Weekly Reports | Jun 24 2016
This story features PLATINUM ASSET MANAGEMENT LIMITED, and other companies. For more info SHARE ANALYSIS: PTM
-Growth spurt expected in managed accounts
-Are health care stock valuations more reasonable?
-Equity correction restores overall value, not relative
-GI has fewer constraints, distractions versus banks
By Eva Brocklehurst
Morgan Stanley believes the business models of wealth and asset managers face disruption from managed accounts/separately managed accounts. Managed accounts are considered better at cornering customers because they meet more of their needs than managed funds. This drives higher flows and market share towards progressive industry players.
The broker contends that managed account business models centre on the retail customer not the product manufacturer and this is driving disruption. A tipping point is signalled between 2015-20, with managed accounts expected to grow funds under administration at a 35% compound rate, to $60bn, in which case they could deliver around 75% of industry flows.
Winners in this tussle are considered more likely to be the wealth managers, as opposed to asset managers, as financial planners seek to deliver more value to customers. While progressive asset managers are expected to grow earnings, Morgan Stanley envisages headwinds for Platinum Asset Management ((PTM)), downgrading the stock to Underweight from Equal-weight.
Among wealth managers IOOF ((IFL)) is in a fragile position, the broker contends, although the risks are largely factored into the price. BT Asset Management ((BTT)), on the other hand, is considered well placed for growth.
The renewal of enterprise bargaining agreements (EBAs) for nurses in Victoria should mean that accelerating wage inflation is the largest single cost for hospital operators until FY20, Morgan Stanley contends.
The broker notes the structure of salary increases is intended to accelerate Victorian public sector nurse wages growth to bring them into line with NSW peers by 2020. Public sector wage have served as state-wide benchmarks for private hospital wage increases in the past.
Ramsay Health Care ((RHC)) and Healthscope ((HSO)) are both due to renew their Victorian EBAs this year. The broker's scenarios suggest valuation downside of around 4% for Healthscope and less than 1% for Ramsay.
While incrementally negative, given the agreements would run over the next five years, a signing of the proposed EBAs would create certainty on a significant portion of employment costs for the hospitals, Morgan Stanley acknowledges. The broker envisages two possible offsets to the impact to earnings. These are a continuation of the lowering of the skill mix and greater funding for nurses from private health funds.
Credit Suisse observes multiples for Australian listed health care companies have re-rated over the past few months. While are number are trading at levels ahead of historical averages, valuations appear more reasonable to the broker on a relative basis, given the commensurate re-rating of industrial stocks.
The broker assesses stock-specific multiples and, overall, finds CSL, Cochlear ((COH)), Sonic Healthcare ((SHL)) and Sigma Pharmaceuticals ((SIP)) are expensive relative to their respective global sub-sectors.
Ansell ((ANN)), Australian Pharmaceutical Industries ((API)) and ResMed ((RMD)) appear inexpensive, while Healthscope, Primary Health Care ((PRY)) and Ramsay are considered fair value. The broker's preferred exposures remain Ramsay, where fundamentals are intact for medium to longer term growth, and ResMed, which is underpinned by a strong market position.
ASX20 stocks have underperformed over recent years and Macquarie suspects this will not end until relative earnings growth and the return on capital differentials begins to stabilise, and ultimately improve. If these stocks were to test the relative performance low seen in 2000-07 then the broker suggests they need to fall another 15%. The deterioration in fundamentals this time, nonetheless, signals this may not be the current floor.
The stocks, or mega caps as the broker calls them, are no longer high relative return-on-equity stocks and within this group the only ones that are substantially over earning are the banks. Structurally, Macquarie considers these stocks are de-rating candidates, as long as relative growth and return on capital continues to decline.
CSL is considered most likely to remain an under-earner while Transurban ((TCL)), Westfield ((WFD)) and Scentre Group ((SCG)) are considered most likely to normalise back to earnings weightings, rather than retain relative growth status, outside of further declines.
UBS observes the equity correction recently has restored some value to the market overall but has done little to restore relative value within, given already expensive defensive sectors held up somewhat better than the rest.
The rising risk aversion is exacerbating stretched valuations, in the broker's opinion. Defensive yield segments at the same time, best represented by the real estate investment trusts (AREITs), are still looking relatively expensive, but benefit from very low bond yields.
UBS remains underweight on mining, AREITs and consumer staples, neutral on energy stocks and overweight on banks. The broker continues to hold selective exposure to both US dollar earners and domestic cyclicals.
Bell Potter believes the general insurance sector is fundamentally sound and favours the sector over the banks for the next 6-12 months, based on fewer operational distractions and regulatory constraints.
The broker believes the environment for general insurers has significantly improved in the last two quarters, as they begin to increase rates to offset claims inflation. In terms of margins, the downward trend in the banking sector could still eventuate, the broker maintains. In contrast, insurer underwriting and insurance margins have been trending higher since 2012.
Increasing loss buffers are also in stark contrast to the banks' decreasing provisions. Moreover, the compulsory nature of the industry and lower sensitivity to GDP swings suggests to Bell Potter the sector is more able to withstand any future global crises, including fall-out from a potential exit of Britain from the EU.
The share price of Breville Group ((BRG)) has eased off recent highs and Bell Potter considers it timely to review the company's strategy. The broker reduces inventory/sales assumptions and strengthens medium to long-term growth estimates. The net effect is a 1% increase to FY18 estimates and the target rises to $8.25 from $7.70. A Buy rating is retained.
The broker considers a more efficient inventory position should serve as a leading indicator and first signs this is happening are expected in the first half of FY17. Ultimately, the broker expects earnings growth will accelerate as the company concludes its transition into a global, innovation-driven business. Other prongs in the company's strategy include selling more effectively in existing geographies as well as obtaining control of the global product flow from manufacture to purchase.
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.
For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: ANN - ANSELL LIMITED
For more info SHARE ANALYSIS: API - AUSTRALIAN PHARMACEUTICAL INDUSTRIES LIMITED
For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED
For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED
For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED
For more info SHARE ANALYSIS: OML - OOH!MEDIA LIMITED
For more info SHARE ANALYSIS: PTM - PLATINUM ASSET MANAGEMENT LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: SCG - SCENTRE GROUP
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED