Tag Archives: Leisure & Tourism

article 3 months old

Weekly Broker Wrap: Macro Outlook, Consumer, Property, Hotels, Gas And Insurance

-Policy support needed for growth
-Consumer positive, despite election
-Declining A-REIT development returns
-War footing with hotels and online agencies
-Flaws in gas reservation policy?
-NZ insurance growth under pressure
 

By Eva Brocklehurst

Macro Outlook

Macquarie suspects the Reserve Bank of Australia will need to cut the cash rate further, to 1.0% from the current 1.75%. Recent weak inflation adds to an already subdued outlook and the broker's former risk case is now the base case.

Domestic demand appears weak and the broker perceives additional policy support is needed to sustain current household spending growth, as support from wealth effects wane.

Macquarie believes it will be harder now to generate and sustain inflation near the RBA's target of 2-3.0%. The broker lowers its long-run inflation target to 2.0% from 2.5% and long-run nominal 10-year bond rate assumption to 3.25% from 3.75%.

Macquarie forecasts a sub-2.0% 10-year bond yield forecast to reflect the new record low in the cash rate, but does not make significant downward adjustments to growth. Growth remains narrowly focused with resource exports the main driver, while domestic demand is muted and fiscal policy points to further consolidation.

The broker also expects the recent strength in the Australian dollar will have a dampening effect on the economy in the first half of 2016 and that further depreciation in the currency is required to secure the transition in the economy.

Australian Consumer

Deutsche Bank contends that elections are not that bad for retailing. The election drag on total retail sales growth is calculated to be a modest 30-40 basis points.

The mid year timing of the upcoming election should also be less of a negative because it won't disrupt Christmas trade, although the impact could be greater if a clear result is not forthcoming. The broker continues to believe the consumer is relatively positive, given low inflation in non-discretionary items such as petrol, rent and utilities.

Deutsche Bank believes Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) will trade well because of the strong housing market, a favourable product cycle and the exit of competitors.

Australian Property

Morgan Stanley is questioning the pay-out ratios of retail Australian Real Estate Investment Trusts (A-REITs). Declining development returns are expected to lead to an increasing proportion of capex being used for maintenance purposes.

The broker suspects this may place downward pressure on pay-out ratios, which are currently among the highest globally. The most vulnerable is Vicinity Centres ((VCX) as the company has an expanding tail of underperforming assets.

These could result in further dilution to free funds from disposals beyond current guidance and, if the company reinvests capital into these assets on marginal returns, it will place downward pressure on the pay-out.

Morgan Stanley recommends a switch from Vicinity Centres to GPT Group ((GPT)) given its distribution is covered by cash and the growth prospects are superior.

Hotels And Internet

Hotels have ramped up their online push to reduce the growing share of online travel agencies. As a result, Morgan Stanley observes global brands such as Hilton and Marriott have demanded lower commissions and removed last room availability signs in online sites.

They are encouraging loyalty members to book direct in return for cheaper rates. These brands are then being pushed down in the online agencies' search order.

Given the shifts in the industry the broker expects both earnings and multiples are changing. At this juncture, the case can be made for either side being the winner but the broker envisages potential for 15-30% in share price impact, either positive or negative, for hotel brands and the agencies and this could quickly put a business model at risk or create a price war.

Domestic Gas

The ALP plans to introduce a country-wide gas reservation policy for future LNG projects, which would extend Western Australia's current policy to the east coast, with the intention to reduce the impact of rising prices for the manufacturing sector.

Ord Minnett doubts the efficacy of such a policy, given price increases have been mainly driven by cost inflation and not export parity. The broker believes the relatively high cost of transporting gas currently insulates the southern states from export parity prices.

East coast gas reserves increased to 47,000PJ in 2016 with most of the development underpinning the three LNG projects on Curtis Island. The broker believes the additional requirements on gas producers could stymie much needed reserve developments while east coast reserves are sufficient for just 7-8 years at current rates of use.

NZ Insurance

There is no joy in the trends for general insurance in New Zealand, Macquarie observes. General insurance growth is under pressure and pricing is competitive.

There have been a large number of new entrants in the market and these have focused on commercial lines. AWAC, BHSI and Ando have all been taking market share in commercial, resulting in price pressure.

Meanwhile, personal lines are highly concentrated. Outside of Suncorp ((SUN)), Insurance Australia Group ((IAG)) and Tower ((TWR)) there are few other carriers underwriting personal lines in the country. Macquarie notes IAG has the greatest relative exposure to NZ in general insurance stocks under coverage, at 47% of premiums.
 

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article 3 months old

Aristocrat Pulls Earnings Upgrade Lever

-Capital returns more likely?
-Earnings base shifts higher
-Highlights digital business potential
 

By Eva Brocklehurst

Aristocrat Leisure ((ALL)) has stunned many brokers, delivering a trading update that was well above most expectations. Can the gaming machine business continue to beat forecasts?

