Tag Archives: Telecom/Technology

article 3 months old

Weekly Broker Wrap: Will The Builders Come To Save The Day?

By Andrew Nelson

With resources companies no longer supplying Australia the same levels of GDP contribution they have been over the past few years, market watchers have become increasingly concerned about what might fill the gap. There’s been a lot of hope hung ‘round the necks of building supply companies, with a cyclical upturn now being prayed for in both the US and Australia.

If you’re a subscriber to the Building And Construction Can Replace The Miners For A While Theory, then analysts at Goldman Sachs have a bit of good news for you. That’s unless you’re one of those hoping for help from the resource sector Construction Industry, in which case there’s really not that much good news. But in terms of residential and commercial markets, Bob may soon be all of our uncles once more, with builders building, building supply companies supplying and maybe soon even resources company will be providing resources for materials companies to turn into more materials. And so it goes....

As I was saying, Goldman Sachs have done a bit of a whip ‘round of the US housing market. While it may be only a piece of Construction Can Replace The Miners For A While pie, it’s one of the biggest pieces as far as international materials companies are concerned. So good news from there is pretty much good news for all.

Last week, the US Census bureau published its US housing starts numbers for October, with total monthly starts 3.6% higher than September and up 41.9% on last October. More importantly this is the highest reading since July 2008, the month before we all learned what GFC meant. Here’s the hitch, much of the upside came from an 11.9% monthly increase in multi-dwelling starts. Single-family housing starts, which the broker finds a more reliable housing activity indicator was pretty much unchanged on the prior month, although still up 35.3% on last October.

US building permits for October were also strong, with the read up 29.8% on this time last year, with single-family housing permits up 2.2% on last month and 26.6% over the last 12-months. Data from the US National Association of Home Builders is even more promising, with the index posting a five point increase to 46. The broker notes this is the seventh consecutive monthly gain and is now at its highest level since May 2006. According to the NAHB, “builders are reporting increasing demand for new homes as inventories of foreclosed and distressed properties being to shrink”.

Says Goldman Sachs, “This data continues to suggest a recovery in the US housing market.”

To give you an idea about a read-through for Australian investors, Goldman’s points out that a 5% change in US housing starts has a 3.3% and 3.0% impact on its forecast FY13 earnings for Boral ((BLD)) and James Hardie ((JHX)), respectively.

Meanwhile, analysts at Deutsche Bank have some good news about the domestic insurers, noting they have been enjoying an extended period of reserve releases on the back of both tort and CTP reforms. While the broker admits an eventual normalisation of releases is inevitable, currently conservative reserving practices and low superimposed inflation in key long-tail classes indicate releases should actually exceed guidance in FY13.

However, Deutsche warns investors to not get too carried away, noting that when combined with the potential for below budget catastrophe outcomes and investment gains from equities and credit spreads, management may look to boost capital strength via higher risk margins, rather than giving the profit back to investors. Either way, support from reserves adds to the broker’s view of attractive upside risk to consensus margin expectations for Insurance Australia Group ((IAG)) and Suncorp ((SUN)). QBE Insurance ((QBE)) comes in a distant third, given a more stretched balance sheet, more limited pricing power and less of a benefit from both conservative catastrophe budgets and reserves.

Switching to the banks, Deutsche notes the US Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency, citing industry calls to delay the implementation deadline, announced they do not expect any of the US Basel III proposals to become effective on the global implementation deadline of 1 January 2013. Further, the US agencies want a new and more considered deadline, although there was no schedule laid out for any new draft proposals. European lawmakers have also jumped on the bandwagon, saying they doubt anyone will meet January deadline, noting the same concerns as the US and the fact there seems to be no consensus on some of the major issues.

Analysts at CIMB believe Australian banks will take a conservative approach to capital given the volatility now inherent within Basel III requirements. While the broker is comfortable about the amount of provisioning being taken on, it sees limited opportunity for capital management in FY13. The year after, once positions are constructed and paid for, capital management should begin once again begin in earnest. Fingers crossed.

Analysts at Goldman Sachs also touched on the domestic telco industry last week, providing insight on how we’re going on getting a viable third operator to compete with the seeming duopoly being built by Telstra ((TLS)) and Optus ((SGT)). Anyone following this sector can likely tell you all about the beating that has been taken by Hutchison Telecommunications ((HTA)) in its bid to try and keep up with the bigger boys. And there’s still a long way to go, notes the broker.

What Goldmans believes needs to happen is parents Vodafone and Hutchison Whampoa will have to invest some serious capital to fund the company’s much touted multi-year turnaround strategy and to arrest the ensuing free cash burn. There are three steps the broker sees: $2bn in network investments, fixing the cost base, and then investing in customer acquisition. A far from impossible task, but it will take several years.

In the meantime, predicts Goldman, Telstra will continue to take advantage in the near term given its strong competitive positioning. The broker has even been kind enough to spell out the upside, seeing respective 1.1%, 2.1% and 2.2% increases to FY13-15 EPS forecasts and a higher price target. Longer term, however, the broker believes there will be an ever increasing risk of some stiff, price based competition, especially given the presence of a subscale Vodaphone (Hutchison).
 

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article 3 months old

Telstra At $5.00?


Bottom Line 20/11/12

EW Trend: Corrective
Price Trend: Up
Trend Strength: Strong

Technical Discussion

LAYMANS:

The rally that commenced in November 2010 has now travelled further than any during the long downtrend that commenced back in 1999.  Of course that longer term downtrend remains intact with the company suffering severe technical damage over the years.  However, it’s a relevant fact and keeps the door open for the bounce to continue over the medium term without too much in the way of retracements, albeit possibly following a small pull-back over the coming weeks. We’re technically in a position to see a pause for breath right now though of course this was the exact situation during our last review.  In fact strength has continued to be the main theme and until there is evidence of selling activity we can’t get overly confident in regard to a pull-back commencing.  We noted the falling volume last month which is always a warning sign of buyer demand flagging though unless sellers start to appear any weakness is likely to be short in nature.   The one thing that continues to help defensive stocks like Telstra ((TLS)) is investor’s reluctance to take on risk and whilst this remains the case it’s difficult to envisage locking in a significant top anytime soon.   

 
TECHNICAL:

Very rarely will we focus on the weekly chart though the lack of clarity on the daily time frame means this is exactly what we’ll continue to do.  We’d pencilled in wave-b last month meaning we were looking for a small retracement before the trend continued.  Obviously this has not been the way forward although that in itself isn’t reason to amend our labelling.  One of the Elliott guidelines states that wave-b of a flat often heads up to the 1.382 projection of wave-a providing us with our line in the sand at $4.24.  If that level is penetrated then our current count is certainly incorrect and we’ll have to take another look at the patterns.  I mentioned the declining volume above as being a potential stumbling block and we also have some Type-A bearish divergence on the daily chart (not shown).  However, very importantly it has yet to trigger with a push beneath today’s low doing just that.  It’s also worth mentioning that weaker Type-B divergence is evident on the weekly chart with price making a higher high whilst our oscillator failed to confirm.  So there are certainly technical reasons implying that a sideways consolidation pattern or small retracement is around the corner though until signs of distribution occur there’s no point trying to fight the trend.  One thing’s for sure, there is no evidence of selling pressure at this juncture although it’s definitely something to look out for throughout the rest of the week and into next.  The other key pattern is the rising channel with price stepping its way higher in a series of corrective movements.  Over the medium term this trait could continue until the next line of resistance circa $5.00 is tagged.

Trading Strategy

“…As already mentioned the high of wave-(a) could be penetrated by a small margin though if volume remains weak we’d expect to see the low of wave-a revisited before the trend resumes...”   The recent pivot high has now been penetrated meaning if our wave count is correct a running or expanded flat pattern is taking hold.  The key level here to focus on is the annotated target at slightly higher levels.  If a downturn kicks in before that level is tagged price should continue down to the lower trend line of the rising channel as a minimum to complete wave-(b).  Should this be the way forward then another good buying opportunity is going to present itself though remember we are looking at the weekly time frame here so it’s not going to happen overnight.  If the 1.382 projection is overcome immediately a more complex combination pattern is unfolding though we’d still expect the line of resistance to come under pressure without too much difficulty.


Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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article 3 months old

Weekly Broker Wrap: Bank Assessment And Telco Calls

By Andrew Nelson

All in all it was a pretty good bank reporting season just gone. However, analysts at Deutsche Bank point out that there were numerous one-offs and non-recurring bonuses that made things look a little better than they were. Stripping these out give us a slightly different picture as to who did the best and who did the worst.

Looking at headline results, the broker notes growth in the Australian and NZ franchises of Australia’s major banks looked reasonably strong in 2H12 at an average of 5-11% annualised. On these numbers, Westpac ((WBC)) posted the strongest growth followed closely by National Australia Bank ((NAB)).  Conversely, ANZ Banking Group ((ANZ)) seems to have posted the weakest growth at a headline level.  However, Deutsche points out that the drivers behind that growth were very different, with NAB relying heavily on low costs, while WBC actually posted stronger revenue growth.  

Thus, NAB takes the biggest hit from stripping out the chaff, with the broker noting that in the absence of a mortgage re-pricing catch up, markets income, fee re-pricing and the non-payment of executive bonuses, the 2H result was actually a flat over the 1H.  This leads the broker to conclude the momentum that is assumed in the bank’s domestic performance is probably not as the headline numbers suggest.

On the other hand, the broker’s analysis points to ANZ as having had the strongest underlying performance, with Australian and NZ franchises booking 5% annualised growth versus Westpac at 1.2% annualised growth. However, the broker gives extra credit points to the latter, noting WBC posted the result despite undertaking some balance sheet restructuring over the period.  Unsurprisingly, NAB comes in at the bottom booked with adjusted underlying growth at 0.2%.

Over the end of the period, analysts at UBS conducted a survey of bank Loan Officers in order to gauge the current trend of underwriting standards, credit demand, loan growth and lending margins.

Firstly, respondents noted that there has been an ongoing tightening of underwriting standards in both mortgages and SME lending. While the broker believes this is mainly due to re-pricing efforts in the mortgage sector, it sees a little bit more to be concerned about in the SME space. Respondents indicated concerns about the general economic environment and worries about the housing market as the main driver for tightening lending conditions to small businesses. UBS points out this is the first shift towards restricting SME lending since 1H10.

The tightness also spread to larger business customers as well, with loans to the corporate sector also showing some signs of restriction, especially in retail property. The broker notes this tightness emerged as both stricter collateral requirements and a focus on loan maturity.

Despite a slowly decreasing willingness to lend, the broker points out that the general opinion in the sector is that credit growth is expected to come in at 5% next year, which is up from the 4% indicated in the last survey. There were fairly conflicting responses on asset quality, with expectations ranging from further improvements to deteriorations.

Ultimately, UBS expects bank prices will remain volatile, torn between outbursts of optimism when the clouds part to show some sunshine, which will be offset by the realities of a struggling Europe, the US Fiscal Cliff and what are still anaemic levels of global growth. As such, the broker believes the fair value range for the banks is at around 1.4x-1.8x book value. Right now, the Big-4 are sitting at the top of this range on the back of the hunt for apparent safety and yield. Yet despite the yield support on offer, UBS is growing increasingly concerned about valuation and thus sees better investment opportunities elsewhere, especially in international markets.

BA-ML also took an angle on banking last week after holding a number of mini-conferences around Asia. The big surprise, notes the broker, was the extent of bullishness towards equities, Asia, and HK/China.  In fact, 58% of respondents believe equities will be the best performing asset class in 2013. Only 14% felt that way about gold, and only 13% for corporate credit. In terms of equities, Asia is expected to be the best performing region, with the US coming in a distant second.

94% of survey respondents see a soft landing for China, with worries about a hard landing seeming to have disappeared.  On the other hand, earnings growth has remained a concern. It seems about half of respondents believe 2013 earnings growth forecasts of 8% are about right, while 42% of respondents  believe earnings growth is at least 10% too high. Still, about 75% of investors surveyed believe the China H-share market will rally into year-end and then continue into next year. 60% expect HK/China to be the best performing country in the region versus Australia and India coming in the lowest.

Switching lanes back to the domestic front, analysts at JP Morgan see a softer, if not more rational market for domestic telecommunication providers. The view is predicated by the recent result from SingTel’s ((SGT)) Optus, which reported some reasonably weak numbers and took the knife to guidance. Revenue guidance for the  year ending March 13 was cut from low single digit growth three  months ago to a mid-single-digit decline, although the operating earnings guidance was maintained at flat.

The broker has its doubts about flat earnings, however, noting things don’t really seem to have improved that much over the last three months. And with things about the same, JP Morgan wonders how margins could be supporting even flat earnings in the face of weaker general trends.

Thus, the broker reads this shift in guidance as likely indicating an increasing emphasis on earnings over market share, with the company not looking to fight revenue headwinds, but rather targeting margins. This would mean the loss of subscribers in Mobile given Telstra’s ((TLS)) network lead, with Optus using price to shift customers off pre- to higher margin postpaid accounts.

While for Optus this amounts to a struggle, for Telstra it is a clear positive, says the broker. In fact, current trends point to Telstra picking up 760k subs this half versus 606k in the June half, with the iPhone5 launch adding further upside risk to the numbers. Analysts at Goldman Sachs agree, also seeing a strong quarter for Telstra on the back of a weak Optus performance in the mobile market.
 

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

As more companies use annual general meetings to confess on earnings guidance for FY13, changes to broker ratings have become weighted to the downside, with the past week seeing nine stocks upgraded compared to 27 downgrades. Total Buy recommendations in the FNArena database now stand at 42.77%.

Both Dexus Property ((DXS)) and IOOF Holdings ((IFL)) received two upgrades during the week. For Dexus, news the company intends to sell its remaining US assets to reinvest in the Australian market prompted Macquarie to move to a Neutral rating from Sell and JP Morgan to go one better and lift its rating to Buy from Neutral. In both cases the asset sale is seen as a likely positive catalyst for the stock.

