Tag Archives: Gaming

article 3 months old

Weekly Broker Wrap: FY14 Outlook May Be Overly Optimistic

-FY14 outlook appears optimistic
-Budget impact minimal for health stocks
-Rise of self managed super funds
-Valuing Telstra's fixed asset base
-Drought rears again
 

By Eva Brocklehurst

The market's outlook for FY14 might be a bit optimistic in terms of stock performances. BA-Merrill Lynch finds there is an over-reliance on second half improvement when it comes to Computershare ((CPU)), Harvey Norman ((HVN)), UGL ((UGL)), Ansell ((ANN)) and Toll Holdings ((TOL)). Margin expansion is also optimistic for the likes of Metcash ((MTS)), Echo Entertainment ((EGP)) and Toll. The broker has looked at the earnings risk for two key sectors, domestic cyclicals and mining.

Recent economic data and company updates suggest the rally in domestic cyclicals could be unsustainable. Merrills finds retail, media and building stocks are not covering the cost of capital. Moreover, they operate in industries with poor pricing power. What's of concern is that some retail stocks have rallied while inventory turnover has deteriorated. In terms of resource stocks, the big caps offer attractive valuations, in Merrills' view. While sizeable earnings risks exist for small cap miners, the broker likes the bigger names, such as Rio Tinto ((RIO)). What is surprising is the amount investors are willing to pay for low-growth yield stocks, particularly banks. While struggling to see value in the sector, the broker thinks a catalyst for de-rating is unlikely near term. Material upside for the Australian market will be driven by miners.

Credit Suisse has reviewed government spending in health care, ahead of the federal budget being brought down on Tuesday. Pathology and the Pharmaceutical Benefits Scheme have borne the brunt of funding pressure. Cuts to drugs that treat Alzheimer's, diabetes and atrial fibrillation are likely but the impact on companies like Australian Pharmaceutical Industries ((API)) and Sigma Pharmaceuticals ((SIP)) is considered minimal. Both are large and can reduce trade discounts to pharmacists to offset revenue. Pharmacists will take the hit. Offsetting this cut is likely to be funding for additions to the PBS. The private health insurance rebate is not expected to undergo further drastic changes, after previous announcements, while GP practice incentives are a perennial target where cuts can be expected. Neither of these are expected to affect the health care sector in any significant way.

The rise of self-managed superannuation funds (SMSF) has gone relatively unnoticed despite a large amount of asset transfer. CIMB notes, between June 2001 and June 2012 the assets in these funds grew at a compound annual 17%, to reach $440 billion. This makes it the fastest growing, and largest segment, of Australia's $1.5 trillion superannuation industry. Market share gains for the funds over the last 15 years netted an additional $180bn over and above system growth. The portfolios tend to be concentrated in Australian shares (32%) and cash or term deposits (29%).

CIMB finds, as a result of the high allocation to Australian equities and rapid growth of market share, the direct ownership of Australian market capitalisation has risen to over 11% in 2012 from 4.7% in 2004. It appears, moreover, that the typical SMSF is less concerned about diversification. Large cap stocks are the beneficiary of increased market participation because of their blue-chip status. The S&P/ASX 200 still looks attractive with the market paying a post-tax gross yield of 5.2%, compared with 3.4% in term deposits. This yield gap is one percentage point wider than the 10-year historical average.

Casinos in Australia are being challenged by the weaker economy, particularly at a time when many of the properties are finishing major capex investment. UBS thinks it's not just economic data that heralds caution in this regard, but also the various industrial companies that have commented on the tough consumer environment. Victorian gaming revenue is also weak. The state government's statistics for non-casino slot machines shows softness and, while there are reasons specific to non-casino slot markets that may account for this, there is likely to be some impact on Crown's ((CWN)) earnings, in the broker's view.

The ACCC has raised the prospect of further changes to valuing Telstra Corp's ((TLS)) customer access network in the 2013 fixed services review. An access price rise seems likely. In CIMB's view, the Telstra economic model shows a divergence between the internal costs for use of the access network and the external regulated access charge. As values fall, average costs will increase relative to regulated prices. The decline in copper fixed services and the implied cross subsidy from retail to wholesale is expected to grow. CIMB thinks the trend of fixed volumes falling faster than expenses leaves the ACCC with little choice but to reduce the value of the regulated asset base.

The current value of the regulated asset base (RAB) is likely to produce an increase in regulated prices for a range of services. The ACCC may adjust the RAB down further to maintain current prices or manage price increases at a lower rate. The analysts do not see a workable price that would allow the RAB to be maintained at current levels. This is of concern to CIMB. The approach adopted in 2011 led to significant access price reductions, which are unlikely to see the reduced value of RAB recover before migration from copper to NBN fibre. This leaves Telstra shareholders holding part of the cost for the endorsement of the government's high-cost FTTP (fibre to the premises) NBN. CIMB notes that the review in 2013 will likely be done in the context of a reversion to the Coalition's FTTN (fibre to the node) NBN.

Drought is the word being bandied about again and the prevalence of herbicide spray rates has been subdued, lagging levels seen last year. CIMB surveyed the agricultural chemical sector and finds the lack of rain has also affected the distributor outlook for fertiliser application rates. Expectations for fertiliser demand were based on a reasonable winter and moisture levels. Incitec Pivot ((IPL)) is likely to experience more of the subdued conditions that persisted in the summer. As an aside, CIMB notes Incitec Pivot has reduced of of the volume risk following efforts to secure volume commitment from distributors, although acceptance has not been uniform. Dry conditions also pose obstacles for Nufarm ((NUF)). The company said in March the domestic backdrop was challenging because of the dry conditions and this, according to CIMB's feedback, has continued in April. The prevalence of weeds has been below average, according to 64% of respondents to the survey.
 

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article 3 months old

The Field Is Open For Tabcorp

-Strong underlying wagering growth
-Intense competition in wagering
-Plenty of risks keep most brokers cautious
-Potential of mobile online confirmed
 

By Eva Brocklehurst

Wagering and gaming operator, Tabcorp ((TAH)), posted third quarter results that were stronger than many expected. The devil (or is it the angel?) may be in the detail.

JP Morgan notes underlying wagering revenue growth is tracking at 7.2%, revealing strength in market share and a rebound in the Victorian totalisator, where revenue increased 8.2%. Total revenue rose by 2.6% in the quarter. Headline wagering revenue fell 4.7%, but this was affected by the company's share of the Victorian joint venture falling to 50% from 75%. The broker considers operating trends as healthy and has no problem with a Buy recommendation, believing the market will become more comfortable in time with the defensive growth on offer.

Deutsche Bank finds a modest acceleration in revenue growth from the first half. Keno revenue growth accelerated to 16% but media softened to 7.6% growth on the prior quarter. Revenue trends in the key area of wagering were stronger than the broker expected and earnings forecasts have been upgraded by 1-3% for FY13-14. There's just so many risks for Tabcorp and Deutsche Bank is cautious, hence a Hold rating. The broker cites several of these risks, including changes to household disposable income, changes to the structure of the wagering industry, imposition of higher race field fees, enforceability of "retail exclusivity" and then there's the Sky Channel arrangements.

For BA-Merrill Lynch the wagering business is facing structural pressure. with intensified competition from new entrants who are aggressively advertising and promoting. This is expected to cap margins. The broker notes Tabcorp is also having to manage the structural decline of tote betting towards fixed odds. There is also the risk of increased costs for rights in media. Another worry the broker has is the balance sheet being stretched at over twice net debt to earnings. Moreover, the dividends yield is considered relatively anaemic. So, it all adds up to a Sell rating for Merrills.

One item, flagged by Citi, is the report from the Senate inquiry into gambling advertising is due next month. Citi thinks this may be a chance for further restrictions on media advertising, a potential positive outcome for Tabcorp. Of note, mobile turnover accounted for 42% of online turnover in the third quarter. The rapid growth implies mobile devices were the single largest source of incremental turnover for the wagering division in the quarter. This confirms Citi's belief that Tabcorp is well positioned to benefit from this market segment.

Macquarie finds one of the strong points in the update was the Victorian tote turnover. Going forward the cessation of Tote Tasmania pooling will start to be cycled during the fourth quarter, so the broker anticipates top-line trends in the Victorian tote business will soften across the remainder of the year. When the new arrangements of incorporating Tasmania into the SuperTAB pool are taken into account it all adds up to being neutral for earnings, in the broker's view. Macquarie notes Tabcorp now needs to pay rebates directly to the wholesale punters.

Credit Suisse thinks Tabcorp is a cheap stock. The broker is a little concerned about the product mix as Victorian retail wagering turnover dropped 7% and, given the Australian economy is likely to deteriorate further, this channel may not get a tail wind for at least 12 months. The broker takes the view that, if Tabcorp can sustain a price/earnings ratio of 17.5 times, in a stock market where bond proxies are in demand, apply that to FY15 earnings estimates and this equates to a valuation at $3.90. The broker's target price is $3.55, within a range on the FNArena database of $2.84 to $3.70.

Credit Suisse makes the observation that, while Tabcorp's retail wagering exclusivity in Victoria expires in 2024, the operation is perpetual because when the licence expires technology would likely have opened up the market such than an exclusivity payment in the next decade may not be worth that much.

On FNArena's database there is one Sell rating for Tabcorp - Merrills. There are five Hold and two Buy. The consensus target price is $3.41, suggesting 4.2% downside to the latest share price. On FY13 consensus earnings forecasts the dividend yield is 4.9% and on FY14 forecasts it's 4.5%.

See also, Wagering Gains Impetus From Mobile Online on April 24 2013.
 

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article 3 months old

Wagering Gains Impetus From Mobile Online

-Mobile phone impetus to online gambling
-Wagering stands to benefit most
-Tabcorp best placed
-Gambling advertising grows strongly
 

By Eva Brocklehurst

There's an interesting aspect to the proliferation of mobile phones. They're having a dramatic impact on gambling habits. Mobile represented around 25% of online turnover for key Australian operators in in the first half of FY13, almost triple the penetration seen a year earlier. The use of mobile phones principally affects the wagering sector and the effects are set to escalate, in Citi's opinion.

Mobiles improve access and this is why wagering has been most affected, as opposed to casinos or gaming machines. Citi thinks the effect on turnover will be similar to the growth during the early stages of the internet. That lifted wagering's share of the gambling wallet to 15% by FY12, from 12% in FY01. Early evidence also points to higher win yields against the internet channel. Citi expects industry turnover growth will recover to 4% per annum from the 1% achieved in FY12. BA-Merrill Lynch attended a recent online gaming symposium and found trading anecdotes supported growth. Larger established vendors were seeing slower growth but still seemed to be generating double digit online wagering revenue growth.

So, which form of wagering suits mobile the most? It's sports. Mobile bet placers tend to be in a younger demographic. In Citi's view, this explains why over 50% of sports turnover is already on line against racing at 30%. Moreover, the potential in Australia for growth in sports betting on mobile is substantial. Turnover in Australia is still, per capita, 40% below the UK. BA-Merrill Lynch is looking for online wagering to continue to grow at around 14% through 2012 to 2015, driven by a push from operators and changing consumer preference for mobile and online commerce.

Of the listed stocks, Tabcorp ((TAH)) has the greatest advantage in this respect as 10% of its portfolio is already in sports. This compares with Tatts Group ((TTS)) at 5%. Citi cites studies in the UK which find that brand loyalty increase along with higher mobile penetration so Tabcorp is on first base given the size of is online account base. The broker also observes that the success of mobile combined with customer relation management may alleviate the pressure from aggressive advertising by corporate bookmakers.

On the strength of these observations, Citi has upgraded Tabcorp to Buy and joins JP Morgan on the FNArena database. These are the only Buy recommendations. There are five Hold and one Sell (BA-Merrill Lynch). Merrills admits Tabcorp has made the most progress in upgrading the online offering and is executing well, but the increased threat of competition amidst general muted growth makes the broker cool on the stock. Tabcorp has a consensus target price of $3.29, suggesting just 0.4% downside to the latest share price. The range is $2.86 to $3.70. The stock offers a dividend yield of 5.1% based on FY13 consensus forecasts and 4.7% based on FY14.

Risks around Tabcorp's retail exclusivity and TVN negotiations are well known and are expected to act as positive catalysts once they are overcome, in Citi's view. The broker thinks Tatts, on the other hand, has been slower to adapt to mobile potential. The broker retains a Hold rating on the FNArena database because of the stock's high valuation. Looking at the other recommendations on the database there are three others with Hold, three Sell and one Buy (BA-Merrill Lynch). Again, Merrills takes a slightly different tack, favouring Tatts, with its strong standing in lotteries and ability to migrate lottery consumers online to improve margin growth. The consensus target price is $3.11, but here it suggests 4.8% downside to the last share price. The range is $2.65 to $3.50. Tatts has a dividend yield of 4.6% based on FY13 consensus estimates and 5.3% for FY14. 

Citi expects online wagering should provide Tatts with upside from FY15, as the company needs to invest in IT and get cracking on marketing. On the marketing side, Goldman Sachs has found that gambling advertising was up 19.8% in the March quarter, making it one of the fastest growing advertising categories. This is made even more significant in the context of an overall agency ad market which declined 2.4% for the quarter. The rising spending on advertising signals a competitive market in Goldman's view. Sports betting and wagering companies are striving to grow share in a crowded space. Television dominates the growth in gambling advertising spending taking up 56%. Digital advertising, while only around 9%, has been growing quickly. Goldman notes it's grown 266% between 2008 and 2012.

Goldman also believes Tabcorp is the stock best placed to benefit. In 2013 the broker estimates 57% of Tabcorp's earnings will be generated form wagering/sports betting against 31% for Tatts. Nevertheless, Goldman's least preferred stock is Tabcorp as the broker suspects managing the business to contain costs will put pressure on the company's market share.
 

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article 3 months old

Weekly Broker Wrap: Which Retail & Building Stocks Are Returning To Favour?

-Department stores well placed for upturn
-Supermarkets expanding too fast
-Wesfarmers' retail and dividends attractive
-Which building materials stocks benefit most?
-Competitive market in gambling
 

By Eva Brocklehurst

Which stocks are best placed as consumer appetites grow?  Morgan Stanley analysts think we're past the worst of  the retail cycle as the drivers of recovery are improving. Underpinning this recovery is the housing market, equity market, interest rates and consumer confidence. Retail sector growth will probably be limited to 3-4% per annum as non-retail categories take a greater hold on consumer wallets. Best placed in discretionary retail are the department stores as they are adapting to cope with the new retail environment, optimising networks and online offerings. David Jones ((DJS)) is the broker's top discretionary pick. Morgan Stanley finds the retailer is under-earning against local and global peers but has the potential to double earnings over the next five years with private labels, store optimisation and online growth. Myer ((MYR)) is also attractive, and an improving top line performance and cash flow shows the company's strategy is working, in the broker's view.

Supermarkets on the other hand haven't had to face the online challenges of the likes of Myer and David Jones and this sector is over-confident. Morgan Stanley believes Woolworths ((WOW)) and Metcash ((MTS)) are overvalued. Part of the problem is that supermarkets are embarking on what the broker describes as irrational store roll-outs. Very bullish plans have been outlined. Morgan Stanley finds retail space growth is 3.5% per annum over the next three years, well ahead of population growth of 1.6%. Incremental returns will be therefore be reduced as new space is not as productive as existing space.

