Tag Archives: Telecom/Technology

article 3 months old

Weekly Broker Wrap: AGMs, Investment, Advertising, Electricity And Telcos

-Some likely AGM surprises 
-Bullish investor sentiment rises
-Online beats print advertising
-Electricity competition ebbs
-Telstra grows market share
 

By Eva Brocklehurst

It's that time of year again. Companies are fronting shareholders for the annual reporting of their hits and misses. Hopefully, missing most of the missiles that shareholders are likely to throw around. Macquarie has taken a look at where the surprises may spring from this year.

Starting with residential A-REITs, don't expect upgrades is Macquarie's advice. Despite "amazing" house prices being reportedly achieved at auction, guidance is likely to be merely reiterated. Macquarie singles out Stockland ((SGP)) and Mirvac ((MGR)) as doing well. A large portion of FY14 residential sales revenue was already bedded down back in June through pre-sales. Moreover, up to one fifth of any improved volumes will be the sale of impaired inventory and this does not contribute to operating profit. Macquarie reminds investors that residential earnings are but a small proportion of these businesses and the majority involves rent collection.

On the industrial front, the broker highlights the potential for an upgrade for Ansell ((ANN)). Existing guidance of 10% earnings growth in FY14 is considered conservative, given how the second half of FY13 panned out. Recent strong industrial activity could provide a tail wind and, even if management steers clear of specific figures, generally positive commentary would be well received by the market. Toll Holdings ((TOL)) is not expected to provide an indication of earnings growth and this will underscore Macquarie's suspicions that business conditions have not improved. Meanwhile, news about the Maule's Creek mine approval should be a positive for Whitehaven ((WHC)) by the time the AGM is held on November 4.

Another focus for AGMs is the two strike rule on executive remuneration. Macquarie notes 10 companies are on watch for a second strike, after incurring the first in 2012. A second consecutive strike - when more than 25% of shareholders vote against adopting the remuneration report - triggers a spill motion on the board. The companies in line for a second strike are Lend Lease ((LLC)), Fairfax Media ((FXJ)), Kingsgate Consolidated ((KCN)), Cabcharge ((CAB)), Peet ((PPC)), Austal ((ASB)), Macmahon Holdings ((MAH)), Redflex ((RDF)) Rialto Energy ((RIA)) and Cochlear ((COH)).

Macquarie is wary of Cochlear. Cochlear doesn't usually give guidance but there is a possibility for some negative commentary and downgrades to market expectations because of weak underlying trends. Cochlear is also one of the companies that Goldman Sachs has removed from its global SUSTAIN Focus list. Stock selection for the list is driven by returns on capital, momentum, strength of  the industry position and the level of management engagement. Cochlear was removed from the global list as competition intensified and, relative to global medical technology peers, returns declined alongside market share. Goldman continues to believe Cochlear as a well positioned company in an attractive industry, with a market leading position in a segment with high barriers to entry. As it is one of the highest returning companies within the broker's Australian coverage the stock is still on the regional SUSTAIN Focus list.

[Note: Cochlear is the most shorted stock on the ASX at present - Ed]

Russell Investments'  Investment Manager Outlook survey shows bullish sentiment is rising for both international and Australian shares, with managers preferring international shares (71%) over Australian shares (65%). It means there's greater confidence in the global recovery. Russell remains cautiously optimistic on the domestic share market in the near term. The survey also reveals the exporting sector of the market to be a major beneficiary of Australian dollar depreciation over the past six months. A total of 81% of managers believe the currency will settle between US81c and US90c in the next 12 months. Managers expect declining commodity prices, economic growth and diverging interest rate movements will drive the Australian dollar going forward.

The managers' preference continues to be cyclical assets on a sector level, with the biggest shifts in bullish sentiment seen in energy, moving up to 77% from 42% in the last survey, and materials, up to 58% from 39%. The energy sector has benefited from recent oil price gains. Bearishness prevails for A-REITs, domestic bonds, cash and the Australian dollar. Share markets hold the best investment opportunities both domestically and overseas, according to the participants.

Online classifieds have overtaken Australian print advertising in terms of spending for the first time, growing 10% in FY13 while print declined 23%. Online now represents 50% of total classified advertising revenue. JP Morgan estimates that the online classifieds market was around $705m in FY13 versus $702m for print. News Corp ((NWS)) and Fairfax are most exposed to the material decline in print classifieds. Newspapers are spearheading the decline. Since FY08 the loss, or migration, in print classifieds has primarily occurred at the metro (-15%) and suburban (-28%) levels. Real estate is the largest migration opportunity and here REA Group ((REA)) and Fairfax's Domain online will best benefit. The broker is more comfortable about REA's depth price increases and favours this stock (Neutral) above Fairfax (Underweight).

What is apparent to JP Morgan is the deflationary impact from the migration of advertising dollars online, particularly in regard to employment. Despite the strong growth in online advertising, total classified expenditure has declined by around a compound 8% over the past five years. Given the migration of job classifieds, government policy changes on job advertising and weak employment conditions JP Morgan estimates the print employment classifieds market has fallen below $100m for the first time.

Churn eased substantially in the electricity retail market in September, with 20,000 fewer accounts switching suppliers compared with August. At 19.9% the churn rate is below 20% for the first time since February 2012. Underpinning the ebbing in churn is the cessation of door-knocking by the large players, as well as diminished activity in the second tier of the market. Despite the fall, the local market's churn rates remain well above other comparable markets overseas and other industries such as telcos and insurance. The sharpest contraction was registered in NSW, as churn dropped to 15.5%, a 20-month low. Victoria is still the national market's most competitive region, with churn around 700 basis points higher. JP Morgan thinks a number of factors are coming into play which should bring some relief to the electricity retail market. It may be too early to call a sustained decline in churn but there is sufficient evidence that the competitive intensity is easing.

The Australian telco sector revenue went backwards in FY13 (-1.3%). This is the first time a decline has been witnessed since FY06, according to JP Morgan's estimates. Mobile was the cause (-2.5%) and not fixed products (0.1%). There were mitigating circumstances behind the drop in mobile spending but the broker observes growth in subscriptions has become more skewed to lower-revenue categories such as wireless broadband. This could mark an inflection point for mobile revenue growth. With handset and wireless broadband subscriber growth maturing, revenue upside from here will depend on price, and to some extent on subscribers which do not use too much scarce capacity.

Telstra ((TLS)) remains well placed and grew its share of spending in FY13 for the second year running. To JP Morgan this is a signal of the company's ability to extract value from the consumer appetite for network quality. The question is whether the others can do the same in such a way that grows revenue. Telstra also benefited from the rebound in fixed broadband revenue and increased its share in the product. JP Morgan retains a Neutral rating on Telstra on the grounds that not much more can go right, even if there is no sign of much going wrong.

In the case of Optus ((SGT)) the company has been prioritising margin over share but the broker suspects that, if it loses too much revenue, then the trade-off will simply not work. TPG Telecom ((TPM)) had another good year for share growth and this underlines how well the business is run. Nevertheless, in JP Morgan's view, the current valuation understates the threat to margins from the NBN. iiNet ((IIN)) faces a similar challenge from the NBN but here the operating momentum is weaker with the broker noting a slippage in subscriber share.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Treasure Chest: Fibre Not As Strong As It Might Seem For TPG

By Greg Peel

TPG Telecom ((TPM)) last week posted an FY13 result that was in line with broker forecasts. But that’s not why the stock has subsequently rallied 29%. The rally is due to the company’s announced intention of rolling out a fibre-to-the-building (FTTB) network to around half a million apartments in Australia’s major capital cities. The network would compete with the NBN which, even under a new government with a more rational approach, is seen as still being glacial in its arrival at most nodes.

See TPG Triggers Interest in New FTTB Plan.

Whatever stock analysts’ varying views on the FTTB plan might be, the market made up its mind very quickly, hence on an isolated valuation basis TPG suffered two downgrades to Hold (or equivalent) in the FNArena database to meet a Hold, two Sells and a lone Buy. Despite the ratings, analysts were nevertheless net positive on the fibre plan.

Citi (Buy) suggested the FTTB offered “material earnings upside”. Credit Suisse suggested the FTTB offered a “highly competitive offer for consumers”, despite downgrading to Neutral. CIMB (Underperform) saw long term margin growth potential but a significant jump in required capex nearer term. BA-Merrill Lynch (Neutral) saw the FTTB as offering binary risk, implying a $5.00 valuation if they get it right and sub-$4.00 if they get it wrong. Macquarie acknowledged a material investment opportunity before downgrading to Neutral, wishing to see more detail.

JP Morgan (Underweight) was never convinced. Having reported on the result, JPM’s analysts have since had a closer look at the FTTB plan and decided their initial reaction was the right one.

The market has priced TPG post result as if the FTTB is offering a competitive retail alternative to the NBN. While the new Coalition government has always been keen on opening up infrastructure competition with the NBN on a wholesale basis, JP Morgan does not believe the competition policy will stretch to retail. Were a monopoly infrastructure owner, as TPG will be of its FTTB, also to provide a retail service then this would amount to recreating a whole series of “mini Telstras” in each location, the broker suggests.

The Howard government’s Telstra ((TLS)) model was a dud, as anyone, including Malcolm Turnbull, will tell you. Neither free market nor nationalised, the uneasy hybrid of infrastructure and service suffered a form of reverse synergy, no more evident than in the spectacular fall of the share price from the first tranche of “privatising” through to when the Labor government decided to finally split the beast up. The whole point of the government buying back the copper network on behalf of the taxpayer, who actually owned it anyway before Howard came along, was to remove an unfair infrastructure monopoly and level the playing field for retail providers. The planned replacement of copper with fibre is a separate issue of technology update.

So if TPG is allowed to build its own, albeit limited, fibre network and then offer retail packages on top, it’s a step back to the bad old days. And if competition then runs riot, which most brokers warn would likely be the case, it will be bad old days multiplied.

JP Morgan’s thinking is along these lines. The market is pricing in some sort of first mover advantage for a TPG that will become a retailer of fibre broadband speeds long before the lumbering NBN, even under the new government, reaches the building. Certainly TPG can become an infrastructure competitor, as infrastructure competition is part of the government’s policy, but a combined wholesale/retail service? Not so likely.

Mini-Telstras aside, the analysts at RBS Morgans are not even convinced about the infrastructure part.

Extrapolating back from the current share price, RBS calculates the market is pricing in a 35-40% market share win for TPG in the buildings TPG proposes to run fibre to. Given Tesltra already boasts around a 45% market share nationally, this is a stretch. But even if such a share could be achieved, TPG first has to get past anti-cherry-picking legislation.

The broker suspects that given TPG already had an existing pipe network in place before the ACP legislation came into to place in January 2011, the company believes it can call the connection of fibre within these pipes to the buildings within one kilometre away a “network upgrade” rather than a start-from-scratch, thus avoiding ACP implications. RBS would not be so hasty.

And even if this hurdle is overcome, Telstra, Optus ((SGT)), iiNet ((IIN)), M2 Telecoms ((MTU)), Vocus ((VOC)) and AAPT ((TEL)) can all do the same, and each already has a large fibre network.

Thus, suggests RBS, even if TPG can get as far as connecting capital apartments legally and without government interference, the competition could quickly make the market’s assumed 35-40% market share very pie in the sky.

RBS rates TPM as Underperform.

 

 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

TPG Triggers Interest In New FTTB Plan

-FTTB plan looks compelling
-But costs are a concern
-How will competitors respond?
-How will the new govt affect plans?
 

By Eva Brocklehurst

TPG Telecom ((TPM)) has stoked interest and speculation in the wake of its FY13 results and the share price has run hot. It's not because of a strong set of numbers but because the company announced plans to build a Fibre-to-the-Building (FTTB) network to 500,000 units/premises in five capital cities, intending to sustain broadband speeds of 100mb/s. Trials are expected to start later this year.

Citi liked the news. The broker restated a Buy rating. The only one on the FNArena database. Citi thinks it represents an exciting development for the telecom sector, enabling access to faster broadband, albeit there's some uncertainty given the changes to NBN policy that are likely with the incoming federal government. Still, Citi estimates potential for a 38% uplift to net profit at 30% utilisation rates. JP Morgan notes the share price response owes a lot to the case that TPG made for rolling out this FTTB product. It would run off the company's PIPE fibre network and TPG would be able to offer speeds comparable to the fastest tier of NBN, but over its own infrastructure, avoiding NBN charges. Given widespread concerns that the NBN would level the telco playing field and compress TPG's margins, the broker thinks it was logical that the company should stress this opportunity.

The FTTB is a highly compelling offer and potential game changer, in Credit Suisse's opinion. The broker has upgraded cash profit forecasts in FY16 and beyond by 20% to reflect upside from FTTB deployment. Credit Suisse assumes TPG will need to build to around 6,667 buildings. In the broker's estimates it equates to capital spending of $87m over FY14-16. Retail earnings margins on the product is expected to be around 68%. TPG has indicated it may offer wholesale access to its FTTB network at prices that could be competitive to the NBN. Credit Suisse thinks 100,000 subscribers in retail and 50,000 in wholesale are easily achievable. This should add $68m to earnings forecasts from FY16.

