Tag Archives: Health Care and Biotech

article 3 months old

Weekly Broker Wrap: Health Care, Banks, Online Mortgage Pricing And Over The Wire

-Hospital usage, health cover lower
-Health insurance affordability at issue
-Bank funding costs appear manageable
-New tech finds tough going against banks
-OTW offers exposure to growing markets
 

By Eva Brocklehurst

Health Care

Private hospital benefits paid by insurers grew 5.0% in the December quarter, below the 7.0% and 10.5% growth experienced in FY15 and FY14 respectively. The percentage of Australians holding private hospital cover decreased to 47.2%, around 20 basis points below September 2015 levels.

Despite these figures, and six months of lower utilisation growth, Goldman Sachs is upbeat about the outlook for private hospital outlays. The broker expects Healthscope ((HSO)) and Ramsay Health Care ((RHC)) will take market share as they are adding capacity and projects in catchment areas with strong underlying demographics.

Looking into FY17, Goldman Sachs believes the key question for the insurers, Medibank Private ((MPL)) and nib Holdings ((NHF)), is whether they can sustain their margins at the near record first-half levels, or whether these gains are partially reinvested back into lower premium growth.

Macquarie observes hospitals claims growth has hit a 10-year low and most drivers of growth are moderating, other than population growth. The broker also believes the fall in the number of Australians with hospital cover is a further sign that insurance affordability is becoming problematic.

Although specific measures to address this are as yet to materialise, the broker envisages a risk to private hospitals, given these comprise the largest segment of insurer claims. Macquarie also suspects hospital industry growth will continue below historical levels.

Credit Suisse also notes the slowing in episodic growth in private hospital statistics. The reasons are not clear but the broker suspects it could be a combination of the cycling of strong comparables, capacity constraints, and exclusions in policies and higher excess levels resulting in the postponement of elective surgery.

Of more concern for the industry, Credit Suisse believes, are the high exit rates from private health insurance by both younger age groups and those aged 70 years and older. The risk is that another round of premium increases above the CPI could put further pressure on participation.

Banks

Concerns over bank funding and liquidity have lifted unnecessarily in recent weeks, Goldman Sachs observes. The broker cautions against reading too much into the shift in Certificates of Deposit (CDS) spreads, which has led to some concerns about a dramatic blow-out in funding costs.

The broker estimates the major banks' new issuance spreads have moved 20-30 basis points wider since late 2015, rather than the 50-60 basis points seen in CDS. Should this widening in new issuance spreads hold up, a small headwind is likely for margins.

The broker also finds no evidence of a cyclical lift in Reserve Bank exchange settlement account balances. With less reliance on wholesale funding, a lengthening in funding tenor and improved liquidity, the banking sector is now better able to navigate the short term credit market aberrations and while funding costs for banks have lifted, the increase is manageable to date, the broker maintains.

Online Mortgage Pricing

Google is discontinuing its US mortgage comparison website after only three months of operation. The exit is attributed to a lack of advertising revenue and Ord Minnett observes the largest financial services companies were unwilling to come on board.

While the broker still finds merit in new technology with brand affiliation looking to disrupt with price discovery, the failure of Google's venture does indicate the banks are negotiating from a strong position.

On the back of this development the broker notes that in Australia, the major banks have not signed up to Apple Pay, with negotiations on profit share ongoing. Additionally, in areas like consumer finance where disruptive technology has been stronger, banks have been successful in maintaining their presence.

Ord Minnett's analysts recently calculated that bank-backed firms have 62% share of the US$200m mobile US-peer-to-peer market.

Over the Wire

Over the Wire ((OTW)) is an Australian based provider of telecommunications and IT. The company listed late 2015 with a small free float of 10m shares. Most of the shares are owned by the vendors and Micro Equities believes this is the reason for a lack of coverage and attention from institutional and retail investors.

The company offers exposure to a number of growing markets, with a focus on the small-medium enterprise segment, and the broker forecasts FY16 earnings to grow 6.4% on pro forma FY15 earnings. The broker also maintains there is a lack of natural buyers for small companies in Over the Wire's markets which may provide some acquisition opportunities. Micro Equities initiates coverage with a Buy rating and price target of $1.41.
 

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article 3 months old

Cochlear: A Little More Upside?

By Michael Gable 

Holding stocks leading into reporting season can sometimes feel like Russian Roulette as it is often impossible to know whether your stock will report well or not. But we can move the probabilities a little more into our favour by sticking to the sectors that should do well and avoiding the tough ones. Yesterday saw a clear example as Aurizon dropped over 11% (exposure to resources) and Amcor was up nearly 10% (exposure to $US earnings). None of our clients hold Aurizon, some of them hold Amcor, but we can see the lesson there of being in the right areas should result in less exposure to potential disappointments. As we've been saying for a few weeks, companies whose reports beat expectations should outperform for the at least the next few months.

One such stock that reported well was Cochlear ((COH)).
 