Over-capacity also increase the risk of more price-based competition and the broker suspects a price war could easily develop, robbing the industry of growth and returns as the majors take bites off each other. Wesfarmers ((WES)) is a bit different as it has a wider reach, with Bunnings and Kmart as well as Coles supermarkets. It also has the advantage of being a strong dividend provider and many brokers expect this dividend should grow significantly over time.

BA-Merrill Lynch comes down hard on supermarkets too but is more bearish on the general outlook. The analysts at Merrills think the situation is likely to get worse before it gets better. The high Australian dollar is pressuring Australian business and unemployment is expected to increase over the year. Wesfarmers, Woolworths and Coca-Cola Amatil ((CCL)) have been spending heavily and pursuing growth that doesn't exist, in Merrills' view. Here again, Wesfarmers gets away with it because of strong cash generation. The broker expects dividends to increase to $2 a share in FY14 and free cash flow after dividends is expected to be a positive 22c a share in FY14.

Coca-Cola Amatil generates less cash but Merrills lauds the stated intention to cut back on capex in FY13 and FY14. Coke dividends are also expected to increase, after a sizeable increase in FY12. Woolworths remains the least preferred because, and here Merrills closes ranks with Morgan Stanley, the company is spending too much on growth, such as new stores, renovations and new business. Merrills finds Woolworths unappealing as an investment despite a very strong domestic supermarket business.

Goldman Sachs expects a more sustained recovery in the areas which drive retail spending as we stride through FY14 and FY15. This broker, too, prefers Wesfarmers and has downgraded Woolworths to Sell because of a much more modest earnings growth outlook. As for discretionary retail stocks, the broker recently upgraded Harvey Norman ((HVN)) to Buy and has a Sell rating on David Jones. The difference? Harvey Norman is more leveraged to a strong recovery in the building cycle. 

UBS is on this tangent too, noting housing is picking up and this benefits retailers in two ways. Firstly, via selling items used in new houses such as hardware, note Bunnings, and appliances, note Harvey Norman. Nevertheless, the broker finds these retailers that are directly exposed to increased housing activity only deliver modest upside. The second way is related to the high correlation between house prices and consumer confidence. Further analysis suggest that those retailers offering high earnings leverage to improving sales, via a housing-driven lift in sentiment,  are the best way to play the ball. The broker's preference on this basis is Myer and Premier Investments ((PMV)), owner of Just Jeans, Jacqui E, Peter Alexander and Portmans stores. Here, every 1% surprise in FY14 revenue would deliver earnings uplifts of 2.9% and 3.3% respectively on UBS estimates.

It stands to reason that improved housing starts will support building materials stocks, such as Boral ((BLD)), Adelaide Brighton ((ABC)) and James Hardie ((JHX)) but CSR ((CSR)) is not in the same league this time, as the company's exposure to aluminium prices will have a negative impact, UBS maintains. The picks are Boral and Adelaide Brighton. In terms of Fletcher Building ((FBU)), UBS finds the stronger NZ dollar reduces the NZ earnings impact too much, whereas the likes of Boral offers leverage to housing both in Australia and the US. James Hardie is well exposed to the US but UBS believes the share price is too expensive. In contrast, CSR and Fletcher are considered fair value. Adelaide Brighton recently revised earnings lower. The broker does worry about the medium term but is comforted by the fact that the stock has a low price/earnings ratio and forecasts are undemanding.

Goldman Sachs has taken a look at what's changed in the gaming business. For the March quarter, gambling advertising was up 19.8%, making it one of the fastest growing advertising categories. This is even more significant in the context of an overall legacy ad market that declined 2.4% in the quarter. Rising advertising spending highlights a competitive market. In the broker's view this reflects competitive wagering and sports betting and companies striving to grow share in an increasingly crowded space. TV dominates. Tabcorp ((TAH)) is the most exposed to rising advertising costs as corporate bookmakers are one of the major drivers behind the increase in ad spending. Managing the business to contain costs may see pressure mounting on Tabcorp's market share, in Goldman's view. The broker's preference is for Crown ((CWN)) in the gambling stakes.
 

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article 3 months old

Gaming Scores A Positive Outlook

-Wagering/lotteries outlook mixed
-Casinos most robust
-Speculation on Crown/Echo continues
-No surprises from machine manufacturers


By Eva Brocklehurst

Things could happen this year at the gaming tables; there are plenty of potential catalysts. For those gaming companies reporting this month the brokers anticipate sound earnings but they differing as to the extent of earnings growth, where it will come from and which stocks in the sector they favour.

Deutsche Bank expects Tatts ((TTS)) and Tabcorp ((TAH)) could surprise to the upside, notwithstanding the loss of the Victorian gaming licences. Here, the two should benefit from robust wagering expenditure. Tatts has acquired Tote Tasmania and should sustain improving win rates at TattsBet, and a reduction in restructuring costs. Deutsche has a Hold rating on both. Macquarie expects Tatts to show solid results but rates it as a Sell, believing the shares are expensive.Goldman Sachs believes Tatts has earnings upside risk as online operations gain traction. This broker has a Hold rating on Tatts but a Sell on Tabcorp, viewing Tabcorp as having flat earnings, high debt and the most potential downside. Macquarie sees the issues and future catalysts for Tabcorpas  being a resolution of its agreement with TVN, possible extension of its retail exclusivity in NSW and potential co-mingling agreements with other offshore partners. The broker expects the first half results to be "messy" with the structure of Victoria's wagering business changing and the end of the company's pokies business in that state. Macquarie rates Tabcorp as Hold, sharing that rating on the FNArena database with four others.

