Weekly Reports | Sep 20 2019
Weekly Broker Wrap: Aged care; advertising; housing; and theme parks.
-Government may move on reforms for aged care but unlikely ahead of the FY22 budget
-Muted impact on sales volumes from stronger house prices
-Mini-boom in house prices could impede reserve bank's willingness to cut
-Price increases at Dreamworld may adversely impact attendances
By Eva Brocklehurst
As just 1% of aged care providers now account for 56% of the sector's pre-tax profit, UBS envisages the financial viability of the majority of providers remains tenuous. Sector pre-tax profit declined -57% in FY18. Expansion of the sector has probably slowed while consolidation has continued.
The number of provider exits have risen to 130 since FY14, representing a -3.4% decline. Despite the decline in operators, the number of operating places continues to expand, with an additional 6453 beds in FY18.
No relief for the sector is likely to be forthcoming in the short term. The government has granted a six-month extension to the Aged Care Royal Commission and the final report is now due in November 12, 2020.
After recommendations have been tabled, the government may move on longer-term sector reforms and address the funding framework. UBS suspects this could involve a replacement for the aged care funding instrument (ACFI) and some level of of resident funding deregulation.
Still, in the absence of any one-off packages, it is unlikely the sector will achieve funding relief ahead of the FY22 budget. UBS believes aged care stocks are pricing in a long-term continuation of the status quo.
The broker considers Regis Healthcare ((RHC)) generates the best returns of the listed operators, with the highest quality portfolio. Japara Healthcare ((JHC)) offers most upside in terms of earnings growth while Estia Health ((EHE)) offers the best gross dividend yield.
August was another tough month for advertising. Metro TV bookings were down -6.6% according to SMI data. UBS notes this is an improvement on the July decline of -10.9%.
The market has been cycling relatively solid comparables and these will start to weaken next month and deteriorate into the end of the year. The main drivers of weakness within the TV advertising market were domestic banks, food/produce/dairy, household supplies and gambling.
Overall, advertising bookings declined -10.1% in August while the strongest categories were insurance and communications.
UBS suspects much of the multiplier effect from stronger house prices to the real economy will be muted in the current cycle. There is very little recovery being seen in housing sales volumes, and a record low turnover rate is dragging on renovations and related consumption.
New housing activity typically follows higher house prices with a short lag of six months but UBS points out building approvals in July fell to a six-year low and a leading indicator, land sales, reveals ongoing weakness.
Rising house prices can lead to a positive wealth affect but the broker suspects the wealth affect is likely to be much smaller this time around, as savings have fallen to just 2.3%, the lowest rate since 2007, and household debt-to-income ratios are already at record highs.
Hence, a mini-boom in house prices could materially impede the Reserve Bank of Australia's willingness to cut official rates again. The key input to another rate reduction in October (UBS expects -25 basis points) will be unemployment data and any easing by other central banks.