Tag Archives: Property and Infrastructure

article 3 months old

Weekly Broker Wrap: Oz Economy, Profits, Drought, Housing, Hardware, Hospitals And Insurers

-Low non-financial profit growth
-Drought in a vulnerable economy
-Westpac move may impact housing
-Operating theatres key to performance
-Online earnings forecasts diverging
-Insurance margin correction factored in
 

By Eva Brocklehurst

Australian Economy

Financial conditions suggest to Citi that Australia's economic growth is weak. The influence of lower official interest rates is waning and the recent moves by Westpac ((WBC)), if followed by other banks, could work to tighten conditions. The broker cites recent sales activity in the property market which supports a view that house price growth has peaked.

The broker forecasts GDP growth at 2.3% by the end of 2015 and averaging 2.4% over 2016. Citi suspects the Reserve Bank will shave 25 basis points off its growth forecasts in its November statement on monetary policy.

Corporate Profits

Non-financial company profit share of GDP has declined by over 3.5% since 2011, Citi maintains. Lower commodity prices are not the only reason for the weakness as, stripping out mining profits, the decline is still noticeable and the profits have underperformed the US. Citi suspects this could, at least partly, reflect lower productivity growth. Consensus has profits recovering strongly, at around 10%, in 2017 whereas Citi is more cautious, expecting around 6.0%.

The broker believes the longer-term outlook is predicated on how successfully the economy re-balances and diversifies its export base. Still, the broker believes the combination of low profit growth and high dividend pay-out ratios is toxic for investment spending and should maintain the prospect of further easing from the Reserve Bank.

Drought

Goldman Sachs wonders whether drought will be the straw that breaks the camel's back for Australia. A rare combination of an intense El Nino event in the eastern seaboard is coinciding with a strong positive phase for the Indian Ocean temperatures which has occurred on only seven other occasions since the 1950's and is consistent with severe deficiencies in rainfall and high temperatures.

Currently, government forecasts assume flat farm production in 2015-16 compared with the median decline of 20% during a drought year. Goldman notes, fortuitously, the severe droughts of 2002-03 and 2006-07 coincided with robust economic growth.

While identification of a drought does not in itself provide a rationale to ease monetary policy it appears to the broker that, in a period where non-farm growth is already below trend and inflation contained, it may be sufficient reason to warrant additional monetary easing.

Housing & Property

Morgan Stanley believes the 20 basis point increase to Westpac's mortgage portfolio will put a dent in housing sentiment. New investors face higher rates and tighter lending standards and this strengthens the broker's belief that the housing boom has peaked. Already, there is evidence of softening auction clearance rates and investor activity, amid weaker house price forecasts.

Morgan Stanley's forecast for a looming oversupply to housing makes the prospect of rental growth and capital gains particularly uncertain. This is all part of what the broker believes is a deliberate macro prudential strategy to rein in the housing market.

Against this backdrop the broker believes there is limited re-rating potential for the residential Australian Real Estate Investment Trusts (A-REITs).  Based on Morgan Stanley's analysis, interest rates are the dominant driver of house prices and house price growth is the key driver of Mirvac Group ((MGR)) and Stockland ((SGP)), in terms of their free funds from operations.

The two stocks have de-rated over the past 6-9 months. Hence, the broker expects further de-rating is questionable, given merger & acquisition pre-conditions are strong, balance sheets can support buy-backs and there are supportive distribution yields.

Hardware

Hardware retailing sales are robust, with the strongest growth in Sydney and Melbourne, Morgan Stanley observes. At a recent industry conference the broker noted the shift to multi-residential developments is creating a headwind for the sector because these developments are large enough to source product offshore and bypass the retail/wholesale channel in Australia.

Participants at the conference also signalled to Morgan Stanley that Bunnings market share is being understated at around 18% and it is more likely closer to 40-50%, given the Wesfarmers' ((WES)) owned business overstates its addressable market.

Morgan Stanley notes the general view that margins at Bunnings have held up despite like-for-like sale growth because of the extent of new store openings, as the business over-services customers in the first six months of opening. As sales increase and customers become aware of where products are within stores, labour is reduced and, hence, margins improve.

Packaging

Morgan Stanley has initiated coverage on the Australian paper and packaging market with a counter-consensus Cautious industry view. The broker expects structural headwinds will cause Amcor ((AMC)) to underperform while progressive reallocation of capital will mean Orora ((ORA)) outperforms.

Amcor has been rewarded in recent years for its defensive characteristics and high returns but delivering the earnings required to support its premium multiple and value-creation target is becoming harder, Morgan Stanley maintains. In contrast, Orora has a largely unencumbered balance sheet and potential to deliver upside through optimisation of its capital allocation strategy.

Australian Online

Pure online classified companies such as Carsales.com ((CAR)), Seek ((SEK)) and REA Group ((REA)) have experienced two years of price/earnings de-rating although Citi notes they are still trading above the historical valuation lows experienced just after the global financial crisis. Meanwhile, Fairfax Media ((FXJ)) and Trade Me ((TME)) have re-rated recently.

The broker finds REA Group the most attractive in value terms, despite a premium multiple, while Carsales.com, Seek and Trade Me are seen trading near peak relative valuations. At the same time most earnings expectations have been deteriorating, with Seek suffering the largest downgrades but Fairfax enjoying incremental upgrades in earnings expectations. Citi now observes a large divergence in earnings growth expectations across the sub sector.

