Tag Archives: Telecom/Technology

article 3 months old

PS&C Downgrades But Brokers Not Worried

-Potential to make forecasts
-Downside limited in FY15
-Dividend confirmed
 

By Eva Brocklehurst

PS&C ((PSZ)) has succumbed to the weak demand gripping the Information Technology sector. Delays in the commencement of work in communications has pushed out the company's earnings timeframe so PS&C needs to complete projects rapidly to meet prospectus forecasts.

In its short life as a listed player, having commenced trading on ASX last December, the company has had to downgrade guidance for FY14 earnings, to $6.65-7.40m from the prospectus forecasts of $7.37m. The consulting part of the business is expected to exceed forecasts while the security segment, which tests to find faults in IT systems, is mixed. Hacklabs is expected to exceed forecasts while Securis is likely to be weaker. Allcom, the communications business, also has the potential to miss forecasts, but this depends on the timing of work done.

Brokers are not too worried. The company intends to pay a final dividend for FY14 of 3c, fully franked, which is above Bell Potter's expectations of 2.5c. The broker has downgraded FY14 earnings forecasts by 8% but makes little change to forecasts thereafter. Work not done in the communications business in late FY14 should flow through to FY15 and boost that period. Bell Potter retains a Buy recommendation and $1.15 target.

All going well, the company could still reach prospectus forecasts, in Morgans' opinion. The broker observes the IT services sector is generally quite weak. Morgans has reduced FY14 forecasts by around 9% and, given overall sector weakness, reduced FY15 forecasts by 7%. As PS&C is trading on a FY14 and FY15 price/earnings ratio of 7.7 times and 7.0 times respectively, yielding 7%, there is value in the stock in the broker's view.

Moreover, earnings growth is still ahead of peers and, as the share price has fallen 25% since the IPO, Morgans believes weakness is already factored in. The company's people business - consulting, contractor management and recruitment - is performing well and the broker considers the main issues seem to be in the communications business, which typically has a very strong fourth quarter.

Morgans has retained an Add rating as the stock is fundamentally cheap. The target is lowered to $1.05 from $1.24. Downside risks relate to the company potentially becoming a victim of tax loss selling, where investors sell to crystallise capital losses ahead of the June 30 end to the tax year. Despite this prospect, the broker believes the business has fundamental value, and downside risk in FY15 is limited.

See also, PS&C Building Opportunities In Technology on January 20 2014.
 

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article 3 months old

Weekly Broker Wrap: Oz Tax, Banks, M&A Targets, Telcos And Retail

-FY14 and capital losses
-Optimism for asset managers
-Are Oz banks really expensive?
-Large number of potential M&As
-Optus ramps up mobile competition
-Which retailers benefit in the current climate?
 

By Eva Brocklehurst

As the Australian financial year draws to a close investor decisions are influenced by attempts to minimise capital gains in some instances. Macquarie highlights typical tax loss selling and notes stocks with shareholders sitting on large capital losses typically experience further selling pressure over the next month, as these losses are crystallised before June 30. Such ASX 100 stocks sitting on capital losses include Regis Resources ((RRL)), Graincorp ((GNC)), QBE Insurance ((QBE)) and Coca-Cola Amatil ((CCL)). Those sitting on strong capital gains, where there is likely to be less selling pressure over the next month, include SEEK ((SEEK)), Challenger ((CGF)), REA Group ((REA)) and Lend Lease ((LLC)). Macquarie observes that nearly 80% of ASX stocks are sitting on capital gains since July 1 2013.

Macquarie is optimistic about the outlook for equities, both Australian and global. Despite the prospect of rising US interest rates the broker thinks the cycle will be quite muted. Stocks which are positively leveraged to the equity market outlook should perform well. Emerging leader asset managers have sold off substantially in recent weeks but the broker thinks the fundamentals are sound. From this sector Macquarie rates Magellan Financial ((MFG)) as a top pick, on Outperform. The business has potential from an improving investment performance and within the wholesale distribution segment. Platinum Asset Management ((PTM)) is another stock in the sector rated Outperform, for which the broker observes improved momentum. The third is BT Asset Management ((BTT)). This stock is coming off a particularly strong FY14, in which performance fees feature prominently, so growth is under pressure going forward. Still valuations are attractive thus while lower in the pecking order, the broker has upgraded to Outperform.

***

Australia's banks are not as expensive as they look, in Deutsche Bank's view. The broker thinks a simplistic analysis that looks only at the headline price/earnings ratio is misleading. From a comparison of relative valuations with historical levels the banks are slightly cheap or fair value. Moreover, dividend yields are supportive and the certainty of relative earnings favours the banks. The broker thinks the banks' PEs are based on very conservative forecasts and this relative conservatism could be inflating the ratios by around 2% for FY15 and 4% for FY16. Relative valuations show the banks are trading at a 3-4% discount to historical levels, based on the broker's forecasts. Deutsche Bank notes ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) offer the greatest upside but given NAB's poor first half, its discount is likely to remain for some time. The ANZ discount is hard to justify, in the broker's view, given the bank's above-peer earnings growth profile for the next three years.

