Tag Archives: Telecom/Technology

article 3 months old

Accelerating Demand Lights Up SpeedCast

-Upside from maritime, energy sectors
-Costs of delivery declining
-Market share growth achievable
 

By Eva Brocklehurst

SpeedCast International ((SDA)) is a satellite communications company which has experienced growing demand for its services, gaining market share as it expands into new geographies and industries. Canaccord Genuity expects strong revenue growth to continue in the long term, as more operating systems require the connectivity and enlarged bandwidth satellite services can provide. SpeedCast does not own satellites but purchases capacity to service over 2,000 clients, which are spread over 4,000 land and sea-based sites such as vessels and offshore oil rigs.

The broker expects a reasonably high trading multiple over the next few years and considers the 2016 price/earnings ratio of 14.7 attractive, especially when viewed against the median of global satellite industry peers at around 15.4, initiating coverage with a Buy rating and $3.60 target. Catalysts include contracts to be won in the energy space, where the broker expects plenty of action over the next 12-18 months. Compound annual growth of 10% in revenue within the maritime segment is expected, which the broker expects to account for around 33% of 2015 revenue.

The positive outlook is being driven by improvements in operational efficiency and a growing reliance on modern communications systems among vessels. Another aspect is the desire to improve crew morale via entertainment and communications as well as tighter regulatory requirements involving safety. Satellite communications costs are estimated to be less than 0.5% of a vessel's operating cost but can improve operations substantially, so the benefit appears straightforward.

Canaccord Genuity expects maritime, and expansion into the energy market, to represent the two largest growth segments. The addressable portion of these markets is worth around US$2.3bn a year, by the broker's calculation. Liquidity is expected to increase over the coming year as escrowed stock becomes available, which could support a positive re-rating. The company reports in US dollars and generates 78% of earnings in US dollars. With the euro and Australian dollar declining there is some pressure on revenue from these regions, with 15.0% coming from Australia and 8.0% from Europe.

The cost of delivering bandwidth is declining and, therefore, the broker believes there is an opportunity to grow margins. Moreover, there is some evidence of a supply/demand imbalance developing in regards to satellite capacity coming on the market from new installations. This, potentially, means SpeedCast could purchase bandwidth at lower rates. Meanwhile, additional support for margins comes from growing scale which has increased the company's buying power.

The company designs, implements, operates and maintains satellite networks for clients that are unable to connect to land-based networks and have mission-critical assets, or an unreliable connection. SpeedCast is increasing its market share in VSAT - very small aperture terminal - technologies, which offer two-way communications via antennas and small satellite dishes. VSAT is a preferred product as it maintains advantages over other offerings. It is cost effective and available for remote locations.

Canaccord Genuity observes the two dominant providers, Harris CapRock and RigNet, have lost some appeal recently. Why? The broker has feedback which suggests clients want high quality connections, highly qualified support in appropriate locations and an extensive network. SpeedCast offers all these features. Were it to increase market share of maritime units to 5.0% from the current 3.9% it would add US$9.5m in revenue above the organic growth rate of 10%. The broker considers a greater market share is readily achievable.

SpeedCast has made seven acquisitions in less than three years with five while it was a private company. Canaccord Genuity expects acquisition multiples to be 6-10 times earnings but does not have additional targets factored into in its forecasts. The company listed on ASX in August 2014. UBS noted back in March the acquisition of Hermes Datacomms was a catalyst which would accelerate growth in the global energy market. UBS has a Buy rating and $3.45 target. Morgans is also positive on the stock, with an Add rating and $3.05 target.
 

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article 3 months old

Brokers Crunch Convincing Numbers On MYOB

-Strong earnings growth
-Robust market share
-Established pricing regime

By Eva Brocklehurst

Accounting software provider MYOB ((MYO)) has taken its accounting platform to the cloud. The company has invested in the technology and must now ensure it captures a rightful share of users of desk top functions as they move to cloud-based services.

