Tag Archives: Leisure & Tourism

article 3 months old

Weekly Broker Wrap: Storms, Skydiving, Banks, Christmas, Interest Rates And The Budget

-Suncorp most exposed to storm
-Skydiving captures Moelis' attention
-NZ contribution to Aust banks slowing
-Joblessness counteracts petrol win
-RBA easing bias implied for 2015
-Budget surplus outlook fading
 

by Eva Brocklehurst

Brisbane Storm

A catastrophic event has been declared by the Insurance Council of Australia for the recent storm in Brisbane, the first such catastrophe for FY15. Losses are yet to be confirmed but to brokers, Suncorp ((SUN)) is the most exposed to this event, given its large Queensland market share. The company has signalled its maximum event retention figure of $250m is likely to be hit. Given this is the first event, downside risks to first half earnings are relatively moderate, in Deutsche Bank's estimates, given healthy allowances and assuming no other major events occur before December 31 2014. UBS observes the storm is a timely reminder of the assistance that benign weather has provided to both Suncorp and Insurance Australia Group's ((IAG)) profits in recent years.

At this stage losses appear absorbable in FY15 allowances, but UBS considers Suncorp's margins are likely to be affected. Suncorp's general insurance division needs to deliver a 17% insurance margin to comfortably achieve returns of more than 10% in FY15. This event has, in the broker's view, shifted the focus to reserve releases in order for this target to be achieved. JP Morgan observes that, generally, insurance stocks underperform soon after big events and often overshoot.

Indoor Skydive

An Australian-based operator of indoor skydiving has listed on ASX. Indoor Skydive Australia ((IDZ)) has captured the attention of Moelis, who initiated coverage with a Hold rating and 56c target. The company has no direct listed comparisons. A high barrier to entry is one of the core investment drivers of the stock, Moelis observes. The company has an exclusive supply agreement with SkyVenture, a global wind tunnel supplier. Its facility, at Penrith on the outskirts of Sydney, commenced operations in FY14 and expansion to both Gold Coast and Perth is underway. Evidence of traction at the Penrith centre and progress on the Gold Coast development should help support an increase in the share price, in the broker's view. Such facilities allow users to experience human flight by simulating the free-fall experience when skydiving. Customers include tourists, skydiving enthusiasts and military organisations.

Australian Banks In New Zealand

The contribution from the NZ divisions of Australian banks is expected to slow. Falling bad debts and improving cost efficiency has meant NZ divisions have been strong contributors to group results since the GFC. The NZ economy is robust, driven by the rebuilding of Christchurch and strong immigration, while Citi observes there is a lesser reliance on key Asian economies compared with Australia. This should lead to continued strong credit growth, with few emerging quality issues.

Nevertheless, New Zealand's significant dairy industry is enduring some pain. Fonterra's farm gate milk price is forecast to fall substantially in 2015. Citi has met with NZ management at the major banks and all are expecting that, given a delay in the cash flow impact on farmers, milk prices can only stay at these levels for 12 months before lending books are impacted. Among other considerations for the NZ banks, increased confidence has led to a more competitive banking sector and mortgage volumes have slowed, while cost efficiency improvements have largely played out. Citi suspects cost-to-income ratios may stagnate. The broker considers ANZ Bank ((ANZ)) the most attractive of the majors in New Zealand, benefiting from its scale.

Christmas Cheer

With the much publicised slump in oil prices, and Australian petrol prices likely to fall despite the weaker currency, Morgan Stanley believes expectations are still too high regarding Christmas trading. Petrol prices have retraced to $1.35/litre from $1.53/lire last December. Nevertheless, not all savings at the bowser will be spent on the retail market. Assuming savings in petrol are spent in line with overall consumption the uplift to retail is just 0.4%. Assuming all savings are spent on discretionary retail, the uplift would only rise to 1.2%. Sorry folks, but Morgan Stanley believes rising unemployment is a far more malevolent trend, not only in terms of income for those that lose their jobs but for making those in work more fearful. The broker notes the unemployment rate is 6.2% compared with 5.9% last Christmas, and theoretically, according to Morgan Stanley's calculations, such an impact largely offsets the petrol price movement.

Cash Rate

Australia's Reserve Bank left its cash rate on hold at 2.5% for the 16th consecutive month at its last meeting for 2014. Governor Glenn Stevens retained the line regarding a period of stability in the outlook. This reinforces Morgan Stanley's view that the central bank will not be pre-emptive in easing monetary policy further, despite fears Australia's growth transition is stalling. The RBA emphasised the accommodative financial conditions in play globally and the recent policy easing in China, which should support growth. The RBA also signalled a lower exchange rate may be needed to achieve balanced growth. Morgan Stanley takes the shift in the bank's rhetoric to signal that, if the Australian dollar were to stabilise at current levels rather than continue depreciating, there may be room to consider rate cuts next year.

The broker also believes the upcoming mid year economic and fiscal report (MYEFO) from the Commonwealth government will be difficult to reconcile with existing commitments to return to surplus and reiterates a view that neither monetary nor fiscal policy will react quickly to stalling growth.

MYEFO

UBS expects a deterioration in the budget is likely to be revealed in the mid year statement, from a combination of delayed and stalled policies as well as lower-than-expected nominal growth. Hopes for a surplus in 2018/19 appear to be fading. Outside of any new policies that might be announced, the budget is considered likely to be a cumulative $29bn worse over the four out years. The broker concludes that the government is unlikely to drop all the policies not yet passed into law and a number will be re-fashioned for re-release at the next budget. UBS also doubts the government will attempt to recoup lost monies at the MYEFO by further leaning on the economy. Still, there is some risk of additional tightening at the 2015/16 budget next year.
 

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article 3 months old

Downside For Ardent Leisure

By Michael Gable 

Aside from the Melbourne Cup, the other notable event today is the RBA interest rate decision at 2:30pm. Rates are likely to remain on hold of course. The other recent news has been the extra stimulus from the Bank of Japan. It has sent the US dollar higher and gold stocks lower. Our market is likely to stall here for a few weeks as the dividends come out of the banks and profit taking comes in up at these levels.

This week we look at a trading opportunity in Ardent Leisure ((AAD)).
 


Ardent Leisure has trended very well but has started to show some divergence with the momentum over the last few months. That is, as the share price was pushing to a new high, the momentum was already trending lower. Following the sell-off after their AGM last week and the failure of the share price to bounce back in the last couple of days, there is a good chance that the overall uptrend is ending here and the stock could find itself falling back towards support in the mid $2’s where it could fill a gap made here on the daily chart in early August.


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

Main Event Centre Stage At Ardent Leisure

-Main Event key to upside
-More sites envisaged
-Focus on medium term
 

By Eva Brocklehurst

Ardent Leisure's ((AAD)) earnings are accelerating, as the company rolls out new sites within its Main Event, or family entertainment division, in the US. Operating results to date have exceeded expectations, including the historical return on investment hurdles.

Bell Potter has taken the opportunity to initiate coverage on the stock with a Buy rating and $3.47 target, expecting the earnings impact of Main Event will be a catalyst for share price performance. The broker's base case scenario assumes the Main Event business has 90 operating sites by June 30, 2024. July revenue of US$9.6m was up 25.3% on the prior July, with constant centre revenue up 13.3%. Four new centres opened recently, taking the total portfolio to 17. As Main Event has exceeded expectations the company has planned a material increase in new sites. Construction is advanced on a further three sites which will open in FY15, negotiations are advanced on seven new sites for FY16 opening and preliminary investigation is underway on eight new sites for FY17 opening.

In the wake of the FY14 results, Macquarie was less inclined to believe there would be further material roll out of Main Event, with the outlook all about execution. To this end the broker has a Neutral rating, awaiting evidence of how the expansion is progressing.

Meanwhile, the health club division is also expected to return to mid to high single digit earnings growth after the acquisition benefits in FY15 are realised, although Bell Potter also rates the probability of further acquisitions as quite high. The company has stated it expects to continue increasing the portfolio by two to three centres per year through greenfield development and bolt-on acquisitions. Ardent acquired Fitness First centres in Western Australia earlier this year and expects these to deliver synergies in FY15. 

The company's theme parks are expected to be supported by resilient visitor numbers. The outlook for interstate attendance is challenging, given the shift away from domestic holiday travel to international, in Bell Potter's observation. July revenues were marginally lower than at the same time in 2013 but company has said it will focus on a digital and direct sales strategy to target new business cost effectively and assist in improving yield.

Bowling is the main area where there was not much revenue improvement in FY14. Bell Potter still expects this division will show signs of improvement following recent restructuring and change of management. The broker expects marinas will be the most subdued of the four divisions. Still, the company reported that strong-than-expected winter occupancy delivered solid trading momentum into FY15.

CIMB retains an Add rating, believing investors are more willing now to focus on the medium-term growth profile following the strong performance in FY14. The stock has four Buy ratings and one Hold on the FNArena database. The consensus target is $3.11, suggesting 3.1% downside to the last share price. Targets range from $2.70 to $3.30. The dividend yield on FY15 forecasts is 4.7%, rising to 5.4% on FY16 forecasts.

See also, Ardent Leisure Still Appeals on August 19 2014.
 

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article 3 months old

Mantra Accommodates Strong Upside

-Likely benefit from consolidation
-Demand improving at resorts
-Maiden dividend likely in FY15
 

By Eva Brocklehurst

Mantra Group ((MTR)) maintains a positive outlook for corporate travel, citing healthy occupancy levels in all capitals. Brokers found little to fault in the accommodation operator's maiden full year results as a listed company. Domestic leisure demand is still strong, with no impact evident from higher air ticket prices. The resort conference market, which has been challenged over the past 3-4 years, is also improving.

Brokers like the business model. Mantra's earnings are leveraged to the domestic leisure and business travel market but, in the longer term, UBS also expects the company to benefit from industry consolidation as well, as larger operators can better manage pricing and brand value. Are there any problems? Only if one is being picky, Macquarie observes. CBD occupancy did slightly miss forecasts but this was somewhat offset by higher paid rooms sold. The CBD miss was largely from an expected slowdown in Perth's corporate market but this is now stabilising. UBS also observes the Brisbane CBD market remains relatively subdued.

RevPar - the hotel industry's measure of revenue per available room - was slightly below forecasts but the difference is immaterial in the broker's opinion, as Mantra outperformed on non-room revenue which bodes well for volume growth. UBS retains a Buy rating and $2.55 target.

Management has reiterated prospectus forecasts for FY15 sales growth of 8.5% and earnings growth of 11.4%. Mantra is in the enviable position of being offered numerous new opportunities, a different position to where it was 7-8 years ago, Macquarie observes. The broker also notes there is good visibility over the next three months for the business into the summer holiday period. Macquarie rates the stock Outperform with a $2.51 target.

Mantra expects to pay a maiden dividend in the second half of FY15. If the trajectory in RevPar continues, UBS easily envisages upside to FY15 prospectus forecasts, reflecting improving business confidence and a recovery in domestic tourism. UBS expects Sydney, Melbourne and Queensland accommodation markets, where Mantra has most of its operations, should provide robust growth in earnings over the next two years.

The broker liked the positive commentary surrounding key resort markets in the tropics, Sunshine Coast and Gold Coast as well as key CBD markets in Melbourne, Sydney and Darwin. Resort destinations in Cairns, Palm Cove, Gold Coast and Queenstown (NZ) are receiving strong interest from Asian inbound tourists. A number of sporting or cultural events are scheduled for FY15, adding further certainty for demand in key markets. These include the G20 conference, the Cricket World Cup and AFC Asia Cup.

Mantra is the second largest accommodation operator in Australia. It has more than 11,000 rooms in over 110 properties in Australia, New Zealand and Bali. The portfolio ranges from luxury resorts to serviced apartments and there are three core brands: Peppers, Mantra and Break Free. Mantra is shifting the Peppers brand into the CBD via a boutique hotel offering and the first one has opened in Canberra. Peppers in Melbourne is currently under construction.

Eight new properties were added in FY14, two in Brisbane and one each in Melbourne, Wollongong, Bali, Broome, Gold Coast and Whitsundays. Macquarie notes the new property pipeline is strong but management is maintaining a discipline regarding metrics and return hurdles. The broker hopes an early indication on how growth is tracking will come from the AGM later this year and provide a catalyst going forward.

 Australia is well into a extended period of below average hotel room supply increases, brought on the the magnitude of supply growth for the Sydney Olympics. There are also structural obstacles to building new properties. As a result, UBS observes the recent improvement in demand has driven the best revenue performances since 2011.
 

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article 3 months old

Flight Centre Levels Out

By Michael Gable 

The overall market is taking a bit of a breather as expected. Although reporting season is pretty much over, we still have some important information coming through in the week ahead. The RBA meets today, and although markets expect rates to stay on hold, there seems to be a growing expectation of a slight shift towards an easing bias again. This is a big difference to earlier this year when interest rates were likely to have edged higher by now. In terms of the effects on our market, this would benefit stocks that pay high dividends. Other news to look out for this week includes domestic GDP on Wednesday, retail sales on Thursday, along with the ECB’s interest rate decision on Thursday night and US jobs data on Friday.

Coming back to this week’s report, we review Flight Centre Travel Group ((FLT)) in light of their annual results.

 


On 17 June when FLT was trading at $44.58, we commented that it should bounce in the short term, with levels in the low $50’s being an ultimate target. After bouncing as predicted, price action since then has turned a bit neutral for the short term. That probably reflects the fact that we need to wait another couple of months for a catalyst to get it rallying back up to over $50. Before that however, if the share price does head south, then we should see some support around $45. If that gets breached, then a brief move to $42 is a possibility. However, that would be very short lived and would represent strong support and another buying opportunity.


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

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

Michael is RG146 Accredited and holds the following formal qualifications:

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

Disclaimer

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

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

article 3 months old

Ardent Leisure Still Appeals

-Main Event key catalyst
-Reduces pay-out ratio
-More upside potential
 

By Eva Brocklehurst

Ardent Leisure ((AAD)) delivered a strong outcome in FY14 after a year of investing in growth. The company's recent acquisition of Fitness First centres in Western Australia is incorporated into forecasts, with the full year results holding few surprises after being flagged along with the acquisition announcement.

Corporate costs stepped up over FY14 with the further roll out of the Main Event division. Six Main Event sites have been secured for FY15 and a further seven are expected to open in FY16. The base is set for a robust earnings profile over next three to four years, in CIMB's view. Investors appear more willing to focus on the medium term growth outlook. Main Event delivered earnings growth of 27% in the year and theme parks and marinas also beat CIMB's expectations. Health club earnings were driven by acquisitions and the acquisition of WA Fitness First centres is expected to deliver synergies in FY15. Macquarie notes health clubs revenue grew 3% in July, which suggests only marginally positive constant centre growth, but the company appears comfortable with the momentum.

Ardent Leisure provided no guidance on FY15 but Deutsche Bank observes July trading was positive. A Buy rating is retained as the stock is trading 12% below the broker's $3.30 target. Macquarie, while maintaining a positive outlook on the growth strategy, considers this is largely reflected in the valuation and sticks with a Neutral rating. The broker remains focused on how well the Main Event expansion is executed. Macquarie likes the fact Ardent Leisure is investing in the Main Event cost base at an early stage. There was a 48% increase in corporate overheads but this expansion is now largely complete. The company did emphasise earnings per share is likely to grow ahead of dividends as it retains more funds to cover the expansion of Main Event. A pay-out ratio of 85-90% of core earnings is considered more appropriate over the medium term, against the previous pay-out of 90-94%.

Bowling was the main area in which revenue did not show any material improvement. However, margins improved and the company is confident the top line will turn around. To Goldman Sachs the outlook emphasises US growth and cost savings in Australia. The mature Australian businesses of theme parks, bowling and marinas remain strong but the broker expects Main Event to contribute 52% of earnings by FY18. That business increases in complexity with the expansion but Goldman is confident the management team is in place to handle the extra pressure.

JP Morgan was encouraged by signs of a turnaround in bowling and the continued success with the acquisition of health clubs. Bowling should benefit from a new facility in Darwin, given the lack of competition in the region. Still, incremental results from new Main Event sites are the catalysts. UBS is awaiting Main Event's growth acceleration but also wants to see more evidence of a strategic turnaround in bowling and return on investment, as well as yield uplift from the initiatives on theme parks such as digital marketing.

An improvement in the macro economic backdrop in terms of domestic tourism and discretionary spending would also be helpful. The company is positioned to benefit from a falling Australian dollar through foreign earnings translation as well as an improvement in domestic consumer spending. UBS observes this situation is unique, unlike retailers or travel agents, which benefit from either of these factors to some degree but not usually both. Goldman believes that the company's portfolio of low-cost entertainment options should provide support against any consumer weakness. Moreover, falls in the Australian dollar should prove beneficial. Goldman calculates that as US earnings are now unhedged, a US1c fall in the Australian dollar adds 0.6% to FY15 earnings.

The company has outperformed the ASX small cap industrials by 50% over the year and is now trading at a premium of around 20%. UBS expects, from a three-year distribution yield and growth perspective, a yield of 5-6% and 15% distribution growth, representing total returns of 20% per annum. Such a firm outlook means UBS retains a Buy rating, based also on the long-term roll out of around 90 Main Event centres.

FNArena's database has four Buy ratings and one Hold. The consensus target is $3.11, suggesting 3.7% upside to the last share price, and compares with $3.03 ahead of the results. Targets range from $2.70 (Macquarie) to $3.30 (Deutsche Bank). The dividend yield on FY15 and FY16 forecasts is 5.0% and 5.8% respectively.
 

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article 3 months old

Weekly Broker Wrap: Gold, Banks, Travel, IVF And Discretionary Retail

-Russia ups gold purchases
-NAB likely to adopt IFRS 9 early
-AVG sells Yaldara, ELD sells Charlton
-Aussies increasingly heading overseas
-PRY becomes VRT competitor
-Costs a headwind for retailers
 

By Eva Brocklehurst

Central banks were buyers of gold in the first half of 2014. Macquarie notes sellers were few and far between. Three countries - Russia, Iraq and Kazakhstan - accounted for most of the purchases. Central banks and international financial institutions, as well as sovereign wealth funds, have historically been the most important holders of gold. Those that report to the International Monetary Fund reported holdings of just over 29,000 tonnes of gold as of June 2014. This understates total holdings as it does not count the gold held by some central banks which do not report, nor any gold held by sovereign wealth funds.

Why is this important to know? Annual flows in and out of the central banks are relatively small given their holdings, but can have a big impact on the gold market and the price. Extrapolating the purchases forward to the second half of the year, Macquarie estimates total net purchases of 226 tonnes, higher than 2013 but below 2012. The shift to higher purchases this year is largely Russian inspired and given that country's FX reserves have fallen, Macquarie suspects this might reflect a preference for gold over government bonds in the current political environment. The fact that gold has managed to rise in price this year should calm some nerves about its long-term outlook, in the broker's view.

***

The new IFRS 9 provisioning standard for bank credit reporting is now on the table. This will come into effect on January 1, 2018. The most important aspect is a move to an expected loss-provisioning model from an incurred loss-provisioning model that is currently in place. This will, in turn, require more timely recognition of credit losses and early adoption of the new standard is permitted. JP Morgan expects annual provisioning charges will rise with a deteriorating credit environment, as opposed to banks building buffers in so-called good times.

The broker expects National Australia Bank ((NAB)) will be the most likely of the big four to adopt this provision early, as it has $550m in its general reserve for credit losses, versus major bank peer average of $170m. A move to IFRS 9 accounting by the major banks in the long run may result in early recognition of credit losses, but may not assist with smoothing out volatility in bad debt charges. Beyond expecting that NAB may be an early adopter of this accounting practice, the broker believes there are limited implications for sector valuations.

***

In agricultural news, Australian Vintage ((AVG)) has announced the sale of the Yaldara winery and brand for $15.5m, while also executing a two-year processing agreement for its Barossa grapes. On face value the transaction is around 5% earnings accretive on an annualised FY15 basis, in Bell Potter's view. Meanwhile, Elders ((ELD)) has announced the sale of the Charlton feedlot for $10.1m which will provide a handy profit of $4m. A positive for the rural sector is that export markets for live cattle remain strong, with mid year reports indicating the number of head for 2013/14 is up 25% and export volume expectations for 2014/15 have been raised 11.4%.

***

Bell Potter has examined how holiday travel expenditure and disposable income is shaping up after the federal budget knocked consumer confidence earlier this year. Holiday travel expenditure, including domestic and outbound, as a percentage of disposable income has been virtually unchanged at around 6.5% over the past eight years. This is consistent with the broker's view that Australians are prepared to spend money on a holiday regardless of circumstances. There is a clear shift in the numbers towards outbound travel and away from domestic - outbound has tripled the growth in domestic expenditure over the same timeframe - and the broker expects this trend to continue. In periods of material economic disruption outbound travel tends to slow. Bell Potter notes this impact tends to be transitory and periods of weakness are followed by a strong recovery.

The implications for stocks in the sector means the trends are positive for Cover-More ((CVO)). Cover-More remains the purest way to play the outbound travel theme in Bell Potter's view. Flight Centre ((FLT)) is also a likely positive beneficiary of any recovery in the household sector, given the sale of outbound travel remains the single largest driver of earnings. The trend shift from domestic has negative implications for Webjet ((WEB)),Virgin Australia ((VAH)) and Wotif.com ((WTF)). The latter has been a major loser in the shift to outbound travel at the expense of domestic.

***

Primary Health Care ((PRY)) has debuted as a provider of IVF services, opening a clinic in Sydney and offering bulk billing. The offer of bulk billing should be able grow the market, given lower economic quartiles are under-penetrated because of the cost of the service. The model is in its early stages and UBS makes no adjustments to forecasts but, since a referral to an IVF specialist ultimately comes via a GP, believes Primary will have an opportunity to capture referrals from its own clinics in NSW. A risk for established IVF providers is that Primary-owned GP clinic referrals could now go "internal". At present the risk is contained to less than 2% for IVF competitor Virtus Health ((VRT)) volumes as Primary's GP base is concentrated in NSW.