The company credited its upgrade to market share gains in North America's Class III segment and Australian outright sales, with improving margins, as well as gains in digital gaming. Profit is expected to be up 66% in the first half.

Deutsche Bank notes the second half is expected to be broadly similar but warns Australia will cycle a strong comparable. The broker increases earnings estimates by 13-15% to reflect higher North American gaming and outright sales earnings as well as higher digital earnings. The broker's dividend pay-out ratio estimate is also raised to 70% from 50%.

In the US, Deutsche Bank now expects earnings growth of 37%, in US dollar terms, and Australian earnings to rise by 42%. The broker believes the company will, in the event of not being able to find suitable investments, look to return further capital to shareholders.

The company appears to be taking share in a growing online gaming market, with Macquarie expecting growth of 33% over the next two years in order to reach $5bn in global revenue. The broker does not believe the company's current 70% share of the Australian market is sustainable in the long term, but envisages it will take time for competitors to erode its advantage.

The broker increases its market ship-share forecasts in North America to 29% for replacement video sales and 25% in new machines. Despite the stock currently trading in line with its long-run average PE multiple, Macquarie does not believe it is expensive on an absolute or relative basis, and maintains an Outperform rating.

UBS upgrades forecasts by 22% and 27% for FY16 and FY17 respectively. The broker assumes a Class III US premium installed base of 13,800-15,800 machines in FY16/17, with VGT's (Video Gaming Technologies) installed base rising to 21,100 machines in FY16.

The broker expects both the Class III installed base and the digital business could provide the next leg of growth. Participation is a higher multiple business, the broker asserts, when compared with outright sales. Recurring revenues are stickier and more valuable in this regard.

Reflecting on the potential upside from participation, UBS estimates Aristocrat has around 17% share of the Class III premium gaming operations in the US. The broker increases its price target by 32% and upgrades to Buy from Neutral.

Credit Suisse also upgrades to Outperform from Neutral, with the company's FY16 forecasts being 20% higher than it previously estimated. Although the broker expects earnings growth to slow to single digits, the base is so much higher now that the target is lifted to $13.00 from $10.50.

 The main engines of growth are the digital and social casino operations as well as US Class III revenue share and, to a lesser extent, the VGT business, the broker suggests.

Credit Suisse is particularly keen on the digital business and believes, in this non-regulated, non-gambling entertainment segment, Aristocrat has a market-leading product that is now just tapping into Asia. The broker suspects the stock may re-rate moderately after consensus forecasts are adjusted for the update and observes there are no international valuation peers, as competitors are heavily geared, part of conglomerates and/or not listed.

Citi, too, found its forecasts were blown away by the update, lifting estimates by 21-26% for FY16-18. The broker does note the company's dividends now look low compared with the strong growth being experienced. Citi has included a graduated lift in the pay-out ratio to 70% by FY18 in its forecasts.

Now, there are six Buy ratings on FNArena's database for Aristocrat Leisure. No Hold, no Sell. The consensus target has risen to $13.17, suggesting 6.7% upside to the last share price, and compares with $10.75 ahead of the update. Targets range from $12.25 (Ord Minnett) to $14.20 (Deutsche Bank).
 

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article 3 months old

Flight Centre Flags Cautious Outlook

-Questions re sustainability of model
-Acquisitions growing strongly
-Investment supportive longer term
 

By Eva Brocklehurst

Earnings growth guidance for Flight Centre ((FLT)) is unchanged for FY16 but the company's subdued commentary niggles at brokers. Flight Centre expects growth of 4-8% in FY16 but has warned that meeting guidance is not a foregone conclusion, despite the imminent and crucial May-June bookings period.

Increased uncertainty is based on a number of factors including the looming federal election on July 2, the reductions in domestic capacity announced by the airlines, and a slowing Australian outbound market.

All these factors mean UBS maintains its estimates at the top of management's guidance range while acknowledging there are risks to its forecast. The broker is comfortable with the company’s ability to deliver generally, given all its markets are profitable ex Singapore. Current market weakness, to some extent, is seen factored into expectations.

Still, for over ten years the broker believes the market has questioned the sustainability of the company's travel business, while Flight Centre has done an excellent job in the face of a number of structural trends over that period. This includes airlines and hotels dealing directly with consumers, growth in online-only travel sites and growing consumer competence when it comes to booking travel online.

UBS suspects the share price is factoring in a long-term structural decline in earnings but also maintains that these risks have been overplayed and the company is well positioned to grow earnings in the medium term. Hence, the broker's Buy rating is retained.

Morgans contends the situation is far from ideal, preferring to stick with a Hold rating. The broker errs on the side of caution and downgrades forecasts for FY16 by 1.8%, to sit below guidance. Low ticket prices, whilst stimulating demand, are affecting overall total transaction values (TTV).