Both Citi and Credit Suisse upgraded IOOF to Buy from Hold following the incorporation of the recent Plan B acquisition into earnings models, which resulted in increases to earnings estimates and price target. Credit Suisse also sees value given the stock is trading below historic average multiples.

Credit Suisse has also moved to a Buy rating from Hold on Goodman Fielder ((GFF)), this on the back of increases to earnings estimates given signs of improvement in the company's bread operations. The changes to forecasts resulted in an increase in price target.

With Archer Daniels Midland confirming an indicative proposal to acquire Graincorp ((GNC)), UBS has upgraded to a Buy rating from Hold previously to reflect the fact the stock is now in play. Given a potential list of suitors for Graincorp the broker has lifted its price target above the proposed offer price.

While Ten Network ((TEN)) delivered a disappointing full year result Deutsche Bank has upgraded to a Hold rating from Sell. While the long-term value in Ten's broadcasting licences is unlikely to be realised for some time, Deutsche takes the view the sale of the Eye Corp assets means a capital raising is now unlikely to be needed.

RBS Australia has upgraded WorleyParsons ((WOR)) to Buy from Hold post an investor day, largely on valuation grounds as both sector and peer multiples have improved in recent weeks. Changes to forecasts post the investor day saw some adjustments to price targets across the market.

JP Morgan was in a minority in upgrading OZ Minerals ((OZL)) to Hold from Sell post the company's quarterly production report. The lift in rating reflects the broker's view value is now less likely to be destroyed via merger and acquisition activity, while there is also seen to be a lack of negative catalysts for the share price at present.

Others didn't agree, as Citi, BA Merrill Lynch and Deutsche Bank all downgraded OZ Minerals during the week, the former to Hold from Buy and the others to Sell from Hold. Citi's downgrade reflects a lack of upside near-term given the stock is near valuation, while BA-ML takes the view rising costs will at some point have a more significant impact on earnings. Deutsche's downgrade is largely a valuation call.

A number of other stocks also received multiple downgrades, one being Mirvac Group ((MGR)). Both JP Morgan and Credit Suisse moved to Hold ratings from Buy following the group's quarterly update, both highlighting valuation as the reason for the rating change given recent gains in the share price.

National Australia Bank ((NAB)) saw both Macquarie and BA-ML downgrade, the former to Hold from Buy and the latter to Sell from Hold. Macquarie sees scope for the bank to have to deal with additional impairment charges in coming months given ongoing soft economic conditions, while BA-ML remains cautious on the outlook for the bank's UK assets as well.

Macquarie extended the weaker outlook to Westpac ((WBC)) as well, trimming earnings estimates and downgrading its rating to Underperform from Neutral.

Lower margin and revenue assumptions have seen estimates for Programmed Maintenance Services ((PRG)) lowered by Macquarie, while Credit Suisse has also adjusted down its forecasts and price target for the stock. In both cases the brokers have downgraded ratings to Neutral from Buy given an increasing risk profile.

SMS Management and Technology ((SMX)) delivered weaker AGM commentary than the market had expected and the resulting cuts to earnings estimates were enough for both Macquarie and UBS to downgrade to Hold ratings from Buy previously. Forecasts and price targets were lowered across the market.

It was a similar story for Treasury Wine Estates ((TWE)), where lowered guidance for the full year was enough for both Deutsche and UBS to downgrade to Sell ratings from Neutral recommendations previously.

On the resource side of the market BA-ML downgraded Alacer Gold ((AQG)) to Sell from Hold to reflect risk of further production disappointments following a weaker than expected quarterly production report.

Credit Suisse also downgraded Gindalbie ((GBG)) to Neutral from Sell following the incorporation of an equity raising for the Karara project into its model for the company. In the broker's view any such raising is unlikely to be well received by the market.

Citi has cut its rating on Oil Search ((OSH)) to Neutral from Buy following the company's quarterly, largely on a valuation basis as results for the period were broadly in line with expectations. Higher than expected costs saw UBS lower earnings estimates for Panoramic Resources ((PAN)) and when the potential need for additional funding is factored in the broker has moved to a Hold rating from Buy previously.

A weak September quarter production report from St Barbara ((SBM)) has left the market wanting more in the view of Deutsche, to the extent the broker has moved to a Neutral rating from Buy previously.

Among the industrials, BA-ML downgraded Ansell ((ANN)) to Sell from Hold on valuation grounds and RBS Australia has downgraded Australian Pharmaceutical Industries ((API)) to Hold from Buy on the same basis following the group's full year profit result. The result prompted changes to earnings estimates and price targets across the market.

RBS also downgraded both Biota ((BTA)) and Bradken ((BKN)) to Hold from Buy, the former as part of ceasing coverage on the stock given its imminent de-listing in Australia and the latter to reflect a full valuation given the expectation of a further softening in the group's markets.

Fletcher Building ((FBU)) saw a rating cut to Hold from Buy by Credit Suisse following solid share price gains, the broker noting the recent run in the stock has come before evidence the cycle has actually turned for building materials companies.

Credit Suisse also downgraded Goodman Group ((GMG)) to Sell from Hold on valuation grounds following a review of the REIT sector, while Deutsche downgraded Charter Hall Retail ((CQR)) on the same basis given the view the market is looking through Poland execution risk, where assets need to be sold to fund the group's development pipeline.

Lower earnings forecasts for SAI Global ((SAI)) given ongoing macro headwinds have been factored into JP Morgan's model, the result being the broker has downgraded to Neutral from Outperform to reflect additional pressure on the company to meet full year earnings expectations.

In terms of target price changes over the week only Australian Pharmaceutical enjoyed an increase of more than 10%, while Panoramic, SMS Management, Ten Network, Senex Energy ((SXY)) and Bradken saw targets reduced by 10% or more.

The cut in target for Senex came despite earnings forecasts being increased by more than 10%, the only stock in this category for the week. Cuts to earnings forecasts were most significant for Panoramic, Ten, Atlas Iron ((AGO)), BC Iron ((BCI)), Mount Gibson ((MGX)), Yancoal ((YAL)), Western Areas ((WSA)), GWA Group ((GWA)) and SMS Management. 


 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup
Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,RBS<*br*>Australia,UBS&b0=110,89,93,90,75,121,142,113&h0=73,117,96,132,100,108,151,126&s0=57,29,43,12,43,39,13,19" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 DEXUS PROPERTY GROUP Sell Sell Macquarie
2 DEXUS PROPERTY GROUP Neutral Buy JP Morgan
3 GOODMAN FIELDER LIMITED Neutral Buy Credit Suisse
4 GRAINCORP LIMITED Neutral Buy UBS
5 IOOF HOLDINGS LIMITED Neutral Buy Citi
6 IOOF HOLDINGS LIMITED Neutral Buy Credit Suisse
7 OZ MINERALS LIMITED Sell Neutral JP Morgan
8 TEN NETWORK HOLDINGS LIMITED Sell Neutral Deutsche Bank
9 WORLEYPARSONS LIMITED Neutral Buy RBS Australia
Downgrade
10 ALACER GOLD CORP Neutral Sell BA-Merrill Lynch
11 ANSELL LIMITED Neutral Sell BA-Merrill Lynch
12 AUSTRALIAN PHARMACEUTICAL INDUSTRIES Buy Neutral RBS Australia
13 BIOTA HOLDINGS LIMITED Buy Neutral RBS Australia
14 BRADKEN LIMITED Buy Neutral RBS Australia
15 CHARTER HALL RETAIL REIT Buy Neutral Deutsche Bank
16 FLETCHER BUILDING LIMITED Buy Neutral Credit Suisse
17 GINDALBIE METALS LTD Buy Neutral Credit Suisse
18 GOODMAN GROUP Neutral Sell Credit Suisse
19 MIRVAC GROUP Buy Neutral JP Morgan
20 MIRVAC GROUP Buy Neutral Credit Suisse
21 NATIONAL AUSTRALIA BANK LIMITED Buy Neutral Macquarie
22 NATIONAL AUSTRALIA BANK LIMITED Neutral Sell BA-Merrill Lynch
23 OIL SEARCH LIMITED Buy Neutral Citi
24 OZ MINERALS LIMITED Buy Neutral Citi
25 OZ MINERALS LIMITED Sell Sell BA-Merrill Lynch
26 OZ MINERALS LIMITED Neutral Sell Deutsche Bank
27 PANORAMIC RESOURCES LIMITED Buy Neutral UBS
28 PROGRAMMED MAINTENANCE SERVICES LIMITED Buy Neutral Macquarie
29 PROGRAMMED MAINTENANCE SERVICES LIMITED Buy Neutral Credit Suisse
30 SAI GLOBAL LIMITED Buy Neutral JP Morgan
31 SMS MANAGEMENT & TECHNOLOGY LIMITED Buy Neutral Macquarie
32 SMS MANAGEMENT & TECHNOLOGY LIMITED Buy Neutral UBS
33 ST BARBARA LIMITED Buy Neutral Deutsche Bank
34 TREASURY WINE ESTATES LIMITED Neutral Sell UBS
35 TREASURY WINE ESTATES LIMITED Neutral Sell Deutsche Bank
36 WESTPAC BANKING CORPORATION Neutral Sell Macquarie
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 IFL 17.0% 50.0% 33.0% 6
2 PRY 25.0% 38.0% 13.0% 8
3 GFF 13.0% 25.0% 12.0% 8
4 CBA - 25.0% - 13.0% 12.0% 8
5 TEN - 50.0% - 38.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SXY 100.0% 33.0% - 67.0% 3
2 SMX 75.0% 25.0% - 50.0% 4
3 PAN 100.0% 67.0% - 33.0% 3
4 API 50.0% 20.0% - 30.0% 5
5 PRG 100.0% 71.0% - 29.0% 7
6 MGR 57.0% 29.0% - 28.0% 7
7 NAB 13.0% - 13.0% - 26.0% 8
8 TWE - 38.0% - 63.0% - 25.0% 8
9 ARP 50.0% 25.0% - 25.0% 4
10 BKN 86.0% 71.0% - 15.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 API 0.408 0.520 27.45% 5
2 KMD 1.467 1.575 7.36% 3
3 IFL 6.242 6.517 4.41% 6
4 PRY 3.688 3.756 1.84% 8
5 MGR 1.470 1.490 1.36% 7
6 GFF 0.593 0.600 1.18% 8
7 CBA 53.606 54.196 1.10% 8
8 ARP 9.660 9.763 1.07% 4

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PAN 1.083 0.883 - 18.47% 3
2 SMX 6.405 5.458 - 14.79% 4
3 TEN 0.481 0.421 - 12.47% 8
4 SXY 0.995 0.877 - 11.86% 3
5 BKN 7.439 6.641 - 10.73% 7
6 SGM 13.314 12.600 - 5.36% 6
7 AQG 7.599 7.294 - 4.01% 8
8 BBG 0.980 0.951 - 2.96% 8
9 CGF 4.439 4.310 - 2.91% 7
10 PRG 2.656 2.594 - 2.33% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SXY 2.000 2.300 15.00% 3
2 WPL 228.066 243.421 6.73% 8
3 CLO 8.633 9.000 4.25% 3
4 API 4.660 4.840 3.86% 5
5 SUL 60.443 61.357 1.51% 7
6 IFL 44.743 45.386 1.44% 6
7 GFF 5.413 5.488 1.39% 8
8 STO 61.988 62.763 1.25% 8
9 EVN 18.100 18.317 1.20% 6
10 QBE 131.511 132.748 0.94% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 PAN 0.125 - 2.075 - 1760.00% 3
2 TEN 1.675 0.689 - 58.87% 8
3 AGO 10.113 5.913 - 41.53% 8
4 BCI 69.967 51.267 - 26.73% 3
5 MGX 21.175 16.388 - 22.61% 8
6 YAL 66.460 53.820 - 19.02% 5
7 WSA 17.314 14.814 - 14.44% 7
8 GWA 13.983 12.267 - 12.27% 6
9 SMX 38.680 34.420 - 11.01% 4
10 SXL 14.950 13.663 - 8.61% 7
 

Technical limitations

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article 3 months old

Telstra Signals Game On

By Eva Brocklehurst

Telstra ((TLS)) has raised the competition heat in the telecommunications sector with its purchase of Adelaide-based ISP Adam Internet, for an undisclosed sum. While only a small acquisition for the giant of the sector, it will make players in the middle tier of the broadband marketplace sit up and take notice, according to brokers. Most see it, with Telstra's stated aim to run Adam as a separate entity, as a bid to challenge Optus ((SGT)),  iiNet ((IIN)) and TPG Telecom ((TPM)). For RBS it  is Telstra's "Jetstar moment", referring to Qantas' ((QAN)) well-founded decision to run a budget airline, Jetstar, along side its premium service. For Deutsche, it reaffirms its view that organic growth in this area is difficult. Credit Suisse sees Adam as Telstra's 'challenger' brand and believes it is a significant change for Telstra and the industry.

The acquisition price was not disclosed but speculation puts it at $50-60 million for around 80-100,000 subscribers. Therefore, the acquisition for Credit Suisse, on an 80,000 subscriber basis, implies an acquisition price of 10-12 times FY12 earnings and $550-$660 per subscriber. Credit Suisse believes the deal won't provoke concerns at the Australian Competition and Consumer Commission, given Adam only has around 1.5% market share. RBS also notes, nationally, it would not be a material reduction in competition. However, Adam could have up to 20-25% of Adelaide subscribers and that may concern the ACCC.

