More on profit season

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This time Macquarie:

1. Consolidation, Trade down and Housing driving Retail dispersion: Three clear underlying themes have emerged for retail. House fillers continue to post solid revenue gains (NCK, JBH); Consolidation within retail categories – home electronics and improvement – has been an even larger than expected revenue generator and importantly without the need to sacrifice margins (JBH, Bunnings (WES)); and Trade down is providing increasing support for the discount end of the retail market (Kmart (WES), Target (WES), Tigerair (VAH)) against a backdrop where discretionary spending levels are not high. This should bode well for both WOW (via Big W) and HVN where we add to our existing overweight portfolio position.

2. Capex & Infrastructure fundamentals improving: Economy wide capex trends remain weak, but the developers and capex sensitive stocks have come in well above expectations (CIM, DOW). This reflects broad improvement with the long-awaited ramp-up of major infra projects and improved contract mining revenue for CIM while DOW was the beneficiary of an increasingly diversified earnings base (Technology & Communications, Rail & Transport). Both signalled a strong outlook which is yet to see the tailwind from any positive cyclical factors, which are in place. Stock specifics, in particular WIH, underpin both names with further upside risk from any improvement in spending trends. Buy CIM, DOW and LLC.

3. Major Banks better than expected but Regionals under intense pressure: There was a large discrepancy between underlying conditions for regional banks (BEN, MYS) versus the Majors, which saw upside surprise on BDD’s, slightly stronger mortgage repricing, solid cost control and further organic capital generation. At a regional level, we saw higher BDD’s, weaker NIM’s as deposit competition intensified and with more limited offset from repricing. One-off tailwinds were disproportionate drivers of upside surprise for CBA (retail bank strength) and ANZ (trading) and this has driven limited follow through to estimates. However, the results provide confirmation that while conditions are not great, banks are pushing hard on cost control and repricing while at the same time the drag from the credit cycle is more benign (confirmed by anecdotal evidence that Developers are providing housing finance, contained credit costs being well contained and reasonable labour market conditions). We are overweight all 4 majors and hold no regional banks.

4. Underlying trends in favour of General Insurers (Suncorp): Underlying conditions for general insurance appear to be improving. Both Personal and Commercial lines are experiencing modest price increases according to APRA, with the external environment also becoming more favourable as higher interest rates provide earnings support. Underlying trends in favour of General Insurers (Continued…) SUN’s result was underpinned by a combination of increasing gross written premiums (+6.2%) and lower net incurred claims (Home and Motor claims were back to LTA). Strong macro conditions will be supplemented by management’s focus on turning the business and guidance around. The Australian Life Insurance division disappointed but this is only ~5% Group’s earnings. The potential for divestment of these operations is an upside risk. The stock is trading at a ~4.3% PE discount to weighted peers. It pays a 5.5%, fully franked, dividend yield.

5. Conditions for US housing rebound strong. Neither JHX nor BLD provided upside surprises on their Nth American operations. However, conditions for a better than expected housing recovery are continuing to fall into place: 1) Affordability is high with debt service as % of disposable income at all-time lows; 2) housing inventory at a 12 year low; 3) US households have been one of the few to significantly deleverage; 4) wages growth is improving; and 5) credit creation is likely to become easier and not tighter. The operational miss by JHX due to capacity ramp-up and inherent inefficiency associated with tight supply is at its worst and evidence of improvement might be needed, we thing general housing conditions will only get better. Similarly, while Boral USA underperformed relative to our due to weather and lower speciality product sales impacted fly ash, a stronger infrastructure and construction environment over the coming 12-18 months will provide support for a solid pricing and volume environment off the back of improving work in progress and infrastructure pipeline. Buy JHX, restriction on BLD.

My view:

  1. Retail is awfully tricky given shrinkflation. Avoid.
  2. Capex is spotty as well given mining downdraft is far from over. Avoid.
  3. Big banks look a short term buy on steepening global yield curve.
  4. Insurers may benefit from robust stock markets but their always a lottery.
  5. Yep.
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.