The Wrap: Health, Housing, Auto And PRRT

Weekly Reports | Nov 09 2018

Weekly Broker Wrap: health insurers; housing; automotive dealers; airlines; PRRT; Security Matters; and Netwealth.

-Catalysts ahead in private health insurance carry downside risk
-Household de-leveraging expected to restrain spending growth into 2019
-Headwinds persisting for automotive dealerships
-Woodside most affected by changes to PRRT


By Eva Brocklehurst

Health Insurers

The private health industry is facing substantial challenges, with Macquarie assessing that over 85% of funds could have insufficient excess capital in order to sustain two consecutive years of a 2% price cap.

Margins in the largest states are improving but premiums per policyholder are increasing more in states where participation is slipping the most. The earnings gap between the for-profit and not-for-profit funds almost doubled in FY18, which the broker suggests raises the chances for different capital rules to be imposed.

The next catalysts for the industry carry material downside risks, Macquarie believes. These include the April 2019 price increases, first half earnings results and the outcome of the federal election, due by May 2019.

Current valuations appear supportive but the broker does not believe all the catalysts are completely priced into consensus estimates and maintains a Neutral rating for both Medibank Private ((MPL)) and nib Holdings ((NHF)).

While UBS assesses the insurers are in good shape it cannot say the same for consumers or hospitals. A soft claims environment appears to have continued into FY19, positively skewing the risk to margins in the near term, although the broker acknowledges the conditions are unsustainable over the medium term.

Medibank Private has made progress in stemming its market share losses but this could prove challenging, in the broker's opinion, should the tailwind from taking share from Bupa moderate. UBS retains a Sell rating on the stock with a Neutral rating for nib Holdings.

More broadly, the sustainability challenge is highlighted by the virtual absence of any growth in policy numbers. The broker also questions whether the historical margin cap of 5.6% will prove irrelevant in a soft claims environment.


While the broader economic impact of sliding house prices has been limited to date, Morgan Stanley believes household de-leveraging will restrain spending growth into 2019. National house prices are now down -4.6% in the year to date, nationally, and auction clearance rates and sentiment have also weakened sharply.

Surveyed house price expectations have now fallen to record low levels. Meanwhile, construction appears to be responding to weaker prices and tighter credit, with a declining trend in both apartments and detached houses.

A further consideration is the proposed changes to negative gearing and capital gains tax discounts being mooted by the ALP ahead of next year's federal election. Morgan Stanley assesses the policies as positive for affordability and negative for prices and turnover.

The broker considers the decline in house prices a catalyst for de-leveraging and a meaningful headwind for bank revenues and consumer spending. However this is not necessarily recessionary while global growth and public expenditure are supportive.

Automotive Dealers

Australian car sales fell -5.3% in October 2018. All states deteriorated besides Tasmania. Passenger car sales continued to lead the decline, down -24% and partly offset by an 8% rise in sports utility vehicles.

UBS believes reductions in house prices are continuing to affect new car sales. When adjusting sales by each dealership over the 12 months, in each state, the broker estimates new car volumes over July-October, combined, were down -8.8% for Autosports Group ((ASG)) and -6.6% for Automotive Holdings ((AHG)).

The broker believes it will be difficult for Autosports to grow like-for-like volumes because of the macro outlook although, given the improving earnings and minimal exposure to flex commissions, estimates new car revenues could fall -5% and still hit FY19 estimates.

Meanwhile, Automotive Holdings has headwinds from its exposure to the slightly faster rate of decline in new car sales in Western Australia as well as the ongoing effects of regulatory changes that, UBS estimates, could reduce finance commissions by -25%.

Wilsons believes WA held up reasonably well in the latest figures as it cycled strong growth, albeit remains cautious about the near-term outlook for Automotive Holdings as there are no notable catalysts for a recovery in consumer activity in WA.

The broker downgraded its outlook for dealerships following the July figures and believes the latest three months justifies the revised outlook. Wilsons assesses conditions remain more favourable for AP Eagers ((APE)).

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