Adam is seen operating as Telstra's low cost online channel but benefiting from the infrastructure and balance sheet of Telstra. Credit Suisse says it is a sound strategic move by Telstra, giving it a lower-cost channel to minimise retail market share loss as the NBN rolls out over time. Nevertheless, there is risk, as Adam needs to gain presence outside its home market and not get bogged down by its big brother's bureaucracy. The broker expects Adam to be positioned as a mid-tier operator going head to head with iiNet and Optus, rather than challenging the lower cost providers TPG and Dodo. The reason for this, Credit Suisse maintains, is that Telstra still has the number one retail broadband business (46% market share) and it would have a lot to lose by leading broadband prices down with the Adam brand. Optus and iiNet hold 18% and 15%, respectively, of the national broadband market share. However, in the metro broadband market, the broker estimates Optus and iiNet collectively hold 45%-50% market share. This, therefore, represents a significant opportunity for Telstra to challenge.

For RBS, while this is a small deal for Telstra, it has some important strategic significance. The broker notes Telstra could have set up its own low-cost brand but it could be difficult to be truly low-cost if it was simply operating within the existing Telstra structure. In its view, Telstra is essentially buying a low-cost 'culture' through this acquisition. Expanding on this theory, RBS says the move could signal a willingness by Telstra to use a range of brands to address different market segments, and it may look at a similar strategy in mobile. Moreover, it may enable Telstra to charge a greater premium for the core brand while retaining market share at the lower end of the consumer market. At 30 June 2012, RBS estimates Telstra has 45.3% market share of broadband subscribers nationally so Adam Internet's estimated 80,000 would represent 1.4% and take Telstra's share to 46.7%. RBS feels the challenge is on for Optus, iiNet and TPG.
 
Deutsche also sees Adam competing against TPG and iiNet and believes, with the compression in margins expected for all companies (except iiNet) under an NBN scenario, scale is likely to be important. With the Australian fixed broadband market reaching its natural saturation point, the broker maintains the fixed market landscape is becoming increasingly competitive and organic growth is difficult to generate. Morgan Stanley notes that industry structure will be key to profitability and long-term returns. While not commenting on this specific acquisition, Morgan Stanley believes a consolidation of the industry is due and would be beneficial. It said mid-sized telecoms have incentive to do this because of the large cost savings that can be achieved when acquiring the smaller firms. The broker says that at the bigger end of the telecommunications market the top four players (Telstra, iiNet, Optus, TPG) control around 80% of subscriber market share and have cemented positions, while there is a long tail of smaller firms that are prime takeover targets. It notes iiNet has acquired seven smaller telecommunication firms over the past nine years, extracting  $36m in annual synergies over this time. TPG has also participated in this consolidation, with three acquisitions over the past five years.
 
For Telstra, Adam is not expected to materially impact on forward earnings forecasts. According to Credit Suisse, Adam generated $49m of revenue in FY12 and $8.5m of earnings, representing an earnings margin of 17% and this was in line with iiNet's FY12 earnings margin. Credit Suisse still prefers TPG as a telco pick, seeing iiNet at risk in the medium term from Telstra's acquisition of Adam. In its view, TPG has a sustainable competitive advantage as a price leader and substantial infrastructure position (metro and international fibre). Telstra has seven Hold recommendations in the FNArena database and one Sell. The consensus target price is $3.79 with the range just $3.50 to $4. Consensusforecast earnings growth is 7.6% for FY13 and 1% for FY14. 
 

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article 3 months old

Weekly Broker Wrap: A Little Bit More Optimism

By Andrew Nelson

We’ll start off this week’s wrap with what fund managers from around the world have to say about financial markets in October 2012. Last week, analysts at Bank of America-Merrill Lynch put out the findings from their Global Fund Manager Survey and while they don’t claim that funds managers are bursting with optimism, they do note that there is an ongoing if cautious shift towards growth.

However, we’re still a long way away from needing to book any party space, or to start printing the invitations, with the broker noting a still large allocation to cash holdings. As far as growth goes, BA-ML notes fund managers like US domestic demand growth plays, as opposed to value plays like Japan and Resources.

Sentiment is certainly improving, if slowly. The survey shows that 20% of respondents expect the global economy to get stronger. This is up from 17% last month. However, the broker notes a majority of those polled also expect weaker profit growth, with China growth expectations especially taking a hit. Only 5% of investors now expect above-trend growth from the Middle Kingdom in 2013. 

What are they afraid of? 42% put the US fiscal cliff on the top of their tail risk list, with the EU debt crisis garnering just 27%. The bigger issue here, however, is that only 20% believe the cliff is actually priced into equities at the moment. And while cash holding may still be high, cash balances have pulled back to 4.3% from 4.5%. That means the broker’s Cash Rule buy signal is also terminated after 5 months.

There was a small shift to equities from bonds in October, seeing the largest positive moves to commodities in the last six months. The analysts also see a shift in preference to corporate bonds, and when asked how more exposure to high beta equities would be funded, 37% said government bonds, 33% responded with cash and 19% would sell defensive equities, while only 4% would reallocate from corporate bonds.

With less money heading to Japan, equity funds made their way to emerging markets, the UK and the eurozone. BA-ML notes this is the first time in almost 2 years that eurozone equity weightings matched that of US. 72% think the yen is overvalued, 53% think the euro is overvalued, while just 16% think the US dollar is overvalued.

The sectors that saw the best support in October were Tech and Pharma, while Banks and Utilities were the least liked. Otherwise, investors remain long on US domestic demand plays like Consumer Discretionary and are very short China-plays such as Energy and Materials.

The next cab off the rank was a new assessment of the small to medium business (SMB) segment of the Australian telecom services market from analysts at Goldman Sachs, prompted by the broker picking up coverage of M2 Telecommunications Group ((MTU)).

The broker estimates the SMB market size is somewhere in the neighbourhood of $7bn in revenues, or about 20% of total telecom market revenues. The market is comprised of about 735,000 businesses with 2-20 seats and around 84,000 businesses with 21-200 seats.

However, what really makes this segment of the market unique is that of all the telecom industry market segments, the broker notes the SMB segment is the most leveraged to the economy. Goldman’s points out that during periods of slower economic growth, SMB spending on IT&T contracts as businesses look to reduce overheads and conserve capital.  The broker sees this as being one of the main reasons that during periods of slow economic activity and weak business confidence, like 2009 and 2012, SMB telecom market revenues slow significantly.

On the broker’s numbers, Telstra ((TLS)) currently owns the SMB market with a 65%-70% share. Next is SingTel’s ((SGT)) Optus at 10%-15%, while up and comer MTU has become the third largest player in the SMB market, with around a 5% share.   

While Goldman’s notes Telstra is best positioned to compete in the SMB space given its range of products and expanded distribution, the broker also believes it will be tough for Telstra to squeeze that much more juice from this orange given its already dominant share, increasing levels of competition and high price points. 

The broker believes both iiNet ((IIN)) and TPG Telecom ((TPM)) are looking at the SMB market as the next big opportunity, with TPM likely to cause some disruption on the price front. However, the broker also thinks both companies lack a sufficient enough distribution footprint to cause too many headaches. As a reseller, MTU cannot differentiate on price, but it does have a nationwide dealer network. A-Ha!

Goldman Sachs has initiated coverage on M2 Telecommunications with a Neutral call. Looking at the FNArena Database shows us one Buy call from Citi, who just initiated coverage last month.

