Weekly Reports | Mar 22 2019
Weekly Broker Wrap: supermarkets; general insurance; health insurance; telcos; asset managers; and industrial earnings.
-Loyalty drops to fourth as a driver of shopping decisions in UBS survey
-Market share of major general insurers continues to slip
-Better claims performance for health insurers expected to persist
-Mooted NBN changes signal disadvantage to providers with lower-tier customers
-Asset managers and wholesale banks are under pressure and need to define a growth agenda - Morgan Stanley
By Eva Brocklehurst
A UBS survey of 1100 shoppers in February was positive for Woolworths Group ((WOW)), slightly positive for IGA, supplied by Metcash ((MTS)), and negative for Coles Group ((COL)) & Aldi.
Convenience and price remain the driver of consumption. Woolworths performed the best across price measures, ahead of Coles, albeit slightly, for the first time since the studies began. Loyalty dropped to fourth as the driver of shopping decisions, which surprised UBS, particularly given the heightened investment in tailored offers and the use of customer data.
Woolworths appears to have accelerated its market share gains, at the expense of Coles. UBS envisages upside to second half growth estimates for Woolworths and downside for Coles.
Meanwhile, IGA market share trends were up modestly and the broker envisages accelerated store refurbishment and more consistent pricing as catalysts for future growth. UBS retains a Buy rating on Woolworths and Metcash and a Sell rating for Coles.
UBS finds the consistent slippage of market share for both Insurance Australia Group ((IAG)) and Suncorp Group ((SUN)) presents a confronting longer-term view. The broker has retained an overweight position on the sector, noting a high level of momentum in personal line rates across motor & home, despite overall gross written premium (GWP) growth being below the challenger brands.
This should add modest upward pressure to the widening of margins over the next 12 months that is being driven predominantly by a hardening of commercial rates. Still, obvious questions about vulnerability remain, UBS acknowledges, should a meaningful disruptor emerge at some point.
A sceptical view of challengers has been based on the probability they would not be able to sustain high growth and deliver acceptable profitability at the same time, and would have greater volatility when costs from catastrophic events were elevated. However, UBS calculates that both the absolute level of challenger loss ratios and the change relative to the first half of FY18 counter this view. Challengers have acquired 4.1% market share over the past five years and now write $2bn in GWP.
Macquarie's analysis shows industry headwinds are mounting for health insurers, as participation continues to contract and the potential for a 2% cap to pricing under a Labor government nears. The broker maintains a Neutral rating for both nib Holdings ((NHF)) and Medibank Private ((MPL)) heading into the May federal election.
Current valuations remain supportive but the broker does not believe the margin risks are completely priced in. Moreover, the analysis shows that Medibank Private achieved claims growth per policyholder that was around -270 basis points below industry averages in the first half and nib Holdings was lower by -230 basis points.
Both companies are confident claims outperformance will persist in the medium term owing to chronic disease management, the acquisition of healthier lives and more facilities to take claims out of the hospital setting. Should a 2% average cap to price be imposed, Macquarie believes those insurers and hospitals with scale will outperform.
Press reports have suggested that the NBN is preparing for further changes to wholesale pricing. Credit Suisse estimates that monthly NBN access costs for 12Mbps customers could effectively increase 8.5% following the changes, primarily because of the removal of dimension-based discounts.