Tag Archives: Consumer Staples

article 3 months old

Weekly Broker Wrap: Retail, Energy, Newspapers, Real Estate Ads And Top Picks

-Retail concentrates in housing
-Survival measures continue in oil
-Less support likely for oil & gas deals
-US print spin-offs reveal some value
-FY15 key catalyst for Vocus
 

By Eva Brocklehurst

Retail

The latest retail sales data suggest growth is increasingly concentrated, Macquarie observes. The home improvement sector, supported by housing growth and fiscal stimulus, may be positive but fails to offset the headwinds in food and liquor.

Supermarket growth was soft in June and Macquarie estimates Woolworths ((WOW)) lost 1.4 percentage points of market share over the year to June. Rival Coles ((WES)) likely gained 0.7 percentage points on the same basis. Liquor growth is weak and consistent with trade feedback that signals domestic consumption, particularly of beer, is softening.

Macquarie is cautious about the sector overall, outside of housing-related categories. Wesfarmers is the preferred consumer staples exposure while JB Hi-Fi ((JBH)) is the preferred discretionary exposure.

Energy Stocks

The energy sector has re-positioned for lower oil prices largely via redundancies and deferring discretionary expenditure. This should be the theme in the upcoming reporting season, in Citi's opinion. Further measures to survive these lower prices are likely.

The broker expects Woodside Petroleum ((WPL)) will move forward with the Browse project but still needs to win over the market on expected returns. Santos ((STO)) needs to reassure the broker regarding an equity raising, as it has previously been adamant one is not required. For Oil Search ((OSH)), the result will present another opportunity to look at how PNG LNG stacks up.

The question asked about Caltex ((CTX)) is one of how does it maximise value of its customers and infrastructure in the wake of the exit from Kurnell. Smaller stocks such as Beach Energy ((BPT)), AWE ((AWE)) and Senex Energy ((SXY)) need to provide an indication of their strategic direction in a low oil price environment.

Macquarie agrees with the need to to respond to the current low oil environment with production efficiencies and reductions in head count. With the industry anticipating a recovery in the medium term and the market pricing in a recovery, albeit modest, in oil prices, the broker suspects future LNG transactions will become harder to justify.

Deals are likely to be less well supported and Australian oil & gas stocks cannot rely on the premium value previous transactions have implied. Instead, future deals could act as a reminder of the marginal returns on offer from Australian LNG projects, the broker maintains.

Macquarie still expects merger & acquisitions will be on the agenda but finds none of the large caps are obvious takeover targets in their own right. To get a deal across the table may require innovation, such as separation and divestment of infrastructure-like assets.

At face value, the broker considers Woodside a more likely takeover target than it was in the past as it still holds strategic, long-life LNG interests. Still, the limited life of reserves and a premium valuation could deter bidders.

Santos appears cheaper, given its lingering funding concerns, and has attractive interests in the Cooper and GLNG. Still the long tail of assets may dissuade potential buyers. Oil Search's takeover appeal is clouded, in Macquarie's view, by the complicating stake held by the PNG government and PNG's takeover code, although it offers an unmatched growth outlook.

BHP Billiton's ((BHP)) petroleum assets are now more important to the company as a whole. While Macquarie does not expect the company to pursue corporate acquisitions, faced with declines in conventional production it may look to acquire liquids reserves.

Interoil ((IOC)) has a greater upstream focus and this simplifies its story. Macquarie believes the company's outlook will now be determined by the improved prospects for an Elk/Antelope development. The broker envisages value emerging in the stock since the end of June and upgrades to Outperform from Neutral.

The broker considers Beach Energy may not be a takeover target in its own right but its strategic review seems to be visiting a number of options to create value through acquisitions and divestments.

Newspapers

Over the last two years, several US media companies have separated their print assets into standalone listed entities. Credit Suisse considers these developments offer a good indication of newspaper valuations generally. While low sector multiples reflect ongoing revenue headwinds, the broker maintains US newspaper assets are at least finding some equity investor support.

Translating this theme to the Australian scene the broker values the Australian newspaper assets of Fairfax Media ((FXJ)), News Corp ((NWS)) APN News & Media ((APN)) and Seven West Media ((SWM)) at around 4.0-4.5 times FY16 earnings. The broker expects revenue declines will continue but be mitigated somewhat by strong cost control.

Real Estate Classifieds

Deutsche Bank tracks new listing volumes in the Australian property market and finds a significant improvement in July from the trend in the June quarter. Sydney and Melbourne remain the drivers behind the national growth rate in listings.

This points to a strong start to FY16 for Fairfax's Domain and REA Group ((REA)), with REA likely to be more leveraged to underlying volumes given its greater penetration. REA remains the broker's preferred exposure.

Top Picks

Credit Suisse has updated its top picks and now includes Vocus Communications ((VOC)). The company's FY15 result is expected to be an important catalyst as the market is concerned around the second half performance of newly-merged Amcom.

The most exciting opportunity, in the broker's view, is Vocus successfully executing revenue upside from the merged group. Credit Suisse believes consensus expectations underestimate the growth potential in Vocus fibre, ethernet and internet businesses.

Morgans adds Burson Group ((BAP)) to its list of high conviction stocks. The broker likes the comapny's highly defensive earnings stream and the acquisition of the Metcash ((MTS)) automobile business. Further growth is expected from expansion in the WA market and the company could accelerate its roll out following the acquisition of Covs.

Morgans removes Federation Centres ((FDC)), National Storage ((NSR)) and Impedimed ((IPD)) from the list. Now the merger with Novion has been achieved there are few catalysts for Federation Centres. The other two have share prices which have appreciated recently, and the broker also envisages few opportunities in the short term for those stocks to re-rate.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Supermarkets, Aviation And Small Caps

-Aldi profile to broaden & grow
-New supermarket operator probable
-Coles/Woolies share loss likely
-Pacific Smiles expands
-Tomizone in the right place
-Greencross "rare value"?
-GDI Property concerns overplayed?
 

By Eva Brocklehurst

Supermarkets

Aldi has revealed some financial details owing to an Australian government inquiry into company tax avoidance. The company's pre-tax profit margin in FY13 was 5.2%, which Citi notes is above Coles ((WES)) and below Woolworths ((WOW)). The broker envisages Aldi has scope to grow and move on price in Australia. Adjusting for store size, given Aldi stores are half the size of local rivals, sales per store total $28m versus Coles at $33m and Woolworths at $37m. The lower sales productivity is attributable to lower prices.

JP Morgan agrees that the German-owned retailer's financial performance in Australia suggests growth is ahead of its peers. The broker suspects sales growth was around 13% in 2014. Aldi's customer profile is expected to broaden as product quality improves and more branded products are offered. JP Morgan now suspects a new entrant in food retail is likely to gain confidence now Aldi's financial performance is known. Any weakness that was thrown up in the financial revelations would have acted as a deterrent. The broker  maintains there is the prospect of another specialised format operator entering Australia and this will be a negative for incumbents, including independents supplied by Metcash ((MTS)).

Morgan Stanley observes Aldi and Costco are now reaching mainstream Australia and both are now over index with younger people and large households. The broker's survey of Australian consumers took note of future indicators of market share such as queue length, convenience and fresh offerings. Morgan Stanley believes FY20 market share forecasts may prove too conservative at 11.1% for Aldi and 1.8% for Costco, given an expanded addressable market. It appears near impossible for Coles and Woolworths to retain market share while the independents (IGA) at 11.4% do not have enough share to give up.

Deutsche Bank's supermarket pricing study for the June quarter was flat, easing back from the 2.2% inflation observed in the prior quarter and the weakest outcome since September 2013. Woolworths is investing heavily in branded product pricing and this is probably the segment where prices became too high. Woolworths increased price investment in the quarter but Coles does not appear to have responded aggressively. Both supermarkets experienced around 6.0% deflation in private label in the quarter but Woolworths branded product fell 2.6% while Coles grew 5.1%. The broker believes Coles has continued to control its own pricing dynamic and maintained solid trading momentum.

Deutsche Bank makes a case that, if Woolworths' earnings in food and liquor were re-based sufficiently for it to be in a position to grow in line with the food retail industry, it could deserve to trade at a 10% premium to the market. The broker calculates the current share price implies margins that are 100 basis points worse than consensus, or a fall of 200 basis points from their peak. That said, it is likely the market is pricing in enough downside but Deutsche Bank considers it too early to invest. Stocks rarely outperform while estimates are being cut and there are risks ahead of the arrival of a new CEO. The broker advises a Hold rating is appropriate at this juncture.

Aviation

Analysis of forward fares in the domestic market points to steady price increases and Deutsche Bank suggests this supports a recovery in domestic aviation profitability. The broker looks at trends in fares for both economy and business class and notes economy fares are up 10% versus the prior June quarter with business only slightly lower. International fares are more volatile and subdued in terms of growth. Economy fares were flat to lower heading into the first quarter of FY16 and only slightly better in business. This confirms suspicions that Australian carriers' international growth will remain negative into FY16. Some international capacity growth is coming from other carriers but this is averaging around half the growth at the end of 2014.

Small Caps

Pacific Smiles ((PSQ)) has opened two new centres, one in Canberra and one in Brisbane. This increases the company's presence in dental care in Queensland and the ACT and Bell Potter believes there are further expansion opportunities in those regions. The company now operates 49 dental clinics in Australia and has a firm growth path, aided by increasing demand for dental services. Bell Potter has a Hold rating and $2.49 target and valuation represents a total expected return of 12.4%.

