The Wrap: Miners, Steel, Healthcare, G8 Education

Weekly Reports | Jan 20 2017

-Miners increasingly awash with cash
-Potential nasty surprises for healthcare
-China's steel reduction supports iron ore
-UBS previews reporting season for emerging companies
-G8 Education a potential turnaround story 


By Rudi Filapek-Vandyck

Focus On Capital Management

How times have changed. It was only a year ago analysts and investors were speculating on which resources stocks might be about to breach debt covenants, and Whitehaven Coal ((WHC)) featured often on top of the list.

Now the boot is firmly on the other foot and the sector is enjoying almost unprecedented piles of cash flowing into miners' bank accounts, while those same analysts and investors are trying to figure out just how long exactly can this purple patch continue?

Now the biggest question in the sector is what to do with all that cash? Analysts at Citi point out the answer will be different for each miner. For example, BHP Billiton ((BHP)) likes to stonewall its single A credit rating, while Fortescue Metals ((FMG)) is aiming to reduce gearing to less than 40%. South32 ((S32)), on the other hand, is debt free and doesn't want to hold more than US$500m in cash.

So many options, so many possibilities.

On our observation, analysts have already started speculating about whether Rio Tinto ((RIO)) might pay out extra dividends, or maybe conduct a share buy back, why not both?

Analysis by Citi has identified Whitehaven Coal as the one with the biggest luxury problem. Key question: is the company first aiming at reducing debt to zero or will it start rewarding shareholders sooner?

Healthcare: Potential Surprises

It's not what we know that defines the year, it's what we don't know is about to happen. 2016 would be the perfect example.

Healthcare analysts at Morgan Stanley applied the principle to the sector in Australia and came up with five possible unaccounted for scenarios; only one would be a positive.

First the potential negatives:

1. A much stronger USD against EUR and GBP. While a stronger USD/AUD is beneficial for US profits, weakening currencies in Europe act as a negative. Ansell ((ANN)), for example, derives some 25% of revenues from Europe. For CSL ((CSL)) the percentage is 24% and for ResMed ((RMD)) the number is 29% of revenues. By the way: I think Ansell is not a healthcare stock, but that's a discussion for another time.

2. CSL and plasma collection cost inflation. It is the analysts observation plans to expand plasma collection centres would, if all executed, imply stronger growth than the market. This raises the prospect of over-supply. In the short term, however, Morgan Stanley notes the market is more likely to stick with the view that CSL stands out as a key beneficiary from mis-steps and supply chain issues among its competitors.

3. It is the analysts view that substantial capacity expansion in some of Healthscope's ((HSO)) key markets has compounded the earnings impact of volume weakness, but thus far, nobody else seems to be paying attention.

4. Cochlear ((COH)) shares are trading on lofty multiples but what if key competitor Advanced Bionics starts fighting back in 2017, grabbing back lost market share?

And here's the potential positive surprise:

5. Market rumours about a potential break-up of Primary Health Care ((PRY)) would, if executed, prove to be a positive for shareholders.

All in all, it is the analysts' view the healthcare sector was punished in 2016 for trading on too-high multiples. The severity of the relative underperformance is unlikely to be repeated in 2017, in their view, though any of the above mentioned scenarios can still have a major impact.


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