The Wrap: Banks, Accounting & Oz Dollar

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Weekly Broker Wrap: banks; infant formula; accounting software; Australian dollar; and Oventus Medical.

-Interim report from Justice Hayne due, stricter licensing considered likely
-Multinationals experiencing price pressure in China's infant formula market
-Xero dominating Australian accounting software but lacklustre in US
-Wilsons suggests current weakness in AUD likely to be temporary
-Oventus Medical a contender for optimal sleep apnoea device design
 

By Eva Brocklehurst

Banks

Citi expects Justice Hayne to deliver a blistering review of practices in the banking industry, starting with the interim report due at the end of September. The interim report from the Hayne Royal Commission is expected to deal with two fundamental issues in the first four public hearings, these being responsible lending and the governance failures in the provision of advice.

Justice Hayne is expected to acknowledge the conflicts of interest in broker remuneration but a ban on commissions is a low probability, in the broker's view. Instead stricter licensing, training and responsible lending obligations are likely.

The broker expects the fall-out will be that some structural change is recommended for the industry, with the conclusions likely to be addressed in the final report. Citi believes conflicts of interest in wealth management are extensive and extend beyond advice to include superannuation and insurance. The substance of these items is also likely to be addressed in the final report.

While earnings estimates and share prices have incorporated the financial implications of the anticipated findings the risk is, the broker warns, of a substantially larger impact from implementation than currently expected.

Hence, Citi prefers the commercially-oriented banks of ANZ Bank (((ANZ)) and National Australia Bank (((NAB)) over the retail-oriented Westpac (((WBC)) and Commonwealth Bank (((CBA)).

Infant Formula

UBS' analysis of online prices and trends in China's infant formula market suggests market share of imported brands is up, although the price premium over domestic peers continues to narrow. Multinationals are experiencing pressure on pricing.

There are also signs that inventory is building and there is increasing competitive activity in the online B2C (business to consumer) channel. Pressures are yet to affect company results and the broker suggests this should be tracked closely. The downside scenario is not priced in, UBS suspects, particularly for multinationals.

New Chinese e-commerce law passed in September indicates the regulatory focus is moving to cross-border e-commerce and daigou (consumer to consumer) import channels from traditional channels. UBS perceives these changes as positive for compliant brands but could put some pressure on companies that rely on daigou.

Accounting Software

Wilsons has analysed tweets within the top 350 pages of Twitter searches related to Xero (((XRO)), MYOB (((MYO)) and Intuit. The analysis suggests Xero is dominant in Australia, being discussed twice as many times as MYOB and 10 times as much as QuickBooks, which has a large presence in the US but a tiny footprint in Australia and the UK.

Wilsons finds Xero's traction in the US lacklustre and at the lower percentage in terms of volume across its three main markets. The US has the lowest location representation out of the company's three markets at 20%, versus the UK at 30%.

The analysts believe MYOB is facing a tight competitive landscape although its execution appears to be improving. Recent investment is likely to take time to manifest in better momentum.

Australian Dollar

Current weakness in the Australian dollar is likely to be temporary. Wilsons believes a number of factors which accelerated the drop in the currency over the first half of 2018 are likely to fade.

In the short term the Australian dollar is expected to hold around US$0.70 before moving back to closer to estimates of fair value in the US$0.73-77 range. The reasons Wilsons believes the weakness will be temporary include strong global growth and a US dollar close to its peak.

The US economy is expected to slow a little in 2019 as late-cycle fiscal stimulus fades. An easing of Chinese policy should mean growth improves in that region and the Australian economy is expected to remain robust from a growth perspective, albeit not enough to put inflation back into the system.

Wilsons does not believe the Reserve Bank of Australia will need to raise rates before late in 2019 and therefore interest-rate differentials between the AUD and USD are more likely to widen in the short term.

While stocks such as Aristocrat Leisure ((ALL)), James Hardie ((JHX)), Lend Lease ((LLC)), Macquarie Group ((MQG)) and QBE Insurance ((QBE)) may be benefiting from a lower Australian dollar, Wilsons suggests it is too early to move to an underweight position for those which derive earnings from offshore.

Oventus Medical

Oventus Medical ((OVN)) has simple treatments for mild and moderately affected patients with obstructive sleep apnoea, including mouthguard-like oral appliances. NDF Research suggests the company is a contender for the optimal design of such devices with its O₂Vent range.

The analysts believe the ability of the newest designs to interface with CPAP (continuous positive airway pressure) and EPAP (expiratory positive airway pressure) devices provides a way to personalise treatment. Sales remain at start-up levels but a worldwide distribution deal with Modern Dental has the potential to push the business past the launch phase.

The analysts initiate coverage with a $1 target and Buy rating, expecting the stock to be re-rated through increased sales and further clinical data showing the superiority of its treatment platform. NDF Research believes ASX-listed companies have been largely overlooked in the global life sciences boom, partly because of insufficient quality research.

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