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Weekly Broker Wrap: Jobs, Retail, Real Estate Listings, NBN And Equity Strategy

Employment numbers; consumer spending; slot manufacturers; real estate listings slowing; momentum in NBN share; is it too early to ditch yield stocks?

-Lower housing turnover foreshadowing weaker spending growth, Credit Suisse believes
-Aristocrat seen increasing share in North America, Ainsworth subdued
-Soft listings likely to have adverse impact on REA and Domain
-Telstra enjoying solid gains in NBN share, Vocus accelerating
-Bond yields unlikely to rise much and Deutsche Bank still values yield stocks
 

By Eva Brocklehurst

Employment

Commonwealth Bank analysts have examined monthly changes in employment, which show that annual employment growth has been propped up by two very big increases in October and November 2015. According to the Australian Bureau of Statistics, employment lifted by 49,000 in October and 65,000 in November. These very large monthly changes were both two standard deviation events, the analysts note.

While concerns abated about the reliability of the data with the passage of time, the analysts are reminded that these are now about to drop out of the annual calculations. They expect the annual pace of employment growth to slow to just 0.7% in November from 1.4% in September.

Such an outcome is expected to mean analysts and policy makers focus a little more on the pace of jobs growth and what this is likely to signal for output, inflation and rates.

Retail Consumption

Credit Suisse suggests, from its observations, that retail spending has stalled heading into the end of year despite official data that points to growth in labour income and solid gains in house prices. The broker believes the official data overstates the strength of the labour and housing markets and stagnation in consumer spending is consistent with an alternative view.

The broker observes a drop-off in housing turnover, even abstracting what is happening in house prices. Lower turnover foreshadows weaker spending growth, even if house prices do not fall. Credit Suisse suggests the Reserve Bank of Australia should pay more attention to the state of consumer spending. This is because the consumer still accounts for around 60% of GDP.

The broker's leading indicators point to slower spending growth in the foreseeable future, in part because labour and housing market conditions are softer than the official data suggests but also because turnover in housing is dropping away. Hence, Credit Suisse believes the RBA will need to cut rates further.

Slot Manufacturers

From a survey of the North American slot machine market in the September quarter, UBS notes that Aristocrat Leisure ((ALL)) added 815 leased games. The survey indicated that Aristocrat achieved 27% ship share in the quarter. This was 11% above its trailing 12-month ship share.

Ainsworth Game Technology ((AGI)) achieved 2.3% ship share in the quarter, 3% below its 12-month trailing average, which compares with 7% in the prior quarter based on the survey. The survey is consistent with the broker's view that Aristocrat is increasing its share in North America and provides further confirmation for Ainsworth's update regarding its soft quarter in the US.

Real Estate Listings

New listings in the national property market declined 3% in October, a slowing from the flat levels observed in September. This indicates a weak start to the second quarter and Deutsche Bank expects a continuation of this soft listing environment will have a further adverse impact on both REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain. The broker lowers forecasts and price targets for both stocks to take this into account.

New listings growth in the capital cities was slightly lower than the national numbers, with Sydney continuing to show the most significant decline, down 16%. Melbourne was down 4%. The broker acknowledges this may simply be a reflection of a low point in the volume cycle rather than because of any structural factors.

UBS also notes a post-election rebound in residential new listing volumes still has not eventuated. This means there is downside risk to this broker's estimates for REA. Relative weakness in Sydney and Melbourne may impact overall yields for REA, given the higher absolute prices of depth products in these markets.

NBN & Telcos

From its observation of ACCC data, UBS gauges Telstra ((TLS)) continues to enjoy solid gains, with its share in the September quarter helped by the acceleration of the FTTN roll out. Vocus Communications' ((VOC)) share of NBN market growth is accelerating and UBS believes this reflects a strong portion of industry additions. As the company's NBN subscriber base builds, reducing churn will become an increasingly important driver of share growth, in the broker's view.

Shaw & Partners notes Telstra is defending its market share aggressively, adding 61% of NBN subscribers in the September quarter versus its market share of around 47%. Vocus is also doing well, the broker observes, adding 11.3% of subscribers versus its market share of around 7%. TPG Telecom's ((TPM)) quarterly additions are below its natural market share, the broker notes, although it is doing well in metro areas.

Goldman Sachs agrees that Telstra is growing its overall NBN share, now considered to be over 50%, while Vocus is building momentum. The broker highlights the fact that the latter's overall share is continuing to increase despite the company not looking to actively migrate existing subscribers to the NBN.

The broker also notes a relatively soft subscriber performance from TPG Telecom, offset by improved plan mix. Goldman believes up-selling to high-speed plans is important for the company's profitability in an NBN world. That said, TPG's iiNet looks to have had a soft quarter, with TPG's share in Western Australia declining by around 115 basis points to 38%.

Equity Strategy

Deutsche Bank believes it is too early to ditch yield stocks even though these have come under pressure in the past three months, coinciding with the rise in bond yields. The broker is not convinced yield stocks will fall further and believes it is appropriate to include a selection of these in portfolios.

The broker's US strategist highlights the still-substantial gap between dividend yields and bond yields. A hike to the US Federal Reserve's funds rates in December is considered likely, but the broker does not believe this automatically means bond yields should move higher.

In 2004 bond yields barely moved when the US Fed was raising rates, weighed down by a glut in global savings. Now the broker observes there is a glut of central bank liquidity. Money is leaving Europe and going to the US, which can keep a lid on long rates.

The broker notes a divergence with Australia, as the US Fed seeks to hike rates while the RBA is likely to cut. Deutsche Bank also detects some recent softening in the Australian economy, slower growth across retail sales, hours worked and credit. The broker does not envisage bond yields rising much, removing a catalyst for more under performance.

Yield stocks may even trade a little rich, given their scarcity value in offering a decent real yield. The broker's portfolio has a selection of Stockland ((SGP)), Telstra, Sydney Airport ((SYD)) and APA Group ((APA)).


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Australian Corporate Bond Price Tables

PDF file attached.

Corporate bonds offer an alternative to equity investment in providing a fixed “coupon”, or interest payment, unlike equities which pay (or not) non-fixed dividend payments, and a maturity date, unlike equities which are open-ended.

Listed corporate bonds can be traded just as listed shares can be traded. Bonds bought at issue and held to maturity do not offer capital appreciation as an equity can, but assuming no default do not offer downside capital risk either. Pricing is based on market perception of default risk, or “credit risk”, throughout the life of the bond.

Bonds do offer capital risk/reward if traded on the secondary market within the bounds of issue and maturity. Coupon rates are fixed but bond prices fluctuate on perceived changes in credit risk and on changes in prevailing market interest rates.

Note that the attached tables offer three “yield” figures for each issue, being “coupon”, “yield” and “running yield”.

If a bond is purchased at $100 face value and a 5% coupon, and face value is returned at maturity, the running yield is 5% and the yield, or “yield to maturity” is 5%.

If a bond is purchased in the secondary market at greater than $100, the running yield, which is the per annum yield for each year the bond is held, is less than 5% because the coupon is paid on face value. The yield to maturity is also less than the coupon as more than $100 is paid to receive $100 back at maturity.

If a bond is purchased in the secondary market at less than $100, the running yield, which is the per annum yield for each year the bond is held, is more than 5% because the coupon is paid on face value. The yield to maturity is also more than the coupon as less than $100 is paid to receive $100 back at maturity.

Note that if a bond is trading on the secondary market at a price greater than face value the implication is the market believes the bond is less risky than at issue, and if at a lesser price it has become more risky. Bonds trading on yields substantially higher than their coupons thus do not offer a bargain per se, just a higher risk/reward investment. In all cases, bond supply and demand balances will also impact on secondary pricing.

Note also that while most coupons are fixed, the attached table also provides prices for capital indexed bonds (CIB) and indexed annuity bonds (IAB).

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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The Short Report

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.


Summary:

Week ending October 27, 2016

Last week was not a good one for the ASX200. An international market-wide sell order(s) pushed the index down through resistance at 5400 and the floodgates opened. With investors struggling to find a good reason to buy, waiting for the index to settle would potentially mean picking up stocks at lower levels.

Things have only deteriorated further this week on US election fears.

This week’s table shows a bit of bracket creep up and down at the lower levels, but two stand-out moves into the upper levels.

Television dinosaur Nine Entertainment has had a tough time of late and short positions had been quietly building ahead of last week, in which they jumped to 10.6% from 8.7% to put Nine into the elite 10% plus shorted club for the first time.

Shorts in SaaS company Aconex have been building ever since the previous high-flyer disappointed at its earnings result in August. Shorts have been building over that period. Last week shorts surged to 10.0% from 7.7% to also introduce Aconex into the 10% plus club.

We’ll also give a nod to hospital operator Healthscope ((HSO)), which has popped up into the bottom of the 5% plus table this week despite its share price having been trashed after the company issued a profit warning last week.


Weekly short positions as a percentage of market cap:

10%+

MYR   17.5
WOR   14.4
WSA   13.9
BAL    12.2
MTS    10.7
NEC    10.6
MND   10.4
ACX   10.0

In: NEC, ACX

9.0-9.9%

AWC, TFC
 
No changes                            

8.0-8.9%

SYR, GEM, ORI

In: GEM                      Out: NEC, CVO, IGO                      

7.0-7.9%

JHC, CVO, FLT, MTR, ORE, MYO, DOW, IGO, VOC, EHE, IFL, BEN, BKL, SGM

In: CVO, IGO, VOC              Out: ACX, GEM, CAB

6.0-6.9%

IVC, RIO, SGH, NWS, GOR, WOW, AWE, PRY, CAB

In: CAB, GOR                       Out: VOC

5.0-5.9%

SEK, GTY, MSB, OSH, ILU, PDN, KAR, HSO, IPH, CSR, BOQ

In: HSO, BOQ                        Out: GOR


Movers and Shakers

Last week I highlighted lithium miner Orocobre ((ORE)), which had moved and shook with a jump into the 7-8% shorted bracket. This week Orocobre shares leapt 20% in one day on the excitement generated by Tesla’s new, much improved household battery storage system. Short-covering likely had a lot to do with it. The share price fell back 10% the next day.

Nine Entertainment ((NEC)) is still reliant on a relic of a bygone era – free to air TV. Aside from likely terminal structural industry decline, Nine has also individually suffered from falling market share, ensuring its share price has fallen steadily all year.

Structural issues led Deutsche Bank to downgrade Nine to Hold earlier in the month. The company was slow to respond to the digital takeover led by the Netflix and Apple TVs of the world, but last week Credit Suisse decided Nine’s digital Johnny-come-lately, Stan, is probably worth a lot more than the market is pricing, and upgraded to Outperform.

Last week Nine shorts rose 2.1 percentage points to 10.7% from 8.6%. A Summer of Cricket awaits, but Ten Network ((TEN)) has the rights to the now more popular bubble gum version.

Aconex ((ACX)) provides cloud-based software-as-a-service (SaaS) to the construction industry. Earlier in the year, any company associated with The Cloud was considered a high growth potential “disruptor” and bought by investors with with gay abandon.

Investors were forced back to earth when the company issued a disappointing earnings report in August, with cash conversion issues being the major stumbling block. Last week’s AGM saw another downgrade to expectations but brokers feel the stock price sell-off has now been stretched given longer term prospects. Citi and Morgan Stanley reiterated their Buy or equivalent ratings and Credit Suisse upgraded to Buy (Outperform).

The stock enjoyed a brief share price bounce, but last week Aconex shorts leapt 2.3ppt to 10.0% from 7.7%.
 

ASX20 Short Positions (%)


To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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Share Buybacks – Who’s Doing It?

International research suggests shares in companies that buy in their own equities are more likely to respond positively through share price appreciation. Investors should note, however, buying back own stock is not a guarantee for significant share price gains ahead.

For local research about investor benefits from capital management, including companies buying in their own shares, FNArena subscribers can read "Buy Capital Management"

Below is an incomplete overview of companies buying in their own shares this year. We very much appreciate all feedback, contributions and suggestions at info@fnarena.com

See attached excel file for more details (paying subscribers only)

8IH 8I Holdings 21/09/2016
ABW Aurora Absolute Return 24/08/2016
ACQ Acorn Capital Inv Fund 10/10/2016
AFA ASF Group 26/04/2016
AFR African Energy Resources 23/11/2015
AGL AGL Energy 13/10/2016
AHY Asaleo Care 01/10/2015
AIB Aurora Global Income 14/12/2015
AIV ActivEX Ltd 01/11/2016
ALR Aberdeen Leaders Ltd 27/02/2015
APW AIMS Property Securities Fund 07/09/2016
AQF Australian Governance Masters 23/11/2015
ARA Ariadne Australia 21/08/2014
ARG Argo Investments 01/01/2016
AUF Asian Masters Fund 23/11/2016
AUF Asian Masters Fund 23/11/2015
AUI Australian United Investments 14/05/2015
AUP Aurora Property Buy-Write Trust 14/12/2015
BWF Blackwall Property Fund 15/03/2016
BWR Blackwall Property Trust 07/07/715
CAM Clime Capital. 21/12/2015
CAMPA Clime Capital Preference 15/08/2016
CGO CPT Global 27/08/2015
CHN Chalice Gold Mines 30/06/2016
CIM Cimic Group 29/12/2015
CIN Carlton Investments 29/11/2015
CIW Clime Investment Management 16/12/2015
CLT Cellnet Group 09/09/2015
CMC China Magnesium Corp 28/10/2014
CNI Centuria Capital 24/12/2015
CSL CSL Ltd 27/10/2016
CSR CSR Ltd 21/03/2016
CSV CSG Ltd 12/03/2016
CVC CVC Ltd 07/12/2015
CVW ClearView Wealth 19/12/2013
CYG Coventry Group 23/11/2015
DUI Diversified United Investments 01/06/2016
EAI Ellerston Asia Investments 27/09/2016
EMF Emerging Markets Masters Fund 21/12/2015
EZL Euroz Ltd 14/01/2016
FID Fiducian Group 03/03/2015
FRI Finbar Group 08/12/2014
GOW Gowing Bros 20/06/2012
HHY HHY Fund 24/08/2016
HOT HotCopper Holdings 02/11/2016
ICN Icon Energy 26/02/2015
IPE IPE Ltd 16/11/2015
IPE IPE Ltd 12/11/2016
ISU iSelect 30/03/2016
ITD ITL Ltd 11/12/2015
JBH JB Hi-Fi 12/09/2016
KAT Katana Capital 30/12/2014
KAR Karoon Gas Aust 17/09/2015
KBC Keybridge Capital 07/12/2015
KKT Konekt 18/11/2015
LGD Legend Corp 24/12/2015
LLC Lend Lease Corp 28/08/2015
MEL Metgasco 04/02/2016
MFF Magellan Flagship Fund 13/08/2015
MGP Managed Accounts Holdings 14/08/2015
MHM MHM Metals 17/02/16
MIN Mineral Resources 04/12/2015
NEC Nine Entertainment 25/02/2016
NVT Navitas 16/02/2016
OCL Objective Corp 26/02/2016
ORL Oroton Group 26/04/2016
OZG Ozgrowth Ltd 30/12/2015
OZL OZ Minerals 14/03/2016
PME Pro Medicus 01/04/2016
PTM Platinum Asset Management 04/10/2016
QAN Qantas 08/09/2016
RCR RCR Tomlinson 21/12/2015
RND Rand Mining 12/12/2015
RUL RungePincockMinarco 07/12/2015
SGM Sims Metal Management 07/12/2015
SIP Sigma Pharmaceuticals 13/10/2014
SMX SMS Management & Tech 15/06/2015
SVW Seven Group Holdings 12/03/2016
SVW Seven Group Holdings 17/08/2016
SWK Swick Mining Services 14/12/2015
TBR Tribune Resources 28/09/2015
TGG Templeton Global Growth Fund 26/02/2016
TLS Telstra Announced 11/8/16
TOF 360 Capital Office Fund 02/05/2016
TOT 360 Capital Total Return 28/03/2016
TSM Thinksmart 06/09/2016
VSC Vita Life Sciences 13/05/2016
WAT Waterco 07/04/2016
WIC Westoz Investment Co 30/12/2015
WMK Watermark Market Neutral Fund 29/09/2016
XPD XPD Soccer Gear Group 20/09/2016
YBR Yellow Brick Road Holdings 20/11/2015

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Uranium Week: Echoes Of A Decade Ago

What has changed between now and 2004, when the uranium price was last under US$20/lb?
 

By Greg Peel

The spot uranium price has fallen to below US$20/lb for the first time in twelve years. A decade ago, notes industry consultant TradeTech, the demand-supply balance of the uranium market was similar to that of today.

Ten years ago utility inventories of uranium were excessive, leading to an overhang of supply. Low prices led to a lack of incentive for the supply-side to invest in development and exploration. Today, as then, supply is being curtailed to avoid further cash burn and new projects are simply not worth considering.

Lack of new development was nevertheless one reason the spot uranium price suddenly ran from under US$20/lb in 2004 to almost US$140/lb in early 2007. When demand started to pick up, supply could not keep up.

So should we strap in and be ready for the price to be back in triple digits within three years?

Probably not advisable. Back in 2004, the newest hot topic around the world was global warming. Carbon emissions need to be reduced, scientists warned, or we’d all be ankle deep in salt water. Nuclear power is carbon free (once operating; a significant carbon footprint is left by the construction of facilities and mining the uranium to fuel them). Nuclear energy is set to take off, particularly in emerging Asia. And most specifically in China.

Speculators began to assume a low uranium price could not stay low for too long. With producers unable to respond with any expediency to a pick-up in demand, prices began to run. A bubble formed. Like any commodity price bubble throughout history, a burst was inevitable. When every Joe with a mining tenement announced evidence of uranium, stock prices soared. Uranium is one of the most abundant elements on earth – it’s just hard to find in commercial quantities.

In 2008 the spot uranium price had crashed back to US$60/lb before the GFC hit. Finally bottoming out at US$40/lb two years later, the price began a post-GFC run. Then in 2011, the tsunami hit.

Interestingly, TradeTech points out, there is no change to the outlook for Asian nuclear energy growth now to what there was back in 2004. Fukushima caused a delay, forcing much higher safety standards for reactors, but today Asia accounts for two-thirds of new reactor builds. Aside from the global warming fears that emerged a decade ago, China in particular has learned in the interim that with economic emergence comes pollution, if not adequately addressed.

It is projected that China will end this decade with the second highest number of reactors in the world.

But a decade ago, Japan was drawing 30% of its electricity needs from nuclear energy. Today all bar three of Japan’s peak of 54 reactors are idled or shut down. Low cost natural gas and subsidies for renewable energy development are making US nuclear power uncommercial, even with the uranium price at a twelve-year low, and hence legacy US reactors have begun to shut down well before their official use-by dates. Governments in Europe have reconsidered nuclear energy as a power alternative since Fukushima.

At some point the spot uranium price must rise. The question is as to how many producers can remain in business until that happens.

TradeTech reports six transactions concluded in the spot uranium market last week totalling 1.1mlbs U3O8 equivalent. The consultant’s weekly spot price indicator has fallen US25c to US$19.75/lb.

Two transactions were reported in term markets, but for less than 1mlbs volume. TradeTech’s term price indicators remain at US$23.70/lb (mid) and US$37.00/lb (long).
 

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Weekly Recommendation, Target Price, Earnings Forecast Changes

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday October 24 to Friday October 28, 2016
Total Upgrades: 10
Total Downgrades: 12
Net Ratings Breakdown: Buy 41.53%; Hold 42.85%; Sell 15.62%

A worrisome trend seems to be awakening in the Australian share market. Industrial companies are showing up their weaknesses and failings, whereas resources companies continue to be carried by international developments. And the banks? They remain cheap on relative comparison and as once again proven by National Australia Bank, they intend to defend their shareholders' dividend satisfaction using everything within their power and control.

For the week ending Friday, 28th October 2016, FNArena registered ten upgrades for individual ASX-listed stocks against twelve downgrades. The latter group contains most of investors' disappointment in the past two weeks; from Wesfarmers to Ardent Leisure, to Blackmores, GUD Holdings, Healthscope and Coca-Cola Amatil.

Recommendation upgrades are mostly share price weakness related, including for Aconex, Crown Resorts, Mirvac, Saracen and Santos.

Changes to price targets remained rather benign, with exception of Tatts Group (+8%) and Beach Energy (+3.5%) on the positive side and Healthscope (-14.6%) and Aconex (-5.8%) on the flipside.

Iron ore minnow Mount Gibson takes honours for the largest increase to earnings estimates (+544%) with the week's Top Ten including only two non-resources stocks; Australian Pharmaceutical (API) and NAB-offshoot CYBG.

The week saw some hefty corrections to earnings forecasts with Alacer Gold grabbing the wooden spoon (-26.9%), followed by Blackmores (-23.4%), Healthscope (-8.8%) and Sandfire Resources (-6.5%).  Plenty of industrials stocks that suffered from analysts paring back their growth estimates, including Aconex, APN News & Media, SG Fleet and Spotless Group.

Banks, AGMs, quarterly production reports, central bank meetings and ex-dividends are populating the calendar for the week ahead. Plus the Melbourne Cup, of course.

Upgrade

ACONEX LIMITED ((ACX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0

FY17 guidance for revenue of $172-180m is below the range implied at the FY16 result, Credit Suisse observes, but EBITDA guidance of $22-25m is broadly in line with expectations and this implies stronger margins.

The broker believes the 30% decline in the share price post the FY16 result has been driven by slowing short-term organic growth, attributable to Conject.

The broker expects the performance of Conject to improve and this provides the confidence for an acceleration in FY18 and FY19 organic revenue growth to 20-25%. Rating is upgraded to Outperform from Neutral. Target is lowered to $6.80 from $7.40.

COCA-COLA AMATIL LIMITED ((CCL)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/5/0

The recent decline in the share price has improved the value proposition, Macquarie believes, particularly in light of the re-rating taking place amongst its peer group of global bottlers.

The broker also notes a significant amount of corporate activity in the Coca-Cola bottling franchises, as new brands and regions are acquired to offset a lack of growth across the system.

The broker upgrades to Neutral from Underperform. Target is steady at $9.37.

See also CCL downgrade.

CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/4/0

Citi has upgraded to Buy from Neutral as the analysts believe the potential loss of the Woolworths ((WOW)) supply agreement has now been well and truly priced in. To account for it, they have reduced EPS forecasts by 7% for 2018 which pushes down the target price by 5% to $34.44.

Citi suggests management has plenty of options to provide offset. Plus investors may have overlooked the recovery in Singapore refined product prices which should improve from August lows, on Citi's projection.

CROWN RESORTS LIMITED ((CWN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/0

Credit Suisse has updated modeling for a more conservative outlook for VIP operations in Australia as well as better performance in Macau where MPEL seems to be coping with increased competition better than expected.

The outcome is an increase in price target to $12.85 from $12.30 and an upgrade in rating; to Outperform from Neutral. The latter comes with a special comment in that any investment in Crown is now regarded as "high risk" given the legal issue emerging from China.

MIRVAC GROUP ((MGR)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/3/0

The company has re-affirmed FY17 guidance for 8-11% growth in earnings per security and distributions of 10.2-10.4c per security.

UBS upgrades to Buy from Neutral on valuation. The broker considers Mirvac has the best exposure to NSW, the state with the best fundamentals across multiple asset classes. Target is steady at $2.27.

MACQUARIE ATLAS ROADS GROUP ((MQA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

September quarter traffic was strong and consistent and Macquarie expects the current quarter will test the value of Greenway in the sale process, given global demand for transport infrastructure.

The broker envisages a premium price will facilitate a capital return or re-investment opportunity with no impact on dividends.

Target is steady at $5.72. Rating is upgraded to Outperform from Neutral.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/3/4

Ord Minnett reviews its investment case on Regis Resources following falling share prices in the sector and finds the pull-back has created an opportunity.

Compelling dividend yield, solid free cash flow and a pipeline of organic options to deliver near-term production growth leads the broker to upgrade to Accumulate from Hold.

Target is raised to $4.00 from $3.90.

SARACEN MINERAL HOLDINGS LIMITED ((SAR)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/1/0

Quarterly production was broadly in line with expectations while cost performances were more mixed. Macquarie updates mining assumptions based on a more detailed understanding of the outlook for operations.

Having brought two new underground operations into production and worked through the highest strip ratio portion of Thunderbox, the broker expects the company's cost performance should improve from now on.

Rating is upgraded to Neutral from Underperform. Target slips to $1.30 from $1.40.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Add from Hold by Morgans .B/H/S: 3/4/1

September quarter production was consistent, as Morgans has come to expect from Sandfire Resources.

Commodity price and currency movements are slightly worse than the broker's forecasts. Hence slight downward revisions to earnings and valuation are made.

Rating is upgraded to Add from Hold on the back of price weakness although US dollar volatility is expected to remain a headwind. Target is reduced to $5.82 from $5.91.

SANTOS LIMITED ((STO)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 5/2/1

September quarter production was slightly below expectations but Ord Minnett was heartened by the 2017 hedges for 7.3mmboe and the positive updates to guidance on sales, upstream costs and capex.

