Weekly Broker Wrap: Housing, Aluminium, Builders, Hospitals And Insurance

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-Is Australian housing overvalued?
-Risks for aluminium producers/fabricators
-Are Oz builders fully valued?
-Health insurer churn at high levels
-Margin risks elevated for insurers

By Eva Brocklehurst

Global Housing

2014 was considered a good year in most of the developed world for house prices. Standard Life observes the stand-out markets were Ireland, UK, Sweden and Australia. Of the six countries in which prices fell, five were in Europe. The widespread housing recovery is based on historically low interest rates, an easing of credit availability and more entrenched economic recovery. Standard Life now asks whether housing is again overvalued, having recouped almost all losses since the GFC. The answer is, in aggregate, not yet. Nominal prices, adjusted for inflation, are still around 9.0% below peak and, adjusted for disposable income changes, they are 12% below. This nevertheless masks significant variations across countries.

The analysts note Australia, Canada, Germany, Switzerland, New Zealand and Norway all have price-to-income ratios that are above mid-2008 levels, and all except Germany are considered in overvalued territory. These are, in Standard Life’s view, the developed countries which are in most danger of a significant housing correction whenever the next global downturn occurs.

What of emerging markets? China, Malaysia, Hong Kong, Singapore, Brazil, Colombia and Peru have seen imbalances build as policy makers encourage credit to either households or developers in order to grow rapidly. The analysts observe, with growth now slowing, authorities have a different problem: preventing the housing market from bringing the rest of the economy undone.

Aluminium

Bell Potter observes that in the last three months, there has been a 62% collapse in Japanese aluminium premiums on the back of rising inventories, with spot rates now well below June quarter contract rates and average 2014 levels. Rising premiums were a feature of the industry from 2009 and, in part, mitigated weakness in London Metal Exchange prices. All up, the slump in premiums suggests downside earnings risk for producers and upside for fabricators. On that note, in a simple sense, Bell Potter considers this is a headwind for CSR‘s ((CSR)) earnings growth and a tailwind for Capral Aluminium‘s ((CAA)).

The broker estimates every US$100/t downward move in the premium stands to cost CSR around $13m in profit on an annualised FY16 basis. In contrast, such a move has scope to add $2m in earnings on an annualised basis for Capral.

Oz Builders

The latest Australian building approvals data was supportive of earnings momentum but Macquarie is increasingly concerned that some stocks are becoming fully valued. The broker continues to like James Hardie ((JHX)) as it is underpinned by exposure to a US housing recovery and offers useful Australian dollar-hedged exposure. CSR, meanwhile, has drifted recently and the broker envisages some opportunity in the stock.

Dulux Group ((DLX)) has been under pressure following its first half results but Macquarie believes this presents an opportunity to invest in a quality, defensive exposure. Caution extends to both Adelaide Brighton ((ABC)) and Boral ((BLD)). The broker believes there are risks to the pace of the engineering and infrastructure growth story and both stocks seem to be discounting some of this recovery prematurely.

Hospitals

There is little in recent data to challenge a belief that Healthscope ((HSO)) and Ramsay Health Care ((RHC)) will deliver double digit earnings growth for some years to come, in Macquarie’s opinion. The proportion of Australians with hospital insurance cover was flat at 47% but population growth has meant that the number of insured grew by an annualised 2.0% over the March quarter. Macquarie also observes net margins for health insurers were strong over the quarter at 4.4%, as premium growth moderated in line with claims growth. One trend which needs watching, in the broker’s opinion, is the switching rate which increased to 4.1% and represents a doubling versus five years ago, while churn is at its highest level since 2005.

General Insurance

March quarter data for general insurance indicates a weak outlook, in Macquarie’s opinion. Implied average rates of growth for the industry from the latest Australian Prudential Regulation Authority report were negative. Contributing to the overall weakness was a 10.7% average decline in commercial lines and 1.1% in average personal lines growth. Gross Written Premium (GWP) growth was 1.3% in the quarter while volume growth was 5.8%. Home insurance volumes were down 3.2% in the quarter while motor insurance volumes were up 7.1%.

Pricing concerns in this sector are growing, in Morgan Stanley’s view. This elevates the margin risks for Suncorp ((SUN)) and Insurance Australia Group ((IAG)) heading into FY16, the broker contends, and maintaining market share will be of crucial importance.

Credit Suisse observes, while there is expectations of a decline in GWP for Insurance Australia and Suncorp, the overall industry data suggests there is some potential for weak growth in the second half of the year. Still, Credit Suisse acknowledges that small increases in GWP do not support further margin expansion and holding, or improving margins, from current levels will require cost cutting. On this theme Suncorp appears better able than Insurance Australian or QBE Insurance ((QBE)) and remains Credit Suisse’s preferred pick in the sector.
 

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