Tag Archives: Consumer Discretionary

article 3 months old

Collins Foods A Winner With New KFC Franchisee

-Increased growth opportunity
-Sizzler struggling
 

By Eva Brocklehurst

Brisbane-based Collins Foods ((CKF)) has made a major acquisition from both an earnings and strategic perspective. Moelis believes this is a game changer for Collins, as the acquisition adds to a very sustainable platform for growth.

Moelis observes the share price has risen 25% after the announcement of the acquisition of Competitive Foods. Nevertheless, the broker considers the yield is undemanding and there's further upside to come from this growth potential. Collins Foods is expected to reveal an underlying profit of $17.3m in FY14 - the company has an April 30 year end - against the $16.4m recorded in FY13. Like-for-like sales grew 1.7% for KFC in the third quarter, on the back of 127 stores. Poultry contracts for the next 12 months have been negotiated at consistent prices, which the broker considers is a satisfactory result. Moelis estimates a 10c dividend for FY14. Moelis has a Buy rating on Collins and a $2.40 target.

Deutsche Bank also observed after the quarterly update that sales were improving at KFC but were weak at Sizzler. On the positive side, margins had improved at both chains. The broker believes the stock has attractive multiples and retains a Buy rating and $2.20 target. UBS is also on the Buy side with a $2.00 target, noting some improvement in the latter stages of the first half as efficiency initiatives paid off. On  the FNArena database the dividend yield on FY14 estimates is 5.3%, and on FY15 it's 5.8%.

The acquisition of Competitive Foods for $55.6 million was completed this month. This is the franchisee of 44 KFC stores, 40 in Western Australia and four in Northern Territory. The acquisition is expected to generate revenue of $110m and earnings of $10-10.3m in FY14. What is crucial to Collins is a retail footprint in a new region, with store roll-out opportunities, while being more than 15% accretive in the first full year. Management is targeting a 200 basis point margin improvement over the initial three years, supported by a $25m capex program to reinvigorate the stores. Moelis estimates Collins' earnings will rise from an estimated $53.8m in FY14 to a forecast $63m in FY15.

Any negatives? The company has confirmed that its Sizzler stores are struggling within a subdued and competitive casual dining segment and like-for-like sales are likely to be lower in FY14. These were down 9.6% over the summer, consistent with the 9.4% fall in the first half. The company is confident of the long-term prospects for Sizzler but Moelis notes the contribution of that chain to earnings is now well below the 10% level after the acquisition of Competitive. Hence, the chain is becoming less relevant.

Collins Foods operates 122 KFC outlets in Queensland alone. The company also operates 27 Sizzler restaurants in Australia. 
 

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article 3 months old

Weekly Broker Wrap: How Goes The Consumer-Led Recovery?

-Travel sector accelerating
-David Jones turnaround
-Coles' lead undermined
-Metcash needs new strategy
 

By Eva Brocklehurst

Bell Potter expects a further acceleration this year in Australians holidaying overseas. This is the strongest growth segment for Australian short-term departures, as a snapshot from the Australian Bureau of Statistics on overseas arrivals and departures shows. The analysts believe international travel rates, particularly for holidays, will be helped along by improving household confidence as a result of the positive wealth effect from property and equity markets. The analysts note that international travel bottomed in March 2013 at a time when a weak domestic economy undermined household consumption. The broker's top picks in the travel sector are Flight Centre ((FLT)) and Corporate Travel Management ((CTD)).

Morgan Stanley prefers discretionary consumer stocks to the staples. Driving this view is a better retail environment, as the consumer benefits from low interest rates and the improving housing market. The lower Australian dollar is also slowing online leakage and improving tourism spending. The broker is avoiding exposure to supermarkets, as the publicly-stated store roll-out plans seem very bullish. Morgan Stanley points out that industry space growth will be 3.5% per annum over the next three years, well ahead of population growth of 1.6%.

The broker thinks David Jones ((DJS)) has a turnaround story in the making and a possible merger with Myer ((MYR)) provides potential upside. Super Retail Group ((SUL)) is considered a premium business, given market share gain and margin potential, while Flight Centre has multiple drivers for double digit earnings growth. David Jones, Super Retail and Flight Centre are key consumer picks for the broker. Morgan Stanley is Underweight Coca-Cola Amatil ((CCL)) as earnings risks remain with a slowing in carbonated soft drink sales. On the point of earnings risk the broker is Equal Weight Treasury Wine Estate ((TWE)), but does think the asset backing will provide support.

Commonwealth Bank analysts have always considered targeting residential construction to transition growth as mining capex wanes is smart policy. It's relatively easy, the analysts assert - you just cut interest rates and wait. It's also smart because there is a genuine demand for new housing. There are some factors that differentiate the story this time around, adding intensity. Competition with mining and infrastructure for skilled labour and materials has limited the supply of new dwellings so the demand for housing has become quite urgent. The focus on skilled migrants who are cashed up tends to add to housing demand more quickly. Education visas are also lifting, and these students need somewhere to live, even if not settling permanently. Finally, real estate investment is attracting, anecdotally at least, a high level of interest from foreign investors.

Consensus earnings for consumer stocks were downgraded for around 50% of the companies that reported in the recent earnings season, Goldman Sachs notes, and momentum will need to accelerate for most in the second half in order to meet estimates for FY14. Food and beverage companies and the discount department stores were materially downgraded. The broker notes major supermarkets will continue to focus on value and seem to be winning at the expense of wholesalers and consumer product companies. Goods, apparel and department stores remain cautious. The most upbeat are consumer electrical businesses.

Goldman is selective and retains Buy ratings for Wesfarmers ((WES)) and Harvey Norman ((HVN)). Woolworths ((WOW)) is rated Sell as it is reliant on growth in trading areas and gross profit margin expansion. Goldman notes online sales are driving a disproportionate share of like-for-like sales for those that disclose the data. Super Retail and Specialty Fashion ((SFH)) are two which are showing a welcome ramping up of online, IT and supply chain investment.

UBS observes that Coles' momentum is on the wane. From the broker's latest supermarket tracker survey, the analysts explored issues in supermarket operations. For Coles the scores were weaker across marketing, creating in-store theatre and pricing strategy compared to the prior surveys. Coles had been leading in innovation, price and in-store initiatives but this survey finds both Woolworths and Aldi are making inroads. Woolworths' scores improved across most key measures in the survey. The survey signalled performance is converging and differentiation is less visible. Woolworths is the broker's preferred exposure in the Australian grocery space.

Food and grocery wholesaler/distributor Metcash ((MTS)) is losing market share and if the company is to turn around the earnings decline, it must engage better with the retailers in the network, according to CLSA. The independent supermarkets - the IGA brand - are critical and, if Metcash is to lead a resurgence in the independents it must confront improvements to the in-store experience, evolving a differentiated branding structure, easing the challenges for suppliers and addressing the poor private label offering - to name a few of the items on CLSA's agenda for change. Enabling online shopping would also be a bonus.

The broker does not believe tinkering at the edges will be enough. Metcash spent several years hoping price deflation was a cyclical issue that would be alleviated by a fall in the Australian dollar, CLSA observes. Aldi's increasing presence and continuing conservative consumer attitudes have dashed that hope. CLSA believes, if the company implements the required strategy, the stock could reach $4.50 on a three-year view, if Metcash is to re-rates back to a 20% discount to Woolworths. Right now, CLSA has a Sell rating and $2.80 target.
 

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article 3 months old

Weekly Broker Wrap: New Shops Are Coming But What About Jobs?

-Price pressures for retailers
-Jobs market weak
-Rate cuts not off agenda
-Strong outlook for broadband telcos
-Mobile players chase share
-China's growth outlook slowing
 

By Eva Brocklehurst

This year Australia will see some new retailer brands gracing its streets. Citi notes certain global retailers, primarily in fashion, are intent on making their mark here and will open stores in 2014. Australia offers high GDP per capita and faster population growth than other developed countries. Over the next year H&M, Forever 21, Uniqlo and River Island intend to open. Citi observes the impact on pricing and margins, in terms of the local competitors, is far more important than the taking of market share. Most of the new entrants will probably take positions in existing shopping centres and they require more floor space than the average Australian specialty retailer. Citi expects the new entrants to target a store base of around 20, initially. The broker estimates that high profile entrants like Marks & Spencer, H&M, Zara, Uniqlo and Sephora will take over $1.1 billion in revenue once established.

H&M poses the biggest risk to the locals' profit margins, as that brand tends to have globalised pricing. Citi's survey has revealed this company is 30-50% cheaper than competitors such as Premier Investments ((PMV)) - think Dotti, Portmans and Just - and department store Myer ((MYR)). One challenge for those retailers entering Australia is the need to have stock for an alternative season. The scale advantages that are retained by H&M and Inditex in their own markets are reduced in this instance. Citi has Sell ratings on many of those exposed to the new entrants, such as David Jones ((DJS)), Wesfarmers ((WES)), Myer and Woolworths ((WOW)).

Economic activity may be strengthening but Australia's job market is weak. AllianceBernstein wonders whether the rise in the unemployment rate to 6.0%, the highest level in a decade, is an indicator of the need to re-assess the Reserve Bank's cash rate profile. While accepting that employment does lag the economic cycle, the economists wonder whether a virtuous circle is not going to work this time. That is, that the improvement in confidence, conditions and housing construction - signs that an economic recovery is underway - will generate the necessary capital expenditure, income and jobs growth down the track. The economists fear it won't be enough to counter the reduction in resources activity, combined with the increased focus on cost cutting and productivity in both the public and private sectors. This is a reason they are mindful that a reduction to the cash rate can still come back on the agenda later this year.

BA-Merrill Lynch suspects Australian house prices will hit new highs in 2014, propelled by low interest rates. Investors are expected to continue to dominate at the expense of first home buyers. Still, the analysts are of the view that gains in house prices are not the positive signal for the broader economy that the Reserve Bank seemingly hopes is the case. Domestic economic growth in the first quarter of 2014 may be modestly better, as indicated by the rise in business confidence in January, but Merrills notes a sharp decline in consumer confidence. Job security looms large as a key concern. Employment growth has been flat and the analyst expected the unemployment rate to continue rising this year. They suggest this measure will be monitored closely by the RBA, noting the central bank has never tightened policy while the unemployment rate has been rising. Hence, they also think expectations for tighter policy later in the year are premature.

Citi notes Telstra's ((TLS)) wholesale broadband subscribers rose by 69,000 in the first half, signaling there is continued subscriber growth among the internet service providers (ISP). This is the highest net subscriber movement in four years, according to Citi. Of the three leading ISPs, Optus reported declining subscriptions in fixed broadband so the growth appears to have come mainly from TPG Telecom ((TPM)) and iiNet ((IIN)) and signals a positive first half for the latter pair. The gain of around 8,000 in Telstra's wholesale off-net subscribers - used by the others to deliver services in areas where they do not have infrastructure - suggests a stabilisation of the customer bases after heavy declines in previous years. This is also encouraging for the aforesaid companies, given the need to establish a wider geographic presence ahead of the introduction of the National Broadband Network roll-out.

JP Morgan thinks Singapore Telecom ((SGT)) may have drawn a line in the sand when it comes to the trade off between Optus revenue and customer losses. The company appears to be targeting growth in mobiles and this is raising the competitive dynamics of the segment, in the analysts' view. In the merry-go-round of the mobile, the three main players - Optus, Telstra and Vodafone ((HTA)) - are chasing each other's business.

JP Morgan observes, when Vodafone was losing share, Optus grew its base significantly, even though overall share slipped. This situation arose because Optus gained from Vodafone at the value end but lost to Telstra at higher price points. If Vodafone ramps up attempts to recover lost ground then Optus may be vulnerable and resort to taking higher value subscribers from Telstra just to maintain share. And the market is rational, JP Morgan asks? The analysts do not think this is the case, with one player losing money and the other going backwards. If the Vodafone brand reaches some stability at the same time as Optus turns up the growth levers it could mean less favourable conditions for Telstra.

AllianceBernstein has revised down growth forecasts for China. A weakening of global emerging market demand is expected to act as a headwind for Chinese exports, even though developed markets are expected to stay firm. The analysts have reduced the growth forecasts for China in 2014 to 7.1%, which represents a deceleration from 7.7% in 2013. This is because of China's increasing domestic financial stress, induced by heightened credit default risk and tight monetary policy.

While the risk of systemic credit crisis is considered remote, the analysts note the People's Bank of China has maintained a hard line. The question is whether the central bank will come under political pressure to relax policy as the economy decelerates. To this end, the analysts estimate that, if the central bank is required to support a GDP target of around 7.5% for 2014, then the chances increase for some easing in credit conditions. In contrast, a 7.0% target would provide more room for the government to implement reforms. Given some major provinces have already marked down growth expectations, the analysts suspect the national target will be closer to this 7.0% rate.
 

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article 3 months old

Lining Up The Domino’s

By Michael Gable 

This market rally that we predicted has materialised in a sensational way. If we are honest with ourselves, we didn’t expect it to push past the 2 January high so quickly. Even though the Dow Jones was oversold 2 weeks ago, our market wasn’t. When we predicted the V-shaped rally in mid December, our market was much more oversold at that point compared to where it was 2 weeks ago. The scaremongering bears from two weeks ago are clearly licking their wounds for now. Emerging markets are yesterday’s news – for now. As a result of the overperformance of our market during the last two weeks, we would expect some lacklustre trading sessions in the back half of this week. This is despite many companies reporting very good earnings. That inevitable cooling off would provide good buying opportunities. As usual, the key to a good trade is finding a company that reports well but had been sold off before hand. Last week’s performance of Carsales.com was a classic example. But beware the expensive company that disappoints.
 

Domino's Pizza ((DMP))


 

Domino's has been trending well for the last couple of years, seeing the share price triple during that time. Last week’s gap up on decent volume could be a final exhaustive move, where the last of the buyers all rush in at the top of the trend. If that is the case, then we should see a sudden drop off over coming days on decent volume. If we don’t see that happening, then we can safely assume that DMP will continue to trend higher. However, it is fairly overbought here so if we are looking for an entry point, we would wait for a pullback to about $16.50.
 

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: Farewell Toyota, Building Ramp-Up And Dividend Prospects

-Carmaker demise part of manufacturing decline
-Department stores still losing share
-Focus on Sydney, SE Qld construction in FY15
-Dividends from resources, energy?
-Oil price expected to strengthen
 

By Eva Brocklehurst

The Australian dollar is not to blame for the country being in a position in which local manufacturing of motor vehicles will cease in 2017. That's Deutsche Bank's take on the news that Toyota will follow Ford and Holden and shut up shop by 2017. In fact, Deutsche Bank analysts note history reveals the exchange rate is often a scapegoat for such closures but employment in the manufacturing sector, as a percentage of total employment, has been declining for 30 years. Manufacturing as a share of GDP has been falling since the 1970s.

In the case of vehicle manufacturing Deutsche Bank thinks short-run impacts are overstated while the long-run benefits are ignored. The analysts suspect the initial public policy response will involve additional government spending to ease the impact of the closures, probably regionally and sectorally focused, concentrating on the "high profile losers". That is, the employees of the car makers themselves. Deutsche Bank would prefer to see the high cost of cars in Australia addressed. As there is no longer a local industry to protect the analyst thinks the tariffs on motor vehicles should be abolished and widespread importing of second hand vehicles should be allowed. The argument is, if cars are cheaper, Australian households will have more money to spend on other goods. Additionally, Deutsche Bank thinks policy makers have not made enough effort to lower costs and prices than they could have done.

Christmas sales were OK but department stores continued to lose share, according to Citi. The broker notes David Jones ((DJS)) and Myer ((MYR)) engaged in less promotion during the last silly season and discounts were more targeted. As a result, the broker expects rising gross profit margins but doesn't think this will overcome the fact that department stores are losing share to specialty retailers and online. Sales trends may have stabilised but the broker observes department stores still need to deal with rising costs.

Citi also considers the building cycle activity will accelerate over the next two years and capacity constraints will loom. The broker welcomes the return of pricing power for the sector. The bright spot is Sydney, where road construction should pick up the slack when housing cools. The broker factors in a healthy housing market through to the end of FY15 and also thinks that year will see a 30% increase in the value of road and highway work, mitigating some of the housing decline. This leaves Citi favouring those plays which cover the whole domestic building cycle, expecting the reward will come through the combination of pricing power, robust demand and a synchronised improvement in markets. The view regarding the leverage to Sydney is focused on the early and late cycle construction materials but the broker concedes building products is where margin could surprise the most.

The broker also thinks many forecasts about the demise of the Australian engineering capex cycle are overdone. While spending could diminish over coming years, as the peak in energy and resources wanes, a material portion of engineering capex has no relation to construction or building materials volume. Instead, a broad based up-cycle increases customer numbers and enhances pricing power. That's not to say the broker doesn't favour exposure to construction materials. Product intensity tied to a wave of essential infrastructure projects should ramp up in FY15 and underpin construction materials. Citi is particularly drawn to businesses with leverage to Sydney and South-East Queensland construction activity. The broker observes cement, aggregates and concrete get earlier leverage than building materials and benefit as building gives way to infrastructure growth.

 This all leads Citi to favour Boral ((BLD)), which has been upgraded to Buy from Sell. Next down the ranks comes Brickworks ((BKW)), James Hardie ((JHX)) and CSR ((CSR)) with Neutral ratings.

UBS thinks the mood among resource companies during this earnings season will be more positive, with stronger commodity prices, a falling AUD/USD rate and a reduction in cost bases. That said, the gold sector is likely to be in line for further impairments with the gold price having declined markedly last year. The broker thinks companies will take a long look at the carrying value of assets in the light of changes to operating assumptions, asset closures and weak prices. Companies have been switching from growth to capital preservation. Hence, UBS expects to see the free cash flow improve and this is expected to be applied to debt reduction in the first instance. Still, the broker is holding out for a tidbit for shareholders from this reporting season. Iron ore miners, in particular, may look to return some capital. Then again, the broker warns, there's a lot to do to make balance sheets ship shape.

Peak years for capex in the Australian energy sector look like being 2012 and 2013, according to Morgan Stanley. The broker's forward estimates show a decline in capex for sanctioned projects. Capex for shale gas expansion of floating LNG projects is still in the planning phase and not included. The broker observes the debate has centred on LNG construction timelines and costs. Now, as delivery is more certain, attention is on what will be done with the cash flow. Will it be dividends, share buy-backs, debt repayment or re-investment? Morgan Stanley expects a modest increase in dividends across the LNG-exposed companies but also cautions investors not to expect large cash returns. Increased operating costs and "capex creep" are two factors present for over a decade which should keep investors' feet firmly planted on the ground. The broker prefers those companies with obvious growth options.

Morgans is overweight oil and gas and thinks the oil price will strengthen in coming months. Growth in developed countries is likely to stimulate demand and the strong season for the oil price is coming, as the US throws off its winter woollies. Most oil and gas companies are expected to benefit from the rising oil price. Still, Morgans thinks those with increasing production and/or reserves are typical outperformers. Morgans does not think oil is going up for just seasonal reasons. Developed economies are expected to grow at the fastest pace since before 2007. The analysts expect Brent to rise to US$124 per barrel this year. The broker's preferences include Oil Search ((OSH)), Santos ((STO)), Sundance Energy ((SEA)) and Senex Energy ((SXY)).
 

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article 3 months old

Myer/DJs Merger Proposal Fails To Impress

-Merger benefits questionable
-DJs price now elevated by speculation
-Concerns remain over market share
 

By Eva Brocklehurst

Attention has been squarely on Australia's two upmarket department stores, David Jones ((DJS)) and Myer ((MYR)), after Myer confirmed an approach had been made to DJs late last year to consider a potential merger. Few brokers were impressed, believing the benefits would be hard to achieve and hard to maintain. The merger proposal also does nothing to address any dwindling of market share.

To Credit Suisse it was a poorly conceived play. There is a risk that a proposal will re-emerge in a form that's more attractive to DJs. This makes the downside risk more acute for Myer and more favourable for DJs shareholders. Credit Suisse has decided to reduce Myer's rating to Neutral from Outperform. Moreover, the broker thinks the supposed synergies are based on a sleight of hand. It requires significant integration to achieve the cost reductions and the promise there'll be no downside from a blurring of brand identity. A big ask, in the broker's opinion.

Citi is also suspicious about the claim of significant synergies, doubting these would be retained over the longer term. So, what was this proposal? Myer approached DJs with a nil premium merger and a fixed change ratio of 1.06 share for each DJs share. The merged entity was to operate separately and stand alone. Key were the financial benefits that would be obtained from a back office and support merger and cost savings at head office, amounting to $30-40m, as well as the consolidation of procurement channels. Working capital synergies were also expected to reduce capital by $30m. Citi believes aligning the two retailers would lead to a smaller sales base, taking away a large part of the synergies. The broker expects there would be at least 10 store closures. This brings up the question of landlords. The average lease term to expiry is close to 10 years and getting out of the leases would cost money. A lot of money.

Macquarie doesn't have such a problem with the potential synergies. The first full year earnings accretion as a merged entity was estimated at 36%, using phased synergies. What Macquarie suspects is that, now the approach has been confirmed, this may bring others that have been eyeing off DJs out of the woodwork. After all, the company has $612m of real estate on its balance sheet, which may be attractive to a wider range of potential bidders.

The approach demonstrates concern about the future of department stores, not opportunity, in Citi's view. It focuses on costs rather than growing sales. The broker believe that pressures from the online canibalising of store sales, competition and wage costs means that department stores need to win back market share to solve their problems, something the proposal is not considering. Citi thinks DJs has the advantage, as Myer advanced the proposal. but there's not much share price upside.

JP Morgan believes the rationale is sound, in terms of the cost savings, but the effort to generate the synergies required is high and the execution risks significant. Also, the potential change of control could provide a reason for DJs to trade at an elevated price/earnings multiple and above valuation. To achieve the scale in online would require significant investment and, while there is potential to rationalise the store network, the broker thinks this potential is modest because of the intention to operate multiple brands and the requirements to maintain scale.

DJs rejected the proposal not long after receipt, forming a view that there was not sufficient merit for shareholders. Myer did some work in making preliminary, confidential contact with the Australian Competition and Consumer Commission. Myer is of the view that the proposal would support competition in the market, in that the merged entity could compete more effectively in what the company considers is a global market. To Macquarie, it all comes down to how the ACCC defines the market. JP Morgan concurs. In the event of a narrow definition of full service department stores there would be some challenges. In the context of a broader department store retail market, JP Morgan thinks the market share of the two on a merged basis remains modest.

The other execution risk is that both companies are engaged in the search for a new CEO. Paul Zahra plans to retire from DJs, making the surprise announcement in October 2013, as soon as a replacement is found. Long-standing Myer CEO, Bernie Brooks, will retire in August this year. To JP Morgan the search for a DJs CEO is now disrupted. Management of an integration is likely to need different skills than those required to operate a brand. Key to this view is that some potential candidates may remove themselves from consideration, given the risk of a merger which could see their role eliminated.

JP Morgan and Citi have Underweight and Sell ratings respectively on David Jones. Macquarie and Credit Suisse are Neutral. On the FNArena database the stock has no Buy rating. There are six Hold and two Sell. The consensus target price is $2.79, suggesting 5.2% downside to the last share price. The price dropped 1c after the merger proposal was confirmed. The dividend yield on FY14 forecasts is 5.0% and on FY15 it's 5.4%.

In comparison, Myer has one Buy (Deutsche Bank), five Hold and two Sell ratings. The consensus target price is $2.76, suggesting 10.9% upside to the last share price. The consensus target dropped 5c (from $2.81) after the news. Myer's FY14 dividend yield is 6.9% for FY14 forecasts and 7.4% for FY15 forecasts.
 

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article 3 months old

Obesity: The New Emerging Market

-Far-reaching implications of obesity
-Chinese waistlines grow substantially
 

By Eva Brocklehurst

Obesity is a health hazard. That's been established for some time. Obesity levels are also increasing globally. What's not so established is what this means for markets and emerging economies.

Global asset manager AllianceBernstein draws a parallel with modern lifestyle and rising obesity levels and emerging markets, finding this unwanted side effect is having an impact on economic progress. According to Sammy Suzuki, AllianceBernstein's New York-based director of research for emerging market equities, there could be far-reaching implications from the obesity epidemic and investors should pay close attention to obesity as an important indicator of consumer and health-related trends in emerging markets.

The evidence cited is this: In China, 11.4% of men were obese in 2009 compared with 2.9% in 1993, according to a study published by Obesity Reviews. Obesity is rising among Chinese women and children, too. This reflected a sharp decline in physical activity, which has been caused by rapid urbanisation of the Chinese population as well as modernisation of the workplace. The Chinese population now also consumes more processed and packaged foods - hence more kilojoules - than previously. It all adds up to weight gain in a large proportion of the world's population that never used to bother about such things.

It's simple. When countries become richer they consume richer food and burn less energy during their day-to-day activities. The trend has been obvious in developed countries for decades. So which industries benefit? The researcher expects those providing snacks, soft drinks, fast food and prepared meals are likely beneficiaries. As well, smart phones and gaming companies gain benefits from the increasingly sedentary population. Suzuki also believes those offering treatments and solutions for obesity will grow, such as medical companies and drug makers.

The analyst believes it would be good news if the developing countries did not succumb to the US example of growing waistlines but, for now, there is little evidence that the Chinese are taking note and this means the obesity epidemic has potential to influence key sectors across emerging markets.


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

McPherson’s Gaining Strength In Diversity

-Streamlining existing grocery channel
-Two more significant acquisitions
 

By Eva Brocklehurst

McPherson's ((MCP)) is a small cap distributor of a range of products in housewares, personal care and household consumables with operations in Australia, New Zealand and Asia. Stockbroker Moelis believes the stock has undemanding fundamentals, even given this month's share price rally of more than 12%.

The broker acknowledges FY13 was disappointing given a decline in profits. Underlying profit dropped 22% in FY13, despite a 1% increase in underlying revenue. At the recent AGM, the company confirmed it was on target to improve profitability and outlined several initiatives that have taken place. Moelis expects that both the strategic initiatives and recent acquisitions will provide the necessary earnings growth and deliver benefits in the next year or so.

A major positive for the broker is that the recent acquisitions diversify the company's exposure to other channels for distribution as well as within the grocery channel. In March the company acquired 82% of Home Appliances P/L and this provided the initial entry into the kitchen appliance category. The brands in that business supply cooking equipment at the lower end price segment. Very recently the company has also bought Think Appliances to tuck into the home appliances division. Think has annual net sales of $30m  in the Australian market and owns the Baumatic, Venini and Damani brands. The acquisition of Think will give the company further channel diversification through entry into the plumbing segment.

The other recent purchase was Dr LeWinn's and Revitanail brands in the personal care segment. These are expected to deliver $50m in revenue and over $7m in earnings for FY15 to be 10% earnings accretive in FY15. All these acquisitions leverage existing infrastructure and provide channel diversification, according to the company. In home appliances it's the kitchen installation and commercial building channels. In the case of personal care it's the pharmacy channel.

Moelis also hails the progress made in regard to initiatives introduced in response to the pressure from the grocery channel. This included removing underperforming products and brands, contributing to a reduction in overheads, preserving margins and increasing warehouse capacity.

The broker upgraded the rating to Buy in early November and has a target price of $1.75. Even with the 12% increase in the share price Moelis regards the FY14 price/earnings ratio of eight times and a dividend yield of over 9% as worthy, because of the strength of the company's brands and the benefits that have ensued from restructuring.
 

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article 3 months old

Weekly Broker Wrap: Patchy Conditions In Lead Up To Christmas

-Sentiment improving slowly
-Consumer confidence diverging
-Life insurance profits soft
-Further upside to bank asset quality?
-Pathology dilemma continues
-TV advertising growth strongest
 

By Eva Brocklehurst

Citi notes a surge in confidence in Australian consumers in November but thinks, while there's no doubt the outlook is improving, it is too soon to be sure of a particularly strong Christmas for retailers. Moreover, wages growth is slowing, reducing the growth of disposable income available for spending, and consumers still hold concerns about their finances. Hence, it's the wealth effect - the sense of having more to spend - and confidence in their savings rather than income that will have to drive consumer spending in the short term. This is not unusual at this stage, as the labour market is normally the last part of the economy to turn around. The broker envisages the better times are ahead in 2014, when real consumer spending should move closer to trend after a disappointing 2013.

BA-Merrill Lynch is seeing a division emerge in consumer spending in Australia. Rising property prices, reduced interest rates and increased super seems to be driving improved confidence in certain social classes and these people are spending. Those not exposed to these drivers are feeling the effects of higher utility prices and are not so inclined to spend. Which are the stocks most exposed to the former? Merrills draws out Wesfarmers ((WES)), Crown ((CWN)) and Telstra ((TLS)). The broker expects top line growth in the consumer sector will remain tough in FY14 as income growth is below average and unemployment is rising.

Wesfarmers has defensive appeal in terms of spending and, through Bunnings, exposure to an improving housing cycle. The class of consumer that typically spends on table games, hotel, food and beverage products is the professional-middle class and this is where the improved spending will benefit Crown. Slot machine players, the choice of the less well off, is showing weakness. For Crown, growth in other revenue segments should insulate the business. In the case of Telstra it's the age demographics of the consumer - the 50-64 year-old segment that has the most disposable income and ability to spend - that's most influential.

Statistics on life insurance show weaker profits for the industry because of a worsening in group risk claims experience and lower investment earnings. JP Morgan thinks additional reserve strengthening in this insurance class may be needed and this could continue to depress industry profitability in the near term. The industry did report September quarter earnings were up 13% on the prior quarter but down 41% on the prior corresponding quarter. Much of the improvement on the June quarter was driven by increased investment income. What was encouraging was that individual risk trends were stable. Profitability levels remain low but at least they are not deteriorating.

The asset quality of major banks improved in the September quarter. This underpins the recent declines in bad debt charges but Credit Suisse is cautious about prospects for further moderation in debt charges. Key trends include a decrease in impaired business to 0.57% from 0.59%. The four industries which continue to have elevated level of impaired business are accommodation, agriculture, construction and property, although there's been some improvement in the latter two and the former appear to have stabilised.

The housing market is recovering, with the latest statistics showing a rise in both the number and value of commitments in September. Macquarie notes, one area that is soft is first home buyers, representing 12.5% of the market and down from the low 30% range in 2009. The data aligns with the broker's expectations for an improvement in credit growth next year.

With lower rates and rising asset prices Macquarie thinks asset quality at the the banks could further surprise to the upside. National Australia Bank ((NAB)) is best placed to benefit because its second half impairment charge in 2013 was 7-18 basis points above its peers. The broker thinks, on a 6-12 month basis NAB and Westpac ((WBC)) should perform the best, with exposure to improving business lending conditions in the SME/corporate segment.

The pathology industry and the federal government have been negotiating a further round of cuts in pathology outlays to reduce overspending. In FY13 the outlays exceeded the agreement by 3.3% and the discussions have probably negotiated the overspending closer to 2.1%. UBS understands that the industry would likely cede a cut of 2% from January 2014 but is seeking a political commitment on the resolution of broader issues, such as excessive rents paid to GPs for collection centre sites. The de-regulation of centres made by the prior government exacerbated the long standing issue of excess rents and the economics of many GP practices now rely on this rent, leaving the government with a funding dilemma. The industry is divided on the issue and the unwinding of excessive rents is expected to take some time.

Advertising agency markets have shown modest growth, up 1.6% in the year to October. TV advertising growth continues to be the strongest, with metro free-to-air spending up 5%. Pay TV goes from strength to strength, up 15% in October. Print is the weakling segment, although there are signs, according to Credit Suisse, that declines may be moderating. October's 14% fall was materially better than the declines of over 20% seen in the first half of the year. Magazines continue to struggle, down 23% in October.

Traditional digital display is slowing although still is the growth engine in the market. The digital market was flat in October and while total spending was still up 8%, growth was entirely driven by search and emerging platforms. In terms of categories, retail advertising returned to annualised growth for the first time this year as improved consumer confidence filters through to budgets. Finance was the strongest of the categories, with growth of 17% year on year.
 

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article 3 months old

Coke Downgrade Flattens Investor Spirits

-Heavy discounting continues
-Weak consumer demand
-Earnings becoming more cyclical?
-Strong brand and capital
 

By Eva Brocklehurst

Coca-Cola Amatil ((CCL)) has flattened investor spirits, downgrading guidance for 2013 earnings to a decline of 5-7%. The Coca-Cola distributor, producer of other bottled drinks and canned fruit blamed weak Australian conditions. Despite a warm winter it seems customers were not inclined to reach for more drinks, or maybe it's a structural problem that's been a while in the making and will hang around for some time.

JP Morgan had assumed the company would benefit from the cycling of aggressive promotional pricing that occurred last year but that's not the case, apparently. Pricing in Australian beverages has been driven by aggressive competition in the grocery channel from both Pepsi and supermarket private labels. Volume growth in the non-grocery channel disproves the belief there's a structural shift away from carbonated soft drinks (CSD). The broker also scoffs at the idea that the company is suffering from growth in private label drinks. Private label growth has largely been in water and Coke's Mt Franklin brand has grown commensurately. The overall non-CSD products from Coke grew 16% in the grocery channel in the first half, gaining one percentage point in share. While Coke is significantly underweight in juice and flavoured milk these are not driving market growth.

JP Morgan thinks the weak first half grocery volumes were a result of promotional fatigue and an unsustainable share in the first half of 2012 but accepts that it does not squash debate about the company's sustainable rate of pricing growth. Moreover, the reaction in the market was fair, in the broker's opinion. 2013 earnings are highly dependent on November and December trading in Australian beverages. These two months account for around 25% of earnings. JP Morgan suspects the weakness in the Australian beverages is exacerbated by a weak consumer environment. In shifting profit and volume mix toward cold drinks amid the decision to invest in cold drink equipment placement, means earnings and margins have become far more cyclical, and exposed to the discretionary spending of low to middle income consumers, particularly western Sydney, south east Melbourne and south east Queensland. JP Morgan contends these markets are likely to remain weak for the balance of 2013.

The weakness in the Australian market is an ongoing problem, according to UBS, particularly volumes and price in Australian soft drinks. This is thrown into high relief by the commentary on Indonesia, where robust growth rates expose the weakness of the Australian segment. Despite the more robust circumstances in Indonesia it's not enough to compensate. Furthermore, continued weakness in PNG is likely to be a larger than expected drag on Indonesia/PNG division earnings in the second half. CIMB expects more pressure on price and volume in the Australian market. While cycling a lower base, increased pressure in the supermarket channel is likely to continue as the retailers increase their private label penetration. A further unknown is the impact the Indonesian consumer slowdown will have on Ramadan sales. CIMB suspects a currency headwind may limit growth from Indonesia to the low-single digit range.

Citi believes de-stocking by key retailers has taken its toll while problems in 2013 are as much about the dispute with Woolworths ((WOW)) stemming from 2011 as they are about Pepsi's discounting. The broker suspects heavy discounting in the grocery channel entices smaller retailers to switch from direct Coca-Cola deliveries to sourcing more supply from grocers. Prices and margins for Coke are lower in the grocery channel. While guidance for double digit volume growth in Indonesia is impressive, Citi thinks Coke's biggest challenge will be contending with elevated inflationary pressures. Nonetheless, Pepsi's short-term actions do not change the long-term fundamental value of Coca-Cola Amatil. For patient investors, the broker believes the current share price weakness is a good opportunity to buy a high quality business with a strong growth opportunity in Indonesia.

For once, the canned fruit and juice business, SPC Ardmona, appears not to be the cause of the downgrade. The company continues to expect this division to report a decline in earnings for the year but Deutsche Bank notes there was some relief from new contracts with the major supermarkets, as well as the immediate tariff which has been imposed on Italian tomatoes by the Anti Dumping Commission. South African peaches are also being investigated. Coke previously suggested that the decline in SPCA earnings will constitute a 2-3% drag on group earnings. CSD volumes across most of the developed world are weak, according to Deutsche Bank, and this raises the issue of structural factors which are causing weak demand and encouraging industry discounting. Despite this, Coke is still a powerful brand and at some point Australian earnings should find a base and return to growth while the macro background in PNG and Indonesia should improve.

It's still an opportunity to build a position in a stock where JP Morgan thinks investors will benefit from the potential for value creation from a reallocation of surplus capital towards acquisitions, capital returns or an increase in the pay-out ratio. Strong cash flow and moderating capex is expected to generate significant cash flow over the next three years. Assuming a 2.5 times net debt/earnings ratio, the broker estimates the stock will have $1.23 per share of surplus capital by the end of 2014. The low level of gearing also overstates the price/earnings relative to other companies.

JP Morgan is sticking with an Overweight rating. Citi is also more bullish and retains a Buy rating. These two comprise the two Buy ratings on the FNArena database. There are three Hold ratings and three Sell. The consensus target price is $12.39, suggesting 1.8% upside to the last share price and down from $12.57 ahead of the announcement. The dividend yield on 2013 forecasts is 4.9% and for 2014 it's 5.0%.
 

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