The Wrap: Insurance, Media, Office And NZ

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Weekly Broker Wrap: Insurance; media; office; and the NZ election.

-Competition still eroding market share of IAG and SUN
-Consolidation to be the main game across media sector
-Stronger Sydney office environment emerging
-Change in NZ government has implications for ASX200 stocks
 

By Eva Brocklehurst

Insurance

UBS suggests FY17 was a pivotal turning point for the profit momentum in general insurance. The broker argues, based on a deep dive into APRA statistics, that industry fundamentals are now more supportive of a recovery in margins, admittedly off a lower base.

While retaining key concerns about such specifics as management instability at QBE Insurance ((QBE)) and a questionable execution on strategy at Suncorp ((SUN)), the broker believes these are outweighed by valuation support and the improving profit cycle.

FY17 results from Youi signal the slowdown evident in the first half has continued, with gross written premium shrinking 1.7% in the second half. UBS observes, for the first time since Youi commenced operations in 2009, the major domestic insurers delivered better premium growth.

Moreover, in an environment where most insurers are pushing through rate increases, management's comments that the Australian market continues to experience soft pricing appear at odds. On balance, UBS expects the company will adopt a rational approach to lifting prices across personal lines.

While the threat from challenger brands appears to be slowing, competition across the broader market is still eroding share for Insurance Australia Group ((IAG)) and Suncorp, in Macquarie's view. Youi has also confirmed it will enter the NSW CTP market in FY18 and Macquarie understands that at least 20% of customers bundle CTP with home and motor insurance, making a highly profitable portion of the market inaccessible for insurers without a CTP offering.

Thus, entering the NSW CTP market, worth $2.4bn, should unlock customers for Youi. Macquarie suggests competition by many insurers on state and product specific grounds will continue to erode market share for the majors.

Bell Potter expects, based on international climate models, that a La Nina event may be reached by January 2018. This would imply wetter conditions in Australia. The next El Niño southern oscillation index report from the Bureau of Meteorology on September 26 should provide more guidance. A neutral summer should be good for insurers and a weak-to-moderate La Nina should be manageable, in the broker's opinion.

Bell Potter observes QBE would outperform IAG and Suncorp in any domestic catastrophe event, given its smaller Australian footprint. Based on the broker's analysis, cyclones & storms are more benign than hail and/or flood events on the east coast for the insurers. The former are easier to pre-empt whereas the latter are more inclined to affect densely populated areas.

Media

Morgan Stanley expects consolidation will be the main game across Australia's media industry in the wake of the government achieving Senate approval to relax ownership rules. Approval to remove the two-from-three and audience reach rules presents an opportunity to re-configure the media landscape.

The broker considers the key debate is whether, after any higher growth/better quality media companies emerge, the downside trajectory in earnings and shareholder value resumes. The broker envisages some opportunity to re-invent businesses but still remains a structural bear on traditional media stocks.

The changes are considered to be overdue and arguably too little too late. Still, consolidation would be better than the status quo, in the broker's opinion. Morgan Stanley also expects cost savings to be the primary driver of growth in earnings per share and free cash flow in most M&A deals.

The majority are expected to be share-based offers, commonly with little or no premium. This is because the rate of change in technology and consumer behaviour is accelerating and this makes it difficult to assess relative value. Some of the best opportunities to create value may come from selling assets rather than buying such as the case with the ex-Domain assets of Fairfax Media ((FXJ)).

Office

Citi believes the near-term outlook for the Sydney office market is strong, given accelerating rents, falling incentives and the potential for growth in re-leasing spreads. The broker believes rental growth is more influenced by demand than supply and according to channel checks this is being supported by expansion of co-working tenants, pharmaceutical tenants centralising in the CBD and second-tier legal firms.

A stronger office environment has started to be reflected in operating metrics, with improving comparable net operating income growth and portfolio occupancy. Citi expects this to continue to improve as expiring leases are marked to market. The broker believes Investa Office ((IOF)) guidance for FY18 may prove to be conservative, given the stronger Sydney office conditions.

Office stocks have been sold off recently and Citi notes Investa Office was the worst performer. The broker prefers this stock over Dexus Property ((DXS)), given its cheaper valuation and potential upside to guidance, as well as a high corporate appeal.

NZ Election

A change in the New Zealand government could trigger a substantial change in policies. The election on September 23 remains a close call. A change in policies has implications for ASX200 stocks, in Morgan Stanley's opinion. NZ Labour, if it wins government, is proposing material changes to migration, taxation and housing.

The proposals on the cards include quarantining negative gearing deductions, extending capital gains tax on investor housing out to assets held for less than five years, banning foreign investment in established property and slowing migration.

Morgan Stanley estimates 43 ASX200 stocks carry meaningful exposure to NZ operations including the four major banks. Of the banks ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) carry the largest exposure. For Australian industrials it is Harvey Norman ((HVN)), Corporate Travel ((CTD)), Downer EDI ((DOW)), Woolworths ((WOW)), Kathmandu ((KMD)), Insurance Australia Group, Fletcher Building ((FBU)) and Fairfax which stand out with meaningful NZ revenues.

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