Private Hospitals

The efficiency of operating theatres is a key component in the overall financial performance of a private hospital, Credit Suisse contends. The broker's analysis suggests Ramsay Health Care ((RHC)) generates 35% more earnings per operating theatre than does Healthscope ((HSO)), for several reasons. These include higher case payments, lower operating costs and more efficient processing of patients, as well as more complex surgical patients which generate higher earnings per case.

The broker believes a reduction in operating costs through procurement and workforce de-leveraging is achievable for Healthscope in the short to medium term and this should facilitate a modest uplift in earnings. Other factors citied above are harder to achieve, Credit Suisse acknowledges, and benefits accrue over a longer term.

Insurance

UBS finds more widespread evidence of personal lines claims inflation and modest price increases. Commercial lines appear soft, still. The broker believes, while the picture is mixed, a healthy underlying correction in margins is now reflected in FY16 estimates. Even if margins trough at 20-30% below their peak, with a subsequent 10% hit to earnings, this could increasingly be tolerated by investors.

Challengers have pulled back share in the highly contested motor class, to 12.7% from 13.4% in the broker's previous review. While the challengers continue to generate superior growth at 18% compared with 3.4% for Suncorp ((SUN)) and 0.4% for Insurance Australia Group ((IAG)) there are some signs of consolidation, UBS observes.
 

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article 3 months old

Weekly Broker Wrap: Electronics, Supermarkets, Insurers, A-REITs, House Building And 3P Learning

-Citi lowers economic forecasts
-JBH, DSH benefit from Apple boost
-IAG stands out in personal lines
-Moderation in housing, building likely
-Oz advantage as players shy from Macau
 

By Eva Brocklehurst

Leading Indicators

Citi's domestic economic barometer has shown signs of deterioration over the last three months in keeping with global leading indicators which have also softened. The broker's economists have reduced growth forecasts for a wide range of countries, the fourth consecutive downgrade to year-ahead forecasts. In Australia, the interest rate-sensitive housing sector appears to be peaking and there remains more downside to come for mining capex.

In contrast, labour indicators are more positive and confidence measures are lifting with the change of Prime Minister, so these more favourable signs should limit downside risk to growth, in Citi's view. Inflation is expected to stay low and a tentative bottoming in the rate of decline in the terms of trade could signal the downward momentum in profit growth is peaking.

The broker's leading indicators suggest more downward adjustment in the Australian dollar and no further change in the cash rate.

Consumer Electronics

Apple has apparently sold more than 13m units of the new iPhone worldwide in the three days post its launch. This is a new record, Deutsche Bank observes, and bodes well for the retailers. The Australian Bureau of Statistics in September last year specifically called out the launch of the iPhone as factor in the 10.6% increase in electronics retail sales.

JB Hi-Fi ((JBH)) and Dick Smith ((DSH)) are considered to be the primary beneficiaries but Harvey Norman ((HVN)) should also gain a fillip.

Supermarkets

Deutsche Bank observes that the Woolworths ((WOW)) store network has aged considerably over the past few years and become older than the Coles ((WES)) network. In addition to price and value perceptions, the broker believes this is a key reason behind the underperformance of Woolworths.

Deutsche Bank's analysis suggests that the 80-plus per annum refurbishment target will modestly improve the situation but there needs to be around 120 per year to restore the network to where it was 3-4 years ago. Around 41% of Woolworths' stores are less than five years old while around 60% of Coles stores fall into that bracket. This is even more acute when considering that Woolworths has rolled out new stores more rapidly.

Australian Insurers

Morgan Stanley has surveyed 3,700 motor and home insurance customers. Strength in personal lines stands out for Insurance Australia Group ((IAG)). To date the company is successfully managing the risk of dilution from Coles to its incumbent brands. IAG locks in customers with multi-policy discounts and has the best cross-sell in home and motor. Its customers are also the least likely to shop around on renewal and it takes greater discounts to persuade them.

Suncorp ((SUN)) has a lower cost strategy but appears challenged, given recent 3-4% price reductions have failed to deliver a higher share of new business, Morgan Stanley observes. Rate increases are now being sought but this risks opening the door to challengers.

Next to IAG, Suncorp's main source of growth is its own brands. As the company simplifies its platform and extracts scale from vertical integration Morgan Stanley suspects it risk further diluting the multi-brand strategy.

After building a reputation for sharp pricing the challengers have delivered lower than average savings, with Youi seen holding back on discounting in 2015. The impressive growth in motor insurance share has paused, stagnant at 13%. Still, the challengers are well placed to advance their share, Morgan Stanley observes, particularly as Suncorp raises rates. Meanwhile, online brokers remain with just 5.0% of sales in both home and motor insurance.

A-REITs

Australian real estate investment trusts (A-REITs) performed strongly over the past week, in contrast to the broader market weakness. Credit Suisse observes the index generated a 0.6% return compared with the broader markets 2.5% decline.

The best performers were Goodman Group ((GMG)), Mirvac Group ((MGR)) and Federation Centres ((FDC)). The worst performers were National Storage REIT ((NSR)), Abacus Property ((ABP)) and Growthpoint Properties ((GOZ)). Credit Suisse expects sector earnings growth to remain stable at 4.4% over FY15-17 with the greatest acceleration from Westfield Corp ((WFD)) and the greatest deceleration from Dexus Property ((DXS)) and GPT Group ((GPT)).