The broker remains cautious about the balance sheet, high cost assets and reserve coverage at GLNG. The recovery in the macro environment means oil prices are now well above the break even point in cash flow at US$43/bbl.

The stock is upgraded to Hold from Lighten on valuation grounds. Target is reduced to $3.90 from $4.15.

Downgrade

ARDENT LEISURE GROUP ((AAD)) Downgrade to Neutral from Buy by Citi and Downgrade to Hold from Add by Morgans .B/H/S: 0/7/0

Ardent Leisure's Gold Coast theme park Dreamworld made news for all the wrong reasons yesterday. A tragic accident has led to four fatalities. Citi analysts report the theme park is closed until further notice. They also note theme Parks represented 33% of Ardent’s FY16 group EBITDA excluding Health Clubs that have been divested.

Trying to assess the potential impact for Ardent Leisure, the analysts draw a comparison with an incident in a UK theme park. After the incident, which had no fatalities, visitor numbers dropped by an estimated 20-30%, reports Citi. The analysts have grabbed the opportunity to reduce estimates on a broader scale for the company.

Price target tumbles to $2.55 from $3.05. Rating downgraded to Neutral from Buy. Note: DPS estimates have been left unchanged.

After the tragic accident at Dreamworld, resulting in the death of four people, Morgans believes the impact for Ardent Leisure is uncertain, given the unprecedented nature of the incident.

Regardless of the cause the broker suspects a negative consumer reaction and downgrades to Hold from Add. FY17 earnings per share forecasts fall by 18.6% for FY17. Target is reduced to $2.23 from $3.30.

BLACKMORES LIMITED ((BKL)) downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/1/0

 First quarter results were very weak, Ord Minnett observes, with sales down 8.1% and net profit down 46.6% to $12.1m.

The company had previously guided to a weaker quarter and the decline in sales was broadly in line with expectations, but the broker notes the operating de-leverage in the business was significant.

While sales are showing signs of delivering more momentum, given the mixed feedback from channel checks and a transfer of analyst coverage, the broker reduces its rating to Accumulate from Buy. Target is cut to $120 from $150.

BORAL LIMITED ((BLD)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/3/1

Citi has downgraded on valuation grounds, to Neutral from Buy.The analysts suggest the long term infrastructure related growth story is well appreciated by investors, but they see short term risks on the rise. Price target drops to $6.50 from $6.80.

BEACH ENERGY LIMITED ((BPT)) Downgrade to Lighten from Accumulate by Ord Minnett .B/H/S: 1/4/0

The company performed strongly in the first quarter, with record production and further evidence of drilling success. Ord Minnett believes there could be more positive announcements in the near term, particularly as the company looks likely to beat its FY17 production guidance.

Nevertheless, the stock has jumped 35% in six weeks and the broker believes the price now factors in the positives. Given Beach is trading at a 20% premium to the broker's valuation the recommendation is cut to Lighten from Accumulate. Target edges down to 64c from 65c.

COCA-COLA AMATIL LIMITED ((CCL)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/5/0

Deutsche Bank observed no significant changes at the investor briefing. The stock has surpassed the broker's target price after a strong performance recently and the rating is downgraded to Hold from Buy.

Deutsche Bank envisages some risks around higher costs. Management expects incremental cost savings over the next three years but this will be reinvested and not result in margin expansion. Price target is $10.00.

See also CCL upgrade.

G.U.D. HOLDINGS LIMITED ((GUD)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/5/0

GUD's AGM update revealed three out of four main company segments experienced a challenging start to the new financial year. Combine this with a sharp appreciation (+19%) in the share price prior and Citi thinks it's best to downgrade to Neutral from Buy.

It's Automotive versus the rest and given this ambiguity Citi finds the shares are probably fairly valued at present level, though some caution seems warranted in the analysts' opinion. Target drops to $10.01 from $10.34.

HEALTHSCOPE LIMITED ((HSO)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/4/0

Healthscope issued a profit warning. Ramsay Health Care ((RHC)) stands by its guidance. Citi analysts report Healthscope management has little confidence in short term outlook, while staying positive long term and insisting short term pressure is industry-wide.

It is Citi's view that Ramsay's Australian assets are less susceptible but not immune to short-term fluctuations in local demand. Amidst an across-the-market debate about many industry issues, Citi analysts suggest industry data for 1Q17 are due to be released on November 15. No doubt, some questions will be answered on that day.

Estimates (both EPS and DPS) have been re-based. Price target tumbles to $2.45 from $3.33. Downgrade to Neutral from Buy.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/1

Ord Minnett downgrades to Hold from Accumulate following cuts to fertiliser price assumptions. The broker had already factored in price weakness for diammonium phosphate (DAP), urea and ammonia, but the actual declines have been more severe and protracted relative to prior assumptions.

Capacity additions are also suspected to be likely to constrain a significant price recovery. Target is reduced to $3.20 from $3.75.

NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/1/1

While acknowledging the company is benefitting from the well-timed acquisition of a stake in Bengalla, the delays to New Acland are now a pressing concern for Credit Suisse.

New Acland will run out of stage 2 coal reserves by late 2017 and delays to stage 3 approvals now mean it is less likely a smooth transition can be made.

Credit Suisse notes the shares are up 26% over the last month and the skew in the risk/reward ratio now looks unfavourable. Rating is downgraded to Underperform from Neutral. Target is raised to $1.75 from $1.65.

PWR HOLDINGS LIMITED ((PWH)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

There were few surprises at the AGM. Morgans reduces FY17 profit forecasts, on the back of updated FX assumptions, but notes that underlying growth assumptions are unchanged given good organic growth momentum.

The broker continues to believe FY18 and FY19 will be strong years. Morgans is conscious of the GBP exposure and views FY17 as an investment year. Rating is downgraded to Hold from Add. Target falls to $3.15 from $3.26.

WESFARMERS LIMITED ((WES)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/5/2

Deutsche Bank had expected a sharp slowing in growth at Coles but the September quarter result still fell short of estimates.

While the broker is mindful of the risks with calling one quarter a trend, Woolworths ((WOW)) is envisaged improving in an environment where deflation is constraining market growth and Aldi continues to gain share.

The broker suspects sales growth will be increasingly difficult to come by, which could undermine the value loop that has been pivotal to the success of Coles. Coles remains the key driver of Deutsche Bank's valuation.

Rating is downgraded to Sell from Hold. Target is reduced to $38 from $43.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating
 
Order Company New Rating Old Rating Broker
Upgrade
1 ACONEX LIMITED Buy Neutral Credit Suisse
2 CALTEX AUSTRALIA LIMITED Buy Neutral Citi
3 COCA-COLA AMATIL LIMITED Neutral Sell Macquarie
4 CROWN RESORTS LIMITED Buy Neutral Credit Suisse
5 MACQUARIE ATLAS ROADS GROUP Buy Neutral Macquarie
6 MIRVAC GROUP Buy Neutral UBS
7 REGIS RESOURCES LIMITED Buy Neutral Ord Minnett
8 SANDFIRE RESOURCES NL Buy Neutral Morgans
9 SANTOS LIMITED Neutral Sell Ord Minnett
10 SARACEN MINERAL HOLDINGS LIMITED Neutral Sell Macquarie
Downgrade
11 ARDENT LEISURE GROUP Neutral Buy Morgans
12 ARDENT LEISURE GROUP Neutral Buy Citi
13 BEACH ENERGY LIMITED Sell Buy Ord Minnett
14 BLACKMORES LIMITED Buy Buy Ord Minnett
15 BORAL LIMITED Neutral Buy Citi
16 COCA-COLA AMATIL LIMITED Neutral Buy Deutsche Bank
17 G.U.D. HOLDINGS LIMITED Neutral Buy Citi
18 HEALTHSCOPE LIMITED Neutral Buy Citi
19 INCITEC PIVOT LIMITED Neutral Buy Ord Minnett
20 NEW HOPE CORPORATION LIMITED Sell Neutral Credit Suisse
21 PWR HOLDINGS LIMITED Neutral Buy Morgans
22 WESFARMERS LIMITED Sell Neutral Deutsche Bank

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 TTS TATTS GROUP LIMITED 71.0% 29.0% 42.0% 7
2 CWN CROWN RESORTS LIMITED 67.0% 50.0% 17.0% 6
3 MGR MIRVAC GROUP 50.0% 33.0% 17.0% 6
4 ACX ACONEX LIMITED 50.0% 33.0% 17.0% 6
5 APE AP EAGERS LIMITED 67.0% 50.0% 17.0% 3
6 MQA MACQUARIE ATLAS ROADS GROUP 83.0% 67.0% 16.0% 6
7 CTX CALTEX AUSTRALIA LIMITED 36.0% 21.0% 15.0% 7
8 MYO MYOB LIMITED 33.0% 20.0% 13.0% 6
9 SFR SANDFIRE RESOURCES NL 25.0% 13.0% 12.0% 8
10 STO SANTOS LIMITED 50.0% 44.0% 6.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 BAL BELLAMY'S AUSTRALIA LIMITED 33.0% 100.0% -67.0% 3
2 BPT BEACH ENERGY LIMITED 8.0% 42.0% -34.0% 6
3 SIQ SMARTGROUP CORPORATION LTD 25.0% 50.0% -25.0% 6
4 IVC INVOCARE LIMITED -8.0% 10.0% -18.0% 6
5 A2M THE A2 MILK COMPANY LIMITED -50.0% -33.0% -17.0% 4
6 BLD BORAL LIMITED 17.0% 33.0% -16.0% 6
7 HSO HEALTHSCOPE LIMITED 44.0% 56.0% -12.0% 8
8 IPL INCITEC PIVOT LIMITED 25.0% 31.0% -6.0% 8
9 HGG HENDERSON GROUP PLC. 20.0% 25.0% -5.0% 5

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 TTS TATTS GROUP LIMITED 4.436 4.099 8.22% 7
2 BPT BEACH ENERGY LIMITED 0.680 0.657 3.50% 6
3 APE AP EAGERS LIMITED 12.410 12.105 2.52% 3
4 HGG HENDERSON GROUP PLC. 4.340 4.250 2.12% 5
5 MYO MYOB LIMITED 3.920 3.844 1.98% 6
6 RRL REGIS RESOURCES LIMITED 3.215 3.203 0.37% 8
7 STO SANTOS LIMITED 4.925 4.918 0.14% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 HSO HEALTHSCOPE LIMITED 2.691 3.154 -14.68% 8
2 ACX ACONEX LIMITED 7.715 8.190 -5.80% 6
3 SIQ SMARTGROUP CORPORATION LTD 6.813 7.002 -2.70% 6
4 IVC INVOCARE LIMITED 12.890 13.208 -2.41% 6
5 IPL INCITEC PIVOT LIMITED 3.153 3.221 -2.11% 8
6 SFR SANDFIRE RESOURCES NL 5.605 5.698 -1.63% 8
7 BLD BORAL LIMITED 6.775 6.838 -0.92% 6
8 MQA MACQUARIE ATLAS ROADS GROUP 5.903 5.953 -0.84% 6
9 CTX CALTEX AUSTRALIA LIMITED 35.073 35.336 -0.74% 7
10 CWN CROWN RESORTS LIMITED 13.753 13.807 -0.39% 6

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 MGX MOUNT GIBSON IRON LIMITED 0.667 -0.150 544.67% 3
2 PRU PERSEUS MINING LIMITED -0.710 -1.167 39.16% 5
3 API AUSTRALIAN PHARMACEUTICAL INDUSTRIES 11.397 9.030 26.21% 3
4 S32 SOUTH32 LIMITED 16.905 14.206 19.00% 8
5 CYB CYBG PLC 26.418 23.129 14.22% 6
6 WHC WHITEHAVEN COAL LIMITED 26.576 23.839 11.48% 8
7 WPL WOODSIDE PETROLEUM LIMITED 140.714 135.812 3.61% 8
8 FMG FORTESCUE METALS GROUP LTD 51.770 50.083 3.37% 7
9 BPT BEACH ENERGY LIMITED 6.023 5.837 3.19% 6
10 RIO RIO TINTO LIMITED 294.748 285.700 3.17% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 AQG ALACER GOLD CORP 11.346 15.534 -26.96% 5
2 BKL BLACKMORES LIMITED 476.000 621.733 -23.44% 3
3 HSO HEALTHSCOPE LIMITED 11.000 12.061 -8.80% 8
4 SFR SANDFIRE RESOURCES NL 30.110 32.215 -6.53% 8
5 TOX TOX FREE SOLUTIONS LIMITED 15.400 16.400 -6.10% 5
6 STO SANTOS LIMITED -7.487 -7.068 -5.93% 8
7 ACX ACONEX LIMITED 6.145 6.477 -5.13% 6
8 APN APN NEWS & MEDIA LIMITED 31.506 33.206 -5.12% 5
9 SGF SG FLEET GROUP LIMITED 23.933 24.900 -3.88% 3
10 SPO SPOTLESS GROUP HOLDINGS LIMITED 12.375 12.625 -1.98% 3

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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Weekly Top Ten News Stories

Our top ten news from 20 October 2016 to 27 October 2016 (ranked according to popularity).

1 Uranium Week: Twelve-Year Low
Tuesday 25 October 2016 - 10:00 AM
The second weekly drop in 2016 in excess of 10% has spot uranium trading at its lowest level since 2004.
2 Fear Of A Market Crash Is High
Wednesday 26 October 2016 - 10:28 AM
Peter Switzer of the Switzer Super Report explains why he's happy many believe a crash is coming.
Weekly update on recommendation, target price, and earnings forecast changes.
4 Australian Banks: Reporting Season Preview
Monday 24 October 2016 - 10:52 AM
Earnings declines, rising bad debts, potential dividend cuts, potential capital raisings – it's not shaping up as a great reporting season for the Big Banks.
Prostheses reforms; housing activity; CBA Business Sales Indicator; equity strategy post Brexit; launch of Playstation VR.
Healthscope has rattled the market, announcing a very weak September quarter and flagging the prospect of a flat revenue outcome in FY17 if the trend continues.
7 Opportunity Comes With Patience
Wednesday 26 October 2016 - 10:04 AM
Opportunity Comes With Patience In this week's Weekly Insights: - IPO Monitor - Opportunity Comes With Patience - Rudi On Tour - Nothing Ever Changes, Or Does It? - Rudi On TV
8 Opportunity in Woolworths
Monday 24 October 2016 - 11:32 AM
The Chartist is looking for a dip to buy Woolworths, expecting an upward trend.
9 Healthscope To Be Avoided
Tuesday 25 October 2016 - 10:24 AM
Michael Gable of Fairmont Equities suggests there may yet be further downside to come for Healthscope.
10 Caltex: The Battle For Woolworths' Petrol Business
Thursday 20 October 2016 - 10:35 AM
Speculation is mounting regarding the potential disposal of the Woolworths fuel business and Caltex has thrown its hat in the ring.
article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

The local AGM season takes a bit of a breather until later in the week next week but from Thursday they start to come thick and fast once more.

There are still some straggler production reports to get through from the resource sectors and quarterly updates from the likes of Qantas ((QAN)) and REA Group ((REA)). There are also a further handful of earnings results.

CSR ((CSR)), Orica ((ORI)), BT Investment Management ((BTT)) and Xero ((XRO)) are all in the frame next week but the biggie in ANZ Bank ((ANZ)) on Thursday.

There are no corporate events on Tuesday that do not involve lunch and empty afternoon offices, being Cup Day. Victoria is of course shut, in case anyone doesn’t notice. The all-important Rate That Stops The Nation will still go ahead as usual, but all the money is on the favourite, No Cut.

It’s a relatively busy week for economic data with private sector credit, building approvals, the trade balance and manufacturing and services PMIs all due. After the meeting on Tuesday, the RBA will release its quarterly Statement on Monetary Policy on Friday.

As Tuesday is the first on the month, manufacturing PMIs will be published across the globe and services on Thursday, except for China’s official number which both land on the Tuesday.

Tonight’s US GDP release will be important in determining whether the odds of a December Fed rate hike will shift from a current 70% and so too will be Monday’s release of the personal consumption expenditure measure of inflation. In case anyone doesn’t realise, the Fed actually meets on Tuesday night, but few expect a pre-election rate hike (17%).

Other US data releases across the week include the Chicago PMI, personal income & spending, construction spending, vehicle sales, chain store sales, factory orders, trade and September quarter productivity. And being the first week of the month, the private sector jobs report is out on Wednesday and non-farm payrolls on Friday.

The Bank of Japan also holds a policy meeting on Tuesday. The Bank of England will wait until Thursday.

The eurozone’s September quarter GDP result is out on Monday.
 

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Weekly Broker Wrap: Coal Economy, Telcos, Food And Infrastructure

CPI outlook; Oz economy and coal prices; telcos under an NBN; Ardent Leisure; food inflation; big infrastructure projects.

-Perceptions the RBA's easing cycle is over are misplaced in Macquarie's, Morgan Stanley's view
-Coal price spike sets Australia up for possible trade surplus
-Trading multiples seen unwinding for telcos as the benefits of structural tailwinds dissipate 
-Sugar price rises spearheading likely inflation in some packaged grocery
-Goldman Sachs considers Lend Lease well placed for new major infrastructure projects
 

By Eva Brocklehurst

Macro Outlook

Australia's headline consumer price index (CPI) in the September quarter was better than Macquarie expected and the outcome removes the trigger for a November cut to the Reserve Bank's cash rate. That said, perceptions that the potential inflection point evident in the headline CPI could mean the easing cycle is over are misplaced in the broker's view.

For its outlook on the cash rate to be derailed, Macquarie believes inflation prospects need to be boosted to the point where the central bank is concerned about containing a sharp break-out in inflation. Morgan Stanley also envisages little change in the low inflation trend.

Core measures of inflation edged down to 1.5% year on year, leaving room for further cuts to official rates in the broker's opinion, if the labour market weakens over 2017. Morgan Stanley expects the slowdown in the housing cycle will impact growth and the labour market over 2017 and into 2018, ultimately prompting the RBA to lower rates another 50 basis points to 1.00% in the second half.

The broker highlights the risk of a hard landing within apartment construction and argues that a broad downturn in housing would put up to 200,000 jobs at risk and mean unemployment would rise to 6.5%.

Oz Economy And Coal

Cuts to coal supply in China have meant coal prices have surged. Initial contracts for hard coking prices spiked by 116% in the June quarter to US$200 and spot prices rose another 20% to around US$240. Thermal spot and semi-soft contract prices also rebounded around 50%.

Together, coal prices, weighted by Australia's export share, have more than doubled and UBS observes this spike adds around $3bn per month to export values. The broker suspects the country's trade deficit will probably disappear in coming months, and may even turn to surplus.

If the price spike is sustained through the December quarter, total export prices are likely to rise around 5%, quarter on quarter. Assuming broadly flat import prices, it would also mean the terms of trade turn up 5%. Hence, even with some retracement of coal prices next year, nominal GDP appears set to grow 5% in 2017.

At face value, the spike in coal prices is a positive for government budgets but the broker's channel checks suggest the Commonwealth's MYEFO (mid year economic and fiscal outlook) will largely look through the price hike, given the May budget already projected nominal GDP of 4.25% in 2016/17 and 5% from 2017/18 onwards.

Telcos

The easy money has been made in tier 2 telcos over the last ten years, Morgans asserts, as the sector has enjoyed structural tailwinds and the benefits of many acquisitions. More diverse companies, combined with low interest rates and strong earnings growth, have resulted in trading multiples virtually doubling from long-term averages of 6 to 12 times enterprise value/EBITDA (earnings before interest, tax, depreciation and amortisation).

This is now unwinding and the broker expects while Telstra ((TLS)) has never re-rated and it has most to lose under the National Broadband Network, it remains well hedged against this loss. The stock is considered relatively safe and holding up with respect to NBN market share.

Morgans expects TPG Telecom ((TPM)) could de-rate further, as unlike Telstra it is not compensated for NBN losses. The company needs to either double its consumer customer numbers, grow corporate share or reduce costs from iiNet.

Vocus Communications ((VOC)) has de-rated and now looks interesting to the broker. There is little risk to NBN earnings as the company already pays the higher access prices. Still, Morgans suspects investors will want to witness the integration of recent acquisitions and the cash flowing before revisiting the stock.

All the above three carry Hold ratings from the broker. Morgans prefers global satellite re-seller Speedcast International ((SDA)) in the sector, rating it Add, as it has a much larger addressable market and therefore a substantially longer pathway for growth.

Ardent Leisure

The Dreamworld fun park has been closed until further notice after four fatalities at the site. Theme parks previously represented 33% of Ardent Leisure's ((AAD)) FY16 group EBITDA  excluding health clubs, Citi observes.

The broker invokes lessons from the UK where Merlin had an accident in its Alton Towers park in June 2015 at the start of its peak trading season. There were two serious injuries but no fatalities. The principal cost to the group was a fine of GBP5 million. Citi calculates that attendance fell 20-30% at the park following the incident and the share price has now recovered to levels at which it was trading prior to the incident.

Based on the Merlin experience, Dreamworld attendance is expected to be adversely impacted over the upcoming peak Christmas period. Revised forecasts assume Dreamworld continues to trade but at lower attendances over FY17, and maintenance capex increases over the short term.

FY17 and FY18 EBIT (earnings before interest and tax) forecasts fall by 27% and 18%, respectively. The broker requires more clarity surrounding the cause of the incident and the duration of the park closure before returning to a Buy recommendation, and downgrades to Neutral.

Food

The Australian supermarket sector has languished with industry growth of 3.2% over the past year but Citi believes low inflation will not last forever and fresh produce inflation is likely to rise. In 2017, some packaged grocery categories could also experience higher inflation.

Using wholesale data, banana prices were up 25% on the east coast and potatoes, tomatoes and lettuce have seen inflation of 18-52%. Fresh produce is about 10% of supermarket sales and recent inflation could add 1.0-1.5% to industry sales growth in the September quarter.

While there is clearly more supermarket competition with Aldi's growth and profile, Citi assesses most of the low inflation is a reflection of lower raw material prices. Many packaged groceries have experienced deflation such as in beverages, bakery and cereals, pet food and toiletries. However, the basket of soft commodities in these products is starting to rise, the broker observes, particularly for sugar. Sugar prices are up 85% for September 2016.

Infrastructure

Goldman Sachs updates its infrastructure construction tracker to reflect the latest high priority projects and also for the recent awards of rail rolling stock contracts. The broker now estimates a pipeline of over $38bn in major infrastructure projects. From a top down perspective, a 3.4% compound growth rate in infrastructure construction investment is estimated over 2016-19.

Four mega projects underpin the pipeline, these being the Sydney metro rail city & south west phase, the Melbourne metro rail tunnel, the WestConnex (Sydney) and Western Distributor (Melbourne) road projects. These four represent 90% of the project pipeline and are due to be awarded in late 2017.

The broker notes Lend Lease ((LLC)) and Cimic ((CIM)) have the capability to participate as equity investors in public-private partnerships, which have been increasingly deployed in Australian infrastructure projects. Lend Lease has won 40% of the $5bn of projects awarded since the start of 2016, compared to its 12% market share in 2015.

This compares favourably to Cimic, where market share declined to 30% in 2016 from 73% in 2015. Goldman Sachs expects the recent momentum in market share will underpin growth in Lend Lease's Australian construction business.


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Australian Corporate Bond Price Tables

PDF file attached.

Corporate bonds offer an alternative to equity investment in providing a fixed “coupon”, or interest payment, unlike equities which pay (or not) non-fixed dividend payments, and a maturity date, unlike equities which are open-ended.

Listed corporate bonds can be traded just as listed shares can be traded. Bonds bought at issue and held to maturity do not offer capital appreciation as an equity can, but assuming no default do not offer downside capital risk either. Pricing is based on market perception of default risk, or “credit risk”, throughout the life of the bond.

Bonds do offer capital risk/reward if traded on the secondary market within the bounds of issue and maturity. Coupon rates are fixed but bond prices fluctuate on perceived changes in credit risk and on changes in prevailing market interest rates.

Note that the attached tables offer three “yield” figures for each issue, being “coupon”, “yield” and “running yield”.

If a bond is purchased at $100 face value and a 5% coupon, and face value is returned at maturity, the running yield is 5% and the yield, or “yield to maturity” is 5%.

If a bond is purchased in the secondary market at greater than $100, the running yield, which is the per annum yield for each year the bond is held, is less than 5% because the coupon is paid on face value. The yield to maturity is also less than the coupon as more than $100 is paid to receive $100 back at maturity.

If a bond is purchased in the secondary market at less than $100, the running yield, which is the per annum yield for each year the bond is held, is more than 5% because the coupon is paid on face value. The yield to maturity is also more than the coupon as less than $100 is paid to receive $100 back at maturity.

Note that if a bond is trading on the secondary market at a price greater than face value the implication is the market believes the bond is less risky than at issue, and if at a lesser price it has become more risky. Bonds trading on yields substantially higher than their coupons thus do not offer a bargain per se, just a higher risk/reward investment. In all cases, bond supply and demand balances will also impact on secondary pricing.

Note also that while most coupons are fixed, the attached table also provides prices for capital indexed bonds (CIB) and indexed annuity bonds (IAB).

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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