Tag Archives: Media

article 3 months old

Weekly Broker Wrap: Online, Consumers, Retail And High Conviction

-Costs a concern for SEEK
-Trade Me margins unsustainable
-Consumer electronics vulnerable
-Housing exposed retailers outperform
-Dick Smith wins share
-Genuine growth in some small caps
 

By Eva Brocklehurst

Market dominance is a key factor in the ability of online classifieds sites to exercise pricing power. BA-Merrill Lynch has compared Australasian sites with their global peers, finding that Seek ((SEK)) is one that appears unable to absorb recent growth in costs and maintain margins. Domestic margins have effectively been flat for the past four years. Merrills suspects underlying costs may impinge even when the employment cycle does turn positive.

REA Group ((REA)) and other property sites are more profitable but REA has the smallest premium compared with leading sites globally, when it comes to earnings margins. Merrills expects margin growth to accelerate as the significant investment in future products the company is making moderates, or revenue starts to offset spending. Carsales.com ((CRZ)) has the strongest market position of all sites and Merrills envisages scope to further leverage pricing power. Trade Me ((TME)) enjoys earnings margins well above peers, and 10% above levels that Merrills considers are sustainable, based on its market share. Rising costs are expected to pull these margins back into line.

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Citi queries whether headwinds are finally abating for Australian consumers, and whether the acceleration in spending priced into retail stocks will really eventuate. Higher house prices are encouraging, but to become more bullish the broker would like to see income and credit growth improve. At present, income growth is just 4%, while credit card spending growth is 5% and well below the long-run average of 15%. Australian savings fell to an annual rate of 8.7% in June 2014, down from 9.3% in June 2013. This reduction is good news for retail spending and may have boosted retail growth by 1.9% over the past year. Citi expects further reductions in savings of less than one percentage point, given persistent unemployment and low wages growth.

The broker expects retail spending to grow 5.0% in FY15. Cafes and restaurants are expected to outperform but apparel may slow, given weaker fashion trends. Consumer electronics remains the most vulnerable with uninspiring product releases. Citi retains a Buy rating on Super Retail ((SUL)) which has scope to turn around its leisure segment. Specialty Fashion ((SFH)) is also rated Buy, as the broker believes the company can lift gross margins via direct sourcing. JB Hi-Fi ((JBH)) is rated Sell, given the risk comparable store sales may decline in FY15.

Morgans notes those retailers of products predominantly exposed to the housing sector provided the most resilient results in FY14. The notable exceptions were Breville Group ((BRG)), largely because of North American weakness, and JB Hi-Fi, which experienced weakness in its July trading update largely because of soft tablet sales. Domino's Pizza ((DMP)), Ardent Leisure ((AAD)), Beacon Lighting ((BLX)) and Burson Group ((BAP)) provided the most impressive guidance and Morgans notes these are also preferred "structural growth" stocks, taking market share in their respective sectors. All trade at healthy multiple premiums as well. Kathmandu ((KMD)) continues to stand out from a valuation versus growth perspective. OrotonGroup ((ORL)) also interests the broker, with strong earnings growth expected in coming years against the background of a reasonable valuation.

The technical consumer goods market declined 3% in the June quarter, which UBS notes is the second largest quarterly decline in more than three years. Recent data for the industry indicates housing categories are improving as consumers trade up, while market share is shifting in the IT category. Major appliances are heading in the growth direction and this is positive for Harvey Norman ((HVN)). Dick Smith Holdings ((DSH)) appears to be winning market share at the expense of JB Hi-Fi. UBS remarks that consumers appear to be reacting positively to Dick Smith's "trading mentality" such as weekly deals. Further embedding the trend is the greater reliance at JB Hi-Fi on post-paid telecommunications. UBS continues to believe there needs to be a reaction from JB Hi-Fi to lift like-for-like sales.