Housing

UBS finds the question in the recent consumer sentiment survey of whether now is a good time to buy a dwelling worrying. This measure has slumped to a 5-year low while, when asked where the wisest place for savings are, the share of respondents citing real estate rebounded to a 12-year high.

Residential approvals are near a record high so, even as commencements ease back in 2016, dwelling investment should lift in coming quarters before flattening in the second half of 2016.

Price growth has likely peaked but UBS does not expect a large drop, given record low interest rates. Adding auction clearance rates into the mix, these are seen falling amid tighter macro-prudential policy and enforcement of foreign investment rules. Still, clearance rates are at solid levels and hardly indicative of a weak market. Overall, the UBS economists expect a moderation in housing strength rather than a downturn.

Building Materials

UBS explores the question of when the housing market does eventual turn. The broker calculates 10% decline in detached housing starts and 35% decline in the number of high rise, which would take total starts back to around 150-160,000 from the current level around 220,000. Boral ((BLD)) and CSR ((CSR)) are the most sensitive to this scenario.

Gypsum wallboard is most vulnerable in terms of product as its sells well into both high rise and detached housing. Data on product segments suggests only 20% of concrete/cement/aggregate volumes are sourced for housing which, if true, would make Boral less vulnerable, comparatively.

Bricks, tiles, insulation and glass would also be negatively affected much more by detached housing changes than by high rise. Land profits would be delayed by a fall in property markets.

For Boral, the US and Asia are expected to continue ongoing growth. For CSR, the aluminum business is the main problem and biggest concern for UBS. Both companies are likely to be looking at how they can invest to ease the exposure to Australian housing as the cycle inevitably moves on.

Gaming

Macquarie is confident that Australian operators can gain a greater share of the Asian VIP market, boosting domestic mass and VIP gaming revenue. The broker is negative regarding the Chinese VIP market, as tightening credit conditions weigh on the high rollers but regional destinations should pick up the players that are shying away from Macau.

The depreciating Australian dollar should support more visits from Chinese tourists, with excess capacity in most properties encouraging more junkets. Macquarie expects Chinese tourists will account for 32% of domestic gross gambling revenue.

Echo Entertainment ((EGP))) is consider the biggest beneficiary of an increase in VIP share. Macquarie estimates, if Echo Entertainment was to hold its current share and Australia lifted its share of the Asian VIP market by a further 1.0%, there is 4.6% upside to earnings estimates. For Crown Resorts ((CWN)) this calculation would boost base earnings forecasts by around 4.0%.

3P Learning

3P Learning ((3PL)) is an online education company with a suite of software products for students in grades up to year 12. The stock has fallen 30% since mid May and provides an attractive entry point in Goldman Sachs' opinion. The broker suspects investors may have over-reacted to the lower FY15 licence numbers.

The move away from textbook learning to online and increased public spending on education supports a positive view of the stock. Goldman Sachs initiates coverage with a Buy rating and $2.49 target.

FY15-18 earnings growth is expected at a compound 27%, underpinned by the company's ability to increase prices increase penetration and cross-sell its products. The broker suspects the market is underestimating the growth potential in the US and UK as well as the upside in Australia.

Competition is substantial, given there are thousands of online education providers around the world. The risk is one could make a significant move into the markets where 3P Learning currently enjoys precedence.
 

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article 3 months old

Goodman Group: Quiet Achiever

By Michael Gable 

The first day of spring. The last month of winter saw the worst share market performance since the GFC. The good thing about this time of year is we have had plenty of companies report results in the last few weeks. So the question of what to buy becomes somewhat easier because there is plenty of up to date company information available to us. As mentioned in last week's report when the market was at its lows, we expected it to bounce sharply and then slowly ease back to retest the low before rallying higher throughout the rest of the year. This means we have a few weeks of filtering out the good opportunities to buy on the second chance dip. Today we have the RBA rates decision which will likely be a non-event, and GDP figures on Wednesday.

Today we look at Goodman Group ((GMG)).
 


 

GMG has seen a very flat performance during this year but so far that is a better result than the overall market. This chart going back about five years shows the steady uptrend in GMG and despite the recent volatility, the GMG share price has only come back to the long term uptrend support line. From here it appears as though GMG should rally higher and resume the uptrend. If this support level breaks, then we have lower support near $5.70 and then further down at $5.50.
 

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

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

Michael is RG146 Accredited and holds the following formal qualifications:

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

Disclaimer

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

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article 3 months old

Weekly Broker Wrap: Oz Economy, Insurance, Banks And A-REITs

-Confidence hit from equities matters
-Returns peak for insurers
-Bad debts on the rise?
-Shift in A-REIT performance
 

By Eva Brocklehurst

Economy

Is Australia's economy in recession? UBS suspects that June quarter data may "pay back" the upside surprise in the March quarter GDP, which grew 0.9% quarter on quarter to be up 2.3% over the year. Exports fell in the June quarter and inventories are expected to be a drag, given the "cliff" in capital expenditure plans that is emerging.

The broker's GDP forecasts do not meet the accepted definition of a recession - two consecutive quarters of negative real GDP - but suggest a higher than normal risk of contraction in at least one quarter for the rest of 2015.

June quarter nominal GDP is forecast to contract 0.3%, dragged down by a collapsing terms of trade causing record low wages and flat corporate profits. Still, rather than a broad downturn across industries, UBS suspects would be more likely reflecting the timing of an intense reduction in capex this year, ahead of a boost from the full ramp up of LNG exports in 2016.

The risk that confidence is battered by the recent share market slump matters substantially, because growth is reliant on maintaining consumer and business confidence. Hence, UBS suspects the risks to GDP are on the downside.

Insurance

The market conditions for general insurance continue to worsen. Macquarie observes the slowest growth in gross written premium since 2005. APRA statistics reveal commercial is down 1.6% for the year to June 2015 while personal is up 1.9%. The weak June quarterly data is a poor sign for the sector, in the broker's opinion. Rates continue to fall and volumes are flat, so as insurance asset values increase this will squeeze margins.

Macquarie believes returns have peaked for Insurance Australia Group ((IAG)), Suncorp ((SUN)) and QBE Insurance ((QBE)) in the absence of further cost cutting. The overall market size in Australia is relatively flat so new entrants are continuing to make inroads and place pressure on incumbents. In response, Suncorp and IAG have turned to increased reinsurance to normalise returns.

Overall, the APRA data was slightly more positive than Credit Suisse had assumed. The June quarter for commercial property showed the first positive growth quarter since December 2013. Industry gross written premium grew 0.7% and the slowing was attributable to products other than commercial. Credit Suisse agrees IAG and Suncorp are losing market share.

The broker suspects current cost cutting initiatives are not enough to support margins at current levels. Credit Suisse prefers Suncorp over IAG and QBE.

Banks

Leading indicators of a deterioration in asset quality are emerging. Commentary from ANZ Bank ((ANZ)) causes the most concern at UBS. The bank indicated it was witnessing higher collective provisioning charges because of balance sheet growth coupled with heightened risk relating to agriculture and resources. To UBS the improvement in stressed exposures appears to be at an end.

In the past, higher corporate credit losses usually followed periods of elevated business lending and loose underwriting. UBS suspects, while these conditions are not apparent on the surface, a dive into the banks' reports shows total corporate exposures have grown 7.0% over the past five years. The broker remains concerned about the outlook for bad debts.

Any official rate reductions from the Reserve Bank, especially if US rate hikes are delayed, should allow for further re-pricing of the net interest margin. Still, UBS prefers Westpac ((WBC)) and Commonwealth Bank ((CBA)) given strong asset quality and greater re-pricing leverage.

Credit Suisse considers the backward-looking data for the banks from the reporting season reasonably benign, although acknowledges asset quality stresses are emerging. This is notable in pockets: in mining, NZ dairy exposures and agriculture on both sides of the Tasman.

Impaired ratios have declined although loss rates edged up. Collective provision coverage is flat for a second successive quarter, although, the broker acknowledges, it edged up for ANZ and National Australia Bank ((NAB)).

In sum, revenue growth for the banks has struggled and system business credit growth is soft, while major bank margins continue to edge lower. The broker suspects the bulk of capital raisings are complete although Westpac is expected to undertake further underwriting of the dividend reinvestment plan.

A-REITs

Australian Real Estate Investment Trust (A-REITs) returns contracted 2.6% over the latest reporting week, weaker than the overall equity market. The best results to date, in Credit Suisse's view are GPT Group ((GPT)), Stockland ((SGP)) and Mirvac Group ((MGR)).

Credit Suisse expects that sector earnings should remain stable over FY15-17 with growth of 4.4% and a shift in composition. Westfield ((WFD)) is expected to accelerate earnings the most, to 4.0% from 1.9%, while Dexus Property ((DXS)) and GPT are expected to decline to 5.7% from 9.2% and 2.9% from 6.0% respectively.
 

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article 3 months old

Weekly Broker Wrap: Trends, Tourism, TV, Clothes, China Steel And A-REITs

-New confidence in tourism, farming
-AFL deal has downside for SWM
-Summer less bright for clothiers
-China facing steel overcapacity
 

By Eva Brocklehurst

Corporate Trends

Analysts at ANZ Bank have recently held meetings with corporates across the country and found certain themes are being widely discussed. The lower Australian dollar is clearly supporting non-resource exports while importers are struggling to pass on costs.

Discussions with the agricultural sector were uniformly positive, supported by the lower Australian dollar and higher prices. Offshore demand appears mixed, with grain traders reporting strong demand but meat and dairy facing difficulties with contract enforcement.

There was a clear divergence in views between the mining states and the industrial states. The analysts found conditions in Victoria positive while South Australia was more sombre. The property market remains patchy across the states. Feedback suggests activity continues to be concentrated in the major capitals while the regions remain lacklustre.

Concerns were raised about the implications of a slowing of growth in China on foreign investor demand for new housing. A view also emerged among Victorians that property market conditions were more sustainable than in Sydney.

The implications for gas prices from the burgeoning LNG export industry was also a key point of conjecture. A combination of international pricing, demand from projects and high development costs are expected to push domestic gas prices substantially higher.

Tourism

While the mining industry investment boom is ending, Australia's tourism industry is benefitting from a lower currency. Trends in the data show arrivals have lifted and the monthly tourism trade balance is in positive territory. The national accounts signal that as the Australian dollar has headed lower, spending on hotels, restaurants and cafes has lifted considerably, particularly in Queensland.

Commonwealth Bank analysts welcome the decline in the Australian currency for those sectors with a high export propensity such as tourism and expect the trend to continue. Tourists from Asia and China in particular are the major growth area. In 2014/15 the number of short-term arrivals from China rose to 935,000 from 770,000 the prior year. This is also partly a result of rising income in China and some softening of travel controls.

The impact of the lower currency is expected to be most notable for inbound tourists from the UK and US. The analysts note those states which benefit the most are those with the highest tourism specialisation which includes Queensland's Barrier Reef and Sydney in NSW. Other areas such as Canberra and the Northern Territory's Kakadu and Uluru are also important.

TV

The Australian Football League has negotiated a 6-year rights package from 2017 to 2022 across free-to-air TV, payTV and digital streaming, doubling the value of the current deal to $2.51bn. The bidding process appears to be uncontested, highlighting to Citi analysts the plight of TV broadcasters forced into negative value deals to protect the viability of their companies.

Seven West Media ((SWM)) has a deal worth $950m, while Foxtel's deal is reportedly worth $1.25bn. Based on the revised deal as reported by industry press, Citi estimates the potential earnings downside for Seven West of 10-16% in FY17 and 20-25% in FY18.

Clothing

ASX-listed clothing retailers have reported mixed trading in the 2015 winter season. Sales appear to have been good, helped by colder than usual weather, and Citi analysts believe Premier Investments ((PMV)) brands such as Just Jeans and Jay Jays have traded well, helped by good denim sales.

Looking ahead to summer, the analysts are less impressed with the offering. and do not expect shoppers will be inspired to update their wardrobes.

Citi upgrades current earnings forecasts for Premier Investments, Pacific Brands ((PBG)) - the stock upgraded to Buy from Neutral as well - and OrotonGroup ((ORL)), downgrading forecasts for Specialty Fashion ((SFH)).

Chinese Steel

Chinese steel exports are up 26% so far this year, despite a 10% export rebate being removed in January. ANZ analysts observe China's steel exports will total 14% of domestic production this year.

The wave of cheaper exports has triggered a rise in anti-dumping duties with European steel producers leading the way and the US now considering similar initiatives. The analysts believe the short term implications for raw materials such as coking coal and iron ore are negative, either dragging steel prices lower or lowering overall demand.

The overcapacity of steel making in China is expected to weigh heavily with a slowdown in consumption triggering heavy price discounting. The analyst predict China's steel demand will fall for the second year in a row in 2015, after 35 years of consistent growth.

A-REITs

In the year to date, Australian Real Estate Investment Trusts (A-REITs) have delivered a 10.6% total return versus 1.2% in the US and the global sector's negative return of 0.5%, Credit Suisse observes. Of note, the Australian dollar has depreciated by 9.8% against the US dollar, 10.2% against the British pound and 2.3% against the euro.

Credit Suisse expects sector earnings growth to remain stable at 4.6% over FY15-17 with a shift in composition. The broker envisages Westfield Corp ((WFD)) will deliver the most acceleration in FY16 earnings, to 4.0%, while Dexus Property Group ((DXS)) and GPT Group ((GPT)) should decelerate to 4.5% and 3.3% respectively.
 

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article 3 months old

Opportunities Still To Be Found In A-REITs

-Conditions support A-REIT outperformance
-Disagreement on MGR, SGP outlook
-Potential for tie-ups in A-REITs?
-Disappearing retail travel agents
-Office on the recovery trail
 

By Eva Brocklehurst

The outlook for Australian Real Estate Investment Trusts (A-REITs) is increasingly attractive versus the rest of the market as balance sheets are solid and gearing is generally falling, in UBS' view.

The sector has outperformed the market by 4.0% over the year to date with the best performers being those with long-lease assets such as Shopping Centres Australasia ((SCP)) andr BWP Trust ((BWP)) and business models such as Scentre Group ((SCG)) and Goodman Group ((GMG)). On fundamentals, the sector is trading at a 6.0% discount to the broker's fair value measures with a distribution yield of 5.1%. UBS expects conditions will support outperformance for the rest of 2015 based on slowing economic growth. The broker's economists are below consensus on GDP growth forecasts for 2015, at 2.3%.

UBS also dismisses the overly bearish argument surrounding the US Federal Reserve's eventual raising of interest rates. Of more importance is the US long bond and the broker expects, despite 200 basis points of Fed Funds tightening factored to the end of 2016, 10-year treasuries will rise by just 60 basis points, to 3.0%.

The broker believes Mirvac Group ((MGR)) and Stockland ((SGP)) could surprise the market at the results with net tangible asset gains, boasting diversified holdings with potential revaluation gains on developments. Mirvac's earnings are expected to surprise to the upside in FY16. The company has put 25% of Green Square up for sale which UBS estimates will be 3.7% accretive to FY16. Morgan Stanley, on the other hand, has downgraded its rating on Mirvac to Underweight from Overweight. This broker's analysis suggests consensus earnings estimates are too optimistic and moderating house price growth is likely to drive a price/earnings de-rating.

Of note, house prices do not need to decline. Only the rate of growth has only to slow for the de-rating to continue. Morgan Stanley notes the current cycle is the first since 1990, ex the GFC, in which the two stocks have underperformed the A-REITs index. Notable differences in the current cycle include regulatory involvement, historically low rates and uneven house price growth across capitals, as well as declining affordability. Morgan Stanley retains an Underweight rating for Stockland on a similar basis, as well for its material exposure to the weakening Western Australian residential market.

In contrast, UBS cites Mirvac's third quarter contract exchanges, which were at record highs. UBS expects pre-sales by year end to be nearing $1.4bn. The broker expects 13% growth in FY16 in terms of lots sold. Stockland has also recorded the highest number of net deposits in its year to date since 2011, while Lend Lease's ((LLC)) apartment pre-sales are expected to rise 50% in FY16. Morgan Stanley disagrees, with forecasts for flat residential volume growth being the key difference that sets it apart from consensus.

UBS envisages upside potential in Stockland's distribution and pay-out ratio in FY16. Stockland has maintained a flat distribution for a number of years after re-basing earnings. The case against a slightly higher pay-out ratio is the investment that is currently occurring in early stage master-planned communities. Macquarie believes Stockland's strong growth stands out, but also notes the distribution currently exceeds the targeted pay-out ratio.

Macquarie contemplates the potential for Mirvac to become a takeover target at current share prices. The broker also believes a tie up with Stockland could be modestly accretive because of a requirement for a majority scrip-funded deal, given balance sheet constraints, and Stockland being likely to have to raise equity at a much higher earnings yield relative to the earnings yield on the bid price for Mirvac. The broker also suspects other types of buyers could pay a higher price for Mirvac in an M&A scenario.

Other A-REITs high on Macquarie's list for potential M&A include Westfield Corp ((WFD)), which the broker suspects is likely to again restructure or be taken out in its existing form. Also, the broker does not envisage material synergies emanating from being an integrated operator across retail, office and industrial segments and speculates whether GPT Group ((GPT)) is ripe for breaking up. Whilst acknowledging a break-up would be a complicated transaction, the high quality nature of the company's real estate suggests there is value to be discovered in the process.

Outside of the residential sector the other aspect likely to feature in the FY15 results is specialty sales. UBS notes recent feedback on David Jones suggests a strong second half while Country Road sales in Australasia grew 11.5%. UBS expects discretionary retail will outperform over 2015 driven by a continuation of the wealth effect - strong house price growth and supportive equity markets -- while a lower Australian dollar supports increased inbound tourism and less online expenditure.

Macquarie takes a closer look at shopping centre tenants and finds travel agents is another category which is contracting. This is because of growth in online travel facilities and reduced total transaction value. A lower Australian dollar is also a negative for the industry, given around 55% of revenue is derived from Australians travelling overseas. Many international tourists book Australian holiday activities either from home or online, thus bypassing domestic travel agencies. Suppliers such as airlines and hotels have launched their own online offerings in order to secure direct bookings.

The broker cites data which reveals travel agents are the most productive retailers in a shopping centre, with low occupancy costs reflected in the bundled nature of items sold. While there is limited disclosure from the A-REIT sector in relation to travel agent exposure Macquarie suspects, when coupled with an already challenged backdrop in other categories, this supports a view that income growth from shopping centres will remain low in the future. With moderate earnings and distribution growth profiles Macquarie remains underweight pure retail A-REITs.

One segment that appears on the recovery trail is office. Macquarie still expects incentives to remain elevated over the next 12 months but they are easing. Hence, as its share price has de-rated and the operating environment is marginally better, the broker upgrades its recommendation on Dexus Property ((DXS)) to Outperform from Neutral.
 

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article 3 months old

Australia’s Building Boom Has Peaked

- Residential starts peaking
- Apartments to lead decline
- Non-res to provide some offset
 

By Greg Peel

Strong growth in the past few years has seen total dwelling starts in Australia reach to just over 210,000 in 2014-15 to mark a record all-time high, according to analysis conducted by research group BIS Shrapnel. From this level, activity is expected to begin trending down over the next three years, led by the previously surging apartment segment.

A sizeable deficiency in dwelling stock, coupled with historically low interest rates, drove building activity to its highs, but the market will shift into mild oversupply by 2018. Construction activity remains strong but population growth will slow, gradually eroding deficiency in key markets.

Net overseas migration is expected to continue its downward trend, easing in response to lower economic and employment growth. Building activity is estimated to have pushed above the underlying demand trend in 2014-15 for the first time since 2011. BIS Shrapnel estimates deficiency of building stock hit a peak in June 2014 of 108,000, but at June 2015 this had fallen back to 85,000.

Investors and upgraders/downsizers will continue to provide enough momentum to sustain construction at historical levels, resulting in deficiency being satisfied by 2018. The fall from the current peak will mostly be felt in the apartment segment, BIS Shrapnel suggests. Detached houses, which have seen a late run in the cycle, will prove more resilient, holding up until 2015-16 before beginning a more subdued decline.

From 2014-15, only NSW is expected to maintain current growth into 2015-16 on the back of a strengthening economy and a persistent deficiency of dwellings. Queensland will remain relatively flat around current levels as its market moves into balance, but Victoria will see a 7% decline, with Melbourne having seen over-building relative to demand. Western Australia is suffering a sharp slowing in population growth at the end of the mining and thus will suffer a 13% decline.

