Weekly Broker Wrap: Storms, Skydiving, Banks, Christmas, Interest Rates And The Budget

This story features SUNCORP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUN

-Suncorp most exposed to storm
-Skydiving captures Moelis' attention
-NZ contribution to Aust banks slowing
-Joblessness counteracts petrol win
-RBA easing bias implied for 2015
-Budget surplus outlook fading
 

by Eva Brocklehurst

Brisbane Storm

A catastrophic event has been declared by the Insurance Council of Australia for the recent storm in Brisbane, the first such catastrophe for FY15. Losses are yet to be confirmed but to brokers, Suncorp ((SUN)) is the most exposed to this event, given its large Queensland market share. The company has signalled its maximum event retention figure of $250m is likely to be hit. Given this is the first event, downside risks to first half earnings are relatively moderate, in Deutsche Bank's estimates, given healthy allowances and assuming no other major events occur before December 31 2014. UBS observes the storm is a timely reminder of the assistance that benign weather has provided to both Suncorp and Insurance Australia Group's ((IAG)) profits in recent years.

At this stage losses appear absorbable in FY15 allowances, but UBS considers Suncorp's margins are likely to be affected. Suncorp's general insurance division needs to deliver a 17% insurance margin to comfortably achieve returns of more than 10% in FY15. This event has, in the broker's view, shifted the focus to reserve releases in order for this target to be achieved. JP Morgan observes that, generally, insurance stocks underperform soon after big events and often overshoot.

Indoor Skydive

An Australian-based operator of indoor skydiving has listed on ASX. Indoor Skydive Australia ((IDZ)) has captured the attention of Moelis, who initiated coverage with a Hold rating and 56c target. The company has no direct listed comparisons. A high barrier to entry is one of the core investment drivers of the stock, Moelis observes. The company has an exclusive supply agreement with SkyVenture, a global wind tunnel supplier. Its facility, at Penrith on the outskirts of Sydney, commenced operations in FY14 and expansion to both Gold Coast and Perth is underway. Evidence of traction at the Penrith centre and progress on the Gold Coast development should help support an increase in the share price, in the broker's view. Such facilities allow users to experience human flight by simulating the free-fall experience when skydiving. Customers include tourists, skydiving enthusiasts and military organisations.

Australian Banks In New Zealand

The contribution from the NZ divisions of Australian banks is expected to slow. Falling bad debts and improving cost efficiency has meant NZ divisions have been strong contributors to group results since the GFC. The NZ economy is robust, driven by the rebuilding of Christchurch and strong immigration, while Citi observes there is a lesser reliance on key Asian economies compared with Australia. This should lead to continued strong credit growth, with few emerging quality issues.

Nevertheless, New Zealand's significant dairy industry is enduring some pain. Fonterra's farm gate milk price is forecast to fall substantially in 2015. Citi has met with NZ management at the major banks and all are expecting that, given a delay in the cash flow impact on farmers, milk prices can only stay at these levels for 12 months before lending books are impacted. Among other considerations for the NZ banks, increased confidence has led to a more competitive banking sector and mortgage volumes have slowed, while cost efficiency improvements have largely played out. Citi suspects cost-to-income ratios may stagnate. The broker considers ANZ Bank ((ANZ)) the most attractive of the majors in New Zealand, benefiting from its scale.

Christmas Cheer

With the much publicised slump in oil prices, and Australian petrol prices likely to fall despite the weaker currency, Morgan Stanley believes expectations are still too high regarding Christmas trading. Petrol prices have retraced to $1.35/litre from $1.53/lire last December. Nevertheless, not all savings at the bowser will be spent on the retail market. Assuming savings in petrol are spent in line with overall consumption the uplift to retail is just 0.4%. Assuming all savings are spent on discretionary retail, the uplift would only rise to 1.2%. Sorry folks, but Morgan Stanley believes rising unemployment is a far more malevolent trend, not only in terms of income for those that lose their jobs but for making those in work more fearful. The broker notes the unemployment rate is 6.2% compared with 5.9% last Christmas, and theoretically, according to Morgan Stanley's calculations, such an impact largely offsets the petrol price movement.

Cash Rate

Australia's Reserve Bank left its cash rate on hold at 2.5% for the 16th consecutive month at its last meeting for 2014. Governor Glenn Stevens retained the line regarding a period of stability in the outlook. This reinforces Morgan Stanley's view that the central bank will not be pre-emptive in easing monetary policy further, despite fears Australia's growth transition is stalling. The RBA emphasised the accommodative financial conditions in play globally and the recent policy easing in China, which should support growth. The RBA also signalled a lower exchange rate may be needed to achieve balanced growth. Morgan Stanley takes the shift in the bank's rhetoric to signal that, if the Australian dollar were to stabilise at current levels rather than continue depreciating, there may be room to consider rate cuts next year.

The broker also believes the upcoming mid year economic and fiscal report (MYEFO) from the Commonwealth government will be difficult to reconcile with existing commitments to return to surplus and reiterates a view that neither monetary nor fiscal policy will react quickly to stalling growth.

MYEFO

UBS expects a deterioration in the budget is likely to be revealed in the mid year statement, from a combination of delayed and stalled policies as well as lower-than-expected nominal growth. Hopes for a surplus in 2018/19 appear to be fading. Outside of any new policies that might be announced, the budget is considered likely to be a cumulative $29bn worse over the four out years. The broker concludes that the government is unlikely to drop all the policies not yet passed into law and a number will be re-fashioned for re-release at the next budget. UBS also doubts the government will attempt to recoup lost monies at the MYEFO by further leaning on the economy. Still, there is some risk of additional tightening at the 2015/16 budget next year.
 

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