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Reporting season has crystallised several changes to Morgans' High Conviction list. One of the biggest surprises was the small cap stocks which recovered lost ground, driven by genuine growth stories, such as that of Domino's, M2 Telecommunications ((MTU)) and Slater & Gordon ((SGH)). The broker has several new small ideas such as Shine Corporate ((SHJ)), GBST Holdings ((GBT)) and Mantra Group ((MTR)), which tap similar characteristics but on more attractive valuations. Overall, dividends remain the over-riding motivator for investors. Hence, the broker's high conviction ideas blend high quality dividend growth stocks such as Telstra ((TLS)), Transurban ((TCL)) and Origin Energy ((ORG)) with growth stories like Challenger ((CGF)), SEEK and Shine.
 

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article 3 months old

iSentia’s Strong Growth Revealed

-Strength from media move online
-Variety of revenue streams
-Asian potential
 

By Eva Brocklehurst

ISentia ((ISD)) is a market leader in an attractive industry. This is Macquarie's view of the recently-listed stock. The increased fragmentation of media channels and growing importance of online and social media are the main drivers of the company's growth. UBS believes iSentia is well placed to make accretive bolt-on acquisitions across the Asia Pacific (APAC) region.

So what does iSentia actually do? The company has become a media intelligence network, catering to both corporate and government clients. ISentia monitors mainstream, online and social media and provides analytics and database services. As of 2013, iSentia was the largest media monitor in APAC, with 90% of the Australasian market share and 28% share in Asia.

Opportunities exist for revenue growth and the business is very scalable. The valuation premium can expand further as management delivers on expectations as a listed entity. The company has suggested paywall discussions with publishers are encouraging. The other spoke in the company's growth wheel is acquisitions, in Asia. Based on Macquarie's forecasts there is $20m in available cash to use for acquisitions.

The first eight weeks of FY15 are tracking as expected and UBS lifted forecasts after the results by 3-5% on the back of better cash generation and lower net interest. The transition of the company's SaaS platform is on track too. Brokers separate revenue sources into SaaS and VAS. SaaS is Software as a Service, a way of delivering applications over the internet. VAS is Value Added Services, massaging content to provide extra benefits to subscribers.

Maiden FY14 earnings were ahead of prospectus forecasts and Macquarie considers the beat was high quality, driven by revenue. Subscription penetration was slightly below forecasts but this has no impact on revenue. Still, Macquarie believes it is crucial that iSentia transfers as many clients as possible relatively quickly to a subscription model, largely as a defence against further changes in print content volumes. Connect and Newsboost - contact/database products - penetration was also below expectations. Management is confident of an improvement in this area, following updated IT functions.

Australasian growth was better than forecast, driven in the company's view by higher uptake of social media product. Asian revenues were in line with prospectus expectations. UBS expects the company will leverage its advantages in Asia with the multilingual MediaPortal Asia launch later this year. UBS factors in a 60% dividend pay-out ratio and forecasts imply increasing cash accumulation. The company did not pay a dividend in FY14, as expected.

UBS retains a Buy rating, noting the four pillars of the company's revenue stream are intact and being enhanced. One pillar emanates from a stabllisation of traditional media, which moving to subscription pricing and decreasing its reliance on volume-based print. VAS is being lifted by the upgrading of products online and on social media, with further scope to increase penetration. The third pillar is the leverage to growth in Asian media monitoring while the fourth is a highly scalable cost base which allows for accretive bolt-on acquisitions. The company is looking for further accretive opportunities in Asia.

Macquarie considers the business requires very little additional investment in terms of working capital and capex. The company has a strong market position in Australia and can increase prices in conjunction with technology upgrades. It has a low effective tax rate as it is eligible for R&D credits. The broker expects that once the company develops a listed track record, it should be able to increase its premium to the emerging leaders industrials, given an attractive growth outlook. Macquarie forecasts earnings growth of 15-17% in FY16-17.

The Asia-Pacific media intelligence industry is small in a global context, relative to the Americas and Europe, but has experienced stronger growth than the other two regions. Drivers of growth are the outsourcing from organizations of media intelligence and growth in the scope of usage.

See also, iSentia Has Potential To Impress on July 2 2014.
 

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article 3 months old

Has REA’s Upside Been Accounted For?

-High expectations in share price
-Outlook centres on agent conversion
-Depth listings need agent co-operation
 

By Eva Brocklehurst

REA Group ((REA)) garnered momentum in FY14 with the relentless migration of classified advertising online. The company's transition to listing/depth product revenue and away from subscription revenue for its real estate classifieds has driven earnings growth, with reduced fixed costs to agents. Will this continue? Most brokers agree the print component of real estate classifieds has fallen, and will continue to fall. This underpins the company's outlook but, given the stock is well priced, has all upside been accounted for?

Goldman Sachs believes the conclusion of the migration from print - which the broker forecasts will fall to 21% of real estate classifieds by FY17 - will test REA's business model, because of the competitive intensity and buyer concentration in the market. Moreover, REA's investments on the international front are unlikely to be a material driver of earnings at this stage. The broker retains a Neutral recommendation and downgrades future earnings growth forecasts. Goldman's target drops to $46.50 from $48.25.

Results may have beaten expectations but CIMB is not buying the long-term outlook. The broker believes the composition of the result leaves a lot to be desired. REA did not provide any FY15 guidance. CIMB remains concerned about agent resistance to the new market-based pricing, and agents are necessary to drive the company's depth strategy. The broker believes agents are worried they will be distanced from their commission pool and are looking at ways to reduce REA's dominance of the online market.

CIMB considers depth listings - where value is gleaned from more detailed advertising - benefit agents and REA more so than the vendor of the property, so it remains important that REA work with agents. The broker does not believe there is a case for a material change in the level of real estate advertising expenditure over the medium term. This is heightened if REA is not working with agents to grow advertising expenditure. A Reduce rating is retained. In CIMB's view, stocks priced for perfection must deliver and this means REA.

Credit Suisse takes the other tack, upgrading to Outperform from Neutral. The broker was surprised by the fall in the share price in response to the result and believes this has created a near-term buying opportunity. Strong growth is expected to continue in FY15. The broker believes REA still has significant opportunity to grow share of real estate transaction spending. Ongoing investment is likely to limit near-term margin improvement but Credit Suisse expects there is potential for margins to rise significantly, if the company decides to ease back on discretionary investment spending. Margin disappointment is probably the source of the market reaction, in Macquarie's opinion, as the conversion rate of incremental revenue to earnings is lower and reflects ongoing investment in product and promotions. Macquarie expects this level of spending to continue but also considers the share price is full and retains a Neutral rating.

UBS has also upgraded, to Buy from Neutral. The stock remains the broker's preferred play in the Australasian online segment. Upside to the broker's price target ($49) hinges on execution and the success of new products as well as delivering acquisition value beyond the recent acquisition of a stake in iProperty ((IPP)). The broker has lifted forecasts for FY15-18 by 4-8%, factoring in the market-based pricing and new product initiatives.

Earnings are the most relevant metric in the results for Deutsche Bank and, despite strong growth, the slight miss to FY14 forecasts shows just how high expectations have built. The share price reaction is probably overdone, in the broker's opinion. Management is reluctant to acknowledge that the stake in iProperty, and a sale of securities purchased on market that were sold at a profit, represents any change in strategy, but Deutsche Bank considers this signals a shift to a more acquisitive approach. The company also provided limited detail on the take up of its new model by real estate agents but the broker's checks suggest a reasonable number have made the transition. Deutsche Bank remains comfortable with forecasts for 45% growth in depth revenue in Australia and retains a Hold rating.

JP Morgan observes some protest regarding the changed pricing model, in that a small percentage of the agent market has combined to attempt to barter with REA on the matter. The broker understands the situation remains unresolved as REA is yet to engage. FY14 revenue was up 30% but the extent of cost growth meant a small miss at the earnings line for the broker. The economics of the industry remain favourable but, given trading multiples and new management, the JP Morgan prefers to retain a Neutral recommendation.

On FNArena's database there are three Buy ratings, three Hold and one Sell. The consensus target is $46.98, suggesting 6.2% upside to the last share price, and compares with $46.34 ahead of the results.
 

