Tag Archives: Consumer Staples

article 3 months old

Can Metcash Turn Around?

-Fewer fuel discounts not helping
-Improvement linked to tobacco excise
-Competition rise at Metcash's expense
-Stabilisation not likely until FY17
 

By Eva Brocklehurst

After avoiding specific guidance at the FY14 result, Metcash has had to bite the bullet after its first half revealed substantial earnings weakness. Brokers are evaluating just when the earnings decline will find a floor. Convincing independent shopkeepers to come on board the transformation train has taken longer than expected but the company acknowledges, even so, earnings visibility is low.

Morgan Stanley is not optimistic, with indications that FY16 will also be lower. The company reported an 18% reduction in food and grocery profits in the first half, despite the lower levels of fuel discounting from the majors which should have led to an improved performance. Moreover, while management pointed to some improvement in the second quarter, the broker suspects this was linked to tobacco excise increases. The company had signalled it would invest $40-45m in pricing strategy through FY15 but to date has only invested $10-15m, indicating the pace of signing of independents to the transformation plan is glacial. Morgans downgrades to Hold, exhausting hope that the reduction in cross-subsidised fuel discounting would provide some important breathing space for Metcash. Now, the broker considers meaningful improvement in the earnings base is not likely until FY17.

Morgan Stanley assesses that South Australia and Western Australia, combined, contribute 40% of the profits and, as Aldi opens stores in these markets in 2016 and Coles ((WES))/Woolworths ((WOW)) invest in price ahead of Aldi's entry, the earnings impact for Metcash will be significant. Aldi has reached a critical mass in Australia such that Morgan Stanley believes its impact on industry profitability will only increase. Metcash's undemanding multiples signal to Goldman Sachs the magnitude of the transformation task and execution risks. The relationship between wholesaler and retailer adds significant complexity to the transformation strategy and the broker does not expect competition within the industry to abate materially. UBS similarly wonders whether the transformation plan, while the right one, is occurring too late. With earnings and market share falling the majors are also stepping up promotional intensity.

This is the "faith" stage of the transformation plan, in Credit Suisse's view, with significant uncertainty as to the level of earnings to which the company will re-base and the sustainability of the initiatives. The broker also worries revenue is weak in a period in which the company's customers, IGA retailers, benefited from a significant reduction in fuel discounting and a pull-forward of inflation because of the earlier increase in tobacco excise. Convenience, hardware and automotive trends are positive but not material enough to make a difference at the group level. Second half results will provide the first reading on the transformation initiatives but, over the medium term, Credit Suisse believes Metcash will be challenged to generate sufficient business improvement.

Deutsche Bank could also find no sign earnings were stabilising in the first half, with the company performing even worse because of customer purchases outside its distribution channel. Price investment will constitute a larger drag in the second half and the balance sheet is also a concern to the broker. In summary, Deutsche Bank finds no evidence that undermines its thesis that Coles and Woolworths can continue to gain share despite Aldi's roll out, and this will be at the expense of independents.

Macquarie considers the sales results of the initial pilot stores were encouraging but the roll out has been very gradual. The share price reaction to the half year result was severe in the broker's opinion, and there is limited opportunity for management to materially turn around the operations in FY15 and FY16. Benefits are likely to be long-dated and an Underperform rating is retained. Citi is the only broker on FNArena's database with a Buy rating. The broker concedes earnings are set to worsen and does not expect an improvement until the second half of FY16, given the timing of strategic initiatives. The dividend reinvestment plan further dilutes earnings, underwritten to the tune of 75%. Citi expect this underwriting will need to continue over the next 18 months.

Why a Buy rating? The broker bases this on valuation and the latent potential in the store network. Profit margins are depressed and the shares should find support as underlying grocery sales turn positive in the second half. The broker believes more opportunity becomes available as the price investment is marketed more widely to shoppers.The remaining ratings on the database constitute two Hold and five Sell positions. The consensus target is $2.26, suggesting 14.0% upside to the last share price, and compares with $2.75 ahead of the results. Dividend yield on FY15 and FY16 forecasts is 6.5% and 6.3% respectively.
 

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article 3 months old

Weekly Broker Wrap: Term Deposits, Supermarkets, Sales And FX Strategy

-Flat cash dampens term deposit rates
-Food inflation downside for supermarkets
-Would Woolworths exit Masters?
-Business sales growth softest in 2 years
-More declines likely for Aust dollar vs US

By Eva Brocklehurst

Term Deposits

Term deposits are now less attractive for investors, Morgans notes. Recent reductions in rates in the face of a flat outlook for the official cash rate and changing regulation regarding breaking deposits have done the trick. The broker expects that term deposit rates will decline further over the coming year, as wholesale credit market continue to offer attractive funding sources for financial institutions.

Clients should hold deposits as part of a diversified portfolio but, for now, Morgans considers they are less appealing. Interest rates will increase at some point but the broker believes investors should focus on equities with increasing dividends. These companies will be better able to withstand a rising interest rate environment when lower risk alternative investments become more attractive. In this case, the broker is a buyer of ANZ Bank ((ANZ)), Pact Group ((PGH)), Stockland ((SGP)), Sydney Airport ((SYD)), Transurban ((TCL)) and Telstra ((TLS)), given the attractive yields on offer.

Food Inflation

Food inflation may disappear by mid 2015, in Citi's view, given the fall in soft commodity prices. Citi estimates this will reduce comparable store sales growth and compress price/earnings ratios for the supermarkets. The broker estimates share price downside of 15% for Metcash ((MTS)), 11% for Wesfarmers ((WES)) and 9% for Woolworths ((WOW)) from a lower food inflation scenario. The potential earnings downside for the three is 3-5%, while comparable store sales growth could drop to less than 1%. The broker cites a 12% decline in sugar prices, 20% for wheat and 34% for dairy. A wide range of other inputs have fallen as well, such as packaging and oil prices.

The correlation between soft commodity prices and retail food price inflation is high. The broker's indicator shows food inflation may have a near-term peak in the December quarter this year and decelerate by 270 basis points by June 2015. Soft commodity price tend to move around nine months ahead of shelf price changes.

Woolworths Exit From Masters?

Deutsche Bank confronts the scenario of a Woolworths exit from the struggling Masters hardware business. The broker expects the joint venture with Lowe's will persist with Masters for some time but, eventually, if the business does not improve, an exit cannot be ruled out. The analysis suggests an exit would be positive for Woolworths' cash flow, even if Masters could not be sold as a going concern. Deutsche Bank assumes the Home Timber & Hardware business, in this analysis, would be retained, as it is profitable. In reality, if the JV exited Masters, there would be few reasons to retain ownership of a predominately wholesale business but it could be sold as a going concern for a reasonable price. Fixed assets account for the most of the assets held in the JV.

On a worst case scenario, where Masters is not sold but assets are liquidated and liabilities settled, Woolworths would be left with residual cash of around $189m. This would not be a great outcome given the $1.7bn already invested but as the money has already been spent, future cash flow should be of more concern to investors in the broker's opinion.

Business Sales Indicator

Sales growth, economy-wide, was at its softest in two years in October. The Commonwealth Bank's Business Sales Indicator showed spending rose in 14 of 19 sectors but increased just 0.3% overall. The positive take on the numbers is that sales have increased for 39 months consecutively. Annual growth in seasonally adjusted sales eased to 8.0% from 9.2% but remains above the 6.4% long-term average. The five industries in which spending fell in the month were mail order/telephone order providers, government services, automobile/vehicle rentals, utilities and automobile/vehicle sales. NSW did not have any increase in sales in the month. The flat result follows generally strong growth over the past 25 months in that state. ACT led the gains by state or territory, up 1.7%, while Western Australia, South Australia and Tasmania rose 0.7%.

