The Wrap: NBN, Hospitals, Housing & Outdoor

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

Weekly Broker Wrap: NBN; mining services; hospitals; private health insurers; housing; outdoor advertising; and zipMoney.

-NBN pricing changes unlikely to deliver relief to retailers
-Growing order books amid strong competition in mining services
-Switching and downgrading show no signs of abating in health insurance
-Timing favourable but would JCDecaux bid for APN Outdoor?
-zipMoney gains traction amid favourable outlook
 

By Eva Brocklehurst

Broadband

The NBN is considering changes to its pricing model. Macquarie does not expect this to deliver a significant windfall for NBN retailers. The problem is the structure of wholesale pricing for the NBN has biased the take-up to lower-speed tiers, with 84% of customers at 25mbps or lower. As well, these factors are also affecting peak-time speeds.

The net impact is revenue for the NBN is lower than expected and margins for retailers are narrow amid potentially variable peak-time speeds for consumers. If this continues to play out, Macquarie observes further fallout could increase fixed-to-mobile substitution over time while the roll out of 5G post 2020 would make this even more pertinent.

The NBN suggests direct price cuts are unlikely, probably because this doesn't solve performance issues. Macquarie suspects the main goals of any change will be to increase the take-up of higher-speed products and improve peak-time experiences.

The NBN has flagged the introduction of a new 50mbps product and, if well executed, Macquarie believes it could mean a number of consumers are willing to pay more for a much better peak-time experience relative to entry-level products. There is some scope for retail margins to benefit but the competitive nature of the market during the rollout means any benefits are likely to be modest and competed away over time.

Mining Services

Order books and the tender pipeline across the mining and civil services are growing amid a tightening of equipment and labour markets. These are some of the trends observed at Macquarie's WA forum. Offsetting this is strong competition across bids for new projects, delaying margin expansion. Exploration drilling remains competitive and this is affecting sector profitability.

The broker observes growing order books will allow some contractors to be more selective about the work they take on. East coast infrastructure is another driver of business, with several companies positioned to benefit by acquiring civil businesses or increasing bidding rates across civil projects.

While utilisation across hire equipment and mining fleets is increasing, this has not flowed through to rates, which remain competitive. The labour market could be a key cost driver over the next few years, Macquarie contends, and access to specialised skills could affect growth and development of new projects.

Hospitals

Macquarie has resumed coverage of Ramsay Health Care ((RHC)) with an Outperform rating and $74.50 target and Healthscope ((HSO)) with a Neutral rating and $2.00 target. Ramsay has generated revenue growth in Australian hospitals above the industry average for the past five years, driven by capacity additions and performance. Macquarie expects this to underpin continued outperformance over the forecast period and support 10% growth in earnings.

For Healthscope, the broker expects a recovery in growth for Australian hospitals over the medium term but retains a degree of uncertainty regarding the near-term outlook. Forecasts imply a reduction in earnings growth of -3% in FY18 before increasing to 14% growth in FY19.

Private Health Insurers

Morgan Stanley's survey suggests Medibank Private ((MPL)) is at the bottom of the list for can customer advocacy. Core brands for nib Holdings ((NHF)) may be losing momentum but AAMI and Qantas ((QAN)) distribution probably helps to sustain 4% targeted growth rates. The broker observes switching and downgrading shows no signs of abating in the industry.

Morgan Stanley believes Medibank Private is a long way from being fixed. The survey shows around 40% were critical of the company and, while it was one of the few brands to experience a reduction in poor claims experience, customers likely to shop around next year increased to more than 50%. Morgan Stanley reduces Medibank private is FY18 and FY19 estimates of policy growth to -3%.

The survey finds Qantas Assure delivered over 95% of volume growth for nib in FY17 as the core brands stalled. With 54% intending to shop around next year, and 50% having a poor experience when making a claim, customer retention is expected to deteriorate further. As an offset, AAMI could contribute materially, given the high brand awareness and home/motor customers showing a willingness to buy AAMI health insurance.

Housing

Deutsche Bank increases estimates for single-family housing starts, although continues to expect a decline in overall starts. Housing starts are expected to decline by -9% in FY18 and by -6% in FY19. The broker expects multi-family starts to be disproportionately affected by a housing downturn and the decline to accelerate from FY18.

Recent changes to the foreign property purchases stamp duty are expected to affect demand but, countering this, Australia migration remains strong. The broker expects a slow recovery in Australia's economy and the unemployment rate to track sideways over 2018, as wages growth remains soft and household consumption is constrained.

As house price growth slows in Sydney pressure for an earlier rate hike should start to ease, and the broker forecasts two 25-basis-point increases in 2019. Any significant decline in mortgage rates from further discounting is also considered unlikely.

Outdoor Advertising

Deutsche Bank responds to press speculation regarding an acquisition of APN Outdoor ((APO)) by JCDecaux. Current timing would be favourable for a bid, given APN Outdoor recently lost the Yarra Trams contract and this loss is now reflected in earnings forecasts and the share price.

The argument is further strengthened by the fact that the next significant contract to be re-tendered in outdoor advertising is held by JCDecaux. An acquisition would also provide increased exposure to roadside billboards and be a step away from the traditional street furniture and transport exposure.

In assessing whether the acquisition would be attractive, the broker expects the company would consider whether there are other opportunities elsewhere. The company has spoken openly in the past about picking up assets in its core European market or the possibility of expanding in the US, which currently represents only 9% of JCDecaux revenue. On this basis, even though the acquisition may be financially attractive, Deutsche Bank doubts the deal is top of the company's priority list.

ZipMoney

zipMoney ((ZML)) is expected to break even before the end of FY18. Bell Potter considers this a major positive catalyst, particularly given the large market opportunity facing the company. Progress is being made in the large health services sector with 700 clinics signed up to the service.

Cost growth has also been lower than the broker anticipated, although largely countered by lower revenue growth versus expectations. Following the quarterly update Bell Potter reduces valuation to $1.27 from $1.35. Buy rating retained.

Shaw and Partners found the quarterly numbers robust and also cash flow break-even on a monthly basis a significant positive. Operating costs are stabilising and funding costs are lower. Significant investment in the business over the past 12 months should now amortise to modest growth in the future, the broker suggests.

Shaw and Partners believes the company is the best of breed in the digital payments space where “buy now pay later” products are gaining traction. A Buy recommendation is maintained and the target price is $1.20.

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