The Wrap: Banks, Health Insurance And IVF

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Weekly Broker Wrap: Banks; health insurers and private hospitals; IVF; Alliance Aviation; OpenDNA.

-Banks' benign credit experience unlikely to be sustained longer term
-Declining trends in private health insurance continue
-Growth in full-service IVF market remains subdued
-Alliance Aviation free cash flow expected to increase significantly
-Broad applications envisaged for OpenDNA's technology

By Eva Brocklehurst

Banks

Banks delivered solid results in the June quarter, underpinned by improving margins, low impairment expenses and capital generation. Macquarie observes they were able to crystallise the benefits of mortgage re-pricing because of an improved competitive and funding cost environment. Yet, the broker suspects the benign credit experience which supported the results is likely to be difficult to sustain in the longer term.

ANZ Bank ((ANZ)) has underlying revenue trends which appear weaker than its peers but the broker explains this by the bank's underweight position relative to strongly performing domestic franchises and the optimisation program for its institutional bank.

Meanwhile, Commonwealth Bank's ((CBA)) result was underpinned by improving margin trends, as it benefited from mortgage re-pricing and improved funding costs. Expense growth was elevated for National Australia Bank ((NAB)) but the broker expects NAB to manage its cost base better in FY18.

While Westpac ((WBC)) doesn't provide a quarterly update, given its overweight position to investor mortgages, and having been affected by higher funding costs in the prior half, second half revenue should be favourable.

Macquarie observes the monthly margin trend for Bendigo & Adelaide Bank ((BEN)) was a highlight of the FY17 result. The broker expects the bank to sacrifice some of its margin uplift for balance sheet growth. Nevertheless, trends in both Bendigo & Adelaide and Bank of Queensland ((BOQ)) are considered supportive.

Health Insurers And Private Hospitals

Benefits paid to private hospitals in the June quarter slowed to growth of 2.6%, affected by the impact of the timing of Easter. There was a positive Easter effect in the March quarter, and UBS believes the six months to end June is a more balanced measure, revealing 5.2% growth. As of the June quarter, benefits paid for private patients in public hospitals increased by 2.6%, above the growth seen in private hospitals.

Meanwhile, APRA data shows private health insurance hospital cover declined -0.3% in the June quarter, with the proportion of the population holding hospital cover slipping slightly to 46.1%. The skew towards older members continues, with those aged over 65 growing 3.6% and members under 65 years falling -0.8%. UBS continues to believe the long-term fundamentals are broadly unchanged and, at FY18, sector comparables are materially lower.

Credit Suisse believes the data indicates a return to average growth that is below the longer-term for private hospital episodes. With a number of structural changes potentially leading to lower private hospital volume growth, the broker does not anticipate any near-term recovery to historical highs. An ongoing decline in private health insurance participation should only exacerbate the more recent trend, as the broker observes exits are not confined to younger adults.

Credit Suisse notes net margins in the private health insurance industry contracted -11 basis points year on year in the June quarter to 5.13%. The number of net new policies in the 12 months to June was down -17% on the March quarter and down -26% from a year ago. Insured growth was strongest in the 70-74 year-old category while the number of 15-34 year-olds with health insurance declined.

Since the 65-plus age group accounts for a substantial portion of industry benefits, the continuing trend of young people dropping out of the system highlights for the broker the difficulties the industry is facing in terms of affordability and value proposition.

IVF

Total Australian IVF cycles grew 3.9% in the second half of FY17, cycling comparable growth of 6.3% in the prior corresponding half. UBS notes growth was weighted towards Queensland, where bulk-bill operators stimulated significant new volumes. Industry comparables are expected to become significantly easier in the first half of FY18.

The data remain supportive of the broker's view that growth in the full-service market, dominated by Virtus Health ((VRT)) and Monash IVF ((MVF)) and unlisted provider Genea, is subdued. The listed providers continue to target a long-run rate of 3-4% annual cycle growth and the broker expects a rebound to around 5% in FY18 after the 0.2% recorded in FY17.

Alliance Aviation

Alliance Aviation ((AQZ)) produced a solid FY17 result, with Wilsons observing an 11% increase in flight hours that translated to operating earnings (EBITDA) increases of 14%. Further debt reduction enabled a 50% increase in the dividend.

Free cash flow will increase significantly from the second half of FY18, aided by the completion of payments for the Austrian Airlines fleet, that will enable a material increase in the dividend paid-out ratio. Wilsons believes the share price remains undervalued and retains a Buy rating with a $1.29 target.

OpenDNA

OpenDNA ((OPN)) is an artificial intelligence system combining machine learning, neural networks and natural language processing to build detailed psychographic and behavioural maps for users and customers. The company measures user activity on websites and apps in real-time, analysing behaviour as they interact with content.

TMT Analytics envisages broad applications for the data analytics markets as well. For example, the company has signed an MOU with US-based Data Analytics and the business intelligence platform Looker to market its technology to an extensive client base. Open DNA listed on ASX in November 2016. TMT Analytics has a Speculative Buy rating.

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