Weekly Broker Wrap: Property, E&C, Health Insurance, Optus And McMillan Shakespeare

This story features GPT GROUP, and other companies. For more info SHARE ANALYSIS: GPT

-Macquarie: retail property tailwind subsiding
-Morgan Stanley rates 4 A-REITs Underweight
-Public infrastructure most positive for E&C
-Regulatory risk heightened for health insurers
-Optus to differentiate on content
-GS expects MMS valuation gap to close
 

By Eva Brocklehurst

Retail Property

Macquarie is of the view that the tailwind for retail property is subsiding, given expectations dwelling prices will show tangible declines in 2016. Retail sales have historically shown a strong relationship with dwelling price growth, as the wealth effect of housing means owners use growing equity to fund purchases.

On a landlord basis, Macquarie expects leasing outcomes will be challenging. The broker is most attracted to those retail property stocks that can grow distributions ahead of inflation and against the backdrop of rising long bond yields.

GPT Group ((GPT)) tops the broker's preferences in the retail property segment while Macquarie has Underperform ratings for Shopping Centres Australasia ((SCP)), Scentre Group ((SCG)) and Vicinity Centres ((VCX)) (formerly Federation Centres).

A-REITs

Morgan Stanley has added four new Australian Real Estate Investment Trusts (A-REITs) to its coverage, all with Underweight ratings. The broker considers  Abacus Property ((ABP)), BWP Trust ((BWP)), Cromwell Property ((CMW)) and Shopping Centres Australasia are all relatively unattractive.

Morgan Stanley's earnings forecasts for Abacus Property and BWP Trust are below consensus and those for Cromwell and Shopping Centres Australasia are in line. All have below-industry free funds and distributions growth, stretched multiples and limited positive catalysts, in the broker's view.

That said, the broker retains an Attractive sector rating. Morgan Stanley prefers Goodman Group ((GMG)), Lend Lease ((LLC)) and Vicinity Centres.

Engineering & Construction

Goldman Sachs has met with several leading mining construction and infrastructure companies to ascertain what will drive earnings. The broker envisages headwinds should continue for those that are more resource-exposed.

The lower commodity price environment is causing capex to be deferred and creating lower volumes for work. This is driving more competitive intensity and pricing pressures. Public infrastructure investment is more positive, with the broker observing over $44bn in projects should move to the construction phase over the next few years.

Goldman Sachs retains a Sell rating for WorleyParsons ((WOR)) and ALS ((ALQ)), given their earnings are more concentrated in resources end markets. The broker is also concerned about the execution of some projects for UGL ((UGL)), rated Sell. The broker's preferred exposure to infrastructure construction is Buy-rated CIMIC ((CIM)).

The broker retains Neutral ratings for Lend Lease and Broadspectrum ((BRS)).

Small & Mid Cap Focus List

Goldman Sachs removes Ozforex ((OFX)) from its Australia small & mid cap focus list following a rating downgrade to Neutral from Buy. The list is up 2.9% in November to date while the ASX Small Ordinaries accumulation index is up 1.5%, implying outperformance of 1.4%.

In November the main performs to date are Ozforex, Costa Group ((CGC)) and Blackmores ((BKL)), which outperformed 19.7%, 11.8% and 7.1% respectively. The main detractors in the list are 3P Learning ((3PL)), Austbrokers ((AUB)) and amaysim Australia ((AYS)) which underperformed by 10.7%, 9.9% and 8.6% respectively.

Private Health Insurance

There are a number of reviews under way affecting the private health insurance industry which focus on affordability and the role of private insurance in the health system. Credit Suisse suspects these reviews will highlight inefficiencies and the fact the industry is unsustainable under current regulatory settings and the community rating principle.

The broker believes solving these problems will require significant regulatory change, in that the industry needs to restrict the launch of new products and offer a small number of simplified and standardised products. The broker estimates that if policy downgrading continues, the industry will require substantial premium increases to reflect claims inflation and recover lost revenue.

Credit Suisse also suspects the industry is carrying more than double the required capital. By lowering targeted returns on equity to a more appropriate 12.5% rather than the 17.0% currently being earned, and reducing excess capital, premium rate increases of just 2.5% per annum could be passed through for three years and assist in addressing affordability concerns, the broker asserts.

There are minimal risk to health insurance earnings in the short term but Credit Suisse envisages earnings uncertainty in outer years, either from recommendations or changes to the settings in the May 2016 federal budget.

Despite the pullback in share prices recently, with earnings at risk in coming years, the broker considers the premium at which Medibank Private ((MPL)) and nib Holdings ((NHF)) trade relative to the ASX200 and ASX Small Industrials, respectively, are unjustified. Credit Suisse retains an Underperform rating on both stocks.

Optus

Optus has formulated its strategy to grow Australian earnings, with UBS attending the briefing and observing the bulk of the focus is on mobile. The company intends to lift capex spending to $1.9bn this year, simplify and improve its project and differentiate its product and content.

The company observes that competing on price is value destructive while investing in the network brings it only on par with Telstra ((TLS)). Hence, the company will differentiate on content and entertainment, noting it does intend to monetise the rise to its recent acquisition of the broadcast and digital rights to the English Premiere League.

Goldman Sachs also noted these key planks in the strategy, with Optus seeking to increase customer share in regional areas and in the small-medium business network where Telstra is dominant. Video content is the next battleground, in the company's view, as content moves increasingly to mobile.

Brokers also noted that Optus would prefer to invest in its mobile rather than fixed line business and has not felt the need to increase scale in fixed line through acquisitions.

McMillan Shakespeare

McMillan Shakespeare ((MMS)) is offering superior earnings growth, despite trading at a discount to its main peers on ASX as well as the Small Industrials, Goldman Sachs observes. The broker upgrades the stock to Buy from Neutral.

The broker expects the valuation gap will close as the company realises cost synergies form its Presidian and UFS acquisitions and its UK segment gains critical mass.

Goldman Sachs envisages potential for further bolt-on acquisitions in the UK leasing market. The broker upgrades FY16-18 forecasts by 2-3%, reflecting the recent acquisition of Anglo Scottish Asset Finance.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms