Weekly Reports | Mar 09 2018
Weekly Broker Wrap: Telcos; banks; insurance; and aquaculture.
-Launching unlimited mobile data plans may be difficult for Telstra
-Valuations for banks may get worse before they get better
-Less earnings risk posed in current half-year for insurers
-New aquafeed additives flagged for both Nufarm and Ridley
By Eva Brocklehurst
Optus is now trialling unlimited mobile data plans in Australia. UBS notes the plans are only available to select Optus fixed broadband customers that have no existing mobile products, and will be at limited speeds. These speeds will support only certain applications. Optus is targeting a small percentage of the user base with the aim of lifting mobile penetration.
UBS, using the US as a precedent, expects any move to unlimited mobile data could be value destructive. Telstra ((TLS)) is considered unlikely to launch unlimited mobile data plans unless competitors force its hand.
The broker believes launching unlimited mobile data plans could be more difficult for Telstra, given its network premium. Telstra may also be unable to throttle speeds to the same extent as Optus while still commanding its current price premium.
Credit Suisse suspects the valuations of banks are likely to get worse before they get better. This will happen as the market speculates on further negative outcomes for the sector. The sector is currently trading at a -27% discount to non-banks and the broker notes history shows a further -10-15% relative downside is possible.
If the sector achieves this level of valuation, and/or regulatory probes and slowing top-line growth are substantially ameliorated, Credit Suisse will re-visit its cautious view. Opportunity may present later in the year, the broker adds.
Bank of America Merrill Lynch upgrades Commonwealth Bank ((CBA)) to Buy from Underperform and downgrades Westpac ((WBC)) to Underperform from Buy. The broker's valuation analysis suggests that the sector is closer to oversold than overbought territory.
Particular appeal is still envisaged for investors that seek quality, dividends or domestic interest rate exposure. CBA has underperformed both National Australia Bank ((NAB)) and ANZ Bank ((ANZ)) by around 7% since June last year, the broker observes.
The market's concerns regarding AUSTRAC allegations and expensive valuations are considered reflected in CBA's share price. The broker has no major concerns regarding Westpac and the downgrade is driven by valuation.
For short-term investors, Credit Suisse observes the current half-year poses less earnings risk from peril events than the prior half. The second half of the financial year is typically riskier for Insurance Australia Group ((IAG)) but this time there is a buffer from rolling forward a more benign first half. Suncorp ((SUN)) has used over half of its natural peril retention, providing earnings protection in the second half.
The company was unable to renew its reinsurance in FY18 on the same terms as FY17 and Credit Suisse suggests the current cover arguably needs a higher natural hazard allowance. QBE Insurance ((QBE)) has, similarly, exceeded its allowance in seven of the last 10 years and has the same reinsurance cover in place for FY18 as it did in FY17.
While the market appears willing to look through QBE's perils risk, Credit Suisse believes this has downside potential again in FY18. The broker prefers Suncorp, as it offers valuation support and a recovery in earnings, driven by positive premium rates and cost reduction initiatives. Valuation at present prevents the broker from being positive on IAG while it remains negative on QBE.
Ridley ((RIC)) and Nufarm ((NUF)) are both developing new aqua feed additives that improve the efficiency of growth rates and/or the general health of seafood. Consumption of seafood globally is projected to increase by 1.8% in the decade to 2025, below the increase of 3.1% witnessed in the decade to 2015. Wilsons assesses the market for new aquafeed additives and the products that Nufarm and Ridley will offer.
The broker is more attracted to the Ridley program as while visibility on profitability is arguably lower, it faces less direct competition. Wilsons, which has a Buy rating and $1.81 target on the stock, considers the risk valuation provides for more significant upside relative to the current share price. The broker retains a Hold rating and $8.75 target for Nufarm.
Ridley's additive acts as a metabolic stimulant and the primary benefits are stated as increased survival and growth. Commercial scale sales are expected in FY19. Nufarm's additive, derived from GM canola, called Aquaterra has the primary benefit of sustainability. Commercial scale sales are expected in FY20.
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