Tomizone ((TOM)) provides managed WiFi services and its core product, Lightswitch, is a cloud-based platform that provides key exposure to a rapidly growing market. Bell Potter notes the higher cost of mobile to WiFi data is driving consumers to seek public WiFi (hotspots) while businesses are increasingly offering WiFi to attract customers, learn about their behaviour and connect through targeted marketing and mobile advertising. Tomizone has a track record and large customer base and the broker initiates coverage with a Buy rating and 30c target.

Having recently revised down forecasts Canaccord Genuity now incorporates higher debt levels for Greencross ((GXL)). Nevertheless, the broker believes the company has a strong medium-term growth profile and, at current levels, is in "rare value" territory. Target is $9.00 and a Buy rating is maintained. FY15 earnings growth is still expected at around 42% while FY16 and FY17 earnings are expected to grow 16%. The company has an established portfolio of around 200 retail locations and 130 veterinary practices in Australasia and is well positioned to leverage its significant first-mover advantage.

GDI Property ((GDI)) could potentially deliver more than 10% earnings growth in FY16 should it accretively re-invest some of the proceeds from the sale of Castlereagh St, Sydney, and/or increase its buy-back to 10% from 5.0%, Moelis observes. Despite a strong growth outlook the broker notes the stock continues to trade at around 10% discount to net tangible assets relative to the sector average premium of 26%. This is largely to do with the $334m balance sheet exposure to a soft Perth office market, Moelis suspects. The broker believes concerns are overplayed as 88% of this exposure relates to securely leased properties, with no value being attributed to the strong funds management business. A Buy rating and $1.08 target are maintained.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Supermarkets, Automotive, Pharma And Banking

-Higher yields no threat to equities
-Price war looming in supermarkets?
-Oz departures slow sharply
-Pharma wholesalers need diversity?
-Automotive dealers stretched?
-Donaco's Star Vegas on track
 

By Eva Brocklehurst

Australian Equity Strategy

As long-term interest rates push higher UBS does not envisage a significant sell-off in the bond market. The broker expects equities can cope with a modest rise in yields spaced over the next six to 12 months. The broker considers the Australian dollar retains downside potential which should be good for Australian market earnings. The broker has trimmed its year-end target for the ASX200 to 5,800 from 5,900, given headwinds emanating from banking and mining. UBS is overweight US dollar earners, housing construction plays and energy stocks.

Supermarket Tracker

Wesfarmers' ((WES)) Coles supermarkets have extended their lead over Woolworths ((WOW)) in UBS' survey. The broker's proprietary survey of the Australian food and liquor market revealed Woolworths score is at its lowest level since the survey began in 2007. In contrast, Coles score was its highest ever. Coles now leads Woolworths in 25 out of 26 categories. Coles is observed winning the marketing war and executing better.

Of most concern to the broker are declines for Woolworths across customer-facing areas, such as value for money, in-store execution and the effectiveness of promotional campaigns. It will take time and money to fix the problems too. UBS maintains that when the number one player is under pressure, major changes to its strategy can cause disruptions across the market.

UBS maintains Woolworths needs to lift morale and with a new CEO that is not attached to margins, amid increasing competitive intensity, the risk is for a price war, with Woolworths going harder and earlier than the market expects.

Overseas Holidays

It could well be the end of cheap overseas holidays for Australians, given the Australian dollar's recent depreciation to a six-year low. Departures from Australia slowed sharply to just 2.0% year on year recently from average growth of 10% over 2003 to 2013. In contrast, arrivals accelerated to a decade high rate of 5.0% after being almost flat from 2005-2013. UBS notes the change in net arrivals is the most positive since the 2000 Olympics and should support consumption, given weak nominal household income. The broker maintains that in a sub-trend economy which lacks domestic drivers, tourism is a welcome bright spot. This view is supported by forecasts for the Australian dollar to fall further by the end of the year.

Automotive Dealers

The valuation of automotive dealers is starting to look stretched to Credit Suisse, although Neutral ratings are retained. industry conditions have supported both AP Eagers ((APE)) and Automotive Holdings Group ((AHG)). AP Eagers has the benefit of no direct Western Australia exposure, with a greater skew toward Queensland. NSW is a key area of strength for the dealership. Earnings momentum is seen favouring AP Eagers over Automotive Holdings. if AP Eagers is fairly valued then Automotive Holdings is probably too cheap, Credit Suisse reasons. That said, AP Eagers needs continued upgrades to justify its rating, the broker adds, while a positive surprise could drive a re-rating for Automotive Holdings.

Pharmaceutical Wholesalers

The passage of the Pharmaceutical Benefits Scheme package through the Australian Senate means a material reduction to spending and, hence, wholesaler reimbursement over the next five years. Credit Suisse expects listed wholesalers, Australian Pharmaceutical Industries ((API)) and Sigma Pharmaceutical ((SIP)) to fully offset the impact to profits by winding back pharmacy trade discounts. Beyond this, should prices continue to fall they will need to reduce operating costs or diversify away from PBS medicines to sustain earnings at current levels.