Deutsche Bank expects Crown ((CWN)) and Echo Entertainment ((EGP)) will disappoint the market, affected by softening in revenue growth trends on the east coast and higher operating costs given expansion and refurbishment disruptions. Crown, nonetheless, remains one of its preferred exposures in the sector with a Buy rating. In fact, on the FNArena database Crown has seven Buy ratings and just one Hold (CIMB). Goldman Sachs expects casinos will lead on revenue and, taking a different tack to Deutsche, believes the refurbishments will drive stronger earnings this year. Macquarie expects Crown's high roller venture at Barangaroo will progress, but has concerns about the challenges for investment returns from the venture. The broker does admit there is not enough detail yet to be sure about this. Approval of this venture this year may be a catalyst for a negative stock reaction, according to Macquarie, as the challenges of the project are brought home. The broker also suspects it may be a negative for Echo, given likely impairment.

As for Crown's investment in Echo, Deutsche sounds a cautious note on this, seeing declining revenue at the Queensland casinos and softer-than-expected machine revenue growth at The Star. The broker notes this will be Echo's first result hosted by the new CEO. Although it may be too early for a new strategy, Deutsche expects an update on the status of Project Icon for the Gold Coast and Treasury casinos. Macquarie also sees a slowing of growth at The Star although Queensland, while still soft, should show improving momentum at the end of the half year. Goldman thinks merger speculation regarding Crown and Echo will continue this year and, while a takeover by Crown would be earnings dilutive, the broker still recommends Crown as a Buy. There are still robust multiples for casinos, the broker believes.

Regulatory approvals down the track for Genting Hong Kong and Crown to raise their stakes beyond 10% may provide some support for Echo, according to Macquarie. In the meantime, the broker rates the stock as Hold, along with three other brokers in the FNArena database. Here the outlook is more mixed compared with Crown, as Echo has two Sell ratings and two Buy ratings as well. Recent commentary from BA-ML on the Buy side notes the company has strategic value, although this could take time to materialise. On the Sell side, Credit Suisse thinks Echo is a difficult stock to assess, given the negotiations with the Queensland government and Crown's potential for competition in Barangaroo in NSW.

Deutsche expects SkyCity ((SKC)) will report a result slightly below the consensus, affected by lower-than-expected revenue growth at the Auckland and Adelaide casinos. Nevertheless, the broker sees defensiveness in the earnings base and strong cash flows. Hence a Hold rating. Goldman rates SkyCity a Buy, finding the stock's price/earnings multiples are supported by solid earnings growth - forecast at 7-9% in FY14/15. This broker sees earnings upside from the Adelaide casino redevelopment and the NZ National Convention Centre.

Macquarie finds valuations stretched for gaming equipment manufacturer, Aristocrat ((ALL)), preferring the casino operators. Deutsche uses the company's maintainable earnings as a valuation methodology, believing it has potential to grow market share. Macquarie notes Aristocrat will not report results this February, with a change to its year-end. It will hold its AGM on February 20. Macquarie has downgraded its recommendation to Sell from Hold, following the recent run up in the share price. On the FNArena database BA-ML also rates it a Sell. Deutsche's Buy rating is joined by UBS and Credit Suisse on the database. Ainsworth Game Technology ((AGI)) is not expected to deliver any surprises with its results but Macquarie will be interested in its progress on North American expansion. This stock is one of Macquarie's preferred plays, hence a Buy rating. BA-ML also rates Ainsworth as a Buy on the database while JP Morgan initiated coverage earlier this year with a Hold rating.
 

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article 3 months old

Advertising Shifts Substantially Into New Media

-Advertising spending to improve
-But mostly in new media
-Publishers face strong headwinds
-TV advertising to rebound


By Eva Brocklehurst

Traditional media is on a downhill road, advertising spending is choppy, debt levels are high. Oh dear, the analysts' outlook for media in 2013 doesn't promise a lot. What it does promise is opportunities in those grasping the new age in advertising spending, with improved returns down the track. Hence, there is a divergence in the outlook, resulting from the remorseless shifting from print to internet and mobile advertising.

Overall, advertising is expected to improve, according to CIMB, after a very weak 2012. The analysts are forecasting total growth of 4.4% with traditional advertising making up just 0.6%. Citi expects there'll be some progress on cost savings which should help sector earnings but agrees that the disparity in traditional versus online advertising growth will remain high. Citi analysts expect growth of 3.1% in advertising overall, and the federal election in September adding 1% to that. Within the traditional market, TV is expected to rebound 5% in 2013 while radio and outdoor advertising remain consistent and expected to grow 2%.