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article 3 months old

Weekly Broker Wrap: Buy-Backs, Electricity, Advertising, Airlines And Retail

-More off-market buy-backs likely
-NSW electricity margins to increase
-Macquarie adds Transpacific as a key pick
-FY14 a likely trough for airlines
-Spending to improve but retailer outlook mixed
 

By Eva Brocklehurst

Credit Suisse suspects that off-market buy-backs will become more popular. The federal budget in May confirmed that on July 1 2015, the Australian corporate tax rate will fall to 28.5% from 30%. One implication from this change is it will make it incrementally harder for Australian corporations to distribute franking credit balances to shareholders. Hence, there is an incentive for those paying tax in Australia to distribute these balances ahead of the changes to the tax rate. One option is via an off-market buy-back.

Prior to the last reduction in Australia's corporate tax rate in 2001, when the rate was reduced to 30% from 34%, Credit Suisse observes there was a significant pick up in buy-back activity. Moreover, those companies that announced off-market buy-backs in the lead up to the 2001 tax rate reduction outperformed the broader market by an average of 15% over the year leading up to the announcement. Thus companies with the greatest potential for this form of capital management are likely to be rewarded by the market over the next year. The broker suggests investors tilt their portfolio to a basket of stocks exposed to this theme.

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The short term margins for electricity retailers appear to have increased in the past month and once the carbon tax is removed, the margin UBS measures will appear to reduce. Nevertheless, longer term, the broker believes the path of deregulation will lead to higher margins for incumbents. The broker cites Victoria's privatised network as an example and the broker's charts show the 5% reduction in price gained in Adelaide following full deregulation did not seem to last that long. Churn is a secondary indicator of competitive conditions and this remains subdued. UBS concludes that full deregulation in NSW will lead to higher margins for the incumbents as well as higher churn and gain of market share by new entrants.

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Macquarie has updated high conviction calls with the addition of Transpacifc Industries ((TPI)) to its list of best ideas. The stock is rated Outperform with a total return of 25% expected. The broker thinks the Australian waste market is a growth industry with low levels of cyclicality and Transpacific is now a substantially different company after the sale of its New Zealand business. AWE ((AWE)) is removed from the list of the broker's best ideas, having outperformed the ASX200 Accumulation Index benchmark by 16.6%. The broker still retains an Outperform rating.

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Goldman Sachs is lowering advertising market forecasts for 2014 given sluggish momentum in the first half. The new 2014 forecast is for growth of 0.7% compared with 1.6% previously. There are two areas of strength the broker has found. These are metro radio and job advertising. The broker remains wary of the weak momentum heading into the second half of the year, particularly given the sizable political spending in the prior period. The big picture shows the ad market has probably been flat for four consecutive years.

Hence, Goldman is focused on winners and prefers SEEK ((SEK)) for its strong job ads business, or audience winners such as Nine Entertainment ((NEC)), Seven West Media ((SWM)) and Prime Media ((PRT)). The broker is cautious on traditional media. The broker upgrades Prime to Buy from Neutral, on its strong revenue share outlook and attractive valuation and upgrades APN News & Media ((APN)) to Neutral from Sell based on improving metro radio. The broker thinks, in the near term, there is minimal impact on radio broadcasts from online streaming. As streaming gains scale it could become a serious competitor in advertising budgets in the digital radio area in around three to five years, in Goldman's view.

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JP Morgan expects FY14 will signal a trough in earnings for airlines. Qantas ((QAN)) has guided to no new domestic capacity in the first quarter of 2015 and Virgin Australia ((VAH)) has also shown restraint. This should signal the beginning of a more rational duopoly and allow excess capacity in the market to be absorbed. In addition, Qantas' $2bn cost savings and asset sale could allow it to repair the balance sheet and gain efficiencies. JP Morgan estimates an underlying pre-tax loss of $619.9m for Qantas and $247.1m for Virgin Australia. This represents a significant deterioration on FY13 for both companies. In the case of Qantas the broker thinks the poor result will reflect yield and load factor deterioration in both domestic and international operations. In Virgin Australia's case, underlying operating metrics will have improved so the decline in profitability is related to operations expenditure.

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Consumer spending should improve over the next six months in Morgan Stanley's opinion. Most consumer oriented companies have delivered their warnings so the broker does not think the results will surprise all that much. Myer ((MYR)) and Woolworths ((WOW)) have the highest risk of weak results and outlook statements and while Coca-Cola Amatil ((CCL)) has rallied on turnaround expectations, the broker thinks this is not warranted. The broker believes trading conditions will improve as cash rates remain low, the housing market is robust and savings rates are still high while the online retail headwind is ebbing. The broker just thinks it may take more time.

Morgan Stanley likes the healthy sales outlook for JB Hi-Fi ((JBH)), particularly in games, and the conservative expectations for Flight Centre ((FLT)), which continues to gain share across the leisure and corporate areas and improve internationally. Woolworths' Masters business break even point is likely to have been pushed out and the broker suspects food and liquor margin growth is slowing. For Coca-Cola Amatil, the broker thinks cost cutting is failing to offset cost inflation and weak carbonated soft drink trends.
 

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article 3 months old

Seek Set To Run

By Michael Gable 

Yesterday saw the ASX200 close at a 6-year high of 5539.9. It quickly brushed off last week’s global jitters and is still set to grind higher into the domestic reporting season, which commences in August. There’s a very interesting chart for Seek ((SEK)), indicating that a big move is just around the corner.
 


When we looked at SEK back in May, it appeared as though it was breaking to the upside. But it couldn’t follow through and instead continued the sideways drift. This is actually making the stock look even more bullish. The previous rally during February saw the stock rally up about $6.50 in the space of 4 weeks. Now, in about four and half months, the stock cannot retrace even half of the move that it made in February. It clearly indicates that the bulls are still in control. The longer that SEK uses up time here, the stronger the move when it eventually breaks to the upside. That is, a break to the upside could see it reach the $20’s in a very short amount of time. So SEK is one worth watching on a daily basis here to ensure we can catch the break as soon as it happens.
 

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

Carsales Expands Into Finance

-Co-benefits in Stratton acquisition
-Private market not well served
-Good leverage for Carsales
-Historical growth rates slowing
 

By Eva Brocklehurst

Online market place, Carsales.com.au ((CRZ)), has acquired a 50.1% stake in a domestic finance broker, Stratton Finance, for $60.1m. This is the company's fourth acquisition in 18 months but its first in the finance arena. Limited financials have been disclosed yet but brokers have found the transaction appealing. Carsales seeks an opportunity to grow broker share of the vehicle finance market as well as Stratton's share of broker commissions.

The founders of Stratton will retain the minority stake and Carsales will control the board and consolidate the earnings. Stratton generates commission revenue from loan financing, for predominantly private vehicles, with no up-fronts and no trailing commissions. Carsales expects the acquisition to be immediately accretive and will fund the investment via debt.

The deal is a structural hedge on shifting consumer behaviour - towards more private transactions and away from dealers, in Citi's view. Using what detail was provided and industry knowledge, the broker estimates Stratton will generate a profit of $10m and gross revenue of $37m in FY15. The business is already profitable on a standalone basis and this signals to Citi the downside risk is modest.

Deutsche Bank also thinks the deal is a mild positive and envisages a path whereby the relationship with Carsales can enhance Stratton's growth profile. Stratton products had been wound back on the Carsales website so increased promotion could lead to further earnings growth for the Stratton business. This is dependent on not being seen as threat to other dealer finance and insurance brokerage earnings on the Carsales site. Moreover, Deutsche Bank observes the majority of display advertising is provided by finance and insurance companies, so Carsales needs to be careful not to upset potential advertisers.

Stratton is one of the highest traffic-generating vehicle finance websites in Australia, and brokers expect significantly greater value can be realised longer term for Carsales if it can leverage this large database of new and used car buyers, and Stratton can cross-sell into Carsales' private business. Macquarie observes Carsales has an exceptionally strong franchise in vehicles and scope for significant growth in adjacent vertical markets and complementary products. Finance companies have tighter relationships with customers and hold more data on these customers than Carsales does. This can be valuable for generating leads. Stratton also buys cars in bulk from dealers to sell. Macquarie believes not only is there a clear growth opportunity in Stratton, the acquisition could also be seen as defensive for Carsales as well. To counter the perception of dealer conflict, the broker notes Carsales is promoting Stratton as operating in the private-to-private marketplace.

