Weekly Reports | Dec 09 2022
This story features SUNCORP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUN
Weekly broker wrap: insurers more resilient, healthcare picks, contractors remain labour-reliant, classifieds look resilient, retail braces for decline.
-Climate resilience supports domestic insurance outlook
-Wilsons lists healthcare sector picks
-Contractors less reliant on labour force to deliver guidance upside
-Classifieds look to hold strong in an uncertain year
-Household retail valuations appear to have largely accounted for a decline in house pricing, but downside risk exists
By Danielle Austin
Outlook looks up for domestic insurers amid increased climate investment
Morgan Stanley is taking a more constructive outlook on domestic insurers into 2023 as the industry appears to improve its climate resilience. Rising catastrophe and associated reinsurance costs have weighed on the industry in recent years, but action from both insurers and government should improve the situation.
While investment should go some way in improving industry resilience, given years of under-investment Morgan Stanley expects it could take up to a decade for investment to have meaningful impact. The federal government has allocated $200m annually to resilience in levees, sea walls, cyclone shelters, evacuation centres and fire breaks, and to explore ways to reduce the cost of insurance.
Further underpinning a better industry outlook is surging premiums, rising investment yields and cheap trading multiples. Morgan Stanley prefers insurers QBE Insurance ((QBE) and Suncorp Group ((SUN)), which have more self-help options, to further buffer against earnings volatility moving forward.
The broker does anticipate ongoing weather-related catastrophe severity will drive up insurance premiums, and warns investors may be concerned about the affordability of higher premiums for consumers. Of concern is the 10% of Australian households already reporting experiencing extreme home insurance affordability pressures.
CSL tops broker's healthcare picks ahead of the new year
Wilsons expects critical trial results and regulatory approvals to be pivotal for share price movement across healthcare stocks in the coming year, and that stocks which have performed strongly through recent difficult periods (namely Pro Medius ((PME)) and Aroa Biosurgery ((ARX))) are primed to be rewarded as appetites for equities return.
The brokers top six picks for the industry are CSL ((CSL)), Pro Medicus, Clinuvel Pharmaceuticals ((CUV)), Aroa Biosurgery, Immutep ((IMM)) and Clarity Pharmaceuticals ((CU6)).
With CSL its top pick, the broker highlights the company's plasma-derived therapeutic protein delivered consecutive sales records in the June and September quarters. Wilsons is anticipating the company can take market share gains in the immunoglobulin market in the coming year.
Tight labour market provides advantage to contractors less reliant on labour force growth
Citi has reviewed its small cap contractors coverage, noting in the current tight labour market it places higher weighting on labour, pricing and competitive advantage. Given this, the broker highlighted a preference for Imdex ((IMD)), and is most cautious on Monadelphous Group ((MND)).
The broker considers Imdex most immune to labour constraints, while revenue and earnings upside are reliant on factors largely within the company's control rather than on increasing its workforce.
Index has also successfully grown its earnings per headcount at an 18% compound annual growth rate since FY19. Conversely, Monadelphous' earnings per headcount have declined at a -6% compound annual growth rate over the same period. Monadelphous' revenue and earnings growth are highly dependent on its ability to increase its workforce, with its engineering and construction and maintenance and industrial services segments both labour intensive.
Elsewhere within its contractor coverage, Citi is Buy rated on both NRW Holdings ((NRW)) and Perenti ((PRN)) but Neutral rated on Service Stream ((SSM)).
Classifieds appear well placed to navigate a difficult year ahead
Despite an uncertain year ahead, Goldman Sachs remains positive on the classifieds sector, seeing strong earnings potential and cashflow.
For REA Group ((REA)), the broker notes good visibility over its more than 10% growth target. The broker expects pricing power and uptake of the Premiere Plus, which should offer meaningful benefits to agents in a soft market, underpinning an acceleration during FY24.
For Seek ((SEK)), Citi has lifted its earnings outlook for the company following its AGM. The company is anticipating volumes to normalise over coming years, in line with unemployment forecasts, while Citi expects volumes will normalise ahead of the unemployment rate. Longer-term, the broker assumes a return to volume growth.
For Carsales ((CAR)), the broker highlights used car pricing remains resilient to date. The company has reported some impacts on display and lead volumes from new car supply, but this is being offset by strong pricing and depth uptake. Carsales continues to expect to reduce gearing while retaining an 80% dividend payout.
Household retail stocks price in decline, but could have further to fall than expected
With the market pricing a decline in household goods sales into relevant stock prices, Jarden has examined how far a decline may go. Extrapolating a household goods decline from the expected house price drop, the broker is anticipating a between a -15% and -20% decline. Jarden feels consensus earnings offer upside risk in the first half, but anticipates sales will bottom out in the second half.
Share prices across household retail stocks appear to be factoring in a -15-20% sales decline, but Jarden suggests this may not be deep enough to account for the actual impending fall. Given this, Jarden remains below consensus for JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Beacon Lighting ((BLX)), but ahead for Wesfarmers ((WES)) and Metcash ((MTS)) and in line for Nick Scali ((NCK)).
Within its industry coverage Jarden retains its preference for Wesfarmers ((WES)), noting there remains some risk to the retailer's second half forecasts. The broker sees the most risk in JB Hi-Fi and Harvey Norman over the second half.
Within the wider retail space the broker noted a retained preference for fashion, including Premier Investments ((PMV)), Universal Store ((UNI)) and Accent Group ((AX1)), travel, including Flight Centre ((FLT)), Webjet ((WEB)) and Corporate Travel Management ((CTD)), fast-moving consumer goods, including Woolworths Group ((WOW)) and Metcash, and luxury, including Treasury Wine Estates ((TWE)), over household retail.
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For more info SHARE ANALYSIS: ARX - AROA BIOSURGERY LIMITED
For more info SHARE ANALYSIS: AX1 - ACCENT GROUP LIMITED
For more info SHARE ANALYSIS: BLX - BEACON LIGHTING GROUP LIMITED
For more info SHARE ANALYSIS: CAR - CARSALES.COM LIMITED
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED
For more info SHARE ANALYSIS: CU6 - CLARITY PHARMACEUTICALS LIMITED
For more info SHARE ANALYSIS: CUV - CLINUVEL PHARMACEUTICALS LIMITED
For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED
For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED
For more info SHARE ANALYSIS: IMD - IMDEX LIMITED
For more info SHARE ANALYSIS: IMM - IMMUTEP LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED
For more info SHARE ANALYSIS: MTS - METCASH LIMITED
For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED
For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED
For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED
For more info SHARE ANALYSIS: PRN - PERENTI LIMITED
For more info SHARE ANALYSIS: REA - REA GROUP LIMITED
For more info SHARE ANALYSIS: SEK - SEEK LIMITED
For more info SHARE ANALYSIS: SSM - SERVICE STREAM LIMITED
For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: UNI - UNIVERSAL STORE HOLDINGS LIMITED
For more info SHARE ANALYSIS: WEB - WEBJET LIMITED
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED