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The Wrap: IVF, Diagnostic Services & A-REITs

Weekly Reports | Dec 01 2017

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

Weekly Broker Wrap: Victoria Electricity; IVF; diagnostic services; mobile; office & industrial A-REITs; and Appen.

-Agreed rebates for certain Victorian electricity customers considered positive for Origin Energy and AGL Energy
-IVF sector bounces back in October, Monash downgrade seen company-specific
-Credit Suisse urges caution in interpreting October Medicare data
-Lower end of mobile market likely most affected by entry of TPG Telecom
-Rare opportunity for A-REITs to trade office segment

 

By Eva Brocklehurst

Victoria Electricity

The main three energy retailers, Origin Energy ((ORG)), AGL Energy ((AGL)) and Energy Australia, have agreed to offer rebates to electricity customers in Victoria on standing offers. The number of customers on these plans is estimated to be around 10% of electricity customers in the state.

The rebates are expected to reduce bills by between 5-28%.  The deal comes ahead of the Victorian government's formal response to a review into the retail energy market. Victorian gas and electricity costs are revised every year from January 1. Given material increases in wholesale gas & electricity prices over the past 12 months, retail prices are expected to increase from January 1.

Media reports suggest Energy Australia will increase retail electricity prices by around 15% and Origin has announced price increases of 14.4%. AGL is expected to follow suit. UBS considers the deal a positive for Origin Energy and AGL as it potentially reduces the risk of re-regulation.

IVF

Growth in the IVF sector bounced back in October, with total cycles growth of 21.4%. UBS observes October, so far, represents the strongest month of growth for the industry in FY18, although it does compare with a very soft period in FY17. Queensland was the strongest market, and for the nine months from February accounted for around 72% of total cycle growth.

Monash IVF ((MVF)) has, at the same time as the growth rebound was announced, downgraded estimates for first half net profit by -13%. This is unlikely to shock investors, UBS suggests, as the company does not offer any low-cost services. Bulk bill and low-cost segments drive the majority of growth in the market.

Hence, UBS is hesitant to read through to Virtus Health ((VRT)), given a significant proportion of the Monash downgrade was one-off and company-specific.

Diagnostic Services

Growth rates for all diagnostic/surgical services improved in October but Credit Suisse suspects this was, in part, because of an extra working day versus the prior October. The broker cautions against interpreting the data as evidence of a sustained recovery in volumes and outlays.

Medicare data suggests non-hospital patient episode growth increased to 4.4% on a 12-month rolling basis. Pathology outlays growth of 7.2% compares with 3.9% recorded in the prior month. Volume growth in diagnostic imaging was 5.6%. Specifically for diagnostic services, Credit Suisse suggests there is low regulatory risk in terms of funding cuts, with Medicare benefits effectively quarantined.

Instead, the broker considers lower volumes as part of a structural change and does not expect material increases in outlays growth in the near-term. Population growth and ageing will sustain a level of surgical volume growth over the longer term, but recently proposed changes to private health insurance are unlikely to drive a recovery in utilisation in the short term.

Mobile

Credit Suisse expects the lower end of the mobile market, pre-paid in particular, to bear the force of increased competition from the entry of TPG Telecom ((TPM)). Competition has already heated up with the launch of new low-price/data allowance plans in the MVNO segment and Telstra's ((TLS)) new Belong offering.

The broker suggests iPhone X is shaping up to be a major re-contracting event and the upgrade cycle should be positive for mobile revenues per unit.

Office & Industrial A-REITs

Sydney and Melbourne office assets have been re-priced since June. Ord Minnett's calculations show that $1.9bn of assets have sold at a 20% premium to book value. Asset values exceed replacement costs at premiums not seen since 1987-88. A-REITs, as a result, have a rare opportunity to trade the asset class and the broker estimates $5bn of lower-quality assets are readily saleable at an $800m premium to book value.

This is a positive for share prices because, if acted on, sales would realise "paper" profits and de-gear balance sheets. This would allow A-REITs to create value by re-deploying funds at the right point in the cycle.

The broker upgrades ratings on Dexus ((DXS)) to Accumulate from Hold because the stock is considered the best positioned in terms of the opportunity. In the same vein, Ord Minnett downgrades Investa Office ((IOF)) to Hold from Accumulate on expectations of lower cash flow and a high level of refurbishment capital expenditure factored into the valuation.

Deutsche Bank also believes Melbourne and Sydney CBD office markets will experience strong rental growth and increases forecasts for both office and industrial assets in 2018. The broker makes small upgrades to earnings estimates, just 1% or less, with the biggest changes for Mirvac ((MGR)) and Dexus. Supply remains constrained in Sydney and employment growth in Melbourne, in particular, is continuing.

The broker forecasts gross rents in the Sydney CBD to increase 8-10% in 2018. Rents in Melbourne's CBD are expected to grow 7-9%. Companies appear willing to pay a premium to be located next to customers, as demand for same-day delivery accelerates.

Deutsche Bank notes a lack of supply in the southern Sydney industrial market has resulted in a number of tenants paying significant premiums to be located within kilometres of high-density areas.

The broker, conversely, reduces retail rental growth assumptions following weak specialty sales reports in the September quarter. More store closures are expected in 2018 as retailers look to rationalise networks and compete against online offerings. Amazon's arrival in Australia is expected to result in market share losses for bricks & mortar retailers but Deutsche Bank believes the retail "apocalypse" has been overhyped.

Appen

Appen ((APX)) will acquire Leapforce for $105m. Citi expects the acquisition to add material scale and capacity to the Appen offering. The company expects to extract cost synergies, primarily from its own business.

There are potential concerns, as previous projects have been won as both sole contracts and share with competitors. Appen customers may, therefore, have "concentration" concerns with the two merging, Citi suggests.  Also, the new scale could result in further margin pressure from customers.

Leapforce provides human evaluation and notation of data sets for use in search, text, image, video and mapping in over 35 countries. Citi retains a Buy rating and $5.88 target for Appen.

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For more info SHARE ANALYSIS: DXS - DEXUS

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: MVF - MONASH IVF GROUP LIMITED

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For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED