Tag Archives: Consumer Discretionary

article 3 months old

Weekly Broker Wrap: The Outlook For Australian Equity Investing

-Restructuring to drive value
-Industrial stocks look stretched
-Cyclical stocks not expensive
-Tourism sector upbeat
 

By Eva Brocklehurst

Australia and China have something in common. Both economies are retreating from an investment binge and the process will weigh on growth in the years ahead, according to Credit Suisse. In terms of Australian company sales, these will slow too and there is limited scope to raise margins. The analysis from Credit Suisse suggests investors should focus on those companies prepared to help themselves, specifically which companies are expected to restructure their asset bases in the near future.

Corporate profitability in Australia is already high by historical standards and growth is expected to be slow. The options for cutting costs and raising profitability further are limited. The traditional drivers of revenue such as emerging market industrial production and domestic economic activity are not expected to provide the impetus over the next year or so. China is moving away from being investment-led and, in the same vein as Australia's slowing mining investment, the transition is unlikely to be smooth and will result in lower growth. So, it's all about low-growth investing. Credit Suisse lists companies which are expected to embark on significant restructuring to drive value independent of the broader economy. This means these companies will become more streamlined, require less capital and could benefit from a re-rating.

The case of Caltex ((CTX)) is conversion to a less volatile, capital light business. Brambles ((BXB)) is de-merging the Recall document storage business to concentrate on the pallets business. Amcor ((AMC)) is de-merging the Australasia & Packaging Distribution business. The company will then have an under-leveraged balance sheet with the option to acquire more growth. Telecom NZ ((TEL)) is selling AAPT, the Australian business, and Credit Suisse believes AAPT will be better off in the hands of a local owner. Telecom's management could then return the proceeds to shareholders. UGL ((UGL)) is de-merging the DTZ property business. DTZ is growing rapidly, unlike the remaining engineering segment, which could be a target for a merger once it's separately listed. Finally, National Australia Bank ((NAB)) is expected to eventually sell its UK business, Clydesdale Bank. A successful spin off could help create up to $4.5bn in value for shareholders, according to Credit Suisse, although the timing of the divestment remains uncertain.

UBS thinks the Australian industrial stocks, ex financials, are looking stretched. The absolute price/earnings ratio has risen to 16.9 times and is around 13% above the long-run average. The stocks also look expensive relative to the broader Australian market and to global peers.The question is whether the current high valuations signal an earnings upswing over the next couple of years. There is certainly some expectation of that factored in but the broker found that the return on equity (ROE) for the sector was not particularly depressed while margins appear quite normal in an historical context. It's hard to make a case for earnings expectations being too low or that there's upside for returns and margins beyond FY14.

There's plenty of stocks with below average returns and/or margins concentrated in the mid cap segment, which are relying on a cyclical upturn that is yet to happen.The potential upside appears concentrated among mid cap cyclicals such as Qantas ((QAN)), Boral ((BLD)) Toll ((TOL)), Harvey Norman ((HVN)) and Aristocrat Leisure ((ALL)) to name some. These are turnaround stocks, in the broker's view, that are battling tough conditions so there is a risk of disappointment.

Cyclical stocks are fairly valued, not expensive, in Deutsche Bank's opinion. Cyclical industrials have re-rated strongly over the past year and no longer trade at the 5-10% discount to defensives that was the case for several years. Instead they trade at a 5% price/earnings premium. The broker continues to see value because the medium-term outlook has brightened considerably and suspects expensive evaluations are taking account of backward looking analysis, which is lumbered with a poor earnings environment that's been in place for the past 5-6 years. Deutsche Bank expects 14% growth for cyclicals in FY15 and FY16 compared to 6-8% for defensives, making cyclicals relatively cheap. OK, the broker does expect some mild downgrades could be possible but, even so, a reasonable earnings growth gap should persist between cyclicals and defensives. Deutsche Bank thinks that years of resource-dominated growth has led to pent-up demand elsewhere. Housing and business capex have not known growth for five years and consumer spending trends are the worst in 50 years. 

Some attractive cyclical industrials that are considered cheap on a 12-month forward price/earnings basis are Downer EDI ((DOW)), Orica ((ORI)), Lend Lease ((LLC)), Myer ((MYR)), Challenger ((CGF)), Automotive Holdings ((AHE)) and Southern Cross Media ((SXL)). Those offering value on the basis of strong growth forecasts for FY15 include BlueScope ((BSL)), Macquarie ((MQG)), Crown ((CWN)), Sims Metal ((SGM)), Adelaide Brighton ((ABC)) and Flexigroup ((FXL)). In terms of low margins relative to history, where these could rise significantly, Deutsche Bank lists BlueScope, Boral, Crown, Tabcorp ((TAH)), Sims, Navitas ((NVT)) and Fletcher Building ((FBU)).

Citi attended its own recent Australian investment conference and notes the retailing industry theme involved an acceptance of a changing landscape. Grocery customers are still price conscious, leaving little option other than to manage costs and improve products. In discretionary retailing with the growth in online and the arrival of more global brands in Australia, differentiating the offering was considered critical. In property, the residential market is seen picking up but at an uneven geographical spread. There is strength in inner Sydney but this not representative of the national picture. Building activity demand is reasonable but also uneven across cities and regions. Mining company presentations highlighted varied conditions. Mining services noted some easing in cost cutting and fewer reductions in the scope of works, pointing to some stabilisation, although the focus remains on lifting efficiency.

Tourism was upbeat. There was agreement that conditions were improving and the outlook was good. Outbound travel by Australians was expected to persist at high rates, more so because of cheaper airfares, enhanced by low-cost carriers, than the high Australian dollar. Inbound travel was also picking up, from the US as the economy improved, amid some positive signs from the UK and Europe. Media continues to find the going tough. On the media panel, the executives confirmed there had been no improvement in advertising spending in recent months and only some stronger interest around events next year provided any encouragement. The infrastructure panel emphasised the need for new approaches towards projects, to ensure that required infrastructure was put in place in coming years. The plans of the new federal government were considered encouraging.

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article 3 months old

Is Wesfarmers Priced Beyond Performance?

- Wesfarmers sales growth reasonable on a net basis
- Yield is attractive
- Coles appears to be slowing
- Analysts question a high PE

By Greg Peel

Wesfarmers ((WES)) reported its quarterly retail and coal sales last week and the story was mixed.

Brokers have been wondering for a couple of quarters now whether the Coles turnaround story had reached a peak following the supermarket’s success in silencing the early sceptics. Within a net 4.8% lift in first quarter retail sales, Coles like-for-like sales growth fell to 3.4% from the previous quarter’s 4.5%. To be fair, Coles was hit with double-digit price deflation in fresh food, a number consistent with figures within last week’s September quarter CPI release.

But is this the whole story?

Deutsche Bank concedes it would be hasty to draw a conclusion before rival Woolworths ((WOW)) releases its sales result this week. However, Deutsche notes irrespective of food deflation, volume appears to be slowing. Margin expansion in Coles’ food &liquor business was soft in the second half of FY13, which suggests to the analysts that “maintaining the earnings momentum may become increasingly difficult”. UBS further notes Coles’ market share gains “disappointingly” slowed in the first quarter. JP Morgan suggests the pace of the Coles turnaround “is moderating somewhat”.

Piffle, says Credit Suisse. “The Coles result was influenced mainly by higher than expected deflation in fruit and vegetables,” the analysts point out, “which from a profit perspective is of little consequence”.

CIMB picked up on another factor, with regard to petrol discounting. Coles made a tactical decision to redirect promotional spending away from petrol discounting in the quarter in question, but clearly the strategy has fallen short of expectation. Late in September, management decided to hastily reinstate significant discounts, despite the cost, which suggests a plan to reinvigorate momentum, the analysts believe.

Wesfarmers is nevertheless not just about Coles. Bunnings is posting its best numbers in years. Lower interest rates, the beginnings of a housing recovery, and even warm, DIY-friendly weather over winter has helped Hardware Hell along at a time the Woolies pretender, Masters, is clearly struggling to gain any traction.

K-Mart also posted a solid result, but the runt of the litter was Target. Despite negative sales growth, Target is at least showing indications of its own turnaround under new management and the figures are becoming less worse. But if Target starts to regain market share, who will it regain it from? The other low-price chain? Well that would be K-Mart.

Let us not forget that Wesfarmers also produces coal, and here a 5% increase in prices for the quarter was pleasing. Credit Suisse suggests the bottom of cycle earnings for coal may now have been reached and modest upgrades could follow over the next twelve months.

And Wesfarmers’ insurance division continues to show signs of recovery.

The good news for shareholders is Wesfarmers’ policy of providing attractive capital returns. The conglomerate generates a lot of cash and has now passed beyond the bulk of its turnaround-spend. FNArena database forecasts suggest an FY14 dividend yield at the current price of 4.6% and an FY15 yield of 5.1%, fully franked, which is not far off the big banks.

The bad news is the price. Wesfarmers is trading at around a 20x price/earnings multiple on FY14 forecasts while delivering only around 5% compound annual earnings growth. For many brokers, that equation just doesn’t add up. Notwithstanding Coles is appearing to wobble, Target still needs work and a resource sector recovery is not on the cards for tomorrow.

One is tempted to hark back, nevertheless, to when Woolies’ PE broke above 20x back in the noughties. At that stage, analysts started applying the Sell ratings. By 25x, analysts were dumbstruck at the market’s folly. As the PE approached 30x, some gave it away and started lawn mowing services. You just can’t justify such a lofty PE for a business that sells bread and milk.

As it was, the GFC saved the day. But we have to concede things were a little different back then. The economy was booming and Australians were spending money like there was no tomorrow. The supermarket business was undergoing a revolution as Woolies soaked up the spoils of its move into liquor stores and petrol stations, the latter in particular driving cross-promotional market share gains of epic proportions. The company also turned the screws on its supply chains, forcing market gate prices lower and lower. It was not just the farmers, butchers, green grocers, independent liquor store and service stations that suffered, and largely disappeared, Coles was hit for six. The rival (as yet not acquired by Wesfarmers) tried to mimic Woolies as best it could, but soon hit the ground and continued to bruise as Woolies continued to kick and kick.

Things are a little different post-GFC and new market initiatives are thin on the ground for the supermarkets. Coles may have posted a faster growth rate than Woolies since being acquired by Wesfarmers but only from a much lower base. Woolies is still a force. Metcash ((MTS)) is fiddling around at the periphery but genuine competition is now being offered by foreign competitors such as Aldi and Costco.

The Coles recovery now appears to have all but run its course and let’s not forget, Wesfarmers includes consumer discretionary, insurance and resource sector divisions.

Add it all up, and five of the seven FNArena database brokers covering Wesfarmers cannot justify a 20x multiple. UBS is at least prepared to hang at Neutral, while all of Deutsche, CIMB, Macquarie and Citi have ascribed Sell or equivalent ratings. Credit Suisse (Outperform) is a bit of a lonely bull, while BA-Merrill Lynch (Buy) admits retailing remains subdued and thus it’s becoming harder to feel confident in forecasts.

But there’s that yield. As we’ve seen with the banks, analyst claims of overblown multiples is not an impediment to further price rises in a yield-hungry world. We may be about to learn, nevertheless, that the earnings outlook for the banks is finally improving. The earnings outlook for Wesfarmers seems less encouraging.

The FNArena database shows a consensus target of $41.62 for WES, or 1% below Friday’s closing price. One should not expect too wide a target range for the conglomerate, but we see Citi the low market down at $34.60 and Merrills the most exuberant at $53.00.

Funny. Merrills was so critical of the company’s decision to acquire Coles back in the day.
 

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article 3 months old

David Jones’ CEO Resigns: Another Earnings Setback?

-New CEO may lift performance
-Sales urgently need a boost
-Changes to current strategy possible
 

By Eva Brocklehurst

Upmarket retailer David Jones ((DJS)) has been thrown a curve ball. Or has the retailer thrown one? The chief executive, Paul Zahra, has suddenly announced his resignation. The resignation was for personal reasons and it has taken brokers by surprise. The company is part way through a strategic plan to reinvigorate the business. Mr Zahra, who has been in the post since June 2010 and with David Jones for 15 years, will continue as CEO until a replacement is found.

