Tag Archives: Consumer Staples

article 3 months old

Wesfarmers Juggles High Expectations

-Comparable sales seen slowing
-Conditions deteriorating for Coles
-Bunnings the mainstay due to housing
-Stock considered fully valued
 

By Eva Brocklehurst

Wesfarmers ((WES)) produced robust sales numbers across its retail businesses in the March quarter, with the exception of Target, but brokers are mindful of the difficulty in sustaining growth across all divisions going forward. Comparable sales are seen slowing across a number of the businesses, despite being relatively strong in the current economic environment.

Citi expects all divisions will slow down in the June quarter, primarily because of competitive pressures. In terms of Coles, food and liquor growth is expected to slow to 3.0% in June quarter (from 3.4% in March quarter) because Woolworths ((WOW)) will become more promotional.

The broker suspects the competitor did not have time to fix its mistakes in the March quarter and observes more promotions occurred during April. Lower private label pricing and reduced industry-wide food inflation will contribute to weaker sales too. Citi expects the cycle will turn in six months or so for Bunnings and believes Kmart, longer term, needs to develop pricing power. The broker believes high expectations have been built into the company's earnings outlook and maintains a Sell rating. The share performance is linked to Bunnings and Coles and, as Coles' sales slow, there is downside risk over the next three months, in Citi's view.

Conditions are likely to become more difficult for Coles, several brokers agree, as Woolworths redoubles efforts to improve operations. That said, Deutsche Bank does not share the market's structural concerns around the Australian food and liquor retail sector. Sales at Coles were above the broker's expectations, supported by strong contributions from new floor space. Kmart and Officeworks are seen resonating with consumers, while Bunnings should continue to benefit from housing activity. The broker makes modest upgrades to estimates but believes Wesfarmers is fully valued.

Macquarie expects there is further downside risk for Woolworths, as Coles gains market share, but there remains comparable downside risk for Coles, too, as Woolworths steps up investment in price. Nevertheless, Bunnings, Kmart and Officeworks are delivering while a turnaround in liquor and Target is expected to continue. The broker considers Wesfarmers' share price reflects the risks and upgrades to Neutral from Underperform.

Kmart's profit growth in the past was driven by margin expansion so news of like-for-like sales growth of 5.5% was a welcome surprise to Morgan Stanley. The broker expects continuing strong growth as the division's footprint is expanded but would feel more comfortable if management commented on the impact of the lower Australian dollar. Morgan Stanley suspects Coles has taken market share from Woolworths during the quarter but considers space growth has risen to a level which is unsustainable, given the roll-out of competitor stores.

Meanwhile, Target remains a work in progress, in Morgan Stanley's view, with like-for-like sales down 3.2%. Management has suggested unit sales were higher year-on-year but this was offset by price reductions as the brand is repositioned. Credit Suisse agrees Target is the vulnerable division and the strong performance of Kmart signals the difficulty in finding a sustainable growth strategy for both businesses simultaneously.

The broker acknowledges Coles and Bunnings are the more material influences on the company. An increase in packaged grocery deflation could potentially affect Coles but Credit Suisse does not consider the competitive environment is getting worse. As for Bunnings, rapid industry growth is masking any potential adverse effect of store expansion.

To UBS the conglomerate is well run, generating strong free cash flow, but the stock is expensive. The main risk remains a price war in Australian food and liquor, if that was to eventuate. At this stage this is not factored into the broker's forecasts. JP Morgan also finds a lack of compelling valuation support in the stock and only modest upside potential from current levels.

On FNArena's database the stock has six Hold ratings and two Sell. The consensus target is $42.78, suggesting 1.9% downside to the last share price. The dividend yield on both FY15 and FY16 forecasts is 5.1%. 
 

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article 3 months old

Diminishing Food Inflation Sounds Alarm Call For Supermakets

-Sharp inflation decline in March
-Severe in terms of packaged grocery
-Prospect of a price war
 

By Eva Brocklehurst

Food inflation, or a lack thereof, is fast becoming an issue for Australian supermarkets. Citi believes so, given soft commodity prices are weak even when viewed in Australian dollar terms.

The Australian dollar has fallen by around 18% over the past year, the broker observes, but soft commodity prices have fallen further. Sugar prices are down 33% in US dollar terms, palm oil is down 34%, wheat down 27% and dairy 29%. Citi maintains the global slowing of emerging market demand and favourable global growing conditions are at the heart of lower pricing. Citi's food inflation indicator, based on a weighted basket of softs, is highly correlated with shelf price growth. Citi calculates that Australian food inflation has fallen to around zero from 2.0% within six months.

What may change this scenario is any drought or flood impact on fresh categories but at the moment, these factors are benign. Suppliers may be expanding margins which could materialise as product innovation and retailers may also be expanding margins. Still, the latter Citi considers is highly unlikely, given Woolworths ((WOW)) plans to step up promotional intensity over the next three months. Citi considers the need to lower private label prices to compete with Aldi will reduce profit margins over the next three years.

Deutsche Bank also conducts a supermarket study which suggests pricing trends were weak over the past three months. Fresh food inflation was modest but packaged grocery items deteriorated. The severity of this deterioration increased mid March and stemmed from price investment by Woolworths, which the broker observes was implemented via offers on both branded and private label products. Rival Coles, which belongs to Wesfarmers ((WES)), did not make price changes to the same degree while the IGA network, supplied by Metcash ((MTS)), recorded price inflation.

