Tag Archives: Media

article 3 months old

Nine Entertainment Excites

-Targeting 40% TV ratings share
-StreamCo launch in FY15
-News investment pays off
 

By Eva Brocklehurst

Nine Entertainment ((NEC)) is showing form to the detriment of its rivals in Free-To-Air TV (FTA TV). The company has held its inaugural investor briefing and brokers came away with increased confidence. Nine appears well placed to leverage a recovery in the advertising market, with its best ratings in eight years, while new initiatives in Perth and Adelaide provide potential upside to earnings expectations.

Macquarie observes the growth in ratings in both of the company's newer markets has outpaced gains in the established east coast markets. Advertising remains subdued but that is no surprise to brokers. Management confirmed weak data which showed the metro TV ad market falling 13% in the year to April 2014. This largely reflected the timing of Easter and the moving of 13 episodes of The Voice to May from April. Nine believes May and June bookings have stabilised but still suspects ad market growth could be negative for FY14.

Nine is confident its ratings momentum and programming strategy will deliver a 40% market share by 2015. The company is on track to launch a subscription video on demand service (SVOD), StreamCo, in FY15. The investment in this platform is $10-15m higher than Macquarie previously had expected, as Nine tackles the market more aggressively with a view to obtaining upside if the launch is executed successfully. Goldman Sachs has kept earnings estimates for key operating divisions unchanged but changed the treatment for StreamCo, with start-up costs now considered as operating expenditure. Break even for StreamCo is expected to be achieved in FY18. Goldman downgrades FY15 and FY16 estimates by 5.2% and 8.6% respectively, given start-up operating losses for StreamCo, but retains a Buy rating.

Goldman also welcomes Nine's initiatives to boost its brand and presence in Perth and Adelaide, such as investment in local news and increased engagement with the local community, which should drive improvements in ratings and revenue. Management has also stated it will fight for cricket rights but remains wary of potential cost increases in the next round of negotiations. Nine will look at AFL rights differently now it owns Adelaide and Perth and will not necessarily bid for the rights in order to win ratings. Nine believes the consolidation of media agencies is likely in the near term, resulting in increased buying power, which could place more commercial downward pressure in the future. TV and digital are envisaged becoming increasingly co-dependent and Nine is in the process of centralising TV and digital sales teams.

CIMB is more confident in the key businesses, particularly Nine Events and digital. CIMB agrees there is a ready market for SVOD but is concerned about the level of investment required and the risk of audience fragmentation in FTA TV. Still, the broker accepts Nine has a desirable asset mix and market share, and can justify a valuation premium to its FTA TV peers. One item that still needs to be considered is the overhang from the company's pre-IPO status. The counter side of any selling down from these shareholders will be increased liquidity and an increase in index weightings. Another area of concern for CIMB is the broader market outlook in the second half of 2014, where the broker thinks weakening consumer and business sentiment, and the cycling of federal election comparatives, will cause metro FTA TV advertising expenditure to decline 5%.

In traditional media UBS prefers Nine, as the network targets that 40% metro share, driven by programming improvements, one-off sports events and a turnaround in the Perth and Adelaide business. UBS also thinks news investment is paying off with the 6-7pm time slot ratings now at 44%, up from 38% in 2010. Earnings forecasts for FY14-17 are cut by 6-9% to reflect the higher SVOD investment and a softer advertising market in FY14, despite factoring in a higher revenue share. The broker finds the valuation attractive and believes there is upside if the company is successful in delivering and sustaining a 40% metro FTA TV revenue share. The broker also thinks Nine will be the prime beneficiary of any potential changes to media legislation which may crop up early next year.

Nine Entertainment has three core divisions - FTA TV, including Nine Network and NBN, Nine Events, including Ticketek, Allphones Arena and Live, and Nine Digital, including Mi9 and Nine Ventures. Nine Network accounted for 74% of earnings in FY13. FNArena's database has six Buy ratings, no Hold and no Sell. The consensus target price is $2.57, suggesting 16.9% upside to the last share price. Targets range from $2.40 to $2.75.
 

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article 3 months old

Treasure Chest: Market Underestimating Downside Risk For Southern Cross

By Greg Peel

When Southern Cross Media Group ((SXL)), owner of 78 radio stations across the country, 19 regional free-to-air television licences and 80 entertainment websites, posted its first half result back in February, brokers for the most part thought the result was a fairly solid one. Efficient cost management had helped to offset falling radio and TV ratings and a generally weak Australian advertising market.

Underpinning SXL’s value, in broker views, is the group’s takeover potential in light of easing of cross-media ownership laws the Coalition government might undertake, as is its wont.

But SXL ratings slipped through FY13, slipped further in the first half of FY14 and, according to the latest survey, have not yet stopped falling. In FY13, SXL’s metro radio business generated around $120m more in revenue than major rival Australian Radio Network and around $30m more in earnings. Its radio audience share has now declined to 23% from 28% over calendar 2014, and TV ratings have continued to edge down.

As a result, Credit Suisse yesterday downgraded its earnings forecasts significantly to sit 20% below consensus for FY15. The broker cut its target price to $1.20 from $1.40 and retains Underperform. The broker does not include a takeover premium in its valuation given this would mean current “reach” rules would have to be abolished.

Citi, on the other hand, does see SXL as an attractive M&A target, pending required regulatory changes, but suggests that attraction is diminishing along with SXL’s earnings trajectory. Citi, too has slashed forecasts, and has followed up with a cut to its FY15 dividend forecast to 4.5cps (consensus 8.8cps) as the company focuses on paying down debt.

The big hit came for SXL when its flagship 2DayFM radio network last year suffered the defection of its ratings-winning Kyle & Jackie O Sydney breakfast team. Never mind that management had stood by bad-boy Kyle every time he played the tool and offended half the population, standing him down for token sabbaticals while feigning disgust. Sandilands was a consistent ratings winner, and that’s all that matters, as was obvious when the team was poached by KIIS FM.

Losing a flag bearer will always hit a broadcasting company, and it takes time to recover. But after making several talent changes, 2Day is yet to stabilise. Radio audience losses are not just confined to Sydney breakfast given SXL’s net metro share is down 12% in Melbourne as well as 40% in Sydney for an 18% group loss, Citi notes.

SXL’s metro combination of 2Day and TripleM is now ranked number three in Sydney behind rivals ARN and Nova, two in Melbourne and two in Brisbane, having held number one position in all three for no less than five years. While, unlike ARN and Nova, SXL stretches to five-city “national” coverage, this implicit premium is also being eroded, Citi believes.

Southern Cross now faces an uphill battle of rebuilding ratings against stronger competitors, Citi suggests, which could take years to play out. While SXL shares are already down 29% year to date, Citi has today downgraded to Sell, “as the market is yet to appreciate the potential downside risk”.

Citi has cut its target to $1.05 from $1.50.

This leaves the FNArena database consensus target at $1.54, but that average is weighted towards the five brokers covering SXL who have not updated their views since the February result. CIMB tenuously held onto an Add rating last month despite slashing forecasts, while Citi and Credit Suisse are now both on Sell (or equivalent). Three Buys and two Holds make up the balance.

 

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article 3 months old

Weekly Broker Wrap: Tax, Crops, Budget, Earnings Risks And Advertising

-Tax burden douses confidence
-US corn, soybean prices overshot
-Oz budget may dampen spending
-Where's the FY15 earnings risk?
-Cinema poised to gain ad share
 

By Eva Brocklehurst

Macquarie observes that tax burdens have been rising on labour income in the world's major economies, as governments seek to rein in budget deficits. According to OECD statistics, personal income tax has increased in 25 of the 34 member countries over the past three years. Macquarie suspects that the increased tax burden amidst declining real wages will produce a negative effect on consumer confidence and growth in domestic demand.

The analysts maintain that, if taxation burdens on labour continue to rise, this will disrupt recovery in household balance sheets, reduce consumption taxes, increase income inequality, and constrain investment and GDP growth in the long run. Macquarie concedes many countries need to cut down on unproductive spending - increased as a result of the global financial crisis - and raise tax revenue. What the analysts question is the increased taxation of labour income.

Taking the OECD analysis on Australia, Macquarie notes the single average worker faced an increased tax burden of 0.8 percentage points between 2011 and 2013, higher than the OECD average of 0.3 percentage points. The average tax burden for single income couples with two children rose by 2.7 percentage points in those years compared with the OECD average of 1.4 percentage points.

What's important, in the analysts' view, is evaluating the implications of rising tax burdens on labour income, prior to resorting to tax-biased methods of fiscal consolidation. They believe policy reform for OECD countries should come via: implementing more progressive taxes, so that lowest paid workers face low marginal tax rates without discouraging labour force participation; shifting tax bases towards consumption to increase employment and reduce the efficiency cost to taxation; using tax polices to affect the number of hours worked rather than the participation choice; and increasing taxes on natural resources and energy consumption, in order to minimize the negative externalities on economies.

***

From one dry area to another. Macquarie's agricultural analysts note cold temperatures in the US have delayed corn planting but this has now started to pick up and the recent rally in corn prices may have caused farmers to increase their intended corn seeding area. Soybean plantings have just begun but the analysts are concerned at the late heading of winter wheat, developing at the slowest pace for the last 20 years. In the areas where soybeans follow on this could inhibit the farmer's ability to plant. The analysts note the delays have allowed a risk premium to remain in place but they remain bearish on soybeans, believing prices have overshot and are liable for correction, led by corn. As the farmer starts planting he starts hedging and this should drive a correction in prices. If reasonable pollination in soybeans and blooming in corn ensues, then a sharp dip in prices is expected at the end of the year.

Dry conditions in the southern US have meant some loss of wheat production is near certain. The cold winter and slow emergence of the crop from dormancy means there has been more time to see if rainfall can help in the critical growth stages. While a drop in US wheat production is likely, the analysts expect it to coincide with a large drop in demand because of a far smaller import program from China. Nevertheless, US wheat prices could be supported by any meaningful Chinese import volumes. This is because, if the El Nino develops as expected in in the southern hemisphere this winter, the Chinese may be compelled to buy US wheat, fearing Australian supplies will be weak.

***

BA-Merrill Lynch believes the federal budget could provide headwinds to consumer spending. Initiatives such as the proposed debt levy, potential cuts to welfare, unwinding of the School Kids bonus and the Medicare co-payments could be as much as $9.4bn, representing 4% of total retail sales and 11% of discretionary retail sales. Merrills' economists are predicting that household disposable income growth in FY14 will be the lowest since 1998.

The broker notes Australian Bureau of Statistics' data shows an increasingly greater proportion of expenditure is allocated to necessities such education, utilities, health and insurance. Pressure on discretionary purchases will come at a poor time for retailers, the broker contends. These retailers will have to deal with a lower Australian dollar going into FY15 by raising prices. If consumer spending decelerates after the budget the ability to pass on price increases may be limited, which would impact gross margins.

As the "confessions season" nears, when companies are likely to tweak guidance for the upcoming financial year, BA-Merrill Lynch has taken a peak at where the earnings risk in FY15 could be coming from. The broker sees downside risk for the industrials ex banks. Consensus forecasts expect sales growth of 4.6% to translate to earnings growth of 11%. The broker notes margin expansion of this magnitude has not been seen for at least five years. Hence, Merrills suggests treating the forecasts for Adelaide Brighton ((ABC)), Sims Metal Management ((SGM)), Monadelphous ((MND)), UGL ((UGL)) and ALS ((ALQ)) with caution. The broker is more comfortable with the forecasts for Amcor ((AMC)), Brambles ((BXB)), Flight Centre ((FLT)) and Suncorp ((SUN)).

In terms of the current year the broker, in aggregate, is comfortable with forecasts. Stock specific risk is the main concern, along with a greater-than-usual reliance on second half sales. In the latter bracket the broker includes Ansell ((ANN)), Treasury Wine Estate ((TWE)), Cochlear ((COH)), Qantas ((QAN)), Virgin Australia ((VAH)), UGL and Southern Cross Media ((SXL)). On the other side of the equation those that could beat because of a lower reliance on the second half include Beach Energy ((BPT)), Brambles and Super Retail ((SUL)).

The broker also lists stocks for which earnings forecasts have fallen, but the share prices have risen over the past three months, as having potential to correct. These are Graincorp ((GNC)), Qantas, Caltex ((CTX)), AGL Energy ((AGK)), Mineral Resources ((MIN)), Harvey Norman ((HVN)) and Lend Lease ((LLC)). The opposite, where earnings have been upgraded but the share price has fallen, occurs with Bendigo & Adelaide Bank ((BEN)), ASX ((ASX)) and Perpetual ((PPT)). Merrills remains underweight in consumer staples and miners in the model portfolio, and considers banks, diversified financials and builders have solid momentum.

***

JP Morgan has hosted a call with media buyers about the advertising market. The broker found the year was off to a strong start in TV, helped by the Winter Olympics and the World Cup. The buyers expect up front volumes to be up 2% this year and TV remains a crucial part of advertisers budgets. Live events, particularly sports, are seen as increasingly valuable. Advertisers are relying even more heavily on live events, as audience fragmentation continues. The broker suggests the premium difference between live sport and general programming could widen even further.

The buyers believe cinema is poised to gain share. Cinema's audience is stronger when TV is weaker - Friday and Saturday. The medium's high engagement through sight/sound and the lack of skipping ability underscores its attraction, as well as the skew to a younger demographic. The broker thinks the premium to TV has historically been a hurdle to advertisers but more aggressive pricing recently should unlock more demand.

There continues to be momentum in the move to digital. Advertisers are increasingly embracing digital video and the buyers noted significant improvements in both digital and cross-platform measurement, whereby advertisers can increasingly evaluate digital media on par with traditional media. While digital media is gaining share TV is still dominating. Even YouTube consumption significantly lags TV in terms of the hours watched per day. Viewing video on digital platforms, including mobile, is growing rapidly, but still only accounts for about 6-7% of total viewing.
 

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article 3 months old

Ten Network Not Rating Well Enough For Brokers

-Ratings improvement difficult
-Limited financial capacity
 

By Eva Brocklehurst

Ten Network Holdings ((TEN)) reported a lacklustre first half result. The loss of $8.0m and TV revenue growth of 4.4% elicited a subdued response from brokers, who see not much in the way of catalysts for the upside in the near term. The least that's expected is a move into the black in FY15, although the likes of Credit Suisse and JP Morgan expect some loss to still be recorded at the bottom line.

A turnaround in ratings is looking less likely to Credit Suisse. There appear to be few opportunities in the near term. The AFL is locked up until 2017, there are no US output deals up for renewal and the broker does not think the Commonwealth Games will draw a large, permanent audience. There are two options for Ten, in the broker's opinion. Either increase investment in local content and event TV, or run a smaller, more profitable business on a lower revenue share by reducing costs and shifting the sales force to a more direct model. Either way, the stock looks expensive and the broker retains an Underperform rating. Moreover, a takeover or merger candidate seems unlikely to appear given the regulatory constraints, in Credit Suisse's opinion.

UBS acknowledges the company has decided to re-invest in content this year and broaden its audience reach, but a recovery in ratings is expected to take time and investment. Therefore, the broker's forecasts only factor in an eventual recovery in TV revenue share back to 24% by FY18, from the current 21%. At current prices, UBS thinks the market is factoring Ten returning to a 27% share and this looks difficult without top tier sports content or dominant news and breakfast programs.

Deutsche Bank was not surprised by the result, which only beat expectations in terms of operational revenue because costs were driven down.The broker observes event TV, such as the Big Bash Cricket and Sochi Winter Olympics, were successful but transient, and general entertainment disappointed. The broker's earnings forecasts do not factor in a material recovery in revenue share at this stage. Citi also found the outlook subdued. The broker thinks free-to-air TV is stuck in a holding pattern. With ongoing content investment required in the second half, this suggests that, without a lift in ratings and revenue share, the business will burn through $28m in cash across FY14, based on Citi's forecasts. The turnaround is taking time and the execution risk is high, in the broker's opinion. The only tailwind is likely to be a number of recent content acquisitions and renewed focus on general programming.

The Big Bash and Sochi gave the network a much-needed fillip but the outlook has since deteriorated, in Macquarie's view. The broker can't find much to be optimistic about, given there's aggressive ongoing competition from the Seven ((SWM)) and Nine ((NEC)) networks. Macquarie's advice to Ten is to trade off cost reductions against the need for investment in new programming to improve ratings. The broker expects net debt to rise to $100.6m by the end of the second half because of weaker earnings, timing fluctuations in programming and the impact of onerous contracts on cash flow.

The result highlights CIMB's negative outlook. The broker thinks Ten has a tough task because of a lack of compelling content. Moreover, the company has limited financial capacity to acquire new content. It would appear that existing franchises, such as Master Chef and The Biggest Loser, are up for review as the company seeks the space to invest in new shows. CIMB prefers those stocks in the sector that are taking share, such as Nine, and those exposed to more defensive media like radio, such as Southern Cross Media ((SXL)). At the current share price the broker thinks further downside risk exists for Ten.

In terms of Ten's advertising market BA-Merrill Lynch is more optimistic, estimating 3% growth in the ad market, mainly from banks, retail and telecoms, which will be supported by housing activity and a more robust competitive environment in telecoms. The broker assumes a positive turnaround from FY15, but also thinks the stock is expensive when considered on a FY16 forecast enterprise value/earnings multiple of 25 times. So, an Underperform rating is retained. There's one potential upside factor that may feature, in Merrills' view. This is early monetisation of the digital opportunity coming from multi-screen viewing. Ten operates three channels. The primary one is Ten and there are two digital channels, One and Eleven.

FNArena's database contains a sea of red ink. No Buy ratings, two Hold and six Sell. The consensus target of 24c suggests 10.5% downside to the last share price and compares with a target of 28c ahead of the results. Targets range from 15c (CIMB) to 35c (Citi).
 

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article 3 months old

Weekly Broker Wrap: Financial Inquiry, Transport, Fox And Salary Packaging

-NAB best placed after inquiry
-Upside for AIO and TOL
-What will replace FOX?
-Strong growth for MMS and SGF
 

By Eva Brocklehurst

The battle lines have been drawn in Australia's Banks And Financial Services Financial Systems Inquiry. Common themes found by Credit Suisse in submissions include tax reform, promotion of appropriate competitive neutrality and removal of regulatory overlap. The most contentious areas, in the broker's view, are related to new digital payment providers encroaching on major banks, funding of the Financial Claims Scheme - ex-ante opposed by the banks, the conservatism of the Australian Prudential Regulation Authority, mortgage risk weightings, regional banks seek a lower ceiling - and government intervention to promote a larger domestic corporate bond market, which Treasury opposes but many favour.

The interim report is expected by September and the final by November. Credit Suisse expects, over time, that the major's balance sheets will improve in terms of lending diversity and composition. The broker considers the likely winner from the inquiry will be National Australia Bank ((NAB)) with the bigger mortgage players, Commonwealth Bank ((CBA)) and Westpac ((WBC)), relative losers.

BA-Merrill Lynch thinks there's enough evidence the Australian economy is improving. Port volumes are up, a key indicator of activity given the flow on to rail and transport. Hence, the broker is warming to Asciano ((AIO)) and Toll Holdings ((TOL)). Nevertheless, just as cyclical risks look like easing there is evidence that structural risks are rising. The broker observes Asciano is facing disruptive price competition in terminals and Pacific National (PN) Rail and there are concerns around the take-or-pay contracts at PN Coal. Merrills thinks PN Coal's issues are manageable but suspects the others could entail downgrades to FY15 expectations.

Toll faces risks from the resources slowdown, and margin pressure from labour inflation as well as contract roll overs from the Singapore government. Both stocks are trading at 12-month lows so Merrills thinks there's opportunity for investors that are comfortable with the risks to wait for better activity levels to come through. Brambles ((BXB)) remains the broker's top pick in the sector based on a view the company is starting an earnings upgrade cycle because of its leverage to an improving US economy. 

21st Century Fox ((FOX)) will be removed from the Official List of ASX on May 8. Morgan Stanley has looked at what might take the stock's spot in the S&P/ASX indices. In the broker's order of highest probability IOOF ((IFL)) is the number one pick for the S&P/ASX 100 with Transpacific Industries ((TPI)) and Australand ((ALZ)) second and third respectively. In the S&P/ASX 50 it's Ramsay Health Care ((RHC)) and SEEK ((SEK)) in that order. In the S&P/ASX 200 the number one replacement pick is Sundance Energy ((SEA)) and number two is Steadfast ((SDF)).

Salary packaging, including novated leasing, and fleet management form part of a sector that is set to grow, in Macquarie's view. Salary packaging administration involves payment of pre-tax salary to a trust where money is then disbursed to cover employee's costs such as leases, superannuation, mortgages, school fees, entertainment accounts and so forth. Novated leasing is the largest part of salary packaging. It involves a three-way deal between a financier, employer and employee and these leases are sold to the corporate and government sectors. The novated lease market now accounts for an estimated 20% of the funded vehicle market. The growth drivers for the sector are employment, particularly in health and education, growth in new vehicle sales and outsourcing of fleet management. The broker also believes there are new product opportunities to help grow the market. Within fleet management there are products designed to improve driver safety and alertness and within the salary packaging there are opportunities to sell other services across an employer's employee base, such as credit cards.

Macquarie observes the two ASX-listed companies in this area have produced solid revenue and earnings growth and both generate high returns on equity of 25-30%. McMillan Shakespeare ((MMS)) has the longest listing history in the sector and is the largest player. Macquarie expects MMS to resume its long-term growth trend in FY15, after the interruption from the former government's proposed FBT changes last year. The broker thinks the acquisition of CLM in the UK last year represents a long-term growth opportunity. Newly listed SG Fleet ((SGF)), is the third largest in the sector and derives 37% of its FY13 revenue from novated leasing.

Goldman Sachs has initiated coverage of SG Fleet with a Buy rating and expects the stock to re-rate as it achieves FY14/15 prospectus forecasts. This broker sees growth opportunities too, as several large public authorities still manage fleets in-house and may look to outsource. The sector has high returns and as SG Fleet derives only 43% of its earnings from novated leasing versus McMillan Shakespeare's 60%, Goldman considers SG Fleet has less regulatory risk. Goldman has a Neutral rating on McMillan Shakespeare. Given the recent action by the federal government in ceasing subsidies to automotive manufacturer's the price/earnings discount applied to novated lease earnings has been raised to 40% from 20%. The broker's multiple on salary packaging earnings is now a 20% discount compared with a 10% premium versus the Small Industrials Index. Goldman's recent discussions with industry contacts have signalled salary packaging is sometimes priced at lower margins to win more lucrative novated lease work.
 

