Tag Archives: Media

article 3 months old

Online Spurs Upside For Latam Autos

-Exposure to growth in new markets
-Replicates established model
-Currency, geographic risk
 

By Eva Brocklehurst

Latam Autos ((LAA)), which recently listed on ASX, intends to become the dominant operator in the Latin American vehicle classifieds market. The company is an aggregation of five assets targeting six countries - Ecuador, Mexico, Argentina, Panama, Peru and Bolivia. Headquarters are in Quito, Ecuador.

The stock provides the opportunity to invest in a company that is replicating a proven business model in an under-penetrated market. On the basis this signals substantial upside, Moelis initiates coverage. The broker observes growth is predicated on online advertising, car ownership and internet penetration and, hence, Latam Autos, with already a leading market, share is well placed. Moelis kicks off with a Buy rating and 34c target.

Latin America has lagged more developed regions but is expected to enjoy the same sort of online growth trajectory. Online advertising is forecast to increase at a compound 18% out to 2018. Meanwhile, car ownership in Latin America continues to grow. Average internet penetration has increased 54% since 2009 but remains 92% below developed counterparts.

The company is replicating the model used by Carsales.com ((CRZ)) and ICarAsia ((ICQ)), potentially reducing some of the execution risk. The broker also highlights the fact that Latam Autos appears to be further down the monetisation path than ICarAsia, with its average revenue per listing increasing significantly. Moreover, unlike ICarAsia, Latam Autos operates in countries using the same language, which should simplify operations and speed up the roll out of the platform.

The broker's bull case assumes a compound growth rate for revenue of 25%. Historically, earnings have grown even quicker than the top line, as scale provides opportunities for margin improvements. The major risk involves currencies. The majority of revenues and costs are derived outside of Australia and Latam Autos has exposure to six operating currencies. Operating metrics can vary significantly across these countries and successful integration will be crucial to future success, Moelis observes.

The company recently acquired AutoFoco.com, equal number one in Argentina, for an attractive multiple, where significant cost cutting opportunities exist. AutoFoco.com predominantly provides online automotive classifieds but also has a magazine providing automotive content and advertising. Latam Autos intends to continue operating the magazine, expecting to find cross promotional opportunities.

Moelis notes revenue did decline in Argentina in FY13, driven by depreciation in the currency, translated into Australian dollars. The asset was previously owned by a Norwegian company that obtained AutoFoco.com as part of a larger acquisition and therefore spent minimal capital on the asset. In the broker's view, this offers Latam Autos the opportunity to turn the business around, being very complementary to the company's other sites.

The industry is one where the number one website can maintain a dominant position and over time create a virtual monopoly, in the broker's view. Critical mass is key to the maintenance of a dominant position. In this case, each of Latam Autos' assets helps it position as a leading player in the respective market. The company was founded by two Australians who identified an opportunity to aggregate vehicle classifieds across Latin America. PatioTuerca.com was the initial acquisition that provided the platform technology, offering online classifieds in Ecuador, Panama and Bolivia. The roll out of the company's platform is expected to take 6-12 months. 
 

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REPEAT: oOh!media Attracts Attention

This story has been re-published to correct erroneous information regarding APN Outdoor in paragraph six. FNArena apologizes for any potential confusion caused.

-Outdoor growth outstrips
-Margin expansion expected
-Superior return profile
 

By Eva Brocklehurst

Travelling through Australia's countryside the business of oOh!media ((OML)) is well evident, as the company has a dominant position in roadside billboards. Scale and incumbency provide a significant competitive advantage for the newly-listed media company, but that is not all. Digital technology's relentless enhancements mean the potential in Out-of-Home advertising for targeting audiences and achieving more flexible advertising campaigns is growing significantly, more so than the broader advertising market.

Digital platforms allow for multiple faces which can attract additional revenue to a single site and increase yields. Historically, a deterrent for using of this type of advertising was the cost and time required for production and installation, and the fixed nature of the message. Digital developments change all that, enhancing flexibility in terms of message and length of time for promotional advertising.

As an operator with scale in this area, oOh!media is well placed and Macquarie initiates coverage on the stock with an Outperform rating and $2.65 price target. oOh!media has a mostly fixed cost base, meaning incremental margins on new revenue are high. Revenue growth on the back of digital investment is a key driver behind an expected expansion in margins, to 18.2% in 2015 from 12.4% in 2012. This underpins the prospectus forecasts for 2013-15 and a compound earnings growth rate of 21.4%.

Out-of-Home advertising includes billboards, airport, social & retail centre signage, as well as street furniture - in which oOh!media does not participate. Growth in this market has remained strong at over 10% in 2014 and oOh!media has 34% of the segment revenue in Australia. Out-of-Home advertising growth has outpaced the broader advertising market over the past 10 years and Macquarie attributes this to growing target audiences, particularly as audiences have become fragmented in other media. oOh!media has a broad portfolio with over 2,000 leases and the top 20 concessions represented less than 43% of 2013 revenue.

Macquarie estimates the market share for this segment has grown to 4.5% currently, from 3.1% in 2003. Digital investment in the segment's assets has transformed both the industry and the company. Upgrading relevant sites to digital increases the available inventory, flexibility and creative opportunities for advertisers. JP Morgan also initiates coverage with an Overweight rating and $2.28 target. The broker believes the market structure supports a superior return profile, as there are high barriers to entry and constraints to supply through lengthy regulatory processes.

The company is one of two major operators in roadside billboards, with the other key player being APN Outdoor Group ((APO)), which has a market share of 27% on Macquarie's estimates. APN Outdoor was formerly part of APN News And Media ((APN)), sold to Quadrant Private Equity in two tranches and subsequently listed on the ASX at the end of last year. There are high barriers to roadside advertising, given lengthy processes for approvals and the value of incumbency. AdShel, which has 13%, and JCDecaux, around 11%, of the segment market, both focus on street furniture and make up the other significant players.

The segment remains highly competitive and oOh!media does face risks from competitors and disruptive technologies, as it may lose key contracts or renew existing contracts on less favourable terms. Advertising markets are also volatile and there is a risk the company cannot generate required returns on digital investments.

Regional markets, which represent around 15-20% of the company's roadside revenues, are highly diversified with a long tail of single-site concession holders. In Macquarie's view this gives oOh!media a unique national audience with scale that is not accessible for other operators in the Out-of-Home segment. There is scope for consolidation with the larger players - AdShel or JCDecaux - but it is not clear if there is any desire for this. A merger with APN Outdoor would create a player with over 60% of the market but is unlikely to be permitted by the competition regulator.
 

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

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

 

By Eva Brocklehurst

Top Picks

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

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

Media

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

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

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

Retail

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

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

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

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

Online Retail

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

A-REITs

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

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

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

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Weekly Broker Wrap: Commodities And Equities in 2015, Banks and Media

By Greg Peel

Commodities in 2015

After a decade of cost inflation and currency headwinds for the Australian mining sector, costs and the Aussie are now starting to follow commodity prices down, Deutsche Bank notes, albeit on a lag. While commodity price falls are hurting higher cost producers, lower cost producers are the greatest beneficiaries of a lower cost curve. The falling oil price is contributing to lower costs.

Deutsche expects the Aussie to fall to US70c by 2016. Those mining stocks best exposed to the falling Aussie and oil price, in the broker’s view, are Alumina Ltd ((AWC)), OZ Minerals ((OZL)), Rio Tinto ((RIO)), BHP Billiton ((BHP)), Whitehaven Coal ((WHC)), Independence Group ((IGO)) and Regis Resources ((RRL)).

The hardest hit commodities in 2014 have been iron ore, thermal coal, copper and oil, Deutsche notes. Aside from lower costs and currency, the broker sees 2015 as being a year of M&A and asset sales in the sector as the gap between low and high cost producers widen. Price-wise, the bulks should begin to rebalance and base metals strengthen. Deutsche’ top sector picks for 2015 are Rio, BHP, Alumina, Independence, Sirius Resources ((SIR)), Sandfire Resources ((SFR)) and PanAust ((PNA)).

The broker is bullish base metals but especially nickel, zinc and aluminium/alumina. Copper will remain in surplus but the impact will be dampened by falling grades in some of the world’s biggest mines. Bulk commodities remain in oversupply so market rebalance will take some time.

Morgan Stanley has downgraded its long term commodity price forecasts substantially heading into 2015. Iron ore and the coals (thermal and met) see 26-33% reductions while base metal reductions are a more modest 5-12%.

The broker notes that market commentary around commodities, in the wake of 2014’s big falls, is “overwhelmingly bearish”, with China’s moderating demand growth the primary cause of concern. Morgan Stanley nevertheless highlights that relentless supply growth sparked by higher prices in the boom has come home to roost, and once rebalancing starts occurring, opportunities will emerge in commodities markets.

Morgan Stanley likes metals. China’s multi-decade, materials-intensive cycle is maturing in a way that requires less bulks and more metals, the broker suggests, and this demand will compete with demand in an improving US economy. The broker prefers nickel, copper and zinc.

Equity Strategy

2014 was a year featuring outperformance of defensive stocks in the Australian market, UBS notes, and high-yielding defensives in particular, albeit the banks lagged on capital concerns. Beyond the yield story, foreign currency earners also performed well, with defensive healthcare a particular favourite. Those high yielders have for the most part now run up against the broker’s target prices.

