Weekly Broker Wrap: Technology, Wagering, Healthcare, TV And Insurers

This story features APPEN LIMITED, and other companies. For more info SHARE ANALYSIS: APX

-Upgrade potential for tech stock Appen
-Tabcorp success in mobile strategy
-Cuts to medical testing rebates probable
-Harder to deliver growth in TV
– Insurers likely call on reinsurance
 

By Eva Brocklehurst

Technology

Microsoft has been a customer of language technology consultant Appen ((APX)) for over 20 years and contracts under the master vendor agreement are due for renewal at the end of June. Bell Potter expects the renewals will occur, albeit there is usually some changes in the statements of work, because of Microsoft’s requirements and the markets or languages which are covered. The dollar value also tends to change. The renewals will warrant a statement to the market, the broker suspects, given the size of Microsoft, and such an announcement could be a catalyst for the share price.

The renewals could also prompt an update or upgrade of prospectus forecasts for 2015, given the work would be secured for the second half. Bell Potter maintains a Buy rating and 85c target for Appen. At this target the total expected return is over 20%.

Wagering

Industry data suggests mobile applications are driving renewed growth in wagering and Tabcorp ((TAH)) and Sportsbet are consolidating their share. Morgan Stanley believes rational pricing and operating leverage are improving the profitability of the industry, while the risk of material near-term racefield fee increases is limited. Mobile is growing the market by expanding the customer base for wagering and product depth is improving, while incentives are driving first time audiences. Customer retention is coming from data driven analytics. The broker expects the penetration of wagering via mobile is likely to keep improving with the popularity of US sports and mobile streaming vision.

Industry participants expect Tabcorp’s multi-channel strategy across retail/online and recent use of offers will be key to its success. Retail growth is positive and Morgan Stanley envisages the business will also benefit from lower oil prices. Tabcorp remains the broker’s key wagering pick with an Overweight rating.

Health

The Commonwealth will conduct a review of Medicare and any future reforms will prioritise patient outcomes and budget sustainability. Deutsche Bank accepts the implications of the review are difficult to assess at this stage but it appears the government is seeking savings and this raises the risk for providers such as Primary Health Care ((PRY)) and, to a lesser degree, Sonic Healthcare ((SHL)). The minister has signalled the government is open to a future review of the current indexation freeze. The rebate freeze removes the 2.0% annual indexation and delivers savings of $1.3bn over four years. Deutsche Bank suspects savings equal to, or greater than, the 2.0% will be required to offset this.

The broker cautions that the review could lead to cuts to pathology and diagnostic test funding on the grounds that these services can now be offered more efficiently than was the case when the medical benefits scheme items were first established. Examples of the reforms mentioned by the minister include vitamin-D, B12 and foliate testing plus X-rays for lower back pain.

TV

The list of viewing options for consumers is growing. Citi assesses the potential impact of Netflix and Pay TV penetration on audiences and free-to-air (FTA) broadcasters. The broker concludes that advertising growth could prove challenging as audiences fragment. TV is not dying but it is getting tougher to deliver growth. Video consumption is increasing in Australia, boosted exclusively by online. This means FTA TV audiences are declining in percentage terms. Citi expects FTA TV audiences will decline by around 2.0% year on year for the next three years and there will be no growth in advertising, ex special events.

For Pay TV providers such as Foxtel the focus is on premium and niche content and superior technologies. For video platforms such as Netflix a lack of scale, high content costs and churn represent risks which could limit profitable returns to two players. Citi rates News Corp ((NWS)) as a Buy, with Foxtel delivering growth under a new pricing model. Nine Entertainment ((NEC)) is also rated Buy, and is viewed as a potential M&A target for content owners. Seven West Media ((SWM)) is considered cheap but risks are growing which will likely weigh on earnings and the share price. Citi has a Neutral rating on Seven West Media.

Insurers

A severe storm in NSW, where significant damage was sustained in the Hunter, Central Coast and Sydney, has led JP Morgan to review the probable impact on Insurance Australia Group ((IAG)) and Suncorp ((SUN)). Insurance Australia has 24.9% of the premium in NSW while Suncorp has 18.4%. The broker estimates IAG’s natural perils experience for FY15 ahead of these storms, and including a full half year’s expected additional perils allowance, to be $646m. The company has an allowance of $700m in guidance but also has reinsurance protection of $150m above that figure, which the broker suspects may be called upon.

In the case of Suncorp, JP Morgan notes the company said it would miss the 10% return target post Cyclone Marcia in March, having flagged event costs to that period of $690-720m. Some of the aggregate reinsurance protections are close to kicking in for Suncorp. As such, JP Morgan suspects, including aggregate reinsurance protection, the cost of the storm is capped at $65m for Suncorp. The broker observes markets tend to react adversely to the peril events in the near term but eventually tend to look through them.
 

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