***

BA-Merrill Lynch expects fixed cost increases will continue to be an obstacle for discretionary retailers. In the past three years, earnings for this group have declined by 21% and the key driver of the decline was fixed cost growth. The broker expects fixed cost growth to moderate slightly in FY15 but still impose a 3.2% headwind. Margins also risk coming under severe pressure. The broker expects discretionary retailers will be dealing with Australian dollar buying rates that will be up to 10% below FY14 levels and this will put upward pressure on pricing. Price rises could be hard to pass through if sales are subdued. Even if gross margins remain flat, retailers will not enjoy the earnings benefit from gross margin expansion that they have sustained in recent years.
 

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article 3 months old

SunHotels Key To Webjet’s Future Growth

-Growth difficult in mature market
-Need for dilution of Oz flight exposure
-Consumer resistance to high fees
 

by Eva Brocklehurst

Webjet ((WEB)) has acquired SunHotels, a European accommodation wholesaler. The acquisition, for around $31m, is an important one for Webjet as brokers believe the company increasingly faces competition in a maturing Australasian flight booking business where growth is likely to be minimal or absent.

JP Morgan observes the price paid for SunHotels was solid, as global online travel agents trade at 24.3 times 2013 earnings compared with Webjet on 13.8 times. SunHotels has 6,000 directly contracted hotels which grow the company's inventory base significantly in a resort and beaches market that is difficult to penetrate. This complements Webjet's other businesses given they are more city based. However, while Webjet expects SunHotels earnings to be "significantly higher" in 2014, the broker suspects the outcome is more likely to be flat. The upside risk to Webjet's earnings in FY14, in JP Morgan's opinion, is predicated on the re-launched ZUJI brand and the Lots of Hotels business contributing more than the forecast $4.0m, with the core flights business being flat. Thus, surprise potential rests on growth in Asian and Middle Eastern travel markets. Webjet's ambition is for these business to contribute $10m each to earnings in 2-3 years time.

The European deal binds the network and agents using Webjet's products but in order to add value, Morgan Stanley believes Webjet need to put more volume through the acquired network. Current management has delivered a strong improvement in organic performance and traction in Lots of Hotels but the ZUJI brand has so far disappointed the broker. Morgan Stanley retains an Equal Weight rating and $3.10 target but needs conviction in the growth opportunity in order to upgrade the recommendation.

SunHotels specialises in European resorts and sells primarily into the Scandinavian and UK business-to-business markets. It will remain a standalone entity. Strategically the acquisition is important, in Goldman Sachs' view. Initial analysis suggests the acquisition could be 13% earnings accretive on an annualised basis, excluding any potential synergies, and is necessary to dilute Webjet's exposure to the Australian domestic air market where booking fees still account for 40% of revenue. The broker retains a Neutral rating and $2.90 target.

Credit Suisse echoes Goldman's view, noting the accretive nature of SunHotels earnings is expected to be 10-15% in FY15 based on conservative assumptions around cost of debt and total-transaction-value growth. The broker has downgraded underlying volume assumptions for Australasia, which means the net result is a downgrade of around 5% to outer year forecasts. Credit Suisse also believes the core business is under pressure from increased competition and to become more positive would need to see signs of stabilisation in flight volumes. A Neutral rating and $2.85 target are retained.

JP Morgan is more positive from the outset, upgrading the rating to Overweight from Neutral. The broker envisages near and medium-term upside to earnings forecasts if the company is successful with ZUJI and Lots of Hotels. Still, the longer term structural risks regarding the sustainability of the business model cannot be overlooked. Webjet deserves a discount. Just not such a large discount.

Many investors have raised concerns that consumers will eventually resist the high service fees associated with Webjet's bookings, especially with new entrants providing an alternative. The broker observes the stock price is trading as if the valuation has no terminal value beyond the next 10 years. Despite this, JP Morgan does not think the stock deserves the 48% discount that it currently endures. The broker's price target of $3.00 envisages Webjet trading at 12.9 times 2015 earnings, which is still 40% below the average for online travel agent peers. The broker's valuation factors in declines in the core Webjet branded business as well as only a 10% probability of the current entity surviving past 10 years.
 

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article 3 months old

Weekly Broker Wrap: Oz Tourism, TV Ads, Retailing, Credit And Gold

-Few catalysts for domestic travel
-Myer, DJs likely to disappoint
-Discretionary shopping hit
-Will credit growth recover?
-US$1000/oz a new gold cost rule?
 

By Eva Brocklehurst

Inbound tourism looks solid, but what about domestic travel? Domestic air seat capacity and passenger growth slowed in the second half of FY14 and UBS believes capacity growth into FY15 is 2-3% at best. Online traffic trends for the Australian travel agency sites look, at the very least, flat in recent months. The broker notes the speculation that Wotif.com ((WTF)) and Webjet ((WEB)) could be acquired by major players, for instance by Priceline or Expedia, given there is some strategic appeal and accretive value for these two as acquirers. UBS thinks the real question they would ponder concerns incremental returns: whether to win share via spending more organically or via an acquisition. The numbers suggest signals to the broker that, at current prices, M&A is unlikely to be on the agenda yet while positive catalysts for Wotif.com and Webjet are limited. A Neutral call on both stocks is retained.

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The metro TV advertising market produced a modest rate of growth in the March quarter but Deutsche Bank's channel checks suggest there was a double digit decline in April due to the timing of Easter and a reduction in spending by advertisers ahead of the federal budget. This pull-back does not seem to have been fully retraced in May. Hence, the broker has downgraded second half metro TV ad market growth forecasts to negative 0.3% from 2.9%, and this takes FY14 growth projections to 2.5% from 3.5% previously.

Nine Entertainment ((NEC)) remains the broker's preference as it pursues a subscriber video-on-demand offering. While this may be a potential long-term opportunity it could also be a drag in the short term as Nine increases investment. Deutsche Bank reduces Seven West Media ((SWM)) forecasts for FY14 by 3% to account for lower TV ad market growth and also expects Ten Network ((TEN)) will take time and more investment to turn around. Deutsche Bank does not factor in a material revenue share recovery at this stage.

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The federal budget has been blamed for poor retail results over recent weeks, compounded by a warm start to winter. Macquarie thinks Myer ((MYR)) and David Jones ((DJS)) could disappoint the market in the current half year. To date Kathmandu ((KMD)), Super Retail ((SUL)), The Reject Shop ((TRS)), Noni B ((NBL)), RCG Corp ((RCG)) and Pacific Brands ((PBG)) have all announced downgrades, citing warmer weather and reduced confidence. Macquarie thinks the outlook remains unfavourable for apparel retailers, with above average temperatures forecast for both Sydney and Brisbane in the final week of the financial year.

From a real estate perspective, Macquarie expects shopping centres owned by Scentre Group ((SCG)), GPT ((GPT)) and CFS Retail ((CFX)) will record more subdued sales relative to the centres occupied by less discretionary businesses, such as those of Charter Hall Retail ((CQR)), Stockland ((SGP)) and Federation Centres ((FDC)).

Macquarie suspects that the softer economic climate in May, as a result of the public counting the cost of the federal budget, is also likely to translate into softer credit growth. This may not necessarily be a cause for concern, unless it persists. New governments usually make their first budgets tough by introducing unpopular measures early in their term. Macquarie's analysis shows that it is normal for credit growth to fall after such a budget. Credit growth immediately after the Howard government's first budget in 1996 showed the largest drop in the sample. The more significant issue emanating from the analysis is that credit growth usually normalises in the two months after the budget, that is over June and July.

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Gold prices have jumped above US$1300/oz in reaction to the conflict in Iraq and a weaker US currency, reacting to geopolitical events for the first time in 12 months. Morgans thinks sentiment is improving overall and miners are seeing value from a positive news flow. The broker also reviews production costs and, taking the outlook for global gold heavyweight, Newmont Mining, on board, suspects US$1000/oz is the new benchmark for all-in sustaining costs. It appears Newmont is working hard to maintain production, let alone increase it. Investors are in turn demanding returns while risk capital is being deferred. The result is a focus on high quality, low cost assets.

Morgans expected that, as costs rose and margins were squeezed, gold miners would lift grade and increase production. However, it appears that as costs are rising production is falling, or going sideways at best, and this is lending support to the physical metal in the medium term, setting up the market for a squeeze. In the meantime, M&A deals are flowing. The broker observes corporates are finding value in cheap valuations and the promise of securing longer term production at costs below US$1000/oz.
 

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Weekly Broker Wrap: Inflation, Accommodation, Gambling And NZ Building

-Low inflation is problematic
-Wotif.com battles competition
-More upside for Tabcorp?
-Echo Entertainment vulnerable
-Fletcher favoured in NZ residential
 

By Eva Brocklehurst

Low inflation. Is it good? Macquarie tackles the subject, noting that a structural legacy of the global financial crisis has been the onset of low inflation in many of the major developed economies. Low inflation becomes a problem when it turns into a deflationary spiral. The broker's analysis finds those countries which have specific numerical inflation targets prevent declines in short term inflation expectations from becoming entrenched. Ultra low inflation is considered a current problem in the eur zone and for financially stressed countries, as it implies higher real debt levels and higher real interest rates, less relative price adjustment and higher unemployment.

