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Weekly Broker Wrap: Hospitals, Housing And Consumer Electronics

Weekly Reports | Oct 21 2016

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

Prostheses reforms; housing activity; CBA Business Sales Indicator; equity strategy post Brexit; launch of Playstation VR.

-Minimal impact likely from initial federal reforms on prostheses pricing
-Morgan Stanley expects slowing housing activity has implications for ASX200
-Economy-wide spending strengthens over past three months
-VR/AR to contribute meaningfully to electronics sales

 

By Eva Brocklehurst

Hospitals

The Australian federal government will reduce the amount spent on prostheses by legislating for an immediate 10% cut to the list prices for cardiac and intra-ocular devices and a 7.5% cut to hip and knee joints. A new price referencing mechanism is expected to be applied to the list using global reference prices that are as much as 50% below list rates. UBS suspects the magnitude of the savings sought may prove difficult to achieve.

The broker notes private hospitals are most exposed to the cuts and provision of hips, knees and cardiac prostheses is more likely to be concentrated in that sector. The impact at this stage is on sentiment, the broker believes. Both Ramsay Health Care ((RHC)) and Healthscope ((HSO)) have played down the impact and suggest their rebates are aligned with costs and modest margin would likely be retained post these reforms.

UBS notes Life Healthcare ((LHC)) is around 35% exposed to prostheses list sales through its spinal specialisation but this area is not targeted in the reforms. The broker envisages upside for Life Healthcare as a disruptor although the extent of this is unclear.

Credit Suisse envisages a minor impact on Ramsay Health Care and Healthscope from these reforms and they should be immaterial to earnings in FY17. The government has flagged further reforms, including the potential move to a price disclosure arrangement and, therefore, additional longer-dated rebate risk exists.

These initial reforms are not a surprise to Citi either and the broker also expects the impact should be minimal for Ramsay Health Care and even less for Healthscope. The broker agrees there may be greater impact on the future of hospital profits from prostheses should they be obliged to divulge more information on costs.

Citi expects Ramsay's reduction in consumable expenses over the next 3-4 years will more than compensate for the potential loss in prostheses profits. The broker continues to prefer Healthscope over Ramsay because of its concentrated exposure to Australia.

Housing

Peak housing conditions have passed and Morgan Stanley believes consensus estimates suggest the market is too complacent. The broker's indicators highlight a growing risk from credit rationing and apartment settlements. Weak fundamentals limit the scope to buffer the cycle.

A slowing in housing activity in 2017 has implications for ASX200 stocks and related sectors. The broker believes investors should maintain caution in regard to building materials and transaction-linked stocks. Retail, banks and developers appear to face longer-dated risks.

Transaction volumes are already declining for REA Group ((REA)) and Fairfax Media ((FXJ)) but these remain attractive to the broker relative to other media stocks. Mirvac ((MGR)) has risks in terms of its project delivery and length of settlement timeframe while the broker envisages Stockland ((SGP)) is less affected by the slowdown, given a mid-cycle outlook for detached housing.

DuluxGroup ((DLX)), CSR ((CSR)) and Boral ((BLD)) are considered to be the most exposed building stocks. Dulux is exposed to repair and renovation volumes while the other two are the most exposed to new construction. Harvey Norman ((HVN)) is considered to be the most exposed retailer. Within the builders, the broker envisages less risk for Fletcher Building ((FBU)) and James Hardie ((JHX)) because of large contributions from offshore.

For the banks the broker envisages the risk that are emerging will take time, and while a hard landing would be a negative this is a low risk at this stage. Consumer risks are longer-dated and linked to the eventual impact on labour force and consumption, likely to be an issue for the first half of FY18, the broker believes.

Spending

The latest Business Sales Indicator from Commonwealth Bank has matched its strongest gain in 17 months, recording a 0.7% increase in trend terms for September. Economy-wide spending has strengthened over the last three months. Spending in 16 of 19 industry sectors rose in September with the strongest gains recorded in amusement & entertainment followed by hotels & motels. The biggest fall in spending was in business services.

In annual terms, four of the nineteen industry sectors contracted: airlines, transport, business services and vehicles. Sectors with the strongest annual growth include wholesale distributors and manufacturers, mail/telephone order providers and hotels & motels. NSW experienced the strongest growth in the month. The ACT and Northern Territory recorded a fall in sales growth over the month and spending was down 0.2% and 0.3% respectively.

Equity Strategy

Deutsche Bank observes the UK pound is down almost 10% versus the Australian dollar over the past month and more weakness is expected. UK-exposed Australian stocks sold off after the referendum on Brexit but have largely ignored the more recent sell-off in the pound. Valuations do not appear attractive to Deutsche Bank and the broker retains a cautious view.

Consumer Electronics

Citi expects the launch of Playstation VR in Australia will be a catalyst for virtual reality (VR) to meaningfully contribute to sales growth for electronics retailers. This category is expected to contribute 100 basis points to JB Hi-Fi ((JBH)) sales growth in FY18. The broker notes with interest that Harvey Norman is not including VR products in ranges at this stage.

Citi expects the global VR and augmented reality (AR) market to reach US$80bn by 2020 and US$569bn by 2025, including hardware, content, services and AR commerce. AR technology is expected to erode the smartphone market and 48% of consumers are forecast to replace smartphones with AR devices between 2025 and 2035.
 

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CHARTS

BLD CSR HVN JBH JHX MGR REA RHC SGP

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

For more info SHARE ANALYSIS: CSR - CSR LIMITED

For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED

For more info SHARE ANALYSIS: SGP - STOCKLAND