Weekly Broker Wrap: Oz Equities, Infrastructure, Hospitals And Electricity

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Equities & Trump ascendancy; returns in infrastructure; coal-fired power stations; variations in hospital revenue growth; metro TV audience share.

-Near-term outlook uncertain but Trump win suggests shift to fiscal vs monetary policy
-Further downside for infrastructure sector if bond yields continue to rise
-Base load capacity closures could push wholesale electricity prices up sharply by 2025
-Ramsay Health Care seen bucking the general decline in growth in hospital procedures
 

By Eva Brocklehurst

Trump And Oz Equities

A lack of specifics in the policies of US president-elect, Donald Trump, signal the near-term outlook for financial markets is uncertain. Credit Suisse analysts observe previous periods of uncertainty have resulted in “risk off” markets, with 5-10% declines in the S&P 500 in the near term.

The policies that are known could support higher bond yields in the medium term, if passed by Congress. US companies will be encouraged to invest more in the US and save less. In the near term, Credit Suisse suspects the environment is likely to be relatively positive for Australian cash generating companies. This includes BHP Billiton ((BHP)), Boral ((BLD)) and Vocus Communication ((VOC)).

Credit Suisse believes investors should position for a more inflationary environment and be cautious about highly valued, highly leveraged bond proxies. Higher trade barriers should be positive for those companies with US operations.

Deutsche Bank also expects greater uncertainty in the US, given the lack of detail around policy positions. Equities are expected to fall further and the broker's European team expects 5-10% downside from current levels. Australia is already 5% off its recent peak and the broker envisages further downside contained at 5%.

The rising risk aversion should boost the US dollar. A strong US dollar tends to weigh on commodity prices which could affect resource stocks but the broker expects gold prices to be well supported because of the uncertainty.

Deutsche Bank suspects a Trump presidency could mean a shift in responsibility to fiscal rather than monetary policy, and higher interest rates that result would help financials. Fiscal stimulus targeting construction would support commodities demand but a retreat from global trade relationships could hurt the Asian region and Australian resource stocks by extension.

The broker believes gold and yield exposure are the best places at present. Amongst gold stocks the analysts have Buy ratings on Evolution Mining ((EVN)), Alacer Gold ((AQG)) and Dacian Gold ((DCN)). Amongst yield stocks the analysts have Buy ratings on Sydney Airport ((SYD)), Macquarie Atlas ((MQA)) and APA Group ((APA)).

Infrastructure

Deutsche Bank has gone back to 2008 and re-examined what returns the infrastructure sector has offered. The required return spread to bond rate has reduced over this period of time but appears to have expanded in the last three months back to the average since 2010, while bond rates remain around 100-150 basis points lower than average.

If bond yields continue to rise, the broker envisages further downside in the infrastructure sector. Deutsche Bank adjusts its required distribution yield across the sector to 5% from 4%, which in turn means price targets are adjusted lower. Given the movement in bonds, the broker adjusts price targets for Sydney Airport, Macquarie Atlas and Transurban ((TCL)) down by 6-11%.

The broker notes that Australian internal rates of return (IRR) for infrastructure stocks are still low relative to other returns from the sector in Asia currently on offer, despite a similar cost of equity being applied in valuations. The average cost of equity being applied across the sector is 9.2% and the average IRR on offer is 11.7%.

Electricity

Ord Minnett takes a broad look at the potential impact of base-load capacity closures on wholesale electricity prices. For the purposes of the analysis the broker assumes Hazelwood closes in 2017, Yallourn in 2019, Liddell in 2022 and Loy Yang B in 2024. These withdrawals will remove around 39TWh of annual generating capacity.

Based on the broker's modelling, the total impact of these closures would mean wholesale prices in 2025 would be 40% higher in NSW and Victoria, 30% higher in Tasmania and 10-20% higher in Queensland and South Australia. Price volatility would also increase materially, the broker suspects, which would likely raise hedging costs to the detriment of pure retailers.

The main beneficiaries of the plant closures are likely to be the vertically integrated utilities, and particularly AGL Energy ((AGL)). The broker estimates that wholesale prices in NSW and Victoria would consistently exceed $100/MWh if all four of these power plants are shut down. More gas-fired generation would be used but Ord Minnett has not included the potential impact on gas prices in its analysis.

Private Hospitals

Differences in exposure to surgical specialties and certain procedures could be contributing to apparent variations in hospital revenue growth for listed operators such as Ramsay Health Care ((RHC)) and Healthscope ((HSO)).

To determine if this could be the reason for the disparity in management commentary regarding recent performance, Credit Suisse reviews surgical volume growth trends as captured in the Medicare Benefits Schedule data.

In the broker's view Ramsay's apparent ability to buck the general decline in industry growth is because of its relatively lower exposure to those procedures which have been most affected.

On a proportional basis, the broker suggests it is feasible that Ramsay has a large number of tertiary type, co-located facilities conducting a relatively higher percentage of more complex cases. For Healthscope the opposite would then be true. Credit Suisse retains Neutral ratings on both stocks.

Oz TV

Metro TV audiences for the three commercial stations declined by an aggregate 3% in October. Declines continue to be more pronounced in the younger demographics. Nine Entertainment ((NEC)) took the top spot in October with a 37.9% free-to-air share. Seven West Media ((SWM)) experienced a dip in its share to 37.2%. Ten Network ((TEN)) retained a relatively static share of 24.9%.

While acknowledging it is early days – there is always a lag between rating share and revenue share – UBS suspects the performance of Seven's new programming, launched after the Olympics, is slightly below expectations. On the other hand, if Nine Entertainment can sustain current share momentum then this may partly offset weaker market growth overall.

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