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The Wrap: Hospitals & Health Insurers

Weekly Reports | Feb 16 2018

Weekly Broker Wrap: hospitals & health insurers; supermarkets; diagnostic services; Carbonxt; and Oneview.

-Brokers suggest decline in private health insurance participation will continue
-Lower Australian hospital volume growth being factored into major private operators
-Competitive impact of Aldi roll out in SA and WA appears less significant
-Macquarie initiates coverage of Sonic Healthcare and Primary Health Care
-Carbonxt obtains key market opportunity in the US


By Eva Brocklehurst

Hospitals & Health Insurers

Credit Suisse, on the back of APRA statistics for the December quarter, estimates private hospital industry revenue grew 3.1% in the first half of FY18, down from 5.0% growth in the prior half-year. Hospital treatment, as a percentage of the population, declined around -20 basis points to 45.6%.

The broker does not believe the government's reforms to the health insurance industry will fundamentally alter current affordability issues for private health insurance. As long as premiums continue to inflate at a faster rate versus wages growth, and the public hospital system provides an alternative, the decline in participation is likely to continue.

UBS agrees the long-term fundamentals are broadly unchanged, and private health industry volumes are unlikely to return to trend in the absence of stabilising private insurance participation or policy intervention to stem the flow of private patients to public facilities.

The broker notes, while a declining penetration rate is noteworthy, and likely to be a continuing feature of the industry, more relevant to medium-term profitability for the listed private health insurers is the pick-up in claims inflation. This rose to 5.1% in the December quarter after 1.9% in the September quarter.

Notwithstanding higher claims inflation, industry net margins finished at a firm 5.2% in 2017. The broker expects this aspect to become increasingly politicised following the ALP's commentary pointing to company profitability in its recent statement on private health insurance.

Macquarie notes premium growth continues to exceed claims growth on a year rolling basis, as per the APRA data. Switching remains elevated and newcomers to private health insurance continue to moderate. Downgrading continues.

The broker believes a lower Australian hospital volume growth environment is being factored in to the major private hospital operators, such as Ramsay Health Care ((RHC)) and Healthscope ((HSO)).

At a state level, the broker observes volume growth in Victoria did exhibit an improvement in the December quarter, although weak comparables were being cycled. Healthscope has a higher relative exposure to Victoria compared with Ramsay.


UBS has analysed Aldi's store roll-out in South and Western Australia and suspects the competitive impact will be less significant than previously feared. The broker notes a surprisingly large number of Aldi stores are cannibalising each other relative to the more mature east coast market.

The broker downgrades FY18 market growth estimates to around 3% to reflect softer first half trends. However, the analysis suggests competitive intensity is unlikely to worsen and growth in the market is likely to re-accelerate in FY19.

UBS is positive on the grocery sector as it remains rational, as per Woolworths ((WOW)) and Coles ((WES)) commentary. Pricing and supplier feedback also underscores this expectation. The broker notes Aldi's impact on market growth from a space perspective is moderating and its store targets look more challenging.

Diagnostic Services

Macquarie has initiated coverage on Sonic Healthcare ((SHL)) with a $26.20 target and Neutral rating and Primary Health Care ((PRY)) with an Underperform rating and $3.75 target.

The investment view for Sonic balances a subdued organic revenue environment with contributions from recent acquisitions. Relative to domestic healthcare peers the stock appears expensive to the broker on a PE/growth basis, while Primary appears inexpensive but the risk/reward profile is skewed to the downside.

The broker's investment rating is based on a reduced share of gross billings for Primary, in line with the move to flexible contracts and fewer patient attendances per GP. There is also the potential for lower Australian pathology collection centre rental costs.


Shaw and Partners initiates coverage of Carbonxt ((CG1)) with a Buy rating and $0.90 target. The company listed in January, raising $10m to develop its activated carbon business which is taking market share in the US. This product removes mercury from the fly ash produced in industrial processes such as coal-fired power generation.

The broker expects the company will break even in the second half of FY18 and deliver strong sales and earnings growth for a number of years. The first market opportunity in the US is a result of regulations that came into force in April 2016 that tightly regulate the emission of mercury through the burning of coal.

The broker notes legislation, spearheaded by the UN, to be implemented around the rest of the world could lift the global opportunity to around US$1bn.

Oneview Healthcare

Moelis initiates coverage on Oneview Healthcare ((ONE)) with a Buy rating and $3.04 target. The company provides software to the healthcare sector that aims to drive workflow efficiencies and improve clinical outcomes. The company's technological benefits have been validated through several hospital operators in the US and Australia.

The company listed on ASX in March 2016 and proceeds from the IPO have been used to develop the product portfolio and invest in sales and marketing. Oneview is targeting the acquisition of new hospital and aged care customers as well as continuing to develop its product.

The company is headquartered in Dublin, Ireland, and has sales and marketing as well as service centres in the US, Australia and the Middle East. The company now has four highly scalable software solutions in various stages of commercialisation, and Moelis anticipates customer acquisition will also accelerate through the offering of an Android solution.

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