***

CIMB observes the macro backdrop to equity investing reveals pent-up demand, currency weakness and stronger business confidence. Deal flows continue to be driven by cross-border interest and the US remains Australia's main source of offshore equity capital. Mergers and acquisitions could be underpinned by weak revenue growth and low interest rates continuing for some years. The broker estimates that around 48 stocks within the ASX 200 are actively considering M&A or asset divestment. The broker assesses the prospects for M&A based on balance sheet strength and valuation and expects more of this activity in healthcare, online media, food and staples. Prospects for M&A in capital goods, metals and mining look relatively low.

This research translates into potential targets, or those stocks likely to offload non-performing assets, such as Ten Network ((TEN)), OZ Minerals ((OZL)), National Australia Bank, Cabcharge ((CAB)) and Wotif.com ((WTF). Conversely, stocks like Telstra ((TLS)), Brambles ((BXB)), SEEK, Ramsay Health Care ((RHC)), CSL ((CSL)), New Hope ((NHC)), Wesfarmers ((WES)) and Myer ((MYR)) all look to be on the hunt, although the broker acknowledges that the deals need to be good for shareholders, with a skew towards cash or debt funding rather than equity.

***

Singapore Telecom ((SGT)) has reiterated its intention to revitalise customer growth at Optus. JP Morgan suspects competition will heat up in the Australian telco market, particularly in mobiles. The broker thinks the plans for Optus to share data among devices challenges Telstra's hopes for growth in the mobile broadband network. Optus is not under intense pressure but the broker suspects the main brand lost significant ground in mobile in 2013. JP Morgan considers the company's strategy has two elements, addressing the value end of the market in order to head off a recovery in Vodafone ((HTA)), and tackling Telstra on what Optus perceives as its weaknesses. One of the tactics exploits shared data. Optus will allow up to five SIMs to be linked to the same data allowance. From this JP Morgan implies that any cannibalisation of Optus' own base is expected to be outweighed by gains from Telstra and Vodafone. Management has also reiterated a commitment to lower pricing in data roaming, an area in which Optus thinks Telstra is vulnerable.

***

Citi observes retail sales data from the Australian Bureau of Statistics is very important for the information it provides regarding listed retailers. The accuracy of the data varies and online leakage is large but the broker still finds it useful for benchmarking the likes of Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Wesfarmers and Woolworths ((WOW)). Recent sales trends are not encouraging for electronics retailers and the broker has set Sell ratings on the former two stocks. The broker observes the relevance of the data is far higher for food & liquor, hardware, electronics and department stores and warns investors should avoid relying on ABS data for clothing, recreational goods and takeaway food.

UBS finds the themes across the retail sector have been consistent for the past six months, with housing related categories performing strongly and the major stores winning market share. Sales at supermarkets have now out-paced other specialised food providers for seven consecutive months. The broker is cautious in the near term for apparel names, particularly following recent downgrades from Retail Cube ((RCG)) and Noni B ((NBL)). UBS reiterates a preference for Woolworths because of its grocery exposure. This broker likes Harvey Norman and JB Hi-Fi for housing exposure, and highlights near-term earnings risk for apparel-weighted stocks Myer and David Jones ((DJS)), should the trends from May persist through June and July.
 

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article 3 months old

Weekly Broker Wrap: Oz M&A, Banks, Aviation, Chemicals And IT

-M&A targets
-Bank exposures to bankruptcies
-Dividend differences for major banks
-Is Oz aviation now more rational?
-Chemical sector under pressure
-IT positioning for a rebound
 

By Eva Brocklehurst

A spate of merger and acquisition transactions in the Australian market has made short positions a dangerous pursuit and reversed the underperformance of some stocks. BA-Merrill Lynch makes this observation and screens potential ASX 200 targets by applying the metrics of recent transactions. Metrics include cheap valuation, low financial leverage and good free cash flow.

So which stocks could be next in the firing line? The broker cites miners where the market is sceptical of analysts' forecasts, such as Mount Gibson Iron ((MGX)), Fortescue Metals ((FMG)), Sandfire Resources ((SFR)), Regis Resources ((RRL)) and Evolution Mining ((EVN)). Mining services providers are also prominent on the list and include WorleyParsons ((WOR)), Downer EDI ((DOW)), Monadelphous ((MND)) and Mineral Resources ((MIN)). Consumer stocks Myer ((MYR)), Wotif.com ((WTF)) and Seven West Media ((SWM)) are inexpensive, have low leverage and good free cash generation as do iiNet ((IIN)) and Telecom NZ ((TEL)) among the telcos. The uptick in M&A activity is encouraging for Macquarie Group ((MQG)), given its exposure to capital markets and Merrills notes Macquarie's Australian deal flow was the highest in more than five years during April.

