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The Wrap: Health Insurance, A-REITs & NBN

Weekly Reports | Nov 10 2017

This story features MEDIBANK PRIVATE LIMITED, and other companies. For more info SHARE ANALYSIS: MPL

Weekly Broker Wrap: health insurance; technology; CPI; retail A-REITs; asset managers; and NBN.

-Most notable change in private health statistics is the high rate of product downgrading
-Published inflation unlikely to have captured all disinflationary effects
-Continued de-rating for retail A-REITs remains possible – Citi
-TPG Telecom, Telstra taking lower share of net additions on NBN

By Eva Brocklehurst

Health Insurance

APRA has produced its annual private health insurance statistics. Ord Minnett observes premium growth has been slowing across the industry since 2011, and the individuals that are covered have slowed to growth of 0.6% versus population growth of 1.6%. Medibank Private ((MPL)) experienced a -1.8% decline in individuals covered in 2017 versus a -2.6% decline in 2016.

Ord Minnett notes listed players saw lower claims cost growth than the average for the industry in 2017, at 2.6% for Medibank Private and 2.2% for nib Holdings ((NHF)). Medibank Private's and nib's gross margins are 16.5% and 16.0% respectively, versus the industry at 14.0%, although both are well behind Australian Unity at 18.0%. While industry revenue growth has been slowing overall growth rates are positive and Ord Minnett suggests government reforms could help ease affordability issues.

The risks, ahead of Medibank Private's AGM on November 13, appear to UBS to be modestly skewed to the upside, although challenges in the industry still point to longer-term downward pressure on margins. The company's market share is down to 26.9% and now level with BUPA. The most notable change deduced from the statistics is the high rate of product downgrading.

UBS notes hospital gross margins declined by =20 basis points in FY17, to 10.1%, although general gross margins continue to widen and were 70 basis points higher at 24.0%. Medibank Private has led the charge, with its general gross margins now at 30.2% and 10.1% higher over three years. Given the Australian Labor Party's past position on the rebate and natural therapies, UBS suggests monitoring the high margins in general policies over the year ahead.

The broker also notes four new funds were approved in FY17 and myOwn (listed on the Hong Kong Stock Exchange) is the most interesting addition. This insurer is backed by AIA, which recently acquired Comminsure from Commonwealth Bank ((CBA)). MyOwn could become a key beneficiary of AIA's 20-year life distribution agreement with Commonwealth Bank, UBS asserts.

Goldman Sachs observes gains in market share remain skewed to the smaller funds and nib. The broker notes Medibank Private has retained its leadership on gross margin for a second year running and therefore, in FY18, has the option to explore the reinvestment of some of this margin into customer initiatives, or reduce the premium rate increase for 2018.

Goldman Sachs maintains a Sell rating on Medibank Private and a Neutral rating for nib. The negative outlook for the local private health insurance industry is based on affordability headwinds that the broker expects are unlikely to fade and the recent reform package is not likely to be a circuit breaker.

Technology

Bell Potter updates its key Buy choices in the tech sector following recent movements. Adacel Technologies ((ADA)) moves to number one following a modest pull back in the share price and the broker expects positive guidance at the AGM later this month. There is an opportunity to buy a higher quality stock in Technology One ((TNE)) ahead of what is expected to be a strong earnings year, Bell Potter suggests.

Senetas ((SEN)), meanwhile, is expected to produce solid earnings as it rebounds in FY18, with further strong growth in FY19 as new products gaining traction in the global cyber security market. Empired ((EPD)) is also a key pick, despite a slightly disappointing first quarter update. The stock appears to Bell Potter to offer value on a low double-digit FY18 price/earnings ratio.

CPI

Macquarie notes CPI inflation has been overstated by around 0.25 percentage points because of a substitution bias, since the weightings were updated six years ago by the Australian Bureau of Statistics. Substitution bias means consumers typically buy relatively fewer things that are going up in price, and vice versa. The broker acknowledges the Reserve Bank has indicated, in isolation, this does not make a difference in terms of interpreting the trends in inflation.

However, Macquarie suggests it matters more at present, in terms of optics, as inflation rates are low. Monetary policy from the RBA works with long lags and a two-year outlook is important yet Macquarie argues the starting point for inflation also matters, particularly when attempting to gauge how much spare capacity exists in the economy.

In summary, the broker believes published inflation, even after the re-weighting, is unlikely to have captured all of the disinflationary effects in recent years, such as supermarket competition and a rising share of consumer purchases made online.

The broker argues that these relatively new features of inflation must be taken into account to the extent they are not fully captured in published inflation. Macquarie downgrades its inflation outlook on the back of the weaker September quarter data, the CPI re-weighting and an assessment that weak labour costs are likely to persist until productivity catches up.

Retail A-REITs

Citi suggests that "themes" such as e-commerce or the demise of large shopping centres, rather than fundamentals, are driving relative performance in Australian A-REITs. Taking the US REIT sector as a precedent, the broker notes US industrial growth has accelerated to record highs while US shopping malls have decelerated to pre-GFC levels.

The broker's recent research suggests a close relationship between A-REIT retail price/earnings multiples and sales growth and indicates a continued de-rating is possible for the retail A-REITs. Hence, the broker believes a preference for Goodman Group ((GMG)) over Westfield ((WFD)) could still work.

While Goodman has materially outperformed Westfield on a year rolling basis the broker is confident this can continue, as Goodman Group trades at a modest 7% price/earnings premium to Westfield and a -15% price/earnings discount to its US peers.

Asset Managers

Credit Suisse observes a strong start for global markets among asset managers. In Australian dollar terms, global markets are up around 7% in the financial year-to-date and this should benefit Australian domiciled managers that are in charge of global equities, such as Magellan Financial ((MFG)) and Platinum Asset Management ((PTM)).

Magellan Financial is upgraded to Outperform on a supportive valuation as the broker upgrades earnings estimates to account for higher market movements. The broker expects flows will slow in FY19 but should remains positive. The broker also upgrades Platinum Asset Management to Neutral.

FY19 earnings multiples are considered slightly stretched but a rebound in fund performance may lead to higher net flows and performance fees. The broker's earnings estimates are now ahead of consensus for FY18-19 and upgrades are expected. The broker also expects Janus Henderson ((JHG)) and BT Investment Management ((BTT)) are likely to benefit from buoyant global markets.

NBN

Deutsche Bank forecasts positive subscriber growth for all telcos over the five years on NBN although this implies Telstra ((TLS)) loses -2% market share while TPG Telecom ((TPM)) maintains share and Vocus Communications ((VOC)) gains 2% share. So far, there has been little change in market share on the NBN, with Telstra capturing 50% of subscribers.

However, the latest wholesale market report from the ACCC has suggested that while overall share has remained stable, TPG Telecom and Telstra took a lower share of net additions than in previous quarters.

Deutsche Bank's analysis signals, by region, that Telstra continues to win the majority of net additions across metro, outer metro and regional areas but its share of metro net additions continues to decline, to 39% in the September quarter versus 41% and 44% respectively for the previous two quarters. Optus and Vocus gain share in the metro, outer metro and regional areas. Others retain a small share but have increased by 1-2% across all three geographies.

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CHARTS

ADA CBA GMG JHG MFG MPL NHF PTM SEN TLS TNE

For more info SHARE ANALYSIS: ADA - ADACEL TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: JHG - JANUS HENDERSON GROUP PLC

For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED

For more info SHARE ANALYSIS: NHF - NIB HOLDINGS LIMITED

For more info SHARE ANALYSIS: PTM - PLATINUM ASSET MANAGEMENT LIMITED

For more info SHARE ANALYSIS: SEN - SENETAS CORPORATION LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED

For more info SHARE ANALYSIS: TNE - TECHNOLOGY ONE LIMITED