Our last charting commentary on COH was on 17 November when it was at $86.93. We mentioned "a possible break to the upside could see COH resume the uptrend and attempt one final move towards $100 to complete the uptrend that commenced early last year." Now that COH has hit our target, we move to a neutral stance on the stock. Their first half result suggests that the stock is not expensive now but around fair value. Because of the their better numbers, it now looks like the stock can head even higher than first thought to just over $110 before profit taking comes in.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Automotive, Utilities, Prostheses List, Grocery And BWX in China

-Import changes slightly negative for APE, AHG
-Wholesale electricity tailwind for utilities
-Woolworths sales remain under pressure
-BWX's substantial growth opportunity
 

By Eva Brocklehurst

Automotive

From 2018, consumers will be able to directly import new cars or motorcycles. They will need to meet Australian safety standards, be right-hand drive and less than 12 months old with less than 500,000km on the clock.

The special import duty on used vehicles will also be removed. At present only Japanese and UK cars meet the standard for import but legislation is planned to change this although there is some early opposition to the changes.

Credit Suisse does not expect a material impact on new or used vehicle prices but believes the change will be a negative for AP Eagers ((APE)) and Automotive Holdings ((AHG)), albeit modest as the dealers are predominantly exposed to the mass market.

Fleet providers such as SG Fleet ((SGF)) and Eclipx ((ECX)) are likely to be unaffected. Leasing providers such as McMillan Shakespeare ((MMS)) and Smartgroup ((SIQ)) are also likely to witness few changes, the broker believes, as novated leasing demand is more influenced by new car sales and finance trends while fringe benefits tax is a more significant issue.

Utilities

The improving outlook for wholesale electricity prices represents a key tailwind for utilities in 2016, Deutsche Bank maintains. Regulated utilities such as Spark Infrastructure ((SKI)), DUET ((DUE)) and AusNet Services ((AST)) face significant final determinations in their Victorian electricity distribution networks.

The broker believes the sector will outperform on earnings growth, sustained low bond rates and improving wholesale electricity prices. APA ((APA)), AGL Energy ((AGL)) and Spark Infra are considered best leveraged to this theme and remain the broker's preferred exposures.

Prostheses List

The federal minister has promised to prioritise prostheses pricing reform and Deutsche Bank regards this a s a medium-term positive, as it should reduce affordability pressures that are driving increased churn for insurers and policy downgrades.

In the near term the earnings impact could be negative for the insurers if the government ensures savings are passed onto consumers through lower premium rises.

Public hospitals are able to shop around for prostheses but the private health insurance industry is required to pay a fixed price to private hospitals based on the prostheses list, and these prices are considered well above domestic and international benchmarks.

Goldman Sachs expects any near-term financial impact on funds such as Medibank Private ((MPL)) and nib Holdings ((NHF)) will be small, if impacting at all. There will be a negative impact on medical device company gross profits in Australia and, in turn, they may seek to reduce any volume rebates they currently pay to hospitals.

Goldman downgrades earnings forecasts by 3.0% for Healthscope ((HSO)) and by 2.0% for Ramsay Health Care ((RHC)). UBS notes both these private hospital operators have previously insisted they would be relatively unaffected by cuts to the prostheses list but at this point makes precautionary reductions to estimates.

Grocery

Competition among grocery stores in Australia has reached new heights, Goldman Sachs maintains, as Woolworths ((WOW)) attempts to resurrect its sales with investment in price, service and inventory.

The broker notes Coles ((WES)) and Metcash ((MTS)) have responded with their own initiatives, keeping any resurgence at Woolworths at bay. Aldi's market share growth, meanwhile, appears to be coming at the expense of Woolworths and Metcash.

The broker compares the Woolworths sales decline with Tesco in the UK, where competition led to a fall in margins, earnings and a sharp decline in the share price. There are some mitigating factors for Woolworths compared with Tesco, the broker acknowledges, given its greater market share and Australia's low population density.

Goldman also revises earnings estimates down for both Woolworths and Wesfarmers in the light of softening food statistics. Margins are forecast to decline at Woolworths and remain flat for Coles.

BWX

Natural skin care product manufacturer BWX ((BWX)) delivered a substantial increaese in interim earnings, up 62%, which for brokers underscores the company's strong potential.

Bell Potter observes the flagship Sukin brand continues to deliver exceptional domestic sale growth and is now poised for a material opportunity in the Chinese market. The broker retains a Buy rating and $3.90 target.

Moelis notes the gross profit margin expanded by 410 basis points as the company transitions from low margin, low volume third party manufacturing. BWX is now net cash. The broker retains a Buy rating and $4.65 target.

Exports commenced in FY16 and this is expected to be the main driver of offshore revenue. The company owns the formulations for all five of its brands Moelis believes the stock is another way to play the growing consumer demand for high quality Australian goods in China.
 

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article 3 months old

Brokers Downgrade As Ansell’s Outlook Weakens

-Faltering industrial production
-Better second half expected
-But costs, tax likely to offset
 

By Eva Brocklehurst

Speciality glove and body protection manufacturer, Ansell ((ANN)), has thrown a a spanner in the works, announcing a downgrade to earnings estimates after a weak sales performance in January. Myriad broker downgrades on the stock have ensued.

The announcement signalled to Citi the interim profit will miss the prior corresponding half by around 20%, and the broker's forecasts by 18%. The company's new guidance for FY16 is around 7% below the market's prior estimates.

Ansell expects first half earnings per share of US45-46c and FY16 guidance has been revised to US95-110c from US105-120c. The fault lies with the macro industrial environment, the company maintains. The main changes to Ansell's estimates centre on cuts to the contributions from the medical and industrial divisions.

Ansell is strongly aligned with a global industrial recovery and UBS observes this recovery is not gaining much traction. With the company reporting ongoing order deferrals and inventory reductions, amid uninspiring key indicators such as blue collar employment and purchasing managers indices, UBS cannot envisage any catalyst that would warrant a stronger near-term outlook.

The broker downgrades to Neutral from Buy. One noteworthy item UBS points to is the balance sheet has the capacity for acquisitions. 

Deutsche Bank finds few reasons to own the stock, given the exposure to the challenging outlook, and downgrades to Sell from Hold.

The revisions are just days ahead of the official interim results and imply a firm recovery in the second half, which the broker wants clarified at the results because the weak start to the year sits oddly with such expectations. The December half year fell 13% short of Deutsche Bank's estimates, partly because of a worse FX impact. The revised guidance implies FX benefits in the second half, as cost currencies have fallen relative to the US dollar.

Volatility has struck the stock in Credit Suisse's view, and its rating is downgraded to Underperform from Neutral. FX and industrial volatility – particularly in emerging markets - means visibility is limited, the broker maintains.

Any improvement in earnings is predicated on a recovery in sales growth. To this end, and based on recent results from US industrial product distributors such as Fastenal and Grainger, Credit Suisse suspects the deterioration witnessed in January will continue for the rest of FY16.

The original guidance range for FY16 was obviously not conservative enough to account for the worsening outlook so Morgan Stanley expects the uncertainty will affect earnings growth. The downgrade is not just about weak sales in January but implies orders are being reduced or deferred. Higher costs are also evident in the medical and industrial units and the broker notes the anticipated FX hedging gain in EUR/USD hedges is offset by hedging losses on weakening cost currencies.

Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, while disappointed with the downgrade, retains a Neutral rating. The broker accepts the results reflect the company's exposure to the global industrial production cycle which has been mixed so far.

Of note, Ansell has leveraged up its balance sheet considerably over the past five years through acquisitions. Goldman Sachs believes this has boosted sales in the industrial/single use and medical segments by 70% and 30% respectively. Hence, this feature has changed the composition of revenue such that historical margins of each division are less predictive of future trends.

Another feature of the soft growth outlook is that the tax rate is likely to increase over the next two years as off-balance sheet losses are exhausted. As a result, Goldman does not expect earnings will show material growth through to FY18.

FNArena's database now shows five Hold and two Sell ratings. The consensus target is $19.49, suggesting 26.8% upside to the last share price. Targets range from $16.75 (Deutsche Bank) to $22.53 (Morgan Stanley).
 

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article 3 months old

Weekly Broker Wrap: Retail, Consumers, Listed Property, Media And Hospitals

-Consumer spending picks up
-But food inflation weakens
-Macquarie retains confidence in A-REITs
-Are regional malls too cheap?
-Traditional media doldrums worsen
-Long term outlook positive for hospitals 
 

By Eva Brocklehurst

Retail

Credit Suisse proffers some “left of field” ideas for 2016. These are low probability, but events which, if they occurred, would have a material impact. One is the de-merging of Coles by Wesfarmers ((WES)) due to a declining valuation from increased supermarket competition.

Credit Suisse would be a seller of the stock in this event. Credit Suisse would also be a seller of Wesfarmers if a global home improvement company bought Masters from Woolworths ((WOW)) and earnings from Bunnings fell as a result of a more capable competitor.

Offshore players targeting Myer ((MYR)) or Metcash ((MTS)) is a low probability event but the stocks do meet several criteria for triggering buyer interest, including underperformance, synergies and an open share register. The broker also considers the prospect that Metcash reorganises into a co-operative. The potential for a retailer buy-out would create a floor under that stock's share price.

Consumers

Consumer spending has picked up over the past two years. UBS observes the main areas of strength in communications, household goods, insurance & financial services, health, entertainment and cars. Weaker trends are noted in food, education and transport.

While spending may pick up toward 3.0% early this year, its fastest pace in two years, the broker’s model forecasts year-average growth of a little over 2.5% and a little below that level in 2017. The main risk to the outlook is from surprises in the labour market and residential property, as well as sharp changes to equity wealth.

The December quarter CPI reveals a sustained slowing in food inflation, which is a reasonable proxy for supermarket inflation, Morgan Stanley contends. Competition among the players appears to be depressing prices. Prices in core categories were reduced in the December quarter. Deflation is occurring despite a weaker Australian dollar. A lower Australian dollar, all things equal, should lead to higher price inflation but the link appear to have broken down, the broker observes.

UBS surveyed 48 suppliers across the grocery sector and found, on average, they expected prices to rise by 0.7% over the next 12 months. This is below 2015 levels. The survey suggest the growth outlook for groceries is slowing, underpinned by lower inflation, consumers eating less and modest levels of population growth.

With this in mind UBS expects the grocery market to grow at 3.4% over the next 12 months. The softer near-term outlook also points towards an increasingly competitive Australian supermarket sector. The broker believes Woolworths is most at risk but Metcash is also losing share to both Aldi and Coles. UBS finds it difficult to envisage upside in the medium term.

Listed Property

Macquarie admits it was unexcited by the Australian Real Estate Investment Trust (A-REIT) sector late last year as the first rise in nearly 10 years was heralded for US interest rates amid expectations for global bond yields to rise this year. The broker retains a high level of confidence in near-term earnings forecasts for A-REITs because of the fixed nature of rental increases and a high proportion of pre-sales in development businesses.

The broker reviews the office market and whilst Perth and Brisbane remain problematic, conditions have improved in Sydney. The positives for A-REITs are their better asset duration and relative simplicity compared with utilities or infrastructure sectors, and greater income security via contracted rents.

Credit Suisse believes regional shopping centres are too cheap. Direct market valuations and A-REIT carrying values of major malls reflect a significant mispricing versus other asset classes, the broker asserts. As this has been the case for 20 year Credit Suisse does not expect it to change soon.

Still, the degree of mispricing has increased of late. The broker believes office and logistics assets now trade well above estimated replacement costs and values for these classes have peaked, whereas upside remains for the top malls.

The broker envisages plenty of value in Scentre Group ((SCG)), both from the development perspective and existing assets. Credit Suisse upgrades Westfield Corp ((WFD)) to Outperform, as it is expected to deliver the highest rate of cash-flow growth out to FY20 of any A-REIT.

Media

Google, Facebook and others are squeezing the revenue pool from Australian TV, newspaper and radio companies, Morgan Stanley believes, as advertising becomes more internet/digital and data based. The rate of structural change in the industry, if anything, has quickened over the last 12 months, the broker adds.

While the industry is acutely aware of this trend Morgan Stanley emphasises the implications are very negative because the more dollars are spent on new media the more funds shift offshore to global media/tech companies.

If the addressable market for local traditional media is shrinking into perpetuity, as the broker believes it is, stocks such as Seven West Media ((SWM)), Nine Entertainment ((NEC)), Southern Cross Media ((SXL)) and Prime Media ((PRT)) warrant a substantial discount to historical and market valuations. Morgan Stanley is Underweight on all four. The broker believes the market underestimates the risk to advertising revenue, margins and returns on a five-year view.

Private Hospitals

UBS maintains a positive long-term view on private hospitals, expecting over 6.0% in 10-year forward compound growth. Underlying growth drivers are unchanged. The broker does not believe the Medical Benefits Schedule review challenges the fundamentals of the business model.

Some moderation in first half growth is likely but, UBS observes, history suggests there are periods when growth slows from time to time. The broker flags weak first half data and prostheses pricing as providing near-term risk but against the long-term outlook such volatility is considered transient.
 

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article 3 months old

Moelis Highlights Potential In AirXpanders

-Oz success indicator for US launch
-Major benefit versus saline injections
-Growing awareness of reconstruction
 

By Eva Brocklehurst

AirXpanders ((AXP)), manufacturer and distributor of AeroForm, has piqued the interest of stockbroker Moelis & Co. AeroForm is a medical device used in breast reconstruction after cancer and has been approved and sold in the Australian market.

The commercial success in Australia is considered a proxy for the US opportunity, with the speed at which the unit has been received a leading indicator of its likely success, which in the broker's view de-risks the long-term valuation.

The company expects to launch the product in the US this year and, to Moelis, the stock offers a compelling investment opportunity, offering a market leading product that aligns all stakeholder interests and offers a simple path to commercialisation. Moelis initiates with a Buy rating and $1.95 target.

The company's device, or expander, is a temporary implant which is used to stretch the skin and chest muscles to allow the placement of a permanent implant. This prepares the breast cancer site for reconstruction post mastectomy.

The device delivers a major benefit compared with existing saline expanders, which currently require several visits to the clinic for saline injections. This means the AeroForm device is less painful for patients and fewer follow up consultations are required. Both saline and AeroForm are devices which are required anew for each patient or breast.

AeroForm replaces saline expanders with a gas (carbon dioxide) that can be compressed inside a small canister in the expander. The patient is able to deliver frequent, small doses using a wireless controller. Given the device is only temporarily in the body any risk from ongoing use is limited.