***

Australian banks which are most exposed to the mass retrenchments by single employers, in the context of consumer asset quality and a default environment, are the subject of a sector review by Credit Suisse. The broker observes ANZ Bank ((ANZ)) is more exposed to recent high profile closures announced by Holden, Ford, Toyota and Boeing, based on branch density by postcode. This also reflects ANZ's concentration in manufacturing and its domestic home market of Victoria.

More generally in regard to regional personal bankruptcy trends, the broker considers Commonwealth Bank ((CBA)), followed by National Australia ((NAB)) as relatively exposed to higher volume bankruptcies. CBA has a high percentage of its national branch network in four of the ten most stressed regions. Suncorp ((SUN)) has a relatively high percentage of its national branch network in three of these regions - all in Queensland. Bank of Queensland ((BOQ)) has a high percentage in three, with two in Queensland and one in Perth. CBA and Westpac ((WBC)) have exposure to three of the least stressed regions via their branch networks and Bendigo and Adelaide Bank ((BEN)) has a relatively high percentage of its national branch network in four of the lowest regions for potential bankruptcy.

***

Macquarie has looked at the underlying differences in the major banks in terms of their dividend outlook. Share price performance has been driven by dividend growth, while APRA's recent adjustments to capital requirements have stymied the rising pay-out story. Macquarie suspects some banks may start building capital again. At face value CBA seems most affected by the new rules, with $2.2bn in Colonial gearing costing 65 basis points in capital to bring the normalised CET1 ratio to 7.85%, while ANZ is the least affected at 22 basis points.

APRA has approved a transition period for the new rules and the banks could use "slow burn" tactics such as discounted dividend reinvestment plans (DRP), constrained risk weighted asset growth and slower dividend growth as remedies. The broker thinks such tactics would be a recipe for the market capitalising a temporary capital build as a low dividend growth outlook, as was the case in 2010-2012. Alternatively, the major banks could close the gap by partially underwriting their DRPs. Macquarie believes CBA is best placed in this scenario and includes two 50c special dividends for CBA in FY15 and FY16 estimates. NAB and ANZ will need to raise more capital through DRPs to get to the required levels. This means an earnings downgrade by the broker for those banks of 1-2% over FY15 and FY16.

(See also: Australian Banks: Result Season Scorecard on the subject of banks and their capital positions.)

***

Is Australia's aviation industry becoming more rational? Deutsche Bank was encouraged by Qantas ((QAN)) announcing it will keep capacity flat during the first quarter of FY15. Yields appear to be increasing as well, but the broker remains cautious about the near-term profitability of airlines. Qantas' capacity as measured by available seat kilometres (ASKs) is relatively flat but the actual seats in the booking system are continuing to grow at over 2%, based on both Qantas and Jetstar brands. This implies that planes are being redirected to shorter routes but the question remains regarding what actual upward pressure this will have on yields, given the capacity growth was previously directed, the broker suspects, to the resources sector, which is currently slowing. Virgin Australia's ((VAH)) booking system suggests available seat growth will average 1.5% per month and Deutsche Bank expects Virgin to take more market share from Qantas.

***

Australia's chemical sector earnings continue to deteriorate as both pricing and volumes weaken. Morgan Stanley believes Orica ((ORI)) is the most exposed to this weakness. The broker believes the downturn in explosives earnings, evident in the fist half of 2014, is only just beginning. Feedback from investors revealed they think Australian miners are not interested in using foreign ammonium nitrate, given perceived risks to mining operations. Morgan Stanley's survey suggests such faith in the Australian duopoly of Orica and Incitec Pivot ((IPL)) might be misplaced, as the majority of miner respondents are interested in lower cost imports under the right circumstances. Australian explosives prices fell 1-5% on average in 2013 and a further 3-5% decline is expected this year.

Morgan Stanley has found little evidence to explain away the weak volume growth as a function of miners high grading their mines. The broker thinks structural factors are more likely, such as more efficient blasting techniques and a shift to emulsion use. Volume shocks from Australian coal mine closures are also increasingly likely.

***

IT services are positioning for a rebound but Morgan Stanley thinks there is a risk that demand may not stabilise until well into FY15. The broker finds there is limited scope for price rises or a rapid acceleration in IT projects to drive earnings higher. Still, utilisation rates are depressed and any top line growth should absorb existing capacity, providing operating leverage. Growth, annuity earnings and a discount to peers amounts to a compelling investment case for CSG ((CSV)), in the broker's view. Morgan Stanley expects the company to more than double its earnings in FY14 compared with FY12. Comparing listed players in terms of the annuity mix, offshore capability and client sector exposure casts a favourable light on Oakton ((OKN)). Market expectations of the stock are modest and Morgan Stanley observes a strong balance sheet and scope for operating leverage. Oakton has moved its mix most aggressively offshore and endured the most price deflation.
 

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article 3 months old

Telstra Asserts Its Strength In Mobile

-Will competitors become more aggressive?
-Revenue up but subscriber growth slows
-Potential to squeeze up dividend?
-UBS suggests acquisitions more likely

 

By Eva Brocklehurst

It is evident to brokers from Telstra's ((TLS)) latest briefing on its mobile business that subscriber growth is slowing but opinion diverges on the strength of the various growth drivers on offer.

JP Morgan believes the update was designed to reassure investors that the company's lead in the mobile network was strong enough to hold share and margin, while tilting the focus to industry growth rather than market share. The broker senses an attempt to wean investors off the view, one that JP Morgan shares, that the lop-sided industry structure could force competitors towards more aggressive tactics. Hence, the broker reserves judgment on some of the growth drivers. Mobile broadband is a key plank in Telstra's growth story but JP Morgan believes the pricing power bestowed by Telstra's leadership in the network is yet to be tested by competitor responses, and assumes mobile earnings will flatten in the next few years.

Deutsche Bank shares concerns about the company's capacity to fully offset rising competition and slowing subscriber growth with data and M2M (machine to machine), which is currently difficult to monetise. The broker believes long-term mobile growth is constrained to 0-2%, which will drag on the company's overall growth. A Hold rating is retained.

Three key trends were highlighted for BA-Merrill Lynch. Revenue growth is set to accelerate as average revenue per unit (ARPU) turns positive and subscriber growth slows. Margins are expanding on the back of lower subsidies and increasing use of low-cost channels and more efficient networks. Furthermore, there is the upcoming launch of 700MHz to widen the network quality gap. Mobile makes up half of Telstra's equity value now and the broker reiterates a Buy rating. Mobile post-paid is now at an inflection point, in Merrills' view, as the negatives from international roaming charges and over-use pricing are cycled and underlying demand applies upward pressure.

Credit Suisse echoes this positive view on the company's mobile network. The broker notes strong market share gains are coming to a natural end as subscriber growth slows but ARPU is picking up because of strong growth in data usage and relatively stable pricing. The flows are sufficient to achieve expected mobile revenue growth of 5.9% in the second half of FY14. The broker also hails the strong brand and network position and expects margins to improve as costs come down.

CIMB's focus is on the value add and service quality momentum. The broker thinks Telstra has good growth potential in the long term from data, devices and M2M. CIMB forecasts a 14.5c final dividend for FY14, making 29c for the full year. The strong mobile-driven cash flow also allows room for a further 1c, fully franked, although the broker is mindful that payment depends on the board's comfort that dividends can be maintained at the higher level. Macquarie balances out the revenue implications from slower subscriber momentum, attributed to a maturing of the market, with positive ARPU impacts. The margin outlook appears healthy in mobile and the broker notes increased scale, with Telstra looking to stimulate growth via tablets for the enterprise market.

UBS thinks Telstra is expensive on every measure. Mobile industry growth is slowing at the same time that price/value base competition is picking up. The broker expects outbound mobile services revenue to grow 7% in FY14 but then slow to 5% in FY15 and again to 3% in FY16-18. Capital management and acquisition options may be hovering but to UBS the latter looks the most likely. A buy-back is less than 0.5% accretive to earnings at current prices and there is a lack of franking credits to fund a special distribution.

On FNArena's database Telstra has three Buy ratings, three Hold and one Sell (UBS). The consensus target is $5.25, suggesting 1.2% downside to the last share price. The dividend yield on FY14 and FY15 forecasts is 5.5% and 5.8% respectively. 
 

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article 3 months old

Flexigroup Spending To Grow

-Hard to replicate prior growth
-Higher costs reduce earnings estimates
 

By Eva Brocklehurst

Leasing and finance service provider Flexigroup ((FXL)) is an example of a stock for which robust growth over several years tends to overshadow the outlook, no matter whether that too is still strong. Brokers are mindful that the share price has fallen away over recent months and maintain there's good value in the stock. The company held an investor briefing recently to update on growth strategies and new products and, while broker spirits were lifted, a degree of caution still prevails.

To Goldman Sachs it's obvious the business is changing. Flexigroup is moving into lower risk customer segments and with this comes lower margins but also lower bad debt rates, lower funding costs and lower capital intensity. Hence, net profit growth will likely lag receivables growth. Goldman is not perturbed by this because a decline in margins is due to a shifting of the mix rather than any change in profitability. The broker notes the fall in profit margins, as the business shifts to lower risk segments such as interest-free cards and commercial leasing, is expected to be offset by 5-20% annual value growth in all business outside of consumer leasing. The Certegy business, the company's card payment services, offers considerable growth potential from better penetrating the existing markets, in Goldman's view. FY15 forecasts are revised lower by 3% but the broker adds 1% to FY16 and retains a Buy rating, given the stock is trading on a FY15 price/earnings multiple of 12 times, which is a 23% discount to the Small Industrials.

When FNArena reviewed the stock in the wake of the FY13 results the company had just posted its fourth year of double digit earnings growth and there were four Buy ratings on the database. There are still four Buy ratings. No Hold and no Sell. The consensus price target is $4.73, suggesting 29.8% upside to the last share price. This compares with $4.78 ahead of the latest update. Targets range from $4.45 (UBS) to $5.00 (Credit Suisse). The dividend yield on FY14 and FY15 forecasts is 4.6% and 5.0% respectively.

CLSA likes the new initiatives but thinks there's a big cost increase to recoup and investors may be cautious about pricing in too much growth for FY16 just yet. New initiatives include a rental bond product for Certegy, a new mobile plan bundle launched in conjunction with Harvey Norman ((HVN)), new retail and enterprise platforms enabling faster processing and a new Paymate on the Go. One new development is the expansion of Certegy further into New Zealand via the acquisition of Equico. Still, earnings expectations are lowered so CLSA retains an Underperform rating. CLSA has decided to reduce its target to $3.80 from $4.30 but acknowledges valuation support has not changed significantly. What the broker has imposed is an additional discount for the near term, recognising a headwind from downgraded earnings forecasts.

Management believes an interest free cards business has the potential to be the next Certegy in terms of growth. This is an area where Flexigroup sees a gap in affinity marketing which the banks do not fill, reflected in its co-branded card with Dick Smith ((DSH)). Macquarie observes a recent de-rating amidst concerns around growth and recent acquisitions and thinks organic growth could be softer while the cards business ramps up. The broker acknowledges such growth potential exists but remains sceptical regarding the time it will take for the business to gain momentum.

UBS considers the company is doing well but also believes will be hard to replicate the growth in coming years. UBS thinks many are discounting the cyclical support the company will obtain and expects additional growth avenues will come from the interest free cards and enterprise/SME leasing, more market share gains in solar and the potential entry into solar storage. The company's track record with acquisitions has also been disciplined and value accretive, in UBS' view.

IT and digital platforms are increasingly important for the company to stay in front of the industry and management has noted that IT investment is likely to rise to 9% of income in FY15, from around 4-5% in FY13. UBS believes this is necessary to support growth in coming years but earnings forecasts need to be trimmed marginally to factor this in. The broker thinks the stock is attractive at current multiples, despite the more moderate growth profile and the additional costs. This may warrant a de-rating but UBS is comfortable with the risk that is factored into the price at current levels.
 

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article 3 months old

Vocus: A Growing Force In Dark Fibre

-Difficult to emulate Vocus' growth rate
-Demand for dark fibre substantial
 

By Eva Brocklehurst

The future is dark. Fibre that is. Vocus Communications ((VOC)) has garnered attention from several brokers as it expands a dark fibre offering with a substantial growth opportunity. CLSA thinks the stock is one of the few telecoms that can generate double digit organic growth over the next few years, expecting a 27% compound annual rate for earnings in FY14-17. Bell Potter expects 31% for the same period.

The company's network has reached a point where capital efficiency and operating leverage has started to show. CLSA has initiated coverage with a Buy rating and $5.65 target. The broker notes Vocus is trading at a 15% premium to its closest rival, Amcom ((AMM)), which shares the Western Australian metro duopoly with Vocus. According to CLSA, Vocus has the stronger growth profile. Compared with TPG Telecom ((TPM)), the main competitor in dark fibre on the eastern seaboard, Vocus is cheaper. There are high barriers to entry in this market, because of the high capital intensity needed to roll out fibre and access rights to land and the three companies are considered the main incumbents.

Dark fibre is the most profitable product for Vocus, being high margin. Moreover, dark fibre requires little ongoing support as the customer is responsible for running the transmission devices. The company is therefore primed to benefit from growth in cloud computing, data consumption and demand for super-fast connectivity with plenty of capacity to meet this need, in CLSA's view. CLSA expects returns on invested capital to improve to 17% in FY16 from 9% in FY13.

Credit Suisse thinks the company has an attractive structural growth story, as Vocus intends to accelerate growth plans via bolt-on acquisitions, leveraging success from the past three years of acquisitions. As corporates move their IT functions to a data centre, this could be the catalyst for seeking alternatives to their existing data networks provider. Credit Suisse has an Outperform rating and $5.40 target. Bell Potter is a little more subdued in its views. The broker revisited forecasts but left them unchanged after Vocus acquired iBOSS International and One Telecom recently. These are tiny acquisitions and it is unclear how many customers will be reconnected with Vocus. These are also the first acquisitions since Vocus undertook its $48m capital raising. Bell Potter retains a Hold rating and $4.50 target, believing that on a FY15 price/earnings ratio of 20 times the forecast earnings are already reflected in the share price.

What are the threats? In CLSA's opinion the threats could come from TPG's Pipe Networks, which may enter a price war to gain market share, and/or Megaport, Australia's first network as a service, which may pose a longer-term threat if its on-demand fibre connectivity becomes a viable substitute for Vocus dark fibre. What are the other risks going forward? The biggest for CLSA is price deflation. Dark fibre prices have fallen by 15% per annum. There is the risk that assumptions may be too optimistic if competitors were to behave irrationally by undercutting prices.

