Tag Archives: Health Care and Biotech

article 3 months old

Weekly Broker Wrap: Oz Health, Gaming, Pacific Smiles And US Housing

-Lower health claims flagged by nib
-Yet hospital growth seen solid
-Positive signals for gaming
-Material expansion likely for PSQ
-Brokers optimistic on US housing


By Eva Brocklehurst

Australian Health Care

The improved claims experience cited by nib Holdings ((NHF)) is difficult to extrapolate across the sector, Goldman Sachs maintains, given the company has less than 10% market share in private hospital operators and its policy holders are predominantly in NSW.

In theory, the broker notes, lower claims growth for health funds should mean lower revenue growth for the private hospital industry. Yet the December half revealed this is not necessarily the case in terms of lower revenue growth and/or margins for listed operators Healthscope ((HSO)) and Ramsay Health Care ((RHC)).

Although private hospital payments make up the bulk of health insurance claims, doctor fees and payments to ancillary services are also large segments. Goldman Sachs observes public hospitals also account for 10% of insurance payments to hospitals.

The broker observes anecdotal evidence suggests hospital volumes grew solidly for a number of operators in the March quarter. Hence, Goldman Sachs makes no changes to its Healthscope or Ramsay Health Care forecasts.


Victorian gaming machine expenditure rose by 2.3% in March, slightly below Deutsche Bank's expectations. The broker notes Crown Resort's ((CWN)) Melbourne casino expenditure is growing in excess of this rate.

After a strong FY15 the broker notes domestic gaming machine expenditure remains firm, with NSW, Queensland and Victoria all showing growth. Deutsche Bank believes this is a positive signal for the casino operators and equipment manufacturers.

Pacific Smiles

The dental centres in the Pacific Smiles Group ((PSQ)) portfolio offer a superior consumer experience, in Morgan Stanley's opinion, and there is scope for five times the number of centres, supported by demand and low government funding risk.

There is flexibility for dentists and value for insurers as well, the broker maintains. The industry is considered to be large, fragmented and relatively defensive with corporatised models comprising a very small percentage. This presents scope for consolidation.

Morgan Stanley initiates coverage on Pacific Smiles with an Overweight rating and target of $2.50, expecting material expansion in the long-term margin and returns on investment.

US Housing

US new home sales missed expectations in March. Morgan Stanley observes growth has been decelerating for the past four months. The broker notes around 75% of single family starts in the past year have been built for the “for sale” market. On that basis the March data signals a significant increase in sales is required to support the current level of building.

The broker remains positive on the US housing outlook, with mortgage purchase applications rising solidly to a six-year high monthly average in March. Despite expectations that James Hardie's ((JHX)) fourth quarter will show weaker volume growth, Morgan Stanley expects a solid profit outcome.

Deutsche Bank reduces housing starts forecasts by 2.0% for 2016 with forecasts for 2017 relatively little changed. This broker, too, remains optimistic on US housing despite the minor downward adjustments. Growth of 11% is expected in FY16 and FY17.

The broker makes minor changes to earnings estimates for Australian stocks on the back of the US data, with a 1.0% decline in its James Hardie target a result of Australian dollar translation. The broker believes the downside risks for Boral ((BLD)) include pricing weakness in cement and concrete in Australia as well as a slower-than-expected recovery in the Australian and US housing market.

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Weekly Broker Wrap: Oz Insurers, Budget, Supermarkets, Banks And Aged Care

-Capital management potential in insurers
-Budget: tax cuts unlikely, super changes possible
-Aldi can further close gap to majors
-Major bank re-pricing likely after election
-UBS envisages no sharp rise in bad debts
-Brokers: aged care proposals broadly positive


By Eva Brocklehurst

General Insurers

Conditions are ripe for capital management and risk management in the general insurance industry, Macquarie contends. Current valuations of Suncorp ((SUN)), Insurance Australia Group ((IAG)) and QBE Insurance ((QBE)) capture the excess capital, although the broker only includes capital management on a one-year forward basis.

Despite a positive view on the potential for capital management, which supports a combination of special dividends, buy-backs and/or share consolidation, the broker continues to forecast difficult operating conditions, with low growth and margin pressure.

Morgan Stanley considers the outlook is tough for insurers. Returns on equity exceeding the cost of capital and negative real rates attracting capital are the main headwinds.

Global re-insurer returns are falling, although profitable at around 10%. The broker observes soft re-insurance pricing is flowing through to weaker global pricing by primary insurers.

The broker prefers exposure to strong domestic franchises such as IAG and speciality business which is relatively more resilient, such as QBE.

Budget Preview

The Commonwealth deficit is tracking broadly in line with the Mid Year Economic and Financial Outlook (MYEFO) released in December, and UBS observes the 2016 budget could be the first in a number of years with minimal fiscal slip.

Supporting this is a surprise lift in iron ore prices, which could add up to a cumulative boost of $27bn over four years. Still, UBS expects some offset in stalled savings from prior budgets and the trimming of nominal GDP forecasts.

Monthly data is showing a cumulative financial year-to-date deficit of $39bn. The broker notes changes to GST and housing have been ruled out. Modest personal income tax cuts are possible but a company tax cut appears to have been delayed.

Changes to superannuation seem likely, with the broker suspecting a lower threshold at which contributions are taxed at 30%. The possibility of a large rise in government infrastructure spending, probably funded by long-term bonds, is on the cards and to some extent priced in by the market.

The broker considers the budget could be an opportunity to buy into attractive long-end Australian government bond valuations.

Australian Supermarkets

The reason for Aldi's success, on Morgan Stanley's analysis, is that customers start out buying staples -- products with a low risk of failure -- and after these have met expectations purchase more products, moving into other dry grocery lines. From there consumers graduate to fresh food.

Aldi's prices are around 25% cheaper on "like" products the broker compares with Coles ((WES)) and Woolworths ((WOW)) , where consumers spend $220 and $228 respectively on average over a four week period.

So it is clear that in terms of basket size, Aldi will not catch up. However, Morgan Stanley does believe Aldi can close the gap. Aldi has increased its basket size by 67% since 2007, but customers spend just $100 over a four week period.

Morgan Stanley forecasts a potential penetration for Aldi of 10% of the Australian food and liquor market by 2020.

Australian Banks

Despite the near-term pressures, Morgan Stanley expects future re-pricing initiatives from the major banks, in the wake of Bank of Queensland's ((BOQ)) move to raise variable mortgage rates, will be delayed until after the federal election.

The broker expects more emphasis on risk-based pricing for home loans, with potential for further differentiation in pricing for investors, interest-only loans and offset accounts.

Morgan Stanley notes 51% of National Australia Bank's ((NAB)) book is now Australian home loans and it receives as much benefit as Commonwealth Bank ((CBA)) and Westpac ((WBC)) from standard variable rate re-pricing. ANZ Bank ((ANZ)) receives the least benefit, given its business and geographic mix.

A number of specific problem exposures in the corporate sector have caused renewed concerns from investors regarding the banking sector, UBS observes. The broker's research indicates that investors are unsure whether this is the start of a more significant bad debt cycle or relatively isolated spikes in the trend, principally caused by limited fall out from the end of the resources boom.

The broker does not that at the same time recent macro economic data has surprised to the upside, with strong business conditions and low unemployment. A low and stable cash rate is not consistent with a marked deterioration in bad debts, the broker observes. On that basis UBS believes bank valuations remain attractive.

GUD Holdings vs GWA Group

Both GUD Holdings ((GUD)) and GWA Group ((GWA)) have strong domestic brands and well recognised household names, while UBS observes consistent high margins have been part of their respective portfolios – automotive for GUD and kitchens & bathrooms for GWA.

Yet while the stocks screen cheap they are not without issues, the broker contends. Top line growth has been sluggish recently and the companies have shifted away form domestic manufacturing to pure import models which means a high level of exposure to movements in the Australian dollar.

Each has undertaken significant restructuring to remove under-performing parts of their portfolios. UBS is positive on GUD, with a Buy rating, given the higher proportion of earnings from automotive after the BWI acquisition and the recent sale of the remaining stake in Sunbeam.

UBS believes lacklustre top line growth and FX pressure, with poor cash conversion and top heavy corporate structure, means GWA has issues to address. Hence, a Neutral rating is retained.

Aged Care

The Aged Care Sector Committee, which provides advice to government, has released a guide to future reforms. The fact that this has been done in close proximity to an election signals to UBS that the government partially endorses the proposals.

The theme is increasing choice and control for the consumer, which the broker suspects will ultimately favour large, well managed, residential aged care operators. The guide recommends a removal of the distinction between care at home and residential care.

Major recommendations include reduced controls on the supply of beds, transparent performance standards, and a review of current funding with the intent to make new financial products available.

For the listed providers Deutsche bank believes a deregulated environment would be broadly positive but the wide ranging proposals introduce a number of new risks which are difficult to quantify. Nevertheless, the providers are expected to have sufficient time to adjust to any changes and the broker awaits the government's response before reviewing forecasts.

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Weekly Broker Wrap: Strategies, Exports, Retail, and Health Care

-Are pay-out ratios sustainable?
-Risks to exports from AUD strength?
-UBS expects modest retail sales growth
-Subdued federal budget for healthcare likely
-Yet further reforms unlikely to be announced
-Medical Developments' key product in trauma


By Eva Brocklehurst

Portfolio Strategy

On face value Goldman Sachs finds pay-out ratios in Australia appear unsustainable. Over the past 12 months the ASX200 has paid out 83% of reported earnings in the form of dividends. This is the highest pay-out ratio in 30 years, the broker notes, and well above other developed markets. The fact that a number of resource stocks have made substantial cuts to dividends over the past few months highlights the focus on sustainability.

Goldman expects growth in shareholder returns will be more muted going forward, and believes there has been too much focus on Australia's high dividend yield relative to other global markets.

The broker agrees with the underlying basis for suggestions that Australia's imputation system and record low bond yields put pressure on firms to maintain a high level of dividend payment as opposed to making future investment opportunities. Nevertheless, this does not account for two important points.

Firstly, the pay-out ratio, while still high, looks better compared with free cash flow than it does when compared with earnings. Secondly, when the cash returned via buy-backs is included, Australia drops to the middle of the range globally.

Ordinarily the broker would argue that firms are better off implementing buy-backs than making dividend payments that are potentially unsustainable, because of the negative price signal a cut to dividend sends. That said, given equity market valuations have been quite high relative to history in many developed markets, Goldman Sachs suspects capital management actions in Australia might prove to be more conservative than many international peers.