Macquarie put out an interesting comment on Banks and bank rates last week, noting once again the nation’s major lenders have stood firm with deposit rates after the prior week’s surprise 25bps cut from the RBA.  

The broker notes this decision has seen deposit competition intensify to levels not seen since May and could mean the banks have reached the tipping point in terms of deposit prices. While Macquarie admits this is positive from a loan-to-deposit ratio (LDR) perspective and also positive in terms of getting ready for the raft of new liquidity requirements, Macquarie worries the inability to pass on rate cuts to deposits could come at a significant margin cost to the banks.

Macca’s notes the average major bank’s cost of deposits has increased between 6-11bps since the October rate cut. This adds up to $0.2-$0.7m cost to the majors every day they delay reducing term deposit rates. It’s true the majors are clawing some back via out-of-cycle standard variable rate (SVR) re-pricing, they are still running at a loss, losing $0.50m more a day compared to two weeks ago.

This latest development sees a shift in the broker’s sector preferences, removing its long National Australia Bank ((NAB)) position in favour of its most preferred stock, ANZ Bank ((ANZ)). The revised pairs trade Long ANZ/Short Westpac ((WBC)) play on cost-out work, earnings momentum and less exposure to the mining states.

Lastly, analysts at Morgan Stanley had a few things to say about a few sectors last week. First, the broker has called the end of the boom years for consumer electronics retailers. The broker notes industry profits remain pressured for four reasons: technological improvements are slowing, there are too many stores, products and purchasing channels are both becoming digitized and Apple is out there eating everyone’s lunch. The view saw the broker downgrade JB HiFi ((JBH)) to Underweight last week, with Harvey Norman ((HVN)) already there.

The broker also notes the Healthcare sector has been on a bit of a tear despite net in-line earnings delivery and relatively flat outlook commentary. Healthcare PE re-ratings have been the dominant driver and the broker believes the currently rich valuations are likely to be sustained until market EPS trends reverse. In the meantime, or until earnings revisions reverse, healthcare is likely to maintain its premium to fair value, says Morgan Stanley.
 

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article 3 months old

Weekly Broker Wrap: Banks Are Being Squeezed, Telstra Turns Around

By Eva Brocklehurst

So the Reserve Bank has cut the official cash rate by 25bps to 3.25%.

What this means has come to be quite different for various business sectors and elements of the population. Once upon a time the word rate cut was pretty universally welcomed. Mortgage rates would come down, albeit with a bit of a lag, people would spend the extra money on purchases rather than pay down their debt and companies would feel more comfortable adding a bit of leverage. In terms of the RBA's desire to provoke a sluggish economy to move up a gear,  it worked.

Now, the community observing these moves is more sanguine and analysts and economists see it working less smoothly. Why? Well, it's probably all to do with the Global Financial Crisis, which five years ago ushered in a financially more sombre world.

Goldman Sachs analysts consider stocks that outperformed in the wake of the GFC were those that are typically called defensive, or those that could benefit from the rash of interest rate easing that was triggered worldwide. Safe as a bank? Not anymore it would seem. This sector, heavily entangled with Europe's debt problems, is still a long way from pre-crisis peaks. Ahead, Goldman thinks this will continue as long as these sovereign risks play out in Europe.

How are the Aussie banks faring? We've been told they are at the top of the heap when it comes to beating the European contagion. Well, they are, but they're still feeling the pinch. Many brokers agree that the business banking margins of the major banks are under pressure, and this is primarily due to an inability to re-price debt (Macquarie and JP Morgan) and, on the ground, a potential shortage of high margin business from Western Australia and to a lesser degree Queensland  (Macquarie). Macquarie has downgraded the banks' earnings forecasts by 1-2% in FY13, adjusting ANZ Banking Group ((ANZ)) and Commonwealth Bank ((CBA)) earnings the least (up 0.4% and down 1% respectively) and Westpac ((WBC)) and National Australia ((NAB)) the most (down 1.5% and 1.2% respectively). The broker continues to prefer ANZ and NAB, although wary of NAB's Western Australia and Queensland exposure. For CBA, while the return on equity decline theme remains intact, Macquarie's recent analysis has shed a relatively more positive light on the stock. This, along with its safer book, is enough for Macquarie to shift CBA to a Hold from Underperform.

WBC now becomes the broker's least preferred bank. Macquarie says pressure on margins is unsurprising given the lack of demand for credit, the excess liquidity available at the larger end of the market and the reluctance to write business below investment grade. Australian banks have benefited from strong loan growth and margin from the mining/energy boom and a slowdown in that quarter implies a more subdued growth outlook. Business banking margin decline was also exacerbated by a shift towards safer, but  higher cost, term deposits. Macquarie has introduced its 'Spotlight 4' -- a scorecard which provides a view on the outlook for loan growth, margins and lending fees. Analysis shows that on a relative basis, unlike the other majors, the loan growth outlook for CBA appears to be improving, albeit off a low base.

JP Morgan observes that deposit competition, and 'maxed-out' wholesale markets, are blunting the impact of rate cuts, and creating a vicious circle such that the official easing is compelled to continue. The broker noted that, as the overnight cash rate declines, an increasingly larger pool of deposits will become the subject of margin compression as asset yields push closer to low-rate deposits.This dynamic gets worse the lower the cash rate falls, given more of the deposit base is re-priced towards zero. Now, extrapolating this, according to the broker, could even mean rate cuts do not get passed on at all!

The calculation looks like this: Each 25bp reduction in the overnight cash rate requires around 4bps of re-pricing on the mortgage book to be fully recovered. Put lower returns on free funds and deposit compression into the mix and this re-pricing looks like being placed in the too-hard basket. JP Morgan maintains the banks have a long-established track record of re-pricing loans to manage higher funding costs and the mortgage book (accounting for 55% to 65% of loan portfolios) has been the primary re-pricing mechanism. So, the broker believes Australian banks are fully valued at current levels and there is no discount for the probability of an elevation in loan losses above current consensus estimates. Hence,  no Overweight recommendations.

In this brave new world of tight credit Goldman has analysed the potential for a residential building recovery. The broker maintains a more modest rate of household mortgage lending does not preclude a recovery in residential construction activity, as new residential construction represents only a small proportion of credit growth. Transactions associated with the established housing market and structural leveraging trends are a far bigger driver of credit growth both in absolute size and variability, it would seem. Indeed, Goldman is forecasting a 30% recovery in housing starts out to 2014, which could be accommodated by an acceleration in credit growth of just 1.0ppt-1.5ppt. Moreover, credit growth would not need to accelerate at all if the savings rate increased by a further 1.5ppt.

The broker maintains changes in the Queensland state budget have strengthened first home buyer subsidies for new construction in that state at the expense of established housing. Additionally, evidence is building that the downtrend in house prices has stabilised with tentative signs of recovery. The thesis is that falling house prices can act to discourage an individual’s decision to build a new home. As such the cessation of house price declines should act as an important catalyst for a pick-up in construction, given the other fundamentals in place.