Domestic Banking

Household banking fee data released by the Reserve Bank of Australia has shown growth for the second consecutive year, following two preceding years of no growth. The main contributor to the 1.5% growth figure was credit card fees (1.9%) while housing fees continued to drag (-0.6%). Macquarie believes the trend points to more rational behaviour and will sit well with shareholders of the major banks as they look to implement strategies to claw back lost returns from the impending increase to mortgage risk weights. The broker notes re-pricing of mortgages has begun and the retail banks are best placed to benefit.

National Australia Bank ((NAB)) has also been progressively re-pricing deposits. Should these re-price to peer-average levels this may boost earnings by 0.6%, Macquarie contends, with potential to create longer term shareholder value.

Donaco International

Donaco International ((DNA)) has signalled its Star Vegas transaction will be completed by next month. Canaccord Genuity views completion of the transaction as a positive catalyst as the company diversifies its revenue base and risks. The Star Vegas acquisition is the primary driver of the broker's forecast earnings growth in FY16, as the company increases its exposure to Asian consumption. Canaccord Genuity has a Buy rating and price target of $1.25

Bell Potter also has a a Buy rating on the stock, with a $1.36 target. The broker observes completion of the acquisition was a key concern and, with the transaction update, Star Vegas now appears on track. Bell Potter also notes an extra US$20m working capital facility is now being sought because of a persistently low win rate at Aristo Hotel. Visits are strong and occupancy is a record 75% but the actual win rates remains weak. The broker suspects the company has had a run of bad luck but that this should soon change.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Suitor Revitalises Interest in A2 Milk

-Unique dairy products
-Expansion in US accelerates
-Planned equity raising
 

By Eva Brocklehurst

Why wouldn't a strong brand with unique products like a2 Milk Co ((ATM.NZ)) receive a takeover proposition? UBS makes the observation after two associated parties signalled their interest. The company's board does not consider the offer is a firm bid, or that it is imminent. The expression of interest is conditional on due diligence and the company refraining from undertaking an equity raising at this juncture. Still, the news has revitalised interest in the stock.

A2 Milk has created some unique dairy products with perceived health benefits which open up the market to new consumers. The company's market share in milk in Australia is around 3.1%, and in infant formula around 5.0%, so it is far from mature. UBS also observes the UK business is nearing profitability, with second half volumes likely to be double the first half. The company has recently launched its brand in California while sales of infant formula in China are ramping up.

A2 Milk is considering raising equity capital. To UBS this suggests the rollout of its product in the US is moving faster than expected. UBS increases earnings forecasts and valuation as a result of the earlier-than-expected start of sales in California. UBS has a Buy rating and NZ95c target, valuing the Australasian component of the business at NZ55c.

The consortium includes one known company, Freedom Foods, a shareholder of a2 Milk with around 17%, and an international liquid dairy. The expression of interest may flush out competing parties to reveal their interests, or push a2 Milk into proceeding with the equity raising to accelerate its expansion plans, Credit Suisse suspects. The broker believes that just as the organic market developed in terms of food production and created a marketing platform for price differentiation, so too does the a2 Milk digestive benefit claims generate opportunities.

The broker downgrades earnings estimates for FY15-17 to reflect a higher cash-burn rate for the expansion into the UK and US. Credit Suisse believe a successful execution of the company's strategy could justify a spot valuation of NZ$1.17. The broker considers, with or without a bid, the stock is undervalued. Credit Suisse has a NZ76c target and Outperform rating.

Deutsche Bank regards an assessment of the underlying value in the stock as difficult to make, given the early stages of its expansion and the level of risk in operating in highly competitive end markets. Hence the broker has a more prudent Hold rating with a NZ73c target. Still, Deutsche Bank has revised earnings forecast to include a stronger outlook from the US opportunity and the recent fall in the NZ dollar, albeit retaining a view of weaker near-term operating margins.

In total, the broker estimates the growth strategy targets an addressable retail market value of NZ$4.5bn. To fund US and infant formula growth the broker estimates the company needs to raise NZ$50m in equity, which is now included in FY16 as a base case. With the stock now trading in line with a discounted cash flow valuation, Deutsche Bank believes investors should start to bank profits on a risk adjusted view. To obtain material value uplift and reach a bull case valuation of NZ$1.17 would require another trade player to enter the bidding stage, in the broker's view. If no bid emerges, Deutsche Bank estimates the Australasian business, without the other growth options, is worth NZ50c.

A2 Milk has transformed from an intellectual property company when listed on NZX in 2004 to now control its own brand marketing and development in all regions outside New Zealand, where it remains under licence until 2017. It relies mainly on third parties for processing. The company's brand development strategy is based on the digestive benefits of its type of milk.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Woolworths Adds More Uncertainty To Outlook

-High chance earnings re-based
-Masters remains a thorny problem
-Is an exit from Masters likely?
-Supermarket issues taking time
 

By Eva Brocklehurst

Sales momentum continues to be sluggish for Woolworths ((WOW)) which, a month after acknowledging it has made mistakes, has lowered FY15 guidance to be in line with FY14. Chief executive Grant O'Brien also announced his resignation and a search is now underway for a replacement. Mr O'Brien will remain in the job until a new CEO is appointed.

The resignation is the main issue for brokers as it clouds the outlook despite the transformation plans that are ongoing and were only announced only a month ago.The chairman signalled a new CEO will not be tied to the 5-year plan. More uncertainty. Morgan Stanley believes an external appointment is required. Someone who will bring a fresh approach and experience in global supermarkets. The risk is that a new CEO may re-base earnings estimates, creating further downside risk for FY16.

The problems are deep and sales growth will remain under pressure as price investment continues, brokers contend. Recent initiatives appear to have had little impact, although Morgan Stanley concedes a new CEO could turn out to be a positive development. Deutsche Bank is of a similar view, suspecting the CEO's departure may provide the opportunity to make the adjustments that are needed. Still, the broker is not all that confident the board will appoint the right candidate. Deutsche Bank is not as concerned as some about the impact of Aldi but believes it is too early to invest in Woolworths given the negative momentum and the prospect of a re-basing of earnings.

Citi suspects an earnings re-base in the order of 20% could well be possible under a new CEO. The brand needs a leader who can manage a diverse mix of retail businesses, a skills combination that is more likely to come from offshore, in the broker's view. Macquarie flags the board's observation that it did not believe grocery experience was a necessity for the role and considers the announcement rushed in the face of a poor trading update, given the lack of a succession plan. Macquarie believes management change is a first step to restoring investor confidence, but a subsequent re-evaluation of the strategy is likely to result in an extended period of underperformance.

A combination of the premature departure of the CEO and a downgrade to earnings guidance tilts the balance of risks too much to the downside for JP Morgan. As a result the broker downgrades its recommendation to Underweight from Neutral.

The seemingly intractable problems with the Masters hardware venture were not dealt with in the latest announcement, and Credit Suisse maintains the necessary step-change in sales to justify ongoing investment appears unlikely to eventuate. Thus Masters remains a knotty issue for the future. Several brokers canvas a view that Woolworths could exit Masters. Credit Suisse believes this could occur with a minimal cash requirement, based on an assumption of the land value upon liquidating the assets.The departure of the architect of the Masters venture, Grant O'Brien, makes an exit more plausible, in Morgan Stanley's opinion.

Hypothetically, Citi estimates it could cost $300-900m to exit the venture. There could be some recovery through asset sales while the value of partner Lowe's put option may be smaller than the current book value. Any exit is considered more likely in 2016 than 2015.

Brokers agree Woolworths is a strong supermarket franchise but became intent on margin at the expense of sales and customer focus. Morgan Stanley has long argued that Woolworths lifted prices too quickly, which supported margins but left customers unhappy. The fact that Australian food & liquor growth has turned negative in the current quarter is very disappointing, given the step-up in price and labour investment, and UBS suspects it will take at least 24 months to return to a defendable growth trajectory. Credit Suisse bemoans an overly centralised structure and complex product range. Store service levels also require improvement. These operational issues are addressable but Credit Suisse also believes it will take time. Citi calculates that margins of 6.2% are sustainable, which is a long way from the 8.0% witnessed in FY14.

The consensus target on the FNArena database is $26.97, which signals 2.1% upside to the last share price and compares with $28.77 ahead of the announcement. The dividend yield on FY15 and FY16 forecasts is 5.2% and 5.1% respectively. There are no Buy ratings on the database, with three Hold and five Sell.

See also Woolworths Changes Tack But Is It Enough? on May 7 2015.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Wesfarmers At Support Level

By Michael Gable

We have a shorter trading week with the ASX closed on Monday. We are set to start slightly weaker again following on from small falls overseas. The situation in Greece has weighed on sentiment and investors still seem concerned about positive news out of the US. This time, it was payroll numbers which implies interest rates in the US may start rising in the September quarter this year. The Australian market is back to the levels seen in January before the RBA started to cut rates again, so we expect some support to now come back in as investors slowly look beyond the noise from overseas.

Today we look at Wesfarmers ((WES)).

Wesfarmers at the moment looks fully valued but from a charting perspective it has come back to a well-trodden support level. You will notice that over the last two years, WES has traded within a range between about $41 and $45. It has momentarily moved beyond these levels of course, but in the absence of a sudden breakdown towards $40, we would expect WES to find support here again and head back up towards the upper end of this recent trading band.