FX Strategy

Strategically, ANZ strategists retain a strong US dollar bias but expect the short term trading environment will be range bound. Global inflation dynamics are clouding the issue regarding what the US Federal Reserve might do with its key funds rate in 2015. The strategist note that as the volatility in the bond market has declined, that of the FX market has risen. Consolidation is expected ahead of a return to US dollar strength next year. Low inflation risks will dominate the euro debate while the strategists suspect the market is under-pricing the interest rate trajectory in Britain.

The Australian dollar is expected to continue to weaken in 2015. The strategists note the Australian dollar's recent decline against the US dollar has only kept pace with the decline in key commodity prices and has not resulted in a reversion to fair value. They suspect that the currency will be weaker than previously envisaged through 2015 and have revised down their 2015 year-end target to US82c from US85c. Even at this level the decline is not expected to be sufficient to provide a substantial and independent boost to the Australian economy, nor accelerate the pace of Reserve Bank policy tightening. Little domestically induced recovery is expected for the local currency in 2015 either, and the strategists lower their December 2016 forecast to US80c.
 

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article 3 months old

Emerging Buy In Woolies

By Nick Linton-Ffrost

Emerging Buy

We expect Woolworths ((WOW)) will bounce towards 34.50 over the next 2-3 weeks after achieving downside break targets.

Our view is based on the combination of wave count assumptions, trend line break targets and Friday’s reversal day. We suspect that the sell-off from 39.00 to 31.00 has traced out 5 waves which improves the odds for a near term bounce. In addition WOW has now achieved the break targets derived from the trend line break at 35.50, these levels can create strong reversal levels.

It is also worth mentioning Friday’s strong reversal signal (ie new lows followed by close on highs). This price action when combined with our previous assumptions significantly improves the odds for a corrective rally. We therefore suggest looking for buy signals over the next 3-5 days such as a higher low or a series of three days with higher highs and lows. Trading below 31.00 for more than 2-3 negates our view.

Trading tactics

Wait for buy signals.
 


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Technical limitations

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article 3 months old

Rough Ride Ahead For Oz Retailers

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

By Eva Brocklehurst

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

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

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

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

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

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

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

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article 3 months old

Woolworths: Value Now Or Not?

-Underestimating marketing need
-Relentless competition continues
-Questions over space expansion 
 

By Eva Brocklehurst

Woolworths ((WOW)) disappointed the broking community with its September quarter sales update, showing signs its competitors are pulling away in terms of growth. Sales growth of 3.9% compares with 5.8% at main rival Coles. Meanwhile, Woolworths' discount department store Big W is under pressure and patience appears to be wearing thin regarding when hardware chain Masters will become profitable. Petrol sales continue to be negatively affected by the competition regulator's fuel discount ruling.

What was there to like about the update? Macquarie observes the share price slump, and further de-rating relative to Coles' owner, Wesfarmers ((WES)),  presents a buying opportunity as the market appears to be pricing in a period of slower growth. Macquarie has an Outperform rating and $35.84 target. Deutsche Bank suspects Woolworths has underestimated the degree of promotion required to maintain its value perception with customers, particularly in dry grocery goods. This issue is addressable, in the broker' s view, and not a sign of any structural deficiency, as Coles' strong performance suggests the broader market dynamics are sound. Deutsche Bank also considers the bar has now been set low for the Woolworths share price and retains a Buy rating and $37.50 target.

This is not the case for JP Morgan, who questions the slowing in Australian food and liquor momentum and the fact the gap with Coles has widened again.The broker note the sales performance at Masters is weak and this suggests the path to profitability remains difficult. New Zealand supermarket sales are also soft and Big W's transformation is adversely impacting its sales. JP Morgan is concerned that Woolworths' efforts to expand earnings margins in the last quarter of FY14 and the first quarter of FY15 may have weighed on value perceptions and customer volume. Initially an advantage for Coles, the broker observes it is also advantageous to Aldi, a small but aggressive competitor.

