The Wrap: Health, Financials & Wealth

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Weekly Broker Wrap: strategy; health care; health insurance; diversified financials; and wealth managers.

-Commonwealth 2018 budget relatively benign for corporate profits
-Unlikely to be substantial improvements in health industry dynamics post budget
-Private health insurance emerging as a key election issue
-Budget seen slightly negative for super and life insurance industry
-Structural separation considered a risk for wealth management industry
 

By Eva Brocklehurst

Strategy

In the wake of the Australian government's 2018 budget, Credit Suisse observes the economy is set to continue with its dual speed nature, reflecting a sluggish and leveraged consumer and confident corporate sector.

The forecast surplus in FY20, a year earlier than expected at the last budget, should be positive for the Australian dollar and bond market all else being equal. However, the broker suggests considerable changes in the demand/supply backdrop in global government bonds will push local yields higher.

Compared with previous years the budget appears relatively benign for corporate profits. The broker suggests the Australian earnings expansion is likely to continue and targets an ASX200 level of 6500 by the end of the year.

Credit Suisse expects a budget to be modestly positive for consumer stocks that sell to low-middle income employees as well as Challenger ((CGF)) and, potentially, Transurban ((TCL)). The budget is expected to be negative for hospitals, life insurers and Link Administration ((LNK)).

Health Care

The budget fully funds a new five-year public hospital agreement with the states and territories. Credit Suisse suggests the increase in public hospital funding, and lack of discussion on the decline in the private health participation rate, means private hospital reforms are unlikely in the near term. Therefore there are unlikely to be substantial improvements in industry dynamics.

Meanwhile the review into the Medicare Benefits Schedule is ongoing, with the government aiming to reduce spending on inappropriate or obsolete diagnostic tests and reform outlays to GP attendance. Credit Suisse suspects funding cuts could emerge in the medium term.

This segment is relevant for Primary Health Care ((PRY)) and Sonic Healthcare ((SHL)). The Pharmaceutical Benefits Scheme, relevant for Sigma ((SIG)) and Australian Pharmaceutical Industries ((API)), will sustain a reduction in revenue rebates and expenses associated with improved payment administration that will offset outlays for new drug listings.

UBS also observes a limited impact for listed health providers from the budget both in the MBS, PBS and public hospital measures and in the supply of home care for the aged. The aged care budget was largely focused on improving sector quality, transparency and mental health outcomes and there was no mention of basic daily care fee deregulation.

Ord Minnett was disappointed that basic daily living fees have not been uncapped in residential aged care, as this may have provided some relief for providers in the light of recent funding reforms.

Despite the benign nature of the budget the broker continues to believe the pre-election period is positive for domestically-focused healthcare companies, with the exception of private hospitals in the light of Labor's plan to cap premiums if it wins the election.

Health Insurance

With falling participation rates and elevated margins the affordability debate in private health insurance is emerging as a key election issue. Labor's promise to cap premium hikes at 2% for two years sets the tone, Morgan Stanley believes, and elevates earnings risks to health insurers and private hospitals.

The broker believes insurers have the capacity to navigate the squeeze on margins but shifting the claims curve will not be easy. The the best lever is better contracted outcomes with private hospitals and shifts to home care.

Morgan Stanley's bear case assumes collective action to attack claims inflation will recover around 50% of the margin headwinds and lifts its bear case weighting to 30% from 20%. In this scenario the broker prefers nib Holdings ((NHF)) over Medibank Private ((MPL)).

The broker notes, unlike Healthscope ((HSO)), Ramsay Health Care ((RHC)) is not underpinned by M&A or the consortium offer and is vulnerable to disruptive rehab models. Healthscope is the broker's preferred hospital exposure.

Diversified Financials

The Australian government's 2018 budget package includes reforms geared to the minimisation of fees and insurance premiums on low super account balances. The government is capping fees to superannuation accounts with balances of less than $6000 at 3% of the account balance and banning exit fees from all superannuation accounts.

UBS considers this a modest negative for super and life insurance. Social Security changes to lifetime income products were slightly less negative than initially proposed and implementation is also delayed to FY20.

UBS notes the automatic transfer of loss in inactive accounts to the ATO of factors that are negative at the margin for super administration providers. Life insurance, a relatively small contributor for AMP ((AMP)) and Suncorp ((SUN)), will become an opt-in for people aged under 25 or those with low balances.

Ord Minnett suggests the measure on small account balances could be negative for Link, in particular, as millions of accounts are consolidated, and for AMP, which manages some accounts in this regard. The government is reducing audit requirements for self managed super funds and this could increase the appeal of such funds at the expense of retail funds.

Wealth Managers

UBS observes the Royal Commission has shaken the wealth management industry and led to a period of considerable change. The risk is the changes could be considerably worse for AMP relative to others. The broker has recently downgraded AMP to Neutral from Sell and IOOF ((IFL)) to Neutral from Buy.

A step-change in the cost base associated with a range reforms aimed at adviser misconduct appears inevitable. The broker does not anticipate any material winding back of 2013 reforms or overall system changes but expects AMP to experience a protracted period of outflows, while the flows to IFL could moderate and Netwealth ((NWL)) emerge a beneficiary.

Vertical integration has been the elephant in the room at the Royal Commission and, while not a base case, the broker suggests that should structural separation proceed, it would be cumbersome and erode value for the vertically integrated major operators.

Benefits to specialty platform providers would be constrained as the wealth managers reinvest in technology and product pricing to retain assets under management.

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