This can make it hard to achieve targets. While investment in the business such as brand expansion, systems and network upgrades are supportive for the medium to longer term, the broker suspects this is currently a drag on underlying profitability.

Challenges in the operating environment are expected to offset the gains from what has been a highly acquisitive period. Morgans suspects the subdued trading and further investment in the business are likely to affect FY17 earnings.

Further out, the broker expects the company's strategy as it transforms to a world class travel retailer and benefits from cheap airfares, more airline choices and less flying time, means it can capture more of the available margin.

The broker suspects that while the underlying corporate travel market in Australia is flat, the company can make acquisitions to complement organic growth in the sector. Recent online acquisitions such as StudentUniverse and BYOjet.com are growing strongly and expected to deliver in excess of $500m in TTV in FY17.

There is also the potential to expand these businesses globally. In early FY17 Flight Centre intends to launch Aunt Betty as a virtual travel agent. Morgans expects solid earnings growth to continue in the UK, US and South Africa. The losses from the Canadian business should continue to reduce.

The update implies the last few months have not witnessed a significant recovery and momentum is not assured in May and June, Deutsche Bank suggests. The broker notes 47% of TTV in the first half was generated outside of Australia and some segments, such as the UK, had faster TTV growth in the first half.

Still, the comment that reaching guidance was not a formality suggests to Deutsche Bank that Flight Centre will approach investment decisions with its growth guidance in mind. The broker also observes growth, according to Australian Bureau of Statistics estimates, was largely driven by leisure in March, affected by the placement of Easter, while work travel deteriorated substantially.

This data is always hard to interpret, given the shifting around of Easter, and the varied timing of school holidays also adds to the confusion this year. However, given the strength of leisure and SE Asia in particular, the broker suspects there is little change in the underlying growth rate of 3-4% and awaits April data to provide more clarity.

Deutsche Bank retains its Buy rating with forecasts at the bottom end of the company's guidance range. FNArena's database shows two Buy ratings, four Hold and one Sell for Flight Centre. The consensus target is $41.47, signalling 8.6% upside to the last share price. Targets range from $36.07 to $48.00.
 

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article 3 months old

Weekly Broker Wrap: Banks, General Insurance, AirXpanders, Pokies And Tourism

-Bell Potter dismisses bank stress talk
-Youi gains scale, insurer margins pressure
-AXP at the door of US potential
-Oz slot manufacturers well placed
-Chinese visitors to Oz accelerate
 

By Eva Brocklehurst

Banks

Bell Potter suggests some of the negative speculation surrounding the value of bank stocks is simply more posturing than substance. Australia's GDP remains strong, spreads are rising, costs are being managed and asset quality is stable.

The broker's analysis of movements in off-balance-sheet liabilities, as a leading indicator of stress, suggests stable asset quality trends for some time to come. Recent raising of capital suggests the Australian banks are now in the top quartile of their global peer group.

Bell Potter observes bank sector dividends have gone backward on only three occasions in the last 37 years. This includes following the 1987 crash, the early 1990's recession and the 2007/8 Global Financial Crisis. Reasons for this occurring included poor credit risk practices in commercial lending and unique economic events such as external liquidity shocks

This is not the case now and the banks have improved their liquidity positions since the GFC. Bell Potter's forecasts are unchanged. As a result of very strong share price performance in the past month, Commonwealth Bank ((CBA)) is downgraded to Hold from Buy.

The broker retains Hold ratings for Bendigo & Adelaide ((BEN)), Bank of Queensland ((BOQ)) and ANZ Banking Group ((ANZ)). Buy ratings are retained for National Australia Bank ((NAB)), Westpac Banking Corp ((WBC)), Macquarie Group ((MQG)) and Suncorp ((SUN)).

General Insurance

Youi is starting to gain scale in the Australian market, Macquarie observes, with the general insurance market consolidated, rational and profitable. Nevertheless, cost cutting strategies are required to defend profitability.

The market's growth has slowed and margins are under pressure. Macquarie notes the financial results from Youi suggest it has now captured 2.6% of the addressable market in home and personal motor insurance.

Youi achieved 22.9% growth in gross written premium (GWP) in the first half. Macquarie continues to forecast further loss of market share by the listed Australian insurers to banks and challenger brands.

Despite a bottoming in GWP growth in the market the broker observes the deterioration in margins has not stabilised. Quarterly data from the Insurance Council of Australia points to negative trajectory for premium spending on home and motor insurance.

Macquarie remains cautious about personal lines insurance outlook and notes upper corporate commercial carriers expect premium spending in this market to contract further in 2016. As a result, the broker reduces growth forecasts for Insurance Australia Group ((IAG)) and Suncorp ((SUN)).

Macquarie has also downgraded QBE Insurance ((QBE)) to Neutral from Outperform as sector conditions remain challenging. The broker acknowledges the stock could trade higher with supportive FX tailwinds and a rise in US/global interest rate expectations.