The supermarket inflation index in the broker's study follows prices of seven discrete baskets of 100 goods across the thee major supermarket chains. Deutsche Bank tracks prices weekly but notes inflation is difficult to measure because of the complexities around promotion. The broker believes the indices published by major chains over-emphasise the promotion impact because they use a moving basket. In contrast, Deutsche Bank uses a fixed basket of goods to understate the drag from promotional substitution and believes this is a good directional indicator of the trend.

The March quarter revealed 2.2% price inflation, only slightly above the prior quarter's 2.1%. Moreover, packaged grocery inflation slowed considerably, notwithstanding a continued weakening in the Australian dollar. Fresh inflation was also soft but the broker acknowledges this cycled strong fresh price growth in the prior corresponding quarter. Still, weaker packaged grocery pricing is a significant negative, more so than fresh, given elasticities are much higher in fresh produce and consumers have a propensity to substitute.

On average in the quarter, Woolworths' branded products increased 1.9% year on year compared with 4.4% for Coles. Notably, Woolworths branded products were in deflation for the last three weeks of March. Deutsche Bank construes this as evidence for the start of Woolies' $500m price investment. The broker expects Coles to eventually retaliate as these offers from Woolies persist and the prospect of a price war and consequent decrease in profitability is concerning.

What about IGA? The data suggests solid price inflation, partly because of the cycling of a period of deflation in the prior corresponding quarter. Deutsche Bank was still surprised at the extent of IGA price inflation but believes Woolies' decision to invest in price will have an adverse impact, given it makes a number of the Super IGA price match actions redundant.

Metcash and Woolworths both derive around 80% of their earnings from supermarkets. As Metcash is primarily a wholesaler, it has a lower cost of doing business and its operational leverage is higher than Woolworths. Coles has the highest leverage to marginal increases in the top line, in Deutsche Bank's observation, given a higher cost of doing business, but it constitutes 45% of Wesfarmers' earnings and the mix of other businesses dilutes the positive impact that inflation can provide.

Deutsche Bank has a Sell rating for Wesfarmers with a target of $39.25. This compares with other brokers on the FNArena database where the targets range from $39.25 (Citi) to $44.34 (Macquarie). There are no Buy ratings on the database, with five Hold and three Sell. The dividend yield on FY15 and FY16 forecasts is 5.3% and 5.2% respectively. The consensus target is $42.44, suggesting 2.3% downside to the last share price.

This compares with Woolworths, which also has no Buy ratings. It has three Hold and five Sell. The consensus target is $29.39, suggesting 1.0% upside to the last share price. Targets range from $24.00 to $32.94. The dividend yield is 4.7% and 4.8% on FY15 and FY16 forecasts respectively.

Metcash has one Buy rating, four Hold and three Sell on the database. Targets range from $1.30 to $2.90. The consensus target price is $1.96, suggesting 38.7% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 9.1% and 8.7% respectively.
 

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article 3 months old

Coke Had Its Run?

By Michael Gable 

The main news items to start this week once again revolve around interest rates. Interest rates in the US should remain where they are for a little longer than expected after the non-farm payroll numbers missed by a long way. They came in at 126,000 compared to market estimates of 250,000. Even if we take into account the bad winter, it was still a poor number. The Fed will therefore be slightly less likely to raise rates when economic data such as that is looking weak. Here in Australia, we have an RBA rate decision today. According to the futures markets, a rate cut today is almost a sure thing, with a cut at least by the May meeting being a near certainty. Given the "pricing in" of a rate cut, we do not expect the markets to lift on a sustained basis and still maintain our "short term bearish, long term bullish" bias on the overall market.

Today we take a look at Coca-Cola Amatil ((CCL)).
 


CCL has recently moved higher with the rest of the market, but it has now come close to that key $11 zone which is where it was trading at last year before dropping 15% in one day. So after 12 months, it has finally recovered in price but the question is whether the fundamentals support that. Purely from a charting point of view, we can see that this area will hold some resistance for the stock. Shorter term it may flash above $11, but already on this weekly chart we can see some indecision across the last couple of weeks. You will also notice a sell signal on the weekly RSI. The last time this occurred was two years ago when CCL was peaking above $15 (both have been circled). Whether the stock has found a high at the moment or will quickly stick its head above $11, it appears as though at some stage it will be trading back to the mid $9's again.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Supermarkets, Packaging, Airlines, Health Insurers And Media

-Supermarket competition ramps up
-Globally focused stocks less constrained
-Lower AUD, oil benefits packagers
-Airline industry more rational
-Health insurer margins diverge
-Media heads for flat end to FY15
 

By Eva Brocklehurst

Supermarkets

Given elevated earnings risk, Morgan Stanley believes investors should continue to avoid the Australian supermarkets. Since March 2013 the broker has argued that aggressive store roll-outs and the emerging competitive threats form Aldi and Costco would impact on the major supermarkets' profitability. Woolworths ((WOW)) has recently indicated it will start to invest in price and Morgan Stanley expects this will slow industry growth further. The broker is alarmed by the chain's recent admission that it had lost share as consumers perceived its prices to be too high. The broker lowers its industry sales growth outlook for FY15-17 to 2.5% from 4.1% to reflect this looming price competition.

As a result, Morgan Stanley has downgraded Wesfarmers ((WES)) to Equal-weight from Overweight on slower growth expectations for Coles. Coles has, in recent years, employed more sustainable strategies to drive profit growth compared with its rival, Woolworths, but the broker does not consider it immune to a weaker outlook. Metcash ((MTS)) will be the most affected by competitor price investment because of its poor positioning and thin margins, in Morgan Stanley's view. Its weak balance sheet compounds the problem.