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article 3 months old

Challenge To Repeat 2013 For Online Media

-REA valuation justified?
-Carsales.com gets benefit of the doubt
-Is the worst over for SEEK?
 

By Eva Brocklehurst

Online media outperformed during 2013 and now trades at a premium to the market, reflecting expectations of strong growth. Brokers find there are some variations within the sector as the stocks line up for earnings season.

BA-Merrill Lynch does not expect a repeat of the sector's 2013 performance and expects returns will differ. Real estate still has some way to go in migrating from print to online, relevant to REA Group ((REA)), while employment classifieds faces a greater challenge from other areas of the online channel, relevant to SEEK ((SEK)). Merrills observes the overall economy's performance will continue to affect the outlook for job and real estate advertising. Pricing power is the major tailwind for the sector, Merrills points out. Even SEEK, which is the most threatened by competition, is still expected to achieve mid-high single digit price increases in the foreseeable future.

JP Morgan has hosted a 2014 advertising summit. Most trade organisations attending the summit expect healthy advertising growth for their respective medium. JP Morgan expects the vehicle category to be a positive growth driver in ads in 2014, along with special events such as the Olympics, World Cup and elections. The broker assumes solid gains in internet advertising, around 18% over the year. This rapid growth is likely to be driven by mobile ad growth and continue at the expense of print advertising. Despite the upbeat outlook, the broker admits a clear domestic catalyst for advertising is lacking at this stage.

Solid earnings growth is likely, in Deutsche Bank's view. Deutsche Bank has upgraded SEEK to Buy. The stock has come down from its highs as underlying conditions have improved. SEEK is now the broker's preferred exposure in the online media space. Deutsche Bank expects to witness positive year-on-year volume growth in the second half and a recovery into FY15 as easy comparative numbers are cycled. On the other hand, a decline in Carsales.com's ((CRZ)) new car listings at the start of 2014 is expected to weigh on the stock. The lower inventory has also affected display advertising. Deutsche Bank states a willingness to reconsider the recommendation (Hold) if there's evidence the company can stem the decline. REA is benefiting from a favourable property market although clearance rates have eased a little, the broker notes. Deutsche Bank thinks the stock is fairly valued at current levels.

Credit Suisse is also reserving judgement on Carsales.com. The broker has moved to a Neutral rating from Underperform, noting that, while the share price has been weak, the downside is limited and the stock should stabilise around current levels. The broker considers the share price is now factoring in earnings risk, as a result of some of the revenue headlines from the slowdown in the overall car market and lower new car inventory. SEEK's first half earnings are expected to be affected by the decline in revenue form the core domestic business but the worst may be over, in Credit Suisse's view, and volumes are expected to grow 3% in the second half.

Credit Suisse notes REA, once again, produced a stellar result in the first half. Subscription revenue decreased as the business successfully shifts to a listings model. The broker retains a Neutral rating, given the run up in the share price. The broker considers the next catalyst is likely to be further merger/acquisition activity, although the first priority is to find a successor to the departing CEO. UBS notes that, upside to valuation would require the company to execute on a leads-based model, take a larger share of the agent commission and unlock the value inherent in a move into Italy.

The latest results have reinforced REA's position as one of the market's premier growth companies, in Macquarie's view. The broker's only negative observation is that this is well reflected in the share price. JP Morgan stays Neutral on REA, while management remains uncertain about the international strategy and without plans for capital management at this stage. JP Morgan expects attention to be focused on future capital deployment strategies for online media stocks, such as acquisitions, sell downs or capital returns. The broker highlights potential risks to consensus estimates on the downside for Carsales.com, because of issues with manufacturers' online display advertising, and on the upside for REA, given price increases and the extent of agency take up of the depth product.

Merrills thinks the market is underestimating the long-term revenue growth that will accrue to REA from the switch to charging fees per listing. Also, the company's strong position gives it an advantage when it comes to assessing re-location trends and management intends to leverage this into leads for utilities, finance and insurance. A transition to fees-per-lead revenue may take time but in Merrills' opinion it opens up new market potential that has not been factored into forecasts. The stock's premium is more than justified in Merrills' opinion, given the earnings trajectory. For SEEK the market is looking at a domestic recovery in the next 12 months but Merrills thinks this is unlikely. Merrills expects unemployment to rise over the next 2-3 years while the company is being affected by leakage of business to social media, aggregators and outsourcing platforms.

Carsales is considered the least cyclical of the online stocks and Merrills expects solid growth, driven by data services and the non-vehicle classifieds. Trade Me ((TME)), supported by a better economic outlook in its home territory of New Zealand, is expected to expand its cost base to support future growth and Merrills thinks earnings growth will accelerate from FY15.
 

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article 3 months old

Weekly Broker Wrap: Mortgages, Financial System, TV, Consoles And IPOs

-House price, credit growth diverge
-Mortgage standards loosened
-Do banks have too much power?
-FTA TV should be resilient
-New consoles don't excite Citi
-Recent IPOs perform strongly
 

By Eva Brocklehurst

House prices and credit growth are diverging. What's driving this scenario? JP Morgan has found that higher transaction activity on the housing front is not fuelling credit growth. Although the average loan-to-valuation (LVR) ratio is little changed there are big differences in categories.

The first time buyers of homes are not increasing in percentage, despite their focus on house prices where there's a higher LVR. So that's reducing credit growth. Those that are at the other end of the market, downsizing from from the family home, are growing in number but they're reducing debt. They're using the equity released from their homes to move into the investor category and the drag on credit growth they create is greater than the credit growth that's primarily being driven by the investor segment. As has been widely talked about - it's the investor segment that's responsible for pushing up house prices. Those owner-occupiers that are upgrading homes may be taking on more debt when buying more expensive housing, but JP Morgan notes the LVR uplift is less substantial than it has been historically.