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Woolworths Yet To Find Support


Bottom Line 02/06/15

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support levels:  $26.57 / $23.50 - $23.00
Resistance levels: $30.22 / $34.71

Technical Discussion

Woolworths ((WOW)) has interests in food, liquor, petrol, hotels and New Zealand supermarkets.  The latter is engaged in the procurement of food and liquor for resale to customers in New Zealand.  The hotel section is engaged in the provision of leisure and hospitality services which includes food, alcohol and accommodation as well as entertainment and gaming. For the 27 weeks ending the 04th of January 2015 revenues increased 2% to A$32.54B. Net income decreased 3% to A$1.28B. Revenues reflect a Liquor segment increase of 2% to A$25.61B.  Broker/analyst consensus is a comprehensive “Sell”.  Dividend yield at today’s prices sits at 4.9%.

Reasons to be cautious short term:
→ Sales remain poor and whilst the company have acknowledged their shortfall, the ability to execute a turnaround will be key.
→ Margins will remain tight and potentially decline further in the near term.
→ Analyst support remains negative.
→ Price action continues to deteriorate with major support now some distance below.

Although Woolworths has been showing some resilience over the past few weeks there is still no sign of significant demand at this juncture.  We also have to take into account the fact that price has been meandering sideways with a bias to the downside beneath a solid zone of old support which is now acting as resistance.  As an absolute minimum we’d need to see a push up through $31.00 before thinking in terms of a major low had being locked in.  It’s not impossible for price to head up through that make or break point though a rally of that magnitude isn’t looking likely right here and now.  Looking at the weekly time frame (not shown) shows the door is still wide open to head down to the target we’ve been concentrating on over the past few reviews circa $23.00.  This is where the next significant area of support sits and should continue to be our focus of attention for the time being.  Zooming into the more recent price action reveals that a symmetrical triangle has been unfolding over the past few weeks which means the next leg lower could be about to kick into gear.  A break through the lower boundary of the pattern could trigger some more impulsive price action which is much more likely if the broader market continues to show weakness.  One thing’s for sure, it’s difficult to envisage WOW bucking the trend of the broader market.  The bottom line is that caution is still required here and could well be for the foreseeable future.

Trading Strategy

If you are actively looking for shorting opportunities and are aggressive than the triangle does provide a low risk entry.  Sell following a break beneath $27.42 with the initial stop placed at $28.67 which in itself is a nice set-up.  As mentioned above there is no reason why the next significant zone of support around $23.00 can’t be achieved over the coming months.  For those looking for a buying opportunity you’ll likely have to wait until the aforementioned target is tagged before an opportunity comes your way.
 

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

Risk Disclosure Statement

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

The Impact Of El Nino

- Forecasters predict strong El Nino
- Upside Risk for soft commodity prices
- Downside risk for consumer earnings
 

By Greg Peel

A couple of weeks ago the Australian Bureau of Meteorology announced that El Nino thresholds had been reached for the first time since 2010, and would likely strengthen during the southern winter. The Japanese Meteorological Agency announced on the same day that El Nino conditions are present, and later the US Climate Prediction Center suggested a 90% chance El Nino will continue through the northern summer and an 80% chance it will last all through 2015.

El Nino, a weather phenomenon related to variations in ocean temperatures on either side of the Pacific, usually results in dryer than normal weather in South East Asia and Australia, warmer and dryer weather in South America and higher rainfall in western North America. Such adverse patterns pose a risk to wheat, sugar, coffee and palm oil production in South East Asia and Australia, to cocoa, coffee and sugar production in South America and corn and wheat production in the US.

The bottom line is a risk the prices of these commodities may rise due to limited supply. Whether or not farmers can benefit from higher prices would depend on whether they can successfully harvest a crop in such conditions or not. The more definitive risk of higher prices is to those companies reliant on grains and soft commodities as inputs to production. The food & beverage industry is a case in point.

The last El Nino event occurred in 2009-10 but proved to be weak. Forecasters are concerned this El Nino may prove to be a strong one, similar to that of 1997-98 which ushered in ten years of drought across much of Australia. Or maybe it won’t. El Ninos and La Ninas are notoriously flighty and difficult to accurately gauge.

Which is why Danske Bank analysts are advising consumers of soft commodities to hedge their input prices for the second (calendar) halves of 2015 and 2016. Danske expects grain prices to edge higher in coming years.

There may be some price relief, nonetheless, offered by current global stock levels. Danske notes that thanks to previously surging production, stock levels of soybeans, wheat, coffee and sugar in particular currently account for some 25-30% of annual consumption. Lost supply can be offset by stock drawdowns, thus alleviating price inflation.

By contrast, rapeseed and palm oil stocks are sitting only at around 10-12% of annual consumption. Given most of the world’s rapeseed is produced in Europe and Canada – two regions unaffected by El Nino events – an impact is unlikely. However dry weather for the rest of the year in South East Asia could significantly impact on palm oil pricing, Danske warns.


Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Housing, NZ Banking, A-REITs, Retailers And Casinos

-Slight easing of Oz investor housing finance
-Dairy, Auckland prices key to NZ bank outlook
-Low bond yields support A-REITs
-Key exclusions from supermarket LFL sales
-Strong cash profit likely for Donaco
 

By Eva Brocklehurst

Housing Lending

Tighter availability of housing credit and the removal of lending rate discounts should curb investor lending growth. Analysts at ANZ suggest the changes to investor lending practices are likely to have a marginal softening impact on house sales and price growth. A number of banks have adopted a more cautious approach recently as a result of APRA's review of housing investment lending. The pullback in investor lending growth should provide some breathing space to the Reserve Bank, in the analysts' view, enabling low rates to be maintained, and support a broadening of the recovery beyond housing in the non-mining parts of the economy.

Property statistics from Australia's prudential regulator, APRA, reveal the major banks, in aggregate, grew investor housing loans by 12.2% in the year to March 2015. Deutsche Bank observes this figure is still above the 10% ceiling APRA would prefer. The broker expects a reduction in these growth rates in coming quarters given the recent actions by banks, such as the removal of pricing discretion for discounts and loan-to-value ratio caps for investor loans, as well as stricter loan criteria for non-resident lending.

Deutsche Bank observes, while the focus has been on investor housing growth, owner-occupied lending remains firm, up 6.8% in the year to March, and commercial property growth has increased to 6.5%.

New Zealand Banking

Citi observes there are two issues which are driving the banking outlook in New Zealand. One is the country's largest export commodity, milk solids, which is experiencing the softest market conditions since 2007, and the other is the Auckland housing market, which is booming. For the banks it will make earnings growth a challenge over the next 12 months. The dairy sector is a large user of debt and the biggest concern for the major banks is the concentration of that debt, with 30% held by only 10% of farms. On an individual basis, ANZ Bank ((ANZ)) has the largest exposure to the NZ agricultural sector and an even bigger share of the dairy market courtesy of former subsidiary, NBNZ.

In terms of Auckland house prices, these have appreciated 18% in the last 12 months. The strength of the market has became a concern for regulators and the RBNZ has announced a new round of measures to cool the market. From an individual bank perspective, Citi notes ASB, owned by Commonwealth Bank ((CBA)), is heavily represented in the Auckland mortgage market and its mortgage volumes have slowed considerably since the first round of RBNZ measures.

Australian Real Estate Investment Trusts

A-REITs do not appear cheap compared with history but there is a likelihood they will remain expensive for some time to come. Citi notes low bond yields are providing the support for further upside in valuations. With the spread between the cost of debt funding and asset yields at decade highs, the broker suspects interest in Australian property assets will remain high, placing further upward pressure on values. Current concerns around macro-prudential controls in the residential sector, while valid, are not expected to significantly slow down the volumes, or reduce house prices.

The broker envisages Stockland ((SGP)) and Mirvac Group ((MGR)) are well placed in this regard but for different reasons. Stockland has low exposure to investor demand while Mirvac, given current pre-sales, offers a high degree of certainty. Mirvac is upgraded to Buy from Neutral.

In the office sector the broker envisages further compression in cap rates - the ratio of asset values to producing income. Recent channel checks confirm further transactions are likely to be biased towards lower cap rates and higher asset values. Dexus Property ((DXS)) is now more attractively priced and Citi upgrades to Neutral from Sell. In retail, the broker suspects the spill over in demand will eventually lead to further cap rate compression. Citi maintains a preference for residential developers and fund managers.

Australian Retailers

One of the more scrutinised statistics in the Australian retailer sector is like-for-like (LFL) sales growth. Morgan Stanley has reviewed the bases upon which the retailers calculate this growth and finds differences exist. Woolworths ((WOW)) and Wesfarmers ((WES)) exclude the impact of new store sales cannibalising existing store sales and, therefore, they overstate LFL sales growth by 0.5-0.8%, the broker suggests. The broker notes retailers in the UK and US do not adjust for new store cannibalisation and this suggesst Wesfarmers and Woolworths are in a minority by reporting this way.

When calculating "core" growth for Woolworths, Morgan Stanley finds it has been flat since FY12, although earnings margins rose to 8.0% from 7.4% over that period. Wesfarmers' Coles has sustained a more rational store roll-out, which leads the broker to calculate core LFL sales growth is running at 2.2% for FY15. The tailwind from Western Australian deregulation, which added 0.3% growth for the major supermarkets between FY11 and FY14, is expected to fade as Aldi enters the market. Hence, Morgan Stanley finds the Australian supermarkets unattractive.

Wesfarmers' Bunnings is perhaps better off for excluding cannibalisation, with core sales growth calculated at a robust 4.0%, on Morgan Stanley's estimates. Retailers which do not adjust for this feature have higher quality LFL numbers, in the broker's view. Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Burson Group ((BAP)), Super Retail ((SUL)) and Pas Group ((PGR)). Myer ((MYR)), Premier Investments ((PMV)), Kathmandu ((KMD)) and The Reject Shop ((TRS) adjust LFL sales growth for refurbishment activity which, all things equal, acts to improve LFL sales performance.