Morgan Stanley has made light of the news, believing this is not a sign that the company's performance has deteriorated. Moreover, the broker has conducted some analysis and finds company shares often perform better after a change of CEO. The consumer sector has experienced plenty of changes at the CEO level in the past three to four years. Competitor Myer's ((MYR)) CEO will finish up in the next year and, since 2009, Pacific Brands ((PBG)), Woolworths ((WOW)), Premier Investments ((PMV)) and JB Hi-Fi ((JBH)) have changed personnel at the helm.

The search for a replacement will be occurring at the same time as Myer looks to replace Bernie Brooks, so there will be a lot of interviews taking place in the department store sector over the next few months. JP Morgan expects succession uncertainty will result in a disruption to operations to some extent. Questions regarding potential changes to organisational structure and strategy are likely to persist. As a result, the broker is concerned that like-for-like sales growth, having improved a little in the first quarter of FY14, could remain subdued for the remainder of FY14.

Citi notes sales per square metre are 11% below the 2010 peak. The broker maintains the company has tightly managed costs but urgently needs to grow sales, not just cut costs. This means staff and marketing costs may need to rise first. A 10% rise in operating costs would wipe out 45% of group earnings so Citi envisages near-term downside for the stock. The company's property may be supportive, but the real opportunity lies in the store.

Morgan Stanley is of the view that David Jones can generate significantly more in earnings. The company has department store earnings margins, adjusted for property ownership, of just 3.3%. By comparison, Myer generates margins of 6.8%. Historically, DJ's has actually generated a higher earnings margin and Morgan Stanley thinks the company can get back above 5%. To do this the company needs to act on recent initiatives, including in-store service, online business and a new point-of-sale system, as well as improve store design, get out of underperforming categories and improve the private label offering. Morgan Stanley expects it will be the incoming CEO's ability to execute on this criteria that will ultimately drive earnings and the share price.

Citi observes that Paul Zahra was only interviewed in an Australian newspaper last week saying that there was still a lot to do at David Jones. There was no indication of an impending resignation. The broker notes he worked hard to restore years of under investment in staffing and online business. An international executive is considered the most likely candidate to replace him. Locally, Citi hails former executives Colette Garnsey, now at Premier Investments, Patrick Robinson, now at Gazal ((GZL)) and Sally Macdonald, formerly of OrotonGroup ((ORL)), as possibilities. A merchant who can drive sales per square metre is what's needed and Citi thinks this person is best coming from an overseas department store such as Nordstrom, Macy's, Selfridges or John Lewis. The pay scale could be over $3 million, compared with current CEO's pay of $2.5 million.

Paul Zahra continued with the execution of the 2008 strategic plan when he took up the post and then, in March 2012, launched his own strategy, which addressed several structural and company specific issues. JP Morgan lists these as the slow response to online, the challenge of global price harmonisation, the reduced service proposition over recent years, and the low credit growth environment which reduced earnings expectations for financial services. While there was a significant re-basing of earnings at the end of FY13 much of the changes had occurred and the business was on a more structurally sound footing. The broker notes that Paul Zahra was awarded around 88% of his short-term incentive payment in FY13, indicating the board was comfortable with his performance.

The valuation changes may be immaterial from a change of leadership but several elements of the current strategy might be reconsidered. In this list Credit Suisse includes the new small format store strategy and the concession agreement with Dick Smith Electronics. Online initiatives appear strategically sound and systems and infrastructure commitments are operating soundly as far as the broker is aware. The strategy for increasing private label brands has been modest at this stage and should not have a high impact if it is reversed. No commitments to the future of the CBD property appear to have been made.

On the FNArena database, David Jones has two Hold and five Sell ratings. The consensus target is $2.61, suggesting 5.9% downside to the last share price. Dividend yield is 5.% on FY14 consensus forecasts and 5.7% on FY15.
 

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article 3 months old

Time To Go Shopping?

-Can supermarkets trade off discounting?
-Consumption may be starting to improve
-Retailers to benefit from lower rents
-Landlords under pressure
 

By Eva Brocklehurst

Citi thinks investors should be concerned about petrol discounts. Deep reductions on high profile products and increased petrol offers push Coles ((WES)) and Woolworths ((WOW)) to a point where it may be impossible for them to achieve sales budgets without continued aggressive discounting. These petrol discounts are costly. An extra 4c a year in petrol discounting costs Coles $88m and the supermarket needs a 160 basis point acceleration in like-for-like sales to pay for it. Woolworths' response to Coles' aggressive stance gives it some edge, in Citi's view, offering a 15c petrol discount for $100 expenditure.

The competition is making it tough for Metcash ((MTS)). The IGA supermarket distributor is losing share and Citi forecasts a fall of 4% in like-for-like sales in the first half of 2014. The question for the other two rivals is whether they can trade off sales and margins and still meet expectations. The broker has a Sell rating on Wesfarmers and Woolworths. 

So, will the consumer step up to the plate? Macquarie observes that consumption is still in the doldrums. There's no evidence that consumers are returning to spending up big, although their expenditure may become incrementally stronger over the next six months. Macquarie believes that, after three soft years, spending may be at a turning point and this is critical if the economy is to avoid a downturn. Nevertheless, it's not a foregone conclusion. A more rapid decline in mining investment still has the potential to overwhelm any nascent pick up in consumer spending. Macquarie suggests waiting until mid 2014 in order to see whether the Reserve Bank's efforts to stimulate the economy have been sufficient.

Spending has been weak in recent years because consumers had reached the limit on leverage, reacting to falling wealth and, more recently, weak income growth. Moreover, capital gains are not included in measures of household disposable income but they do affect the ability of households to spend. Rising house prices enable households to withdraw on equity even if the capital gain is not realised. After analysing why spending has been so weak, Macquarie has looked at why this may not have changed, yet. First, monetary policy may have only just started to support spending.

The broker thinks a neutral cash rate could now be as low as 3%. A 5% cash rate that was considered neutral five years ago may not have the same effect as a 5% cash rate today. Since the GFC, banks' cost of funding has diverged from a once close relationship with the cash rate. Macquarie thinks a cash rate in an environment where household credit is growing at a 15% pace is likely to be higher than in an environment where credit is growing by 5%. This implies that a neutral cash rate is likely to around 3% now and would partly explain why the economy has not responded as yet to the lowering of the cash rate over 2012 and 2013.

With an improvement in spending on its way Macquarie thinks retailers may be in line for a larger share of consumer purses. Rapid growth in prices for non-traded goods and services such as education, utilities and healthcare has meat less money to spend on consumer goods. With governments and companies attending to containing costs and improving efficiency, costs should moderate, enabling households to spend more on items of choice. If consumption does improve over the next year and companies experience an improvement in earnings growth, then it is possible that by the end of 2014 employment levels will rise and companies will consider increasing investment spending. This is what is needed to broaden growth through the remainder of the non-mining investment economy. Without an improvement in consumer spending, Macquarie finds it difficult to see how that can happen.

Furthermore, the decline in the Australian dollar means more spending by tourists when they come in increasing numbers. Retail sales growth would have averaged 4% over recent years if the net tourism expenditure had been sustained at its previous robust level. In Macquarie's view, with the currency shifting back to the low US90c region, this drag on retail sales growth has been eliminated. If the Australian dollar fell to US80c then it may actually support sales growth.

The outlook is improving for retailers. Citi expects retail rents to fall over the next three years. Using industry averages, sales are down 6% from 2009 to 2013, but rent costs are 19% higher. The good news is that the lease expiries in 2014 are likely to be renewed at lower rents. Premier Investments ((PMV)) and Specialty Fashion ((SFH)) are cases in point. Their lease term to expiry is only three years and they are likely beneficiaries. Super Retail ((SUL)) and JB Hi-Fi ((JBH)) average lease expiries that are closer to 4-5 years and already enjoy special rent deals as "mini anchors", in Citi's view. There's more. Rental growth is likely to be slow for some time. Onerous leases signed in 2009-2011 roll off in 2014-2016. Citi forecasts rent-per-square-metre growth of less than 1% for OrotonGroup ((ORL)), Premier Investments and Specialty Fashion in FY14-FY16. The upside will likely take time, but over the next three years, rents should fall as a share of sales for these three.

Wait, there's more. It appears, in addition to lower rents, risks associated with weaker sales are increasingly being shared with landlords. Two features are creeping into specialty leases, according to Citi. These are percentage rent caps and break clauses. The implication from this is less operating leverage for retailers, which is good news if sales trends remain as weak. OK. It's not all good news. Even though rents are falling, Australian retailers still face tough conditions. The challenges include new international entrants lowering average price points, rising wage costs and near-term excess industry-wide inventories.

What does this mean for retail landlords? They're on the other side of the fence. Citi thinks rent growth will be lower for longer and leasing spreads will be under pressure. Fixed rentals are on the increase and will outpace market growth. The broker thinks specialty store leasing matters for investors because retail A-REITs are large, with a market cap of over $50 billion, and specialty store leasing is their core business. The majority of rental income comes from specialty stores, especially in the larger shopping centres. Commonly on five-year leases with anchor tenants on 10 years or more, movements in specialty rent can be a significant earnings driver for landlords. Rentals appear to be moving in the tenant's favour and slowing rental growth is the result.

The long term nature of the leases means slowing rental growth takes time to impact. Citi notes that, two years out from a report compiled in 2011 about the earnings implications of retail weakness, landlords are showing increasing signs of being affected, yet their share prices have risen an average of 23%, well ahead of the broader market's 16% gain. Increasingly, landlords are not being priced for what appears to be a growing risk. Supply of retail space is also expected to increase substantially over the next year. Some of the forecast space may not be built but it represents another risk for retail landlords. In terms of online shopping, this is a form of supply as well as demand, shifting spending away from shopping centres. A-REIT portfolios have not distinguished themselves to a significant degree and Citi thinks, with sales consistently weaker, pressure is building. Linking this to stock preferences Citi cites Charter Hall Retail ((CQR)), Stockland ((SGP)) and CFS Retail ((CFX)) as best able to grow rents in the future.
 

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article 3 months old

Oz Businesses Feeling Christmas Cheer

-Profits, earnings expectations improve
-Retailing also more confident
-Outlook dampens call for cash rate cut
 

By Eva Brocklehurst

Australian businesses are looking forward to a better Christmas. The despondency witnessed earlier in the year has ebbed away and low interest rates, a weaker Australian dollar and the passing of uncertainty over the federal election have conspired to improve the mood of businesses across the spectrum.

Profits at the end of the year are forecast to improve against the fourth quarter of 2012 and 2011 and sales and earnings are also expected to be much healthier. Dun & Bradstreet has surveyed business expectations during the September quarter and found that 28% expect to increase profits over the next three months. This compares with just 7% that are forecasting reduced profits. The responses come from across the board. Business expectations traditionally rise in the fourth quarter because of increased consumer spending but this year it is even better because the federal election has come and gone. The survey found 65% of businesses were now more optimistic about future conditions following the change in government. Optimism is closely linked to profit.

That most troubled sector of recent times, retailing, is also more confident. Of those surveyed, 25% expect to increase profits and the number rises to 31% among small business retailers. Significantly, the discounting which occurred earlier in the year does not appear to be critical to expectations for improved activity. The majority of retailers intend to keep prices level.

Across all sectors the selling price index was steady at 10.2 points, up marginally from 9.4 points in the prior quarter. The selling price buoyancy is also underpinned by recent weakness in the Australian dollar. When asked about the effect of the current level of the Australian dollar, 58% of businesses expected no impact, while 34% expected a positive impact and 8% a negative impact. Although recent sales activity has been weak, with the actual sales index falling to minus 8.3 points in the June quarter -- the lowest level in four years -- forward expectations have improved. Sales expectations have moved to 7.9 points, up from 4.9 points in the previous quarter, as businesses anticipate that the low level of interest rates will stimulate spending for the remainder of the year.

The issues that are expected to influence operations in the December quarter are cash flow, which 26% identified as the biggest barrier to growth, and fuel costs, flagged by 22%. The biggest areas of concern are investment and employment. Despite increasing marginally, the employment and investment indices are in negative territory for Q413, indicating that a greater number of businesses plan to reduce, rather than increase, levels of hiring and capital expenditure. Additionally, credit growth is weak. Only 8% of businesses intended to seek new finance. With other issues, 41% confirmed they had customer payment or customer insolvency problems in 2013 while 11% hold concerns about the potential impact of online fraud or scams.

D&B economic advisor, Stephen Koukoulas, said the improvement in conditions was noteworthy. The Reserve Bank has viewed the recent spike in house prices with some concern.

"The positive signs for the economy from the survey all but close the door on talk of a further interest rate cut from the RBA," Mr Koukoulas maintains. "It would not be surprising that, if these positive signals are sustained, the market will be pricing in interest rates rises in the early part of 2014 as the RBA works to normalise monetary policy."
 

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article 3 months old

Not So Fine At Oroton

-Loss of Polo-Ralph Lauren felt
-Competition pressure on margin
-New brand impetus needed
 

By Eva Brocklehurst

OrotonGroup ((ORL)), purveyor of luxury accessories, is finding things are not so fine in terms of growing income.

The company delivered FY13 profit of $24.1 million but this was enhanced by the performance of Polo-Ralph Lauren, a brand which the company will no longer sell. To reach guidance for FY14 earnings of $16-18 million implies a strong lift in the Oroton brand. UBS thinks it can be achieved but via marginally stronger sales growth, moderate gross margin recovery and cost reductions. There's no clarity on where any new business may come from and so, beyond FY14, UBS assumes the cost base is reduced to reflect an Oroton-only operating structure.

UBS has opted to retain a Neutral rating on the stock, pending further information on new business. This is the only one on the FNArena database, where the other three brokers rating the stock have Sell ratings. The consensus price target is $5.65, suggesting 7.4% downside to the last share price. The price targets range from $5.20 to $6.00. The dividend yield is 4.7% on projected FY14 earnings and 5.0% for FY15.

Credit Suisse downgraded to Underperform from Neutral on the back of the FY13 report, finding the Oroton brand the key source of weakness with like-for-like sales down 4%. Gross margins contracted 360 basis points. This broker also felt there were a lot of uncertainties facing the company. Oroton Australia is fielding competition from international players and the online presence of these players is increasing. This requires Oroton to be innovative with marketing. BA-Merrill Lynch also thinks a large part of the declining sales trend is the impact of international brands such as Coach and Michael Kors. Potential positive catalysts could be acquisitions, or capital management, but in the absence of any such developments the broker thinks the stock is overvalued.

If both sales and gross margins are declining it usually means the retailer is in trouble, according to Citi. The broker is prepared to give the company the benefit of the doubt. Maybe it was a particularly poor season. There's no doubt competition is rising. Citi expects Oroton will have to lower prices to compete with Michael Kors and another drop in margin will ensue. The Polo brand contributed $23m in earnings for FY13 and this hole will be hard to fill. Citi estimates Oroton generated no sales growth in FY13, with $96.5m in revenue. Management conceded the focus was on the loss of a core brand and that the promotional calendar was not used effectively. The broker is factoring in the acquisition of another brand into the equation but thinks any near-term contribution will be small.

Credit Suisse wants to see the brand reinvigorated with fewer mark-downs. Furthermore, Oroton International does not contribute materially to earnings at present and the pace of expansion is slow in the broker's view. Whilst Credit Suisse acknowledges there is opportunity here, the company appears to need more confidence in the macro environment to accelerate store growth. The Brooks Brothers joint venture, signed in August, in which Oroton has a 51% stake, offers potential and the company is targeting $50m in sales in five years. Credit Suisse remains a little dubious, noting a material increase in marketing and other expenditure is required to support growth in this venture.

The brand has historically outperformed the clothing industry on a like-for-like basis. The take on this from Credit Suisse and Merrills is that it has been driven solely by price increases. Oroton consistently delivered a quality product but now that prices are becoming broadly in line with international competitors such as Coach, the brokers consider there's little scope for further yield expansion beyond the industry norm. Adding to the risks, in Merrills' view, is the likelihood a decline in the Australian dollar will put extra pressure on gross margins.

The maturity of the Australian offering suggests growth is largely dependent on offshore expansion. Credit Suisse notes there are now two stores in Singapore and five in Malaysia, generating around $3m in sales on a net investment of $2m. Oroton plans to open a store in Shanghai and Hong Kong in FY14 and is assessing the possibility of opening more stores in China. A website for China will be launched in October 2013. Oroton has also signed an agreement with a distribution partner in the Middle East to open a store in Dubai in October 2013 and Abu Dhabi in mid 2014. The investment metrics for these sites have not been disclosed.
 

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article 3 months old

David Jones Ready For A Sale


Bottom Line 18/09/13

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up

Technical Discussion

We’d pencilled in an interim top during our last review of David Jones ((DJS)) which came on the back of two patterns.  The first was a rising wedge with the upper boundary being tagged and rejected a few days prior to our last look at the company.  Generally these are high probability reversal patterns although of course nothing is guaranteed.  And in this case the lower boundary of the wedge failed to be penetrated.  The basic wedge shape is still in position although it’s now losing symmetry.  In fact we’d need to see an aggressive downside break to suggest the origin of the pattern circa $2.40 is going to be tagged which would be the norm for this type of setup.  The other bearish pattern was Type-A bearish divergence which is still in position today though again it’s no longer a textbook example.  There is still a chance of a downside break although it’s no longer a high probability proposition with one reason being that the 61.8% retracement level has been exceeded.  As we’ve been mentioning often lately when the typical retracement zone is overcome a larger flat pattern is often the way forward which is now a possibility here.

For the most part price has been chopping back and forth between $2.00 - $3.00 since August 2011 making for frustrating trading conditions.  Trading ranges are all well and good with many traders happy to buy at support and sell at resistance with plenty doing quite well out of the strategy.  You just have to be cognizant of the fact that a decent trend isn’t going to materialise.  So for the moment we have to be aligned to the likelihood that more of the same choppy price action is going to be the way forward.  In regard to our wave count it’s very noticeable that the probe down to wave-A was clean and strong so is therefore impulsive in nature.  On the flip side, the subsequent rebound higher has been the exact opposite.  It’s more been a case of price stepping its way higher with overlapping wave structures continuing to dominate.  This is always an indication that the corrective pattern is still in progress.  A continued meander higher up to the high of wave-(X) followed by rejection would portend to another decent leg south.

Trading Strategy

We offered a shorting opportunity last time though with the pattern subsequently starting to fail we pulled the pin with no trade made.  Aggressive traders could still sell following a break beneath yesterday’s low with the initial stop placed just above the prior pivot high at $2.96.  It offers a low risk set up though I’m not going to make a formal recommendation as the patterns are starting to lack clarity.  Still, if you’re looking to balance your portfolio with some short positions then David Jones is worth considering.  There is certainly no evidence that the current move higher is the initial stage of something much more bullish.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not 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

Premier Investments Potential Lies With Smiggle

-Core apparel brand struggling
-Smiggle has most potential
-Concerns linger for FY14
 

By Eva Brocklehurst

By all accounts it was a warm winter in much of Australia and this means clothing labels have excess inventory to sell. This particularly affected Premier Investments' ((PMV)) lower-end brands such as Just Jeans and Jay Jays in the FY13 results. The company's earnings were describe as soft by brokers, again. Sales trends have been poor for three years, according to Citi. How long can this go on?

In seeking out the positive story, UBS thinks the Smiggle stationery brand's improvement and roll-out, along with the Peter Alexander sleepwear store expansion, should help offset the tough conditions in the other brands. Smiggle's sales per store in the second half were down 1% but that compared with being down 11% in the first half. This result was partly due to timing of new store openings but UBS thinks a degree of improvement can also be attributed to the underlying performance, driven by production innovation such as the launch of the Orange range. A strong Christmas season is also expected against the prior comparative period.

On a sales per store basis, for the key apparel brands, only Dotti and Portmans achieved growth. Jay Jays declined 11%, Just Jeans 3.3% and Jacqui E 2.3%. Dotti grew 7.3% and Portmans 2.5%.

Citi sees plenty of upside in the Smiggle expansion but gets a headache when looking at the core brands. They are seen losing share and competition is intensifying. Citi forecasts sales growth of 3.1% in FY14, lower than cost growth of 3.3%. The broker believes there are always good and bad performing brands within the portfolio, but the company has generally struggled to hold market share. Citi has decided to downgrade the rating to Sell from Neutral, reflecting a stock that has run up 27% over the past three months. This is similar to other discretionary stocks, but the broker remains equally concerned about those where share prices have run ahead of expectations.

UBS retains a Buy recommendation on the basis that management is capable of turning around mature brands and implementing initiatives to lift margins and control costs. Moreover, Premier is one of the only listed Australian retailers to offer a credible and profitable offshore growth strategy. Smiggle and Peter Alexander are expected to represent more than 30% of stores and sales by FY16.  The broker's underlying valuation is undemanding: stripping out the Breville ((BRG)) stake and net cash the underlying Just business suggests 11 times FY14 forecasts earnings. 

The company has put Smiggle Japan on hold given risks uncovered after further investigation, such as inability to launch the full product range and unfavourable lease arrangements. Instead, attention has shifted to the UK, with the first UK store opening in February 2014. From FY15, Premier envisages the roll out of 20-40 stores per annum to reach 200 stores in the UK. This profile is not dissimilar to the previous plan for Japan. Considering Smiggle management's former experience in the UK, and the closer cultural and commercial realities, the execution risk for UK is arguably lower than for Japan, in UBS' view.

The first store will open in Westfield Stratford in February 2014 and Citi factors in some success into forecasts, assuming the company has 63 offshore stores by FY16 across both Asia and the UK. Smiggle Malaysia still on the cards, and the first store is to open in Kuala Lumpur in the second half of 2014. This has limited risk considering proximity and similarities to Singapore. Peter Alexander's growth trajectory is for sales to increase 40-50%, driven by additional stores in Australia and New Zealand, flagship store opportunities in major CBDs, as well as new Myer wholesale and concession agreements.

 Deutsche Bank is positive about the earnings outlook and confident management can deliver. The broker commends the consolidation of the distribution centres into a single company-owned facility as good use of the balance sheet. Apart from targeted operating expense savings of $2m per annum within three years, there is also the strategic benefit of taking greater control of the supply chain. Macquarie, while recognising the importance of controlling the distribution infrastructure, questions the need to acquire the land and buildings. The new distribution centre for Australia will be near Melbourne while a new Singaporean centre is being established with a global logistics partner. The NZ centre capacity has been reduced and other NSW and Victorian facilities will be closed.

Other concerns? Well, the year-end inventory position per store increased 18% after falling 8% in the first half. Management defended inventory levels, saying the build up in stock levels was in anticipation of earlier and larger scale promotional activity from August. UBS also notes the company announced plans to roll out of Peter Alexander in Singapore a year ago but is still finding it hard to obtain a site.  Labour cost pressures aren't going away either. Wage cost inflation is offsetting other cost benefits. UBS expects similar base wage increases in FY14. The delays to the Jay Jays turnaround is also significant and the broker questions whether the change in brand management means uncertainty around timing and strategy.

Citi reminds investors that there was $3.4 million in gains on financial instruments in FY13 that are unlikely to be repeated in FY14. Citi also thinks investors should recognise the sales and profit split from the two growth brands and the remaining core apparel brands. The broker calculates that the growth brands, Peter Alexander and Smiggle, account for 33% of sales and 40% of group earnings and have implied margins of 18%. The remainder of the business has an earnings margin of 7%. The key question, therefore, is whether these margins are sustainable. The broker is less concerned with Peter Alexander because of the design focus and price point but Smiggle has many imitators and sustainable margins may be more like 12-15%.

Then there's that other (a little time-worn?) concern. Consumer confidence. When will it improve? Confidence is generally expected to improve after elections, supported by lower interest rates and capital city house price rebound. The market awaits. Besides this, brokers continue to expect incumbent apparel retailers will face competitive pressures from online and international entrants over the medium term.

Premier Investments has two Buy, two Hold and two Sell ratings on the FNArena database. The consensus target is $8.22, suggesting 0.8% downside to the last share price. The price target has moved from $7.73 ahead of the results. Price targets range from $7.60 to $9.05. The dividend yield is 5.0% for FY14 forecasts and 5.2% for FY15.
 

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article 3 months old

Myer’s Outlook Refurbished But Still Subdued

-Weak sales, cost pressures continue
-Better season ahead with lead to Xmas
-Online growth but benefit takes time
 

By Eva Brocklehurst

When FNArena looked at department store Myer ((MYR)) at the end of the March quarter it was hoped shoppers would be in a better frame of mind by September, when the FY13 results would be known. It appears they were not. Myer's sales growth in the June quarter contracted 0.8% after growing 0.5% in the March quarter. Sales grew by just 0.4% for FY13. Subdued trading continued into the September quarter but brokers are prepared to accept this may be related to uncertainty ahead of the federal election.

Will that now change? Goldman Sachs observed several retailers pointed to political uncertainty in the lead-up to the September federal election as contributing to subdued trading conditions but the broker's economic analysts have found little evidence to suggest retail spending, confidence and asset prices have historically surged in the months following a federal election. In fact, they found that retail sales have tended to slow in the period post a federal election, with consumer confidence largely unchanged. The two areas that were found to benefit following previous elections were building approvals and business confidence.

Things are staying tough out there in retailing land, it seems. The company's position typifies a lot of Australian retailers. Soft sales and growing costs. The Sass & Bide label was a highlight and shows the potential of a strong brand and good design. Myer acquired 65% of the women's fashion label in March 2011 for $42.25m and has announced it will acquire the remainder this financial year for $30m. Morgan Stanley suspects that, while the brand was a strong driver of the department store's profits this time, it will be unlikely to get the same benefit again. Taking out that label, Myer's business appears to have deteriorated at a faster rate than sales have grown.

Oh to have more brands like Sass & Bide, laments Citi. The broker considers the company has price/earnings value relative to other discretionary retailers like JB Hi-Fi ((JBH)) and David Jones ((DJS)) but that doesn't deny the fact that absolute prospects remain weak. Near-term upside is most likely to come from rising house prices, creating a wealth effect and reduction in household savings, but Citi asserts this is dependent on consistent house price growth greater than 10%. The broker has revised down earnings forecasts by 7% and 3% for FY14 and FY15 respectively. Myer's operating costs are expected to rise 4-5% in FY14 and by 3% beyond that year, as wages and rents rise. Growing sales faster than costs is not easy, but Citi thinks it is possible. The broker maintains that staff levels need to rise by 10% as a precursor to better sales growth. The rating is downgraded to Sell from Neutral as Citi believes the recent run in the share price looks unjustified based on the earnings trajectory.

UBS is cautious but retains a Neutral rating. Sales trends are subdued but the broker thinks this will start to improve. Trends slowed through the June quarter because of the cycling of stimulus in the prior corresponding quarter, subdued pre-election spending and a warm winter. Looking forward, the broker expects improvement will be underpinned by a more confident consumer, rising house prices and normal spring/summer weather. The weaker Australian dollar should slow online leakage and drive more inbound net travel. FY14 is being labelled as a transition year with earnings pressured by rising costs and higher depreciation. The broker expects the net impact of refurbishments and new store openings to be neutral in FY14, with like-for-like sales broadly in line with reported sales.

Morgan Stanley has downgraded to Equal-weight from Overweight but still likes the business. Earnings are seen pressured while refurbishment and the building of the online business occurs. Operating cost growth is expected to increase by 4-5% during FY14 and this equates to a $40-50m headwind in the broker's calculation. A significant portion of the cost increase relates to building the online business but this should enable Myer to compete better and boost like-for-like sales growth. Gross margins in FY13 were driven by less discounting of wholesale branded products and continued reduction in shrinkage, but Morgan Stanley thinks these opportunities are becoming limited. Gross margin is still likely to rise, but at a slower rate than in the past.

In FY14, the broker expects Myer to post the strongest like-for-like sales performance since FY07 amid strong online growth and less price deflation. Myer has struggled for sales growth and costs have often been removed to enhance profits. This has supported earnings over the past few years but left the business exposed to headwinds like the shifting to online. Morgan Stanley doesn't doubt the company has the right strategy, but expects it will take time for results.

The contraction in June quarter sales disappointed Deutsche Bank but the broker thinks consumer confidence, which has recently improved, may continue to do so in the lead up to the key Christmas trading period. Under this scenario, the broker thinks appetite for discretionary retail stocks is likely to increase and Myer should outperform, as it is the cheapest stock in the sector and offers very attractive cash generation. Hence a Buy rating is retained.

Credit Suisse has also hung onto a Buy rating. The broker suspects Myer may be be downplaying expectations. On the surface, the results suggest a continued emphasis on business downsizing and the absence of further profitable opportunities for growth in the short term. Moreover, company specific initiatives will result in revenue and profit from new stores being offset by the refurbishment activity on three major stores. So, where does the broker get the confidence for a Buy rating? Excluding the refurbishment and online expansion initiatives, the growth rate in like-for-like sales is likely to improve through the course of FY14 from an acceleration in online sales and a generally improving retail environment. Growth in operating costs are also seen moderating. In addition, cash generation remains strong and Myer has a modest valuation.

On the FNArena database there's a 6.7% dividend yield on FY14 consensus forecasts and 7.1% for FY15. The consensus target price of $2.73 suggests 2.8% upside to the last share price. There are two Buy, three Hold and three Sell ratings.
 

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article 3 months old

Weekly Broker Wrap: Aust Healthcare, Building, Retail, Gaming And Transport

-Solid defensives in Aust healthcare
-Conflicting stories in building
-Discretionary retail trends diverge
-Aust gaming subdued
-Transport dividends up

 

By Eva Brocklehurst

Australia's healthcare sector retains some attractive defensive characteristics but the valuations are not generally defensive, in Morgan Stanley's view. ResMed ((RMD)) holds the most upside potential for the broker. Sonic Healthcare ((SHL)) was upgraded to Overweight during August, joining ResMed, Primary Health Care ((PRY)) and Sigma Pharmaceuticals ((SIP)) in the category.

Morgan Stanley had been concerned that Sonic would miss expectations as a result of fee cuts across major geographies and a benign US volume environment. FY13 results surprised, however, and this provides a higher forecasting base. The broker understands that execution of the US cost cutting program is now complete and benefits are expected in FY14. This cost cutting may negate most known fee cuts in FY14 and provide the platform for growth which the broker was previously skeptical about. Sonic is considered a defensive volume growth story.

US device growth at 16% in FY13 was in line with expectations and ResMed benefitted from the shifting of the mix as home sleep testing accounts for a greater proportion of prescriptions. Mask sales growth in the US was over 8% in the second quarter but ResMed lost share. The broker expects new releases will claw back this lost share and revenue could surprise on the upside if the new devices gain traction. Home Sleep testing now accounts for over 30% of US volumes and is expected to approach 40% over the next year. The competitive bidding pricing is already known for the bulk of round two contract winners and this leaves ResMed with good forward visibility and confidence in the outlook.

Building materials stocks have seen price/earnings re-rating that was ahead of results, in anticipation of a growth recovery. Morgan Stanley thinks FY14 will provide some growth but for the most part consensus expectations are seen as still too high for the broker's liking. The most preferred stock is DuluxGroup ((DLX)), a high quality company generating a high return which justifies its P/E premium, in Morgan Stanley's opinion. Dulux has more defensive earnings characteristics than other building materials stocks, but still offers solid growth prospects. Earnings upside may come from a sharp fall in the titanium dioxide price, which is a significant input cost to paint. Working capital opportunities in the former Alesco businesses could drive further upside.

The broker's least preferred stocks are Fletcher Building ((FBU)) and CSR ((CSR)). Fletcher is exposed to a recovery in the New Zealand housing market, where it is the leading player through its vertical offering. This is the main positive. There is no FY14 guidance, and consensus expectations for FY14 and FY15 appear aggressive to Morgan Stanley. Revenue looks light across most of the divisions. No significant volume growth is expected in Australia while North America remains mixed - positive on the residential but flat on the commercial side.

CSR is positioned for a recovery in the Australian residential market but the broker sees challenges within aluminum and the Viridian turnaround requires proof. CSR offers some of the best exposure to an improving east coast property market but it's not enough to change an Underweight recommendation. Strength in building products is offset by execution risk in Viridian and risks around the aluminium assets.

JP Morgan has taken a look at the US operations of Boral ((BLD)) and James Hardie ((JHX)). Boral's performance through the downturn has mirrored that of the broader construction industry, i.e. spiralling losses, followed by deep capacity cuts and restructuring efforts. The future of the US business hinges on a number of factors, in the broker's opinion, principal among these being a recovery in brick intensity.

In contrast, James Hardie's performance through the downturn has been exceptional as it is one of the few building-related entities in the US to remain comfortably profitable. In fibre cement James Hardie stands out with a differentiated product and high market share. Boral has been affected by the volatility that is typical of fragmented industries such as bricks and tiles. In terms of pricing,  brick and tile that was resilient, although future increases will need to be considerable to restore returns, in JP Morgan's view. Again, in contrast, James Hardie has battled on the price front.

Australian retailers had a stronger second half of FY13 with earnings up 4% relative to the 3% lift in the first half. UBS finds household goods in terms of JB Hi-Fi ((JBH)) and supermarkets in terms of Woolworths ((WOW)) reported the strongest results. Billabong ((BBG)) and Pacific Brands ((PBG)) were notably soft.

For the staples, reactions were mixed while results were in line. Whereas Wesfarmers ((WES)) fell as the softer second half for Coles was construed negatively, despite Wesfarmers announcing a capital return, Woolworths ((WOW)) performed strongly, as the market reacted to the upbeat commentary on FY14 momentum. UBS views the grocery sector as fair value, but thinks Woolworths has the greatest scope to outperform. The third player, Metcash ((MTS)) sustained 5-10% downgrades in the wake of its AGM, as IGA sales were reported to be hit by heightened levels of fuel discounts by the major chains.

In discretionary retailing the trends parted. Household goods, underpinned by improving house prices, performed well while the department store/fashion area was soft. Looking forward, UBS expects this trend to continue, with increased competition in fashion to present a risk to department store forecasts and an improving housing backdrop to provide upside to those stocks such as Harvey Norman ((HVN)) and JB Hi-Fi.

Crown ((CWN)) and Aristocrat ((ALL)) remain Deutsche Bank's favoured stocks in the gaming sector. Australian gambling expenditure is expected to remain subdued through the remainder of 2013. Crown will benefit from its exposure to the higher growth Macau and Perth markets and has introduced some cost reduction initiatives in order to offset the weaker trends at Crown Melbourne. Aristocrat is sustained by the fact it generates just 27% of earnings from Australia. Of note to the broker, Crown and Tabcorp ((TAH)) were unusually quiet about trading in July and August. Echo Entertainment ((EGP)) and Tatts ((TTS)) reported positive trends. Echo was boosted by strong growth in the VIP segment while Tatts benefited from a favourable jackpotting sequence in lotteries.

The weakness previously seen in gaming machine expenditure has also affected gaming tables, and there's been a softening in wagering and keno expenditure. Conversely, lotteries expenditure has remained buoyant, although Deutsche Bank thinks this can largely be explained by the favourable jackpotting sequence. In order to offset the weaker than anticipated top line growth, some of the companies introduced cost reduction initiatives and there is an increased focus on cost control and margin improvement.

Transport produced three main themes from the earnings season. In Deutsche Bank's view, these are cost reductions, higher dividends and an uncertain outlook. Most results were in line with forecasts. Qantas ((QAN)) showed the largest variance because of an accounting adjustment to the treatment of ticket revenue. Dividends were generally higher, with Aurizon ((AZJ)) standing out. Asciano ((AIO)), Royal Wolf ((RWH)) and Toll Holdings ((TOL)) all delivered better-than-expected dividends. The changes to FY14 earnings expectations were mostly small, with the airlines being the largest downgrades on the back of fuel and capacity/yield pressures.

Deutsche Bank now has three Buy recommendations in the large cap transport space, these being Asciano, Aurizon and Toll. Toll is being more disciplined on costs and strategy but has less earnings visibility than the other two. Brambles ((BXB)) is no longer a top pick and was downgraded to Hold from Buy during the earnings season.
 

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