Top Picks

Credit Suisse includes Amcor ((AMC)) in its top picks for Australia. The broker considers the stock defensive and well managed, providing exposure to the global packaging market. Bolt-on M&A opportunities are also on the rise. The broker notes 32% of the company's revenue is derived in higher growth emerging markets.

Amcor is expected to generate 6.0% earnings growth in FY17 from the US$200m in acquisitions made over the past 12 months, a sequential improvement in flexibles trading in China and no further drag on reported earnings from US dollar strength. Credit Suisse retains an Outperform rating and $15.30 target.

Services Exports

Net services exports contributed one sixth of Australia's 3.0% GDP growth in 2015 and ANZ analysts expect this segment will slow in 2016, amid a waning stimulus from the Australian dollar.

A stronger-than-expected currency then raises the risk of an earlier and sharper slowdown. There is already some evidence that Australians are holidaying more overseas while education exports have already slowed.

On the optimistic front, the analysts argue that growth in inbound Chinese tourism has been less sensitive to the currency and this is a key driver of services exports. Additionally, given the extent to which a more resilient currency reflects better fundamentals, a weaker outlook for net services exports is less of an issue, the analysts acknowledge.


Retail sales for February were up 3.3%, below the 12-month run rate of 4.2%, UBS observes. Supermarkets were weak, household goods continued to moderate, driven by a weaker result in electronics, reflecting a tougher comparable as well as the unwinding of Dick Smith. Department stores provided a strong result, recording 7.0% growth.

UBS expects mid single digit growth to continue in 2016, driven by support from the housing market. The broker contends Harvey Norman ((HVN)), JB Hi-Fi ((JBH)) and Adairs ((ADH)) offer the best listed exposure, with Harvey Norman having further upside via successful execution of its efficiency strategy.

The broker also expects the department store sector, namely Myer ((MYR)), should also perform well. Sell ratings for Woolworths ((WOW)) and Metcash ((MTS)) are unchanged. The broker retains its relative preference for Coles ((WES)) within supermarkets.


The upcoming federal budget is expected to update projections on recent shifts in policy regarding bulk billing incentives, the Pharmaceutical Benefits Scheme (PBS) and the freeze on Medicare benefits.

UBS suspects it is too early to book material savings from the key reviews but, equally, the growing budget deficit remains a constraint on largesse. Given major reform processes are under way the broker generally expects a more subdued approach to further healthcare reform in this budget.

Monthly aged care data recently released recently showed 200 basis points in over-spending versus forecasts. While UBS believes this was dealt with in the government's Mid Year Economic and Fiscal Outlook (MYEFO), when a top up was applied and the scoring matrix changed, a modest correction may be considered at this budget.

Still, the broker suspects it is more likely that with scoring matrix changes yet to take effect, and given the political climate, the government may wish to reassess the situation later in the year at the 2016 MYEFO.

Aged care funding growth of 7.1% in the four months to October was in line with Deutsche Bank's expectations and the broker does not expect material reforms to be announced at the May budget, given the cuts already announced at the MYEFO are yet to be implemented.

The broker believes the funding reforms proposed in the MYEFO were largely intended to rein in growth in the complex health care category of funding. The risk of further reform, therefore, will depend on the success of these cuts, the broker maintains, and growth should decelerate in 2016 as providers react to the changes. Further cuts in July may be required to slow growth to the budgeted level, Deutsche Bank suggests.

Medical Developments International

Bell Potter initiates coverage on the specialist health care company, Medical Developments International ((MVP)), with a Buy rating and $7.50 target. The company offers industry-leading products in the areas of pain and respiratory devices.

The company’s Penthrox product is a self-inhaled, fast acting, non-narcotic analgesic for trauma pain. Approval for marketing in the UK, Belgium and Ireland was received in the first half.

The broker notes emergency trauma pain is under-served and a growing market. Increasing use of emergency departments has put them under pressure and Penthrox can facilitate a 3-hour turnaround performance standard and provides an attractive alternative to opioids.

The company's respiratory product is Space Chamber, designed to be used with metered dose inhalers to improve the delivery of asthma and COPD medications. Bell Potter forecasts double digit revenue and earnings from FY16 and considers the valuation reasonable relative to the stock's aggressive growth potential and risk profile. The broker expects 3-year compound growth in earnings of 66.4%.

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Pro Medicus Raises Its Stake In US Market

-Key US health care system
-Earnings estimates up by 10%
-Margins of 40% expected in FY18


By Eva Brocklehurst

Pro Medicus ((PME)) has won a large, long-term contract to roll out its medical imaging software. This time it involves the Mercy Health System's 46 facilities in the mid west of the US. Mercy Health is the seventh largest Catholic health care system in the country.

The seven-year contract has a base value in excess of $21m. The company will receive $3m per year as a minimum over the life of the contract regardless of the number of scans performed. Moelis observes Mercy Health is at the forefront of adopting leading edge technology in the US, having been the first to adopt an electronic health records system which is now ubiquitous throughout the US.

Pro Medicus' technology provides detailed scans at high speed to the medical fraternity in hospitals and radiology clinics and Moelis believes the contract with Mercy will support further success going forward. The key to the company's software is the ability to rapidly render scans to be viewed on desktop or mobile devices for diagnosis.

Imaging software extends beyond radiology to cardiology, oncology, neurology and pathology. Meanwhile, the company's practice management software, which is 20% of sales, manages work flow for radiology groups in Australia and Canada.

The company is currently working on tenders for more than ten potential contracts. Moelis observes Pro Medicus has won six out of its last seven tenders over the last two years. A new master agreement with a large healthcare purchasing organisation is also expected to streamline the contracting process with that organisation's membership. The size of the network was not disclosed.

Moelis retains a Buy rating and raises its target to $4.18 from $3.61. Earnings estimates are increased by more than 10% for FY18 and beyond, to reflect the new contract. The broker likes the stock for its long-term recurring revenue stream, which is typically 5-7 years. The contracts are structured to provide guaranteed minimum values, with upside payments if volumes are higher than forecast.

The stock offers a scalable model, with margin leverage. The broker notes margins doubled to 30% in FY16 from 16% in FY14. A margin of 40% is forecast in FY18, assuming more contracts are won over the next two years.

A 3c dividend is forecast for FY16, rising to 4.6c for FY17 and the business remains net cash. Earnings per share growth is forecast at 72% for FY16 and 49% for FY17. Revenue is projected to reach $27.2m in FY16 and $33.2m in FY17.

See also, Pro Medicus Projects Strong Outlook on March 11 2016.

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Weekly Broker Wrap: Drones, Electric Vehicles, OncoSil, Insurance, Think Childcare And Banks

-Broad applications opening up for drones
-Limited copper use in electric vehicles
-Optimism for OncoSil's treatment device
-Major insurers unable to match market growth
-Think Childcare growth impresses
-Bank margins likely to narrow


By Eva Brocklehurst


Drones and the footage from the cameras they carry have become familiar to many, yet Goldman Sachs suspects these unmanned aerial vehicles have only scratched the surface of their commercial potential. Drone technology, like the internet and GPS before it, is migrating from military roots to encompass a broad array of applications.

Once regulations governing expanded use are in place the broker expects demand to be unlocked in industries such as construction, agriculture, energy and mining. Drones offer three main benefits - efficiency, cost reductions and safety. Police and fire services are already tapping observational capabilities.

Goldman estimates the combined market for drones could reach a cumulative US$100bn by 2020, rivalling the size of the helicopter market. This could have impacts on areas such as insurance, camera and component manufacturers.

Electric Vehicles

As China's demand for copper shifts down a notch, Macquarie observes a new growth area for the metal is needed and electric vehicles have attracted some attention in this regard. While the broker believes demand from this sector will grow strongly it is a small absolute volume in copper usage.

Electric vehicle growth will be hard pressed to offset the slowdown from other major copper consuming sectors such as construction and consumer products. There are also some uncertainties on electric vehicle development in China because of lower petrol prices and poor profitability among power-charging facility operators. Macquarie expects more government support is needed for the market to reach its targets and the impact on copper demand is still likely to be minimal.

Oncosil Medical

The medical device company, OncoSil Medical ((OSL)) is expected to gain CE Mark approval shortly for its product which treats pancreatic cancer. A small clinical trial of the device along with chemotherapy has indicated an extension in overall progression free survival versus the standard of care for the cancer. The company has also applied for the CE Mark in hepatocellular cancer with the approval process ongoing.

Bell Potter notes OncoSil is now funded to drive commercialisation in Europe and commence a clinical study in the US. Pending the award of the CE Mark the broker expects first commercial revenues in 2016 and initiates coverage of the stock with a Buy rating and 30c target.


UBS refreshes its views on premium growth and market share across motor and home & contents insurance. Although Suncorp ((SUN)) and Insurance Australia Group ((IAG)) are managing the margin/volume trade-off well, first half results signalled to the broker how challenging it is to get the balance right.

Both companies have begun modestly raising rates again, with premium rates lifted by 1-3%. This means the major providers were unable to match market growth rates. APRA statistics indicate the industry premium growth returned to 5.1% for motor and 3.9% for home & contents.

Challenger brands continue to erode market share, growing at 17% in motor and 26% in home & contents. Youi, Hollard, A&G and Progressive now account for 10% of the personal lines market form 3.7% five years ago. While the broker suspects it will prove increasingly difficult to maintain this trajectory off a higher base, 15-20% growth could be sustained over 2016.

Think Childcare

Think Childcare ((TNK)) is providing child care services in Australia, with a growth profile that has impressed Canaccord Genuity. The broker expects a four-year earnings growth rate of 13.6%. The company has a portfolio of 32 long day care centres, the majority being in Victoria.

The company is an operator not a consolidator and targets underperforming centres with the intention of improving occupancy. The broker takes a positive stance on the stock with its strong track record and supportive industry drivers. The 2016 dividend yield is forecast to be 6.3% and the broker initiates coverage with a Buy rating and $1.56 target.


Goldman Sachs suggests that even if the Australian cash rate is unchanged at 2.0%, bank margins in FY17 will fall about four basis points, driven by the higher wholesale funding costs, partially offset by mortgage re-pricing.