Morgan Stanley believes Australian supermarkets are fast becoming a zero sum game, and the big chains will increasingly take share from each other rather than the independents. While the Metcash-supplied IGA and specialists (greengrocers, delicatessens) control 22% of the market, the broker believes this overstates the opportunity to gain market share, especially from specialists. While the broker concedes its outlook for Woolies and Coles looks quite bearish in isolation, in the light of weaker industry growth it becomes more plausible.

Equity Strategy

Macquarie has reviewed the equity market outlook following changes to its currency and commodity price forecasts. In a demand-deficient, low-growth environment those stocks able to deliver sustainable, above-average earnings growth will stand out. The broker increasingly finds these are located in the international industrials space, reflecting the fact they are not constrained to the low demand currently being experienced domestically and have a larger pool of opportunities available, such as acquisitions. The lower Australian dollar will also boost translation of offshore earnings. Key picks? Westfield Corp ((WFD)), James Hardie ((JHX)), Amcor ((AMC)), Computershare ((CPU)) and CSL ((CSL)).

Paper & Packaging

Deutsche Bank considers the outlook for the packaging sector is positive, as companies benefit from lower raw material costs, stable trading and a depreciating Australian dollar. Balance sheets appear sound and the broker expects both organic growth and acquisitions are in the frame. Amcor is still experiencing good growth in emerging markets and there are signs of improvement in the US. Orora ((ORA)) is benefiting from operational improvements as is Pact Group ((PGH)). Considering valuations are more demanding Deutsche Bank believes Pact provides the greatest valuation upside, trading at 12.7 times FY16 earnings estimates, with a dividend yield of 4.6% and free cash flow yield of 7.5%.

Airlines

Goldman Sachs expects a rebound in the profitability of Australasian airlines. Qantas ((QAN)) and Virgin Australia ((VAH)) are expected to deliver a major turnaround in earnings in FY15/16, underpinned by cost cutting, lower fuel pricing and more rational industry conditions. The broker reiterates a Buy rating for Qantas and expects a return to pre-tax profit in FY15 of around $855m. Free cash flow should be stronger and lead to lower gearing in FY15-17. The broker has reinstated Virgin with a Neutral rating as, while a turnaround is still expected, the improved outlook appears captured in the share price. The broker also considers Air New Zealand ((AIZ)) is fairly valued and retains a Neutral rating, with strong earnings growth expected, backed by solid demand.

Health Insurance

Industry-wide margins fell in FY14 and Goldman Sachs observes gross margins are far from uniform across the sector. The margin of Bupa is 200 basis points better than both Medibank Private ((MPL)) and HBF, Western Australia's largest health insurance provider, and even further ahead of nib Holdings ((NHF)). Australia's largest not-for-profit health fund, HCF, continues to position with a much lower margin. Within the groups of smaller funds, Goldman notes the open funds generate margins similar to the leaders whereas the small restricted funds are much lower. The broker believes claims will continue to rise strongly, given the ageing cohort of policy holders. Hence, gross margins by fund may diverge even further, depending on that fund's particular focus. Hospitals cover is expected to be well placed, given the margins are in an upwards trend.

Media

Ad market agency bookings lifted by 1.5% in February year on year and brings year-to-date growth to 0.9%, UBS observes. Bookings were weaker in February for banking & finance, pharmaceuticals, household supplies, general retail and travel. Automotive, education, food and insurance spending lifted. Metro free-to-air TV spending was up 1.5% and regional TV was up 3.3%. Metro radio fell 2.7% and regional radio rose 20%. Newspapers fell 14.3%, digital ad spending rose 5.2% and outdoor bookings were up 8.8%.

UBS believes Nine Entertainment's ((NEC)) recent trading suggest revenues are up 8-9% in the current quarter with market share trending towards 40%. Guidance from both Seven West Media ((SWM)) and Nine suggests FY15 market growth will be flat for TV, with a recovery in the second half of 2015. JP Morgan notes the start to the second half of the financial year was modest and driven by non-traditional media such as digital and outdoor. This broker also expects a flat finish to FY15 with metro TV trends subdued and print still challenged.
 

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article 3 months old

Woolworths Comes Clean. Now What?

In this week's Weekly Insights:

- Woolworths Comes Clean. Now What?
- Reporting Season Special
- Orica's Glencore Concentration Problem
- Copper: Improving Fundamentals
- Radar On Buy-Backs
- Rudi On TV
- Rudi On Tour

Woolworths Comes Clean. Now What?

By Rudi Filapek-Vandyck, Editor FNArena

The most important event during this year's February reporting season happened on the final Friday when supermarket operator and SMSF darling Woolworths ((WOW)) finally admitted its management team had been living in the past for far too long and that pulling the company forward is going to require one helluva lot of effort, and investments.

Given the shares have proved somewhat of a market favourite over the past fifteen years, with margins, profits and dividends steadily increasing over the period, it is probably fair to assume most SMSF shareholders, and the financial advisors who guided them into owning Woolworths shares, are currently relying on the experience of the past fifteen years when they make up their mind whether to hold on or to hold on with doubled conviction, and maybe buy some extra shares since they now are so "cheap".

Let there be no mistake. Friday's shock profit warning by Woolworths marks an important turning point in how the market outside the loyal SMSF shareholder base is going to view this company and its damaged outlook. Whereas previously share price weakness had been solely due to "market speculation" and "investor sentiment", post Friday this is no longer the case. Woolworths is now officially in "repair" mode.

It's official. They dropped the ball. Hung on for too long to what was perceived as an impregnable market leading position in Food and Liquor. Post Friday, now there is a dent in the armour. A serious one.

There is no clearer illustration for this than the chart below from Monday's research update by Citi. Observe how the loss in market share started accelerating from the third quarter of FY14 onwards.





Here is the same information in a different format:





Woolworths is now clearly trailing Coles and Aldi. Reversing the trend is going to require extra investment, which is going to weigh on cash flows and on profits. Meanwhile, loss-making Masters and troubled Big W still need to be fixed too.

The Next Chapter: De-rating

After the news and sharp punishment by the market on Friday, I made a few quick calculations and thought the share price is likely going to drop into the $28-29 range. Part of my consideration is that at those share price levels the forward looking implied dividend yield rises to be around 5%. Add franking and there should be a small army of advisors and yield hungry SMSF operators ready on the sidelines to jump onto what they believe has now turned into a bargain.

No doubt, this view will be supported by the fact the shares were seemingly heading for $40 only twelve months ago when they surged above $38 in April 2014. Surely a stock like Woolworths ("low risk" and with a commendable track record, etc) that falls from $38 to below $30 in such a short time-span, must now by definition represent excellent value for longer term investors?

Cue financial advisors that line up all kinds of bogus arguments like "consumers won't stop buying alcohol and food" and "Woolworths is still going to be around in ten years time".

Every comparison is by definition imperfect, but I believe for the closest example of the market process that is now reshaping Woolworths, investors should look no further than Coca-Cola Amatil ((CCL)).

Arguably, Coca-Cola Amatil under CEO Terry Davis had it all going smoothly, at least on the surface, but ill-advised expansion into unfamiliar territory (sounds familiar within the Woolworths context?) -food processing- plus an Indonesian problem that simply would not resolve itself were ultimately too much to deal with when consumers in Australia started rethinking their sugary drinks consumption.

Coca-Cola Amatil equally had a long track record of consistent shareholder returns and solid, reliable dividends but its own moment of having to come clean occurred in 2013. The result was a big down-year in FY13 and dividends had to be cut in the following FY14. The share price, during that time, fell from beyond $15 to below $9. In recent times there has been a bounce back above $10.

I think a similar trajectory should be assumed for Woolworths shares. To date the share price decline from $38 is in excess of 33%. Note that CCL's share price loss exceeded 40% (this does not imply Woolworths has to fall by exactly the same percentage). Note also that Woolworths' down-year will be FY16, not FY15. So the trough is still ahead of us, with more bad news to follow, no doubt.

The chart below shows the various cycles of Price-Earnings ratio (PE) re-rating and de-rating that have impacted on Woolworths' share price between 2000 and late February 2015. While the PE, on my own calculations using live FNArena data at the time, exceeded 27 in the heydays of 2007, it has subsequently been as low as 13 in the post-GFC de-rating, just before the international search for yield pushed up the PE to circa 18, and kept it there until one year ago.

Now that analysts have recalibrated their estimates, and investors have sold down the shares by some 15% in two days, Woolworths PE now sits above 15, both for FY15 and FY16, with consensus anticipating no growth and a relatively steady dividend outlook of 137-138c for each year. The latter translates to 5.1%, plus franking.





The Future Is All About Margin

One reason why investors tend to underestimate the risk that overhangs the Woolworths share price is because a large industrial oligopoly member such as Woolworths or Coca-Cola Amatil tends not to report a 47% deterioration in net profits, like BHP Billiton ((BHP)) just did, unless there are impairment charges involved. Impairments are certainly possible further down the road if loss-making Masters cannot be fixed or if partner Lowes decides to pull up stumps.

What should be of concern to investors is the fact that Woolworths' Food and Liquor division operates on an exceptionally high margin of 8% (EBIT) and with the pressure to lower prices and to re-invest in reinvigorating the business, those margins can only go south from here.

Woolworths sells in excess of $60bn in consumer goods each year, and F&L accounts for some 78% of total group profits, thus what happens to the F&L margin is now largely going to determine the outlook, PE and perception of the company and its share price.

And with nearly 80% of $60bn on a world beating margin, small changes can make a big impact.

Below is the share price sensitivity guide as published by UBS analysts in response to Friday's shock announcement. UBS effectively assumes the PE remains unchanged, showing a 50bp deterioration in margin should take the share price to $27. Assume 50bp more, and two more dollars go off the Woolworths fair value valuation.





But, of course, the PE can go lower. In fact, on FNArena's consensus forecasts revised post Friday, the PE already has fallen to 15 (see Stock Analysis on the website). If things do not turn around quickly or competitor's responses draw the food and liquor sector into a fierce pricing war, a la Qantas versus Virgin Australia, then both PE and margin and profits can fall a lot further.

This is pretty much the view analysts at Morgan Stanley have taken. Under such a scenario, the share price can fall a lot further, still. Also because it will ultimately force Woolworths into cutting its dividend to shareholders. Morgan Stanley has taken the view that Woolworths is now ex-growth and it shall remain ex-growth until 2020. Where the share price shall be by then is very much dependent on how much margin erosion is about to take place over the five years ahead.

If margin erosion is very small, the Woolworths' share price is likely to trade around $30, on Morgan Stanley estimates. If margin erosion is modest, Morgan Stanley calculates a fair value destination of $24. If margin erosion turns out genuinely bad, the share price is doomed to go back to $20.

No need to ask about the prognosis of Morgan Stanley; the analysts lowered their price target to $24. The above mentioned analysts at UBS have reset their price target at $28.50, but the following quote provides a better insight into their thoughts about the outlook for Woolworths:

"Most likely, in our view. We believe WOW margins are too high and that the Australian F&L market is entering a period of structural change. Under the scenario where WOW re-based Aust. F&L margins by c100bp and the stock de-rate we see scope for WOW to trade towards $25 per share."





Stockbroking Analysts Respond

Stockbroking analysts receive a lot of criticism, mostly for being too slow when trends turn, but in case of Woolworths, warnings were issued before Friday's results release. Morgan Stanley, for example, cut its target to $27 before the event, and then had to conclude it still wasn't low enough. UBS warned its clientele Friday was likely going to be a clear "miss".

Both warnings had been published in FNArena's Australian Broker Call. This is one opportunity I cannot let go unmentioned that taking a paid subscription, $370 for a whole year, and reading the Australian Broker Call, five days a week, can prove its value many times over.

Otherwise, the analysts' responses post Friday can probably be best described as a general reset of expectations and projections. There is not one report on Monday that somehow suggests this is not serious damage. As said above, estimates have dropped and there is general agreement that repairing Woolworths is going to require time.

Unlike Coca-Cola Amatil, Woolworths cannot call headquarters in Atlanta and ask Big Momma for some strategic, financial assistance.

In the meantime, everybody will be watching Woolworths margins with hawk eyes.

As things stand right now, the company will struggle to post any gains in profits this year and next, and it may not raise its dividends either. The consensus price target has now fallen to $29.59 from $33.95 on Friday. Ratings have been pulled back (of course).

What Should Investors Do?

Given the above, it should not surprise the Woolworths share price now starts with a '2' instead of a '3'. With the share price down some 15% in two days, and the implied forward yield now above 5% (ex-franking), it's probably a fair assumption that, for the time being, most of the damage has been done.

From the moment the share price stops falling, the "bargain hunters" and "yield seekers" are likely to move in, which is probably going to provide support, for the time being, around current levels.

Note also that Woolworths may have announced it is going to face its competitors mano a mano, management has not provided any details about the how or what behind the new strategy. More should be forthcoming on the Annual Strategy Day, scheduled for May 6. Prior to that date, Woolworths will release its Q3 sales update on April 29.

Probably a fair assumption the share price is going to move side-ways ahead of both dates.

Investors who bought in long time ago are likely going to take a long term view, relying on the solidity of the dividends and in the knowledge this company has one of the best track records over the past 15 years. Such a strategy is valid, but it should be clear from all of the above that risks remain high and success is far from guaranteed. The past 15 years certainly happened in a different context than the five years that are ahead of us.

Time to take note of an old worn out market truth: if you don't like bad surprises, do not mix dividends with operational weakness.

For investors who do not own Woolworths shares today, I would suggest do not fall for the temptation. There are plenty of lesser risk options in the Australian share market. No need to play the hero.

Reporting Season Special

Woolworths' finally revealing it has been swimming naked since last year is without any doubt the most important event of this year's February reporting season. A more general assessment of the reporting season shall be written and published later this week. Watch this space.

Orica's Glencore Concentration Problem

A too high concentration of customers or profits. It's usually a risk that comes attached to medium, small and micro caps. The past few weeks have seen some of such risks come to light at companies including OzForex ((OFL)) and Genworth Mortgage Insurance Australia ((GMA)), with share prices re-setting at significantly lower price levels. Navitas ((NVT)) is another example that springs to mind.

Orica ((ORI)) is a Top 40 member on the ASX, but judging by a research update from Morgan Stanley, investors might have to ponder exactly how much concentration of risk is there attached to the provider of mining services?

Consider the following series of observations, published in the wake of Glencore announcing a significant reduction in its Australian thermal coal output; the 15mt cut equating to 7-8% of Australian seaborne production, point out the analysts at Morgan Stanley. And the importance for Orica?

Well, points out Morgan Stanley, Orica generates some 75% of its Australia & Pacific profit from the east coast with much of this generated from thermal coal. Circa 70% of Australia's seaborne thermal coal is produced in NSW where the analysts estimate Orica holds a  market share of 90-95%.

Morgan Stanley sees additional downside risk because of increasing competition and the ongoing downturn for the mining sector, pointing out the ammonium nitrate (AN) operations have a fixed cost base so any downward impact will cause a much larger impact on profits.

The stockbroker has now positioned itself well below market consensus, suggesting the financial year to September 2015 (FY15) will only see earnings per share (EPS) of 137c against consensus at 159c. And can you believe it, Morgan Stanley still maintains it may well need to lower that number further.

Note: Orica announced a share buy-back on Monday.

Copper: Improving Fundamentals

This might come as a surprise to many, but the average annual growth in copper consumption over the past decade is only 2.5%. Note this is including Super Cycle China's emergence post 2003. Incredible, but true, average demand growth for aluminium over that same period has been twice as high.

One would not think such is the case when looking at the price performances for both major metals. So what's been driving the price of copper if not insatiable demand from China?

In two words: disappointing supply.

And copper producers in early 2015 are back at doing what they do best; missing production targets and reporting delays, closures and interruptions.

Here's a brief overview from a recent sector update by Citi:

"Rio cutting Kennecott's expected output by 100,000 tonnes, BHP cutting 150,000 tonnes from Escondida's 2015 outlook, while Glencore has cut guidance at Minera Alumbrera by 50,000 tonnes. BHP Billiton announced a 6-month care and maintenance outage at the Svedala mill, the largest of three mills on site at the Olympic Dam facility in Australia. This operational disruption is likely to cost the mine c65,000 tonnes of copper concentrate.

"Closures have occurred at Mineral Park, Boseto, Aranzazu, Wolverine, Troy and Dikulushi. Barrick has placed it 135,000 tpy Lumwana mine on care and maintenance due to introduction of a 20% royalty rate on open pit mine operations in Zambia, up from 6% previously. This royalty rate move has prompted a freezing of mine investment in Zambia, and we believe will prompt further production losses through the year if the policy is not reversed".

So far, it appears the market hasn't paid much attention to all of this, instead taking lead from macro-issues, including Chinese New Year. At some point, however, this is likely going to change.

Citi analysts, for their part, expect increasing supply problems to be "highly supportive" of copper prices, probably in the second half of the year. On Citi's projections, copper should revisit US$7,000/t before year-end.

Radar On Buy-Backs

Not every share buy-back is the same. That much I am willing to concede. At times, when a company is in trouble and no reliable growth prospects seem on the horizon, buying back own shares merely limits further downside. In most cases, however, market outperformance is the ultimate consequence.

CEOs in the US know it. Just about every quant analyst who has done the data analysis knows it too. Share buy-backs are beneficial for performance.

Last year I ran a regular update on local share buy-backs in this weekly story, with some participation from subscribers and readers; thank you for your assistance.

Some readers, however, complained that I should focus on whether buying back own shares was actually the right thing to do. The suggestion here was that if a company bought its own shares at too high a price, an opportunity was being wasted and there should be no outperformance, but the opposite instead.

While I can sympathise with such view, and it certainly seems to make a lot of sense -within an academic context- I actually find there's very little evidence supporting such good/bad buy-back assessments.

Sure, if iron ore prices collapse tomorrow, it won't stop shares in Rio Tinto ((RIO)) from falling, even those shares look relatively undervalued and the board is thus doing the right thing, seemingly.

But companies including Telstra ((TLS)), CSL ((CSL)) and Amcor ((AMC)) have been buying in own shares for years now, and in each of these cases it can be argued there's no undervaluation and those companies are buying in at too high prices. It has not stopped each of them significantly outperforming the broader market.

So what's all this fuss about companies should only buy in when their share prices are cheap and undervalued? Isn't the irony that if a company is in good shape, and has plenty of excess cash, its share price by definition won't be undervalued? Happy to start up a discussion about this. All contributions welcome at info@fnarena.com

In the meantime, here's my starting overview of share buy-backs in 2015 (all contributions, corrections and additions, welcome at the above email address):

- Amcor
- Fairfax ((FXJ))
- GDI Property Group ((GDI))
- Nine Entertainment ((NEC))
- Orica ((ORI))
- Rio Tinto ((RIO))
- Seven Group ((SVW))

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves
- on Thursday, Sky Business, noon-12.45pm, Lunch Money

Rudi On Tour

I have accepted invitations to present:

- Wednesday, 11 March to members of Chatswood section of AIA, in Chatswood (evening)
- August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland

(This story was written on Monday, 2 March 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website)

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of January available. Just send an email to the address above if you are interested.

article 3 months old

Woolies Downside Limited

By Michael Gable 

The market continues higher although with less gusto compared to a month ago. A lot of it is predicated on another interest rate cut, but if that doesn’t happen today, could it be a situation of buy the rumour sell the fact? A short term correction is needed to take some heat out, although the market still looks bullish medium to longer term. Today’s report includes an opinion on the charts for Woolworths ((WOW)).
 


We have tracked the highs and lows of WOW every now and then, and last week’s sell-off now makes it clear that we are in a 5th wave. That is, from its peak in May last year, WOW has almost completed a 5 wave decline. We are currently within the 5th wave which implies that, despite what the pundits are saying, further downside is limited from here. WOW is likely to head back under $29, possibly as low as $28 before finding support. It will be also interesting to note whether price diverges with the RSI as the stock finds a new low. From there we would be interested in WOW on the long side. As it may not bounce too sharply from there, one suggested strategy would be a bull put spread using options.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Oz Equities, Building, Telcos, Grocers, Aussie And Oil

-Headwinds stronger in some sectors
-Benefit of infra spend more so in FY16
-Focus on telco pay-outs, stable earnings
-Risk to Woolworths' guidance
-Another cut to cash rates likely?
-Negative wealth offsets to lower oil
 

By Eva Brocklehurst

Equity Strategy

As earnings season gets underway Citi notes expectations are being tempered and becoming more realistic. The broker expects large moves in global markets over the past three to six months will continue to impact earnings estimates, with downside risks to resources earnings from commodity prices and upside risk to offshore industrial earnings from the Australian dollar.

Domestically, the outlook is mixed. The improvement in the economy outside of resources is still concentrated in housing, which has been good for developers, construction materials and, less directly, retailers. It has not yet buoyed areas such as logistics or advertising. In Citi's view, some of the larger sectors now seem to be facing stronger headwinds. These include the banks, insurers and food retailers.

A reluctance to invest and a preference for distributing profits to shareholders does appear entrenched at this juncture and the broker considers it still too early for management to be talking much about FY16, so the main outcome from reporting season could be just the continued erosion of FY15 earnings, for which growth forecasts were already downgraded late last year. If so, the broker suspects this may stymie the recent gains in the market.

Building

JP Morgan believes the construction sector is emerging into a smoother period which should underpin reasonable growth over the next five years. Residential construction remains the bright spot, with an ongoing high level of approvals supporting the stronger-for-longer theme. The non-residential and engineering construction outlook looks bleaker. The broker finds some evidence to suggest road infrastructure will go a way to offsetting the headwinds from a declining spend in resources and energy, but the benefit of these projects is unlikely to be felt until well into FY16.

Telcos

Macquarie finds two themes for the telecoms sector over 2015, including the impact of the digital dividend amid the shifting dynamics of fixed line competition. Digital spectrum is now online and the broker expects it will have the greatest positive impact on Optus as it covers a prior deficiency in the company's low-frequency spectrum holdings. Both Telstra ((TLS)) and Optus are placed to benefit from improved coverage and capacity in the spectrum.

Macquarie expects a positive impact on financial for mobile players form consumer data consumption and a more competitive fixed line segment, reflecting a more aggressive Optus and rising customer acquisition cost in NBN areas. M&A is expected to remain on the agenda. The focus on liquid, cash generating businesses with high pay-out ratios, franking credits and stable earnings will continue to attract investors to Telstra. Optus will also be an important driver of growth for SingTel ((SGT)), should it succeed in reinvigorating its brand and customer growth trends.

Supermarkets

Recent reports from Australian real estate investment trusts have highlighted slowing growth in supermarket sales. The landlords, SCA Property ((SCP)), Novion ((NVN)) and Federation Centres ((FDC)) collectively control of 10% of Woolworths ((WOW)) and Coles ((WES)), stores. Morgan Stanley believes the trends are relevant for these two and risk of a soft sales performance in supermarkets is growing.

Tobacco accounts for 7-8% of supermarket category sales, so given the timing of excise increases in December 2013 and September 2014, this should have contributed to a net acceleration in growth in the second quarter versus the first quarter of FY15. According to Australian Bureau of Statistics data however, supermarket category growth slowed in the second quarter to 5.9% from 6.3%, highlighting for the broker the underlying weakness and the risk to Woolworth's 4-7% profit growth guidance.

Australian Dollar

Australia's economy is struggling to gain traction and the central bank is easing official rates. High yield advantage is becoming negligible and volatility is rising. Thus, ANZ analysts expect further erosion of investor confidence in the Australian dollar. High net worth individuals are reportedly shying away from AUD instruments The downgrading of iron ore price forecasts by the ANZ commodity team only adds to this story. To the analysts, it means pressure remains not only on the AUD's risk premium but on the valuation level as well.

The analysts expect another downshift in the Australian currency is coming. The US dollar is starting to look more resilient while, technically, numerous tests in the AUD above US78c recently have all been rejected. Moreover, US dollar strength is broadening into emerging market currencies and its break-out against the yen has set a direction which will be important for the AUD. A weaker yen will reduce the appetite of Japanese investors to buy yielding assets in Australia, by keeping the AUD above 90 yen.

As Chinese New Year approaches the analysts also expect Australian bond issuance is likely to lighten, as major centres of demand close, and this will take away some of the marginal support for the currency. A final reason for the prospect of a mark down in the AUD is that it would be unusual for the Reserve Bank not to following up its February cash rate reduction with another cut in March. On this note, ANZ analysts expect a cut next month, while observing the market is only factoring in a 40% probability.

Oil In Australia

In the short term, falling oil prices are likely to mean lower inflation and lower interest rates in Australia, in the view of National Australia Bank analysts. The impact will also be contingent on the degree to which second round price effects are passed through to consumers and, ultimately, household spending. The analysts suspect that the windfall opportunity is limited, reflecting the offsets to higher disposable income from negative wealth effects in terms of lower equity prices (energy) and greater contraction in business investment, namely mining, that will weigh on the labour market.

Moreover, less inflationary pressures along with lower global interest suggest lower official domestic rates. The NAB analysts also expect the RBA to move again in coming months. Lower rates will be instrumental in the anticipated recovery in consumption and dwelling investment into 2016.

NAB analysts have revised the profile of their oil price forecasts lower through 2015-16, but expect a recovery to pick up pace later this year. The oil futures curve has moved into contango - where forward prices are higher than spot prices - since last October. This typically indicates excessive downward adjustments to prices in a short time frame alongside the lowering of longer-term expectations. Still, the analysts note contangos in commodity markets tend to be short-lived.
 

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article 3 months old

Mixed Outlook For Australia’s Retailers

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

By Eva Brocklehurst

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

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

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

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

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

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

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

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

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

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

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article 3 months old

Weekly Broker Wrap: Key Picks, Media, Retail And A-REITs

-Credit Suisse more positive on NAB
-Upside potential for MTU, CRZ and NEC
-Can WOW meet profit growth guidance?
- JBH still under pressure?
-Is there more upside for A-REITs?

 

By Eva Brocklehurst

Top Picks

Credit Suisse has kicked off 2015 by including National Australia Bank ((NAB)) in its top picks for Australia. The broker hails the restructuring that is underway at the bank, while macro leverage to the Australian dollar depreciation and a recovery in the UK market add to the positive underpinnings. There are divestment opportunities which could release substantial capital, in the broker's view.