Resource sector stocks and resource sector service providers made up 14 of the bottom 20 places, performance wise, for the ASX100 in 2014, UBS notes. No surprise there. But the broker believes 2015 offers better prospects for a price “basing” in base metals and oil, particularly if global growth can show some signs of life.

UBS believes Bluescope Steel ((BSL)) and Sims Metal Management ((SGM)) are the best positioned resource-related companies for a turnaround in 2015. Among the yielders, Spark Infrastructure ((SKI)) still offers upside in the broker’s view, while Aristocrat Leisure ((ALL)) is offering positive earnings momentum among the foreign currency earners. Among local industrials, UBS believes Crown Resorts ((CWN)) is oversold.

The Banks

It could have been a lot worse, suggests Macquarie, in reference to the Murray Inquiry. The banks copped one specific capital impost in the form of higher mortgage risk weightings but avoided a direct impost on a “too big to fail” (TBTF) basis. However, the more vague recommendation that Australia’s big banks should maintain capital ratios within the “top quartile” of international bank ratios creates its own problems.

ANZ Bank ((ANZ)) and Westpac ((WBC)) were the two banks most likely to be hurt if a specific TBTF buffer were applied given Commonwealth Bank ((CBA)) is already well capitalised and National Bank ((NAB)) has the luxury of being able to sell assets. But all the banks will be needing some $6-7bn of additional capital as it is, Macquarie suggests.

The problem with “top quartile” is that it is potentially a moveable feast of a measure, dependent on what the rest of the world’s banks are up to. Thus while specific TBTF buffer would have hurt, at least it would be a “known”. Macquarie believes the vague “top quartile” guideline will create great uncertainty.

Of course it’s all just recommendations at this point.

And it is still uncertain exactly how the regional banks will be impacted, Deutsche Bank suggests. The broker’s base case is for a capital benefit to the smaller banks, bringing their return on equity measures into line with, or to a premium over, the big banks.

What we do know is that the individual litigation clouds hanging over each of the big two regionals have now parted. The Federal Court has approved a settlement between bank of Queensland ((BOQ)) and investors in Storm Financial and the Victorian Court has approved a settlement between Bendigo & Adelaide Bank ((BEN)) and investors in Great Southern.

Media

Advertising data suggest a flat first half of FY15 to date, with mid-single digit improvement noted in November driven by digital and a lumpy jump in outdoor, JP Morgan notes. Metro TV booking have declined by 4.4%, FY-to-date, and newspaper/magazines have declined by around 10%. Metro radio is up 5.7%.

Traditional media revenue trends remain subdued, JP Morgan suggests, and there remains downside risk to consensus earnings forecasts among stocks in the sector. The broker is Overweight Carsales.com ((CRZ)), Seven West Media ((SWM)) and Prime Media ((PRT)) and Underweight Fairfax Media ((FXJ)) and Ten Network ((TEN)).
 

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article 3 months old

Nine Entertainment Positioned For Upside

-Forecast to take market share
-Improving advertising trend
-Shares inexpensive


By Eva Brocklehurst

Nine Entertainment ((NEC)) continues to pull away from its rivals, guiding to improved profits down the track despite the weakness currently prevailing in the TV advertising market. The company's AGM commentary followed a similar theme to rivals, in that the Free-To-Air TV advertising market was notably weak. Beyond that, brokers expect company-specific initiatives will deliver growth in coming years, while Nine is well positioned to leverage the potential upside in advertising spending.

Nine expects the ad market will be weaker in the first half of FY15 but guided to 1-2% growth in the second half. Deutsche Bank now forecasts Nine to reach a revenue share of 39.2% in FY15, from 38.7% in FY14, primarily at the expense of Ten Network ((TEN)). JP Morgan expects a 39.5% share for Nine, assisted in the second half by the Cricket World Cup. Nine has a desirable asset mix and the market share gains from TV are coupled with strong growth in its events business, in Morgans' view. The broker notes guidance for 10% profit growth in FY15 was a little below consensus but this reflects a weak first quarter metro TV market and should give way to the improved trend the company is witnessing in the second quarter.

The fact that Nine expects profit of $85-90m in the first half but a full year at least in line with FY14's $311m implies a big second half, in Citi's calculations, and it will need higher ratings and, hence, revenue share or cost savings to help achieve targets. Citi suspects a lack of advertising growth and the intensely competitive environment could suppress near-term sentiment, but then the shares are priced accordingly. Citi also envisages value in leveraging the network effect, potentially in a merger with Southern Cross Media ((SXL)) and via expansion of the events business.

Internet film provider Netflix has announced it will launch a service in Australia in March 2015 but, near term, the threat to FTA TV is small, as Deutsche Bank observes Netflix will not compete for advertising spending and the content at launch will be limited. Still, the broker will watch developments closely on this front as any longer-term fragmentation of audiences could have an impact on the market. UBS reduces FY15-16 earnings forecasts based on the weaker market growth but, even with this downgrade, believes the stock is inexpensive. A future rebound in ad markets and potential cost savings on the Warner Brothers contract from FY16 are expected to underpin medium-term profit growth

Nine has stated it remains on the hunt for acquisitions in new consumer facing ventures where it can add value and this has reinforced Morgans' confidence that the network can deliver TV margin expansion over the medium term, as revenue growth exceeds cost growth, predicated also on the company's ability to re-orient historical investment in studio content to other content such as sports. JP Morgan bases its Overweight rating for Nine on revenue share momentum, moderate gearing and the company's ability to participate in any future media consolidation.

The stock has a neat appearance on FNArena's database, with seven Buy ratings, no Hold, no Sell. The consensus target is $2.45, suggesting 19.1% upside to the last share price. Targets range from $2.35 to $2.72. The dividend yield on FY15 and FY16 forecasts is 4.7% and 5.6% respectively.
 

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article 3 months old

Brokers Cautiously Positive On News Corp

-Print decline levelling off?
-Several business lines unclear
-Stronger ad trends at WSJ
-Minimal value placed on key assets
 

By Eva Brocklehurst

Online real estate services remain News Corp's ((NWS)) clearest growth driver, with earnings in the division up around 30% in the September quarter. Brokers attribute much of the robust result and outlook in the quarter to majority-owned REA Group ((REA)) and its higher pricing, which suggests the online real estate move to a market-based pricing structure has not impacted on volumes.

The September quarter revealed a firm result for book publishing, up 24%, and cable network programming (Fox Sports), up 10%, more than offsetting weakness in news and information services. Revenue declines in traditional print media remain of concern but there are a number of one-off costs which should roll off in 2015. Macquarie was buoyed by signs the print decline appears to be levelling off. Advertising is improving but the broker is not sure if there is yet a material shift in trends.

Deutsche Bank notes management was surprisingly upbeat on the state of the advertising market, signalling that headwinds in Australia have dissipated, while the Wall Street Journal is showing solid growth. Moreover, Foxtel has new pricing packages in place this month and the international experience suggests to Deutsche Bank this will position the company for longer term growth.

Citi expects earnings growth to continue at a more modest pace than the underlying rate of 18% revealed in the first quarter results. The positive aspects are that newspaper revenue declines have moderated, the PayTV assets are delivering and real estate is robust. On the negative side, newspaper advertising is still declining in all three of the company's main markets - the UK, Australia and the US.

Macquarie is cautious about the outlook for Foxtel, while expecting some offset from recently-acquired Harlequin (publishing) synergies, and recently upgraded the stock to Neutral from Underperform, to reflect the improved value for shareholders after a fall in the share price. Meanwhile, education (Amplify) is considered an uncertain investment proposition at present. Amplify's first quarter growth was boosted by hardware sales and the business lacks clarity, in Citi's opinion. The company's trajectory remains choppy but, in summary, Citi finds evidence of a general improvement and retains a Buy rating.

Newspaper operating trends are volatile and there is limited financial visibility so JP Morgan prefers a Neutral rating on the stock. The broker notes book publishing once again benefited from strong sales in the Divergent franchise, while REA was also notable, making the broker less concerned about the competitive environment following the move to market-based pricing. There is upside potential in the recent acquisition (80%) of US-based digital real estate business, Move, in partnership with REA (20%). Despite the large opportunity, JP Morgan considers it still too early to gauge the benefits in what is quite a fragmented market in the US. News Corp is confident it can leverage its expertise to improve Move's positioning and any sign that this is gaining traction would be a key catalyst for several brokers.

The company's focus remains on digital acquisitions and, in terms of geography, the US, with global expansion more likely in Asia than in Europe. JP Morgan observes the company is conscious of the need to make acquisitions which extend current expertise. While total segment advertising revenue declined 7% in news and information, management notes strong trends at the Wall Street Journal, particularly in finance and technical areas.

JP Morgan is aware this could drive meaningful growth but warns trends are volatile and ad buying is short term, advising investors to wait on the sidelines at the current valuation until a clear path is delineated in the key business segments. Meanwhile, UK news advertising remains challenging, with revenue declining 13% in local current terms amid weakness in retail, telecoms and finance.

The value gap to its peers continues to weigh, in Credit Suisse's observation. After excluding REA and cash balances the value attached to the core assets has fallen to around US$3bn from US$4.4bn at the time of the corporate split in mid 2013. The earnings multiple attached to the core business has fallen to 3.6 times from 5.0 times over the same period, well below the trading values of key media peers across publishing and pay TV. Still, the company has some valuable assets to which Credit Suisse believes minimal value is being attributed at the current share price.