The broker has recently reinstated a view that the Reserve Bank of Australia will cut the cash rate two more times in 2016, to 1.5%. If correct, and even if the banks hold onto 10 basis points of mortgage re-pricing per each 25 basis point reduction in the cash rate, Goldman expects margins will still fall.

Perversely, While ANZ Bank ((ANZ)) has the highest loan-to-deposit ratio of the domestic sector, and this appears negative when assessing balance sheet structure, it also means it would be less affected by lower cash rates. Moreover, it is the only bank in Goldman's coverage that should provide material positive leverage to rising US base rates, as ANZ has an estimated $50bn in Asian free funds largely linked to US rates.

Within the sector, Deutsche Bank observes ANZ has also experienced the largest increase in short selling recently. Short positions have risen in March and are now at 2.0% of issued shares on average, the broker observes, compared with 1.4% three months ago and 0.8% a year ago.

National Australia Bank ((NAB)) is the least shorted of the banks while both Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) have experienced higher short selling activity in recent years.

The broker suspects some of the increase in short selling has been driven by offshore fears regarding bank exposure to the housing market -- fears which have overstated the risks to the banks. ANZ has the highest level of foreign ownership of the banks, at 26% versus a peer average of 22%. It also has the highest level of institutional ownership at 56% while Commonwealth Bank ((CBA)) has the lowest at 47%, Deutsche Bank observes.

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Concerns Grow Over Ramsay’s French Connection

-Brake on French earnings
-Further consolidation potential
-Strong Oz growth trajectory
-Headwinds not abating yet

By Eva Brocklehurst

A reduction in tariffs for private hospitals by the French government has put the cat among the pigeons at Ramsay Health Care ((RHC)). The French government has announced a 2.15% tariff reduction, less than the 2.5% announced in 2015 but ahead of what brokers were expecting. Several brokers are concerned about the company's French strategy, as the different settings compared with the Australian business are put into stark relief.

Macquarie calculates that acquisition-related cost synergies mean that the French business earnings were flat in the first half and, if this latest reduction is not offset, it imparts a 5.0% brake on earnings. Tariffs in France will now be 3.5% lower than 2005 while in Australia prices have risen by 33%, the broker observes.

Prior to the latest cuts, Ramsay was generating a return of 8.9% pre-tax on its French investment, which is considered well below both its cost of capital and its internal target of 15%. Macquarie observes this would not be such a problem if France was not a key part of the business. Since the initial acquisition of Generale de Sante, Ramsay has spent $1.85bn on acquisitions in the country and France now contributes 15% to earnings.

Moreover, conditions are unlikely to improve for some time. Macquarie notes the French government's fiscal position is challenged, with debt to GDP at 98%. That said, this is in the context of margins for earnings in France of 19.9% compared with 16.4% in Australia, which suggests to the broker the French government has room to move before imposing financial distress on operators.

So, it is up to the company's Australian business to carry the growth trajectory and, although this segment impressed Macquarie in the first half, there are risks emerging as industry volumes are seen slowing. The broker retains an Underperform rating.

On the Australian front, CLSA is not worried, given the company has a 27% market share and pricing power, able to roll out new theatres in existing hospitals which should lead to longer-term profit expansion.

The analysts calculate 73 private hospital operating theatres will open in Victoria between now and 2020, an increase of 30% over the current stock, compared with a smaller increase in public hospital theatres. While if too many were to open in a given time frame volume growth might be an issue, the fact that Ramsay is instead opening relatively more theatres in NSW, which is not subject to the same volume of openings as Victoria, augurs well in the broker's view.

While this volume issue remains on CLSA's radar (not one of the eight brokers monitored daily on the FNArena database) as a potential pressure point for earnings. a $80 price target and Buy rating are maintained.

Ramsay Health Care has a large skew in its French operations towards psychiatric hospitals and Ord Minnett points out that the extent of tariff reductions in this discipline is unclear. The impact of the tariff change will vary from operator to operator. In 2015 the broker observes the changes were more pronounced in dialysis and less so in obstetrics.

Ord Minnett believe the reduction in tariff has potential to force further consolidation on the industry, particularly as some private equity owners of hospitals have high debt balances. Ramsay is well placed in this regard, the broker observes.

While the question marks over the company's foray into the French market are now more marked, Ord Minnett still believes the tariff reductions need to be read in tandem with synergy and procurement opportunities and retains an Accumulate rating.

Deutsche Bank downgrades to Hold from Buy, disappointed with the news as it highlights the difficult operating conditions under the current French government. The broker remains confident in the medium-term outlook but believes Generale de Sante is becoming an increasing drag on group earnings. Other near-term risks are also heightened locally, with the changes to prostheses funding and the pending negotiation with Medibank Private ((MPL)).

While another reduction in the tariff was probably factored into the company's guidance at the first half results, Morgan Stanley does not believe the upgrade cycle can be maintained. The broker believes a third reduction in 2017 is likely.

No financial detail has been provided on the nine hospitals acquired in the town of Lille in December but, with procurement synergies not expected until FY17, the French division could be challenged, Morgan Stanley adds. The stock appears priced for perfection and the broker reiterates an Underweight rating.

The new measures imply flat organic revenue growth for Ramsay in France over the next 12 months, in Credit Suisse's opinion. Nevertheless, the broker envisages a favourable case mix, with an ongoing transition to day surgeries and a rationalisation of services/assets will support margins. There are also cost reduction opportunities in terms of global procurement initiatives as well as acquisition potential, given the fragmented private hospital market. Outperform retained.