JP Morgan maintains the liquor side is arguably the best business for Woolworths, but the company has been cautious about growth in that division and having been a strong performer, sales growth rates could moderate with a more subdued liquor industry. Price perception needs to be repaired, in JP Morgan's view, and this requires a marketing and/or price adjustment by Woolworths. Coles remains aggressively intent on value and this may hinder the effectiveness of Woolworths' marketing. Meanwhile, Aldi is growing in the background.

UBS suspects market share inroads have been made by discounters Aldi and Costco, with the third consecutive quarter of market share loss for Woolworths' food & liquor division. The broker suspects the re-launch of "The Fresh Food People" and the launch of "Cheap Cheap" have not resonated with the market as well as the company would have liked. UBS' recent study of the impact of discounters suggest they are highly efficient and offer compelling value and it is difficult for the major chains to compete.

Morgan Stanley believes Woolworths has done some of the damage to itself. Feedback from the industry suggests poor inventory management, declining fresh food displays and recent cost cutting initiatives are beginning to affect store performance. Morgan Stanley notes the Australian food & liquor division sustained its lowest volume growth in more than 12 years as food inflation ticked higher.

Supermarkets rely heavily on scale to reduce fixed supply chain costs and declining volumes are likely to lift the cost-to-sales ratio. The broker makes no bones about the acceleration in store roll-out. New stores are increasingly being rolled out in existing catchment areas and this simply leads to cannibalisation in Morgan Stanley's opinion. Eight supermarkets and nine liquor stores were opened in the quarter and Woolworths expects to open another 17 and four respectively in FY15.

Morgan Stanley is critical about increasingly relying on cost cutting and gross margin expansion rather than operating leverage to achieve profit growth. The company has not proven its credentials in retailing outside supermarkets, hence the broker remains unwilling to factor in value upside from non-supermarket businesses. In supermarkets it comes down to a "space race" with competitors and the broker is not impressed, retaining an Underweight rating and $30.00 price target.

On FNArena's database there are four Buy ratings, one Hold and three Sell for Woolworths. The consensus target is $35.51, suggesting 6.1% upside to the last share price. Targets range from $30.00 to $42.60.
 

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article 3 months old

Time To Buy Retail, But Not Supermarkets

-Tables turn on grocery suppliers
-Major supermarket profit growth to slow
-Discretionary price rises encouraging
-Reasons, now, to buy retailers


By Eva Brocklehurst

UBS has decided to put to rest the supposition that suppliers to supermarkets "over earn". In 2012 the broker's analysis found that Australian supplier margins were 210 basis points below the global average but their returns on investment capital (ROIC) were higher, leading to the conclusion that, while suppliers were under pressure, they had more to offer the retailers.

The broker has revisited its assumptions and now finds that gross margins have fallen more than earnings margins, suggesting suppliers have become more efficient and have cut costs. ROIC has fallen materially, and is now 13% compared to the global average of 21%. The magnitude of the decline in supplier profitability means UBS questions the ability of retailers to extract the same margins from their Australian supplier base. This could be a negative signal for Coles ((WES)), Woolworths ((WOW)) and Metcash ((MTS)) in the broker's view as, along with the emergence of Aldi and increased government scrutiny, driving margins via tighter terms with suppliers will become more difficult. Near-term margin growth for Australian supermarkets looks constrained with Metcash and Woolworths considered most at risk.

Morgan Stanley also observes the profit shift to Coles and Woolworths at the expense of suppliers and smaller food retailers. The broker suspects profit growth for the majors will slow and more regulation will become a headwind. The broker's analysis shows aggregated profits in the grocery industry have been reduced to $10.7bn from $11.9bn in FY10 but supplier profits have fallen to $3.7bn from $6.1bn, while Coles and Woolworths combined have increased annual profits to $4.4bn from $3.1bn.

