The Wrap: Aldi, Dairy, Packaging & Insurers

Weekly Reports | Sep 08 2017

Weekly Broker Wrap: Aldi; dairy; Zenitas Healthcare; paper & packaging; general insurers.

-Aldi making life difficult for incumbent supermarkets
-Bell Potter speculates on a merger of MGC and BGA
-Strong growth prospects for Zenitas Healthcare
-Macquarie retains solid outlook for paper & packaging sector
-But envisages margin pressures for general insurers

By Eva Brocklehurst

Aldi

Morgan Stanley has gained greater conviction in its Underweight views on Woolworths ((WOW)) and Wesfarmers ((WES)), especially as they relate to the respective supermarket businesses. This view is underscored by the belief that Aldi's 2.0 stores will be a game-changer, as they will allocate significantly more space to fresh products, to 25% from 15%.

Margins tend to be higher in fresh food, which means the success of Aldi's refurbishment provides more dollars to invest in price. To date, Aldi has completed 54 refurbishments and plans to refurbish its entire store chain by 2020. Based on the broker's analysis the impact of refurbishment provides 25-30 basis points of share gains to Aldi per year to FY20. Morgan Stanley suspects life will become more difficult for the supermarkets.

Dairy

Bell Potter speculates on a merger between MG Unit Trust (Murray Goulburn) ((MGC)) and Bega Cheese ((BGA)). Murray Goulburn has announced a strategic review which would encompass its corporate structure. The company has stated it has received a number of approaches and has asked its advisor to seek more detailed proposals.

To the broker, this is a sign the company is willing to entertain a sale of the business and commence what could be the largest consolidation event in dairy history, since the 3-way bidding war for Warrnambool Cheese & Butter in 2013. Bell Potter suspects Bega Cheese would be in the mix to acquire Murray Goulburn, or part thereof.

At a high level, the broker envisages potential for material synergies in combining the two. Even if Bega Cheese was not able to secure the entire business, the broker envisages scope for asset and brand disposals if any of the other large domestic processors should acquire Murray Goulburn, or if Murray Goulburn were to seek selective asset disposals.

Zenitas Healthcare

Zenitas Healthcare ((ZNT)) has surprised the market with a strong assessment of organic growth prospects. Underlying FY17 earnings were ahead of prospectus, when eliminating the high-risk and low-margin discontinued elements of the Caring Choice business.


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