The Wrap: Health Care, Slots And Automotive

This story features NIB HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NHF

Weekly Broker Wrap: health care; child care; aged care; slot manufacturers; and automotive dealers.

-Benign claims environment signals risk to hospital volumes
-Childcare centre supply/demand expected to tighten
-Sell-off in aged care stocks a potential opportunity
-Aristocrat Leisure stakes its lead in the slot machine game
-Conditions have peaked for automotive sector

By Eva Brocklehurst

Health Care

Morgan Stanley believes fewer claims highlight the ongoing risk to hospital volumes. Nib Holdings ((NHF)) has announced underlying operating profit should be at least $190m, upgrading prior guidance by $10m.

This was primarily from a easy claims environment, particularly in Australian residents health insurance. Lower industry participation and lower utilisation by existing members has led to lower growth in claims.

Citi also notes a slowing of private procedures nationally has caused the private hospital sector to de-rate over the last 12 months. The broker expects the softness to continue in the short term, not helped by an upcoming federal election, as the prospect of a Labor government has historically been negative for private health care.

Healthscope ((HSO)) also provided a quarterly trading update, indicating hospital revenue is subdued, although the company remains on track to meet guidance for hospital operating earnings (EBITDA) growth at at least 10%.

Healthscope has estimated the value of the 20 hospitals to be included in its proposed property trust is $1.6-1.8bn and will update the market on the outcome of the process at the first half result.

The board is also evaluating the latest offer from the BGH consortium. Citi notes shareholders were very negative towards the bidders in the first instance but there appears to be a view that due diligence should be granted this time.

Child Care

Canaccord Genuity expects growth in the supply of childcare centres will moderate in 2019 and combine with an increase to government funding, which is expected to drive demand.

While positive on the sector, earnings risk for the listed operators, G8 Education ((GEM)) and Think Childcare ((TNK)), both rated Hold, appears to be factored into share prices, although the broker suspects uncertainty will weigh on sentiment.

Canaccord Genuity would turn more positive if there is evidence that government funding is driving increased participation in child care, or there is evidence in the March quarter that the rate of opening new centres is declining. Childcare centre numbers increased 1.25% in the September quarter.

Aged Care

Negative impacts on aged-care earnings across FY19/20 in the light of the announcement of a Royal Commission appear to Moelis to be factored into share prices. Therefore, the significant sell-off is considered an opportunity to build a position.

Attractive dividends and free cash flow underpin the broker's forecasts. In determining the level of risk posed to earnings in both the short and longer term, Moelis assesses quality versus cost reductions, the extent of financial distress, consolidation opportunities and a growing need for private sector funding.

The broker concludes there are enough positive drivers to support exposure to the sector. In the short term these include consolidation opportunities and speculation regarding corporate activity, while in the long term there is a structural undersupply.

The broker has a Buy rating for Regis Healthcare ((REG)), observing the 20% growth in earnings per share expected in FY20 is supported by greenfield developments. Estia Health ((EHE)), also rated Buy, is the least leveraged operator and therefore viewed as the best placed to acquire distressed properties.

Slot Manufacturers

Macquarie has reviewed the performance of slot machine games in Australia during September based on its database that represents 24% of machines across Queensland, NSW and Victoria.

Aristocrat Leisure ((ALL)) released a number of games during the month including two new titles across both the Dragon and Lightning series. These releases are already in the top five performing new games in Queensland, where they were first released, and should support near-term ship share and conversions.

Meanwhile, the new releases from Ainsworth Gaming Technology ((AGI)) performed at floor averages during September, although, while early days, the broker believes a sustained step-up in performance is required before ship share improves.

Macquarie continues to prefer Aristocrat Leisure's land-based slot products, expecting the company will capture higher market share in North America.

Other manufacturers continue to perform above floor averages and installations are starting to build. Excluding Aristocrat Leisure, Scientific Games leads in new game performance.

Automotive Dealers

Morgan Stanley believes conditions have peaked for automotive stocks. AP Eagers ((APE)) is preferred, as the dealership exposure is more than 50% weighted towards Queensland, whereas Automotive Holdings ((AHG)) is weighted towards NSW and Victoria. Negative wealth affects are expected to impact on the latter two states.

Morgan Stanley downgrades Automotive Holdings to Underweight. The broker believes the market is underestimating the risks facing Automotive Holdings that could see the stock de-rate. To date, property prices have fallen -3.6% and vehicle sales are yet to turn negative on a 12 five month basis.

The broker cites a sustained period in previous property downturns where negative vehicle sales were coupled with a correction in housing. This time around, Automotive Holdings' balance sheet is more constrained, elevating the risk profile. In contrast, AP Eagers has a lower cost of capital and better cash flow, resulting in more capacity for consolidation.

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