In all, JP Morgan believes the rapid rise in house prices, in Sydney in particular, cannot go on. At some stage affordability will become a structural issue for the market. Perhaps there are some changes needed on the political or regulatory front. The broker's report canvases LVR limits, as they apply in New Zealand, and explores the taxation, incentives and regulatory environment.

UBS has looked at mortgage underwriting statistics which APRA has provided. The trend of loosening underwriting standards for mortgages continued in the September quarter. Interest only loans rose, hitting 40% of major bank mortgage approvals. Many were for investment property but also increasingly popular with owner-occupied borrowers. Those approvals that are outside serviceability - they fail the interest rate sensitivity/affordability test but still get approved - have grown by 36% and now represent 3.3% of all mortgage approvals. High LVR loans are relatively high at 34% of approvals but are down from the 37% peak that was seen during the period of first home buyer grants in FY09. Investment property mortgages are at record levels, at 35%. The figures show an improvement in asset quality and balance sheets but UBS suggests the looser standards are worth scrutiny, as these are potentially the impaired assets of the next cycle. This is especially the case with loans "outside serviceability" in this very low rate environment.

The Murray review of the financial system is at an early stage but JP Morgan has looked at what the issues are. What could affect share prices? This review will find the system much more heavily controlled by the big four banks than when the Wallis inquiry took place, and there is a risk they could be seen to have too much market power. This is a similar theme in general insurance as well. Wealth management has much stronger competition. Another focus is on the costs of regulation and this may result in some winding back of quite significant increases in regulation of the financial sector. This, in turn, could reduce compliance costs land lead to a more dynamic sector. Also, the new government's focus on infrastructure investment could procure some attention to encouraging retail super funds to reduce holdings of liquid assets. As for the choice to head the inquiry, former Commonwealth Bank CEO David Murray, JP Morgan suspects Mr Murray's strong prior involvement in the financial services may increase the likelihood he will listen to the views of existing providers.

Rumours of the death of television have been greatly exaggerated. That's Citi's view. Nevertheless, TV is changing. Consumers now have multiple devices for content and they're booking their time. Rather than being enslaved by live TV the tendency is to spend appointed time, which is growing at 1% per annum while live TV declines at 1% per annum. Appointment viewing, as Citi describes it, is now 14% of total TV watching, up from just 1% five years ago. Citi thinks broadcasters need to be aware that fragmentation of the viewing audience is growing. TV broadcasters need to deliver hits on a regular basis. The broker retains Buy ratings for Seven West Media ((SWM)) and Ten Network ((TEN)).

Goldman Sachs has reviewed the outlook for Free-To-Air TV and concluded that, despite facing headwinds similar to print media, the industry should be more resilient. Forecasts have been raised for this segment's advertising market share. There will be some leakage to new media but the analysts expect it to be modest. TV should be underpinned by the quality of the content and the ability to draw a large, mass market audience, as well as the regulatory protection in place and the expansion of the broadcast footprint to multi-channel. The defensive position on FTA TV is concentrated in the Seven and Nine networks, the broker believes. The analysts don't believe FTA TV will lose that much advertising market share. Goldman forecasts FTA TV ad market growth of 3.6% over 2013-18 versus the greater advertising market forecast for 4.3%. The broker likes the structural winners in the sector and has raised Seven West to a Buy rating.

New games consoles are about to be launched. Citi is not that excited.The broker has Sell ratings on JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). JB Hi-Fi could generate a 1.4% comparable store sales boost in FY14 but this could be followed by a 2.0% fall in FY15. There's likely to be negligible impact on Harvey Norman as the retailer does not have a strong presence in the category. Citi thinks long-term unit growth may disappoint and price deflation will erode any gains. These new consoles also provide an easier digital download for games, reducing an important category for JB Hi-Fi. The important growth is in games software, as gross margins are higher. This should fade as earlier version sales collapse and the games category will be dilutive to gross margins, in Citi's view.

What's a positive? The timing. It's been six years since an upgrade to consoles and it's just before Christmas. The most significant upgrade is graphics capability and there's a cheaper price point. In Australia pricing is 17-27% higher than in the US so this is a negative, in Citi's view. There's no step-change in innovation either. These new devices may appeal to mainstream game players but are unlikely to covert others, so there's no increase in penetration. Moreover, the analysts note, casual gaming has now moved to tablets and smart phones. Enter the fragmentation word again.

Finally, Macquarie observes the performance or stocks that have recently listed. There has been a raft of new IPOs and this is often an indicator of market sentiment, as they signal investor appetite for equity. The performance in 2013 has been strong, with average returns after one week of 3.8% and a stag profit of 4.64%. The larger IPOs had positive returns over the first week and this diverges from history where the aggregate performance is less compelling. The broker highlights Virtus Health ((VRT)) and Steadfast (SDF)) as two recent IPOs that continue to perform strongly. Volume is often considered a good proxy for investor attention too. The larger IPOs, with a deal size of more than $100m, are more likely to receive investor attention and are a better gauge of market sentiment. Stocks with high volume and high momentum tend to typically outperform.
 

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article 3 months old

Weekly Broker Wrap: Patchy Conditions In Lead Up To Christmas

-Sentiment improving slowly
-Consumer confidence diverging
-Life insurance profits soft
-Further upside to bank asset quality?
-Pathology dilemma continues
-TV advertising growth strongest
 

By Eva Brocklehurst

Citi notes a surge in confidence in Australian consumers in November but thinks, while there's no doubt the outlook is improving, it is too soon to be sure of a particularly strong Christmas for retailers. Moreover, wages growth is slowing, reducing the growth of disposable income available for spending, and consumers still hold concerns about their finances. Hence, it's the wealth effect - the sense of having more to spend - and confidence in their savings rather than income that will have to drive consumer spending in the short term. This is not unusual at this stage, as the labour market is normally the last part of the economy to turn around. The broker envisages the better times are ahead in 2014, when real consumer spending should move closer to trend after a disappointing 2013.

