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Weekly Broker Wrap: Banks, General Insurance, AirXpanders, Pokies And Tourism

Weekly Reports | Mar 11 2016

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

-Bell Potter dismisses bank stress talk
-Youi gains scale, insurer margins pressure
-AXP at the door of US potential
-Oz slot manufacturers well placed
-Chinese visitors to Oz accelerate

 

By Eva Brocklehurst

Banks

Bell Potter suggests some of the negative speculation surrounding the value of bank stocks is simply more posturing than substance. Australia's GDP remains strong, spreads are rising, costs are being managed and asset quality is stable.

The broker's analysis of movements in off-balance-sheet liabilities, as a leading indicator of stress, suggests stable asset quality trends for some time to come. Recent raising of capital suggests the Australian banks are now in the top quartile of their global peer group.

Bell Potter observes bank sector dividends have gone backward on only three occasions in the last 37 years. This includes following the 1987 crash, the early 1990's recession and the 2007/8 Global Financial Crisis. Reasons for this occurring included poor credit risk practices in commercial lending and unique economic events such as external liquidity shocks

This is not the case now and the banks have improved their liquidity positions since the GFC. Bell Potter's forecasts are unchanged. As a result of very strong share price performance in the past month, Commonwealth Bank ((CBA)) is downgraded to Hold from Buy.

The broker retains Hold ratings for Bendigo & Adelaide ((BEN)), Bank of Queensland ((BOQ)) and ANZ Banking Group ((ANZ)). Buy ratings are retained for National Australia Bank ((NAB)), Westpac Banking Corp ((WBC)), Macquarie Group ((MQG)) and Suncorp ((SUN)).

General Insurance

Youi is starting to gain scale in the Australian market, Macquarie observes, with the general insurance market consolidated, rational and profitable. Nevertheless, cost cutting strategies are required to defend profitability.

The market's growth has slowed and margins are under pressure. Macquarie notes the financial results from Youi suggest it has now captured 2.6% of the addressable market in home and personal motor insurance.

Youi achieved 22.9% growth in gross written premium (GWP) in the first half. Macquarie continues to forecast further loss of market share by the listed Australian insurers to banks and challenger brands.

Despite a bottoming in GWP growth in the market the broker observes the deterioration in margins has not stabilised. Quarterly data from the Insurance Council of Australia points to negative trajectory for premium spending on home and motor insurance.

Macquarie remains cautious about personal lines insurance outlook and notes upper corporate commercial carriers expect premium spending in this market to contract further in 2016. As a result, the broker reduces growth forecasts for Insurance Australia Group ((IAG)) and Suncorp ((SUN)).

Macquarie has also downgraded QBE Insurance ((QBE)) to Neutral from Outperform as sector conditions remain challenging. The broker acknowledges the stock could trade higher with supportive FX tailwinds and a rise in US/global interest rate expectations.

AirXpanders Inc

AirXpanders ((AXP)) offers an investment opportunity, Moelis believes, with a market leading product and a simple path to commercialisation. The company reported a net loss of US$11.2m for FY15. A favourable industry thematic supports a growing market while Australian success so far has opened the door to the US potential.

US FDA approval is expected in the June quarter. Moelis considers the valuation assumptions underpinning the stock are undemanding and its base case provides significant upside opportunity. Moelis retains a Buy rating and $1.95 target.

AirXpanders manufactures and distributes AeroForm, a medical device used in breast reconstruction after cancer which has been approved for sale in the Australian market.

Casinos

Following a survey of the US slot machine market, Ord Minnett has concluded that Australian manufacturers, Aristocrat Leisure ((ALL)) and Ainsworth Gaming Technology ((AGI)) are well positioned.

Aristocrat is the main beneficiary, with 66% of participants in the survey suggesting that it is the top performing manufacturer. The broker also expects Ainsworth will grow sales as its profile builds. Ord Minnett reiterates an Accumulate rating for both stocks, with a target of $10.75 for Aristocrat and $3.25 for Ainsworth.

Tourism

The annual growth rate of international visitors to Australia in December was 7.9% while visitor expenditure in the month grew 17.7% annualised. Bell Potter also notes international airline activity signals both outbound and inbound passengers in December grew 5.4%. In the light of the data the broker takes a look at where Chinese visitors are spending time in Australia.

The data indicates Sydney and Melbourne remain the most popular cities. Chinese visitors to Melbourne have accelerated by 27% in the last 12 months, while Sydney is also up 20%. Numbers to the Gold Coast and tropical north Queensland suggest a recovery is under way over the past two years after a weak 2013.

Chinese visitor numbers to these tourist areas are more volatile than in the larger cities as, given the smaller visitor base, large swings can have a large impact in percentage terms. The broker also points to the fact that airline capacity to these destinations has been subject to material change and this is a key driver of numbers.
 

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CHARTS

AGI ALL ANZ AXP BEN BOQ CBA IAG MQG NAB QBE SUN WBC

For more info SHARE ANALYSIS: AGI - AINSWORTH GAME TECHNOLOGY LIMITED

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: AXP - AXP ENERGY LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION