Weekly Broker Wrap: Insurance, Telecoms And Supermarkets

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-Positive outlook for Medibank Private
-IAG and SUN losing market share
-Interest may switch to telco access providers
-IIN may be vulnerable to access reform
-MTS likely the biggest loser to discounters
 

By Eva Brocklehurst

Morningstar believes Medibank Private, Australia's largest provider of health insurance and owned by the government, will be attractive to investors. The business is to be sold via an initial public offer (IPO). Pricing is yet to be determined but, given the government's eagerness to sell the asset, it should be keen. Assuming a realistic issue price and no negative surprises in the prospectus the researcher believes demand for the stock should be healthy, given successful recent floats and a dearth of attractively priced, high quality defensive investment opportunities. Based on the long-term outlook for the private health insurance industry and research on listed competitor, nib Holdings ((NHF)), Morningstar is positive about the industry. Government regulated pricing and risk sharing across the industry limits earnings upside but also create a floor for minimum profitability.

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Insurance Australia ((IAG)) and Suncorp ((SUN)) are likely to sustain a period of flat top line growth, in Morgan Stanley's view. The two are being tested by challengers. IAG's personal lines franchise is likely to prove more durable than Suncorp's, the broker suspects. Challengers to the major's franchises are growing their market share in motor and home insurance, building consumer brand awareness. Youi is now number three in motor insurance, with a 4% share. it has a 5% share of home insurance.

The challengers are seemingly more intent on making Suncorp customers switch brands. The price is less of a factor for IAG customers, in the broker's analysis, as they shop around less and it takes a bigger discount for them to switch. Suncorp customers tend to shop around more. Both insurers have been growing below system in the home and motor insurance markets over the past three years. Morgan Stanley suggests customer retention is the key for IAG while Suncorp needs volume.

UBS is cautious about the general insurance sector as the major insurers attempt to address market share losses. The market shares of Suncorp and IAG have slipped again over the second half of FY14. Both lost 1.0% in motor insurance share and almost that amount in home. UBS acknowledges the success in the general insurers over recent years in widening underlying margins is commendable, as margin usually wins over growth on the day. Still, market share losses are mounting and are now at odds with another mantra to "at least hold share and manage margins". The broker observes, had the majors maintained the market share in motor and home they held four years ago when the challengers started to make inroads, their collective premia base would be almost $700m higher – Suncorp at $390m and IAG at $285m. 

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Draft recommendations from the Harper Competition Policy Review have significant implications for the telecommunications sector, in Morgans' view. One is the onus on those seeking access to infrastructure – resellers – to show proof of a public benefit. There is also the recommendation of a specialist access and pricing regulator separate from the ACCC. Morgans believes the proposals are likely to have a significant impact on shaping investment returns and improving productivity across the fixed line telco sector. Moreover, the recommendations are part of a set of developments that are likely to swing investor interest back towards access providers and return the purpose of access regulation to supporting an appropriate balance between efficient infrastructure and competition.

Reform of the access regime may come too late to preserve much of the value in Telstra's ((TLS)) copper network, in the analysts' view. TPG Telecom's ((TPM)) competitive advantage may be underpinned by the reintroduction of infrastructure competition but substantial changes are not expected before 2016. Of the providers, iiNet ((IIN)) has the most commitment, perhaps over-commitment Morgans suspects, to the existing NBN model, and it would need to regroup substantially to remain a viable carrier in a more competitive framework. The other main player, M2 Telecommunications ((MTU)), is the purest reseller but has other areas that may help it manage changes in the way value is created.

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The grocery discounters, Aldi and Costco, are becoming more of a threat to the sales and margins of the major supermarket chains in Australia. UBS takes a look at whether Australia will go down the path of the UK, where traditional chains have been negatively affected by new entrants, with the growth in the discounters accelerating in the past four years and now occupying a market share of 9%. A high penetration of private labels and a willingness to try new channels aided acceptance of the new brands in the UK and the broker suspects Australia will be no different. The discounters are also winning a share in UK fresh food and are no longer viewed as cheap alternatives.

How relevant is this to Australia's supermarkets? UBS notes Aldi already has more market share in Australia, at 6%, than it does in the UK, at 5%. Given higher margins in Australia versus offshore peers, Aldi Australia may have even greater opportunity. UBS believes the margins of Australia's major supermarkets are under greater risk than their sales volumes, based on the UK experience, and they need to regain shopper trust to moderate the Aldi threat. The independents, such as the IGAs, supplied by Metcash ((MTS)), are a more significant part of the Australian landscape, in both fresh and full supermarket channels compared with the UK, where independents are virtually extinct.

UBS suspects IGAs will be the main casualties of the newcomers and insulate the threat to Coles ((WES)) and Woolworths ((WOW)) in the near term. The broker has downgraded forecasts for Metcash as a result, reducing its recommendation to Sell from Neutral.
 

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