AirXpanders Inc

AirXpanders ((AXP)) offers an investment opportunity, Moelis believes, with a market leading product and a simple path to commercialisation. The company reported a net loss of US$11.2m for FY15. A favourable industry thematic supports a growing market while Australian success so far has opened the door to the US potential.

US FDA approval is expected in the June quarter. Moelis considers the valuation assumptions underpinning the stock are undemanding and its base case provides significant upside opportunity. Moelis retains a Buy rating and $1.95 target.

AirXpanders manufactures and distributes AeroForm, a medical device used in breast reconstruction after cancer which has been approved for sale in the Australian market.

Casinos

Following a survey of the US slot machine market, Ord Minnett has concluded that Australian manufacturers, Aristocrat Leisure ((ALL)) and Ainsworth Gaming Technology ((AGI)) are well positioned.

Aristocrat is the main beneficiary, with 66% of participants in the survey suggesting that it is the top performing manufacturer. The broker also expects Ainsworth will grow sales as its profile builds. Ord Minnett reiterates an Accumulate rating for both stocks, with a target of $10.75 for Aristocrat and $3.25 for Ainsworth.

Tourism

The annual growth rate of international visitors to Australia in December was 7.9% while visitor expenditure in the month grew 17.7% annualised. Bell Potter also notes international airline activity signals both outbound and inbound passengers in December grew 5.4%. In the light of the data the broker takes a look at where Chinese visitors are spending time in Australia.

The data indicates Sydney and Melbourne remain the most popular cities. Chinese visitors to Melbourne have accelerated by 27% in the last 12 months, while Sydney is also up 20%. Numbers to the Gold Coast and tropical north Queensland suggest a recovery is under way over the past two years after a weak 2013.

Chinese visitor numbers to these tourist areas are more volatile than in the larger cities as, given the smaller visitor base, large swings can have a large impact in percentage terms. The broker also points to the fact that airline capacity to these destinations has been subject to material change and this is a key driver of numbers.
 

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article 3 months old

Corporate Travel In A Sweet Spot

-Cash conversion a highlight
-More offshore acquisitions likely
-Strong interim dividend growth
 

By Eva Brocklehurst

Corporate Travel ((CTD)) hit a sweet spot for most brokers in the first half, enjoying increased market share, acquisitions, improving demand and the benefits of a falling Australian dollar.

The company now has a presence in all key corporate travel markets globally, and an opportunity to cross-sell between the different regions.

Having built up its network with the acquisition of UK-based Chambers Travel, the business is now primed for growth by winning large, global tenders. Along with this comes improved margins and buying power, Ord Minnett observes.

The broker expects 15-20% growth ahead is possible. FY16 earnings guidance was maintained at $68m and organic growth through new client activity remains the dominant driver of the uplift. A full year of acquisitions, such Chambers, should underpin that upside, Ord Minnett asserts.

Cash conversion was the highlight for Morgan Stanley, with 100% conversion lining up for the second half. One-off factors that impinged in the prior half year were unwound. The broker's forecasts for the full year edge up but so does its capex numbers, which implies little change to estimates.

Australia and the US were softer in terms of low single digit transaction growth, while Asia and Europe surprised Morgan Stanley on the upside. The broker likes the proven domestic model and growing international track record, retaining an Overweight rating.

Moreover, the company's model is light on capital needs and highly scalable within a large fragmented market. Corporate travel is the segment which is least susceptible to online challenges yet has the strongest growth profile, the broker observes.

Morgan Stanley does not forecast future acquisitions in its base case but considers earnings-accretive catalysts such as acquisitions could still be a source of upside. The broker's rounded valuation implies increased scale, organic growth, balance sheet strength and the company's specific guidance.

Revenue was a little variable across the regions, Macquarie maintains. Australasia was flat and exposure to oil & gas and mining dragged on the result, which resulted in a flat comparable total transaction value. North America was in line with expectations at the revenue level while Asia was a highlight, with revenue up 33%. UK and Europe were in line with Macquarie's estimates.

The broker likes the economies of scale that are developing over a fixed cost base, which allows the company to compete on global contracts. Acquisitions are expected to be sought in the second half as management intends to diversify further outside of Australasia. Nevertheless, for Macquarie, the main issue is one of valuation rather than the outlook or execution. In that regard, Macquarie retains a Neutral rating.

The positives line up for Morgans, as well as the higher-than-expected interim dividend, up 50% to a fully-franked interim of 9c a share. Record margins in Asia and Australia provide confidence in the upside that is potentially available in North America and Europe as the company gains scale.

The company emphasised that a decline in activity from its oil & gas clientele has been built into earnings guidance. In that sense, the company remains highly leveraged to an economic recovery, Morgans believes.

Moreover, the broker notes the company is also intent on leveraging a technological advantage into new market segments and argues that a company of this quality and growth profile should be trading on much better metrics. Morgans reiterates an Add rating.

FNArena's database shows three Buy ratings, and one Hold (Macquarie). The consensus target is $13.84, suggesting 9.6% upside to the last share price. Targets range from $12.59 (Macquarie) to $14.80 (Morgans).
 

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article 3 months old

Village Roadshow On A Slowing Roundabout

-Structural issues for distribution
-Should Gold Coast be doing better?
-Strong Asian theme park potential
 

By Eva Brocklehurst

Village Roadshow ((VRL)) disappointed brokers with a subdued outlook at its first half results, plagued by weakness in film distribution and poor weather in Sydney.

Structural issues faced by the distribution business highlight the significant trend towards digital channels. One which several brokers believe needs to be addressed. Meanwhile, cinema exhibition was very strong and theme parks are expected to continue to benefit from tourism demand.

With the exception of cinema exhibition, the results were weak and materially missed Macquarie's estimates. The broker believes the theme parks should also be performing better than they are, given the buoyant tourism conditions.

Australian box office revenue is up 3.0% year to date but coming in against some tough comparables over the next six weeks when it cycles Fast & Furious 7 and The Avengers: Age of Ultron. In view of this situation Macquarie revises down 2016 box office forecasts to a contraction of 4.0%.

Macquarie remains of the view that the portfolio is an enviable collection of leisure assets, and theme parks in Asia will likely be a material opportunity in the long term. The company added some detail to its plans for the Asian theme park strategy, looking to develop a product at a cost of $15-30m and generating a return in the high teens. The company is currently undertaking a search for a local partner.

Nevertheless, the upside is captured in the premium valuation and Macquarie does not envisage scope for this premium to expand until results can be consistently maintained. As a result the broker downgrades to Neutral from Outperform.

Bell Potter expects the cinema exhibition division will report record results but these are likely to be overshadowed by lower results from distribution and weather related issues for Wet 'n' Wild Sydney. Distribution continues to be affected by the structural shift away from physical DVDs with the extent of the decline even greater for Village Roadshow because of the nature of its content, Bell Potter maintains.

The broker acknowledges the company appears to be addressing the issue with a new marketing solutions division. Earnings estimates are downgraded by 8.0% for FY16 and by 15% for FY17, given the commentary.

Bell Potter, not one of the eight stockbrokers monitored daily on FNArena's database, has a $6.83 target and a Buy rating, which is predicated on the range of growth options available and the potential to unlock value. These include the stake in film production company, VREG, Asian theme park opportunities and land on the Gold Coast as well as The Edge loyalty business.

Citi likes the focus on the cinema business in the results and expects, if the company's strategy proves successful, that very strong growth will ensue. Theme parks are also expected to benefit from upside to Gold Coast tourism.

Theme parks and film distribution were short of Deutsche Bank's forecasts and the broker reduces near-term operating earnings estimates by 5-6%. While the company does not provide earnings guidance per se, commentary suggests Gold Coast theme parks will report growth in FY16.

Wet 'n' Wild Sydney looks to be in line in the second half, which suggests to Deutsche Bank earnings will be down around 10%. Cinema exhibition is expected to experience growth while film distribution earnings are expected to be lower.

To Ord Minnett the stock has probably sold off more than was warranted. The broker downgrades its expectations for FY16 by 9.0%. Yet, valuation and capital upside, along with the dividend yield, mean the broker takes the opportunity to upgrade to Buy from Accumulate.

In theme parks, the broker expects a margin of 30%, which implies growth in the second half of 12%. New attractions, a full period of membership sales and better weather should underpin the outlook for the Gold Coast assets.

In exhibition the broker finds it difficult to assess the second half trajectory but believes the line up is solid enough to mean a flat result is probable. The content, underpinned by Star Wars VII, supported the box office in the first half and the company's circuit continues to gain market share, the broker observes, thanks to Gold Class and Vmax.

The distribution segment has more than halved over the last three years and, while Ord Minnett believes the division will bottom out at some stage, there is no indication when this is likely to happen.

FNArena's database shows three Buy ratings and one Hold. The consensus target is $6.64, suggesting 18.6% upside to the last share price and compares with $7.80 ahead of the results. Targets range from $5.85 (Macquarie) to $7.05 (Citi). The dividend yield on FY16 and FY17 estimates is 4.7% and 5.4% respectively.
 

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article 3 months old

Opportunity Arises In Village Roadshow

By Michael Gable 

With share markets taking a tumble over the last couple of weeks, the first thing we need to do is remind everyone how unrepresentative the S&P/ASX 200 Index is of the broader market and the broader economy. This is because the top 20 stocks account for half of the index - and 30 per cent of the market downturn of the last several months can be attributed to only BHP.