Another stock to watch is Primary Health Care ((PRY)). The company is facing some structural headwinds around its GP workforce, which needs to be reinvigorated. Younger GPs are not considered as productive as their more experienced peers. As well, recent Medicare schedule changes planned by the government suggest a price cut for PRY, which has a significant bulk billing component.  A key call for 2015 is M2 Communications ((MTU)), which Credit Suisse expects to outperform through the February results season. The broker believes the stock can deliver a 3-year earnings growth rate of 15% through to FY17.

Media

Carsales.com ((CRZ)) takes the top position in the online classified segment for Credit Suisse with REA Group ((REA)) in second. The broker observes carsales.com has no upside priced in for its early-stage offshore operations. An Outperform rating on REA reflects the broker's opinion that strong revenue growth will ensue as the company takes a larger share of property transaction spending. Seek ((SEK)) is rated Underperform, as Credit Suisse considers the stock expensive with high valuations already priced in for its offshore business.

Nine Entertainment ((NEC)) is the top pick in the traditional media segment. TV advertising is subdued but stable and the broker expects a significant re-rating with any sign conditions are improving. Credit Suisse retains an Outperform rating for News Corp ((NWS)) on valuation and a Neutral recommendation is in place for Fairfax ((FXJ)). The latter is considered cheap based on the valuation of its Domain asset but Credit Suisse believes Nine offers more upside.

The main theme for online advertising, which overtook TV as the largest Australian advertising category last year, is continued strong growth in video and mobile. Retail companies are expected to increase the percentage of online advertising spending. JP Morgan is also most positive on carsales.com, given its valuation upside, while Neutral on REA and Seek, where the upside is considered limited despite the broker liking their business models. JP Morgan notes online advertising expenditure has come at the expense of more traditional advertising and this trend is likely to continue in the near term.

Retail

There were concerns heading into Christmas that trading may be disappointing after downgrades early in December from Flight Centre ((FLT)), Kathmandu ((KMD)) and OrotonGroup ((ORL)). However, UBS has feedback which suggests that Christmas activity was late starting but turned out to be good, with sales progressively improving over the month. Boxing Day sales were also strong. Discounting prevailed but the broker did not find it more significant that the previous year. Leisure and fashion stood out, while feedback from the electronics and household categories was mixed. The broker believes, while discounting was aggressive, it was more targeted in categories such as apparel.

Based on early trade feedback and web traffic in December, UBS believes Wesfarmers ((WES)), Harvey Norman ((HVN)) and Myer ((MYR)) are poised to deliver the strongest top line results among retailers in February. The broker highlights risks for JB Hi-Fi ((JBH)), Pacific Brands ((PBG)), Woolworths ((WOW)) and Metcash ((MTS)). JP Morgan also notes issues for these four stocks. Woolworths is at a key decision point for investors. Some question whether Woolworths can meet its FY15 profit growth guidance of 4-7%. JP Morgan believes it can, even if the like-for-like sales gap with rival Coles remains wide and losses in home improvement increase. It is the long-term outlook that is challenged, in the broker's view, as 8.0% margins in food & liquor earnings are arguably unsustainable.

JP Morgan also questions whether the transformation program at Metcash will provide a boost this year, or even achieve a stabilising of earnings. The other issue is how the weaker Australian dollar and petrol prices will affect discretionary retailers. The broker suggests, while lower petrol prices are a positive, the sales mix is likely to shift more to fresh food and premium products. In this instance, the broker wonders whether Myer will be rewarded if it meets FY15 guidance.

The broker asks whether the new CEO will deliver the goods for JB Hi-Fi and suspects that near-term announcements may continue to be negative, as software sales remain a drag and Dick Smith ((DSH)) continues to be an aggressive competitor. Can the sale of several divisions by Pacific Brands last year help in managing rising costs? JP Morgan suggests the path ahead will continue to be difficult.

Online Retail

Australian online retail sales rose 12% in the year to November 2014 and now make up around 7.0% of all retail sales in Australia. UBS observes, despite sales outpacing the broader market, online growth is slowing. The weaker Australian dollar and better execution by local retailers is the reason why international sales growth is slowing. UBS has identified trends such as momentum accelerating at Myer and Dick Smith winning share by aggressive pricing and promotions. Growth at Flight Centre has accelerated as the travel market rebounded in December, while UBS also observes traffic on the web for DIY names such as Bunnings is also increasing.

A-REITs

After outperforming last year Australian Real Estate Investment Trusts (A-REITs) may look less appealing but Morgan Stanley suspects there could be more upside. If the broker's view of lower bond yields is correct, multiples could expand further as valuations and earnings continue to grow. The differential between US And Australian bond yields continues to narrow and this suggests the relative discount in current price/free funds multiples for A-REITs is overdone.

Morgan Stanley expects valuations will gradually move towards its bull case scenario, which signals 28% upside. The broker is cautious about the rental fundamentals, as operating income is relatively stable and the lower cost of debt could drive up to 2-3% upside for selected stocks.

As earnings revisions get harder to come by in the wider market the broker believes the A-REIT sector's momentum will be attractive. The exception to this expected outperformance is Westfield ((WFD)). The broker prefers Goodman Group ((GMG)), Lend Lease ((LLC)), Mirvac ((MGR)) and Scentre Group ((SCG)). The least preferred, including Westfield, are Stockland ((SGP)) and Novion ((NVN)).

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article 3 months old

Upside For Wesfarmers


Bottom Line 17/12/14

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

Technical Discussion

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

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

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

Trading Strategy

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

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

Risk Disclosure Statement

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

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

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