-Price pressures for retailers
-Jobs market weak
-Rate cuts not off agenda
-Strong outlook for broadband telcos
-Mobile players chase share
-China's growth outlook slowing
By Eva Brocklehurst
This year Australia will see some new retailer brands gracing its streets. Citi notes certain global retailers, primarily in fashion, are intent on making their mark here and will open stores in 2014. Australia offers high GDP per capita and faster population growth than other developed countries. Over the next year H&M, Forever 21, Uniqlo and River Island intend to open. Citi observes the impact on pricing and margins, in terms of the local competitors, is far more important than the taking of market share. Most of the new entrants will probably take positions in existing shopping centres and they require more floor space than the average Australian specialty retailer. Citi expects the new entrants to target a store base of around 20, initially. The broker estimates that high profile entrants like Marks & Spencer, H&M, Zara, Uniqlo and Sephora will take over $1.1 billion in revenue once established.
H&M poses the biggest risk to the locals' profit margins, as that brand tends to have globalised pricing. Citi's survey has revealed this company is 30-50% cheaper than competitors such as Premier Investments ((PMV)) - think Dotti, Portmans and Just - and department store Myer ((MYR)). One challenge for those retailers entering Australia is the need to have stock for an alternative season. The scale advantages that are retained by H&M and Inditex in their own markets are reduced in this instance. Citi has Sell ratings on many of those exposed to the new entrants, such as David Jones ((DJS)), Wesfarmers ((WES)), Myer and Woolworths ((WOW)).
Economic activity may be strengthening but Australia's job market is weak. AllianceBernstein wonders whether the rise in the unemployment rate to 6.0%, the highest level in a decade, is an indicator of the need to re-assess the Reserve Bank's cash rate profile. While accepting that employment does lag the economic cycle, the economists wonder whether a virtuous circle is not going to work this time. That is, that the improvement in confidence, conditions and housing construction - signs that an economic recovery is underway - will generate the necessary capital expenditure, income and jobs growth down the track. The economists fear it won't be enough to counter the reduction in resources activity, combined with the increased focus on cost cutting and productivity in both the public and private sectors. This is a reason they are mindful that a reduction to the cash rate can still come back on the agenda later this year.
BA-Merrill Lynch suspects Australian house prices will hit new highs in 2014, propelled by low interest rates. Investors are expected to continue to dominate at the expense of first home buyers. Still, the analysts are of the view that gains in house prices are not the positive signal for the broader economy that the Reserve Bank seemingly hopes is the case. Domestic economic growth in the first quarter of 2014 may be modestly better, as indicated by the rise in business confidence in January, but Merrills notes a sharp decline in consumer confidence. Job security looms large as a key concern. Employment growth has been flat and the analyst expected the unemployment rate to continue rising this year. They suggest this measure will be monitored closely by the RBA, noting the central bank has never tightened policy while the unemployment rate has been rising. Hence, they also think expectations for tighter policy later in the year are premature.
Citi notes Telstra's ((TLS)) wholesale broadband subscribers rose by 69,000 in the first half, signaling there is continued subscriber growth among the internet service providers (ISP). This is the highest net subscriber movement in four years, according to Citi. Of the three leading ISPs, Optus reported declining subscriptions in fixed broadband so the growth appears to have come mainly from TPG Telecom ((TPM)) and iiNet ((IIN)) and signals a positive first half for the latter pair. The gain of around 8,000 in Telstra's wholesale off-net subscribers - used by the others to deliver services in areas where they do not have infrastructure - suggests a stabilisation of the customer bases after heavy declines in previous years. This is also encouraging for the aforesaid companies, given the need to establish a wider geographic presence ahead of the introduction of the National Broadband Network roll-out.
JP Morgan thinks Singapore Telecom ((SGT)) may have drawn a line in the sand when it comes to the trade off between Optus revenue and customer losses. The company appears to be targeting growth in mobiles and this is raising the competitive dynamics of the segment, in the analysts' view. In the merry-go-round of the mobile, the three main players - Optus, Telstra and Vodafone ((HTA)) - are chasing each other's business.
JP Morgan observes, when Vodafone was losing share, Optus grew its base significantly, even though overall share slipped. This situation arose because Optus gained from Vodafone at the value end but lost to Telstra at higher price points. If Vodafone ramps up attempts to recover lost ground then Optus may be vulnerable and resort to taking higher value subscribers from Telstra just to maintain share. And the market is rational, JP Morgan asks? The analysts do not think this is the case, with one player losing money and the other going backwards. If the Vodafone brand reaches some stability at the same time as Optus turns up the growth levers it could mean less favourable conditions for Telstra.
While the risk of systemic credit crisis is considered remote, the analysts note the People's Bank of China has maintained a hard line. The question is whether the central bank will come under political pressure to relax policy as the economy decelerates. To this end, the analysts estimate that, if the central bank is required to support a GDP target of around 7.5% for 2014, then the chances increase for some easing in credit conditions. In contrast, a 7.0% target would provide more room for the government to implement reforms. Given some major provinces have already marked down growth expectations, the analysts suspect the national target will be closer to this 7.0% rate.
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