BA-Merrill Lynch anticipates that display advertising in online classifieds, as it matures, will transfer to a model more focused on providing leads to the advertiser. In Carsales case this is particularly relevant for finance and insurance providers. Finance and insurance are a relatively small, albeit a significant part of the company's display ad revenue, Merrills notes. Dealers are already significant players in vehicle finance but the private market is not particularly well served, and Carsales is well situated to leverage this opportunity. As there is no visibility on current earnings or outlook, Merrills takes a conservative approach and values the Stratton business at the purchase price. Despite the soft outlook for the domestic economy, Merrills considers used cars to be the least cyclical of the vertical online classifieds, and with that in mind reiterates a Buy rating.

Carsales can bring value to the Stratton business, in Credit Suisse's opinion, as it builds an expanding portfolio outside its core Australian used car market. In this instance, the broker thinks there are similarities with the strategy that has added value for SEEK ((SEK)) shareholders. The broker also observes Carsales is not intending, at this point, to compete with dealer finance.

UBS stands out with a Sell rating. The broker takes stock of the company's long-term share of addressable markets and international assets and observes growth is slowing from historical levels in terms of volume, market share and display. Therefore, the company needs to deliver earnings growth via yield, cost management, new products and acquisitions, all of which carry higher risk. The broker thinks the positive reaction to the Stratton news is overdone.

On FNArena's database UBS is the lone Sell rating. There are seven Buy ratings. The consensus target is $11.78, suggesting 5.2% upside to the last share price, and compares with $11.69 ahead of the announcement. Targets range from $8.45 (UBS) to $13.75 (BA-Merrill Lynch).
 

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article 3 months old

iSentia Has Potential To Impress

-Organic, acquisition upside
-High barriers to entry
-Strong industry growth
 

By Eva Brocklehurst

iSentia ((ISD)), formerly Media Monitors, listed on ASX in June and the share price has performed strongly over the month. The attraction for brokers is in a company with an entrenched position in Australasia as a media intelligence provider.

Moelis initiates coverage on iSentia with a Buy rating and $2.80 target price, despite the stock currently trading at 15% premium to the $2.04 IPO price, confident that the company has value on offer in Asia Pacific. Around 80% of revenue is derived in Australasia but Asia is growing strongly. The company has a market share of 28% and this is five times greater than its nearest competitor, US-based Meltwater. Most participants address only a single market segment while iSentia operates in eight countries, with a multi-segment and multi-lingual offering.

The company has revenue sharing arrangements with almost all broadcasters and publishers as well as social media players and a wide client reach that includes more than 92% of the top 100 global brands. The company has the ability to process 100 stories per second every day of the year.

Moelis expects earnings to rise to $50.2m by 2016. The compound annual growth rate between 2013 and 2015 is estimated around 34%, supported by geographic and product expansion, increasing take up of social media, and scale benefits. The company is expected to offer a dividend yield of 2.9% in 2015, rising to 3.4% by 2016. Moelis thinks an FY15 price/earnings ratio of 17 times, based on the prospectus forecasts, signals an attractive investment opportunity given the robust growth profile and high qualitative features. The broker considers earnings risk is to the upside, both organically and via acquisitions, as the prospectus numbers assume no price increases in Asia. Bolt-on acquisition opportunities should be facilitated by balance sheet capacity. Net debt is expected to reduce over the forecast period in the absence of acquisitions, given the strong conversion of operating cash flow.

The broker considers the primary risk is competitive behaviour, although iSentia's superior offering remains a barrier. Declines in volume from traditional mainstream print media may result in lower demand for some products, and was one reason behind a 4% decline in revenue in Australasia in FY13. Moelis thinks this will be more than offset by increased growth in online and internet/social media monitoring.

The company has a market software service, providing clients with media intelligence. Moelis estimates this is a US$340m industry which is growing at 14% per annum. Barriers to entry are high, in terms of scale, client retention and proprietary technology. The company has built a position that is hard to replicate, based on aggregating content, search technology and client relationships. Moelis believes the company is very well positioned against the newer competitors such as Google.
 

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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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article 3 months old

Weekly Broker Wrap: Oz Retailers, Liquor, Macro Views, Media And Credit

-Are Oz retailers appropriately priced?
-Coles wants to improve liquor business
-Morgan Stanley cautions on Oz equities
-Goldman selects winners in media
-Is commercial property credit a problem?
 

By Eva Brocklehurst

A warm start to winter has not pleased Australian retailers. A number of them have downgraded expectations and Deutsche Bank believes, of those that are yet to downgrade forecasts, Myer ((MYR)), Premier Investments ((PMV)) and Specialty Fashion ((SFH)) carry the most risk. Weakness in spending after a federal budget is not unusual in the broker's opinion. Property and equity markets are buoyant and this has historically supported improvements in sentiment. Thus, the broker believes the sector is appropriately priced after the recent contraction in multiples. Moreover, while the drop in sentiment has been across the board, the lower socioeconomic consumers are more affected. Hence, the broker envisages considerable risk to Specialty Fashion earnings, with Premier Investments and Myer being under more pressure than David Jones ((DJS)).

Upside risk is present for Flight Centre ((FLT)). Deutsche Bank thinks trends should improve as travel continues to be a structurally strong category. The broker likes Harvey Norman ((HVN)) for its exposure to the property cycle and potential for operating leverage, although acknowledges the stock is not immune to soft consumer sentiment. JB Hi-Fi ((JBH)) sales have probably been affected by the weak trends but the broker thinks robust margins should provide some reprieve. Myer may carry downside risk for FY14 but, longer term, free cash flow yield suggests the stock is cheap and there is potential for multiples to expand on even modestly positive news. Kathmandu ((KMD)) is also considered inexpensive, given its growth profile, and Deutsche Bank believes it offers substantial brand equity and offshore expansion.

***

The incoming Coles CEO, John Durkan, signalled his disappointment with the liquor business at the Wesfarmers ((WES)) strategy briefing. His principal concern was the lack of customer awareness and engagement. Coles operates Australia's third largest liquor business behind Woolworths ((WOW)) and Metcash ((MTS)). UBS estimates Coles liquor has an earnings margin of around 2%, which is below the industry leaders at over 6%. The broker estimates the earnings opportunity for Coles in liquor equates to a 4% uplift to Wesfarmers' FY15 pro-forma earnings.

The key to driving this uplift involves productivity, lifting traffic through brand and marketing, and increasing private labels in wine. That said, the broker believes Mr Durkan has a hard task ahead and margin growth, in the absence of an accelerated lift in liquor penetration, will slow in the medium term. The company has said it does not aspire to Woolworths' food and liquor margins, despite the market often touting the difference - 280 basis points on FY13 numbers - as a major opportunity. UBS believes this reflects the fact that the opportunity is not as big as it first seems.

***

Morgan Stanley has updated key macro views and model portfolio recommendations, becoming more cautious on the short-term outlook for Australian equities in the face of a weaker iron ore outlook and a stubbornly high Australian dollar. The federal budget has also created a mini crisis of confidence and, combined with the former two factors, increases the risk of earnings forecasts being delivered in FY14, and growth rate forecasts for FY15. A sustained recovery in housing will be crucial to achieving the transition from the resources boom and, should the recovery stagnate, the broker expects the Reserve Bank of Australia to consider a change in both rhetoric and action. Morgan Stanley does not rule out reductions in official interest rates should condition deteriorate more sharply.

In the model portfolio the broker adds Stockland ((SGP)) to enhance domestic housing links and switches to Henderson Group (((HGG)) from Perpetual ((PPT)) to gain exposure to a call on stronger European equities. Both James Hardie (JHX)) and ALS ((ALQ)) are added, as globally-exposed stocks with strong business models. Treasury Wine Estate ((TWE)) is removed, given recent movement in the share price, and DUET ((DUE)) is added for defensive exposure. The broker adds weight to high quality growth stocks such as Domino's Pizza ((DMP)), Navitas ((NVT)) and REA Group ((REA)).

***

The latest data on agency advertising confirms to Goldman Sachs that the strong market in the second half of 2013 did not continue into 2014. Total agency ad bookings fell 2.8% in May and all main media types endured declines except metro TV and online display. A lack of a rebound in May from April's decline of 6.5% suggests momentum has softened. The data reflects poor consumer confidence and patchy business conditions, in the broker's view. Goldman has downgraded ad market growth forecasts for 2014 to 1.6% from 3.6%, and for 2015 to 4.0% from 4.7%.

In the current environment Goldman is focused on winners, either structural winners taking market share or audience winners taking revenue share. In the former camp the broker prefers SEEK ((SEK)) and Carsales.com ((CRZ)) and in the latter Nine Entertainment ((NEC)) and Seven West Media ((SWM)). The broker is cautious about traditional media that is experiencing market share and audience losses such as Fairfax Media ((FXJ)) and Ten Network ((TEN)). JP Morgan thinks this latest advertising data signals a softer revenue outlook for the first half of FY15. This means leverage for traditional media and capital allocation for online media will be foremost in investors' minds. The broker is Overweight Carsales.com, Seven West and Prime Media ((PRT)) and Underweight on Fairfax and Ten.

***

UBS observes that a large portion of business credit is being allocated to commercial property. Data from APRA for the major banks indicates that, during the last year, exposures to office commercial property have grown by 9.1%, retail by 9.2% and industrial by 10.3%. Westpac ((WBC)) and ANZ Bank ((ANZ)) have shown the biggest increase in commercial property exposure, growing exposures 11.1% and 9.3% respectively over the last 12 months. The broker does not believe the growth in the major banks' exposure to credit in this area is a bad thing per se, especially as Australian property players have been de-leveraging since the GFC. Nevertheless, if underwriting begins to slow, leverage ratios rise, or occupancy and rental yields come under pressure, it may again become an issue for the banks. For now, with improvements in asset quality, the banks' earnings outlook remains robust and the recent rally in bonds provides a further tailwind.
 

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article 3 months old

Upside For REA


Bottom Line 03/06/14

Daily Trend: Down
Weekly Trend: Up
Monthly Trend: Up
Support levels: $41.73 / $35.66
Resistance levels: $48.28 / $52.45

Technical Discussion

REA Group ((REA)) is involved in real estate which includes online advertising and associated services. Its online advertising services includes advertising of residential properties, commercial properties for sale and lease and provision of online display advertising space for advertisers in various industries. The Company’s residential and commercial property Websites are realestate.com.au and realcommercial.com.au. Its REA Media serves the property development and display media markets. In January 2014, REA acquired 1Form Online Pty Ltd. For the six months ended 31 December 2013 revenues increased 30% to A$209.4M. Net income increased 37% to A$70.7M. Broker/Analyst consensus is “Hold”.

Reasons to buy:
→ The March quarter update indicated a continuation of recent growth trends.
→ REA should continue to reap the benefits of its switch to a price per listing model from a subscription model.
→ The new CEO appointed this week may spend cash on acquisitions.
→ The longer term trend remains strong with price recently retracing to support.

REA has been an extremely strong trending stock over the years with a gain of over 428% between August 2011 and the recent all-time high made in March this year.  Since the top was made a healthy retracement has taken place.  The 20% pull-back is being viewed as being healthy in the bigger scheme of things whilst also opening the door for the trend to kick back into life.  Short term weakness is feasible although the next significant move should be to the upside.  Also note that the retracement has come back down to tag old resistance/new support in a clear 3-leg movement.  This is very typical at this stage of the trend. Although higher prices have been seen over the past few weeks volume has been extremely lacklustre.  This trait needs to change quickly if upside traction is going to be maintained.  On a more positive note bearish divergence on the weekly chart (not shown) has recently unwound which can only add weight to the bullish case.

Trading Strategy

Having just seen an A-B-C correction down to support an opportunity has arisen.  Buy following a break above last Thursday’s high at $45.96 whilst placing the initial stop one tick beneath the recent pivot low at $41.72.  The initial target sits at $58.52 though longer term there is no reason why those levels can’t be exceeded by a substantial margin.  A break beneath the initial stop before entry is reason to cancel pending orders.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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

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