Weekly Broker Wrap: Casinos, Insurance, Financials, Contractors And Aged Care

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Outlook for casinos; stock picking in insurance; bank earnings; outlook for diversified financials; slow recovery for contractors; aged care trends.

-Casino capacity expansions signal efforts to gain exposure to inbound tourism
-Value appearing in QBE for Citi but remaining insurance stocks seen fully valued
-Headwinds for car dealers in ASIC intentions on add-on automobile insurance
-Insufficient new beds to meet demand in residential aged care equals higher fees
 

by Eva Brocklehurst

Casinos

Inbound tourism from China and South East Asia has more than doubled in the last six years and Citi remains positive on the outlook for Australasian casinos as a result. The analysis signals that these tourists represent low levels in terms of visits to the main floor of domestic casinos, at just 4%, but have potential to increase that percentage to as high as 9-11% by FY25, given the capacity expansions that are flagged.

The broker also notes concerted efforts by Crown Resorts ((CWN)), The Star Entertainment Group ((SGR)) and New Zealand's SkyCity to improve exposure to these strong inbound trends. Crown and Star remain high conviction Buy calls for the broker, as they currently trade on a discount to the market despite their premium, long-dated licences and growth profile.

Insurance

Citi suspects AMP's ((AMP)) wealth protection division problems will be around for a while but tranche one of a reinsurance program may not be too far away. In time, this may enable meaningful capital returns to shareholders. Meanwhile QBE Insurance ((QBE)), if it can deliver on its expense savings targets and rectify problems in Australia, appears excellent value to the broker.

Modest growth and broadly stable net margins appear likely for Medibank Private ((MPL)) and Citi believes the patient shareholder will be rewarded. In terms of nib Holdings ((NHF)), Citi believes the stock needs to fall further to offer value appeal. Suncorp's ((SUN)) margins, meanwhile, should improve but appear largely priced in, while the broker believes Insurance Australia Group ((IAG)) is a quality holding but appears fully valued.

Goldman Sachs now believes the capital management opportunity for IAG is less certain. Therefore, to justify current valuations the market is anticipating a sizeable expense management opportunity will be announced at the briefing in December. The broker suspects whatever is forthcoming will be modest.

Goldman finds valuation appeal in Suncorp and believes further evidence of improvement in underlying margins should act as a catalyst for a re-rating. QBE management's ambitions appear realistic but the broker does not expect the way forward will be smooth and awaits further clarity on domestic issues and further progress on the three-year plan.

The Australian Securities and Investments Commission (ASIC) has published a report criticising high premiums and inconsistent prices for add-on automobile insurance. Examples include consumer credit, loan termination, GAP, tyre and rim and mechanical breakdown insurances. The report suggest the insurances represent poor consumer value. ASIC is proposing that insurers move to a model where they are unable to charge different prices on the same policy unless the underlying risk profile is different.

Moelis believes the findings are likely to generate headwinds for car dealers. Dealerships are the main point of sale for these add-on products and subsequently receive commissions, and the Insurance Council of Australia is now looking to impose a 20% cap on commissions to dealers. ASIC is not opposed to dealers earning a commission but the broker believes the investigation highlights the fact that the regulator is determined to implement regulation around dealer income from finance and insurance.

Banks

Goldman Sachs has been highlighting the risk to bank earnings as the cash rate is cut, particularly once it falls below 2.00%. The Reserve Bank's official cash rate is presently 1.5%. The broker believes Australia's easing cycle has ended and the cash rate should start to rise at the beginning of 2018 taking it back to 2.25% by the end of that year.

The negative margin implications of low cash rates is the main concern in the banking sector. As this is now dissipating and asset quality is acting as a mild headwind, Goldman Sachs believes the earnings environment is reasonable and forecasts 1.7% and 2.8% earnings-per-share growth for the sector in FY17 and FY18 respectively. Coupled with a 6.2% dividend yield and the fact the sector trades at a 39% price/earnings discount to the industrials sector the broker considers the bank valuations are attractive.

Goldman Sachs has upgraded Commonwealth Bank ((CBA)) to Buy from Neutral. The broker has a Buy rating on ANZ Banking ((ANZ)) and retains a Neutral rating on the other two majors as well as Bank of Queensland ((BOQ)). A Sell rating is retained for Bendigo & Adelaide Bank ((BEN)).

Diversified Financials

Citi expects the earnings per share growth profile of Computershare ((CPU)) should change materially after FY17, for the better. This reflects modes allowance for business momentum improving and modestly higher interest rates but also factors in the estimated impact of the UKAR contract, the CMC acquisition and savings on Louisville.

The broker expects strong sales ahead for Challenger Financial ((CGF)) but expects downward pressure to be exerted from maturities the spread from lower interest rates. Growth options for Perpetual ((PPT)) appear to be more medium term to Citi, although the recent sell off in the stock has made it look a little less expensive.

Link Market Services' ((LNK)) earnings growth profile is a rarity in the current market, Citi believes, and while the price appears full there is little on the horizon likely to de-rail its story. The fall out from Brexit for Henderson Group ((HGG)) is more muted than expected and the broker anticipates further outflows once the gate comes off the UK property fund.

IOOF ((IFL)) has a strong balance sheet and this suggests scope for an acquisition. Without such a development the shorter term growth profile is considered tough. ASX ((ASX)) still seems expensive to Citi but there is scope for the stock to re-trace.

Contractors

Deutsche Bank has become more positive regarding the outlook for contractors, given there are some signs the minerals exploration segment is recovering and the renewable energy market is providing some growth opportunities. That said, the broker notes the sector is still faced with a rolling off of oil & gas construction activity and the slow ramp up of infrastructure projects.

Hence, sector revenues are forecast to still decline for the next 12 months with pressure remaining on margins. The broker questions the re-rating of the sector and remains cautious about those exposed to the minerals and oil & gas construction markets given it is not clear when a recovery could occur.

Currently, the broker notes UGL ((UGL)), Spotless ((SPO)) and Downer EDI ((DOW)) and Monadelphous ((MND)) are trading at large discounts to the market whereas Cimic ((CIM)), WorleyParsons ((WOR)) and ALS ((ALQ)) appear expensive and trading close to a market multiple.

Aged Care

UBS has identified an emerging trend around higher sector occupancy in residential aged care (RAC). The broker's analysis indicates average industry occupancy may gain several hundred basis points by FY20. At over 35% incremental EBITDA (earnings before interest tax and depreciation) margin each 100 basis points gain in occupancy above market estimates for the ASX listed sector would add 1.6% to EBITDA, sufficient to offset the drag of around 8% from the government's funding cuts by FY19.

Occupancy is rising and the data signals insufficient new beds are meeting the need. UBS believes a higher utilisation of respite care as a point of admission to RAC, and potentially higher acute hospital bed blocks, are the lead indicators of the trend. Ultimately the broker envisages more demand than supply, which will lead to higher accommodations fees.
 

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