The Wrap: Wealth, Agriculture & Aged Care

This story features AMP LIMITED, and other companies. For more info SHARE ANALYSIS: AMP

Weekly Broker Wrap: wealth management; agriculture; infrastructure; private hospitals; and aged care.

-Less certain outlook for wealth management sector
-Poor start to winter crop season entails more bearish view of agriculture sector
-Citi questions sustainability of distribution pay-out at Transurban
-Private hospital patronage seen ebbing on affordability issues
-Operating headwinds in aged care not expected to ease in the short term
 

By Eva Brocklehurst

Wealth Management

UBS expects enhanced education standards, coming into effect from January 2019, could transform the wealth management industry. The broker estimates the average existing adviser will need to undertake 642 hours of study by January 2024. Based on the new minimum education standards that are proposed, planners would also need to pass a national exam by January 2021 to continue practising.

As a result, given the average age of advisers is around 55 years, UBS suspects at least 25% will call it quits from the industry over the next five years. More attrition may occur should grandfathered commissions be abolished.

AMP ((AMP)) and ANZ Bank's aligned dealer groups that are due to be acquired by IOOF ((IFL)) appear most exposed. The broker does not believe vertical integration will be outlawed, although structural separation is a tail risk that should be factored into views on stocks.

Bell Potter argues the business models used by AMP and IOOF are broken, and until it is clear how the adjustment to the new environment will take place believes the stocks demand a lower PE multiple rating. This is based on earnings outlook being weaker and less certain.

Bell Potter currently has AMP on and FY19 PE of 13x and IOOF on 16x. The broker suggests the main beneficiaries of the trend will be Praemium ((PPS)), Onevue Holdings ((OVH)) and Netwealth ((NWL)). The broker recently downgraded Netwealth to Hold from Buy because of strong share price action and, until such time as there is greater clarity on how much traction the business will get with the shift to independence, prefers Praemium and Onevue.

Agriculture

Bell Potter is incorporating a more bearish view across the agricultural sector given a weak start to the winter cropping season. This view is also incorporated in derivative commodities such as livestock.

Stocks considered most exposed include Elders ((ELD)) , for which expectations are downgraded given the poor start to cropping amid reduced forecasts for the value of livestock turnover. The impact is a -10% reduction in FY18 net profit estimates and -4% in FY19.

Graincorp ((GNC)) is a late-cycle exposure leveraged to the harvest rather than the inputs so a softer 2018/19 east coast harvests affects its FY19 result. Bell Potter's Sell rating is maintained.

Nufarm ((NUF)) generates around 21% of revenue and 15% of operating earnings (EBITDA) in the Australasian business but this percentage will shrink as recent European acquisitions are consolidated. The broker downgrades the FY18 season and assumes a heightened competitive environment in FY19-20. Rating is also downgraded to Hold in light of recent share price strength.

The outlook for the cropping season also merits a downgrade to estimates for Ruralco Holdings ((RHL)). Bell Potter reduces net profit estimates by -15% for FY18 and -5% for FY19-20. Buy-rated Australian Agricultural Co ((AAC)) is still expected to sustain operating earnings improvements from the closure of the Livingstone processing facility and the internalisation of its supply chain.

Infrastructure

In analysing Australasian infrastructure, Citi finds a preference for Auckland International Airport and Sydney Airport ((SYD)) over Transurban ((TCL)). Balance sheets, debt metrics and the credit cycle are leading the broker to question the sustainability of distribution pay-out ratios. Citi reinstates coverage of Sydney Airport with a Buy rating and Transurban with a Sell rating.

Earnings certainty remains high across the sector and there is upside risk to consensus expectations for airports. While overall valuation metrics appear fair in a low interest rate environment they are not compelling, in the broker's opinion.

The broker expects strong international passenger growth in both Auckland and Sydney, with a multi-year retail tailwind for the latter Airport as terminals are progressively upgraded. The broker's less favourable investment view of Transurban is driven by an expected reduction in the pay-out ratio from FY23 as balance sheet pressures mount.

Private Hospitals

Credit Suisse asserts that the recent deterioration in Australian private hospital industry growth is a structural issue. Affordability pressures have stretched the elasticity of demand for private health care in a market where there is a viable public hospital substitute.

The broker believes the market is underestimating the long-term downside to Ramsay Health Care ((RHC)) and Healthscope ((HSO)). Several factors are driving patients to the public system, including funding incentives for public hospitals to admit more private patients, a deterioration in private health hospital cover and increases in out-of-pocket surgery costs.

While accepting that Ramsay Health Care has underperformed the market by around -15% in the last 12 months the broker continues to envisage downside risk in the medium term and downgrades to Underperform. Credit Suisse retains a Neutral rating for Healthscope but considers the underlying valuation implies material downside to the current share price even if an M&A deal does not eventuate.

Aged Care

Operating headwinds in the aged care sector are unlikely to ease in the short term and Macquarie suggests offsetting initiatives carry higher execution risk. Costs of care are outgrowing revenues, caused by downgrades to the industry subsidy.

The broker's top-down analysis suggests the growth outlook is not attractive. Budget estimates imply little relief in funding per bed for aged care operators and there are unlikely to be any regulatory changes that will result in positive inputs before the next federal election.

The broker's preferred stock in the sector is Estia Health ((EHE)), upgraded to Outperform, which provides a three-year growth rate of 7.4% on a 5.5% forward yield. Japara Healthcare ((JHC)), with a Neutral rating, carries the highest execution risk, Macquarie believes, as it has material capital commitments to support the workbook.

Meanwhile, Regis Healthcare ((REG)), downgraded to Underperform, is expected to sustain declines in earnings per share in FY19. The business is currently at a point in the cycle where a material investment is required and distributions are in decline.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms