The Wrap: Optus, Construction & Healthcare

Weekly Reports | Nov 06 2020

Optus's acquisition of Amaysim may be positive for the industry; the health insurance industry's gross margins fell in FY20; backlog in elective surgery saw reduction in the September quarter.

-An analysis of Optus'sacquisition ofAmaysim
-Falling profits across the health insurance industry
-Covid-19 testing providing a boost topathology volumes

By Angelique Thakur

Following a dual-brand strategy

UBS believes Optuss acquisition of Amaysim ((AYS)) could be positive not only for Optus but the entire telecom industry. Recall Amaysim is Australias largest Mobile Virtual Network Operator (MVNO) business.

The Singapore based telecom also launched a budget mobile brand called Gomo, a no-frills"service, if you may, aimed primarily at customers seeking budget-friendly telecom services.

The rationale behind the move? As Goldman Sachs puts it, the deal is a defensive investment to accelerate [the telcos] dual-brand strategy

The fact the company did not have a sub-brand in the MVNO market was at odds with the likes of peers Telstra ((TLS))and TPG Telecom ((TPG)), both of which have their own sub-brands (Telstra's Belong and TPG'sFelix) in the segment.

In CEO Kelly Bayer Rosmarins own words:

Optus has been rated Australias strongest brand, and is competing well in the market, but we have not had any sub-brands competing in the growing MVNO segment of the market. Thats why we are so excited to extend our reach and appeal by adding Australias largest and most successful MVNO brand, Amaysim, and a new digital brand, Gomo, to our line-up.

UBS is pleased with Optus' Amaysim acquisition and believes the deal will be good for industry pricing since Optus will be able to premiumise its head brand, something the telco wasnt able to do earlier due to the fear of cannibalisation by Amaysim.

A similar strategy was followed by Telstra when it launched its Belong brand for the lower end segment and also allowedthe telco to lift the prices for its head brand - essentially covering both the markets.

The deal will also eliminate what is considered by UBS an unfavourable contract structure between Optus and Amaysim wherein Optus had committed a certain amount of capacity at a specific price to Amaysim. Both UBS and Goldman Sachs agree Amaysim had more pricing flexibility under the contract than Optus would have liked.

Goldman Sachs is Neutral on TPG Telecom and rates Telstra as Buy.

Health insurance policy growth softened in FY20

In FY20, the private health insurance industry saw a broad-based deterioration in profits, as confirmed by the annual report released by APRA.

The overall policy growth softened to 0.4% in FY20. Market share gains were skewed towards the smaller funds, HCF Health Insurance and nib Holdings ((NHF)) with Bupa ceding -0.4% of its market share. nib Holdings' market share rose 0.6% to 9.2% in FY20.

The report sees policy downgradingas a constant headwind throughout the year. Revenue growth also lagged despite a lower increase in premium rates. What increased across the industry were claims growth, which rose to 3.1% in FY20 from 2.4% in FY19.

All in all, the industry gross margins fell to 12% as compared to 14% in FY19. This was instrumental in a higher proportion of the industry posting operating losses, with 16% of the total policies loss-making as compared to a puny 1% last year.

Goldman Sachs believes the fallout from the pandemic remains hard to judge currently with many moving parts. Even then, the broker feels the risks are now better reflected in valuations and is Neutral on both Medibank Private ((MPL)) and nibHoldings.

Pathology boosted by covid-19 testing

UBS has taken a look at the Medicare data released for September 2020. With Medicare contributing about 85% of Healius ((HLS)) revenues and 60-70% of Sonic Healthcares ((SHL)) revenues, Growth in availing Medicare is regarded as a proxy by UBS for understanding operating trends of these health care providers.

Covid-19 PCR tests have been a major boost to pathology volumes, finds UBS aftercomparing the September quarter numbers with last year's growth rates. Pathology benefits also jumped (27% growth year on year).

In fact, pathology benefits outgrew the pathology volumesquite significantly (27% versus 9.3%), a feat UBS believes was helped by the higher reimbursement per patient for covid PCR tests versus the routine tests.

Growth in GP attendance was robust at 4.9%, assisted by telehealth. Imaging volumes were down -0.3% during the quarter.

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