The quarter was solid beat on Goldman Sachs' estimates. Book publishing continues to surprise on the upside while costs at Amplify were lower than the broker expected. Goldman Sachs lists three areas to watch where the earnings growth profile could change materially. These include the success, or otherwise, of the newspaper pay walls, the size of the annual investment in Amplify and the use of the cash balance in any acquisitions.

FNArena's database has three Buy ratings and two Hold. The consensus target is $21.84, suggesting 23.5% upside to the last share price. This compares with $20.89 ahead of the quarterly update. Targets range from $19.40 (Macquarie) to $24.00 (Citi).
 

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Weekly Broker Wrap: AGMs, AUD, Advertising, Capex, Gaming And ClearView

-Will there be a post AGM bounce?
-Aust dollar fall benefit more in Q215
-PayTV advertising first ever decline
-UBS wary about resource capex plans
-Opportunity in US gaming market?
-WilsonHTM advises caution on ClearView
 

By Eva Brocklehurst

What items will provoke interest at upcoming listed company Annual General Meetings? Macquarie observes AGMs often offer the first formal guidance regarding the unfolding financial year and, given the economic uncertainty and sell-down in equities in the past month, the broker considers any moderately positive news around trading activity is likely to push share prices higher. Those contenders for the most interesting AGMs in the broker's view include AGL Energy ((AGK)), with MacGen likely figuring in guidance for the first time, Ansell ((ANN)), with a narrower guidance range expected, and BHP Billiton ((BHP)), with shareholders on the alert for any mention of capital management and dividend policy. Others which may spark interest include Cochlear ((COH)), not for specific guidance but the potential impact of positive commentary and Carsales.com ((CRZ)), which has promised more detail on trading.

Macquarie's quantitative analysis team has run an event study on AGMs and this shows that on the day of the AGM, stocks experience substantially increased trading, with aggregate volumes some 44% higher in the sample of stocks under Macquarie's coverage. Stocks tend to marginally underperform the market after their AGMs for a period of two weeks.

Morgan Stanley also observes the market is hoping for the AGM season to bring about a bounce but is not confident this will occur, given the macro headwinds. Growth conviction regarding FY15 aggregate earnings is low and any AGM-induced negativity would challenge the pick-up that is factored into FY16 estimates and pressure valuations. The broker believes any break-out for stocks is biased to the downside. Investors are rotating out of banks and avoiding resources as the grind higher in industrials ex-banks valuations continues. Morgan Stanley envisages increased risk to PE levels should AGM presentations disappoint. The recent unwinding of the Australian dollar yields a cautionary note in that, for translators, the real benefit is in the second quarter of 2015 and, hence, may not feature strongly in AGM commentary.

***

Citi notes the depreciation of the Australian dollar will provide much needed assistance in re-balancing the economy, but the outlook will not be altered quickly. The currency's strength has been a major headwind for economic growth and there is some hope it will now align better with fundamentals. The trade weighted index has fallen 5.5% and the Australian dollar is now back at a four-year low. Nevertheless, Citi suspects the Australian dollar will probably need to decline further and forecasts US82c by the end of 2015. Citi doubts that even the recent fall will boost inflation or, for that matter, that the Reserve Bank will respond to a weaker currency by tightening monetary policy. The impact on inflation is likely to be mild and temporary, given the spare capacity in the economy and labour market.

***

Recent advertising data for the first half of 2014 suggests online/digital advertising is robust and still taking share from print. Metro also outperformed regional. Citi lowers total ad market forecasts to growth of 2.2% in 2014 and notes that, while total spending is still growing, it is very much a tale of two trends. Traditional media is down and online is on the up and up. There were a few segment surprises in the CEASA data. PayTV advertising declined for the first time ever, while print declines accelerated. Online sustained 21.5% growth in the half, helped by mobile display and strong classifieds. Outdoor also delivered robust growth. TV advertising was weaker than expected but grew overall on the back of a 1.2% increase in free-to-air metro growth.

***

Analysis by UBS of more than 500 companies in the energy, resources, utilities and chemicals sectors reveals that after peaking in 2013, capital expenditure is forecast to decline 2.0% year on year in 2014, followed by a 4.0% decline in 2015. Major oil company capex is forecast to decline by 3.0% in 2014 followed by a 1.0% increase in 2015. Mining capex is forecast to decline by 23.0% in 2014 followed by a 10.0% decline in 2015. The broker concludes that the soft patch for engineers and contractors will continue for some time and remains bearish on sector prospects, amidst weak commodity prices and an escalating push towards capital preservation and increased shareholder returns among oil majors.

***

BA-Merrill Lynch has upgraded Aristocrat Leisure ((ALL)) to Neutral from Sell. The broker conducted channel checks in the US recently and a field trip has provided more conference. That said, Merrills remains guarded on valuation and is aware that US market conditions remain challenging. Hence, the Neutral rating. Still, recent consolidation in the US market provides a potential disruption risk and this presents an opportunity for both Aristocrat and Ainsworth Game Technology ((AGI)). Across the Pacific, in Macau, the analysts note Golden Week visitations increased 10.0%, with mainland visits up 2.0%. Still, this data is not considered to be a good indicator as patronage largely comprised casual/mass and non-gamblers.

***

ClearView Wealth ((CVW)) has experienced a 35% re-rating over the past two months. WilsonHTM believes this is unusual for a defensive stock, given the predictability of life insurance earnings. The broker is mindful that the distribution of life insurance through planners is capital intensive, because of the need to pay up front commissions, and a further capital raising is probable within the next 12 months to support rapid growth. ClearView will buy the Matrix dealer group for $20.5m in cash and scrip, which will add 85 advisers but reduce reported earnings in FY15, and lower surplus capital to $15.5m once the deal is completed. Another issue the broker reminds investors of is, in the current low interest rate environment, private backers may be encouraged to sell down their combined 55.1% stake, otherwise slated for FY17.
 

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Are News Corp, REA Making The Right Move?

-Compelling for News Corp
-Risks in REA's exposure
-NWS capital return less likely
 

By Eva Brocklehurst

News Corp ((NWS)) and REA Group ((REA)) will partner to acquire US online real estate classifieds business, Move Inc, for US$950m. This is the largest investment News Corp has made since it split from Fox. The deal is cash funded and split 80:20 between News Corp and REA. Move is considered the number three real estate portal in the US market in terms of traffic but has delivered the slowest revenue growth of the three. Citi observes the 3-year compound growth rate of just 6% compares with Zillow's 44% and Trulia's 57%. Zillow and Trulia are planning to merge and Citi also notes other real estate markets are also trending towards two major digital players, e.g. Rightmove/Zoopla in the UK and REA/Domain in Australia.

Citi believes the deal is a compelling opportunity for News Corp to deliver increased value to shareholders, despite the relatively high price being paid for the asset. Execution risk is material, as Move is facing well funded and established competitors. Nevertheless, Citi considers the risk/return is skewed to the upside and welcomes the transaction from News Corp's perspective.

It is a smart move, in Credit Suisse's opinion, as while News Corp has paid a sizeable premium and the transaction is likely to be dilutive, it has the potential to deploy cash in an area where its associate, REA, already has expertise. Move also has tax losses that may ultimately lower the effective purchase price. News Corp could also help Move become more competitive, having the financial capacity for greater marketing spending and the ability to leverage existing US media assets and drive traffic to Move's websites.

CIMB is less impressed, questioning the logic behind REA's 20% stake. There is a large US real estate online opportunity, with relatively less penetration than the Australian marketplace which already has 50% online penetration, but the broker is not sure if Move is best placed to capture this opportunity. Valuation metrics signal US investors are willing to pay a 100% premium for the number one and two players - Zillow and Trulia - over Move. The investment is relatively small for REA but, if the rationale was so compelling, the broker asks: why not acquire a larger stake? The benefits to News Corp are obvious, given REA's involvement, but CIMB envisages limited upside for REA over the medium term. CIMB also considers Australian online valuations are stretched and the risk of a property correction, while not assumed, puts the spotlight on REA's exposure given its shift to a listing model.

The market structure in the US differs from Australia and Deutsche Bank warns that any read through regarding the online growth path is limited. The US real estate market is almost 20 times larger in terms of transactions and agents. The broker does not have a problem with REA's 20% stake, as it effectively puts the company in a position to benefit from any upside while limiting the downside. Deutsche Bank also expects Move would be well placed to increase its share of the addressable US market, but News Corp will need to work hard - if Zillow and Trulia merge - to make the most of the opportunity. Without any additional investment in sales and marketing, the transaction appears broadly neutral to Deutsche Bank's forecasts.

The transaction makes strategic sense to JP Morgan, from a News Corp perspective. Management can leverage REA's expertise. Still a need to reinvest in marketing is likely to hold down earnings growth in the near term. The investment should help propel News Corp's business mix towards a potentially higher growth digital segment but JP Morgan also observes this transaction further decreases the likelihood of capital returns to shareholders, which may disappoint some investors attracted to the hefty cash balance. From a REA perspective, JP Morgan notes the net cash balance is almost eliminated, for now, although the business does generate strong cash flow. JP Morgan acknowledges the early stage market opportunity in the US but was surprised by REA choosing a developed market partnering with News Corp.

News Corp has three Buy, two Hold and one Sell rating on the FNArena database. The consensus target price is $20.86, suggesting 15.1% upside to the last share price. REA has three Buy, three Hold and one Sell rating with a $46.98 consensus target, suggesting 10.4% upside to the last share price.
 

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Weekly Broker Wrap: Banks, Advertising, Wages And Energy Retailing

-CBA's deposit base stands out
-Advertising reliant on retail
-Risks for consumption growth
-Snowy Hydro privatisation?
 

By Eva Brocklehurst

Macquarie's analysis of Australian banks reveals Commonwealth Bank's ((CBA)) deposit base delivers $935m in profit and the bank remains a clear leader over its closest peer, Westpac  ((WBC)), at $550m. As a result CBA remains the broker's top pick. ANZ Bank ((ANZ)) has a retail deposit base around half that of CBA but its customers do have higher average balances, leading to an overall profit per deposit customer that heads the sector. ANZ also has more exposure to the older de-leveraging demographic segments, while softer credit growth in Victoria stands the bank in good stead from a deposit growth perspective. The broker retains an Underperform rating on ANZ given concerns around Asian exposure.

Of most concern to Macquarie is Westpac's lower quality customer base. Westpac appears to have favourable deposit trends but is less competitive on savings account considerations. Hence, Macquarie has recently downgraded to Neutral from Outperform. National Australia Bank's ((NAB)) deposit base is the smallest by value but it does have the largest average balance by customer. To complicate the picture, NAB also has the lowest share of wallet and lowest spread, in that it pays more for deposits than the other majors. In a similar way to Westpac, Macquarie expects idiosyncratic factors to dominate NAB's deposit growth outlook. The broker does acknowledge other positive catalysts for NAB around divestment and the restoration of domestic business momentum.

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Media agency bookings indicate the advertising market in the first half of FY15 is flat to slightly weaker, with August down by around 3%, primarily because of comparisons with last year's spending on the federal election, a benefit largely captured by TV. JP Morgan considers the underlying market is weak. The most positive aspect in the data was that retail, the largest media spending category, grew 3.2% in August, reversing recent weakness. Metro TV spending declined by 6.0% and the structurally challenged newspaper and magazine sectors declined by 14.5% and 16.1% respectively. Digital advertising spending grew 5.7% in the month. JP Morgan expects first half FY15 growth will be reliant on the fourth quarter of 2014 for growth, particularly in retail, which contributes around 20% of total advertising expenditure.

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Wages growth slowed sharply over FY14, with household average earnings just 1.5% higher year on year, the weakest growth since the late 1990s. This is well below the pace consistent with UBS' consumption forecast of 3% growth for 2015. While UBS acknowledges slower wages growth is good for company profits, it can also depress economy-wide demand, ultimately worsening both profitability and the ability to invest. In the broker's view it will boil down to inflation outcomes, and whether lower inflation is enough to deliver a boost to consumer spending and ultimately support profits and jobs.

UBS finds that companies with the greatest potential to benefit from slower wages growth are those in which the wages bill is a significant share of profits, but also where there has been less reduction in wages growth so far. These sectors include administration and support, manufacturing, accommodation, food and construction. The broker still expects real household disposable income to rise 2.5% over the coming year, helped by lower inflation and a pick-up in employment. Despite this, a further draw-down in household savings rates will be needed to meet the forecast of a 3% pace in consumption growth in 2015. At present, the broker concedes, the risk is for under achieving on that forecast.

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Snowy Hydro has purchased Lumo Energy for $605m. The acquisition includes around 540,000 customers, mainly in Victoria, as well as 163MW in diesel peaking plant in South Australia and Direct Connect, a customer acquisition channel. Deutsche Bank had anticipated Lumo Energy would be sold but both the value and acquirer were surprising. In the broker's view, the transaction metrics are supportive of an improving retail outlook and further vertical integration appears consistent with the recent report to the federal government recommending the privatisation of Snowy Hydro.

Deutsche Bank is adamant that irrational competition for market share by small players has blighted energy retailing and consolidation should improve sustainability. Given energy retailing is highly scalable, the industry has endured significant discounting in order for small players to obtain market share and this has increased churn and compressed margins. Consolidation is therefore considered a positive for the listed players such as AGL Energy (((AGK)) and Origin Energy ((ORG)).

The three government owners of Snowy Hydro, NSW, Victoria and the Commonwealth tried unsuccessfully to privatise the business in 2006. Deutsche Bank believes recent developments appear to support increased vertical integration as a way to privatisation. The deal makes sense to Citi too. The broker believes the price of Lumo Energy was too rich for most tier two players in the market, which lack sufficient balance sheet capacity, while the top two, AGL and Origin, were probably restricted by competition concerns.

Citi also notes Snowy Hydro has stated a desire to be the fourth pillar of competition in the market, which suggests a listing or sale to a new entrant is more likely than a sale to an existing player. The broker does not envisage a large change in the NSW or Victorian landscape until Snowy Hydro obtains base load generation, unless customer growth becomes a focus. However, the addition of peaking generation in South Australia could allow the company to compete harder for new customers.
 

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Weekly Broker Wrap: Equity Strategies, Insurers, Electronics and Online

-Risks rising for banks, A-REITs
-Deutsche Bank likes yield & growth
-Lower insurer losses, lower risk cost
-Increased inventory, risk in electronics
-Online shares rise, so should earnings
 

By Eva Brocklehurst

One of the surprises this year has been the overall decline in US bond yields, even as the Federal Reserve has wound down purchases of securities. Citi observes, in terms of equities, this sustains investment in the Australian banks, real estate investment trusts (REITs) and other interest-rate sensitive sectors. Still, it may not be the case for long. The broker suspects upward pressure on yields may be building as a number of indicators show a further strengthening in the US economy. To this end short-term US Treasury yields continue to trend higher, resulting in a flattening of the yield curve. All these indicators suggest to Citi that risks may be rising in the Australian equity market for banks, A-REITs, utilities and infrastructure stocks thus trimming weightings in these areas may be a prudent move.

Deutsche Bank's strategists suggest interest rates could nevertheless remain lower for longer and this should support equity investments. Profits are unlikely to grow strongly but they are headed higher. Moreover, the pace of earnings downgrades appears to have stabilised. The broker observes forecast earnings growth for the ASX200 index is low compared with history and offshore markets, but this is largely because miners and banks weigh on the aggregate. Earnings from industrial stocks look likely to achieve 10% per annum growth over the next two years. Deutsche Bank continues to favour housing and financial market exposure, adding some defensive names, yield plays and cost cutting stories as well.

The banks are not exciting, although the broker is mildly drawn to the fact that business credit growth looks to be returning. Deutsche Bank is overweight on the energy sector, as earnings surge on the back of LNG projects, but remains underweight in miners, as sliding iron ore prices pressure earnings. Other observations are that low price/earnings ratio (PE) stocks are expensive versus history and recent momentum has been poor. The broker is no longer underweight on high PE stocks. Another observation is that the yield premium from pure yield plays has shrunk. Deutsche Bank retains a preference for both yield and some growth potential.

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The insurance industry is on the verge of major changes in technology. Morgan Stanley observes the multiplication of devices that are interconnected allows for new ways of selling and servicing product, whether it be motor, home, business or health insurance. Insurers are able to gain a better understanding of customers via new datasets, which means they assess risk in a completely different way. Risk pools are likely to shift and shrink, in the broker's opinion. An improvement in loss prevention is capable of delivering 40-60% risk reduction for home and 15-25% risk reduction for motor insurance. Moreover, consumer expectations have changed much faster than the industry, and insurers need to move ahead in terms of customer engagement, in the broker's view.

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There was a common theme regarding expanding inventory in the FY14 results of electronic retailers and CIMB fears this brings increased downside risk. Retailers have geared up for a surge in demand in the first half of FY15 and, while underlying conditions are stronger, the broker suspects there is not enough risk priced in should sentiment soften into Christmas. For example, Harvey Norman ((HVN)) franchisees are holding inventory at around 22% of sales, up from 20% in recent years. Dick Smith ((DSH)) ended FY14 with closing inventory up 49% on the prior comparative period.

Dick Smith management suggested the stores were underweight in inventory as of June 2013 and had to build up in order to drive sales growth. Still, CIMB observes the company is holding significantly higher stock levels than its most comparable peer, JB Hi-Fi ((JBH)). While Dick Smith operates a distribution centre the broker does not believe this supports a higher relative inventory. The broker highlights an extreme example in the second half of 2012, when JB Hi-Fi's profit margin contracted substantially as Dick Smith, then owned by Woolworths, and Woolworth's Sight & Sound cleared excess inventory in an already-soft retail environment.

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CIMB has reviewed its valuation consideration for Australian online media. Share prices and earnings multiples are at high levels and the broker's analysis indicates that valuation themes for Australian stocks are consistent with global comparatives. Yet expansion in multiples with no accompanied expansion in earnings does nothing to resolve valuation concerns, in CIMB's opinion. A case in point is REA Group ((REA)), which has grown its share price strongly over the past three months, driven entirely by price/earnings expansion as profit forecasts were revised slightly lower. Similarly, Seek ((SEK)) has enjoyed reasonable share price growth but the profit revisions were flat. Trade Me ((TME)) and Carsales.com ((CRZ)) are in the same mould, although the broker does envisages earnings upside at multiples which represent better value and a greater degree of safety with these two.
 

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