Should the retail profit pool remain flat at the current run rate, the majors will control 100% of the pool by 2020. However, the broker observes the consumer regulator, ACCC, is now taking a more active stance to increase competition in this industry by removing restrictive lease provisions, taking retailers to court over unconscionable conduct and limiting fuel discounting. This will make it more difficult for the majors to expand margins, in the broker's opinion.

Checking the pulse of apparel retailers, Credit Suisse notes Myer ((MYR)) persisted with a big mid-season sale while apparel prices at David Jones, in contrast, were stable and even showed some inflation. Price increases have occurred for the fourth consecutive week at Dick Smith ((DSH)), with aggregate price points in line with January levels. Prices have rebounded more than 12% from peak discounting levels in mid September. Meanwhile, minor price rises have occurred at JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), which Credit Suisse finds encouraging for the sales and gross margin outlook at both retailers. One category where there is no sign that competition is abating is in white goods, with price points under pressure throughout 2014.

Sales growth is looking better but retailers are struggling to hold onto margins, given lower FX rates, while cost cutting opportunities are harder to find, in Citi's opinion. The broker likes those retailers that are in control of their margin gains through sourcing and supply chain savings such as Super Retail ((SUL)) and Specialty Fashion ((SFH)). The best performers in FY15 are expected to be in food-related categories or those tied to strong house price growth. While FY14 revealed the weakest margin performance among retailers in several years and a need to shift focus to sourcing opportunities and reduce mark-downs, the broker suggests there are some reasons, finally, to buy retail stocks.

Citi is more positive because petrol prices are lower and budgeted tax increases have not been implemented. This could boost retail spending by 1.7%. The broker now rates OrotonGroup ((ORL)) and Pacific Brands ((PBG)) as Buy and has upgraded Myer and Premier Investments ((PMV)) to Neutral. Household finances are in better shape but the near-term risk for retail spending is in initiatives stemming from the government's mid year fiscal and economic outlook, which is released some time before Christmas.
 

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article 3 months old

Weekly Broker Wrap: Supermarkets, GPs, Housing, Steel, Insurers, Banking

-Grocery weak for CCL, GFF
-Health insurers engaging GP sector
-JP Morgan downgrades steel sector
-Bell Potter positive on insurers
-Banks: higher capital vs funding tailwind
 

By Eva Brocklehurst

Deutsche Bank's supermarket pricing study suggests grocery price trends have improved over the past three months. A continuing factor has been inflation in fresh products. The broker concedes food and liquor sales are not immune to the current weakness in consumer sentiment but inflation is likely to be the main driver for supermarkets, so the trend bodes well for the upcoming first quarter sales figures.

The broker's data suggests Coca-Cola Amatil ((CCL)) refrained from aggressive price promotions and, as a result, experienced positive year-on-year price improvements in the September quarter. This is in line with management's commentary after the first half result, revealing it was working on balancing the trade off between price realisation and volume growth. As a result, Deutsche Bank suspects CCL has experienced weak volumes in the grocery channel. Promotional activity in supermarkets' proprietary bread over the quarter has continued to erode price gains made over the year. The broker's channel checks suggest the selling of bread at 85c has been strong, which is not helpful for Goodman Fielder ((GFF)).

***

UBS observes, just as major ASX-listed hospital operators were undervalued five years ago relative to their strategic value, so national GP operators are in the same camp now. Taking a 5-10 year view on the evolution of the Australian healthcare sector the broker points to the growing engagement between private health insurers and general practice. Consistent with offshore developments, the broker expects GPs will evolve a more strategic role in the provision of integrated care, particularly for the chronically ill. Add to this a trend to consumer-driven care, where patients monitor personal health indicators and seek GP advice.

These trends signal to UBS that the geographical footprints of GP operators such as Sonic Healthcare ((SHL)), Healthscope ((HSO)) and Primary Health Care ((PRY)) become more significant. Previously the corporate function was simply administration but it now involves coordinating services. With the changes already underway, UBS envisages a transformation in GP-health insurer links, anticipating there will be valuation uplift for GPs. The broker takes the preliminary step of raising its GP valuation component in these stocks by 20%.

