The Wrap: Retail, Insurers, A-REITs & Health

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Weekly Broker Wrap: retail; media & technology; debt purchasers; insurers; A-REITs; healthcare; and McGrath.

-Consumer remains robust, supporting Woolworths and JB Hi-Fi
-Morgan Stanley prefers structural winners in media
-Defensive growth in insurers considered attractive
-Fundamentals seen improving for A-REITs
-CSL and ResMed top picks in healthcare for Citi
 

By Eva Brocklehurst

Retail

Despite concerns around housing and wages growth, Deutsche Bank's channel checks signal the consumer is still active, which is attributed to the housing wealth affect. Reading into this, the broker envisages upside for Woolworths ((WOW)) and JB Hi-Fi ((JBH)).

Woolworths has continued to deliver strong sales growth and that should drive operating leverage and margin expansion. Industry checks signal Woolworths has traded strongly over Christmas while Coles ((WES)) was weak. The broker also expects a large loss from Bunnings UK will impact on Wesfarmers.

Meanwhile, JB Hi-Fi has benefitted from a strong consumer electronics market and share gains. The broker believes JB Hi-Fi has gained some share from Harvey Norman ((HVN)) and Harvey Norman will have a difficult comparables base to cycle, which could weigh on its trading update.

Morgan Stanley is increasingly confident in JB Hi-Fi and Domino's Pizza ((DMP)) first half earnings. This is based on evidence of the data from cashless retail sales in December produced by National Australia Bank. Cashless retail sales grew 8.7% in December versus 9.3% in November.

Morgan Stanley notes cashless sales should typically be higher than the underlying market growth, as shopping moves online and sales in restaurants move increasingly from cash to card. Morgan Stanley finds cafes are accepting more cards sales at the expense of cash as surcharges are reduced and minimum expenditures removed.

Media & Internet

Morgan Stanley remains a structural bear on traditional media as the rate of change in consumer behaviour and technology diverts advertising expenditure. Structural winners are preferred and the broker's key overweight stocks in the sector are REA Group ((REA)), Fairfax Media ((FXJ)), Domain Group ((DHG)), Seek ((SEK)) and WiseTech Global ((WTC)).

Morgan Stanley is underweight Seven West Media ((SWM)), Southern Cross Media ((SXL)) and Prime Media ((PRT)). The broker believes as media mergers occur in the US, and scale becomes important, this will also occur in Australia.

The broker considers APN Outdoor ((APO)) the turnaround story for 2018. Industry data suggests the company lost revenue share in the second half of 2017 but, after a recent re-set of expectations, the broker envisages potential for a turnaround.

Debt Purchasers

Ahead of reporting season Canaccord Genuity reviews the outlook for the listed debt purchasers. A strong result is expected from Credit Corp ((CCP)) and all divisions appear to be performing at, or better than, expectations. The US operations have a long runway of profit growth and the broker upgrades outer year forecasts. Buy rating and $23.09 target.

The broker increases the target for Pioneer Credit ((PNC)) to $3.08 from $2.71 and upgrades to Buy from Hold, based on a strong uplift in FY18 after expansion of the workforce and rate of investment. The company is confident that while its liquidation profile will be flatter than peers high returns will be in evidence over time.

Management has clearly outlined the solutions to its problems at Collection House ((CLH)) but Canaccord Genuity believes the success of its strategy must be borne out by increased collections and a review of the investment thesis is not justified at the present time. The broker maintains a Sell rating and $1.29 target.

Insurers

Morgan Stanley finds the defensive growth and yield leverage across the general insurance sector attractive. A strengthening of top-line growth and margin expansion in commercial lines is envisaged.

The broker believes QBE Insurance ((QBE)) offers value as it is trading at a -20-25% discount to global peers the ASX 200, and the upcoming results will be a major catalyst with the risk/award skewed to the upside.

The broker envisages an upgrade cycle is coming for Insurance Australia Group ((IAG)) amid synchronised benefits from cost reductions and pricing tailwinds. A strong first half is expected, supported by relatively benign catastrophe outcomes.

Morgan Stanley upgrades Suncorp ((SUN)) to Equal-weight from Underweight. The main areas of interest in the upcoming results include remediation in commercial lines, growth outlook for premiums and retention of customers and growth via the “marketplace” strategy.

A-REITs

Ord Minnett finds the fundamentals for Australian real estate investment trusts have improved with considerable strength in transaction markets. Despite this, the sector is trading at a -9% discount to the broker's valuation.

One of the main changes in 2018 that is expected is an improvement in retail operating conditions from trough levels. The broker envisages value across a spectrum of retail, office, residential and fund managers.

Improving expectations for global growth have meant these stocks underperformed other equities over the past month. The broker acknowledges time will tell whether the current positive market sentiment can be maintained.

Meanwhile, Ord Minnett lowers its rating for Hotel Property Investments ((HPI)) to Hold from Accumulate. Preferred A-REITs in 2018 include Scentre Group ((SCG)), Stockland ((SGP)), Dexus ((DXS)) and Charter Hall ((CHC)).

Healthcare

Ahead of the reporting season, Citi reviews its preferences in the healthcare sector. The broker retains a Buy rating for CSL ((CSL)), based on the attractiveness of the plasma industry and the company's FY17-20 compound growth rate for earnings per share of over 15%.

ResMed ((RMD)), where the mask category is returning to growth and the trend of declining gross margins is expected to ease, is also rated Buy. The broker envisages the greatest potential for positive news comes from both CSL and Cochlear ((COH)) but believes Cochlear is already priced for perfection.

The broker has downgraded Healthscope ((HSO)) to Sell because of a lacklustre track record, a slow contribution from its expansion projects and the rally in the share price. Primary Health Care ((PRY)) is also downgraded to Sell as the short-term earnings risk remains to the downside.

McGrath

McGrath ((MEA)) has downgraded FY18 guidance amid the CEO and director resignations. The downgrade is driven by the underperformance of the core sales division.

Founder John McGrath will assume the role of interim executive chairman and lead the company until a new CEO is appointed. The company has flagged a modest first half operating earnings (EBITDA) loss of -$500,000 and revised operating earnings guidance to $5.8-6.8m.

Bell Potter materially downgrades its forecasts for the next three years, now expecting a net loss in FY18. Target is reduced to $0.45 from $0.65 and the rating is downgraded to Sell from Buy, because of the lack of a leadership team and options for the company outside privatisation.

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