Moelis maintains market growth is underpinned by the growth in breast cancer diagnoses and the passing of the Breast Cancer Patient Act in the US, which should drive increased reconstruction rates and increased awareness of the potential of reconstruction.

The broker believes its base case valuation of AirXpanders offers significant upside beyond assumptions around market penetration and timing, with a free option on longer-dated global expansion and further product applications.

US Food & Drug Administration approval is expected in the June quarter. AirXpanders currently operates from Palo Alto in the US and will establish a contract manufacturing facility in Costa Rica.

This should allow the company to achieve around 82% gross margin and increase its capacity to produce significantly greater volumes at a faster rate. Moelis anticipates the transfer of manufacturing equipment over the first half of this year and operational launch in the fourth quarter.

Breast cancer is the second leading cause of death in women globally. AirXpanders estimates its addressable market is US$800m per annum, based on a US$2,500 sale price. The current US market size for tissue expanders is 120,000 units per year, with a potential addressable market of 350,000 units per year.

The company was incorporated in the US in 2005 and listed on the ASX in June last year at 50c per CHESS Depositary Interest.
 

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article 3 months old

Questions About Medibank Private’s Margin Sustainability

-Competitors also likely to re-submit increases
-Major uncertainties continue with govt review
-Closing in on optimal margins, soft earnings growth
 

By Eva Brocklehurst

Medibank Private ((MPL)) surprised brokers by announcing a substantial upgrade to earnings guidance for FY16 but questions are raised about the sustainability of margins and, therefore, how long growth can continue.

The company has increased its operating profit guidance to $470m from $370m, driven by lower claims expenses and reserve releases. The revised guidance recognises a lower level of claims as a consequence of the payment integrity program, improved hospital contracting and favourable industry trends, as well as increased marketing and brand investment.

Credit Suisse suspects this action by Medibank Private is probably a one-off, although positive industry trends should continue. The broker upgrades profit forecasts by 23% for FY16 and by 1.0% for FY17. In FY17 the company reaches the broker’s target of a 6.5% net margin, earlier than expected, but this is offset by lower premium growth assumptions.

Medibank Private will re-submit its premium increase application in order to share some of the benefits with policy holders but Credit Suisse believes, with the company now producing a record net margin, there is minimal case, if any, for a rate increase in coming years.

The broker warns, while some investors may be tempted to assume this places Medibank Private at a competitive advantage, a number of insurers are expected to re-submit applications for lower premiums.

The company has traded at a significant premium to the market over the past year, which reflects strong earnings growth but as this is expected to slow in FY17, on peaking margins and regulatory pressure. Credit Suisse considers the stock no longer deserves such a premium and maintains an Underperform rating.

UBS concedes its Sell rating is challenged by the latest upgrade to FY16 guidance and that it probably underestimated the flow through to gross margins. Momentum may carry into FY17 but the broker is resolute that margins above 7.0% are not sustainable. Key uncertainties lie with the government reviews under way.

The broker highlights the lack of detail on the reasons quoted for raising guidance and asks: How can $100m drop into the numbers over a couple of months? The emphasis appears to be on product mix, which in turn favoured higher margin business, as well as a soft half in hospital utilisation rates and underlying inflation. Still, UBS warns against chasing the momentum and retains a Sell rating.

The other question is regarding the uncertainty surrounding the industry review and how long that will continue. UBS suspects the government may make its intentions clearer in coming months but changes may be controversial and have long dates for implementation. UBS does not expect Medibank Private's brand will start growing in line with the market over the next 12-18 months.

A similar theme is playing out at Macquarie, with a downgrade to Neutral from Outperform. The broker considers the balance of risks is now more neutral, with the reviews that are ongoing presenting the single biggest risk to the sector outlook. Morgan Stanley also notes the company is a step closer to optimal margins and mid single digit earnings growth.

Regulatory risks are expected to neutralise any earnings surprise while other health funds are also expected to re-submit their filing to the health minister, to counter any advantage Medibank Private seeks to gain. Benign claims inflation is driving the improvements but Morgan Stanley also highlights that this means lower top line growth.

Citi is more buoyed by the upgrade, maintaining a Buy rating and continuing to envisage the potential for further cost savings, while Morgans believes the key is whether the company can hold onto, or improve, its margins.

Margins are near historically high levels and if they cannot be maintained the broker suspects the earnings growth profile will quickly become subdued. Morgans believes the company's efforts to improve hospital gross profit margins are bearing fruit, with the benefits from recent hospital re-contracting likely to flow further.

The broker acknowledges the fist half was assisted by abnormally low hospital utilisation, something which the company expects will normalise going forward. Overall, the regulatory risk remains at the forefront and Morgans sticks with a Hold rating.

FNArena's database has two Buy ratings – the second one is Deutsche Bank which is yet to update on the latest upgrade. There are three Hold and two Sell ratings. The consensus target is $2.47, signalling 0.7% downside to the last share price. This compares with $2.32 ahead of the announcement. Targets range from $2.10 (Morgan Stanley) to $2.90 (Citi).

Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, suspects Medibank Private will report a record net margin comparable to its closest peer, Bupa Australia, in FY16. Guidance implies a gross margin of 16%, in line with previous records in FY08 and FY11.

Given the company's history of following up record gross margins with a large retracement the following year, Goldman Sachs retains a cautious element to its forecasts.

The broker has a Neutral rating but does observe that the company is progressing with its efforts to roll out new contracting terms with hospitals. The company has also stated it is not budgeting for a structural slowdown in admissions growth.

The question for Goldman is the extent to which Medibank Private can sustain this margin in the future, given its desire to reinvest part into lower premium growth, as well as what the government considers is an appropriate margin and return in a highly regulated industry.

Disclosure: The author has shares in the company.

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article 3 months old

Weekly Broker Wrap: Hospitals, Insurers, Banks, Building Materials And Temple & Webster

-Caution urged on hospital sector
-Domestic insurer P/E discounts unjustified?
-Domestic bank provisioning on oil too low?
-Low oil prices support building products
-With most benefit attributed to Boral
-Temple & Webster well placed to grow
 

By Eva Brocklehurst

Hospitals

Utilisation has been the main driver of growth in the hospital industry, with Macquarie's analysis signalling the amount of hospital care per person received since 2005 has increased 41%, for those with insurance. Contrary to popular belief, the analysis points to ageing as only a small factor in this.

Are we receiving too much health care? The broker asks the question, given the federal government has initiated a review of the Medical Benefits Scheme fee schedule with a goal to link reimbursement to good clinical practice. Uncertainty exists as to the impact on the industry but Macquarie suspects it could be material and there is little appreciation of the current risk.

Hence, the broker urges caution on the sector until clarity is obtained. Macquarie prefers Healthscope ((HSO)) over Ramsay Health Care ((RHC)) based on valuation, given a larger brownfield pipeline and less exposure to France.

Insurers

Softer premium rates flowed through to margin pressure in 2015 and investor expectations were lowered considerably for 2016. Nevertheless, Credit Suisse observes early signs of a recovery in premium rates. The broker believes a large price/earnings (P/E) discount is no longer justified for domestic insurers Suncorp ((SUN)) and Insurance Australia Group ((IAG)).

IAG offers earnings upside in the broker's opinion, and the potential for a capital return in coming years, while Suncorp offers valuation support and an earnings recovery, albeit delayed versus IAG.

QBE Insurance ((QBE)) enters 2016 with commercial line premium rates softening globally and the broker envisages downside risk to gross written premium, which will continue to pressure margins. From a low base, nonetheless, it offers dividend support as its equity raisings are near an end.

Morgan Stanley considers QBE has the greatest risk/reward outlook, offering the best earnings growth and an undemanding valuation, while IAG struggles for growth but offers resilience and potential P/E expansion. In terms of Suncorp, the broker believes downside earnings risk and weak franchise momentum overhangs the stock and it remains too early to become a buyer.

Banks & Oil

Major banks have around $31bn exposure to the oil & gas industry, Morgan Stanley contends and provisions appear low versus the levels reported by US banks, although the broker acknowledges the nature of the exposures is quite different.

Commonwealth Bank ((CBA)) and ANZ Banking Group ((ANZ)) are the most exposed of the four major banks. The broker's US analysts note Wells Fargo reports energy reserve ratios of 7.0% and energy provision levels are building.

In contrast, none of Australia’s major banks have disclosed stressed exposure or provisioning levels in their oil & gas portfolio. The broker doubts provisioning levels on the mining books would be much above 1.0%. At the very least, Morgan Stanley expects the decline in the oil price will lead to pockets of weakness and higher-than-expected loan losses in FY16.

Building Materials

Credit Suisse looks at the implications of a low oil price environment on the building sector. The two most exposed stocks are Boral ((BLD)) and James Hardie ((JHX)). The broker concludes the current oil price environment is positive for the former and net negative for the latter.

Lower diesel fuel costs which directly reduce costs associated with concrete, asphalt and quarry trucking benefit Boral and, in addition, this should flow through to freight rates for other building products.

The lower cost of gas should also help with the manufacture of James Hardie's key product, fibre cement. The negatives for James Hardie lie in the sharp drop in oil sector employment in the US states of Texas and Oklahoma, key home building markets for the company.

UBS notes US housing is growing at a steady pace, even in Texas, and a lower Australian dollar traditionally favours building materials companies so, while the housing downturn will hurt this is not a typical cycle and companies are well prepared.

The broker finds CSR ((CSR)) significantly exposed to a housing downturn amid ongoing concerns over the future of the Tomago aluminium smelter. UBS highlights news that Fletcher Building ((FBU)) is close to acquiring the Higgins group in New Zealand, which will increase its exposure to construction contracting and mark its entry into asphalt and road surfacing.