And now for something completely different?

Well, perhaps not completely as it's still about money. As the billions are being spent rolling out the National Broadband Network across Australia RBS has looked at the market share of Telstra ((TLS)) and Optus ((SGT)) and TPG ((TPM)). Telstra is seen increasing market share by 0.6ppt in six months to June 2012. Meanwhile, TPG added 0.2ppt and Optus lost 0.3ppt.

RBS estimates fixed broadband revenue grew by 3.9% in the six months to 30 June 2012, an improvement on the 1.8% growth in the prior half. Household penetration grew to 65.3% in the second half from 64.2% in the first. Telstra’s Average Revenue Per Unit (ARPU) growth has made a material turnaround at 3.2% in 2H12, versus 0.3% in 1H12 and minus 5.6% in 2H11. It's seen as stable and RBS has a Hold recommendation and target price of $3.85. Meanwhile, iiNet ((IIN)) is acquiring market share and has become the broker's preferred pick in the sector with a Buy rating and target price of $3.93. 


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article 3 months old

Moelis Continues To See Value In BigAir

 - Solid earnings growth outlook for BigAir
 - Niche markets offer potential
 - Valuation attractive according to Moelis
 - Broker reiterates a Buy rating

By Chris Shaw

Junior telecommunications player BigAir Group ((BGL)) provides high speed fixed wireless broadband in metropolitan areas, while also offering specialist student accommodation wireless services.

Moelis notes much of BigAir's growth in recent years has been in the business division, where revenue has grown from $4.6 million in FY09 to $18.5 million in FY12. Growth has been both organic and via acquisitions.

The growth has seen BigAir expand the coverage footprint of its microwave services, which now cover Australia's seven largest cities. Management is now looking to further roll-out the service to regional areas, where BigAir would compete primarily against Telstra ((TLS)).

The community broadband division is now a leading provider of wireless services to tertiary student accommodation facilities. Moelis points out BigAir now services more than 120 locations housing in excess of 27,000 students. 

Moelis expects this sector of the market is likely to remain small in relation to the total high speed data market. At the same time, the wireless service market offers significant growth potential for BigAir, supporting the expectation of double digit revenue and earnings growth in coming years.

One risk for BigAir going forward in the view of Moelis is the ongoing roll-out of fibre services in office buildings in major metropolitan markets by others in the industry. An offset to this is that microwave offers attractive technology for mitigating risk, something Moelis suggests could drive take-up of BigAir's services. Companies acquire microwave connections as a back-up to street-laid cable.

In earnings per share (EPS) terms Moelis expects BigAir will achieve results of 4.4c this year and 5.4c in FY14. This implies a FY13 earnings multiple of just over 11 times, which Moelis suggests is a 12% discount to the Small Industrials sector.

Investors in BigAir should enjoy reasonable income returns, as Moelis's forecasts suggest the stock should yield 3.1% in FY13, rising to 4.1% in FY14. Dividends are expected to be fully franked from FY13.

Given the forecast earnings multiple is not overly demanding, Moelis retains a Buy rating on BigAir. Supporting the positive view is the expectation of further industry consolidation in the telecommunications sector, with BigAir a potential target given the combination of value and growth on offer.

In contrast to Moelis, RBS Australia rates BigAir as Hold, having downgraded from a Buy rating post the group's profit result last month. The downgrade was a valuation call, as while RBS sees a bright outlook the stock has rallied solidly over the the past year, implying less upside share price potential. 

A market capitalisation of just over $80 million means BigAir receives little broker coverage. RBS is the only broker in the FNArena database to provide research on the stock.

RBS has a target on BigAir of $0.49 based on EPS forecasts of 4.4c for FY13 and 4.9c for FY14, while Moelis has set its target for the stock at $0.60. BigAir shares are currently trading down slightly in a weaker market, the stock 0.5c lower at $0.49 as at 10.55am. Over the past year BigAir has traded in a range of $0.25 to $0.495. 


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article 3 months old

Weekly Broker Wrap: QE3, LNG, Coal And iPhones

By Andrew Nelson

On the eve of the Fed’s QE3 announcement, local brokers were pondering the likely impact such a move would have, as by Thursday afternoon Sydney time the odds were favouring that Bernanke would act. And as we all know by now, act he did.

We start this week’s wrap with some prognostications made by analysts at UBS, who, citing recent weak payrolls and PMI data were more or less confident some form of QE3 would be announced at the FOMC meeting Thursday night, Sydney time.  (For more detailed coverage of the Fed’s release, see FNArena’s The Overnight Report from Friday morning).

The broker notes that QE1 and QE2 were quite helpful for global equities and commodity prices, although QE2 was less so given the much lower, GFC inspired starting point QE1 enjoyed. The effectiveness of the latter stages of QE2 was also impacted by what started as a policy-induced slowdown in China and the latest round of the eurozone sovereign debt crisis sparked by issues in Greece. Remember Greece?

Turning back the pages to the US QE moves of yore, UBS notes Mining was certainly one of the industries that outperformed. Given recent underperformance in the same sector, UBS thinks there will be evident upside here from this latest round of US easing. Although, not to the extent seen during QE1. Conversely, Consumer Staples, Health Care and REITs, which are again boasting some pretty steep relative valuations, underperformed during QE1 and the broker thinks we’ll see the same again as QE3 starts to gain some traction.

However, UBS thinks the current strength of AUD will act as a headwind to Australian equity performance. In fact, the broker notes it’s the US’s need for these QE packages that is at the heart of the strong Aussie in the first place. UBS does see somewhat of a silver lining to this issue, as it feels if the AUD does remain resilient during the early phase of QE3, the RBS may well have to jump in with some easing of its own.

Goldman Sachs was also pretty confident of the FOMC outcome, last Wednesday putting out an assessment on the presumed impact QE3 would have on the domestic Mining and Metals sector. Where the brokers vary the most in their prospective assessments comes down to their views on the direction of the AUD. Where UBS sees a strong AUD likely remaining place, Goldman Sachs sees it weakening to benefit of Metals and Mining plays. The latter broker notes that there is less and less talk of the Aussie being a foreign reserve diversification play now that the peak of the capital cycle in the mining boom looks to have passed.

The broker also views these developments as being positive for gold prices, seeing a historically strong correlation with US real interest rates. With Goldman Sachs expecting a 4% annual contango until mid-2014, it then expects rates to turn upwards. This could be pushed out a year, the broker admits, which in turn extends the timing of the broker’s targeted peak in gold prices. Until then, the broker expects to see an annual price decline of 10%.

Now we get tom the meat of it, were the Aussie to weaken and gold to still perform as expected, there is massive upside for gold producers, especially those with AUD denominated production. The broker predicts 18% to 40% earnings increases and 20% to 30% rises in DCF valuations. Goldman Sachs notes this would mean mostly higher earnings that would be delivered in FY15 were interest rate rises be pushed out an extra year.

On the other hand, mineral sands producers and USD denominated companies would see the least amount of upside, given generally lower leverage and a lack of exposure to beneficial changes in currency.

