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The Wrap: Economy; Wealth, IMF And Imaging

Weekly Reports | May 17 2019

Weekly Broker Wrap: consumer tax lift; RBA and Oz economy; wealth platforms; infant milk formula; diagnostic imaging; and supermarkets.

-Consumer spending may be lifted from July as tax rebates take effect
-Slowing employment growth the key to an RBA decision on cash rates in the second of 2019
-Change to franking credit policy could be positive for Australian wealth management platforms
-Sales of infant milk formula in China decelerating as births slow
-Healthy outlook for the diagnostic imaging segment
-Improving inflation outlook underpinning supermarket sector


By Eva Brocklehurst

Consumer Tax Lift

Tax relief in the 2019/20 federal budget should provide a de-facto tax cut to around 10m Australian residents and inject a significant amount of cash into the household sector from mid July, Commonwealth Bank economists assess. This will occur regardless of the outcome of May 18 election, as the ALP opposition has backed the government's policy.

In many ways, the economists suggest this is akin to the $900 “cash splash" per person delivered from the government during the GFC in 2009. The CBA economists believe 2009 provides a guide as to how households may spend this rebate from the 2019 budget.

Evidence shows there was a clear, short term positive impact on spending and there could be a material bounce in retail trade for a 3-4 month period. In total, the Australian household sector will receive around $7.25bn in rebates over 2019/20 and a similar amount will be refunded in 2020/21.

RBA And Oz Economy

Franklin Templeton finds it interesting that, despite downward revisions to the RBA's growth and inflation forecasts, cash rates were left unchanged at 1.5% at the latest board meeting.

The analysts consider the RBA's downgrade to both growth and inflation was the largest possible without contradicting the interest-rate decision a few days prior, and now hangs on the outlook for the labour market.

Franklin Templeton focuses on employment by groups of industries to reflect the major components of demand such as consumer and business spending, government expenditure and exports. The analysis points to employment exposed to private consumption slowing sharply, while business and government-exposed employment is growing at a better rate.

Exports-exposed employment has been mixed. This is the smallest category because of the capital-intensive nature of these industries. Employment in business spending-exposed groups also tends to lag employment in consumer-exposed group by around 12 months.

The analysis implies a slowdown in overall employment growth is likely to begin in the June quarter and become more pronounced throughout the remainder of 2019. Amid falling house prices and near-zero real income growth, a rebound in consumer-related expenditure appears unlikely, absent a boost to disposable income via lower interest rates.

Unemployment, therefore, is expected to rise the second half of 2019. Even growth in government employment is unlikely to offset this. If this occurs, Franklin Templeton considers the RBA will have no choice but to reduce the official interest rates and the only question would be by how much.

Australian Wealth Platforms

Citi suspects a change to franking credit policy could be positive for Australian wealth management platforms. The proposal by Labor could be positive for Netwealth (NWL)) and HUB24 ((HUB)) as it could result in incremental flows from off-platform self managed super funds (SMSFs).

However, whether this eventuates is not certain as the amount of flows into each platform depends on the mix of accumulation and pension members. Other strategies could also be adopted to minimise the impact of any change.

The proposed changes could result in SMSFs moving assets to an industry fund or retail super fund, continuing to utilise excess franking credits. Still, Citi calculates using the share of advisers as a proxy, Netwealth could attract $1.2-2.9bn of incremental flows while HUB24 could attract $750m-1.9bn.

Upside exists if the policy changes also result in increased churn from platform super funds that are in a net refund position to Netwealth and HUB24, given the relative tax position. Still, the policy change could also represent a risk to platforms, as SMSFs already represent a substantial portion of funds under administration through both companies' investment wrap offering, and the changes may make this less attractive.

Infant Milk Formula

Nielsen data has revealed that sales of infant milk formula (IMF) at retail outlets in China (ex online business) decelerated to growth of just 4% in January and February. This compares with growth of 11% in the previous six months.

Morgan Stanley assesses the developments in the industry based on channel checks, data and company updates, acknowledging that Nielsen data cannot capture sales trends in certain channels and outlets in lower-tier cities.

Still, the broker expects overall demand to trend lower amid declining birth rates in China, which in 2018 were down -12%. China's government has not revealed any policies designed to counter the decline and Morgan Stanley suspects it will be difficult to prevent.

As industry growth slows, and major operators develop similar strategies, the scope for competition to affect earnings and returns of companies such as a2 Milk ((A2M)) and Bellamy's Australia ((BAL)) is increased. Competition from Chinese brands is also set to increase.

Morgan Stanley believes many tailwinds for a2 Milk will not continue into FY20 and growth will slow considerably. Factors leading to slower growth include higher spending on marketing, increased dairy costs and a non-recurrence of the earnings benefit from the new Synlait Milk ((SM1)) deal.

Diagnostic Imaging

Ord Minnett notes revenue growth for both Integral Diagnostics ((IDX)) and Capitol Health ((CAJ)) is underpinned by long-term average growth in benefits of 6%, now supplemented by indexation of almost 80% of the Medicare Benefits Schedule from FY21. Added to this is the pledge by Labor to support the industry with $600m over four years with free will scans for cancer patients, a measure expected to boost utilisation of unlicensed MRIs (magnetic resonance imaging).

Ord Minnett also notes Integral Diagnostics' new prostate specialist centre should contribute meaningfully to earnings once at full capacity in FY21. The broker expects earnings growth of 16.8% in FY21 and upgrades to Buy from Accumulate. Meanwhile, Capitol Health is trading at a discount to Integral Diagnostics as as well as recent bid multiples, and is likely to remain a potential target, in the broker's view.


UBS acknowledges an improving inflation outlook should provide some upside risk to forecasts for the supermarket sector but suspects this is being priced into the stocks. The broker downgrades Woolworths ((WOW)) to Neutral from Buy and moves Metcash ((MTS)) to its most preferred stock. While retaining a Sell rating for Coles ((COL)) the broker is becoming less negative.

UBS forecasts 4.0% industry growth in 2019/20 on the back of an improving inflation outlook. This is supported by a fall in share of promotional mix, supply shortages in fresh produce, cost pressures from Imports & fresh produce, as well as tax on tobacco. The broker assesses every 1% of industry inflation will have a 3-7% positive impact on group earnings (EBIT).

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