To further put it all in perspective, Warren Buffett in his recent letter to shareholders wrote about the difference between volatility and risk. He goes on to say:

"Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions."

Our stocks are moving around a lot but beyond the prism of a few weeks, we don't see them at risk, we view them as great investments. The majority of our stock picks are holding up well compared to the market. The recent market weakness has led us to add another stock to our portfolios.

We are getting back into Village Roadshow ((VRL)) which has fallen into our laps as the market decided to get sold off. Last year saw more than 1 million Chinese visitors to Australia for the first time, and whatever the top 20 will want to do to the ASX200 index in the short term won't change that.

Our previous charting commentary on VRL was on 15 December when it was at $6.50. We suggested a move back up towards $7.30. It managed to hit $7.50 only two weeks later for a quick 15% return. It has now eased back again to those original levels because of the broader market sell-off. You will notice that it is right on the uptrend line established a year ago, so these levels are a second chance to purchase VRL. By resuming the uptrend, VRL should make a "higher high" which implies levels beyond last year's high of $7.68.

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

Upside For Corporate Travel

By Michael Gable 

All eyes are on the Fed decision due Thursday morning AEST. Expectations are that they will raise rates which ultimately will be a positive catalyst for the share market. With the S&P/ASX 200 Index unexpectedly testing 5000 again, investors will be looking for the next rally off the lows. If we look for the positives in the recent market rout, the fact that we have been down here for a few months means that the longer we stay here, the more frustration that builds, which means the greater relief when the market enters its next bullish phase, which means the more buying that comes back in on that bounce. When that happens, not if, can only come sooner rather than later. In the meantime, we have to continue trying to almost ignore the market and concentrate on quality stock-picking, such as those recent trades of ours which have been nicely outperforming the market.

Today we look at Corporate Travel Management ((CTD)).
 


After briefly dipping under $10 a few months ago, the stock then went on to break the downtrend that started earlier this year, moving towards striking distance of our initial $12 target. You will notice that this downtrend is merely a small correction against a longer-term uptrend, which is a positive sign for the medium-longer term. Since breaking out several weeks ago, CTD has eased back over a dollar here to retest that smaller downtrend. The stock is unlikely to test $10 again soon, even though that would be a preferable entry point. The momentum is now here in CTD, so it will probably resume the uptrend and push through $13 over the next few months.


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

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

Michael is RG146 Accredited and holds the following formal qualifications:

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

Disclaimer

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

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article 3 months old

Weekly Broker Wrap: Yield, Focus Stocks, Equity Strategy, Travel And NBN

-Macquarie: high quality yield prevails
-Goldman adds MMS, ISD to focus list
-WES, CSR, AZJ more interesting to DB
-Strong inbound tourism growth from China
-NBN connectivity charges in spotlight
 

By Eva Brocklehurst

Yield

Macquarie suspects stronger growth, not higher yields, poses the largest threat to relative performance of Australian yield stocks. If economic growth assumptions are correct, the broker does not expect bond yields will rise enough to unwind the desire for high quality yield.

Still there is a de-rating risk for stocks where earnings growth is not enough to offset a higher cost of capital. These stocks may have been mispriced on questionable dividend or distribution policies and/or may have undergone expansion in multiples even if growth concerns were easing.

The broker does not have a timeframe in mind for a turning point but suspects it is too early to take a strong cyclical view versus a defensive one. In contrast to some, Macquarie is not overly concerned about the risk to bank dividends and would be a buyer on price/earnings expansion, while considering Telstra ((TLS)) has potential to raise its dividend and should be purchased for yield.

In the cases of infrastructure and utilities the broker believes while distribution trends can be maintained valuations are largely borne out and these should be purchased for yield. Energy, materials and domestic cyclicals are expected to take market leadership with the greatest price/earnings expansion in 2016.

Focus List

Goldman Sachs adds McMillan Shakespeare ((MMS)) and Isentia ((ISD)) to its Australia Small & Mid Caps focus list. In November the list was up 1.3% while the ASX Small Ordinaries Accumulation index was flat.

The main performers on the list in November were Costa Group ((CGC)), Blackmores ((BKL)) and Super Retail ((SUL)) which outperformed by 10.3%, 9.5% and 7.7% respectively. The main detractors were 3P Learning ((3PL)), Austbrokers ((AUB)) and Genworth Mortgage ((GMA)), which underperformed 13.5%, 7.9% and 5.9% respectively.

Equity Strategy

Deutsche Bank believes the environment is now more fertile for stock picking. There are fewer macro issues and more space to assess stocks on their merits. The broker runs a simple screen on earnings, valuation and quality metrics.

The names that become more interesting and have not been in the broker's model portfolio include Wesfarmers ((WES)), considered cheap versus history with good momentum, CSR ((CSR)) as its price/earnings ratio is 10x and housing exposure is still attractive, and Aurizon ((AZJ)) as it offers solid growth driven by cost cutting.

With the US Fed funds rate set to rise, Deutsche Bank notes this is positive for QBE Insurance ((QBE)) and Computershare ((CPU)). When it comes to the yield trade the broker does not believe short term rates will rise a lot and long rate may not move much at all. Moreover, the broker does not believe earnings growth is likely to be so robust that yields of 4-5% can be ignored.

Deutsche Bank does not envisage a need to chase traditional yield plays that have already re-rated and offer limited growth such as telcos, real estate investment trusts and infrastructure. Instead, the broker sticks with choosing stocks with yield and some achievable growth, noting yields of more than 5.0% are on offer from CSR, Stockland ((SGP)), Fletcher Building ((FBU)), AMP ((AMP)), Harvey Norman ((HVN)) and Spotless ((SPO)).

High Conviction Stocks

Morgans removes Challenger ((CGF)) and BHP Billiton ((BHP)) from its list of high conviction stocks. The broker notes Challenger has outperformed since being included in the list three months ago, returning 21% in an otherwise volatile market. The stock is now considered fair value but still representing a solid investment in the current climate.

BHP has drifted into oversold territory in the broker's view, following the tragic incident at the Samarco mine, but the stock is considered a long-term investment prospect because of its diversification, operating performance and free cash flow leverage to a recovery.

The broker suggests investors stick to stocks with higher levels of conviction and those that have shown resilience in a rising interest rate environment.

Travel

Inbound tourism for the year to September 2015 grew 6.6% to a new high of 6.7m visitors, Tourism Research Australia has revealed. International visitor spending on trips to Australia grew by 13.5%. Growth was strongest from China, with Chinese visitors now accounting for 22% of total expenditure by international visitors on trips to Australia.

Bell Potter likes Amalgamated Holdings ((AHD)) in this sector given its hotels and resorts are exposed to the Sydney and Melbourne markets, gateways to international visitors. Ardent Leisure ((AAD)) is also considered attractively priced given growth in its Main Event business and exposure to Chinese visitors through its theme park assets.

Corporate Travel Management ((CTD)) is expected to enjoy further share price upside with gains in market share supplemented by acquisitions while the slowing outbound travel and lower currency headwinds that plague Cover-More ((CVO)) are expected to turn around as the domestic economy recovers.

NBN Charges

A spike in data usage with the launch of Streamed Video On Demand (SVOD) has caused the service providers to lobby NBN Co to reduce the current charges for the connectivity virtual circuit (CVC). This is the capacity required to serve a collection of end user premises as defined by NBN Co. NBN Co has commenced an industry consultation process on the issue.

The current charge for CVC is $17.50/month/mbps. Speculation suggests the NBN will trial a new dimension based discount which would scale up with the amount of CVC capacity provided to the end user by the service provider and would not disadvantage smaller players.

Savings would depend on how much CVC capacity is currently provided per end user. UBS considers the implementation of new pricing could result in NBN cost savings per user of $1.30 a month.

Despite this development, the broker still believes the NBN is a negative inflection point for fixed returns. Unbundling regulation has traditionally lowered fixed input costs for the service providers but NBN now assumes control of the last mile and, as a result, marginal cost curves lift materially for Telstra and service providers such as TPG Telecom ((TPM)), UBS maintains.
 

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Weekly Broker Wrap: Dairy, Strategy, Pathology, Tourism, Oil And Banks

-Dairies benefit as milk prices surge
-What is attractive as risk aversion fades?
-PRY more sensitive to pathology growth
-Tourism benefit flows to retail
-Discretionary retail benefit from lower oil
-Pressure continues on major banks
 

By Eva Brocklehurst

Dairy

The global dairy price index has risen 48% since the beginning of August. Macquarie believes the main driver of the price response at recent auctions is a significant reduction in Fonterra's offer volumes. These have fallen because of changes to product mix and more product being sold outside the auction marketplace. There is also a 2-3% reduction in forecasts for New Zealand's milk collection.

Macquarie believes Fonterra's reduction in its 12-month offer quantities for a third time last week amplifies worries about a shortage in global supply. Buyers that are only able to access the auction platform are being squeezed, the broker suggests, and may be bidding up the price to cover forward requirements.

A further recovery in dairy prices is good news for NZ farmers and could ease unit holder concerns about Fonterra providing further support to farmers. The problem for Fonterra, the broker maintains, is that the pass-through benefits of lower costs are eroded as input prices rise and this translates to lower earnings. Macquarie's preferred play on the dairy recovery story is Murray Goulburn ((MGC)), with a target of $2.70.

Movements in global dairy ingredient prices have a high correlation to Australian farm gate milk prices. Bell Potter notes Murray Goulburn, Australian Dairy Farms ((AHF)) and Bega Cheese ((BGA)) are positively correlated to rising dairy prices. Average forward curve prices in Australian dollars are implying gains of 10-11% for whole milk powder and butter, while skimmed milk powder is likely to be flat in FY16.

