The Wrap: Health, Retail, Super Advice & Asia

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

Weekly Broker Wrap: private health; banks & retail exposure; retailers; retail A-REITs; Amazon; superannuation advice; Asia.

-Private health insurance coverage continues to decline putting pressure on private hospital operators
-Little in the way of good news for Australian apparel retailers
-Reduced profitability for retail tenants factored into retail A-REITs
-Success at Amazon Marketplace initially expected at the expense of eBay
-Asian construction boom supporting strong inflows of manufacturing investment
 

By Eva Brocklehurst

Private Health

APRA has published September data for the private health industry, with 4.3% growth in insurance premiums noted in the year to September and 3.7% growth in benefits paid. Industry margins were 14.4% and at the highest level since 2011. Deutsche Bank notes the offset for higher margins and strong premium growth is that customer numbers remains soft.

The number of hospital-only persons insured has fallen to 11.3m while total persons insured is up 40 basis points to 13.5m. Given strong population growth, the penetration rate slipped to 54.7% in the September quarter. There remains a skew towards older members in private health insurance, with those aged over 65 growing 3.5% while members under 65 down -0.9%.

Opinions among brokers regarding recently announced reforms to help affordability vary from negative to marginally positive. UBS continues to envisage long-term fundamentals are broadly unchanged and volumes are not expected to return to trend inside 12 months in the private hospitals sector.

Citi forecasts first half growth in Australian hospital business of 7% for Ramsay Health Care ((RHC)) and 4% for Healthscope ((HSO)) and suspects, as the number of people with private health insurance is declining, pressure on revenue for private hospital operators will continue.

Macquarie believes the hospital sector is already factoring in a lower volume growth environment, amid headwinds from reduced private health insurance participation as well as weaker utilisation. The broker retains an Outperform rating for Ramsay Health Care and Neutral for Healthscope.

Bell Potter notes lower hospital utilisation is generally good for the operating margins of insurers but believes, in the current environment, it remains very tough to grow policy holder bases. The offset to low claims inflation for the consumer should be the thin premium increases in April 2018. The broker considers Medibank Private ((MPL)) is better value in this segment at present. Nib ((NHF)) has been a strong performer but the broker does not consider its valuation enough to justify current levels.

Credit Suisse does not believe reforms will alter current affordability issues: as long as private health insurance premiums inflate at a rate faster than wages growth, and with an alternative service provider in the form of the public hospital system, the decline in participation will continue along with lower levels of private hospital utilisation.

Banks & Retail Exposure

Credit Suisse benchmarks major bank exposures to retail trade through the prism of increased online retailing. Exposure levels range from 1.1% for Commonwealth Bank ((CBA)) to 2.3% for ANZ Bank ((ANZ)). Broadly half of this is in the sub-sector of personal & household goods.

National Australia Bank ((NAB)) has stated that its exposure to personal & household goods is dominated by pharmacy retailers followed by apparel and furniture & homewares. Retail trade asset quality trends were mixed in the second half of FY17.

Commonwealth Bank reported a higher troublesome & impaired ratio at 2.2% versus 1.9% in the first half, while National Australia Bank reported a lower impaired & past-due ratio of 0.79% versus 0.98%. Westpac ((WBC)) reported an increased stress ratio of 3.02% versus 2.51% but a lower impaired ratio of 0.31% versus 0.40%.

Retailers

Macquarie analyses the most recent income statements from apparel & footwear retailers, finding two thirds reported negative top-line growth, suggesting profitability has been trending down over the last few years and remains challenging. While the prospect of closing underperforming stores should lift near-term performance in some networks, the broker envisages little in the way of good news for Australian apparel retailers.

In the last few years headwinds in the form of a lower Australian dollar have likely affected gross margins, given the relative inability to pass this cost on via higher prices. Macquarie suggests this is exacerbated by the arrival of recent low-price international retailers such as Zara, H&M and Uniqlo. The pending arrival of Amazon will also mean elevated discounting continues.

Operating earnings margins of unlisted retailers are also observed to be at all-time lows, compressing to 0.5% in FY16 from 6.5% in FY11. In contrast listed retailers, such as Premier Investments ((PMV)), Specialty Fashion ((SFH)) and Noni B ((NBL)) have experienced improvements in operating margins over the same period.

Retail A-REITs

As profitability headwinds persist, a number of retailers have been closing less productive stores and Macquarie calculates store count is down around -1% year-on-year. The broker expects this trend to continue, particularly among unlisted retailers.

While profitability for retail tenants remains under pressure the broker believes this is already factored into the share prices of the retail A-REITs. The broker retains Vicinity Centres ((VCX)) as its preferred domestic retail landlord while Westfield ((WFD ) is offering the highest total shareholder return, 19%, across the broader coverage.

Amazon Summit

Morgan Stanley attended the Amazon Marketplace summit, where the company has announced its fee structure. Sellers will be charged $49.95 plus GST per month and then a 6-15% referral fee which varies by category. This is the price for the Marketplace offer and does not include fulfilment by Amazon.

By comparison eBay charges monthly fees of zero (no store) up to $549.95 per month (store with unlimited products) and a variable fee of between 4.8% and 10.9%. Initially, the broker suggests that success in Amazon's Marketplace will come at the expense of eBay's business, although at first glance it appears Amazon is offering a more "premium" model.

No timeline was provided for the launch in Australia. The company has stressed the importance of fulfillment by Amazon, citing a case study in the US where the cost for sellers of shoes is just US$4-5, a significant saving as it includes picking, packing, returns, enquiry handling and freight.

Superannuation & Advisors

Bell Potter notes structural changes occurring in the superannuation sector, with a continued move away from the big integrated players. Around 82 advisers left the main four banks and AMP ((AMP)) in October. Over the last year advisers are reduced by -8.3% for the large five players, and AMP has lost the most.

The broker does not observe anything to arrest this decline and considers the trend supports a Sell rating on AMP and IOOF ((IFL)). The broker retains a Buy ratings for the independent operators that are benefiting from the changes, including Praemium ((PPS)) and Onevue Holdings ((OVH)).

Asia

Southeast Asian markets, led by the "tiger cubs" of Indonesia, Malaysia, Philippines, Thailand and Vietnam are among the world's fastest growing. These countries need to invest heavily in infrastructure, such as transport and utilities and, across the region, governments are embarking on ambitious programs.

BIS Oxford Economics suggests, until now, the pace of these infrastructure projects has been limited by significant constraints on public finance since the GFC, but growth has resumed and is set to provide a stronger foundation. Rising living standards will also fuel demands for better quality housing and public facilities, including healthcare and education.

The analysts at BIS Oxford Economics observe this is attracting a strong flow of inward business investment from both local and multinational manufacturers, supported by a supply of still relatively cheap labour. Over the next five years construction investment in Asia is expected to average US$1.61 trillion per year.

The positive prospects in Southeast Asia are underpinned by China's external investment in construction such as its "one belt one road" initiative. The analysts also note India's construction sector investment is currently the third largest in Asia, after China and Japan, matching that of the UK.

BIS Oxford Economics notes India's annual construction investment, expected to jump by almost one third, adds more momentum to an Asia-wide building boom that look set to last through the next decade and beyond.

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