As residential construction surged over 2014-15, non-residential construction fell by 13%, BIS Shrapnel estimates. However non-res is expected to bounce back by 10%-plus in 2015-16. Growth will be driven by the commercial and industrial sectors (+17%) with retail in particular performing well (+29%). The overall profile for non-res out to 2018 nevertheless remains relatively flat, albeit typically lumpy, given economic conditions will remain subdued and it will take time for capacity constraints to build to underpin a new round of development.

BIS Shrapnel thus sees further 6% improvement in 2016-17 before a slip-back in 2017-18. Thereafter, a healthy upward trend should return as improved economic conditions begin to set in.


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article 3 months old

Gateway Lifestyle Offers Potential In Affordable Homes

-Large development pipeline
-High demand for seniors living
-Consolidation opportunity
 

By Eva Brocklehurst

Newly ASX-listed Gateway Lifestyle Group ((GTY)) is one of the country's largest owners of manufactured home estates, with a strong growth profile.

The company offers an FY16 distribution yield of 6.1%, which compares favourably against its sector peers, considering the growth profile. Income comes from three primary channels: rents, sales of homes and commissions from the sale of third-party homes. The company is focused on converting short-term sites at its mixed-use estates into long-term sites. Development is specifically limited to sites on adjoining vacant land to leverage the infrastructure currently in place.

There are 36 estates in Gateway Lifestyle's portfolio, with 4,046 tenanted sites that provide predictable rental income. Rents are non-seasonal and grow at a minimum of the CPI. An additional 2,172 sites are suitable for new manufactured houses so there is a substantial development pipeline over an eight-year period. Moelis estimates this may generate over $525m in revenue from manufactured homes which translates to around $210m in profit based on current prices.

Taking into account an under-geared balance sheet and likelihood of acquisitions, Moelis expects earnings growth of 12.2% into FY17. Distribution estimates are set at a 75% pay-out ratio, the mid point of the company's target of 65-85%. Moelis initiates coverage with a Buy rating and $2.37 target.

An ageing Australian demographic makes for a significant increase in demand for affordable accommodation for seniors. Furthermore, a fragmented market structure is expected to provide ample opportunity for consolidation in the sector. Gateway Lifestyle is considered well placed in this respect, boasting considerable acquisition experience. Moelis expects management to deploy earnings accretive acquisition opportunities in the short to medium term. The company's portfolio is spread across NSW, Queensland and Victoria. Manufactured homes are typically priced at 40-60% of the median house price in the area, which enables potential residents to sell their existing house and release equity to fund their retirement.

The company has also identified some opportunities for the future, including the sale of insurance and pharmaceutical products to residents, as well as leveraging the resident base to earn marketing revenue. Major competitors include Ingenia ((INA)) Hampshire Villages and Aspen ((APZ)), which appear to compete for existing parks on the eastern seaboard. Gateway Lifestyle does not operate either tourism or mining manufactured estates but is open to acquiring mixed-used villages with tourism sites, to the extent it is possible to convert these over time.

Risks centre on common themes such as a material downturn in the housing market in the localities in which the company operates. This may reduce the appeal of manufactured homes because of a narrower gap between the sale price of the existing home and the purchase of a manufactured alternative. There is also risk in developments with delays or issues with planning and regulations. Greenfield developments have the potential to adversely impact sales of manufactured homes and also the ability to increase rents.
 

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article 3 months old

Oz House Prices To Decline From 2017

- Prices to peak over the next two years
- Apartments to reach oversupply
- RBA rate rise in late 2016
- Declines seen from 2017


By Greg Peel

The ongoing rise in Australia's median house price is being driven by record low interest rates and a lag in housing supply. The bulk of the average is nevertheless being driven by Sydney, and to a lesser extent, Melbourne, both of which are expected to have posted double digit percentage average gains in 2014-15.

Sydney and Melbourne have experienced solid population growth, notes BIS Shrapnel's latest property report, Residential Property Prospects 2015 to 2018, alongside improving economic conditions and a lack of dwelling supply. Affordability in these cities has now reached a level of concern. Other capital cities are not experiencing such an affordability strain, given weaker house price growth due to more subdued economic conditions and excess dwelling supply.

Low interest rates will continue to support house prices, BIS Shrapnel suggests, but shifts in the housing demand/supply balance across the states will impact on prices in coming years. A boom in the construction of apartment blocks is creating a disconnect in the supply balance between detached houses and units and as such, a divergent price path is emerging.

Most capital cities are building apartment blocks at record rates, driven by investor demand. As projects are progressively completed, strong tenancy will be required to support rents and thus implicit unit value, BIS Shrapnel warns. At the same time, national population growth is beginning to slow, falling from a peak of 235,700 in 2012-13 to a forecast 184,000 in calendar 2014. The slowdown in net migration is most evident in the mining states of Western Australia, Queensland and the Northern Territory.

The detached house market is less reliant on tenant demand and more exposed to owner-occupiers. Here low interest rates are expected to continue to support house prices in most capital cities in 2015-16. BIS Shrapnel expects house supply in New South Wales, Queensland and Victoria to be in overall deficiency as of June 2015. The affordability strain in Sydney and Melbourne should nevertheless affect an easing to single digit percentage price growth over 2015-16. Brisbane has been experiencing weaker price growth recently, but further interest rate cuts this year should see house price growth supported.

Rapidly weakening economic conditions in WA and NT, as mining investment winds down, will lead to flat prices in Perth and Darwin.  South Australia, Tasmania and the ACT are all estimated to be in oversupply and thus will also see flat prices.

While the Australian economic transition away from mining to improved domestic demand is a slow one, BIS Shrapnel expects positive signs to be apparent by late in 2016, resulting in improving employment. While a stronger economy would usually suggest higher house prices, it will also signal the beginning of the RBA's interest rate tightening cycle. The central bank is expected to "fire a shot across the bow" at the first sign of economic improvement in order to stave off potential inflationary pressures.

The first rate rise, and fear of more to come, will impact on Sydney and Melbourne house prices. The undersupply element in these cities stands out given affordability has fallen to levels last seen at peaks in the RBA's interest rate cycle. But the current apartment construction boom means supply will be rising just as the RBA is looking to slow economic growth.

As dwellings under construction reach completion over the next three years, all states with the exception of NSW will either move into oversupply or see oversupply increased, BIS Shrapnel warns. As price pressure is alleviated, house prices are expected to remain flat or decline over 2016-17 and 2017-18. Sydney prices should remain supported until 2016-17 while Melbourne prices should begin to decline in 2015-16. Economic conditions will foster further declines in Perth and Darwin, while oversupply will foster further declines in Adelaide, Hobart and Canberra.

The exception is Brisbane, which has already suffered price declines against the trend of the rest of the country. Affordability has improved as a result thus combined with low interest rates, should lead to price support.

The aforementioned disconnect between detached houses and units means the bulk of price declines will be felt in the unit market. Detached house construction has lagged apartment block construction, which has been driven by investor demand. Thus BIS Shrapnel suggests house supply will remain in deficit or a slight surplus while units suffer from oversupply. While interest rates might rise, they will remain historically low, thus mortgage holders should not feel too much of a strain.

By June 2018, BIS Shrapnel expects only Brisbane to be experiencing any house price growth in real terms. Remaining capital cities are forecast to see median declines of up to an average 10%.  Unit prices are expected to decline 4-12% across the capital cities over the next three years.  

Given foreign investors are only permitted to purchase new apartments, the resale market will be confined to only domestic buyers.


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article 3 months old

Rural Funds Group A Low Risk Agriculture Play

-Attractive distribution yield
-Strong upside from Tocabil
-Scope for acquisitions
 

By Eva Brocklehurst

Rural Funds Group ((RFF)), an agricultural real estate trust, offers exposure to agricultural assets with minimal operating risk. The portfolio comprises almond orchards, poultry and vineyards, with water entitlements attached to each asset. The stapled security comprises $250m in established assets, underpinned by tenant covenants, and is externally managed by Rural Funds Management (RFM).

Moelis observes the security's forward distribution yield is an attractive 7.9% and distributions are expected to grow organically at around 3.0%, given the terms of the leases. There remains scope for acquisitions as well, given a history of acquiring and developing agricultural assets. Moelis notes the stock offers investors visible earnings, strong yield and exposure to Australia's agricultural sector. These features inspire the broker to initiate coverage with a Buy rating and target of $1.28.

Distributions in FY15 are expected to be 8.6c per security, rising to 8.9c in FY16, paid quarterly. The group is expected to deliver around 9.0c in earnings per security in FY15 following the $15m equity raising in March associated with the Tocabil development. Tocabil almond orchard was acquired last year for $5.2m. The tenant is Olam Orchards Australia, a subsidiary of the second largest almond grower globally, and the only supplier with production in both Australia and California.

There are limited capex requirements as Rural Funds Group employs a relatively standard lease structure. A stable income stream is expected from long-term leases to the likes of Olam, Treasury Wine Estates ((TWE)), Select Harvests ((SHV)) and RFM Poultry. Asset value is primarily concentrated on almond orchards and poultry infrastructure. Vineyards contribute around 16% with other areas relating to plant, cropping, grazing and livestock leasing.

Upside is expected to come first from the Tocabil acquisition which should, coupled with market rent review for two assets, deliver income growth of 18% in FY17 based on FY16 estimates. Moelis expects compression in cap rates - the ratio of asset value to producing income - in this segment, similar to what has happened in other non-traditional real estimate segments such as child care, caravan parks, self storage and data centres.

Downside risks centres on animal welfare standards, where the poultry tenant may be subject to making improvements which will come at a cost. There is also a risk of suspension events under the terms of chicken growing contracts. Under the terms of the lease any reduction in grower fee revenue relating to a suspension will result in a proportional reduction in the rent payable. Other risks include declines in asset values and natural disasters. Water availability is also a risk. Pursuant to the terms of the leases, Rural Funds Group is required to supply water from alternative sources for the orchards and vineyards where there is a reduction in entitlements attached to the asset.

The group owns 1,800 hectares of almonds at Hillston, NSW, supported by 27,210ml of ground water licence and irrigation infrastructure. Select Harvests leases 1,200 hectares with the remainder leased by RFM managed investment schemes. The weighted average lease expiry of the orchards is 14.1 years. The other mainstay, poultry, comprises 17 farms in NSW independently valued at $97.1m. The lessee is required to undertake maintenance with the group limited in its operating responsibility as the sheds are rented on a floor space basis, not a throughput basis. The sheds are leased to RFM Poultry, which has a long-term growth contract with Baiada, one of the largest processors of chicken in Australia.

At present Rural Funds Group has $152m in investment property, $67m in biological assets such as orchards and vineyards and $26m in water entitlements on its balance sheet.
 

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