Goldman Sachs notes publishers have not started 2013 well in their efforts to transform their business models. The analysts expect mastheads will continue to close, and flag this possibility with regard to Fairfax's ((FXJ)) The Age and Sydney Morning Herald. The broker is steering clear of stocks with structural headwinds, putting a Sell recommendation on APN News & Media ((APN)) and Fairfax. Citi's least preferred stocks include Fairfax, APN and also Seek ((SEK)) but it retains a Hold rating on all three. The broker sees potential in online asset growth for Fairfax but concedes both FXJ and APN are struggling to find value in the digital world. It's just that they appear cheap on valuation. Why Seek among the least preferred? The broker has problems with the company's valuation but likes its business model. CIMB has trimmed forecasts for Fairfax based on the disposal of Trade Me stake and US agricultural publications but has an Outperform rating. Why? Because Fairfax is ruthlessly cutting costs and this should support earnings in the face of revenue decline. Moreover, there are some quality online assets here that CIMB believes are materially undervalued.

So, which stocks have upside risk in this brave new world? Credit Suisse finds for Carsales ((CRZ)), REA ((REA)) and Seven West Media ((SWM)). Carsales' earnings growth is expected to be strong, particularly in display and data services segments. The broker also notes high traffic on the website and solid uptake of the mobile offering. Goldman Sachs also rates CRZ as a Buy. In terms of REA, Credit Suisse sees it having potential for a special dividend, given its cash position. Meanwhile, SWM has the increasing importance of live TV.

Citi also likes SWM, rating it a Buy as it has broad appeal to advertisers and a solid audience. Citi likes News Corp ((NWS)), placing it as a top pick in the listed media sector in Australia. Here, Credit Suisse prefers to maintain a Hold, awaiting further clarity on the forthcoming splitting of Fox from News Corp. What about Network Ten ((TEN))? Citi has it as a Buy along with Southern Cross Media ((SXL)) as the broker believes TV companies are due for a re-rating. However, Credit Suisse marks Southern Cross for downside risk along with APN. The broker says Southern Cross has seen declines in TV and radio share while APN is constrained by lack of cash and the acceleration in print's decline. Goldman also has APN and FXJ with Sell recommendations.
 

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article 3 months old

Weekly Broker Wrap: Earnings Season May Disappoint

-Upcoming earnings season uncertain
-Risk with over-optimistic expectations
-Earnings downgrades outweigh upgrades
-Talk of Crown/Echo merger to continue


By Eva Brocklehurst

Know your stocks. The upcoming reporting season is full of uncertainties, according to JP Morgan, perhaps more so than the last. The broker sees potential for just 23% to surprise with better performances, which is close but below the long-term average, and 35% likely to offer downside surprises, again slightly below. A few stocks have excess cash, which may hold out prospect of increased dividend or a stock buy-back, and some are struggling to generate cash flow in the current market. For Credit Suisse, the greatest area of concern is domestic cyclicals as these have seen a re-rating in recent months despite an underlying deteriorating domestic growth profile. Credit Suisse prefers bond proxies such as the Australian real estate investment trusts (REIT), infrastructure and utilities sectors as well as defensive industrials and global industrials. This broker is underweight banks, domestic cyclicals and mining services.

So which are those JP Morgan thinks have excess capital and could launch a new buy-back? Ainsworth ((AGI)), Amcor ((AMC)), Australian Pipeline ((APA)), Aurizon ((AZJ)), BHP Billiton ((BHP)), Challenger ((CGF)), Coca-Cola Amatil ((CCL)) Domino's Pizza ((DMP)), Flight Centre ((FLT)), Nib Holdings ((NHF)), REA ((REA)), Rio Tinto ((RIO)) and Sims Metal ((SGM)).

Some the broker thinks may need to raise additional equity include Alumina ((AWC)), APN News ((APN)), BlueScope ((BSL)), Oil Search ((OSH)), Crown ((CWN)), Goodman Fielder ((GFF)), Leighton ((LEI)), Lynas ((LYC)), Ramsay Health ((RHC)), Paladin ((PDN)), Southern Cross Media ((SXL)) and Seven West Media ((SWM)).

For UBS, Australian corporates face earnings headwinds, even though the market has rallied in the last six months amid improvements in the global economy. Some important drivers of earnings growth have turned up in recent months, according to this broker. Commodity prices have bounced from September's lows, creating upside for mining sector earnings. As well, the rally in the stock market bodes well for those stocks leveraged to the market, even if fund flow is still not super strong. Nevertheless, the broker sees this reporting season as likely to be a "hand brake"on the rally rather than an "accelerator". 

What are those companies UBS sees offering potential upside surprise? On a quantitative view basis, some with potential upside are Beach Energy ((BPT)), Mirvac ((MGR)), Primary Health ((PRY)), Sonic Health ((SHL)), Tabcorp ((TAH)), Tatts (TTS)). Downside? These are Commonwealth Bank ((CBA)), Goodman Group ((GMG)), Leighton, and Lend Lease ((LLC)). On a fundamental view basis, those that could surprise on the upside are Automotive Holdings ((AHE)), GPT ((GPT)), Insurance Australia ((IAG)), Monadelphous ((MND)), Myer ((MYR)), Super Retail, ((SUL)), Pacific Brands ((PBG)) and Toll ((TOL)). Downside? These could be Bradken ((BKN)), Brambles ((BXB)), Computershare ((CPU)), David Jones ((DJS)), QBE ((QBE)), Santos ((STO)), Stockland ((SGP)) and SMS Management ((SMX)).