Donaco International

Bell Potter initiates coverage of Donaco International ((DNA)) with a Strong Buy recommendation and $1.15 target. The company is an integrated casino, hotel and entertainment provider in South East Asia. The broker believes the stock will re-rate positively over the next year as the company finalises its Star Vegas acquisition. Donaco operates in low tax rate jurisdictions and has little ongoing capex requirements as well as no major debt burden.

Bell Potter estimates that over 90% of the FY18 operating profit will convert to cash profit. This is around double the average conversion rate for Crown Resorts ((CWN)), Echo Entertainment ((EGP)) and Sky City Entertainment ((SKC)). Despite this the stock trades at a significant discount to peers. Bell Potter believes this discount should close over the year ahead.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Woolworths Changes Tack But Is It Enough?

-Capex focus on supermarkets
-New Masters roll out halted
-Price matching, not leading
 

By Eva Brocklehurst

Brokers define May as the "confession season" ahead of end of financial year and Woolworths ((WOW)) did just that, acknowledging mistakes were made and that  it took its eye off the main game in terms of looking after customers. The company presented a transformation plan which involves better capital allocation and a renewed focus on its supermarket chain to compete with rivals.

Third quarter sales were softer than expected, particularly in food & liquor, where like-for-like growth was just 0.2%. The company stated it would invest in price because of a need to be perceived as cheaper. Woolworths will also reduce FY16 capital expenditure to improve cash flow. The underperforming Masters business will be required to prove its new format before further expansion capital is allocated.

Several brokers were disappointed with the lack of a major shift in strategy. The supermarket recovery path is long-dated and uncertain and Macquarie suspects investors may become impatient after several years of underperformance. Woolworths has chosen a less aggressive stance towards its rivals than it presented at its first half results, choosing to match prices rather than lead. This suggests a slow grind to the broker, with no catalyst to drive a turnaround in price perceptions. Macquarie retains an Underperform rating and prefers Wesfarmers ((WES)), whose Coles supermarket chain has materially diverged in growth terms, having reported substantially stronger sales over the March quarter.

New store targets for Masters have been halted and there is no net increase in store numbers for Big W. Credit Suisse believes the strategy could have gone further, by reducing the rate of expansion in the supermarket store network, at least in the short term, but a 15-25 store per annum target was maintained.

Morgan Stanley also considers the changes are incremental and not what is needed to improve earnings sustainably. Since price investment will lower sales growth, not lift it, the broker believes it inevitable that profits will be lower in FY16 than in FY14. Morgan Stanley would have liked to see a slowing of supermarkets roll out as well as a step change in supply chain efficiencies, driving sales per square metre growth. The broker also wanted an acknowledgment of the impact of Aldi and a strategy to compete with the newcomer.

UBS warns Coles and Aldi will not stand still while Woolworths turns its ship around. The new approach is the right one but regaining momentum will take time and cost money. While FY15 guidance was reiterated, the broker considers it at risk, particularly given a disappointing sales result in April. The business had lost its way, having been too intent on the short term and taking margin at the expense of sales. UBS considers it will be at least 12-24 months before the sales growth trajectory returns to a defendable position and along the way there is a real risk of a major earnings and margin re-base. Sell maintained.

JP Morgan is more confident, upgrading to Neutral from Underweight on the basis the company has started to make changes. The broker is mindful that the promises need to be followed up with execution, but the underlying business is considered strong and there is plenty of potential.

The admission is a step towards addressing the problems facing Woolworths, in Deutsche Bank's view, but despite previous comments to the contrary the broker was disappointed that Woolworths is more expensive than Coles. The downturn in April suggests that large investments in price and service have not yet delivered any benefit. The broker noted the significant attention to pricing and service at the briefing but was surprised to find little detail on marketing.

Deutsche Bank notes the company's statement that it would neutralise Coles' ascendancy on price and contain Aldi's advance, which makes a price war less likely. Still, confidence was dented by the deterioration in April trade. At current levels the market is pricing in material contraction in margins. While ultimately the sales trend can improve, given asset quality, Deutsche Bank considers it is too early to invest, retaining a Hold rating.

Fundamentally, the business is strong but needs to be reinvigorated to drive a re-rating, in Morgans' view. The broker would be a buyer at $25-26 in the short term but, if the share price remains around $28, improvement in sales growth needs to be evident before being confident to buy the stock again. Morgans welcomes the shift away from earnings to a focus on the customer but finds it unfortunate that the company has to play catch up with Coles, as this means earnings growth will likely be under pressure for at least the next 12 months.

There are no Buy ratings on FNArena's database for Woolworths. Just four Hold and four Sell. The consensus target is $29.01, suggesting 4.5% upside to the last share price, and compares with $29.39 ahead of the update. Targets range from $24.00 to $32.70. The dividend yield on FY15 and FY16 estimates is 4.9%.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.