In Brief: Mortgage Stress, Strata Insurance, Wound Care

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Weekly broker wrap: borrowers at mortgage imprisonment risk, strata insurance market consolidation, wound care stocks re-rate. 

-Australian mortgagees at risk of loan" imprisonment" in a rising rate environment
-Domestic strata insurance market tightens with exit of Insurance Australia Group
-Analysts see value in wound care stocks post-pandemic

By Danielle Austin

Australian borrowers face mortgage "imprisonment"

The impact of rising interest rates on mortgage holders is again a talking point among analysts as cash rate hikes continue. Rates have now risen 250 basis points in six months, and Jarden feels it is likely that further rate increases totaling 50 basis points will be enacted before the end of the year. With $500bn in fixed rate loans set to expire in the coming years, rising rates pose a significant risk to mortgagees. 

The broker has raised concerns that such steep rate increases will make borrowers “mortgage prisoners”, where consumers become trapped in their existing loan and with their existing lender, without options to refinance given poor loan-to-value ratios. Jarden anticipates 20-30% of recent borrowers, or 10-15% of outstanding mortgages, could face refinancing difficulties but expects these figures underestimate the true extent of mortgage imprisonment. 

Jarden is anticipating borrowing capacity to decline between 25-30% by June 2023, to be up to -20% below borrowing capacity of December 2019. The decline will mean many recent borrowers will be unable to meet the serviceability on their current loans. Borrowers who maxed out their lending capacity in recent years will be most at risk of becoming mortgage prisoners. While a risk for borrowers, the broker expects the trend will prove positive for banks, reducing the expected intensifying of competition in the industry. 

Stata consolidation leaves insurers exposed

The Australian strata insurance market is set to become further concentrated with Insurance Australia Group ((IAG)) announcing its intention to exit the segment. The news follows the exit of three major insurers since FY15, and leaves remaining companies further exposed to catastrophe events. Strata insurance accounts for 1.1% of IAG’s gross written premium, 2.7% of QBE Insurance’s ((QBE)) and 0.5% of Suncorp Group’s ((SUN)).

Insurance agency CHU, whose policies are underwritten by QBE Insurance, has been a main market share beneficiary of ongoing consolidation. QBE has been transparent about its need to manage its catastrophe exposure over the last twelve months and Macquarie analysts expect exposure is likely impacting on the company’s catastrophe reinsurance. The broker believes it would be prudent for QBE to look to reduce its strata insurance market exposure. 

Exposure reduction by QBE would increase pressure on the broader market, and Macquarie finds regulatory change necessary. Given these changes would need to be implemented at a state level, the broker highlights they would be difficult, time consuming, and therefore unlikely. Steadfast Group ((SDF)), as owner of CHU, would be most impacted by regulatory change, but the broker estimates a worse-case scenario would equate to a -4.4% impact on earnings per share. 

Wound care stocks to benefit post-pandemic

Wilsons suggests now may be the time to reconsider listed wound care stocks with the sector in full volume recovery following a period of de-rating during the pandemic. US patient volume recovery in the treatment of severe burns, traumatic injury, reconstructive surgery and chronic wound management post-pandemic has been supportive of recovery in the segment, which suffered a de-rating with access to hospitals restricted in recent years.

Post-pandemic, the market appears to be favouring lower priced devices that satisfy prospective evidence quality thresholds. However, according to the broker not all wound care stocks are equal. 

Wilsons finds Polynovo ((PNV)) expensive compared to peers, particularly given its near-identical revenue growth to Aroa Biosurgery ((ARX)) and its single sector exposure compared to Aroa Biosurgery’s more diversified product suite. AVITA Medical ((AVH)), which demands half the valuation of PolyNovo, also services a single sector. Given its premium pricing, Wilsons remains Underweight rated on Polynovo, and is market weight rated on AVITA Medical, noting profitability does not appear to be the company’s focus. The broker finds Aroa Biosurgery well placed to recapture a premium valuation, and is Overweight rated on the stock.

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