In Australia's case, the inflation targeting regime of the Reserve Bank means inflation expectations longer-term consistently stay within 0.1-0.2 percentage points of the mid point of the central bank's target 2-3% band. The recent strong and sustained appreciation of the Australian dollar has also played a key role in anchoring longer-term inflation expectations. Macquarie believes global investors should be alert to the risks of low inflation and should assess country/regional risks according to measures adopted by central banks to ensure inflation expectations remain well anchored.

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Feedback from the accommodation industry conference suggests to JP Morgan that Australia's tourism environment is stagnant and the cycle is not supporting listed travel agents. This means the competition remains intense and there is pressure to increase spending on marketing, which in turn pressures margins. The broker observes the majority of global online travel agents are pursuing traditional advertising such as TV to complement their search engine marketing. This is seen as a better way to build brand awareness.

Global tourism operators are spending more on marketing and JP Morgan thinks this may continue to erode Wotif.com's ((WTF)) market share, despite the company's market-leading brand. The broker notes Wotif has mounted initiatives to regain share but thinks there's a clear need to preserve the relationship with hotel and accommodation providers to protect advantages, such as last room availability. Another observation was that room supply growth was flat in FY13 and room supply in FY14 is forecast to grow 2.7%. Despite little in the way of increased supply the average room rate has risen by just 1.5%. The broker notes the four main capitals - Brisbane, Sydney, Melbourne and Perth - are outperforming the national average on revenue per available room, while the leisure centres of Cairns and the Gold Coast are underperforming.

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Australia's gambling sector can be classed as "mature". That view, combined with a more reserved consumer and modest top line growth, suggests to Morgan Stanley that investment opportunities remain very stock specific. The broker breaks from consensus on Tabcorp ((TAH)), expecting there's upside to earnings and distributions. Expanding margins are expected to offset lower turnover and provide for growth in wagering. A structural change delivers the most benefit, as customers increasingly bet online and on fixed odds. Turnover may decline, as UK bookmakers take share, but the broker still thinks Tabcorp can generate 14% 3-year compound earnings growth rates and raise the pay-out ratio to 100% from 80%.

Another area where the broker diverges from consensus is on casino operators Crown Resorts ((CWN)) versus Echo Entertainment ((EGP)). The broker believes Echo is more exposed to the swings in VIP table business, despite Crown having the larger VIP market share in Australia. This is because Crown's VIP business dominance is only on an absolute basis. VIP makes a larger relative contribution to Echo's earnings. Given the greater VIP earnings volatility experienced by Echo's domestic casinos, the stock deserves to trade at a valuation discount to Crown in Morgan Stanley's view. This is potentially offset if Echo can take some share of this market away from Crown. Crown will face earnings upside if it gains a foothold in the Queensland casino market, with up to three additional licences being issued. As a result, Echo faces significant risk as its Queensland dominance is set to be diluted. This will be compounded in 2019 when Echo loses NSW dominance with the opening of Crown's Barangaroo.

Morgan Stanley does not think the market has fully considered the possible impact of privatisation of Western Australia's TAB and/or lotteries. These are some of the last government-owned gambling businesses in Australia. There are opportunities and risks for both Tabcorp and Tatts ((TTS)). Morgan Stanley thinks opportunities for Tatts in the core lotteries division is limited. Tatts has lotteries exclusivity in NSW and Queensland until at least 2050. The Victorian licence is up for renewal in 2018. The broker does not think a potential WA transaction would be positive for Tatts, as there's limited scope for cost reduction. In wagering, Tabcorp has successfully renewed its licence in both NSW and Victoria and secured retail exclusivity. There could be upside to earnings if it is able to acquire WA TAB because of the cost reduction potential, in the broker's view.

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CIMB has extended the home building survey to New Zealand, noting the rebuilding of Christchurch continues to gain momentum and is coinciding with a cyclical recovery in other major cities. The analysts have revised NZ residential construction forecasts and now expect 16% growth in 2014. In contrast to the nascent recovery in Australia, NZ's residential recovery is continuing at a rapid rate. CIMB believes there's further upside to come. Builder commentary suggests, while Christchurch and Auckland have been the drivers of the improvement so far, this is now filtering through to other cities and regions. All this leads CIMB to prefer Fletcher Building ((FBU)) in the building materials sector with the three C's - Cyclical leverage, Christchurch rebuild and Cost reductions - seen providing many years of earnings growth.
 

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