MYOB is ahead in this race, starting with an installed user base of 1.2m and brand recognition, as well as a dedicated software solution and strong distribution platform. Citi expects earnings growth of 19% on a three-year compound rate and believes the stock's trading discount to global peers is unwarranted. The broker initiates coverage with a Buy rating and $4.00 target. Management has invested heavily in product, adding $24m in costs over 2012-14. Citi expects this investment will continue at a more modest pace, with cost growth running at around 4.0% compound out to FY17. Cost additions are considered a key investment risk in MYOB's business.

Market share is concentrated and barriers to entry are high, Goldman Sachs observes. MYOB is benefiting from the shift to cloud-based software, which the broker notes has driven a 10% per annum growth in paying users since 2011 and increased customer lifetime value - where customers move towards subscription products as older products are no longer supported. Goldman Sachs initiates coverage with a Neutral rating, tempering its favourable view as the stock is trading close to the $3.56 target. The broker forecasts a 16% compound earnings growth rate over 2014-17.

The migration away from perpetual licences and towards subscription products has meant recurring revenue has risen to 94% of 2014 sales and resulted in improvement in MYOB's client retention to 81%. MYOB has 505,000 current paying subscribers, of which 116,000 are in the cloud. With cloud-based growth the benefits are enhanced.

Where are the risks? These relate to new entrants and the potential for aggressive marketing and product pricing, in Goldman's view. The broker has grouped peers into three sections. Firstly, operating peers are business software companies such as Technology One ((TNE)), Xero ((XRO)) and Reckon ((RKN)) as well as global entities such as Intuit and Sage. Other domestic peers are application software companies, such as Infomedia ((IFM)), Integrated Research ((IRI)) Iress ((IRE)) and Altium ((ALU)), as well as data processing and online businesses such as Veda Group ((VED)), Computershare ((CPU)) or Carsales.com ((CAR)).

Thirdly, there are established software business that operate as oligopolies such as Adobe, Microsoft, Oracle and SAP. Against a selection of profitable operating peers and domestic software peers MYOB screens broadly in line to mildly expensive in terms of its valuation, on both a growth adjusted and returns adjusted basis, in Goldman's analysis.

The company expanded its offering into practice management to the accounting industry via acquisition of Solution 6 in 2004. MYOB entered the enterprise resource planning segment after acquiring Commac and Exonet in 2007. Enterprise solutions formed 13% of its 2014 revenue. R&D in recent years has produced products such as PayDirect - mobile payments integrated into SME software, Smart Bills - integrated supplier bills, and Australian Business Number checks.

MYOB and its main competitor, Reckon, have historically implemented annual price rises of around 5.0% for their SME products and 3.0% per annum for practice management products. Goldman does not believe this has had an adverse impact on business volumes, given the stagnant nature of relative market share. MYOB management expects to continue achieving such price rises, driven by increased functionality and a mix shift towards higher end products.

MYOB, which stands for "mind your own business", launched its first desk top software in 1991. The company listed on ASX in 1999 and was taken private 10 years later. In 2011 it was sold to the current 57.7% majority shareholder, Bain Capital. The recent re-listing is aimed at raising the profile among small business, accountants and the broader investment community. Accounting software has a high portion of recurring revenue and a diverse customer base. MYOB has a dominant - around 60-65% - revenue share in Australia and New Zealand. The company has four main offices: Melbourne, Sydney, Christchurch and Auckland.

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article 3 months old

Dealerships Fuel High Growth For Infomedia

-Subscription based model
-Strong earnings growth rate
-Is valuation justified?

By Eva Brocklehurst

Infomedia ((IFM)) is a well placed business, with products which can improve the efficiency of automotive parts procurement and identification worldwide. The company provides electronic information to the spare parts and servicing departments of car dealerships.

Canaccord Genuity initiates coverage with a Buy rating and $1.50 target. The broker believes Infomedia offers exposure to a solid earnings growth profile through an increasing subscriber base. The industry has high barriers to entry with most automotive manufacturers selling exclusive licences of their vehicle data. The parts and services departments typically generate 35-40% of a dealership's profit. Canaccord Genuity observes this is a vital division, if often poorly run, and Infomedia has the capacity to improve this function.

The subscription based model means that 96% of revenues are recurring. The broker estimates 75-80% of operating costs are fixed, so incremental subscribers have potential to generate earnings growth. Analysis suggests 15% revenue growth would generate 35% earnings growth per share. While the valuation is not cheap - the stock is trading at a price/earnings ratio of 23.3 on FY16 forecasts - the broker considers it justified. The 5-year forecast for compound earnings growth of 19% could increase to over 30% if the company can accelerate top line growth to 15% from 10%.

What stands in the way? Subscriber growth can be difficult to foretell and timing is challenging. Canaccord Genuity accepts Infomedia may have periods when growth is more subdued. Still, the company is net cash, has strong returns and a reasonable dividend yield of 3.9% on FY16 forecasts. All very positive, in the broker's view. Morgans also considers the company's outlook is positive, citing a number of pilot programs being developed which should generate increased revenue in the current half year. Morgans has an Add rating and $1.30 target.

Longer term, the growth trajectory is likely to come from rapid changes in technology and increasing wealth in developing countries. The latter represented 20% of Infomedia's revenue in FY14 but these countries generate 42% of global new car sales. Technological changes are being reflected in the rising recognition of the value of out sourcing systems. Canaccord Genuity estimates that nearly 40% of the addressable market for Infomedia is currently in house and this model is becoming less feasible for dealerships. Any downside would involve the company failing to keep abreast of technology or maintaining its competitive advantage, and failing to capture the growth inherent in developing markets.

The broker is forecasting FY15 profit growth of 12%, broadly in line with guidance for over $13.7m. Infomedia's core product is its electronic parts catalogue which identifies the spare parts required from a car's VIN, or vehicle identification number, while accessing an extensive cloud-based database. The company is also rolling out a suite of modules which focus on diagnostics, servicing and repairs that is integrated to the parts system, providing dealers with the tools to improve customer sales and service.

The company has a global customer base in excess of 19,000 dealers and 160,000 users across 186 countries. Offices are located in Sydney and Melbourne in Australia, Detroit in the US, and Cambridge in the UK.

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article 3 months old

Telstra Offers Opportunity

By Michael Gable 

Today’s interest rate decision by the Reserve Bank and increased jitters in global markets over Greece remain the local market’s focus. The Australian Dollar faces a week of sharp volatility ahead of the RBA decision, with the RBA widely expected to keep the benchmark lending rate unchanged at 2%, and also given that domestic economic newsflow has increasingly underperformed consensus forecasts since the RBA meeting in May.

Today we take a look at a trading opportunity in Telstra Corporation ((TLS)).

 


We last looked at TLS on 21 April where we suggested “We would expect to see TLS come back to about $6.00 - $6.10 at which point that would be the next buying opportunity.” That has now happened perfectly (circled) and now TLS is knocking on the door of the recent short term downtrend. We would be happy to buy TLS around current levels, and a break of this short-term downtrend line is confirmation that it will continue to head up to new highs.
 

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

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

Michael is RG146 Accredited and holds the following formal qualifications:

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

Disclaimer

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

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article 3 months old

Altium Primed For High Growth

-Strong balance sheet
-Acquisition growth potential
-Expanding market
-High barriers to entry
 

By Eva Brocklehurst

Altium ((ALU)), the printed circuit board designer, is primed for high growth. The company has set a target of achieving US$100m in revenue by FY17 amid plans to develop the necessary tools to expand its addressable market.

Deutsche Bank takes up coverage with a Buy rating, while Bell Potter also upgrades to Buy from Hold. Deutsche Bank's view is based on a scalable, cash generating business which is exposed to highly attractive industry dynamics. Altium provides circuit board design software which is used across the electronics, automotive and aerospace industries. It is the fourth largest in this field, globally, with a 10% market share. The company's major geographies include the US and Europe, which contribute 80% of sales collectively.

Bell Potter upgrades because the total expected return is now over 20% and, given there is no change in forecasts, the recommendation is solely driven by valuation. The broker notes the company may not produce sales figures for the June quarter, as it has signalled it intends to discontinue quarterly reporting. If it does indeed release the data and guidance, in order to round off the current financial year, then the broker considers that could well be a likely catalyst for the share price, given FY15 forecasts for growth of 33% and 43% in earnings and profit respectively.

Another potential trigger is an acquisition, which Bell Potter suspects may occur in FY16. With a cash balance of US$62m the company is well positioned for such a move if it can find a suitable proposition in coming months. The broker prices in a 10% premium in its target of $5.50 for an acquisition.

Deutsche Bank also believes Altium is well placed to capitalise on any market opportunity, boasting a significant subscriber base and a strong internal development capability. Growth channels include expanding the analysis tools segment, new products and acquisitions. The main concern for Deutsche Bank is the sustainability of the margins the company enjoys. This is particularly the case with regard to the company's intention to expand into the upper end of the market, which will required increased investment in research & development and marketing.

Given subscriptions contribute around 50% of revenue, the need to retain customers over time is important to sustaining growth. Deutsche Bank notes renewal rates in the developed pool are around 85% while materially lower in the underdeveloped regions, such as China and Russia, at around 30%. The issue in China centres on the high level of piracy. Current sales models are geared towards monetising the pirated use of software via policing infringements and/or the provision of additional services.

As a result of higher cost intensity the margin profile is less attractive in the underdeveloped regions compared with other areas. The broker notes this is also partly a function of less attractive re-seller agreements. Still, a change in attitudes and legal remedies are required for the greater China region to become a material contributor to earnings.

The barriers to entry into Altium's market are significant, given the investment required to develop the intellectual property. The major risk, in the broker's view, comes not so much from a new entrant but rather the company being overtaken by new technology or R&D expenditure turning out to be uneconomic.

Deutsche Bank initiates with a $5.50 target, observing that while the company is trading at an elevated FY16 multiple, this is distorted by the capital raising in the first half as the proceeds have not yet been deployed. Using ungeared multiples, given the strong balance sheet, the company is trading on 17.7 times FY16 earnings estimates, broadly in line with domestic peers.
 

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article 3 months old

Technology One Atop The Cloud, But At What Price?

-Special dividend potential
-Unclear re pure cloud impact
-Acquisitions strengthen service
 

By Eva Brocklehurst

Technology One ((TNE)) is a strong proponent of cloud-based solutions and its sales outlook is solid, albeit weighted to the second half. Despite the soft economic backdrop, which affects the broader IT sector, the company has witnessed increased activity from government verticals in the first half, as contractors are shed and more tailored solutions are sought. With high cash reserves and sufficient franking credits, management intends to assess the possibility of paying a special dividend at the full year result.

First half results surprised Morgans, as while profit declined 10% the interim dividend increased by the same amount. The broker does not usually place much store in the interim outcome because of the timing of lumpy contracts. FY15 guidance for 10-15% profit growth was delivered as usual, in line with expectations. Annualised revenue from the cloud business is up over 100% year to date and, while impressive, Morgans observes this is off a low base. 

FY16 should be the peak in cloud losses before profitability occurs over the next two to three years. Technology One's Cloud 5.0 is to be released shortly. The company runs a six-monthly software upgrade cycle and the significance of version 5.0 is that it moves to a mass production model. Morgans notes there are large deals in train for which Technology One is the preferred supplier and margin expansion is expected in FY15. The company is targeting 25-30% margins in the long term and remains unperturbed about competition, confident in its ability to execute internally to deliver the margin expansion.

The business is solid but Morgans maintains that even a good business can be a poor investment if you pay too much. Technology One is approaching that stage and share price momentum should eventually weaken, providing a catalyst to exit the stock in the broker's opinion. For now, Morgans has a Hold rating but highlights the substantial premium at which the stock currently trades, relative to peers and its own long-term performance.

Cheaper capital may have pushed equity risk premia lower but, even so, the stock appears pricey. The extent of Technology One's premium to the market is rare but Morgans observes stocks can stay expensive for a number of years. In this instance the broker surmises the market may be pricing in either strongly accretive acquisitions, given surplus capital, or a takeover premium. Morgans sets a price target of $3.82.

Macquarie concurs that the majority of the outlook is captured in the share price and the issue is one of valuation rather than outlook, execution or the quality of the business model. Hence, a downgrade to Neutral from Outperform with a $3.65 target. The broker expects growth to continue as forecast, with considerable leverage once new products contribute to the bottom line, such as asset management, HR/payroll, property and stakeholder management solutions.

Revenue was weaker than Macquarie expected but was not helped by the cycling of a strong prior first half. Macquarie is not overly concerned about the weak cash flow, given the traditional seasonality of the business and a track record of delivering sustainable growth. The broker looks for conversion to rebound in the second half much like it did in the second half of 2014, as contracts settle in the September quarter.

That said, the UK continues to hold back profitability and the division is expected to incur a $400,000 loss in the full year. A significant acceleration in sales performance will be required before there is an improvement to profit margins, in Macquarie's view. In Australia, state governments are embracing cloud technology and while the company has never had a strong presence in this market, Macquarie suspects this is a future opportunity. Further to this theme, the broker is also surprised to find larger organisations are embracing the cloud more so than smaller, more agile clients.

Customer numbers have more than doubled since September 2014, to 47, and management targets 80 by December. The proportion of clients opting for a pure cloud solution may be increasing but Macquarie is yet to be sure of the full financial impact. With the emergence of cloud computing the software-as-a-service fee may be spread over a longer period of time. Management may be confident it can book the full value of the licence revenue at the start of the contract but it remains unclear as to the underlying earnings implications and potential disconnect in the profit & loss ledger and cash flows.

The company is not chasing acquisitions but the recent acquisitions have strengthened the offering, Macquarie observes. Icon Software Solutions and Digital Mapping Solutions add intellectual property to service government clients and provide further leads for other Technology One products.
 

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article 3 months old

Treasure Chest: Appen About To Re-Rate?

By Eva Brocklehurst

Software company, Appen ((APX)), which listed earlier this year on ASX, has re-stated its 2015 prospectus forecasts but also observed negotiations with Microsoft are ongoing and not likely to be completed until June. This remains the main impediment to an updated forecast, in Bell Potter's view, given the substantial amount of work done with Microsoft.

A renewal of statements of work with Microsoft for another 12 months should warrant an announcement to the market and could be the catalyst for the share price, given the risk of non-renewal is eliminated. Bell Potter also suspects a renewal would prompt an update to forecasts at the very least, or possibly an upgrade, given the work would be secured for the second half of 2015 on top of new client acquisitions and the lower exchange rate.

The chairman suggested at the AGM the shift in the Australian dollar against other currencies, particularly the US dollar, is a positive for Appen. Still, until there is some visibility on the level of revenue from Microsoft, the broker suspects the company is not in a position whereby it can update its forecasts.

Hence, Bell Potter maintains a Buy rating. While incorporating each item in terms of market movements and time creep, the broker finds there is no net change to its 85c target. At this target the total expected return, including a forecast dividend yield of 2.9%, is over 20%, which in turn supports the Buy rating.
 

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article 3 months old

Weekly Broker Wrap: Oz Insurers, Techs, Advertising, Papers And Solar

-Insurer challengers resilient
-Global advertising robust
-But big clients review accounts
-Questions re print advertising
-AGL, ORG need to respond to solar
 

By Eva Brocklehurst

Australian Insurers

As Insurance Australia Group ((IAG)) and Suncorp ((SUN)) have quantified natural peril losses for FY15, UBS suspects it will turn out to be the worst year for weather events in a decade. The broker disagrees with emerging bullish views which believe pricing in general insurance will firm up and the challenger brands will fall by the wayside. Despite appealing valuations, UBS retains a cautious outlook until margins re-base to more sustainable levels.

Since 2010/11 the challenger brands have been able to grow without operational strain or financial cost associated with significant weather events. 2014/15 was the test. UBS estimates Youi incurred around $110m in gross catastrophe losses in FY14, with $40m retained and $70m passed on to reinsurers. While this will hurt it is unlikely to undermine the business model, in the broker's view. Concerns around the challengers' service levels are overstated, UBS maintains, as Auto & General and Hollard continued to deliver premium growth of 15-20% over 2010/11, despite elevated levels of complaints to the financial ombudsman over that period.

Techs, Media & Telcos

Bell Potter has updated its key picks in the emerging tech space with Integrated Research ((IRI)), Empired ((EPD)) and Appen ((APX)) the top three. The broker now has two Sell rated stocks in the segment - Technology One ((TNE)), as it now looks expensive, and Vocus Communications ((VOC)), for which the first half showed slowing growth in the core data business. The broker hastens to add that neither of these Sell ratings suggest there is anything fundamentally wrong with these businesses. The ratings are driven by valuation.

Advertising & Newspapers

Citi has reviewed the commentary from over 40 global advertisers and concluded that the outlook is robust, although agencies are under pressure from clients with a number of large accounts being reviewed. Traditional media owners are also pressured by changing consumer behaviour. Of note, promotion levels are declining in the US although price increases are managing to pass through.

A number of companies spoke positively about European improvement, France in particular. Citi suspects, if Europe follows the US, the first quarter of 2016 could be a key one for advertising. In the US, traditional media benefited from early stages of the recovery and then reverted back to trend after a year as structural developments came to the fore. This is a factor the broker suggests should not be ignored in Europe. Mindful of these structural risks Citi takes a selective approach to Europe, preferring to play any recovery via those media owners where expectations are lower and/or valuations are not extreme.

Newspaper circulation data in Australia in the first quarter reveals a slowing of the decline in print. Citi notes this is now the sixth such quarter in a row. Despite this, declines are still double digit in some cases. The rate of decline was lower for Fairfax Media ((FXJ)) and Seven West Media ((SWM)) but up slightly for News Corp ((NWS)). The pace of digital subscription uptake has slowed.

Metro newspaper circulation is down 8.3% on a weighted average, the fourth consecutive quarter of single digit falls. Weekend editions performed slightly better than weekday editions. The reduced pace of circulation decline offers some hope but also raises further questions over the ability of newspapers to attract advertising in the long run, Citi maintains. The broker remains cautious about print publishers but rates News Corp a Buy, because of the digital and TV assets, and retains Neutral ratings for Fairfax and Seven West.

Household Solar

There is a large opportunity for household solar and batteries, in Morgan Stanley's view. From a survey of around 1,600 households in the National Electricity Market (NEM) the broker found a strong level of interest in such product, with a clear $10,000 price point and 10-year pay-back period. Around 1.1m households in the NEM already have solar panels which could be retrofitted with batteries. As yet, there are no clear winners in this market.

Morgan Stanley downgrades its utilities view to Cautious from In-Line. Australia's solar resource, high retail tariffs and early adopter culture means it is one of the forerunners in the global shift from centralised electricity. The broker expects debates round tariff structures, stranded assets and pool prices. Moreover, the broker estimates AGL Energy ((AGL)) and Origin Energy ((ORG)) could each witness earnings reductions of $30-40m in FY17, rising to $90-100m in FY20, absent a competitive response to this issue.

Early indications are that Tesla, the manufacturer of the PowerWall product expected to arrive in early 2016, will ignite the sector and this will lead to rapid take up of the batteries. What could go wrong? Morgan Stanley suspects Tesla may not be able to supply all Australian demand, potentially delaying take up. Technical issues, or a lower Australian dollar making the product more expensive, could also delay take up.
 

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article 3 months old

Weekly Broker Wrap: Stock Picks, Travel, TV And Telecoms

-Credit Suisse positive on Oz housing stocks
-Qube tops Morgan Stanley's transport list
-Is market underestimating Sydney Airport?
-Decline in outbound travel subsides
-Flat outlook for TV advertising
-Telecoms line up in data war
 

By Eva Brocklehurst

Stock Picks

Investors based in China and new immigrants from China purchased $8.7bn of Australian residential property in 2013-14, up 60% over the year. This statistic is equivalent to 15% of the national housing supply, Credit Suisse maintains. Purchases are concentrated in Sydney and Melbourne, where Chinese demand is the equivalent of 23% and 20% of new supply, respectively. Credit Suisse expects the next six years will witness a doubling of Chinese demand for Australian housing.

New foreign investment proposals are not expected to erode demand by very much. Added to low interest rates, this means the outlook should remain positive for housing-related stocks such as developers, building material companies and property web sites, in the broker's view.

Demand for infrastructure stocks is typically resilient through economic cycles. Morgans observes the sector has rewarded investors, boosted by falling interest rates. However, Australian investors are constrained by the number of ASX-listed infrastructure stocks and investing globally may provide investors with a far larger choice and greater asset diversity, where values may be cheaper than ASX-listed entities.

Meanwhile, the broker has updated coverage on the transport sector with a neutral view as valuations appear toppy. The long-term pick in the sector is Qube Logistics ((QUB)), as while the stock appears expensive, it is building out a profitable business that should be substantially larger in a few years time. The broker also suspects the market is underestimating the amount of cost savings Sydney Airport ((SYD)) can achieve in 2016-17, as expensive interest rate swaps expire and are replaced at far lower rates. The company's credit metrics may improve faster than expected, increasing the potential for capital management initiatives.

The broker considers the insurance sector is expensive at present but QBE Insurance ((QBE)) is a preferred pick, given the upside from its transformation program. QBE is also able to benefit from any fall in the Australian dollar and retains a strong leverage to any rise in US interest rates. Morgans has made changes to its top 100 high conviction list this month, adding Carsales.com ((CAR)), Qantas ((QAN)) and Sydney Airport. Macquarie Group ((MQG)) and Transurban ((TCL)) have been removed because of strong share price appreciation while Seek ((SEK)) is removed because of a lack of short-term re-rating catalysts.

Travel

Preliminary arrivals and departures data from the Australian Bureau of Statistics signals the consistent decline in the rate of outbound travel over the last 12 months has stalled. Bell Potter suspects this points to improving household consumption, given this variable is the most important driver of outbound travel. The data also lines up with the broker's analysis which suggests that the declining currency and soft economy have not resulted in a shift in market share to domestic holidays. Still, Bell Potter is only expecting a modest steady improvement in the rate of outbound travel. CoverMore ((CVO)) and Flight Centre ((FLT)) remain the broker's preferred ways to play the improving outlook for outbound travel.

TV

Citi has reviewed audience ratings for free-to-air broadcasters with the data showing Nine Entertainment ((NEC)) is struggling to replicate its 2014 performance. Seven West Media's ((SWM)) channel has retained its leadership position while Ten Network ((TEN)) has improved. Meanwhile, PayTV audiences reached their second highest level in share terms in March. The broker recently lowered medium-term forecasts for advertising to no growth, because of growing structural pressures from alternative viewing platforms.

Citi rates Nine Entertainment as a Buy and considers it is a potential M&A target, with a net long cash position and option value on affiliate deals. Seven West Media is rated Neutral as it is cheap but has no earnings growth, while Ten is Neutral High Risk, trading at fair value based on the value of its TV license.

Telecoms

Macquarie has developed a new monthly mobile phone plan tracker for the Australian market, which compares calling and data inclusions between the three major operators for post-paid handset plans. There were material increases in data inclusions by all players in April with Telstra ((TLS)) lifting by as much as 6 gigabytes per month. SingTel's ((SGT)) Optus lifted data inclusions by up to two gig and moved to offer unlimited voice for $40/month. Vodafone ((HTA)) responded with the return of its double data promotions.

Macquarie observes competition is heating up but believes mobile service revenues can continue to grow, given the increased demand for data. Still attention is warranted to trends with regard to average revenue per unit and handset subsidies.

Morgan Stanley has observed the data value war continues but finds little evidence of a price war. Value has increased via the data gains with no decreases in prices. Optus actually increased plan prices over the month, by 14-20%. Morgan Stanley expects industry prices will rise 2-3% in 2015 and 2016. Optus has also added six months free in Netflix to new subscribers. This usage is not unmetered. As the consumer watches Netflix the mobile data allowance is consumed and they can potentially exceed allowances.
 

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article 3 months old

Weekly Broker Wrap: Technology, Wagering, Healthcare, TV And Insurers

-Upgrade potential for tech stock Appen
-Tabcorp success in mobile strategy
-Cuts to medical testing rebates probable
-Harder to deliver growth in TV
- Insurers likely call on reinsurance
 

By Eva Brocklehurst

Technology

Microsoft has been a customer of language technology consultant Appen ((APX)) for over 20 years and contracts under the master vendor agreement are due for renewal at the end of June. Bell Potter expects the renewals will occur, albeit there is usually some changes in the statements of work, because of Microsoft's requirements and the markets or languages which are covered. The dollar value also tends to change. The renewals will warrant a statement to the market, the broker suspects, given the size of Microsoft, and such an announcement could be a catalyst for the share price.

The renewals could also prompt an update or upgrade of prospectus forecasts for 2015, given the work would be secured for the second half. Bell Potter maintains a Buy rating and 85c target for Appen. At this target the total expected return is over 20%.

Wagering

Industry data suggests mobile applications are driving renewed growth in wagering and Tabcorp ((TAH)) and Sportsbet are consolidating their share. Morgan Stanley believes rational pricing and operating leverage are improving the profitability of the industry, while the risk of material near-term racefield fee increases is limited. Mobile is growing the market by expanding the customer base for wagering and product depth is improving, while incentives are driving first time audiences. Customer retention is coming from data driven analytics. The broker expects the penetration of wagering via mobile is likely to keep improving with the popularity of US sports and mobile streaming vision.

Industry participants expect Tabcorp's multi-channel strategy across retail/online and recent use of offers will be key to its success. Retail growth is positive and Morgan Stanley envisages the business will also benefit from lower oil prices. Tabcorp remains the broker's key wagering pick with an Overweight rating.

Health

The Commonwealth will conduct a review of Medicare and any future reforms will prioritise patient outcomes and budget sustainability. Deutsche Bank accepts the implications of the review are difficult to assess at this stage but it appears the government is seeking savings and this raises the risk for providers such as Primary Health Care ((PRY)) and, to a lesser degree, Sonic Healthcare ((SHL)). The minister has signalled the government is open to a future review of the current indexation freeze. The rebate freeze removes the 2.0% annual indexation and delivers savings of $1.3bn over four years. Deutsche Bank suspects savings equal to, or greater than, the 2.0% will be required to offset this.

The broker cautions that the review could lead to cuts to pathology and diagnostic test funding on the grounds that these services can now be offered more efficiently than was the case when the medical benefits scheme items were first established. Examples of the reforms mentioned by the minister include vitamin-D, B12 and foliate testing plus X-rays for lower back pain.

TV

The list of viewing options for consumers is growing. Citi assesses the potential impact of Netflix and Pay TV penetration on audiences and free-to-air (FTA) broadcasters. The broker concludes that advertising growth could prove challenging as audiences fragment. TV is not dying but it is getting tougher to deliver growth. Video consumption is increasing in Australia, boosted exclusively by online. This means FTA TV audiences are declining in percentage terms. Citi expects FTA TV audiences will decline by around 2.0% year on year for the next three years and there will be no growth in advertising, ex special events.

For Pay TV providers such as Foxtel the focus is on premium and niche content and superior technologies. For video platforms such as Netflix a lack of scale, high content costs and churn represent risks which could limit profitable returns to two players. Citi rates News Corp ((NWS)) as a Buy, with Foxtel delivering growth under a new pricing model. Nine Entertainment ((NEC)) is also rated Buy, and is viewed as a potential M&A target for content owners. Seven West Media ((SWM)) is considered cheap but risks are growing which will likely weigh on earnings and the share price. Citi has a Neutral rating on Seven West Media.

Insurers

A severe storm in NSW, where significant damage was sustained in the Hunter, Central Coast and Sydney, has led JP Morgan to review the probable impact on Insurance Australia Group ((IAG)) and Suncorp ((SUN)). Insurance Australia has 24.9% of the premium in NSW while Suncorp has 18.4%. The broker estimates IAG's natural perils experience for FY15 ahead of these storms, and including a full half year's expected additional perils allowance, to be $646m. The company has an allowance of $700m in guidance but also has reinsurance protection of $150m above that figure, which the broker suspects may be called upon.

In the case of Suncorp, JP Morgan notes the company said it would miss the 10% return target post Cyclone Marcia in March, having flagged event costs to that period of $690-720m. Some of the aggregate reinsurance protections are close to kicking in for Suncorp. As such, JP Morgan suspects, including aggregate reinsurance protection, the cost of the storm is capped at $65m for Suncorp. The broker observes markets tend to react adversely to the peril events in the near term but eventually tend to look through them.
 

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