Weekly Reports | Mar 15 2019
Weekly Broker Wrap: telcos; building; diagnostic providers; casinos; insurance; and consumer stocks.
-UBS expects little improvement in mobile industry earnings and cash flow
-Construction materials sector retains a positive outlook
-Crown Resorts' Sydney casino could actually grow the gambling market, Credit Suisse asserts
-Local insurers could be vulnerable in home and motor markets
-Australian companies increasingly seeking to expand offshore
By Eva Brocklehurst
The main issues for the telecommunications sector in 2019 centre on mobiles and the NBN. In terms of mobiles, UBS believes revenue share has been the main goal of Optus and, significantly, the first half of FY19 was the first period in over three years in which the company did not materially grow its share of mobile revenue.
UBS estimates the company's share rose to 30.7% in the first half of FY18 but has been steady ever since. The offset was higher-value subscribers, causing a lift in mobile earnings. The broker wonders whether Optus may now be prioritising earnings and cash flow over market share.
UBS suggests mobile returns are attractive for Telstra ((TLS)), the number one operator, but much more modest for the number three, Vodafone Hutchison Australia. Little improvement in mobile industry earnings and cash flow is expected. Mobile revenue growth in the first half was misleadingly robust, UBS believes, as hardware revenues provided a substantial proportion of the growth and offer negligible margins.
The broker suspects one of the main reasons the ACCC approved the merger of Vodafone and Hutchison in 2009 was that these entities were unlikely to significantly invest in mobile broadband/network capacity on a stand-alone basis.
With current delays to the merger decision of TPG Telecom ((TPM)) with Vodafone Hutchison Australia the broker suspects a similar debate could be occurring at present, i.e. would a stand-alone TPG or Vodafone invest enough to be an effective competitor to Telstra and Optus?
On the NBN, UBS believes an eventual reduction in wholesale prices is the most likely outcome for the industry. Vocus Group ((VOC)) has announced it is prepared to cede NBN market share and prioritise yield and profitability, and the broker believes this is part of a wider strategy to prioritise fixed wireless products over the NBN.
UBS wonders whether the growth in non-residential and engineering construction can offset the fall in residential activity. Around 37% of Australian construction expenditure is on residential and housing approvals were down over the last seven consecutive months.
Boral ((BLD)) expects flat growth and Adelaide Brighton ((ABC)) envisages stable volumes. CSR ((CSR)) has reiterated guidance, and BlueScope ((BSL)) appears the only one expecting detached housing construction will moderate. Most expect infrastructure work to mitigate the housing impact in the short term, although the broker is less certain.
To offset housing declines, engineering work needs to grow by around 10%. Hence, UBS believes it is too early to become positive on the earnings trajectory, as the overall outlook for the Australian building materials volumes and prices remains weak.
UBS believes the latest review of diagnostic medicine carries downside risk for providers. Potential changes to referral criteria for several pathology and diagnostic imaging tests have been recommended.
The recommendations focus on reducing low-value testing in areas such as vitamin B12 testing, iron/folate studies, shoulder ultrasounds and lower back MRI. If implemented, UBS believes the changes could lead to a reduction in referral volumes for operators such as Sonic Healthcare ((SHL)) and Healius ((HLS)).
In assessing the impact of the Crown Resorts ((CWN)) Sydney casino when it opens in 2021, Credit Suisse concludes that both this property, and the new Star Entertainment ((SGR)) Sovereign Room, will grow the gambling market more than originally expected, estimating the premium mass market may grow 11%.
This means the revenue erosion projected for The Star may not be as bad. The broker models a -10% decline for premium mass and flat VIP revenue over FY21-23. On the other hand, Credit Suisse increases Crown Sydney's projected FY22 operating earnings (EBITDA) to $175m and then to over $200m in FY23.
The broker sees Star Entertainment as cheap, upgrading to Outperform from Neutral. The analysis provides improved confidence in the expansion of the Australian gambling market and this should drive the stock towards fair value. Meanwhile, Crown Resorts is considered fully valued and a Neutral rating is maintained.