Macquarie wants more detail on the deployment costs before getting excited. Given the nature of the project, scale in the building is unlikely to be delivered before FY16. For every $100 in capex required per unit/business connected, TPG would need to generate incremental earnings around $8m to deliver a return in excess of its cost of capital, in the broker's opinion. The company has already identified $10m in earnings uplift from migrating its existing ULLS customer base to the FTTB network. Macquarie acknowledges there is significant scope for retail market share gains and winning over wholesale customers in time.

The margin metrics look very promising JP Morgan admits, but notes TPG would need the incoming government to follow though on a commitment to infrastructure-based competition with NBN Co. Thus, if TPG has this option, so would other players. JP Morgan observed the company downplayed the NBN in its briefing, and wonders just what the level of engagement is in this regard. Does it have a plan? Macquarie noted a mention that the company would use the NBN "strategically". According to JP Morgan the slow pace of the NBN roll-out means that TPG is not missing a major subscriber opportunity. Nonetheless, the potential for TPG to gain market share in an NBN world was one of the bull points advanced for the stock in the past and a lack of clarity on the NBN strategy may become an issue.

CIMB is worried about the additional capital expenditure required to build the FTTB network. The broker has increased capex forecasts but also added to the long-term operating performance. The broker notes the underlying growth rate has slowed and the earnings margin of 37.6% could contract in the brave new NBN world. What was enticing? The investment in network infrastructure continues to provide a competitive advantage while TPG's subscriber momentum remains robust. CIMB observes that, with the FTTB and the investment in submarine cable, TPG can offer an end-to-end service bypassing Telstra ((TLS)) and NBN Co. With such control over the cost structure, the company proposes a 100Mbps service with unlimited downloads for $69.99 per month on a 24 month contract and around $160 in initial charges. It will also offer wholesale service and expects to undercut NBN access charges. CIMB think this would offer a significant competitive advantage in the FTTB footprint area.

CIMB does not expect Telstra will take TPG's latest plans lying down. A response is expected in time from Telstra on the HFC network, which likely overlaps the same areas. This could also have implications for the NBN roll-out and access regulation. The broker expects a Coalition government would applaud private sector investment and may ultimately constrain NBN roll-out in those areas with two or more network suppliers. Its policy is to remove regulatory impediments to the construction and operation of non-NBN access networks.

CIMB believes one of the impediments is the ACCC, which has a stated preference for retail level competition and has opposed integrated full service carriers and carrier competition in the access network. It has adjusted regulatory settings to favour a structurally separated NBN. Management of access regulation does, in CIMB's view, deter network investment and appears to have impeded earlier rival telco infrastructure investment. A return of carrier competition in viable parts of the access market is therefore seen as a positive development for TPG as well as for Telstra, being on-net suppliers able to bypass NBN in part of the market.

As things stand at present the broker thinks it could be negative for Optus ((SGT)), iiNet ((IIN)) and M2 Telecommunications ((MTU)). The two former players have extensive infrastructure and may consider developing their own end-to-end on-net strategies. Optus, for instance, has canvassed a possible fibre repayment option but for access to the NBN.

Where do other concerns regarding TPG's outlook lie? Macquarie noted corporate revenues remained under pressure, falling by 2.3% over FY13 and 7.5% in the second half. The key drivers here have been price deflation for corporate customers, as well as lost wholesale revenue due to wider industry consolidation. Macquarie also put a wet blanket on the 36% dividend increase, noting that the 7.5c for the year represents just 34.1% of free cash flow estimates and a yield of just 1.8%. Mobile margins also fell to 23% from 27% in FY12, largely because of a revised wholesale deal with Optus. Management has indicated mobile will not be a growth driver over the next few years but still needs to be offered.

JP Morgan thinks the recent share buyers are too willing to imply significant value for the direct fibre product. The broker retains an Underweight rating. The consensus target price on the FNArena database is $3.96, which compares with $3.05 ahead of the results. The target suggests 11.3% downside to the last share price. In sum, there are one Buy, three Hold and two Sell ratings. Both Credit Suisse and Macquarie downgraded ratings to Neutral (Hold) in the wake of the announcement, citing the excessive rally in the share price. Targets range from $2.93 (JP Morgan) to $4.80 (Citi).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Telematics, Media, Broadband, Wealth and Transport

-Telematics take up likely to be slow
-What's likely on media reform agenda?
-Broadband returns decline, mostly for Telstra
-What issues ahead for diversified financials?
-Picking the best in subdued transport sector
 

By Eva Brocklehurst

What is telematics? Morgan Stanley has a survey which shows that 20% of Australian motorists are ready to give telematics insurance a go. Telematics measures how, when and where you drive in order to price insurance more precisely for the individual. The insured connects a BlackBerry-sized device to the car and that connects with GPS and mobile networks. All cars made from 2000 onwards are capable of telematics. The device can track location, and driving behaviour such as accelerating and braking as well as swerving and lane-switching. An actuarial logarithm then translates this data into a behavioural risk score. Presto! You're measured for insurance.

Morgan Stanley observes that, unlike the UK where the market is three years old, Australia does not have widespread market pricing failures that would accelerate the adoption of telematics. Moreover, in the US and UK insurance combines bodily injury and motor, making the economics more compelling. Telematics has a 0.6% share of the UK market and in the US, where penetration is higher, it's estimated at 2-3%. So it's not likely to take off like a rocket.

Morgan Stanley thinks that once telematics gains initial acceptance here it will fuel its own growth as community rating systems break down. The insurer absorbs the costs of the device which could cost $100 but Morgan Stanley thinks the economics make sense on a policy over $900. Telematics calls for more underwriting and more data handling, including the cost of connecting to a mobile network. The potential to bundle with CTP green slips would make it even more attractive. The benefits for insurers include the fact that less risky drivers are likely to select telematics first, and there'll be higher retention of such customers once they're "connected". Morgan Stanley thinks, eventually, car manufacturers, or telcos for that matter, risk displacing direct motor insurers if they do not enter this market. While the analysts at Morgan Stanley think this option is inevitable it is unlikely to grow fast. They estimate the current market potential is around 7%, but expect this to rise as technology gets cheaper and major insurers get involved.

The change in the federal government has caused JP Morgan to put a spotlight on potential media regulation reform. Such reforms are more likely to occur in FY15. The potential list includes the scrapping of the 75% reach rule and a review of the 4.5% FTA licence fee. The scrapping of the 75% reach rule is likely to be a trigger for regional and metro consolidation in the industry. In June a parliamentary committee supported the removal of the rule. The committee was of the view that the rule was becoming redundant with the advent of the internet and converging media. JP Morgan considers the most likely beneficiaries of the scrapping of the rule would be Prime Media ((PRT)) and Southern Cross Media ((SXL)). In the case of the potential review of the Free-To-Air licence fee, JP Morgan rates a reduction as a one-in-three chance.

In a speech to parliament earlier this year the now Minister-elect for Communications/Broadband, Malcolm Turnbull, noted that Australian FTA fees were relatively high by global standards. Should these fees be reduced further, JP Morgan would expect further legislative requirements for FTA stations, such as increased Australian content obligations. Modelling for a 0.5% and 1% reduction scenario, the FY15 earnings estimate for Seven West Media ((SWM)) rises 2% and 4% respectively. For the Ten Network ((TEN)) it rises 6% and 12% respectively.

Australian telcos may have attractive dividend yields of 5.3% for FY14 forecasts but Morgan Stanley thinks the 10-year government bonds at 4% offer a justifiable alternative. Slowing Free Cash Flow growth and the decline that's expected in broadband industry returns underpin the broker's Underweight call on Telstra ((TLS)). In contrast, NBN-driven regional share gains should see increasing returns for the likes of iiNet ((IIN)) and the broker is Overweight on that stock. Profit taking has been dominant in the telco sector recently but Morgan Stanley still views iiNet, TPG Telecom ((TPM)) and Singapore Telecom ((SGT)) as attractive.

Why does Morgan Stanley think Telstra's returns will decline? Telstra's competitors have new mobile pricing plans which could see a potential change in market share and this is yet to be priced in by the market. Based on the broker's analysis these are not domestic price decreases, so a seven times EV/EBITDA multiple is still applied to Telstra's mobile business, in line with global peers. Changes to international roaming fees are one genuine change to the industry, which could inspire consumers to move away from Telstra. Morgan Stanley expects Telstra to gain 0.5 percentage points of mobile market share in FY14. 

What the broker finds a major problem with is the market pricing in declining returns for all players. Broadband industry returns are set to decline, yet smaller ISPs, such as iiNet are expected to increase returns and take regional market share. Hence, Telstra's price/earnings ratio should contract to 14 times from 15 times on slowing cash flow growth, in the broker's view. The company's 3-year FCF compound annual growth rate should slow to 7-8% from 12-15%. Historically this measure is a predictor of multiples expansion and, hence, a slowing rate means multiples compression.

Citi has changed some calls on the diversified financial sector in the wake of reporting season. The broker lifted ratings on Perpetual ((PPT)) to Neutral and dropped Henderson Group ((HGG)) and IOOF ((IFL)) to Neutral. The broker became significantly more positive on Challenger ((CGF)), lifting it to Buy, following the best annual result in a very long while.

What has Citi deduced from the results overall? Equity market performance is still key to the sector performance with Henderson, IOOF and Perpertual earnings strongly leveraged to markets. ASX ((ASX)) and Computershare ((CPU)) are positively leveraged to trading and corporate actions. Citi maintains Computershare is the most leveraged it has ever been to short-dated interest rates. Despite the low interest rates, annuity sales momentum also looked strong in June and continued into July and August. While not out of the woods, the broker suspects funds management may be past a turning point.

IOOF has revenue pressures, including platform margin pressure, but cost control is a mitigating factor for Citi, even if IOOF is unsuccessful in its bid for Trust Co ((TRU)). Counter bidder Perpetual is relatively expensive, but Trust is seen as a worthwhile accretive acquisition. Meanwhile, ASX is considered relatively safe but unexciting. There is little sign of IPO or secondary capital raisings picking up materially, and new initiatives such as collateral management and OTC clearing are not expected to make a substantial difference for some time. Derivatives volumes did rise in FY13 but, in Citi's opinion, if interest rates are more stable then these too may subside.

Soft economic conditions and slowing resources activity meant a challenging end to FY13 for the transport industry. CIMB notes growth was below that recorded in the first half for all stocks except Toll Holdings ((TOL)) and Qantas ((QAN)). Toll was cycling a weak result in the second half of 2012, while Qantas benefited from an accounting estimates change. Overall, the airlines were hit the hardest as a combination of excess capacity in the domestic market and weak demand affected yields. Logistics operators, such as Toll, Brambles ((BXB)) and Qube Logistics ((QUB)) faced sluggish consumer demand, while Asciano ((AIO)) and Aurizon ((AZJ)) faced a softening coal market. All this is expected to persist in FY14, making earnings growth a challenge in the year ahead.

Qantas and Virgin Australia ((VAH)) have the most risk going forward because of excess capacity in the market and soft demand, according to CIMB. Toll and Qube also have risks, given the continued weakness in the broader economy and their exposure to the resources industry. Less risky are Asciano, Aurizon and Brambles. Brambles was re-rated Outperform at the FY13 result as CIMB thinks valuation multiples are now more reasonable. The broker's other key picks are Asciano, for its double-digit earnings growth profile combined with attractive valuation multiples, and Qantas, where there's an opportunity to add some cyclical risk to the portfolio with limited downside. CIMB finds downside risks continue for Virgin Australia while Toll and Qube are starting to trade above fair fundamental valuation.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Winter Gas, A-REITs, Telcos And Advertising

-Modest impact on gas retailers
-Stockland favoured by UBS versus GPT
-Optus needs to get more aggressive
-Politics dominates ad spending
 

By Eva Brocklehurst

It's been a mild winter so far in the eastern states, especially for July. Sydney recorded 20% less "heating degree days" and Brisbane 40% less, relative to the average over the past decade. Historically, gas consumption has correlated with the number of heating degree days throughout winter, more so than electricity. This is particularly evident in Victoria where a larger share of the population has access to piped gas for heating. Goldman Sachs suspects fewer days may weigh against earnings for gas distributors and retailers and this may reduce margins in late FY13 and early FY14.

For Sydney, Brisbane and Adelaide the winter to date has been the warmest since 2005. Heating degree days is defined as the cumulative difference between the average daily temperature and a comfort level, which the Bureau of Meteorology defines as 18 degrees Celsius. For example, if the average temperature is 15 degrees, that day will contribute three heating degree days to the total. The impact on the energy retailers and distributors may be there but it is expected to be minor. Goldman Sachs highlights volume risks for AGL Energy ((AGK)) Origin Energy ((ORG)) and Envestra ((ENV)) in the approach to the FY13 results. First half risks are there for AGL, Origin, Envestra and SP AusNet ((SPN)). FY13-14 earnings estimates have been revised down slightly. AGL is down 0-1%, Origin is negligible, Envestra down 0-2% and SP AusNet down 0-3%.

