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The Wrap: Property, Health Insurers & Gaming

Weekly Reports | Jun 30 2017

This story features STOCKLAND, and other companies. For more info SHARE ANALYSIS: SGP

Weekly Broker Wrap: Residential developers; health insurers; strategies; gambling sector; and Class.

-Residential cycle turning less favourable, Citi expects dwelling price growth to moderate
-Morgan Stanley challenges view that government cannot afford to allow private health insurance participation to decline
-Economic growth and modest inflation helps ASX-listed equities linked to offshore markets
-Morgan Stanley cautious on gambling sector amid high valuations and declining returns on investment

 

By Eva Brocklehurst

Australian Residential Developers

Citi is increasingly of the view that the residential cycle is turning to less favourable and dwelling price growth will moderate. All major apartment markets have recorded reductions in prices over the past three months and Sydney's auction clearance rates, a leading indicator of price growth, have declined for four consecutive months.

Lending conditions are tightening in response to increased regulatory scrutiny and apartment settlement times and conversion times are extended, a sign, the broker believes, that conditions are affecting demand.

Given the changing residential landscape Citi prefers residential projects that are longer dated, and have embedded price gains to support margins, as well as product that is at relatively affordable prices to support volumes, with buyer profiles tilted to owner occupiers and domestic purchases. This supports a preference for Stockland ((SGP)) over Mirvac ((MGR)). Citi has a Buy rating for the former and a Sell rating for the latter.

Health Insurers

The perception that population growth and policy enticements are driving 2-3% volume growth per annum for health insurers is not the reality, Morgan Stanley contends. After a decade of around 3% annual growth, the broker forecasts participation in hospital insurance will be falling in FY18.

Lives under 60 years of age that are insured have turned negative in FY16 and are likely to continue to deteriorate. Worsening affordability, a squeeze on household cash flows and competition from public hospitals are underpinning this trend, while regulatory sticks are losing their sting.

Therefore, restoring the Medibank Private ((MPL)) franchise gets tougher, in the broker's opinion, and revenue growth of less than 2% is expected in FY17-19. For nib Holdings ((NHF)) Morgan Stanley suspects sustaining above-market growth will be more challenging, although expanding distribution is helping.

The broker also challenges the view that the government cannot afford to allow private health insurance participation to decline. Meaningful changes to the system carry large political risk and appear unlikely in the medium term.

Strategy

Global growth is around trend, Morgans observes, and increasingly positive for Europe and the US. Employment, corporate profits, consumer sentiment, industrial production and inflation all support an improved outlook. The broker notes economic growth and moderate inflation have helped the performance of ASX-listed equities that are linked to offshore markets.

Companies in the ASX200 currently source 66.3%, or 78% ex resources and healthcare, of their revenue from Australia. While this number indicates a large bias to the domestic market, around 29% have significant revenue streams outside of Australia.

The broker highlights ten stocks which it believes will benefit from offshore growth. They include Corporate Travel Management ((CTD)), Incitec Pivot ((IPL)), Domino's Pizza ((DMP)), Orora ((ORA)), Amcor ((AMC)), Macquarie Group ((MQG)), SpeedCast ((SDA)), BT Investment Management ((BTT)), ALS Ltd ((ALQ)) and Macquarie Atlas Roads ((MQA)).

A falling Australian dollar against a stronger US dollar and euro will benefit companies with US and European exposure and exporters linked to foreign earnings. A persistent lack of demand from the domestic economy is expected to weigh on growth and, in the short to medium term, without further rate reductions, Morgans expects the Australian dollar to drift lower.

Deutsche Bank observes demand for Australian commodities appears solid and Chinese growth continues to move forward. The broker's preferred lead indicator, Asian company earnings revisions, points to ongoing strength.

While resource share prices have been tied to commodities since 2004, historically, miner earnings and share prices do better than commodities, as value is created through volume growth and developing new assets. The broker envisages scope for this to happen again as capital expenditure has dropped sharply and, historically, this has been good for share prices. Rio Tinto ((RIO)) is the top pick in miners and Oil Search ((OSH)) in energy.

Gaming

High valuations and a declining return on investment capital suggest caution in the gambling sector and require greater selectivity, Morgan Stanley asserts. The environment has changed since FY16, when VIP revenues were driving solid growth at Australasian casinos. Now, the broker expects lower industry growth, slow recovery in VIP, and domestic pressures from increased competition, fewer concessions and weaker macro conditions.

Historically, changes in returns for gambling stocks have tended to correlate with share price performance. Thus, with returns trending lower amid high valuations and optimistic forecasts, the broker has a Cautious industry view.

Star Entertainment ((SGR)) is positioned for relative strength, as the broker expects higher utilisation as refurbishments are completed. Morgan Stanley has an Overweight rating on Star and believes the stock offers above-peer growth. Crown Resorts ((CWN)), on the other hand, is considered fairly valued and the broker has an Equal-weight rating.

Morgan Stanley considers the prospects for New Zealand's SkyCity Entertainment signal low growth earnings, driven by fading tailwinds in Auckland, as benefits from new concessions roll off and the disruption from capital works continues, while challenges in the company's Australian business continue.

Class

Class Ltd ((CL1)) provides cloud-based administration software for self-managed super funds in Australia and has an FY17 market share of 23%, via its flagship product Class Super. UBS observes consistent growth has been a feature of the business, with compound growth in a 2015-17 of 39% for sales and 54% for operating earnings (EBITDA).

The company continues to benefit from the growth in self managed super funds in Australia and the structural shift of administrators to the cloud from desktop and non-specialised software. The broker's forecasts imply FY18-21 compound growth in sales of 20% and operating earnings of 24%, highlighting the operating leverage in the business as it scales up. UBS initiates coverage with a Buy rating and $3.40 target.

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CHARTS

ALQ AMC CTD DMP IPL MGR MPL MQG NHF ORA RIO SGP SGR

For more info SHARE ANALYSIS: ALQ - ALS LIMITED

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For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED

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For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED

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For more info SHARE ANALYSIS: SGP - STOCKLAND

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