Vocus was established in 2008 to provide an international telecom network and wholesale services to ISPs (internet service providers). It has since diversified into data centre and dark fibre, operating 12 data centres across wight sites in Australia and New Zealand. CLSA highlights the cross selling opportunities that front the company, and the fact that Vocus is on the hunt for further acquisitions - second tier data centres in a fragmented market. The company has a right to use the Southern Cross cable which provides a connection between Australia and the US west coast via New Zealand and Hawaii. Earnings growth has impressed brokers since Vocus listed in 2010, although that took a knock from a significant capital raising in FY13. Dark fibre and ethernet represent around 30% of revenue at present. CLSA expects this to rise to 50% in FY16.

What is dark fibre? Dark fibre refers to optical fibre that has not been connected to any transmission equipment - which when switched on provides the "light". Each strand of dark fibre leased is used exclusively by the customer. The company's ethernet management services use different communication media to link office locations and connect to a data centre, mainly fibre but not necessarily so. This feature of the business is used by smaller companies without the IT resources to manage a dark fibre connection. CLSA notes there is a lot of pent-up demand for dark fibre, given its superior characteristics such as high bandwidth, security and reliability. Telstra ((TLS)) and Optus ((SGT)) may operate the most extensive network of fibre between cities and in metro areas but they are not specifically selling dark fibre.
 

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article 3 months old

Strong Growth Heading Altium’s Way

-Opportunities to drive scale
-Strong earnings growth expected
 

By Eva Brocklehurst

Circuit board designer Altium ((ALU)) has turned around. There are some big growth numbers heading the company's way and brokers are increasingly confident the company can perform.

Moelis has set a Buy rating and $3.00 target, noting that despite an 80% increase in the share price over the past year, FY15 multiples are undemanding in the context of sustainable growth per annum of over 15%. A 45% underlying profit increase in the first half was indicative of the scale that will come from top line growth opportunities in a global niche market segment. Altium targets the mid tier of the global printed circuit board (PCB) design market, which Moelis observes is worth US$500m within a total market of US$800m, of which Altium has a 10% share. This share is growing because of a lower priced product with comparable features to competitor offerings.

It wasn't always this way. The company has endured four years of either negative or low earnings because of a number of one-off items including restructuring, share-based payments and an onerous lease. These issues have now been dealt with and the outlook is strong for both revenue growth and margin expansion.

Bell Potter has initiated on the stock with a Buy rating and $2.75 target and bases its investment case on the company's position in the top five in the PCB design market. PCBs are integral to electronic parts, the broker notes, and Altium develops links and assists designers of electronics to manage their projects. Bell Potter expects earnings growth of 508% in FY14, 26% in FY15 and 29% in FY16 and now expects a much narrower gap between reported and underlying earnings. The broker's forecast dividend for FY14 is 12.5c, suggesting a yield of 5.7% on earnings estimates of US$15m. For FY15 that forecast extends to a 13.5c dividend and a yield of 6.1% on earnings estimates of US$18.7m.

The March quarter showed the company has significant growth opportunities with primary regional drivers being Europe and the Middle East as well as China, where the CEO, Aram Mirkazemi, is based. Moelis observes the trend in the Americas is also improving, contributing 40% of sales in the March quarter. The reseller model has now been restructured in the US. Moelis also expects R&D spending will be relatively stable, at around US$10m per annum. Bell Potter also likes the potential upside from expanding into new markets. Management is focused on developing a new product suitable for the top end of the market segment, in order to increase market size and growth potential. This product development is expected to be completed in FY15. The company is also releasing new products into the low end or the market.

Bell Potter assumes only modest revenue from new products, with potential upside to forecasts should the product releases be more successful than assumed. The broker also notes the company is at a point where it can grow revenue without having to increase expenses by a similar percentage, so over the medium term margin improvement is expected. Key risks centre on FX fluctuations as the majority of sales are in US dollars or euro, while the majority of costs are in US dollars. There is always the risk that new technology will make the company's products less competitive but at present PCBs are holding the floor.

The corporate structure of the company has evolved with the high percentage of sales in offshore markets. Founded in 1985 as Protel, originally, the headquarters were in Sydney but then moved to Silicon Valley in the US in 1990. Headquarters were then moved back to Sydney in 2001, when the company's name changed to Altium. Main operations are in Sydney and Shanghai with R&D in Ukraine, the Netherlands and China.
 

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article 3 months old

Downside Pressure For Telstra

By Nick Linton-Ffrost

We suspect the next 3-5 days trading and the price action around 5.10 and 4.95 will determine Telstra ((TLS)) direction for the next 2-3 weeks.

Trading below 4.95-5.00 for a few days brings the bearish wedge pattern into play which would improve the odds for a move towards 4.70.

Whereas a few days trading back above 5.05-5.10 would imply a return to the two month trading range between 5.00 and 5.30. Before trading from the long side we require a high low to from above 5.00.

Trading tactics

Open shorts after a few days trading below 5.05 placing stops above 5.15 and looking for a move to 4.70.



Another trading idea from

Fifth Wave | fwtc.com.au                                               

FW generates over 150 Trading Alerts on the ASX100 each year. We are a subscription service specialising in short term technical strategies based on 27years experience.

 AFSL 319830 | Disclaimer

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).

Technical limitations

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article 3 months old

Weekly Broker Wrap: Telcos, REITs, Registries, Wagering And Media

-Growth slowing for telcos
-Valuation key to GPT, Charter Hall
-Shareholder numbers decreasing
-William Hill threat to retail wagering
-Media outlook improving


By Eva Brocklehurst

CIMB contends there's no such thing as normal in the telco sector. Conditions change with the seasons. Still, the broker notes several abnormal issues influenced performance over the recent reporting period and these seem to be diminishing. The broker thinks the mobile sector is promising more competition, while organic growth in broadband is slowing and there are fewer acquisitions available to improve scale. Telstra ((TLS)) is well priced and offers reliable earnings and dividend with sheer scale enabling it to withstand market conditions. Smaller telcos are priced for growth or acquisitions, opportunities that CIMB thinks are receding. Growth will still happen, the broker maintains, but it will be a return to low service revenue growth in mobile and a maturing, hence slowing, of fixed broadband growth. The broker is generally neutral on the sector. Among the Aussie telcos the broker covers, CIMB has a Hold rating on Telstra and a Reduce rating for both M2 Telecommunications ((MTU)) and iiNet ((IIN)).

Are GPT Group ((GPT)) and Charter Hall Group ((CHC)) starting to resemble each other? That's the question CLSA is asking. Both have high growing property funds in the same three asset classes with near-identical margins. The broker notes Charter Hall has greater leverage to funds management growth while GPT's balance sheet capacity is a huge comparative advantage. So, which one gets the bigger tick? The starkest difference, CLSA observes, is in valuation.

The broker estimates the market places a 20 times earnings valuation on Charter Hall and no premium for GPT. In valuing Charter Hall, CLSA notes the company has outperformed Australian real estate investment trusts (A-REITs) by 13.4% versus 5.5% year-to-date, and is trading within 1% of the price target - $4.17. This means the stock is fair value, with the price target implying a 6% total return. Hence, the rating is downgraded to Underperform. In GPT's case, the stock has outperformed A-REITs by 10.3% year-to-date and the price target of $4.15 implies a 16.2% total return. The Outperform rating is maintained.

The JP Morgan registry survey, conducted in December and January, has found Computershare ((CPU)) and Link service 95% of the companies in the S&P/ASX200 index, although Boardroom doubled share to 4%. Of note, the rate of switching increased in 2013, with 4.6% of the market changing providers, up from 1-2% historically. There was also an increased tendency for respondents to put registry contracts out to tender.

Shareholder numbers continue to decrease, with 72% of companies reporting flat or decreasing shareholder numbers over past six months. Pricing was flat or falling, driven by, JP Morgan suspects, falling shareholder numbers, increased competition and a low number of contracts being renewed in any one year. Computershare received a higher positive response rate for performance compared with Link, but Link continues to outperform on cost. Another observation is that corporate activity was weaker for registrars in 2013 against 2012, while a stronger IPO market did not add material new shareholders. Secondary raisings decreased by 19% and the companies with a discounted dividend reinvestment plan fell to 17% from 26%.

Be warned. CIMB observes UK-based wagering business William Hill is talking up intentions for Australia. The company will land a vastly improved offering at the end of this month and intensify competition with the locals, Tabcorp Holdings ((TAH)) and Tatts ((TTS)). By the end of March William Hill will integrate Tom Waterhouse into Sportingbet and launch a new website, providing easier player registration and betting, with improved display and navigation. CIMB thinks this will have a significant impact on Australian online wagering. More so because it appears from the results season that online betting is cannibalising retail betting. William Hill is shifting its marketing mix towards online and the company expects to reach a 69:31 ratio in FY14. This leads to a lower cost per player acquired and will enable the business to continue to operate on considerably lower win margins than either of the local retail incumbents. It adds up to a loss of market share for both Tabcorp and Tatts, according to CIMB.

The latest results season was positive for the media. Finally, there are signs of improved trading and cost control. JP Morgan observes a bump up in share prices in response to the better outlook. It's early days but the broker is heartened by the improved second half outlook, with Fairfax Media ((FXJ)) being the stand out stock in that regard. Seven West Media ((SWM)) has increased TV guidance to low-to-mid single digit growth. The one area that remains subdued is regional markets, reflected in a more sober outlook for local revenue from Prime Media ((PRT)) and Southern Cross Media ((SXL)).

JP Morgan has Overweight recommendations on Carsales.com ((CRZ)), Seven West and Prime Media. Understood. The broker thinks the issues facing Carsales in new car inventory/manufacturer display are short/medium term. However, the broker is Underweight Ten Network ((TEN)) and Fairfax. The Underweight rating for Ten stems from the fact that JP Morgan thinks any rating/revenue recovery will take time and require significant reinvestment in programming. As for Fairfax, cost control and improved trading conditions are well and good but the broker is cautious about extrapolating this out too far. JP Morgan continues to believe that, excluding Domain, Fairfax lacks strong digital growth assets.
 

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article 3 months old

Weekly Broker Wrap: M2 Telecom, Health Care And Financials

-Disparities in M2 accounts
-Potential for M&A in radiology?
-Medicare reform possibilities
-Can bank impairments go lower?
-Fund managers prefer insurers
 

By Eva Brocklehurst

CLSA has reservations regarding junior telco M2 Telecomunications ((MTU)). The broker has a problem with the company's accounting methods for acquisitions, which is creating an exponential divergence between underlying and reported profit. The broker was surprised that the $203m paid for the Dodo acquisition will be wholly accounted for as goodwill. This means the value of identifiable net assets is zero. The broker compares such a method with the iiNet ((IIN)) acquisition of Westnet, where 20% of the price was booked to net assets. CLSA also observes that M2's management incentives are based on underlying earnings, not reported earnings. The exponential divergence in the accounting treatment lowers reported earnings and raises underlying earnings.

The broker admits it doesn't like the structure that gives management an incentive to grow by acquisition and gear up the balance sheet. CLSA's fundamental concerns about M2 centre on the absence of operating leverage and margin expansion, despite the numerous acquisitions. This brings into question the quality of the assets acquired. The broker also notes the relatively high leverage on the balance sheet, with twice net debt to earnings, a high ratio for a small telco. The broker also raises the red flag regarding governance issues - the former CEO and founder is still on the board and there's the link between management remuneration and absolute profit growth.

BA-Merrill Lynch observes from the latest Medicare and PBS data that radiology volumes have been stable over the last month, with volume and benefit growing at 5-6% and 6-8% respectively for almost a year. The recent acquisition of I-MED, Australia's largest radiology business, by a Swedish private equity group has re-affirmed the broker's belief that mergers and acquisitions will become the FY14 theme for the sub-sector. This is because of the appealing remuneration models. Having said that, Merrills acknowledges that both Primary Health Care ((PRY)) and Sonic Healthcare ((SHL)) have indicated they do not intend to pursue acquisitive growth in this sub-sector.

The broker believes the federal government has put the health industry on notice for an increased likelihood of reforms, particularly regarding the increase in contributions to health care costs for those who can afford and the need to modernise Medicare, given changing demographics and disease profiles. While there's nothing concrete likely to come ahead of the May budget, Merrills concludes that a lack of pricing uplift, if indexation of GP rates continues for another 12 months, means the only way Primary, the predominant bulk biller, could increase revenue would be to increase volume. Alternatively, the company could seek better monetisation of each patient with non-GP services, but this can be problematic in the broker's opinion.

Ultimately, Merrills expects Primary would maintain a bulk billing approach, reducing the potential growth on offer. If the government mandates a GP co-payment then Primary is seen as more exposed to this risk than Sonic. The broker maintains a preferential Buy rating on Sonic.

How low can bank impairment rates go? That's the question Credit Suisse is asking. Major bank asset quality improved in the December quarter, with impaired percentage credit exposures declining to 0.5%, the lowest in five years. Moreover, the 0.07% decline in the December quarter was the largest quarterly decline in the broker's time series. Business impaireds declined sequentially to 1.21% from 1.38%. Actual losses in the quarter were the lowest in five years. This may well be the bottom. The broker is cautious regarding the prospects for more moderation in bad debts.

From the fourth quarter financial fund managers survey Merrills notes respondents are still overweight on insurers compared with banks and diversified financials. The most popular overweight stocks are Suncorp ((SUN)) and National Australia Bank ((NAB)). Commonwealth Bank ((CBA)) is the most popular for underweight status, by quite a margin. The majority of respondents signalled Macquarie Group ((MQG)) had the greatest capacity to surprise on the upside, while QBE Insurance ((QBE)) was where analysts were most pessimistic.

The premium rate cycle was viewed as the key threat to insurer valuations according to 40% of respondents. Credit quality was the greatest perceived threat to bank valuations, with around 43% nominations, although margin squeeze was still a strong contender, with 29% naming that the greatest threat. Investment markets were perceived to be the greatest threat for diversified financial valuations. Most were comfortable with the capital positions of the banks and insurers. None of the respondents believed dividends were unsustainable, or that they would be cut. Perceptions of dividend growth were stronger for diversified financials. Earnings growth prospects were considered similar across sectors.
 

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