertheless, over the past decade the loss of international competitiveness has been stark. Australian unit labour costs increased 34% between 2004 and 2013 in Australian dollar terms, with currency movements amplifying the increase. A depreciation of the Australian currency will, therefore, provide welcome assistance in reducing these costs.

The economists find it difficult to envisage Australian wages growth will run at a significantly lower rate than global counterparts for a sustained period, although wages in some countries such as the US will outstrip Australian wages over the next few year, given the cyclical upswing that is envisaged. Hence, once the currency benefit fades any substantial improvements in labour competitiveness will need to come from productivity. In turn, productivity enhancements will depend on infrastructure spending, competition & innovation policy and taxation reform.
 

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article 3 months old

Myer Fears The Grinch

-Pre-Xmas conditions subdued
-Are expectations too high?
-AUD headwinds significant
 

By Eva Brocklehurst

First quarter sales were a little drab for Myer ((MYR)), up just 0.1% overall, but brokers differ in their interpretation of the department store's outlook. Morgan Stanley accepts the weakness stemmed from refurbishments, which are now out of the way, and that momentum should improve, but wonders whether shaky consumer confidence in this crucial Christmas quarter will provide enough acceleration.

Management has indicated second quarter sales account for 75% of the annual profit and the broker notes prior commentary has also indicated the other profitable quarter is the fourth. The fact that the first and third quarter are loss making is not necessarily a concern, as many retailers sustain losses in seasonally weak quarters, but Morgan Stanley considers it becomes an issue if consumer demand is also weak heading into Christmas. Moreover, international players are likely to ramp up the pressure on pricing this Christmas.

New stores at Joondalup and Mt Gravatt should help growth momentum and the broker does acknowledge the company's comments that exclusive brands, cosmetics and toys all performed better than average in the first quarter. These products usually generate higher profits compared with the average across the store. Online also boosted growth, but in this case the broker suspects margins are relatively narrow and would not help profitability. Macquarie believes the sharp share price reaction to the subdued result reflects a greater-than-expected disruption from refurbishments. Structural challenges continue to plague department stores but Macquarie believes there is risk to the upside if sales momentum is maintained in the critical second quarter.

Citi maintains the market's negative reaction to the weak first quarter fails to recognise the timing of refurbishments and new store openings. The broker expects sales growth will be better over the next nine months but also believes consensus expectations are too high at 3.8% growth for FY15. Citi forecasts sales growth is more likely around 2.6%. Peer valuation multiples have risen and there could be as much as 13% upside for Myer over 12 months, in the broker's view. The stock does not qualify as a buy for Citi, which retains a Neutral rating, but, there are more reasons to be cheerful about retail sales growth and the broker expects Myer, like all other retailers, will be a beneficiary.

JP Morgan takes a different view. The broker considers sales growth has been elusive over the last 20 years for Myer and, while a return to like-for-like sales growth in FY14 was pleasing, momentum appears to have ebbed in the first quarter. Acknowledging that new stores, online and refurbishments should drive sales in FY15, the broker still believes competitive pressures will hinder growth. Australian dollar headwinds are significant and deflation remains a risk. Competition is also ratcheting up the rate of cash growth required.

Myer's valuation remains uncompelling for the broker and an Underweight rating is retained. UBS also continues to envisage risks from increased competition, further investment in competitor David Jones under new ownership and share loss to specialty retailers. The broker points to signs of further market share loss across the fashion segment and for the department store as a whole, despite winning a major brand such as Napoleon cosmetics. On balance, UBS believes risks are to the downside for earnings, while the risk to the broker's Sell call comes from corporate activity in the form of a takeover bid.

Myer runs the gamut on the FNArena database, with two Buy, four Hold and two Sell ratings. Consensus target is $1.97, suggesting 13.0% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 7.5% and 7.7% respectively. Targets range from $2.30 to $1.60.
 

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