***

The magnitude of the Australian housing recovery improved in the first half of this year. Citi notes Sydney housing remains the highlight, favouring companies which can leverage the whole value chain in construction products. The broker reiterates a Buy call on GWA ((GWA)) but expects the housing recovery will only positively impact the company from the first half of FY15. Peet ((PPC)) in contrast should benefit more immediately from improved activity, given its early stage exposure.

Detached housing looks to be responding to the low interest rate environment, creating lower risk for building product companies compared with construction materials in the near term. A slowing in in resource capex has caught up with the engineering sector but Citi expects a recovery in infrastructure spending will support top line growth from FY16 onwards. Given this backdrop the broker's preferred pick is Lend Lease ((LLC)) with its exposure to long-term infrastructure investment.

***

Australian steel spreads widened in the September quarter as a result of resilient steel prices, continued weakness in iron ore prices and a declining Australian dollar. JP Morgan expects this will be the case until early in 2015, when spreads will start to narrow. The broker has downgraded earnings estimates across the steel sector. For BlueScope ((BSL)) and Sims Metal Management ((SGM)) the downgrades primarily relate to moderating steel prices and spread forecasts. For Arrium ((ARI)), the deeper cuts are largely because of downgrades to iron ore price assumptions.

***

Bell Potter remains positive on the general insurers. The Bureau of Meteorology anticipates at least double the risk of an El Nino weather event by the end of the year. This would result in drier than usual weather on the eastern seaboard. These events tend to correlate to a net beneficial impact on insurers. The threat of bushfire activity in such periods is a key risk but the actual damage tends to be smaller than for storm or flood related events, given lower average land and building values in rural areas. Meanwhile, commercial premium growth expectations are considered achievable. Discounting in the first half crimped top line growth but Bell Potter believes this was anticipated, and more than offset, by better margins.

The broker forecasts returns to remain stable, as lower market gains are offset by lower claims expense, although Insurance Australia Group ((IAG)) is expected to experience a small decline in returns, given a higher proportion of equities/alternative investments in its portfolio. The greatest upside potential belongs to QBE Insurance ((QBE)), given its investments are shorter in duration, while its claims liabilities are longer. The broker has Buy ratings for all three stocks in the sector IAG, QBE and Suncorp ((SUN)), reflecting the defensive nature of the industry.

***

Credit Suisse observes trends in personal and corporate insolvency are benign or improving across each of Australian banks' key markets. In relation to Australian corporates, the Reserve Bank recently stated that indicators of business stress improved over the past six months and failure rates are well below recent peaks in 2012. In Australia, in the September quarter, the number of aggregate personal insolvencies increased 8% sequentially while bankruptcies increased 14%.

As the Murray review of the Australian banking sector looms, JP Morgan highlights the case for higher capital measures, but drags to profitability from higher capital requirements are likely to be fully offset by the funding tailwind being received by the major banks, via lower interest rates, or by equivalent change in mortgage discounting behaviour from the sector. Wholesale funding costs continued to decline in the September quarter and major banks have looked to increase their net issuance. This environment provides the backdrop for the Murray inquiry's outcome, expected in November. JP Morgan's base case is for a 17% total capital ratio by 2018, in part achieved through issuance of an additional $70bn in tier 2 sub debt at a cost of $1bn to the system.

The broker does not believe this is as challenging as first thought, if it is accompanied by the introduction of senior unsecured bail-in debt akin to the moves in Europe. With major bank share prices now trading at a 10% discount to fair value the broker looks to the upcoming G20 meeting in November to obtain further clarity on whether senior unsecured bail-in debt is being recommended globally.
 

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article 3 months old

Bounce For Woolies?