UBS has compared GPT ((GPT)) and Stockland's ((SGP)) results and performance with consideration as to the drivers of shopping centre portfolio growth, office expiry profiles and the impact of capitalised interest and debt costs on FY14. Non-discretionary anchored shopping centres continue to outperform discretionary anchored shopping centres and tenant churn is increasing across both companies' portfolios. GPT has a higher quality office portfolio but faces higher near-term income headwinds because of the impending vacancy at MLC. Office vacancy will increase to 12% on expiration of MLC with a further 11% in FY14. This compares to Stockland with 7% current vacancy and 8% expiring in FY14.

Capitalised interest represents a drag to Stockland earnings into FY14, given the annualised impact of residential projects written down. UBS estimates this is a 1.5-2.0% headwind in FY14. GPT, on the other hand, may benefit from a capitalised interest tailwind on the basis that the Erskine Park land base is activated and the company proceeds with three industrial pre-commitments. The remaining issue, debt costs, is seen as a drag for Stockland, given they increase to 7.1% because of legacy positions and no hedge break costs. GPT spend $330m in breaking hedges over the past three yeas and this has resulted in cost of debt at 5.2% in June 2013. All up, the broker prefers Stockland and rates it a Buy over GPT which it rates Neutral.

The Optus result in Singapore Telecom's ((SGT)) first quarter release confirms for JP Morgan that Telstra ((TLS)) continues to outperform its peers. Optus appears to have a strategy of not fighting too hard. Eventually, Optus may have to become more aggressive. Optus lost 59,000 subscribers in June quarter with pre-paid bearing the brunt. In fixed broadband 9,000 were lost in the June half and Telstra gained market share. Cost reduction was the highlight for Optus in June, as earnings margins rose to 27.0% from 24.4% a year ago, despite a 5.4% revenue fall. One reason given for this was low-margin revenue losses but cost control also played a part.

To JP Morgan this is reminiscent of Telstra in 2010, still growing earnings while losing share. A strategy of losing revenue while taking out costs can hit a point where the trade-off turns negative. Optus may have had only moderate losses so far but this owes a lot to Vodafone's ((HTA)) troubles and the broker thinks Optus may be more vulnerable to a Vodafone revival than Telstra. JP Morgan thinks the recent decision to take a revenue hit by replacing excess use charges with a plan step up may be evidence the trade off is losing importance at Optus. The upshot is that Telstra may not enjoy such a benign competitive environment for long.

JP Morgan and Credit Suisse have taken a look at advertising data for July. An increase in the month of 5.9% was driven by government and political advertising, but this is one-off and masks weaker underlying trends. JP Morgan's feedback suggest that the FY14 advertising outlook is quite uncertain and this may herald downgrades in earnings expectations. TV reigns. Metro TV ad bookings increased 7.9%, following June's 4.7% increase and total TV revenue grew by 9.2%. Excluding government, TV revenue still increased 3.6%. Newspaper and magazine advertising spending continues to decline while digital is increasing. JP Morgan remains Overweight on Seven West ((SWM)) and Prime Media ((PRT)) and Underweight on Fairfax ((FXJ)) and SEEK ((SEK)).

Credit Suisse forecasts total ad market growth of 3% for 2013, with growth to pick up in the second half of the year. July’s result marked an acceleration from the modest growth seen in June and follows a soft start to the year. The broker expects stronger growth in the second half of the year as weaker comparatives are cycled. While some advertisers may stay on the sidelines during the weeks preceding September's election, with political ad spending crowding out other categories, Credit Suisse expects a pick up after the election to compensate.

TV ad spend grew 9.2% year to date in June, benefiting from the political advertising as well as a surplus of premium sport. This growth was strong across both broadcast and subscription TV and should be the main driver of a recovery in advertising spending, in Credit Suisse's view. Agency revenue from print is a comparatively small proportion as local and classified advertising is not booked through them but the data provides a representation of trend. It's a predictable outlook. Newspaper ad spending declined 14.3% in 2012 and momentum has deteriorated further in 2013. Newspaper bookings were down 14% in July and magazines down 28%. Credit Suisse currently forecasts a 10% decline in newspaper display advertising for 2013, suggesting further downside to newspaper advertising forecasts. Meanwhile, digital ad spending continues to take up the slack, up 17.8% in July.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Fibre Binds A Strong Outlook To Amcom

-Strong gross margins to continue
-Slight IT weakness offset by cloud
-Costs of generating revenue fall
 

By Eva Brocklehurst

Fibre is the thread that binds a positive outlook to Amcom Telecommunications ((AMM)). The company delivered on expectations once again in FY13, meeting guidance of around 20% growth in underlying earnings. The result was driven by leveraging the in-ground fibre network, a valuable asset which the company owns.

The fibre sales run rate continues at $1.8 million per month despite softness in the Western Australian resources market, the prime geographic region for Amcom. The fibre business operates at high gross margins of 84% and because of the relatively flat cost structure the increase in revenue via new customers and additional products flows nicely to the bottom line. A softer resources sector is impacting new sales in Western Australia but other sectors are offsetting this. Strong contract wins in Northern Territory with corporate and government customers were highlighted by Macquarie. Fibre revenue was up 11% in FY13 and third party networks sale accounted for 20-30% of new sales, although they attract a lower margin at 30%.

IT services and hosted/cloud services is a newer area of the company's business that leverages off the fibre infrastructure. Macquarie notes the sales cycle is slower, as the deals are larger and revenue growth has been affected by several low-margin contract cancellations in the first half. Credit Suisse also found IT weakness caused operational revenue to miss forecasts by 3.5%. There was also a $1m miss on data networks. Not large in the scheme of things and earnings of $40m were in line with the broker, as stronger cloud, hosting and Amnet margins offset the IT weakness.

Macquarie notes the second half was tough for L7 Solutions business and revenue and earnings fell significantly versus the first half. This reflects aggressive competitor prices and weaker resources sector demand. Amcom has moved to reallocate billable resources to other parts of the business such as the cloud. Hosted and cloud services are a growing focus for the company, contributing $5.7m for the year against $3.3m previously. Macquarie observes Amcom currently has around $6m of recurring billing from the cloud as it works to leverage L7 relationships.

Fibre is likely to stay the key driver of revenue and seems to have several more years of development ahead, according to CIMB. The high margin is expected to continue to creep up as utilisation rates are increased. Hosted and cloud services make a useful and growing earnings contribution, in the broker's opinion. Previously, CIMB considered capex may flatten and remain below $20m over a three-year forecast period. Now, it's expected to increase as Amcom steadily builds out its infrastructure. The company has a strong and focused management and a consistent track record of delivering solid and reliable results and CIMB sees no reason why this won't continue for several more years.

