Weekly Reports | Jun 22 2018
Weekly Broker Wrap: credit crunch; retail margins; health insurers; NZ broadband; and automotive.
-Mortgage growth resilient despite credit tightening
-Disruption by subscription services likely to impact retail margins
-Health insurers generally running strong levels of capital
-Stabilising margins observed in NZ broadband
-New vehicle sales remain soft, luxury outperforms in May
By Eva Brocklehurst
What credit crunch? That is Citi's question. Despite investor fears, the broker points out mortgage credit is growing at around 6% annually after slowing modestly since August 2017. Growth is tracking at around twice the rate compared to the last time residential property prices were in decline, in 2012.
The source of resilience has been owner-occupier growth, which has stayed at around 8% for the past 18 months. As property prices soften two cohorts of borrowers emerge – first home buyers and upgraders. Citi expects upgrading to larger homes will feature over the next 2-3 years, particularly if house prices remain weak.
First home buyer applications as a proportion of borrowers have increased to 13% from 8% over the last three years, as their main competitors in the market, investors, feel the effects of regulatory intervention.
Going forward Citi believes mortgage credit will be more robust than many expect. Nevertheless, the broker expects the listed banks to continue to suffer market share declines, as well as net interest margin contraction from price discounting. The failure of a credit crunch to materialise will also support bank capital and dividends.
Margins remain the issue for retailers, Credit Suisse contends. Launch of subscription services by eBay and Amazon Prime can be expected to accelerate the development of free and subsidised shipping. Kogan has launched free delivery as well. There has been no obvious response from the major retailers as yet.
While it may be tempting to expect the market share to shift following these announcements, Credit Suisse believes the near-term impact is likely to be on margins. Incumbent retailers appear to have little alternative but to respond.
On typical 7% online sales penetration from either JB Hi-Fi, ((JBH)) Harvey Norman ((HVN)), Myer ((MYR)) or Super Retail ((SUL)), the broker calculates delivery revenue would be around 20 basis points with respect to sales, an equivalent negative impact of fully subsidised delivery. This equation excludes the potential for free returns, for which these retailers currently utilise stores.
The broker also suggests the extension of the GST to all imports of goods and services irrespective of value is unlikely to be a material factor weighing on local retailers.
The main impact from this is likely to be the unwillingness of sellers to undertake the collection task and their consequent exit from the market. EBay has introduced systems to collect GST from offshore sellers while Kogan is able to mitigate GST with logistics efficiencies.
Therefore large-scale changes to the market structure are considered unlikely. At most, Credit Suisse expects a marginal narrowing of price differentials.
Final guidance on new capital standards for the private health industry is likely to be released in the second half of 2018. APRA has assumed the role of a regulator from the Private Health Insurance Administrative Council.
Credit Suisse applies APRA general insurance standards to health insurers to estimate a prescribed capital amount of around 10% of annual premium. The broker considers both the issue of caps to premiums and the new capital standards are manageable.
Those with very strong capital positions are running at lower net margins while those with below-industry capital multiples are delivering the highest net margins. At an even lower level, of the insurers that made an operating loss in 2017, almost all of them are sitting on strong levels of excess capital.
NZ Broadband Pricing
UBS observes some stabilisation of margins in NZ broadband pricing. Gross margin differentials between tier 2-3 and tier 1 operators have fallen to 13% after peaking a 15%, although the broker suggests tier 2-3 are unlikely to take significant broadband share from Spark New Zealand ((SPK)).
The broker notes the new Fan Pass from Spark NZ is the first sign of a bundled add-on for broadband that could be accretive to earnings. The company has announced it will offer Sky Fan Pass (streaming sports) for NZ$30 a month.
This represents an NZ$25 discount to retail. Vodafone and Vocus Group ((VOC)) have jointly announced plans to unbundle fibre post 2020. Physical unbundling appears challenging to UBS and virtual unbundling more feasible.
National new vehicle sales were down -2.1% in May, a continuation of the softness in headline sales from April. Wilsons observes this time it was driven by private buyers across most parts of the country.
The broker is yet to see an established trend for positive momentum in consumer sentiment, and Western Australia remains soft, consistent with Automotive Holdings ((AHG)) commentary when it recently downgraded its outlook.
However, there is a more sustained recovery in new vehicle sales growth in Queensland and South Australia, which is positive for AP Eagers ((APE)). After a surprising decline in April 4×4 sales recovered modestly, up 3.0%, in May.
The prestige & luxury segment rose 0.5% in May and, in a relative sense, Wilsons points out this end of the market outperformed. This is a positive read through for Autosports ((ASG)). Wilsons has Buy ratings for ASG and MotorCycle Holdings ((MTO)) and Hold ratings for the remainder of the sector.
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