By Michael Gable 

With the US markets now starting to join the “correction party” that started in Australia last month, our market seems to lack any interest in having a sustained bounce. The last time our currency took a hit was back in May last year when the market fell 11%. When the dollar finished its fall, the market then went on to rally 1000 points to the September high this year. We found the price action last week to be particularly interesting to the extent that it gave us clues as to what would be the catalyst for a market rally. You would have noticed that as the Aussie dollar fell into support around US$0.86, it managed to stabilise and edge higher for a few days. As a result, our market staged an 80pt reversal on the Tuesday from the lows, another retest of that level on Wednesday with an intraday recovery, followed by a nice day up on Thursday.

We had Janet Yellen talking down the US dollar on Wednesday night which no doubt helped our currency. The other interesting point was that NAB started last Thursday down over 1% due to a write-down, only to quickly rally back and be up over 1% on the day. All of this is telling us that when the Australian dollar finds some support, money gets thrown at the market, shrugging aside bad news like in the case of NAB. Of course, the Dow Jones was down over 300 points on Thursday night so our market tanked and is once again struggling against the backdrop of the US market having a pullback. But the reaction to the currency movements is interesting. Yesterday also saw a great outperformance from the miners as China posted some better than expected trade numbers and iron ore bounced nearly 4% overnight. Commodities led our market lower, will they lead it higher? Alongside that we have 3 of the big four banks going ex dividend soon. Previous calls for a market bounce have been premature but with the market having moved from a “struggling to find value” state to a more palatable proposition, it will be interesting to see when the eventual recover starts to kick in, led by the Australian dollar.


Woolworths ((WOW))


WOW has come back to an interesting level here. Earlier in the year it broke out of an almost year-long continuation pattern. The recent pullback has seen it come back to the midpoint of that, which could represent a level of support. The pullback from the May high has also been done in 3 waves, where a = c in this “abc” correction. Price action on the daily chart was also recently oversold on the RSI (not shown on this weekly chart). With any bounce in the market, dead cat or not, likely to result in top 20 stocks showing strength, and WOW being undervalued, we could see it rally here up towards resistance at $35.
 

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

Downside For Woolies

By Nick Linton-Ffrost

Sell

Woolworths ((WOW)) appears to have broken the 2 month trend line line around 35.50 which implies a move towards 33.00 over the next week or two.

The confirmed break below our pivot level 35.20 is enough to trigger a sell based on our assumption that the move lower from 36.50 is a 3rd wave which should be followed by trading between 34.50 and 35.10 before a 5th leg lower to 33.00.

Our view is negated after 2-3 days trading above 35.70.

Trading tactics

Open shorts using a 35.00 limit placing stops at 35.75 and looking for a move to 33.00. Otherwise wait for a lower high to form below 35.50 before opening shorts and placing stops above that lower high.
 


Another trading idea from

Fifth Wave | fwtc.com.au                                               

FW generates over 150 Trading Alerts on the ASX100 each year. We are a subscription service specialising in short term technical strategies based on 27 years experience.

 AFSL 319830 | Disclaimer

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).

Technical limitations

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

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article 3 months old

Weekly Broker Wrap: Insurance, Telecoms And Supermarkets

-Positive outlook for Medibank Private
-IAG and SUN losing market share
-Interest may switch to telco access providers
-IIN may be vulnerable to access reform
-MTS likely the biggest loser to discounters
 

By Eva Brocklehurst

Morningstar believes Medibank Private, Australia's largest provider of health insurance and owned by the government, will be attractive to investors. The business is to be sold via an initial public offer (IPO). Pricing is yet to be determined but, given the government's eagerness to sell the asset, it should be keen. Assuming a realistic issue price and no negative surprises in the prospectus the researcher believes demand for the stock should be healthy, given successful recent floats and a dearth of attractively priced, high quality defensive investment opportunities. Based on the long-term outlook for the private health insurance industry and research on listed competitor, nib Holdings ((NHF)), Morningstar is positive about the industry. Government regulated pricing and risk sharing across the industry limits earnings upside but also create a floor for minimum profitability.

***

Insurance Australia ((IAG)) and Suncorp ((SUN)) are likely to sustain a period of flat top line growth, in Morgan Stanley's view. The two are being tested by challengers. IAG's personal lines franchise is likely to prove more durable than Suncorp's, the broker suspects. Challengers to the major's franchises are growing their market share in motor and home insurance, building consumer brand awareness. Youi is now number three in motor insurance, with a 4% share. it has a 5% share of home insurance.

The challengers are seemingly more intent on making Suncorp customers switch brands. The price is less of a factor for IAG customers, in the broker's analysis, as they shop around less and it takes a bigger discount for them to switch. Suncorp customers tend to shop around more. Both insurers have been growing below system in the home and motor insurance markets over the past three years. Morgan Stanley suggests customer retention is the key for IAG while Suncorp needs volume.

UBS is cautious about the general insurance sector as the major insurers attempt to address market share losses. The market shares of Suncorp and IAG have slipped again over the second half of FY14. Both lost 1.0% in motor insurance share and almost that amount in home. UBS acknowledges the success in the general insurers over recent years in widening underlying margins is commendable, as margin usually wins over growth on the day. Still, market share losses are mounting and are now at odds with another mantra to "at least hold share and manage margins". The broker observes, had the majors maintained the market share in motor and home they held four years ago when the challengers started to make inroads, their collective premia base would be almost $700m higher - Suncorp at $390m and IAG at $285m. 

***

Draft recommendations from the Harper Competition Policy Review have significant implications for the telecommunications sector, in Morgans' view. One is the onus on those seeking access to infrastructure - resellers - to show proof of a public benefit. There is also the recommendation of a specialist access and pricing regulator separate from the ACCC. Morgans believes the proposals are likely to have a significant impact on shaping investment returns and improving productivity across the fixed line telco sector. Moreover, the recommendations are part of a set of developments that are likely to swing investor interest back towards access providers and return the purpose of access regulation to supporting an appropriate balance between efficient infrastructure and competition.

Reform of the access regime may come too late to preserve much of the value in Telstra's ((TLS)) copper network, in the analysts' view. TPG Telecom's ((TPM)) competitive advantage may be underpinned by the reintroduction of infrastructure competition but substantial changes are not expected before 2016. Of the providers, iiNet ((IIN)) has the most commitment, perhaps over-commitment Morgans suspects, to the existing NBN model, and it would need to regroup substantially to remain a viable carrier in a more competitive framework. The other main player, M2 Telecommunications ((MTU)), is the purest reseller but has other areas that may help it manage changes in the way value is created.

***

The grocery discounters, Aldi and Costco, are becoming more of a threat to the sales and margins of the major supermarket chains in Australia. UBS takes a look at whether Australia will go down the path of the UK, where traditional chains have been negatively affected by new entrants, with the growth in the discounters accelerating in the past four years and now occupying a market share of 9%. A high penetration of private labels and a willingness to try new channels aided acceptance of the new brands in the UK and the broker suspects Australia will be no different. The discounters are also winning a share in UK fresh food and are no longer viewed as cheap alternatives.

How relevant is this to Australia's supermarkets? UBS notes Aldi already has more market share in Australia, at 6%, than it does in the UK, at 5%. Given higher margins in Australia versus offshore peers, Aldi Australia may have even greater opportunity. UBS believes the margins of Australia's major supermarkets are under greater risk than their sales volumes, based on the UK experience, and they need to regain shopper trust to moderate the Aldi threat. The independents, such as the IGAs, supplied by Metcash ((MTS)), are a more significant part of the Australian landscape, in both fresh and full supermarket channels compared with the UK, where independents are virtually extinct.

UBS suspects IGAs will be the main casualties of the newcomers and insulate the threat to Coles ((WES)) and Woolworths ((WOW)) in the near term. The broker has downgraded forecasts for Metcash as a result, reducing its recommendation to Sell from Neutral.
 

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