Boral's progress in the US, and any comments around cement and concrete pricing, is expected to drive sentiment during reporting season and UBS still believes the stock provides the best overall risk/return investment proposition on a three-year view.

The broker has recently upgraded James Hardie to Neutral from Sell, as the price versus growth trade off appears more reasonable. Reporting season for Adelaide Brighton ((ABC)) is expected to be steady as she goes, with UBS not envisaging much new investment opportunity.

Temple & Webster

Temple & Webster ((TPW)) is Australia’s largest online specialist in furniture and homewares, operating three e-commerce platforms which attracted a combined audience of 12.6m visitors over the year to June 30. Bell Potter has initiated coverage of the stock with a Speculative Buy rating and $1.30 target.

The broker's positive view is predicated on the large growth potential for online penetration of the segment, with the company having a strong competitive position and multiple growth avenues, as well as a data-driven advantage.

The sites' categories have a relatively low level of branded goods and a wide range of unique products which reduce the tendency of consumers to check around for prices, Bell Potter maintains.

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article 3 months old

Not Good News For Primary And Sonic

-Medicare review ongoing, adds uncertainty
-Bulk billing changes still have to be approved
-Less problematic for diagnostic imaging
-Planned aged care changes modest
 

By Eva Brocklehurst

At its mid-year economic and fiscal outlook (MYEFO) Australia's government has unveiled its – somewhat anticipated -- intentions to reduce bulk billing funding for pathology and diagnostic imaging.

The impact is clearly negative for major providers of pathology, Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)), brokers contend, but the devil remains in the detail. These announcements also appear to be changes that are separate to the ongoing Medicare review, which is looking at over-utilisation of services. This all adds uncertainty into the mix for 2016, brokers maintain.

Morgan Stanley, while unclear about the allocation of the expense measures between industries or the bulk billing mix within each company, estimates the revenue mix exposed to these changes in FY17 for Sonic Healthcare is 34%, while for Primary Health Care it is more like 79%.

Brokers covering the stocks and monitored daily on FNArena's database have not changed their ratings per se for Primary Health Care. Citi notes that as the share price have fallen substantially in recent weeks, the stock is now more like fair value. Otherwise, the broker observes, the risk remains to the downside.

Two brokers decided to downgrade Sonic Healthcare on the announcement, Citi and Credit Suisse. Citi moves to Sell from Buy, suspecting that not only will the MYEFO plans be a hit to earnings but the US Medicare changes, effective in 2017, and a potential fee cut in Germany are looming negatives as well.

Credit Suisse also adjusts for changes to foreign exchange forecasts and downgrades earnings estimates for Sonic Healthcare by 6.0%, with the rating moving to Underperform from Neutral.

JP Morgan calls whoa! Reminding investors that these proposed changes to funding have to yet go through the arduous process of being approved by parliament. Moreover, the broker observes the market does not appear to be factoring in any potential for the companies to recover some of the funding via co-payments.

Nevertheless, JP Morgan suspects the government is attempting to shift the burden of charging a co-payment onto the industry and, irrespective of the MYEFO announcement, reimbursement risk prevails in terms of the Medicare review.

On the subject of parliament's approval, Credit Suisse is not so sure that the changes will meet the same level of opposition the previous co-pay legislation received, because of the exclusion of GPs from any funding changes.

So, what are the changes that are planned? Bulk billing incentives will be removed from pathology and bulk billing incentives for diagnostic imaging services will be aligned with those that apply to GP services. The bulk billing incentive for MRI (magnetic resonance imaging) services will be reduced to 10% from 15% of the schedule fee. Bulk billing incentives for diagnostic imaging will continue to apply to concession card holders and children under 16. The changes are expected to begin in FY17.

The impact weighs more on Primary Health Care, given its model is more heavily skewed to bulk billing. Sonic Healthcare has existing co-payments on certain tests. Deutsche Bank suspects the changes, in time, will lead to higher rates of private billing but highlights that past efforts to introduce out-of-pocket changes have proven difficult because of the adverse impact on demand and the competitive nature of the industry.

UBS is surprised by the extent of the government's proposed cuts. The broker believes this development is signalling an industry nadir, capable of re-setting provider pricing or the industry structure.

The broker expects the cuts will be confronting for the industry, not only in efforts to recoup the immediate impact via co-payments, but also as it ushers in the potential for smaller operators to be unable to absorb the cuts and bring around a final bout of industry consolidation.  UBS currently estimates industry consolidation at around 90% for pathology and 40% for diagnostic imaging.

The impact of the government's changes for diagnostic imaging is likely to be materially less than for pathology, Macquarie observes, as there are more offsets from diversified revenue sources, lower reliance on bulk billing and a greater ability to offset cuts through patient co-payments.

FNArena's database has two Buy, four Hold and two Sell ratings for Primary Health Care. The consensus target is $3.59, signalling 48.7% upside to the last share price. The dividend yield on FY16 and FY17 estimates is 6.7% and 7.2% respectively.

Sonic Healthcare has four Buy, two Hold and two Sell ratings. The consensus target is $20.59, signalling 16.7% upside to the last share price. The dividend yield on FY16 and FY17 estimates is 4.5% and 4.8% respectively.

Mooted aged care changes in the MYEFO are only modest. The cuts from FY17 equate to around a 1.0% reduction in total federal funding of the sector, which is comparable to the indexation freeze Deutsche Bank had assumed.

The exact changes will be finalised after industry consultation and the implementation date is July 1 2016. Morgan Stanley will also re-assess the impact when more detail emerges but considers Estia Health ((EHE)) the more leveraged to any funding changes.
 

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article 3 months old

Brokers Renew Enthusiasm For CSL

-High margin products in train
-May dominate market with Idelvion
-Significant cardio opportunity
 

By Eva Brocklehurst

CSL ((CSL)) has provoked renewed attention from brokers after it updated on a swag of new products it hopes to bring to market in the next year or so. Several key developments are now nearing commercialisation, including long acting haemophilia therapies.

UBS expects these products will contribute modestly at the revenue level but provide higher earnings, given margins are over 80%. The company's specialty products are such that more raw plasma does not need to be collected and base-fractionated, as is the case for immunoglobulin and albumin. Hence, margins are very high.

UBS believes the expenditure on research & development outlined at the briefing is a renewed commitment to sustaining the current growth profile and supports the stock's premium valuation.

Of note is Idelvion, a long-acting recombinant haemophilia treatment which has the potential to elevate the company to a new stage of growth. Macquarie is excited by this one, as it has a clear advantage against other next generation products in terms of both outcomes and dosing. The broker expects CSL will become the dominant player in this market and this could incrementally add 10% to earnings.

JP Morgan describes Idelvion as a potential “category killer” in a US$1.3bn market as it provides protection for 14 days. Approval in both the US and Europe is expected in 2016. The broker is encouraged by the progress over the last 12 months and expects a return to growth in FY17 on the back of products being launched over the next 18 months.

Afstyla is another haemophilia product to be launched next year. This market segment is considerably larger than that for Idelvion but it is more competitive and new products carry less differentiation, Macquarie observes. Still, the latest data is positive as it shows the improved efficacy of Afstyla. The broker suspects the company will replace all Helixate sales with Afstyla in coming years, which could boost earnings by 7.0%.

Macquarie is positive on the company's development strategy in the specialty portfolio, given the high incremental margins and probability of success.

An investment in CSL is also a free option, in JP Morgan's view, over an extraordinary but yet to be quantified opportunity in the cardiovascular arena, via rHDL. Enthusiasm for a drug in this category, CSL112, has arisen from data which demonstrates potential to reduce the risk of recurrent cardiovascular events. JP Morgan suspects this product could see a near doubling of R&D as the company contemplates a phase 3 trial.

Credit Suisse also notes the significant opportunity that exists for the company in the hereditary angioedema and cardiovascular markets, highlighting the phase 2b trial for CSL112 is due at the end of 2016.

The broker upgrades earnings estimates by 3.0%, which is driven by price increase for the company's Hizentra and specialty products in the US, partly offset by adverse FX movements.

Commentary on market conditions was very positive, in Deutsche Bank's view, with the company reporting all production of immunoglobulin and albumin is being sold.

The broker also notes the progress with CSL112 but observes, while this is a substantial opportunity, the company's plans to fully fund the development, along with a 10,000 patient phase 3 trial, are likely to cost in the realm of hundreds of millions of dollars.

Morgan Stanley stands out as the more sceptical, retaining an Underweight rating and $80.87 target on the stock. The importance of bringing the R&D pipeline to fruition cannot be underestimated, in the broker's opinion, and is critical to the long-term sustainability of current returns.

The broker acknowledges CSL's potential to be a first mover in the European market with Idelvion, but Afstyla may be affected by its tardiness in coming to market. Moreover, US pricing may indicate a price premium to incumbents but European pricing is not necessarily the case, Morgan Stanley suggests.

Morgan Stanley's valuation reflects the potential for accretive cash flow in the longer term from the Novartis flu acquisition. Still, the broker believes immunoglobulin industry growth is moderating and the coagulation franchise contracting. This is offset only somewhat by the robust growth in specialty products, in Morgan Stanley's opinion.

The partnering on CSL362 – for acute myeloid leukaemia - with Janssen is progressing and Janssen is now responsible for all further oncology development. CSL is expected to obtain milestone payments as a result but timing and quantum were not disclosed at this briefing.

The main disappointments brokers observe are with the delay of the launch of factor VIIa in haemophilia, which has moved out to 2020 because of manufacturing challenges, and a return to the clinic for the recombinant von Willebrand therapy.

FNArena's database shows six Buy ratings, one Hold and one Sell (Morgan Stanley) for CSL. The consensus target is $101.10, suggesting 1.2% upside to the last share price. Targets range from $80.87 (Morgan Stanley) to $110.00 (Macquarie).
 

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