Strategy

Goldman Sachs adds Blackmores ((BKL)), Costa Group ((CGC)) and M2 Telecommunications ((MTU)) to its small and mid cap focus list. In September to date the list has performed in line with the ASX small ordinaries accumulation index. Over the past 12 months the list is up 1.8% while that index is down 10.6%.

Key performers in September have been Ebos Group ((EBO)), amaysim Australia ((AYS)) and Tassal Group ((TGR)), outperforming by 7.5%, 4.2% and 4.0% respectively. Detractors were Genworth Mortgage Insurance ((GMA)), Austbrokers ((AUB)) and Dick Smith ((DSH)), underperforming by 6.2%, 5.4% and 4.6% respectively.

Australia's equity market is down around 15% from its April 27 peak and has performed more in line with emerging rather than developed markets, UBS observes. This is probably because of Australia's relatively high commodity exposure and associated economic links to China. However, some of the apparent correlation may be countered by the banking sector, which has corrected under its own specific issues.

Taking out resources and banks the market appears closer aligned to the developed market, with pressure coming just in the last six weeks. UBS expects market growth to be around the low single digits in FY16 but it could rebound in the next few months on fading risk aversion in relation to China and the US Federal Reserve.

Stocks that have emerged with value and appear attractive to UBS include AMP ((AMP)), ANZ Bank ((ANZ)), Harvey Norman ((HVN)), Incitec Pivot ((IPL)), Lend Lease ((LLC)), Macquarie Group ((MQG)), Mirvac ((MGR)), Perpetual ((PPT)), Qantas ((QAN)), ResMed ((RMD)), Stockland ((SGP)) and Westpac ((WBC)).

Pathology

Credit Suisse is shifting attention for cost inflation to the main drivers of pathology volume growth. Long term, the correlation with Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)) in terms of pathology revenue growth and Medicare pathology outlays growth is high.

The broker notes utilisation was the major contributor over the past five years, accounting for about half of the growth in pathology. This includes increased disease prevalence/test offering and collections. This is followed by population growth. The growth in the aged population is not a material driver.

Calculation of valuation sensitivity to utilisation growth suggests the risk to Primary Health Care is greater because of its higher weighting to pathology earnings. Tempering the broker's enthusiasm is the outcome of the Medical Benefits Schedule review, which could mean removal of certain pathology items. Sonic Healthcare presents as a better investment option in the broker's view because of a more geographically diverse business model.

Tourism

One of the brighter spots in Australia's economy is tourism, as it benefits for the steady move lower of the Australian dollar. Year on year growth in overseas departures has halved to around 3.5% in the first half of 2015, UBS observes. Arrivals have picked up, to be up 6.0% year on year. The broker expects this income from tourism should contribute more than 25 basis points to GDP growth over the past year.

UBS also notes that upswings in tourism contribute to improvements in retail sales, reflecting not only more inbound tourists but also more locals choosing to holiday domestically. The broker expects an increasingly positive impact on the tourism sector from the Australian dollar's decline with support for retail spending, non-mining capex and GDP growth over time.

Oil

Oil price declines should detract from global headline inflation around 0.5-1.5 percentage points in 2015-16, Commonwealth Bank analysts maintain. Australia is a net energy exporter and lower oil prices may lead to lower coal and LNG prices. The analysts calculate the negative terms of trade effect is equal to around 0.5% of GDP. 

The most positive impact is expected to come for those companies which are large consumers of energy, such as manufacturing, electrical and transport. The other positive impact is the boost to household spending. Oil prices are expected to remain at low levels over the next two years. At this stage, firms in the domestic market have not signalled a major intent to pass on lower oil prices to consumers and the analysts suspect lower prices will be absorbed in margins.

The analysts calculate the income gain for householders should equate to around 0.3% of household income from the drop over the past year in average petrol prices. There is also a second round benefit if lower transport costs are passed on. Discretionary retailers are also usually the first to benefit from a sizeable fall in petrol prices.

Banks

Recent commentary from the Australian Prudential Regulation Authority (APRA) chairman has suggested major banks still have some work to do to achieve the financial system enquiry's recommendations to be unquestionably strong.

JP Morgan does not believe this will translate into another round of capital raising, but does expect continued dividend reinvestment plan (DRP) support will be required. The more challenging task is to meet the broader benchmarks.

The leverage ratio, created as a simple metric by which regulators could assess appropriate balance sheets size, is recommended as a minimum range of 3-5%. Australia's major banks are currently at around 5.0%, lagging their top quartile global rivals which average a 6.0% ratio. JP Morgan expects returns on equity will remain under pressure, as the majors rely on further re-pricing initiatives to sustain returns.
 

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