The Wrap: Housing, Leasing & Health Care

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Weekly Broker Wrap: housing; vehicle leasing; telcos; and health care.

-Credit tightening and regulatory scrutiny remain elevated and could weigh on house prices
-Leasing companies not facing major impact from regulatory pressure on commissions
-Telstra proactively pricing to limit impact on gross margin from unlimited data plans
-Limits to be placed on knee MRIs, little improvement in hospital operating conditions
 

By Eva Brocklehurst

Housing

House prices have hit a soft patch, ANZ bank analysts observe. Recent data showed a renewed decline in prices amid easing auction clearance rates. Renewed weakness in house prices is not factored into forecasts and the analysts suggest this matters because of the impact on household wealth and, thus, the household savings rate.

The analysts suspect numerous reports about tighter criteria for owner-occupied mortgages may explain the renewed weakness. While cautious about changing view on just one month's data, they are mindful that the housing market and consumer spending are key downside risks for the domestic economy, and a further easing of auction clearance rates would be of concern.

Morgan Stanley suggests credit tightening and regulatory scrutiny may remain elevated for 2018. This could weigh on prices and, given consumer leverage to the housing market, broader spending conditions will remain under pressure.

The broker observes the weakness in house prices looks to be extending in Melbourne while Sydney continues to show the largest declines from the 2017 peak. Quarterly building activity data shows that housing completions also continue to slow and Victoria and NSW appear to have peaked.

Building approvals are still relatively steady, which is keeping the pipeline of dwellings under construction elevated at around 210,000 of which nearly 90,000 is in NSW. Morgan Stanley expects approvals will decline over the rest of 2018, especially apartments.

The data confirms the broker's expectations for a modest slowdown in the housing market over 2018. At this stage there appears to be little flow through to broader conditions as household sentiment remains robust and there is little evidence of forced selling.

Vehicle Leasing

Regulatory pressure on finance and insurance commissions in the automotive industry remains centre stage but Morgan Stanley notes leasing companies have not faced a major impact because of the nature of their transactions being B2B.

While there is a risk that regulatory changes affect finance commissions in the medium term, the broker is not aware of any potential changes and notes insurance commissions have come down.

The broker finds some risk still exists regarding the tax treatment of novated leasing but there is little risk to healthcare, not-for-profit and government workers, a reason for liking Smartgroup ((SIQ)). The stock trades at a premium to peers and Morgan Stanley retains an Overweight rating, as high growth should mean the multiple sticks.

The broker retains EclipX ((ECX)) as its top pick, as ancillary businesses drive growth above that of the corporate fleet management division. SG Fleet ((SDF)) is considered a higher-risk proposition given the corporate customer focus, and Morgan Stanley retains an Equal-weight rating.

The broker likes the core novated leasing business of McMillan Shakespeare ((MMS)), maintaining an Equal weight rating, but suggests it is too early to bank on the company's "Beyond 2020" strategy.

Telcos

UBS, like many industry observers, envisages potential downside for Telstra ((TLS)) once TPG Telecom ((TPM)) enters the mobile market. The broker factors this in as negative near-term catalyst for the company, although once the impact crystallises, suspects Telstra will be attractive on a long-term risk/reward basis.

The broker suspects the market could be factoring in all the NBN headwinds but none of the associated 5G option. UBS suggests Telstra is likely learning from Verizon and AT&T mistakes. US peers were comparatively late to react to unlimited data plans and ceded share to new entrants.

While unlimited plans are likely to put pressure on Telstra's already shrinking data, the company is proactively pricing to limit the impact on gross margin in the short term. The broker suggests ARPU dilution from the migration could be offset by cost savings on content.

Moreover, Telstra's pre-emptive launch of unlimited data plans is potentially negative for the aspirations of TPG Telecom although, in the short term, TPG is still likely to gain traction by targeting the lower end and value-led user base.

Health Care

The Medical Benefit Scheme review task force has provided the latest recommendations to the Commonwealth government, which has accepted 40 of the new recommendations across knee imaging, dermatology, spinal surgery and other clinical areas. The most significant for listed domestic healthcare providers, UBS believes, other new restrictions to be placed on the MRI services.

Under the new guidelines from November 1, 2018 GPs will no longer be able to request knee MRIs for patients over 50 years of age. They will also be limited to a maximum of three for patients aged 16-50 years. UBS envisages around -1% revenue risk for Primary Health Care ((PRY)) and Sonic Healthcare ((SHL)).

Ord Minnett notes, after discussions with four of the leading private hospital groups, there has been little improvement in operating conditions over the first few months of 2018. Most providers have found sufficient efficiency and cost savings to ensure some margin improvement but believe it will be difficult to replicate this next year.

Ord Minnett suggests Ramsay Health Care ((RHC)) is in a better position than its peers as its joint venture with Ascension in the supply chain is expected to work to expand its procurement savings. The cautious feedback appears consistent with the soft utilisation data from Medibank Private ((MPL)), the broker points out.

Ord Minnett finds a private equity offer for Healthscope ((HSO)) attractive, and an attractive option for shareholders given the industry challenges. The board is expected to seek a higher bid than the current $2.36 although the broker notes potential for a competing offer is complicated by the bidding consortium's 14.5% interest.

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