BA-Merrill Lynch is seeing a division emerge in consumer spending in Australia. Rising property prices, reduced interest rates and increased super seems to be driving improved confidence in certain social classes and these people are spending. Those not exposed to these drivers are feeling the effects of higher utility prices and are not so inclined to spend. Which are the stocks most exposed to the former? Merrills draws out Wesfarmers ((WES)), Crown ((CWN)) and Telstra ((TLS)). The broker expects top line growth in the consumer sector will remain tough in FY14 as income growth is below average and unemployment is rising.

Wesfarmers has defensive appeal in terms of spending and, through Bunnings, exposure to an improving housing cycle. The class of consumer that typically spends on table games, hotel, food and beverage products is the professional-middle class and this is where the improved spending will benefit Crown. Slot machine players, the choice of the less well off, is showing weakness. For Crown, growth in other revenue segments should insulate the business. In the case of Telstra it's the age demographics of the consumer - the 50-64 year-old segment that has the most disposable income and ability to spend - that's most influential.

Statistics on life insurance show weaker profits for the industry because of a worsening in group risk claims experience and lower investment earnings. JP Morgan thinks additional reserve strengthening in this insurance class may be needed and this could continue to depress industry profitability in the near term. The industry did report September quarter earnings were up 13% on the prior quarter but down 41% on the prior corresponding quarter. Much of the improvement on the June quarter was driven by increased investment income. What was encouraging was that individual risk trends were stable. Profitability levels remain low but at least they are not deteriorating.

The asset quality of major banks improved in the September quarter. This underpins the recent declines in bad debt charges but Credit Suisse is cautious about prospects for further moderation in debt charges. Key trends include a decrease in impaired business to 0.57% from 0.59%. The four industries which continue to have elevated level of impaired business are accommodation, agriculture, construction and property, although there's been some improvement in the latter two and the former appear to have stabilised.

The housing market is recovering, with the latest statistics showing a rise in both the number and value of commitments in September. Macquarie notes, one area that is soft is first home buyers, representing 12.5% of the market and down from the low 30% range in 2009. The data aligns with the broker's expectations for an improvement in credit growth next year.

With lower rates and rising asset prices Macquarie thinks asset quality at the the banks could further surprise to the upside. National Australia Bank ((NAB)) is best placed to benefit because its second half impairment charge in 2013 was 7-18 basis points above its peers. The broker thinks, on a 6-12 month basis NAB and Westpac ((WBC)) should perform the best, with exposure to improving business lending conditions in the SME/corporate segment.

The pathology industry and the federal government have been negotiating a further round of cuts in pathology outlays to reduce overspending. In FY13 the outlays exceeded the agreement by 3.3% and the discussions have probably negotiated the overspending closer to 2.1%. UBS understands that the industry would likely cede a cut of 2% from January 2014 but is seeking a political commitment on the resolution of broader issues, such as excessive rents paid to GPs for collection centre sites. The de-regulation of centres made by the prior government exacerbated the long standing issue of excess rents and the economics of many GP practices now rely on this rent, leaving the government with a funding dilemma. The industry is divided on the issue and the unwinding of excessive rents is expected to take some time.

Advertising agency markets have shown modest growth, up 1.6% in the year to October. TV advertising growth continues to be the strongest, with metro free-to-air spending up 5%. Pay TV goes from strength to strength, up 15% in October. Print is the weakling segment, although there are signs, according to Credit Suisse, that declines may be moderating. October's 14% fall was materially better than the declines of over 20% seen in the first half of the year. Magazines continue to struggle, down 23% in October.

Traditional digital display is slowing although still is the growth engine in the market. The digital market was flat in October and while total spending was still up 8%, growth was entirely driven by search and emerging platforms. In terms of categories, retail advertising returned to annualised growth for the first time this year as improved consumer confidence filters through to budgets. Finance was the strongest of the categories, with growth of 17% year on year.
 

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article 3 months old

Weekly Broker Wrap: Oz Savings, TV Ads And Housing; China, US Reforms

-Aust savings rate an illusion
-TV ad budgets bleeding to online
-Sustained Aust housing rate needed
-China reform proposals
-US growth being held back
 

By Eva Brocklehurst

The official Australian household savings rate is 10% of income but Credit Suisse disputes this rate is showing a healthy position for consumer spending. This is a high rate by international and historical standards but the measure overstates discretionary saving, in that it includes compulsory superannuation and principal payments. Removing superannuation substantially lowers the savings rate to 2% from 10%. Accounting for principal payments lowers it further, to minus 3.6%. Hence, the pool that households can draw on to spend more is an illusion.

The general view is that households run down savings as interest rates are reduced and asset prices rise. Accordingly, consumption should grow faster than disposable income in the months ahead, enabling Australia's economy to move away from mining-led growth. Contrary to this notion, and because the official rate overstates the case, Credit Suisse thinks households are not saving much at all and therefore not in a position to increase spending. The discretionary saving rate is currently below the long-term average.

Moreover, even supposing that asset prices rise a little, further reducing the need for households to save income, the analysts find it hard to see the savings rate falling materially, because lending standards are tighter than before. So, either a major easing of lending standards, or a very strong increase in asset prices, is needed to persuade households to spend more. Over the next few years, the economy is likely to experience a drag from reduced mining investment. At the same time consumer demand will be patchy. Overall, it's low economic growth that's on the cards in Credit Suisse's view, and the risk to interest rates is to the downside.

Despite the tremendous growth in online advertising over the past 10 years, Citi researchers believe the majority of this growth has been derived from budgets for magazines, newspapers and direct response channels, such as mail. Top brand advertising, which is concentrated on TV, represents a significant and largely untapped market for online growth, at $62 billion. The researchers looked at survey data recently released by Adap.tv and Digiday that suggests marketers are increasingly looking to shift TV advertising spending to the internet.

This is consistent with Citi's observations of the industry and forecasts for online video advertising growth. Brands are allocating an increasing mix of spending to online video and tapping into budgets for TV broadcast, online display and print. Interestingly, what is holding back spending online is the ability to measure reach, target and performance across platforms and devices in a uniform way.

Australia's housing market is in recovery. How strong it becomes is the next guess. The recovery is led by NSW and Western Australia and characterised by falling housing starts in Victoria. Morgan Stanley suspects, for peak cycle numbers of 180,000 starts per annum to be achieved, Victoria needs to rebound. The broker sees downside earnings risk across the majority of the sector but earnings momentum is turning positive. This is strongest for Boral ((BLD)) and CSR ((CSR)). CSR has risks on the aluminium front but Morgan Stanley thinks the stock's leverage to a residential earnings recovery is underestimated.

Housing needs to be robust enough to be sustained for some time. Domestic building product margins have been in decline for the past decade and the peak in starts has not historically been enough to see a sustained recovery in margins. Morgan Stanley's base case is for housing starts to improve to 170,000 in FY14, peaking at 175,000 in FY15 before falling to 165,000 in FY16. The broker would be more positive about the sector if there's signs a residential recovery can last over three years, supported by low rates.

Rates are expected to remain on hold for the next 15 months, which would support a multi-year recovery, but it's too early to price this into stocks. Morgan Stanley wants to see, for sustained outperformance, a longer cycle than past cycles, such that utilisation and price flows through to earnings. The largest downside earnings risk is for those most operationally geared to a recovery such as Fletcher Building ((FBU)), Boral, CSR and James Hardie ((JHX)). There's less earnings risk seen for DuluxGroup ((DLX)) and Adelaide Brighton ((ABC)).

Reform proposals by an influential Chinese think tank will from the basis of a reform policy to be announced at the third plenary session of the eighteenth Chinese Communist Party Central Committee meeting on November 9-12. AllianceBernstein strategists suspect that even a 50-70% success rate for the proposals would contribute substantially to the long-term development of the country. The reform proposals include changes to state-owned enterprises and government reforms to reduce state monopolies, inviting private sector competition in strategic areas such as telecommunications, oil and gas, power generation and banking. They also call for tax reforms, including the introduction of a property tax and changes to the value-added tax to move to consumption bases from production.

The reforms are aimed at achieving a better balance between local and central government revenues and include a land reform, which will allow rural and farm land under collective ownership to be sold at market prices. The proposals highlight the importance of the opening of the Chinese currency, the renmimbi (RMB), and an endeavor to make it a major currency for trade settlement as well as a reserve currency in Asia within 10 years.

Although the US economy continues to grow modestly, the pace has not yet accelerated to levels that might be expected during an expansion. In AllianceBernstein's view, issues related to fiscal policy are partly to blame and  upcoming budget and tax debates will likely determine growth trends in 2014. Implementation of the new health care law has added a layer of confusion. At the margin it will raise cash outlays for existing health policy holders but people who are required to purchase new or revised plans in 2014 may face even larger expenses. It's hard to quantify the incremental burden on the US consumer but, based on AllianceBernstein's estimates, workers will be asked to pay a greater share of overall health care costs.

The recent US government shutdown, with almost 800,000 federal employees laid off for 17 days, will also have a dampening influence on the rate of economic growth in the current quarter. Not only did it disrupt activities directly it also weighed heavily on consumer confidence. Although the loss of output could reach as much as 0.5% annualised in the fourth quarter, the economists think it will be fully recovered by the first quarter of 2014.

Perhaps the biggest headache for the US government, and curtailing growth, is discussions on the budget and taxes. AllianceBernstein doubts that the tax reform negotiations can make any advance in the short term. US businesses will have to wait at least another year, or maybe longer, before Congress approves fundamental tax reform legislation. The growth opportunity is being lost because businesses would be willing to commit more investment to the US if they were confident that the outdated tax code was being reformed to welcome more capital.
 

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article 3 months old

Carsales Could Provide Buying Opportuniy

By Michael Gable 

Our market appears to be holding up fairly well here so it adds weight to the idea that we should generally grind higher into Christmas and beyond. Despite the decreasing likelihood of a rate cut (the RBA meets today as usual on Melbourne Cup), the market appears to be taking it in its stride. Of course, when it becomes likely that rates will start heading higher, those stocks that have been used as a proxy for bonds will start to come under pressure. Speaking of the banks, holders of ANZ Bank ((ANZ)), National Bank ((NAB)), and Westpac ((WBC)) which have now all reported, can look to write covered calls against their shares before they go ex dividend in order to potentially pick up some additional premium or an “extra dividend”. We have also made some additions to the model portfolio this week as it continues to stretch its legs.

Carsales.com


 

What stands out the most during the recent pullback in Carsales.com ((CRZ)) is the volume. You will notice that the share price started pulling back sharply in October on daily volume that was about 6 times higher than what was seen in the preceding week. In mid October the share price tried to rally on volume which decreased day by day, only for it to come off again very sharply on even greater volume. So the signs are negative for CRZ at the moment. Even last week’s small rally appears to have stopped short at the $10.50 resistance level so once again we should expect to see some downside to CRZ. We anticipate support to hold at $10, otherwise we may see it as low as about $9.60. As long as there is an absence of negative catalysts, we should see strong buying come in at that $9.60 level.
 

Content included in this article is not by association necessarily 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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