Credit Suisse sees significant earnings risk across some sectors because of overly optimistic market expectations and a weak domestic macro environment. Since the last reporting season the broker has reviewed trading updates and production reports for ASX200 stocks and has noted few earnings upgrades. However, earnings downgrades are occurring in cyclical sectors such as metals, mining and industrials. Credit Suisse has identified 21 downgrades, including equity raisings, across its ASX200 coverage up to January 16 2013.

CIMB also warns that over-optimistic expectations often disappoint. Here, the analysts have developed models which find that a positive bias in forecasts is an indication that negative information may be missing from the consensus. The model suggests accelerating and intense short selling in the lead up is a good predictor of earnings disappointment. So, what are likely nasty surprises out there. CIMB notes stocks which have the highest likelihood of disappointing expectations include Sandfire ((SFR)), Sims Metal, Kingsgate Consolidated ((KCN)), Cochlear ((COH)), Western Areas ((WSA)), Coalspur Mines ((CPL)), Virgin Australia ((VAH)), Saracen Mineral ((SAR)), Whitehaven Coal ((WHC)), Beadell Resources ((BDR)), Medusa Mining ((MML)), Buru Energy ((BRU)), The Reject Shop ((TRS)), Ten Network ((TEN)), Arrium ((ARI)), Iluka ((ILU)), M2 Telecom ((MTU)), Perseus Mining ((PRU)), Leighton, St Barbara ((SBM)) and Fairfax ((FXJ)).

Looking more closely at gambling stocks, Goldman Sachs finds that completion of refurbishing at Crown Melbourne, Crown Perth and The Star will drive earnings growth. The broker expects talk of a Crown ((CWN))/Echo ((EGP)) merger will continue this year, given that the share price ratio of the two is the highest it has been since Echo listed. Despite the fact that a takeover of Echo would be earnings dilutive for Crown, the broker recommends Crown as a Buy based on strong earnings growth and a positive view of Macau. The broker has company. On FNArena's database there are seven Buy ratings and one Hold. Echo is a bit more mixed with two Sell, two Buy and four Hold.

Goldman Sachs also finds Sky City ((SKC)) a Buy, with earnings upside seen from the Adelaide casino redevelopment and the NZ National Convention Centre. However, Tabcorp has drawn a Sell recommendation. Goldman cites flat earnings and high debt. BA-ML also has it as a Sell on the FNArena database. There are five others with Hold ratings and two with Buy ratings. Tatts is a Hold for Goldman Sachs, although the online lottery may gain traction and present upside risk, while Aristocrat ((ALL)) is Hold based on a benign US outlook. Citi also recently confirmed Aristocrat as a Hold recommendation on the FNArena database. The stock has four Hold, three Buy and one Sell (BA-ML). BA-ML remains cautious on the trading outlook, despite 2012 earnings beating its estimates. Tatts has a mixed review on the database with four Hold three Sell and one Buy. In this case BA-ML is the odd one out again. Here, the broker sees higher earnings coming on the back of the purchase of the South Australian lotteries and keno licences. 
 

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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The XJO put in a solid day of trade following positive leads from the Street overnight as Cliff talks once again stole the show. Both Obama and House of Reps. speaker Boehner said they were optimistic that a deal could be struck over the budgetary issue. The XJO finished the day on its highs up 30 points or 0.7% to points on better than recent volume of $3.5B despite trailing the futures by 10 points for most of the day.

You must now have observed that this is a nightly saga where equity markets around the around the world are totally dictated to by mere words from individual US politicians. This type of weak headline-driven price action makes trading markets incredibly difficult so for those traders out there trying to make sense of things, don’t be too hard on yourself because this is as tough as it gets.

Take some solace from the fact Goldman Sachs chief Lloyd Blankfein described Obama’s fiscal cliff plan as “very credible”, we all know brokers have a vested interest in injecting confidence into markets but this is actually a pretty important development. Both because it means Obama actually has a plan and also because it shows Republican support for the Democrat’s plan. Obama taking the stage to confirm they were actively working on a ‘plan’ may be the next step to putting the issue to bed. Don’t expect the volatility to end before there a signatures on paper though.

On the data front, Aussie Q3 Capital Investment data showed capex had risen by 2.8% q/q (in real terms) in Q3 ahead of expectations of a 2% rise. More importantly total nominal capex in 12/13 was revised 3% lower from the previous estimate. The peak of the mining capex cycle is beginning to bite, BHP Billiton ((BHP)) chief said it was even behind us at the BHP AGM today, so don’t be surprised to see this number decline going forward. Anyone care to bet on an interest rate cut next Tuesday?

Mining services took a beating today following NRW Holdings’ ((NWH)) profit downgrade and sell off yesterday which has now fallen 28.9% in two days. Mining consumables (far more resilient than pure services and capital equipment suppliers) company Bradken ((BKN)) got sold down 7.1% to due to worsening sentiment in the sector. Other players in the space: Cardno ((CDD)), Macmahon Holdings ((MAH)), Ausdrill ((ASL)) all ended the day lower.

Otherwise it was a strong day for across the board with stocks in the defensive and cyclical sectors both ending the day well.