FNArena's database shows three Buy, three Hold and two Sell ratings. The consensus target is $66.14, suggesting 5.2% upside to the last share price.

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Pro Medicus Projects Strong Outlook

-Unique high speed technology
-Long-term recurring revenue
-Strong US market potential


By Eva Brocklehurst

Pro Medicus ((PME)) is at the forefront of new medical technology, harnessed to provide detailed scans at high speed to the medical fraternity in hospitals and radiology clinics.

Over $60m in minimum contracted revenue is currently envisaged by Moelis over the next five years. The broker's base case assumes volumes will be 20% higher than the minimum contracted. A 1.5c dividend is expected in the second half, taking the total to 3.0c for FY16. Dividends are currently unfranked but full franking is considered likely within the next 18 months as more Australian tax is paid.

Moelis takes up coverage with a Buy rating and $3.61 target, assuming more contracts will be won with hospital and radiology practices over the medium term and volumes from existing customers will remain over and above contracted minimums.

The company is a medical software developer, providing imaging and practice management software in North America, Australia and Europe. The medical imaging segment is 80% of sale and enables up to 4D, including x-ray, CT, MRI, PET scans that can be digitally streamed to desktop or mobile devices for diagnosis. Practice management software caters to radiology groups in Australia and Canada.

The unique technology delivers speedier images to the customer. There is a large problem for hospitals and clinicians in that IT networks struggle to manage the data loads. Pro Medicus technology enables the digital streaming without sacrificing image quality and takes seconds as opposed to competitor offerings which take minutes.

The company has long-term recurring revenue streams with upside potential through 5-7 year contract terms. The relatively high fixed cost base and scalable software platform means each new contract allows for incremental margin expansion. Moelis notes this is in evidence through earnings margins almost doubling to 30% in FY16. The broker expects earnings margins to grow to almost 40% by end FY18.

Meanwhile, the US imaging market is valued at US$2bn a year and growing at a 10% compound rate. The company's software is leveraged to the features that underpin this market, such as regulatory requirements for hospitals to have electronic medical records, including digital images, or face lower government and/or insurer reimbursements.

Demographics such as an ageing population and growth in remote diagnoses also underpin the business. Electronic medical records will be mandatory in the US by 2018. Another highlight, noted by Moelis, is that digital imaging is a less invasive method of diagnosis and can reduce medical risks – in turn providing a digital record for legal risk mitigation.

The company was listed on ASX in 2000 and expanded imaging software in 2009 when it acquired US-based Visage Imaging. At this stage the company has less than 1.0% market share in the US. There are no direct listed competitors but a number of listed conglomerates focus on imaging equipment in the hardware market while there are some private and niche operators primarily in North America.

Risks? Moelis notes increased competition is one. Major investment in software development by competitors may affect the company’s future earnings profile. The major hardware competitors are large well-funded firms such as Siemens, Fuji and Philips, which presently focus on capital equipment given its higher value and larger market size relative to software.

The other risk is that some of the customers receive funding from government and changes to regulation may impact on the business. For example the Australian government recently made changes to limit bulk billing for digital imaging which impacts radiology clinics. Although Pro Medicus has fixed contracts with radiology clinics in Australia it may face future re-tendering for practice software.

A significant portion of the revenue is also derived in the US so exchange rates may affect the reported Australian dollar value, while a portion of R&D costs are also in Europe. The company has a number of registered and pending patents and has taken measure to secure its rights in terms of intellectual property.

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Weekly Broker Wrap: Banks, General Insurance, AirXpanders, Pokies And Tourism

-Bell Potter dismisses bank stress talk
-Youi gains scale, insurer margins pressure
-AXP at the door of US potential
-Oz slot manufacturers well placed
-Chinese visitors to Oz accelerate


By Eva Brocklehurst


Bell Potter suggests some of the negative speculation surrounding the value of bank stocks is simply more posturing than substance. Australia's GDP remains strong, spreads are rising, costs are being managed and asset quality is stable.

The broker's analysis of movements in off-balance-sheet liabilities, as a leading indicator of stress, suggests stable asset quality trends for some time to come. Recent raising of capital suggests the Australian banks are now in the top quartile of their global peer group.

Bell Potter observes bank sector dividends have gone backward on only three occasions in the last 37 years. This includes following the 1987 crash, the early 1990's recession and the 2007/8 Global Financial Crisis. Reasons for this occurring included poor credit risk practices in commercial lending and unique economic events such as external liquidity shocks

This is not the case now and the banks have improved their liquidity positions since the GFC. Bell Potter's forecasts are unchanged. As a result of very strong share price performance in the past month, Commonwealth Bank ((CBA)) is downgraded to Hold from Buy.

The broker retains Hold ratings for Bendigo & Adelaide ((BEN)), Bank of Queensland ((BOQ)) and ANZ Banking Group ((ANZ)). Buy ratings are retained for National Australia Bank ((NAB)), Westpac Banking Corp ((WBC)), Macquarie Group ((MQG)) and Suncorp ((SUN)).

General Insurance

Youi is starting to gain scale in the Australian market, Macquarie observes, with the general insurance market consolidated, rational and profitable. Nevertheless, cost cutting strategies are required to defend profitability.

The market's growth has slowed and margins are under pressure. Macquarie notes the financial results from Youi suggest it has now captured 2.6% of the addressable market in home and personal motor insurance.

Youi achieved 22.9% growth in gross written premium (GWP) in the first half. Macquarie continues to forecast further loss of market share by the listed Australian insurers to banks and challenger brands.

Despite a bottoming in GWP growth in the market the broker observes the deterioration in margins has not stabilised. Quarterly data from the Insurance Council of Australia points to negative trajectory for premium spending on home and motor insurance.

Macquarie remains cautious about personal lines insurance outlook and notes upper corporate commercial carriers expect premium spending in this market to contract further in 2016. As a result, the broker reduces growth forecasts for Insurance Australia Group ((IAG)) and Suncorp ((SUN)).

Macquarie has also downgraded QBE Insurance ((QBE)) to Neutral from Outperform as sector conditions remain challenging. The broker acknowledges the stock could trade higher with supportive FX tailwinds and a rise in US/global interest rate expectations.

AirXpanders Inc

AirXpanders ((AXP)) offers an investment opportunity, Moelis believes, with a market leading product and a simple path to commercialisation. The company reported a net loss of US$11.2m for FY15. A favourable industry thematic supports a growing market while Australian success so far has opened the door to the US potential.

US FDA approval is expected in the June quarter. Moelis considers the valuation assumptions underpinning the stock are undemanding and its base case provides significant upside opportunity. Moelis retains a Buy rating and $1.95 target.

AirXpanders manufactures and distributes AeroForm, a medical device used in breast reconstruction after cancer which has been approved for sale in the Australian market.


Following a survey of the US slot machine market, Ord Minnett has concluded that Australian manufacturers, Aristocrat Leisure ((ALL)) and Ainsworth Gaming Technology ((AGI)) are well positioned.

Aristocrat is the main beneficiary, with 66% of participants in the survey suggesting that it is the top performing manufacturer. The broker also expects Ainsworth will grow sales as its profile builds. Ord Minnett reiterates an Accumulate rating for both stocks, with a target of $10.75 for Aristocrat and $3.25 for Ainsworth.


The annual growth rate of international visitors to Australia in December was 7.9% while visitor expenditure in the month grew 17.7% annualised. Bell Potter also notes international airline activity signals both outbound and inbound passengers in December grew 5.4%. In the light of the data the broker takes a look at where Chinese visitors are spending time in Australia.

The data indicates Sydney and Melbourne remain the most popular cities. Chinese visitors to Melbourne have accelerated by 27% in the last 12 months, while Sydney is also up 20%. Numbers to the Gold Coast and tropical north Queensland suggest a recovery is under way over the past two years after a weak 2013.

Chinese visitor numbers to these tourist areas are more volatile than in the larger cities as, given the smaller visitor base, large swings can have a large impact in percentage terms. The broker also points to the fact that airline capacity to these destinations has been subject to material change and this is a key driver of numbers.

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article 3 months old

Sirtex Medical Facing Key Catalysts In 2016

-Further upside potential from clinical trials
-Strong growth dependent on centres recruitment
-Self funding business model


By Eva Brocklehurst

Sirtex Medical ((SRX)) has provoked broker attention over past few months as it furthers several trials and studies of its oncology treatments. The company supplies oncology clinics with its SIR-Spheres product, used in selective internal radiation therapy for liver tumours. The company sells its product globally and achieved FY15 sales of $176m.

Initiating coverage with an Overweight rating, Morgan Stanley believes the company's salvage therapy - where other treatments have been ineffective - should sustain its high compound growth and returns and underpin the share price. Further upside may come from successful clinical trials which, in the broker's view, have a better-than-average chance of achieving positive outcomes.

The company is engaged in two trials to expand its market and the broker values these at a combined $15.01, with a 60% probability weighting. The broker's bear case valuation, where the trials are unsuccessful, has a $13.86 price target.

Its bull case, where the FoxFire global study and the SARAH Phase 3 data are positive, results in an 11% and 42% increase to FY18 and FY20 dose sales forecasts respectively. The price target in this instance rises to $56.56. The base case assumes a price target of $38.18. The broker notes the current share price reflects some clinical trial success. SARAH data is expected at the end of 2016.

The company has a number of products in development but SIR-Spheres is currently the only one that is commercially available. The product is approved for treatment metastatic colorectal cancer (mCRC) in the liver by the US FDA. This is where some of the original cancer site in the colon or rectum has broken away and lodged in the liver.

SIR-Spheres is a form of treatment where the radiation is placed inside or next to a part of the body requiring treatment. It destroys cancerous tissue but over a much shorter distance, thus minimising harm to healthy tissue.

The SIR-Spheres product has only entered clinical practice in a meaningful way in the last decade but has revealed benefits in patients with inoperable liver cancer that are unresponsive to other treatments (salvage therapy). Morgan Stanley notes few substitute products exist in this end market, but also that awareness among oncologists is low.

The outcomes of the trials are expected to be key catalysts over the next 24 months. A successful outcome for the Foxfire global studies could mean the inclusion of SIR-Spheres in the first line treatment of mCRC. In Morgan Stanley's estimation, this would expand Sirtex Medical's addressable market from 7.6% to 55.7%.

Morgan Stanley also likes the strong margins and cash flow, with a capital light business model which enables the company to self fund. The broker acknowledges the base business is somewhat dependent on recruitment of treatment centres, particularly in the Americas.

There is a risk that new centre recruitment could be more mature than the broker accounted for, given a lack of transparency around new clinics. The company's closest competitor is BTG, which manufactures a glass microsphere product that also treats liver cancer. Morgan Stanley notes another contender in the same disease markets is DEB-TACE, microspheres loaded with a chemo therapeutic agent.

The SIR-Spheres dose sales grew a compound 20% over the last five years and Morgan Stanley believes such growth can be maintained as new centres come on line and because the salvage therapy market is under-penetrated.

In assessing dose sales in the base business Morgan Stanley estimates that current treatment centres alone could deliver 6.6% growth in FY16. In order to reach management's guidance of 19.7% sales growth, the broker estimates that the company would need to recruit 19% more treatment centres, slightly higher than the growth rate of the past five years.

The broker suspects that as penetration of the market increase, growth is likely to to taper. While the Americas are the largest contributor to dose sales, in order to maintain the base business trajectory over the long term, greater growth needs to come from Europe and the Middle East and the Asia Pacific region.

After the first half results Morgans maintains a view that FY16 dose sales guidance is optimistic, whereas Macquarie is more comfortable with the forecasts, expecting sales to accelerate in the second half.

There are three Buy ratings and one Sell (Morgans) on FNArena's database. The consensus target is $35.67, suggesting 14.8% upside to the last share price. Targets range from $17.60 (Morgans) to $46.90 (UBS).

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article 3 months old

Aveo Strides Ahead With Aged Care

-Freedom expands care capability
-Risk of acceleration in development
-On track for retirement earnings target


By Eva Brocklehurst

The transition to a pure residential retirement business is underway for Aveo Group ((AOG)) and this remains the key driver of the stock. The first half results benefitted from the last of the major apartment settlements.

Brokers are mindful that the non-retirement business produces a substantial level of earnings and if the sell-down proceeds according to plan then the capital required to ramp up development will be available.

Moelis notes there is $567m in cash to be recycled and the development business should increasingly boost returns, providing an additional 500 sites from FY19. Care services have been expanded following the Freedom Aged Care acquisition.

This $215.5m acquisition is to be funded via $83.5m in stock and $10m cash, and assumes $88m in debt with a potential $34m deferred payment. It makes strong strategic sense to Moelis, as it expands resident care capability while providing the additional beds. The broker, not one of the eight monitored daily on FNArena's database, has a Buy rating and $3.40 target.

When profits from the sale of non-retirement assets are excluded, the first half result was in line with Macquarie's expectations. The mix of business has changed slightly, with care and support reduced and development increased. The reduction in care and support revenue in the half was largely driven by the earlier-than-expected departure of residents from the Durack facility, which is undergoing significant refurbishment.

The non-retirement sell-down has progressed well but Macquarie purposely assumes a conservative realisation of non-retirement assets in its numbers as, while this is an important catalyst for the acceleration of village development, the profits are best viewed as one-off. Nonetheless, the broker has included a more rapid realisation of the non-retirement portfolio in its calculations, which inflates near-term earnings estimates.

Macquarie prefers a discounted cash flow approach to valuing retirement operators because of the lag between completion of a village and mature earnings. In Aveo's case the broker includes half of its development target to reflect the risk of a strong acceleration in development rates.

Macquarie has a strong bias towards organic development but acknowledges there are some robust arguments in favour of the Freedom acquisition. If the acquisition was judged solely on financial criteria the broker would be a lot less comfortable.

It has a unique offering where residents can stay in serviced apartments while receiving relatively high levels of care. Aveo intends to roll out a similar service offering across a number of its its villages over time and, hence, the acquisition makes strategic sense to Macquarie.

Earnings in the first half were boosted by land sales but Morgans also considers the company is on track to deliver on its retirement returns target of 6-6.5% in FY16. The main sensitivity in the broker's model rests with development settlements.

Morgans expects the Freedom acquisition will contribute positively with the main drivers being better quality contracts, a significant increase in new development sales and expansion of care services. The broker expects the Freedom acquisition will be materially accretive in FY17 and beyond.

With the acquisition of Freedom, Aveo becomes the largest owner/operator in Australia. Freedom owns and operates more than 1,000 units in 15 villages across Australia. Aveo has stated the order of priority for the allocation of the $567m in sale proceeds is $188m for retirement development pre FY18, $127m for developments post FY18 and $242m for acquisitions, further buy-backs or debt re-payments.

Ord Minnett upgrades earnings forecasts by 4-6% for the next three years, with around one third of this upgrade from the acquisition and the rest from better residential and development prices and margins.

The company's targets imply earnings will rise to over $75m for FY16, expecting a much stronger second half with around 153 retirement development sales forecast. The company's target for earnings over $110m in FY18, ex Freedom, is a taller order, in the broker's opinion.

There are three Buy ratings and one Hold (Ord Minnett) on FNArena's database. The consensus target is $3.63, suggesting 15.9% upside to the last share price. Targets range from $3.11 (Ords) to $4.35 (Macquarie).

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