Telecommunications investors might feel that they are bearing the brunt of the Gillard Government’s micro-economic meddling, but they’re not alone – increased regulatory uncertainty across several sectors has the potential to help or hinder a number of leading stocks.
Heightened regulatory risk within resources, banking and telecommunications is currently being reflected in attractive price to earnings multiples within these sectors. And a lurch towards greater protectionism by the foreign investment regulator is also making M&A activity more problematic for the big end of town.
With a growing number of big-ticket regulatory reforms expected to pass next year, investors need to consider which stocks to back as direct benificaries of reforms, and which ones will suffer the most.
TheBull canvassed the market, asking analysts to identify the sectors and stocks they expected to be on either side of the regulatory reform ledger in 2011. Here’s what they said.
While still subject to myriad political and industry hurdles, the Gillard Government’s proposed Minerals Resource Rent Tax (MRRT) is a net-negative for the “boom-time” commodities of iron ore and coal, and is also set to hit the oil and gas sectors. Andrew Muir, resources analyst with Hartleys says that until the details have been nutted out the direct impact is difficult to gauge.
Nevertheless, he says pure-play miners like Fortescue Metal Group (FMG), Atlas Iron (AGO), Murchison Metals (MMX), Mt Gibson Iron (MGX), and Gindalbie Metals (GBG), will take a greater hit simply because they’re less diversified than larger players like BHP Billiton (BHP) and Rio Tinto (RIO). “There’s a perception that the MRRT will tarnish the attractiveness of Australia’s iron ore and coal assets in the eyes of foreign investors,” says Muir. “Uncertainty created by the MRRT has already impacted the sale of Atlas’s magnetite deposits at Ridley.”
Andrew Harrington, analyst with Pattersons doesn’t expect the MRRT to be passed in its current form, so he’s reluctant to factor it into current modelling. But at face value, he suspects the valuation impact will be sub-5 per cent for diversifieds like BHP and RIO up to 10 per cent for stocks like Fortescue.
The MRRT is also a net-negative for the coal-seam gas (CGS) sector now that the same tax treatment for offshore is now being applied onshore. Roger Leaning, head of research with RBS Morgans says it’s too early to start factoring in the fuller MRRT impact. But assuming the MRRT is successful, he says the bigger threat would be its extension to cover other commodities over time.
The structural separation of Telstra (TLS) is set in stone following passage of the bill late November. But the introduction of the Gillard government’s controversial $42 billion national broadband network (NBN) promises to be a tougher legislative battle. The treatment of Telstra in relation to the NBN has unnerved investors, who for the most part see the benefits of the company’s mandated split as uncertain at best. Proposed arrangements will see Telstra transfer all copper network customers onto NBN Co fibre, effectively ending its role as the nation’s retail and wholesale provider of fixed telephony. Under these arrangements Telstra will receive more than $11 billion from NBN Co over the next 30 years in decommissioning and leasing payments.
In light of recent confirmation that Telstra will lose its wholesale business, Paul Saliba CIO with Lachlan Partners says any further strengthening in its share price could provide an opportune time to exit. He says recent share price weakness reflects growing uncertainty over Telstra’s ability to maintain its attractive 10 percent fully franked yield long-term. “Generally speaking what’s bad for Telstra is good for other players in the sector,” says Saliba.
Ian Martin, an analyst with RBS Securities, says a levelling the telecommunications playing-field will create myriad opportunities elsewhere within the sector. As a case in point, SingTel Telecommunications’ (SGT) Australian subsidiary Optus is in advanced negotiations to transfer its cable broadband customers to the NBN, and Perth-based Telecommunications provider iiNet Ltd (IIN) expects to play a significant role in the National Broadband Network (NBN) rollout.
This also bodes well for Amcom Telecommunications (AMM) which has exposure to the consumer broadband market through a 22.4 percent stake iiNet Ltd.
The review of ATM and mortgage exit fees doesn’t bode well for any bank. But contrary to popular speculation, it’s expected to hurt the mutuals and regionals considerably more than the big four which have deeper pockets to withstand such losses. At face value, proposed reforms that would use taxpayer money to provide greater funding availability to regional banks and non-banks look encouraging. Without these reforms the future for Australia’s 108 credit unions and 11 building societies looks problematic at best. According to recent analysis by KPMG, pressures to merge – courtesy of rising costs and competition for deposits – could see these numbers halve.
With the exception of mid-tiers like Bank of Queensland (BOQ), Suncorp (SUN) and Bendigo and Adelaide Bank (BEN), UBS says there’s insufficient capital within the ‘mutuals’ and regional banks to capture sufficient market share. Of the three, the broker says Bendigo and Adelaide Bank is more financially leveraged to be provided with low-cost funding compared to the big four counterparts due to lower ROI and margin improvement. “The major banks will be on the wrong side of the ledger, but rather than being a show-stopper, it adds to the headwind already confronting them.”
Having concluded that recent inquiries and comments by government officials will negatively impact investor sentiment and potentially impact banks’ future earnings, James Freeman banking analyst with Deutsche Bank has a blanket hold on the sector’s leading seven stocks – with the exception of the ANZ and Macquarie Group (MQG) which remain buys at current levels. “Key downside risks include slow loan growth, increase in the cost of funding and weakness in financial markets impacting upon funds management income,” says Freeman.
The removal of the ASX Ltd’s (ASX) long-standing monopoly status as the country’s sole exchange will lead to market share erosion as soon as newcomer Chi-X Australia launches some time in 2011. It’s unclear how much of the downside is already built into the ASX’s share price, but UBS isn’t expecting the ASX to get close to its 2008 peak revenue any time soon.
The removal of the gaming machine duopoly held by Tabcorp (TAH) and Tatts in Victoria doesn’t bode well for either stock, now faced with replacing a large chunk of lost business through a growth-by-acquisition strategy. Under new regulations, no single entity will be able to hold more than 4,812 or 35 percent of the EGM (electronic gaming machine) market. As the incumbent, Tabcorp is expected to retain the Victorian wagering license – due for renewal in 2012 – over rival bidder Tatts Group (TTS). But some analysts are concern that they’ll overpay in their attempts to do so. Sam Theodore, gaming analyst with UBS expects casino operator Crown Ltd (CWN) – which is less exposed to the prevailing regulatory environment – to start eyeballing opportunities for industry consolidation. “Crown could be looking to consolidate its position in the Australian casino market by bidding on Tabcorp’s casinos to gain access to lucrative VIP markets in Sydney and QLD. But any move may need to wait till after Tabcorp demerges midway through 2011,” says Theodore.
Emissions trading talks will intensify in 2011, but David Wall, oil and gas analyst at Hartleys doesn’t expect the Gillard Government to survive long enough to implement either the MRRT let alone an ETS carbon trading scheme. But assuming it does – based on a $40-$50/tonne – he says the viability of any gas projects, where Co2 levels are above 10 percent would be put at risk – with many projects in the Browse Basin looking decidedly vulnerable.
Beyond coal and gas, Leaning says the stocks directly in the eye of a future ‘ETS hit’ include those with carbon-heavy or energy intensive operations including, aluminium refiners like Onesteel Ltd (OST), BlueScope Steel (BSL); steel mills like, Alcoa Ltd (AAI), and Alumina Ltd (AWC), and power generators that have already slashed $10 billion from their spending due to uncertainty surrounding carbon policy.
On the flipside, Leaning expects all alternative energy stocks to benefit from any future ETS scheme as the focus on clean technologies intensifies. Given where they are on the commercialisation curve, Leaning’s favoured cleantech stocks include: Former Babcock & Brown ‘wind play’ Infigen Energy (IFN); geothermal stock Geodynamics (GDY); wave energy stock Carnegie Wave Energy (CWE), energy storage company CBD Energy (CBD) and integrated energy company Energy Developments (ENE).
John O’Brien, managing director of Australian CleanTech expects Carbon Conscious (CCF) and Carbon Energy (CNX) to be among early benificaries.
|Sector||Reform||Potential winners||Potential losers|
|TELCOS||NBN launch and Telstra split|
iiNet Ltd (IIN)
|BANKS||Government’s support to provide regional banks, mutuals and non-bank lenders with alternative funding sources.|
Mutuals, second-tier banks & regionals
Bank of Qld (BOQ)
|The big-four banks|
|ETS||Carbon Trading Scheme based on $40-$50/tonne|
Alternative energy sources:
CBD Energy (CBD)
Infigen Energy (IFN)
Power generators, carbon-heavy or energy intensive operations including power generators, aluminium refiners, and steel mills:
Onesteel Ltd (OST)
BlueScope Steel (BSL)
Alcoa Ltd (AAI)
Alumina Ltd (AWC)
On/off shore gas projects where Co2 Levels are 10 percent-plus.
Duopoly gaming license in Victoria up for grabs 2012.
Uncertainties pertaining to the Victorian and NSW wagering markets.
|Crown Casino (CWN)|
|RESOURCES||Minerals Resource Rent Tax (MRRT) – only applies to iron ore and coal (and the oil and gas sectors).|
Coal Seam Gas producers & Iron Ore and Coal stocks.
Pure-plays more directly impacted:
Atlas Iron (AGO)
Mt Gibson (MGX)
|FINANCIAL||Multi-market equity platform environment removes ASX’s monopoly status.||New market entrants Chi-X Australia (unlisted)||ASX|