Weekly Broker Wrap: Obamacare And The Oz Health Sector

This story features ORIGIN ENERGY LIMITED. For more info SHARE ANALYSIS: ORG

By Andrew Nelson

We waited a long while to find out, but last week finally saw the re-election of Barack Obama as the President of the United States. That’s one piece of uncertainty down and about a million to go. While we could bang on about this topic from a myriad of directions, angles and possible implications, last week saw analysts at Bank of America-Merrill Lynch take a practical approach, looking at the possible ramifications for the listed Australian Healthcare Sector.

The broker notes the key take away from the election is that Obamacare, or more correctly the Patient Protection and Affordable Care Act will kick in mid-January 2013 and will see an extra 32m or so Americans provided with better access to healthcare. There will be cuts to reimbursements for healthcare providers, especially given ongoing budget wrangling, but while BA-ML believes much of the downside is factored into forecasts, it sees only limited accounting for the potential benefit from the creation of significantly increased volumes.

With fixed cost leverage a key to Healthcare earnings, the potential of an extra 32m Americans receiving more comprehensive levels of healthcare should prove quite a significant development. However, what we still don’t know is how what and much in the way of services will an Obamacare insured patient receives.

One thing the broker does believe is that many within this group have likely gone a long while with insufficient healthcare and are likely building a veritable war chest of required services. The broker calls these prospective patients “super users” and the coverage type they will receive will be a crucial component of any calculations made. Thus for now, we must remain calculation free. Still, at this stage the broker does see extra patient volumes as representing at least a modest positive, but more of an offset to Medicare cuts, rather than an earnings driver.

CSL ((CSL)) should fare the best, thinks the broker, while for both Sonic Healthcare ((SHL)) and Resmed ((RMD)), the broker also sees potential upside. The potential is greater for Resmed, says BA-ML, noting there is a chance the company’s devices may not be taxed. If you add in the potential upside from super users and the potential for tax expectation, then the broker thinks the positives from Obamacare could be quite meaningful.

Last week Deutsche Bank took a look at APRA’s latest round of more stringent stress testing and the end result was the major banks have remained above the 4% minimum Tier 1 requirement. And what’s more, APRA reports that once mitigating actions were taken, Tier 1 ratios returned to pre-crisis levels. The broker is quite pleased by the news, especially given APRA has become increasingly focused on the use of stress tests for its ongoing reviews of capital plans and capital management.

Last week also saw analysts at Citi upgrade its recommendation on both Myer ((MYR)) and Billabong ((BBG)), with both lifted to Buy. The main driver of this change in heart are improving sales trends and moderating levels of discounting. Margins appear to be improving, with firming sales providing some nice leverage given fixed costs.

The reason these specific companies were chosen is because these companies possess a combination of valuation support and strong leverage to improving sales growth. However, the broker believes David Jones ((DJS)), Specialty Fashion ((SFH)) and Premier Investments ((PMV)) will also benefit. On the broker’s numbers, each 1% of sales improvement adds 10% to Specialty Fashion’s earnings before interest and tax, 8% for Billabong and 3% for Myer. 

While this admittedly sounds fantastic, Citi cautions you not get too excited here, as the risks posed by deflation, online competition, new entrants and store closures remain in the foreground as well.

Last but not least, Macquarie took a look at Origin Energy ((ORG)) and Santos ((STO)) after Standard and Poor's said it is reviewing the equity credit that it applies to hybrid securities. What S&P said was “this review could lead to a revision of the equity content for some existing instruments from ‘high’ to either ‘intermediate’ or ‘minimal’ equity content. The broker reads this as meaning these new regulations could apply retrospectively to existing securities, which would dramatically affect the forecast LNG development funding gaps for both companies. 

There’s no date yet for the final word from these fellas that helped us so much with the GFC, but we’ll probably have word by January or February next year. Understandably, the prospect of such changes are not doing much to help the collective blood pressure at these companies given both have structured their balance sheets to suit the previous S&P criteria.

And with S&P now possibly re-classifying equity that could add up to $2.8bn, the broker fears funding shortfalls could increase significantly. In turn, both Origin and Santos will likely question the relative value of maintaining BBB+ ratings, especially the escalating cost of compliance. Ultimately, however, Macquarie believes both will likely to do what is needed to remain investment grade. 
 

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