Amcom acquired a small Perth data centre in July which provides some capacity to underpin cloud and hosting growth in the short term. Credit Suisse expects another purchase of a larger facility in FY14. The broker continue to be highly attracted to the business case on a two and three-year view. As the stock is now trading on 20.8 times FY14 estimated price/earnings there is limited room for upside earnings surprise in FY14. Hence, Credit Suisse is content to maintain a Neutral rating for now. CIMB is mindful of the same things and retains a Neutral rating. The upside risks include better-than-expected subscriber growth while downside risks include greater capex or margin erosion, if growth relies too much on low-margin IT services.

Key to several broker views is the fact that Amcom's telco business is 90% fibre and, with a more established network, Amcom can leverage each dollar of data revenue with lower incremental capital spending. This impresses Citi. The broker noted the costs of generating incremental revenue on the network have fallen 10%. Moreover, sales will be supplemented by the Cisco Unified Communications offering, expected to come on board in the fourth quarter of FY14. Macquarie expects this new Cisco partnership will involve further costs in sales and marketing ahead of revenue opportunities, hence there will be a minimal contribution in FY14. Nevertheless, the opportunity looks promising given the ability to leverage off Cisco's strong enterprise market share.

On the FNArena database there are two Buy and two Hold recommendations. The $2.12 consensus price target shows 3.8% upside to the last share price and the price target has moved from $1.96 ahead of the results.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: How Some Oz Stocks Fare In Low Growth Environment

-Building materials get more lift from US
-Modest residential recovery this year
-NBN scope for TPM and IIN
-Bank dividends should hold up
-Lower $A and leisure stocks
 

By Eva Brocklehurst

June was characterised by a weakening job market with Australia's unemployment rate pushing to near 4-year highs of 5.7%. This should put downward pressure on inflation and, for UBS, cements a 25 basis points cut to the cash rate when the Reserve Bank next meets in August. This is of course, unless the June quarter CPI throws a spanner in the works. Of interest, by state, employment growth was faster in NSW and Victoria improved, while Western Australia has slowed sharply and Queensland was soft.

Meanwhile, the domestic building materials sector may have outperformed in the week to July 11 but Goldman Sachs finds it was primarily US-exposed stocks such as Boral ((BLD)) and James Hardie ((JHX)) that gained the advantage. Adelaide Brighton ((ABC)) and CSR ((CSR)) were more modest performers. Domestic dwelling starts appear to be recovering slower than anticipated, although the volatile multi-unit component has amplified the month-on-month moves. Building approvals for residences declined 1.1% in May and are down 3.2% for the year to May whereas the single family dwelling, which was up 2.8% on the prior month, is up 13.1% in the year to May.

The market recovery is modest but low interest rates are continuing to support home buyer optimism while auction clearance rates are now at a 3-year high. Despite this, with an expected rise in unemployment, BA-Merrill Lynch believes a more positive outlook for the domestic economy is needed to support a stronger residential recovery. The broker leaves forecasts for the major developers unchanged but expects the apartment sector to sustain most of the lift in approvals. Top picks for the sector are Mirvac ((MGR)) and Lend Lease ((LLC)) in large caps and Peet ((PPC)) as a pure residential exposure.

Despite the accommodative interest rates, recovery in housing has been quite tentative. BA-Merrill Lynch 's models suggest current house prices are around 7.6% below fair value and a lack of confidence may be restricting sharp increases in prices. Labour market uncertainty near term suggests price rises, and the general level of activity, will stay subdued throughout 2013.

Australia's National Broadband Network roll-out will expose players to narrower fixed line re-seller margins. This is a threat to TPG Telecom's ((TPM)) growth upside in JP Morgan's opinion. While expecting TPG can increase market share in the NBN world, the lower capital intensity and open architecture of the NBN suggests it will attract new entrants. TPG has limited ability to re-base costs as margins erode because it is already quite lean. The problem is that TPG lacks a content proposition which might protect margins. The company's recent spectrum purchase does raise the possibility that a mobile proposition will form part of its response to margin compression in fixed line. The concern is that, to be meaningful, this would require a link up with Vodafone Hutchison ((HTA)) and this is a problematic scenario, in JP Morgan's view.

JP Morgan expects the NBN will provide scope to drive broadband penetration and open up non-metro markets to greater competition. Overall, the size of the addressable market for both TPG and small telco competitor iiNet ((IIN)) should increase by 70% by 2020.

The broker has remodeled iiNet in the face of this re-basing of margins on the NBN and downgraded the stock to Underweight. Where iiNet has an advantage relative to competitors is a higher proportion of low-margin off-net customers compared with TPG. The Coalition's plans for the NBN, should it win government, are more negative for iiNet, in JP Morgan's view. This is because the NBN would roll out faster and margin assumptions put a net negative impact on iiNet. The broker has acknowledged the relative stability of iiNet's earnings in the near term and, along with a lower bond yield assumption, this offsets some of the NBN margin erosion. A lower discount rate, nonetheless, does not save the day and the broker's target at $4.41 is well shy of a share price that's had a strong run recently.

The banking sector may be slowing down. Citi forecasts the sector delivering earnings growth around 4% in FY14/15. On the broker's modelling, neutralising of the divided reinvestment plan could cease for two years but no bank would be forced to cut dividends, although National Australia Bank ((NAB)) would come closest. This reflects the much higher capital ratios that banks now have and the much lower leverage in corporate Australia compared with past slowdowns. The models show Commonwealth Bank ((CBA)) fares the best and NAB the worst through the slowing scenario. This reflects higher return on equity and better credit quality at CBA. With no threat to the dividend pay-outs from the slowing scenario, the sector's 5.9% prospective dividend yield remains compelling value for Citi. Prospective yields still maintain a 200 basis point premium to 10-year bonds and a 200 basis point premium to term deposit rates.

Investor appetite for leisure stocks should also hold up in the wake of a lower Australian dollar. Village Roadshow ((VRL)) and Ardent Leisure ((AAD)) have outperformed the ASX Small Industrials by 11% and 12% respectively since mid May. Deutsche Bank notes the lower Australian dollar will drive domestic and international inbound tourism and Ardent benefits further from the US dollar earnings of Main Event. The broker's preference is for Village, as it is trading at a 20% discount to Ardent with earnings upside. Deutsche Bank admits Ardent's yield and US dollar earnings are still attractive. It's just that this stock is on the expensive side, trading on a 2014 estimated enterprise value/earnings of 14.1 times. Hence Deutsche Bank has a Buy rating for Village and a Hold rating for Ardent.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Australian Dividends Still Attractive

- Australian yield still attractive
- Ageing population an important factor
- Dividend surprises forecast


By Greg Peel

In recent months the Aussie dollar has weakened sharply, US bond rates have risen and foreigners have exited Australian equities, suggesting an end to the yield play which has prevailed since last year in particular. Yield stocks remain attractive for local investors, and specifically from a superannuation perspective, while the RBA remains in an easing phase. Yet the yield gap has begun to close for foreign carry-traders, and the falling currency has hastened their departure.

Many analysts are now assuming US bond prices have peaked and yields will now begin a longer term steady increase towards “normal” settings. On that basis, and given a sombre economic outlook in Australia, most houses are shifting towards a Neutral or even Underweight stance on yield favourites such as the banks and consumer staple stocks. Hedge funds are rumoured to be shorting the banks in particular ahead of expected further currency weakness and further foreign selling.

CIMB Securities disagrees that it’s all over for Australian yield stocks. CIMB does not see the yield trade as solely cyclical, but rather reflective of an underlying structural shift. Populations are ageing across the developed world, note the analysts, and rising levels of government debt (on easy monetary policy) are keeping interest rates low. A combination of the need for income and insufficient returns from traditional fixed income means equity dividends have become an important component of investors’ total return, the analysts suggests.

CIMB has studied stock markets across the developed world and found that Spain is the only market offering a higher dividend yield on its bank sector than Australia. Yet in terms of credit ratings, the two are chalk and cheese. In consumer staples, only Finland offers a higher yield.

The net yield on CIMB’s top twenty preferred Australian yield stocks is still 190 basis points, or 1.9 percentage points, above the ten-year government bond yield, and 220 basis points above the average one-year term deposit rate. Self-managed super is growing by 17% per year and now owns 12% of the ASX 200 by market cap. Preferences are weighted towards blue chip yield.

Super investors are nevertheless still heavily weighted towards cash within their portfolios, well beyond traditional levels, as nervousness still holds sway over thoughts of re-entering the volatile equity market. Demand for equities is thus not as strong as might otherwise be, CIMB notes, hence the market price/earnings ratio is not as high as it might otherwise be. The market PE is the traditional measure of “value” against long-run averages. Lower equity balances in portfolios are ensuring a still attractive market PE, particularly since the May-June correction.

Yield investors nevertheless need to be cognisant that unlike fixed income, company dividends are paid solely at the discretion of the board. Some companies offer fixed dollar dividends, such as Telstra, others offer target payout ratios, such as the banks, while more cyclical stocks will pay or not pay dividends based on their point in the cycle. In every case, those dividends may be subject to reduction, such that entry yields are never fixed. Telstra could cut its fixed dollar amount, for example. Companies offering payout ratios will pay less on lower earnings. Cyclicals, such as retailers, could pay a special dividend one period and no dividend the next.

Or they could all go up.

Macquarie’s quant team runs models every six months ahead of the February and August results season (in which most but not all Australian companies report earnings and declare dividends) to provide lists of companies which may provide a “dividend surprise”. That surprise can be positive, meaning a declared dividend is greater than consensus forecast, or negative, meaning less than.

Since 2010, note the quants, stocks providing a positive dividend surprise have outperformed the market by an average 3% in the following quarter and 6% in the following six months. Stocks providing a negative dividend surprise tend to hold their ground in the shorter term but are then punished subsequently, underperforming the market by an average 6% after six months.

While negative surprises have become fewer since the initial GFC impact in 2008, downside price reactions to dividend misses have gradually become more severe over that time, the quants note, which clearly reflects the growing popularity of equity yield.

Macquarie’s model suggests the stocks with a high probability of a positive dividend surprise in August are Carsales.com ((CRZ)), Flight Centre ((FLT)) and Breville Group ((BRG)). Stocks with a high probability of a negative surprise are Fleetwood ((FWD)), Kingsgate Consolidated ((KCN)) and Newcrest Mining ((NCM)).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Amcom Strength In Leveraging The Cloud

-Advantage in owning fibre networks
-Key JV with Cisco
-Incremental margin and recurring revenue
 

By Eva Brocklehurst

As the adoption of cloud computing grows at a healthy pace, a company such as Amcom Telecommunications ((AMM)), which has its own fibre network, can improve market share. The company has triggered keen interest on this basis and Citi has initiated coverage of the stock.

Amcom provides IT and telecom services to government and enterprises over fibre. The company built its own fibre optic network in 1998 and delivers a broad range of data, internet and managed services nationally. The proprietary fibre network spans 2,200 kilometres in Perth, Darwin and Adelaide and leverages third-party networks in capital cities where Amcom does not own the fibre. The company's Amnet Broadband provides internet and VoIP to customers across Western Australia.

Citi is watching out for strong free cash flow that will be fuelled by organic growth in data networks. This has grown over the last 18-24 months and now represents 93% of Amcom's underlying net profit. Data network sales for FY12 were 43% ahead of the previous financial year. Citi's Buy recommendation joins two others covering Amcom with Buy ratings on the FNArena database. They are Macquarie and CIMB. The present consensus target on the database is $1.86, albeit Macquarie and CIMB have not updated since February. The dividend yield is 3.0% based on FY13 forecasts and 3.6% for FY14.

Post the first half results, CIMB considered the company's new divisions were gaining traction and was confident double-digit earnings growth would continue. Macquarie expected fibre sales and margin would maintain earnings per share growth above 20%, driven by growing demand for cloud-based services. Cloud computing is company-specific services delivered via the internet which do not require special applications or infrastructure. Shifting to the cloud provides businesses with cost savings, operational flexibility and faster market response times and reflects a convergence of IT and telecommunications.

Telcos are seen partnering with software companies and acting as software aggregators. This benefits Amcom's L7 Solutions software business. L7 has been offering cloud-managed services and IT in a partnership with Cisco. Cloud services require a strong, diversified network and growth in this respect will be material for Amcom, in Citi's view. Amcom is exploiting a first mover advantage via its hosted collaboration with Cisco. Amcom is currently one of only three accredited Cisco providers, gaining access to the enterprise market where Cisco has around 60% market share emanating from a strong brand. In turn, Amcom has made Cisco more visible in government sectors locally. These two features - the cloud and the Cisco JV - can be leveraged by Amcom via its proprietary fibre network to gain economies of scale and recurring revenue.

Another advantage is in the roll out of the National Broadband Network (NBN). All fixed line service providers will become retail providers, which provides an opportunity for newcomers such as Amcom to obtain customers from the incumbents such as Telstra ((TLS)). Competition abounds of course. Second tier telcos are looking for scale ahead of the ramp up of the NBN. The networks are fairly saturated as NBN is being offered both in the wholesale channel as well as via resellers. Telstra and Optus ((SGT)) provide connectivity for retail, SME and wholesale services and the smaller ISPs such as iiNet ((IIN)) and TPG Telecom ((TPM)) rely on these for final delivery.

Where Amcom differs from the smaller telcos is that it has its own fibre network to provide services to SMEs. The risks lie in the potential increase in new players in this area. Here, Citi believes execution will be vital in deciding winners and in the first half of 2014 it is critical for Amcom to leverage the connection with Cisco. Amcom may not be encumbered by a large existing network, such as Telstra and Optus, but it may be challenged if price becomes the critical differentiating point for clients. Profit growth could be affected if Amcom's value and service offering is undermined by price wars.

FY13 profit growth is expected to be over 20%. Citi notes Amcom is trading on a FY14 price/earnings multiple of 20.3 times, equating to a conservative price/earnings growth ratio of 1.4 times FY14 expectations and 1.3 times FY15. Moreover, there is growing annuity revenue from the fibre network. Of the expected $100m in annuity based revenue in FY13 Citi estimates data networks constitute 70%, with the remainder split between IP telephony and Amnet. As customers usually sign long-term contracts of three to five years the greater the traffic that passes through Amcom's network the greater the incremental margin that can be generated. Amcom also expects to generate $1.8 million in annualised network revenue per month from new customers and its ability to leverage this recurring relationship is what makes it appealing.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Bank Bubble, Cautious Consumer, Tested Telecoms

-Has the bank bubble evaporated?
-Discretionary spending still weak
-Deutsche Bank prefers logistics, some AREITs
-Telecoms mature, mobile margin focus
-Plasma market is robust
 

By Eva Brocklehurst

Australian banks were in bubble territory at the start of the year but are they there now? Bank shares, having been buoyed by the chase for yield, have fallen sharply since the beginning of May and the sector returns are down 14%. UBS finds bank stocks are still not cheap, but valuations are less stretched. The case for an aggressive underweight stance may have run its course. The banks are now much closer to their global peers in terms of return on equity versus the price to book ratio, with the exception of Commonwealth Bank ((CBA)).

From here, catalysts will be centred around the macro view, with one of the key risks being a slowdown in the Australian economy and weak employment. Ongoing Australian dollar weakness and the ratcheting back of the US Federal Reserve's quantitative easing will also play a part. Support, in UBS' view, will come from further cuts to the cash rate from the Reserve Bank, a sustained pick up in the housing market and domestic investor rotation back to the sector as a "least worst" alternative.

In retracing the bank territory, UBS has decided to upgrade ANZ Bank ((ANZ)) to Buy from Sell. Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) are upgraded to Buy from Neutral. ANZ's operations are performing well while the regional banks offer more upside now. ANZ is viewed now trading at a more appropriate 11.2 times price earnings and 1.6 times book value. The upcoming appointment of a new head of international and institutional banking could be critical to the stocks rating as well. UBS believes this appointment, most likely from a large Asian bank, must satisfy the market by further developing the super regional strategy and the person be seen as a potential successor to the CEO.

Bendigo and Adelaide Bank offers upside in UBS' view as the network matures while there is leverage to improved equity and debt markets. The risk centres on the very thin provision coverage. Bank of Queensland, on the other hand, offers a more classical bank turnaround opportunity as it works through legacy issues. The risk here is exposure via its mining leasing book.

Australia's bank stocks have typically been a safe haven in times of currency volatility. The unwinding of the yield trade and the renewed search for growth has signalled the flight-to-safety is less prevalent now. Macquarie notes the banks outperformed the market up to April 2013, driven by the yield trade and their safe haven status. Since then the banks have underperformed, driven by short selling and a turn away from yield to seeking growth. Macquarie thinks further de-rating may occur as the yield trade unwinds, but the banks are expected to restore their safe haven status in the ASX200 universe in the medium term.

Consumers are not co-operating. Spending growth has dropped below trend and the response to lower interest rates has been muted. Largely, in Deutsche Bank's view, because of how slow the rate cutting cycle has been. Discretionary spending growth in value terms has dropped below 2%. FY14 could be better as unemployment expectations look to have stabilised and an upward trend in wealth may encourage consumers to lower their savings rate.

Deutsche Bank believes growth in discretionary spending is close to recessionary levels, with a softening in both goods and services. Cars and gambling are the two items that have held up well. Early evidence is pointing to a resumption of spending on services such as travel and eating out, rather than on retail items. If this continues, it is likely to be a replay of 2010-12 where spending held up but retailers saw little benefit.

Spending on essentials, meanwhile, is growing around trend. What stands out is the large rise in the price of utilities. This relates to a large price increase in September 2012 at the time of the carbon tax introduction. When this cycles through, Deutsche Bank expects spending on utilities will track lower, allowing growth to pick up elsewhere. It will likely be food. Food inflation has been at historically low levels and an uptrend is now in place.

From all of this Deutsche Bank maintains a gaming exposure in stocks, and with firming air travel continues to hold Sydney Airport ((SYD)). Without an improvement in retail spending, the broker sees better options in logistics and those retail AREITs that have exposure to services spending. Consumer staples are viewed as expensive. The broker remains of the view that monetary policy is yet to have its maximum impact. The quantum of official rate cuts has been small and gradual relative to history. A further cut of 25 basis points to the cash rate is expected by September, which should buoy sentiment.

Australia's telecommunications industry is mature by various measures, one such being total telecom revenue as a percentage of GDP, which is 2% according to Morgan Stanley. The broker is not expecting a significant increase in total telecom revenue as a percentage of GDP but thinks the mix will change, with mobile increasing share as PSTN revenue moves to zero and the NBN builds. This sector has had one of the highest earnings revisions in the last three months. Positive revisions for the smaller names have been driven by consolidation of the broadband sector and resulting synergies.

The sector currently offers an average 5.3% dividend yield and a 1.9% spread to 10-year Australian government bonds, which should be sustainable over the medium term. Morgan Stanley highlights Telstra's ((TLS)) metrics in this regard, being 2.7% spread to the 10-year bond with a 6.1% dividend yield. Hence, for Morgan Stanley the sector offers investors an alternative to investing in bonds and the broker has a constructive view on Telstra because of these metrics, plus the exposure to mobiles.

Australia appears to be around one year behind the US in Smartphone penetration and Morgan Stanley expects earnings margin expansion through the Australian mobile sector for scaled players. There is increasing focus on mobile profitability in the US industry, and Australia appears to be following suit, a factor that the broker suspects is not well appreciated by the Australian market.

Plasma prices have risen again and this industry is upbeat on a global basis, with demand continuing unabated. UBS hasn't seen two price increases in the same year since 2007 and this is being read as underscoring a robust industry. US albumin prices have firmed to US$37-38 per vial and prices are expected to head towards US$40/vial in 2014. The past high point was US$50/vial but this is considered unlikely to be reached this time around. CSL's ((CSL)) collections are growing around 12%. The major risk facing CSL, in UBS' view, is changes to the plasma market dynamics and weakness in the prices that CSL is able to set for it products.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.