Weekly Broker Wrap: Consumer, Telcos, Cement, Hospitals And Technology

Sep 09, 2016 Consumer spending indicators; Australian retailer results; NBN and telcos; East Coast Cement; private hospitals; Bell Potter's picks in technology; Carzoos. -HVN and JBH most exposed to any downturn in consumer confidence -Citi expects will have to cut dividends post FY21 -Risk to cement prices in NSW as ECC facility commissioned -Carzoos likely to be a significant growth driver for AP Eagers

By Eva Brocklehurst Consumer Spending The Australian June quarter GDP release signalled consumer spending on discretionary retail items remains above-trend despite decade-low wages growth. Consumers are dipping into savings to support these sales. Citi expects retail sales will be slightly below trend growth over 2016, at 4-5%. For retail spending growth to be maintained without a lift in income growth consumers must continue to save less. Citi observes this is predicated on sustained confidence, in turn driven by further rises in house prices and stable employment. Retailers such as ((HVN)) and JB Hi-Fi ((JBH)) are considered the most exposed to any downturn in confidence as both are near peak cycle in terms of sales and earnings growth. Australian Retailers FY16 results were good for Australian retailers and Citi observes strength in non-food retailing. Results also reflected more investment in stores. Only 46% of the 35 companies managed to lift gross profit margins but, given the magnitude of hedged FX reductions, the broker believes this is a decent outcome. Hard goods companies such as JB Hi-Fi, Breville ((BRG)) and Super Retail ((SUL)) managed to lift gross margins. Fashion retailers struggled with gross margin compression,FNArena Citi notes. The broker calculates that 57% of consumer companies managed to lower their operating costs to sales ratio and just over half managed to lift EBIT (earnings before interest and tax) margins. Telecommunications Citi believes the market is underestimating the impact from the NBN. The broker does not accept that Telstra ((TLS)) can full offset the impact and expects earnings per share to fall more than 20% post NBN implementation. Hence the expectation the company will have to cut its dividend. Citi expects Telstra to hold its dividend at 31c to FY21, with excess cash deployed for share buy-backs. A 30% cut to the dividend is forecast in FY22. The broker considers TPG Telecom ((TPM)) to be the only major telco to achieve sustainable growth in free cash flow despite the NBN disruption. While the potential for earnings growth from the newly merged Vocus Communications ((VOC)) is obvious, Citi believes the amalgamation of four separate companies carries too much risk and until there is meaningful progress on the integration, is inclined to take a neutral view. East Coast Cement East Coast Cement has fully commissioned its 35,000t terminal on Kooragang Is, Newcastle. The company can deliver up to an initial 300,000t of cement to the NSW market annually. The facility also has further capacity for related products. Morgan Stanley notes the market continues to expect price increases for construction materials in the case of ((BLD)) and Adelaide Brighton ((ABC)). The broker is sceptical about significant price increases flowing through and envisages the ECC facility will be one driver of price declines in the NSW cement market. Although Boral sells considerably more cement than Adelaide Brighton in NSW it is considered somewhat more protected through its vertical integration. Hence, Morgan Stanley envisages volumes at risk are similar for both companies. Private Hospitals Ord Minnett prefers hospitals among domestically focused health care companies as there is strong demand growth from an ageing population, without undue risk from funding cuts or regulatory reforms. The broker reiterates Accumulate ratings for Healthcope ((HSO)) and ((RHC)). Ramsay trades at a significant premium, reflecting a strong earnings growth track record. While the French operations may be a drag in FY17 this should be offset, in the broker's view, by the savings from the global procurement program. Healthscope in turn offers more upside but the broker suspects earnings will be less predictable in the short term as multiple projects ramp up concurrently. Technology Bell Potter has updated its main picks in the tech sector. Adacel Technologies ((ADA)) has pulled back and now looks to hold value, the broker notes. Infomedia ((IFM)) delivered on guidance and provided positive guidance but the share price has not rallied. Integrated Research ((IRI)) has a strong outlook which appeals and Melbourne IT ((MLB)) is expected to have a big second half if its transformation has been successful. On the otherFNArena side, the broker has downgraded two stocks to Sell including Technology One ((TNE)) as it looks expensive and ((ALU)), a high quality stock but also looking expensive. Both are downgraded on valuation and the broker emphasises there is nothing fundamentally wrong with either. Carzoos AP Eagers ((APE)) is about to launch its Carzoos used car outlet, with the first store opening at Garden City in Brisbane on September 12. A second will open in North Lakes in November. Moelis will be watching the run rate of cars sold each month in each store. The broker assumes a longer ramp up in the first couple of stores and, once teething issues have been resolved, expects each new store would require only a 12 month ramp up to reach a monthly run rate of 120 cars/store. The broker considers AP Eagers has two significant growth drivers – market consolidation and Carzoos – which could deliver around 15% compound growth to earnings per share over the next 10 years. The broker is cautious about the impact of the ASIC investigation into dealer finance income, which could potentially deliver a hit to earnings of around 5%. Moelis retains a Hold rating and $13.30 target.

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((TPM)) TPG TELECOM LIMITED has changed its code to ((TPG)). ((ARQ)) ARQ GROUP LIMITED has changed its code to ((WCG)).

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