Sticking with Goldman Sachs, the broker also took a look at the iPhone5 launch and the implications it has for the Australian wireless market. One of the key issues is the confirmation the new iPhone will support LTE 1800 (4G LTE), which is a clear win for Telstra ((TLS)), notes the broker. The company still holds the early mover advantage in 4G, while an announced $1.2bn spend in FY13 to sustain its network and extend 4G coverage from 40% to 66% will only increase its advantage over competitors.

There will also be a lesser amount of advantage for SingTel’s ((SGT)) Optus, given it will be offering 15%-20% 4G coverage in Sydney, Perth and Newcastle and Melbourne as of this week. Vodafone Hutchison ((VHA)) will be the clear loser in all of this, with their 4G rollout not likely to begin in earnest until early 2013. Thus, Telstra and Optus will have a 6-month or better head start in terms of device leadership, as they will be offering the two most popular phones around, being: the iPhone 5 and Samsung Galaxy S3 4G. In fact, Goldman Sachs thinks this will be the first time that there will be significant differentiation in handset line-ups between the major Australian carriers.

More bad news for VHA, as these developments will do little to stem the flow of customer’s losses the company has been battling with over the past year, or so. Speeding up the 4G rollout and selling cheaper phones is the only way forward, thinks the broker.

Deutsche sees the new iPhone as being a positive for industry wide stats, expecting that the handset subscriber market will grow at 3% in FY13, driven by iPhone5 launch. Macquarie is also of a similar belief, noting the December 2012 half will be dominated by the iPhone5 and will spark a lift in recontracting rates and also help to increase handset subsidy levels.

Last week also saw some big news is the LNG space, with the NSW Government having released its Strategic Regional Land Use Policy, which analysts at Bank of America-Merrill Lynch believe paves the way for resumption in Coal Seam Gas (CSG) related activities in the state. It couldn’t have come too soon either, thinks the broker, as NSW already imports 95% of its gas requirement, while Queensland LNG projects are set to start up in 2015.

It’s not an easy task that has been set for the state, with BA-ML noting while NSW may well be highly prospective, it is also under-explored and under-appraised because of a the lack of a firm policy direction. Now that this is passed, the broker thinks we’ll see quick work in the Gunnedah basin, which Santos ((STO)) has described as being a world class CSG region. On the other hand, government inclusion has now made CSG development more expensive in NSW and the broker notes the price will, of course, be passed right on to the consumer.

Analysts at Deutsche also chime in with their concerns about the increase in red tape and subsequent expense the new regulation will bring, noting an independent scientific impact assessment on both land and water will need to be undertaken before a developer can even lodge a development application.

On the other hand, Deutsche notes the State’s blanket ban on hydraulic fracturing has been lifted, and royalty levels are set to rise.

Winners? Yes if you listen to BA-ML, who sees the news as a positive for both AGL ((AGK)) and Santos, both of whom are the main reserve holders in NSW.

There was also some important Energy news from across the northern border, with Queensland announcing a plan to raise an extra $1.6bn in revenue over the next 4 years via higher taxes on coal miners. The increase in coal royalties was fairly ill-timed, thinks BA-ML, as it hits a mere day after miners announced cutbacks to deal with falling prices and rising costs.

However, the hike is only targeted at higher priced coal, with coal valued at between $100 and $150 a tonne now subject to a 12.5% tax, which is up from 10%, while coal sold for more than that will attract a 15% royalty, also up from 10%. The broker estimates the Australian companies that will take the biggest hit are BHP Billiton ((BHP)) and Yancoal ((YAL)).

The valuation impact on BHP runs at around $100m on BA-ML’s numbers, while for Yancoal it equates to around a 10% decline given a very low earnings base in 2012. On the other hand, thermal coal players like Rio Tinto ((RIO)) and Newhope ((NHC)) should feel little or no impact, says the broker.

UBS sees a slightly broader impact, noting while thermal coal producers will be impacted less by the new tax structure, both Rio Tinto and BHP will feel it, as they will both be paying more tax under the broker’s newly modelled price assumptions. Still, the valuation hit is less than 1% for either, with margin impact on the EPS line, notes UBS.

 
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article 3 months old

Telstra Looking Vulnerable


 

Bottom Line 12/09/12 

EW Trend: Corrective
Price Trend: Up
Trend Strength: Strong

Technical Discussion

LAYMANS:

Although the trend was still looking reasonably strong during our last review the patterns were undoubtedly starting to look a little stretched with the noted increase in volume also suggesting that sellers were starting to appear.  Some weakness has been seen over the past few weeks although it certainly hasn’t been significant.  We also have to take into account that the stock went ex-dividend on the 20th of August which accounts for some of the decline.  In a perfect world I would like to see lower prices tagged with the line of support being the first port of call.  Indeed, we are technically in a position to head down toward those slightly lower levels pretty much immediately though there is room for one final show of resilience.  Unless the prior pivot high at $4.09 is overcome there is still every chance that an interim high is firmly in position.  One thing’s for sure, if the line of support is breached over the coming weeks the chances increase that a more substantial pull-back is going to unfold.  The lower target sits around the $3.20 area though of course we’re looking much further down the track now.  For the time being we’ll focus on the smaller degree patterns as they should continue to show us the way forward.

TECHNICAL:

The push down from the high of wave-C is undoubtedly a corrective movement which completes the minor degree wave-a.  As can be seen the typical retracement zone has already been tagged meaning we are in a position to see the anticipated next leg south.  Interestingly, the wave equality projection shows good confluence with the line of support making it a high probability target area should the next move be to the downside.  If the patterns play out as anticipated the subsequent low point should only complete intermediate degree wave-(a) and therefore not be the full extent of the counter trend move.  If we are correct and a larger degree wave-(A) is firmly in position then price should rotate down to the larger degree typical retracement zone with the upper boundary sitting at $3.32.  That’s assuming the more typical zigzag pattern is going to evolve.  That lower target will be invalidated should more of a flat pattern take hold which would actually be a very bullish proposition.  If the 61.8% retracement level is penetrated over the coming week or so then the more bullish scenario is likely going to be the path of least resistance.  We’d then expect to see the high made on the 7th of August tagged again before sellers once again enter the fray.  So unfortunately there are a couple of scenarios to keep a close eye on which is really down to the lack of distinct subdivisions from the November 2010 low.  Overlapping wave structures have definitely dominated over the past eight months or so despite the significant percentage gains realized.


Trading Strategy    

Aggressive traders could initiate short positions following a break beneath Monday’s low with the initial stop one tick above the 61.8% retracement level as annotated at $3.95.  If that line in the sand is overcome then the smaller degree count is incorrect meaning defensive action needs to be taken.  The initial target would be the line of support with a chance that price could probe down to the wave equality projection.  Anything lower at this stage of proceedings is a low probability scenario, at least without first seeing a decent bounce.  A continuation up through the high of wave-(A) means the prior trend hasn’t run its course though it would undoubtedly invalidate our wave count.  Not our highest expectation but something to bear in mind if strength does reappear with a vengeance.

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Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITIES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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