US futures closed the overnight session up 80 odd points then reopened intraday down 5 or so points. They are now tracking up nicely and are currently reading in the green up 18 points
 
(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

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article 3 months old

Odds Improving For Aristocrat

 - Aristocrat's earnings beat guidance
 - Brokers lift forecasts as positive momentum continues
 - Capital management initiatives expected
 - Credit Suisse upgrades to Outperform


By Chris Shaw

Having guided to a full year net profit after tax of $85-$90 million, gaming machine producer Aristocrat Leisure's ((ALL)) profit of $91.7 million was well received by the market. The better than expected result reflected higher average selling prices in both North America and Australia in particular and strong net operating cash flows.

Management has indicated further earnings improvement is expected in FY13, which in JP Morgan's view reflects ongoing positive momentum across Aristocrat's business. Deutsche Bank suggests the growth expected in the coming year will be driven by game and product quality, new game releases, improved operational performance and ongoing market share gains.

One area of interest in terms of future earnings potential is social gaming, and to this end Aristocrat recently acquired Product Madness. The new assets are not considered likely to make a meaningful contribution to earnings short-term, but as JP Morgan points out the deal will allow the market to see what potential revenue could be generated from the online gaming space.

Given the better than expected full year earnings from Aristocrat, brokers covering the stock have lifted forecasts going forward. Deutsche has lifted its earnings estimates by 6-7% through FY14, while Credit Suisse's numbers have been increased by 5-7% across the same period.

Consensus earnings per share (EPS) estimates for Aristocrat according to the FNArena database now stand at 19.3c for FY13 and 23c for FY14. The changes to earnings forecasts have impacted on price targets, as the consensus target for Aristocrat according to the database has risen to $3.11 from $2.90 previously. 

Looking forward, UBS sees potential for capital management from Aristocrat given a strong balance sheet and good cash flow generation. Credit Suisse agrees, both brokers seeing a share buyback as a likely form for any such move. As Credit Suisse points out, Aristocrat's balance sheet is approaching under-geared levels, as net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) stands at 1.2 times at present. The broker has factored a buyback in FY14 into its model.

In terms of ratings for Aristocrat, the FNArena database shows four Buy recommendations, three Hold ratings and one Sell. Valuation underpins the Buy rating of Deutsche Bank, the broker noting the stock is trading around 10% below its valuation at present, with the added attraction of potential capital management in coming years.

Credit Suisse agrees, having upgraded to an Outperform rating from Underperform previously. The change follows the broker taking a new approach to valuation for the company, which results in the broker's price target increasing to $3.50 from $2.60. This has Credit Suisse at the top of price targets for Aristocrat among brokers in the FNArena database, with BA Merrill Lynch the low mark at $2.58.

This supports BA-ML's Underperform rating, which is based on the view Aristocrat's growth will continue to slow given ongoing market headwinds, a virtual embargo on the Victorian market and expectations for a less favourable sales mix.

In a stronger overall market today shares in Aristocrat are higher and as at 11.20am the stock was up 11c or 3.6% at $3.16. This compares to a range over the past year of $2.16 to $3.25, the current share price implying downside of nearly 2% relative to the consensus price target in the FNArena database.
 


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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

US Senate majority leader, Harry Reid spooked US markets with his comments that Fiscal Cliff negotiations had made “little progress”. Thanks Harry. The positivity of the Greek deal yesterday failed to excite Wall Street despite the stronger lead from Europe ending in another night of cliff induced vertigo. The XJO, like other Asian markets struggled to gain much traction and despite a push higher over the last few hours of trade, finished in the red down 9.5 points or 0.21% to 4447.

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

We need to keep in mind that volumes are still extraordinarily light in Australia and offshore and that it doesn’t take much market influence (a mediocre portfolio buy or sell) to sway the market in either direction. Today the ASX turned over $3.8B worth of stock. We were buyers of the ANZ Bank ((ANZ)) yesterday as the short term technicals look interesting as well as the completion of the company’s DRP selling meant the stock should find support here. This was the first time I really took notice how little genuine volume was actually being put through the market. I, one retail broker feeding lines of stock that could hardly be considered substantial, were causing Algos (Algorithmic Trading Systems) to jump around in a global bank with a market cap of $64B. Go figure. When 30% of the entire turnover based on value can be attributed to Algos this means only 70% of the volume going through the market on most days is actually a result of investors buying or selling positions. What this means is that without the Algos (I am not promoting their use by any means) there would be VERY little activity in our market and that the lack of volume means price action is becoming less reliable as an indicator of market sentiment.

The ACTUAL news last night was the positive US economic data, Greg went into detail on this this morning but the fact the market chose to trade Harry’s useless comments instead of recognising the continuing positive trend in the US recovery. This is the real issue after all isn’t it?

The ABS posted its Q3 read for construction activity which showed an advancement of 1.7% which was bang on the consensus target. The market barely took notice given it was largely inconsequential.

Mining services company NRW Holdings ((NWH)) was the big mover of the day after comments at the company’s AGM warned the market to expect a decrease in profit in FY12. NWH closed the day down 17.8% to $1.48.

Aristocrat Leisure ((ALL)) posted a 70% increase in FY12 profit, following the broader trend in gaming stocks recently and finished the day up 6.6% to $3.05.

BHP Billiton ((BHP)) staged a nice recovery to close close to its highs at $34.00 after being down as much 41c. Rio Tinto ((RIO)) copped the brunt of the miners’ selling and closed down 1.9% to $56.70.

DOW futures are pointing to a slightly more negative lead, currently down 9 points.
 

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

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