In Brief: Lithium, Telcos, SMAs, Healthcare

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Weekly broker wrap: lithium concerns, telco rejection, SMAs growth, healthcare picks. 

-Concern for lithium outlook emerges as electric vehicle demand slows
-Rejection of Telstra-TPG Telecom deal by the ACCC a negative for both telcos
-SMAs have become a preferred option for Australian investors, reporting steep increases in funds held in recent years
-Morgans outlines healthcare picks it expects have a better year ahead

By Danielle Austin

Outlook weakens for lithium despite recent high auction price 

Concerns have emerged around the lithium market outlook in recent weeks, as wait-times for electric vehicles decline, prices are cut, and battery inventories rise. Barrenjoey is yet to make cuts to its lithium pricing outlook, despite some expectations that the lithium market will move into a surplus in the coming year following the slower first half of the fiscal year. 

The broker has, however, lifted its capital and operating expenditure assumptions across its lithium coverage. With the price for construction having risen more than 20% in the last year, Barrenjoey warns company’s yet to lock in contract pricing were at risk of capital expenditure inflation. 

For Liontown Resources ((LTR)), which continues to progress on its Kathleen Valley hard rock lithium project build, the broker assumes capital expenditure increases to $750m from the $545 estimated by the company in June. Coupled with higher operating expenditure, this drives a -20% decline in Barrenjoey’s net present value for the stock. 

The broker also assumes higher capital and operating expenditure for both Allkem ((AKE)) and Pilbara Minerals ((PLS)), with both continuing with new builds or expanding operations, and lowers its net present valuation on both. Mineral Resources ((MIN)) remains Barrenjoey’s preferred lithium exposure.

Competition concerns sees the ACCC deny Telstra-TPG Telecom network deal

The proposed network sharing deal between Telstra ((TLS)) and TPG Telecom ((TPG)), known as the Multi Operate Core Network (MOCN), has been rejected by the Australian Competition and Consumer Commission (ACCC), with the Commission citing reduced infrastructure competition as a key concern. The Commission felt the deal would reduce inclination of both Telstra and Optus to invest regionally. 

With rejection of the deal meaning lost near-term earnings for both telcos, Goldman Sachs finds it a marked negative for both companies. Telstra and TPG Telecom are pushing for a review from the Australian Competition Tribunal, and an outcome would be expected by mid-2023. Rejection of the deal also adds uncertainty to a network deal emerging for Telstra with TPG Telecom and Optus, according to Goldman Sachs. 

This broker considers three possible outcomes from here. Firstly, that proposal is rejected and TPG Telecom remains a metro-centric mobile network, likely also meaning a deal between TPG Telecom and Optus does not emerge; secondly, that a alternative deal is made between TPG Telecom and Optus; and thirdly, that an alternative deal is made between Telstra and TPG Telecom that would not require ACCC approval, such as a regional roaming deal. 

UBS’s outlook continues to assume successful implementation of the MOCN agreement by mid-2023. It considers the deal to add $65m in earnings uplift to TPG Telecom by FY27 and $100m by FY30, and $160m in additional revenue to Telstra by FY26. On the flip side, it expects an unsuccessful appeal to drive a -4% impact to longer-term earnings for TPG Telecom, and a -2-3% impact for Telstra. 

Macquarie did highlight rejection of the deal appeared to be a positive for Optus, and that it would need to see mobile pricing on a positive trajectory before it could take a more constructive view on either Telstra or TPG Telecom. 

SMAs take majority segment share after steep growth in recent years 

A steep increase in funds held in separately managed accounts (SMAs) since mid-2020 has seen segment share increase to 52% from 36% in just two years. Rainmaker Information suggests the sharp increase is a result of SMAs being easier for financial advisers and investment managers to work than managed discretionary accounts (MDAs), as well as being more scalable and easier to explain to clients. 

According to data from Rainmaker, SMAs are growing three times faster than MDAs, with the former increasing 151% in dollar terms in two years compared to the latter’s 44%. Total funds held in managed accounts reached $163bn at the end of June, with funds in managed accounts growing at 46% per annum in the last five years. 

SMAs now appear on track to become the preferred type of investment platform domestically, and Rainmaker suggests they offer access to the only platform market segment demonstrating long-term growth, with superannuation and retirement platforms constrained by ongoing market disruption and competition. 

[Note that while SMAs are being preferred over MDAs, exchange traded funds (ETFs) are being increasingly preferred over SMAs (https://www.fnarena.com/index.php/2022/12/15/smsfundamentals-etf-investment-drags-on-smas/)]

Healthcare plays have a better year ahead, according to Morgans 

Morgans anticipates the year ahead will be a better one for the healthcare sector, after a challenging 2022. Within the sector, it prefers stocks that can broadly be described as a high quality company, approaching a key catalyst, or reaching an operational turning point.

Its top six healthcare picks, Pro Medicus ((PME)), Ebos ((EBO)), Neuren Pharmaceuticals ((NEU)), Proteomics International ((PIQ)), Volpara ((VHT)) and Nanosonics ((NAN)), all fall broadly into one of these categories.  

The broker considers both Pro Medicus and Ebos high quality companies, with Pro Medicus in particular one of the best growth stories on the ASX in the last decade. Ebos, meanwhile, continues to benefit from structural headwinds that include a greater need for healthcare in an ageing population and an increasing population. 

It sees both Neuren Pharmaceuticals and Proteomics International as approaching a catalyst. For the former, it is FDA approval of its trofinetide treatment, which is set to be actioned by mid-March. Approval could lead to a US$40m milestone payment, according to Morgans. For the latter, it is progress on a formal agreement with Sonic Healthcare regarding licensing of its Promarker testing platform. This is anticipated by years end, and will outline timelines to commercialisation. 

It sees both Volpara and Nanosonics as approaching a turning point. It anticipates Voltara breaking even by the fourth quarter of FY24, with the company advancing new strategic direction and focusing on its most profitable products, markets, and larger value customers. Morgans feels the transition to a direct sales model has been a positive shift for Nanosonics, and expects it will underpin profit growth in the medium-term following the company’s latest update.

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