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The Wrap: Airlines, Insurers And Telcos

Weekly Reports | Jul 27 2018

This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ

Weekly Broker Wrap: regional banks; airlines; insurance; supermarkets; billing utilities; and telcos.

-Little earnings growth expected for regional banks
-Headwinds gathering for domestic airlines
-Major regulatory issues still confront insurers
-Only one major supermarket likely to make online profitable
-Changes to electricity distribution pricing probably manageable
-Consensus expectations for telcos sector may prove optimistic

 

By Eva Brocklehurst

Regional Banks

Ord Minnett has reviewed earnings forecasts for the regional banks. Forecasts have been reduced by around -1% for both Bank of Queensland ((BOQ)) and Bendigo and Adelaide Bank ((BEN)) for the next three years, to reflect expectations that re-pricing of mortgages will not cover a deterioration in funding costs.

The broker is concerned retail banking margins have peaked, while competition remains elevated. No earnings growth is expected from the first half base over the next three years. Bank of Queensland has announced back book re-pricing of its variable rate mortgage by 9-15 basis points and Bendigo and Adelaide has increased most rates by 10 basis points.

The delayed nature of the repricing poses downside risk to second half results, in the broker's view, given the bank bill swap to overnight index swap spread has been running at above 40 basis points since mid March.

Airlines

Domestic passenger growth slowed to 2% in May 2018 versus the prior year with a weak performance from the Sydney-Melbourne-Brisbane hub. Capacity in these regions grew 3% in May, with Qantas ((QAN)) adding 2% and Virgin Australia ((VAH)) adding 1%.

Using bookings data from Travelport, the broker estimates Qantas yields rose 5% on average in May across the S-M-B routes as well as transcontinental markets. However yields fell -1% in May for the Sydney-Melbourne route versus April.

International capacity grew 9% across key markets, Ord Minnett notes, with the historical correlation between oil price movements and the Qantas share price remaining broken.

On key international routes the broker calculates Qantas yields were down -4% in May and Virgin Australia yields up 3%. The worst performing route was Sydney to Denpasar, with Qantas yields down -19%. The broker expects both airlines to face headwinds amid increased competition, weak demand, excess capacity and higher fuel costs.

Insurance

A number of issues are clouding the insurance sector, Citi notes, and topping the list is the Royal Commission, amid major implications for AMP ((AMP)). AMP and Suncorp ((SUN)) are affected by changes proposed in the federal budget and Westpac's ((WBC)) recent move to cut platform fees for BT Panorama has increased margin pressure in the wealth management industry.

Citi believes the QBE Insurance ((QBE)) share price has now fallen to such a level that delivering a reasonable first half should be enough to underpin the share price without needing to accommodate a turnaround story.

The broker finds Suncorp's value not quite as compelling as before, but the second half should provide the market with more confidence in FY19 and targets. Citi expects Insurance Australia Group ((IAG)) to announce a capital return, with a $750m buyback forecast.

Meanwhile, evidence suggests benign health insurance claims inflation and this could be a source of upside risk for Medibank Private ((MPL)) and, to a lesser extent, nib Holdings ((NHF)). 

Supermarkets

Citi notes online penetration is rising towards 3% for both Woolworths ((WOW)) and Coles ((WES)). Nevertheless, online is loss-making for both on a EBIT margin headwind of around 40 basis points. The broker believes only one of the two has the opportunity to turn online into a profitable channel through an exclusive deal with Ocado. This could add 5% to long-term earnings with a 15-year agreement.

Ocado has signed up five major retailers and they licence exclusively the warehouse automation that enables them to service online profitably. A de-merged Coles is the most likely retailer to partner, in the broker's view, as online losses have more impact on a stand-alone business and Coles has made less investment in online than Woolworths in recent years.

The UBS survey of Australian grocery shopping over June signals shifts in market share are moderating and consumers are experiencing promotional fatigue. Shoppers are now placing less emphasis on price, while loyalty now ranks as the second most important driver of trips to the supermarket. Those retailers that are differentiating and investing in loyalty remain best positioned.

Coles is performing better, as its relative score in the survey is stabilising, while Woolworths is peaking and the rate of share loss by Metcash ((MTS)) is easing. UBS lifts estimates for Coles' sales by 1% for FY19 and and no longer forecasts a decline in share.

The consistent message from suppliers was the need to improve promotional effectiveness. Woolworths is playing a long game and investing in online, data and refurbishments but this has not been reflected in the views of suppliers and customers through June and July, which suggests to UBS the positive impact is waning.

Billing Utilities

The ACCC has recommended that the Australian Energy Regulator set a simple default retail price for electricity in each distribution area in the National Electricity Market.

The price would be set midway between current standing offers and average market offers, and ACCC believes average household bills could be reduced by -20-25%. Morgan Stanley suspects the changes, if implemented, will be manageable, with AGL Energy ((AGL)) having slightly more flexibility than Origin Energy ((ORG)).

The broker estimates that billing utilities would need to reduce discounts by less than -300 basis points across the board to recoup the one-off price reduction. Disengaged customers pay a "loyalty tax" versus customers who shop around and the broker believes the ACCC has effectively recommended a cut to the loyalty tax rate. As the industry structure is oligopolistic Morgan Stanley anticipates incumbents would recoup the loyalty tax reduction over time.

The broker suggests disruptions to the market could come in the form of automation of comparison/switching and changes to the structure, such as the entry of second-tier operators and/or a large vertical or horizontal participant.

Telecoms

Morgan Stanley suspects consensus expectations for FY18-21 earnings and distributions in the Australasian telecommunications sector will prove optimistic. Telstra's ((TLS)) recent investor briefing highlighted a severe impact from structural change and disruptive competitors on fixed line and mobile.

Consensus expectations have been lowered for Telstra's FY19 and operating earnings by around -15% and the broker suspects these headwinds exist for all incumbents. In fixed line TPG Telecom ((TPM)) may be able to do a better job of holding up margins and, the broker suspects, as a disruptor in mobile, the focus will be on the timing and budget of its roll-out plans.

Morgan Stanley also expects, after recent instability, that the market should be more positive regarding Vocus Group ((VOC)), if first time FY19 and operating earnings guidance is up 0-5%. Meanwhile, investors will be tuned to the maiden FY19 and dividend guidance for Spark New Zealand ((SPK)). The broker forecasts the existing NZ$0.25 distribution to be maintained, placing the stock on a yield of 6.4%.

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CHARTS

AGL AMP BEN BOQ IAG MPL MTS NHF ORG QAN QBE SPK SUN TLS WBC WES WOW

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED

For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED

For more info SHARE ANALYSIS: MTS - METCASH LIMITED

For more info SHARE ANALYSIS: NHF - NIB HOLDINGS LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: SPK - SPARK NEW ZEALAND LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED