Weekly Broker Wrap: Oz Banks, Insurers, Housing, Mining Exploration And Grocery

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-A wake-up call for banks in digital
-Margin vs growth in general insurance
-Small brands challenge motor insurance
-Foreigners underpin high density housing
-Linking miner equity raising to activity
-Prices rising at your supermarket
 

By Eva Brocklehurst

The number one issue facing the banking industry is not regulatory, in Macquarie's view. It is the threat from digital payment providers. Facilitated by personal smart phone penetration, online players such as PayPal are moving into the "real" world that was once the domain of the bankers. The parties which have a superior understanding of their customers are the most credible threat to the banks in the digital payments terrain. This comes from either running a market for goods or knowing customer spending habits. Trust may be the major banks' biggest asset but to stave off competition Macquarie believes banks will need to build capabilities in delivery of real-time banking, an omni-channel presence and value added services. Macquarie believes the banks should make better use of their customer knowledge before someone else does.

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General insurance may be in good shape but some tough decisions are looming. While the dilemma over growth versus margin in personal lines may not be new, it still represents the most pressing issue, in UBS' view. Market share is not being retained by incumbents and challengers are gaining traction. What to do? UBS notes volume growth is required to offset margin erosion and this is unlikely to occur. Nevertheless, there is a price for procrastinating on addressing the issue, in the broker's opinion.

The hidden cost of allowing a challenger to prosper is reflected in Suncorp's ((SUN)) acquisition of the Promina business in 2007. UBS notes Suncorp paid a significant amount of goodwill for the large synergies it expected to extract from general insurance and at the heart of this was AAMI, which had gained significant market share. Suncorp remains encumbered to this day by the legacy of this goodwill that sits on its balance sheet and stifles returns. While insurer valuations are now more compelling, the broker is cautious about the sector.

CIMB has looked at the small brands challenging the majors in the motor insurance market. The upcoming brands all managed to turn a profit for the second consecutive year, and this suggests they will have a long-term presence. The broker notes the overall dynamics of general insurance are highly favourable but elevated multiples suggest a Neutral rating for the sector. Despite strong price competition, underlying profitability in motor insurance has been relatively stable. Both Suncorp and Insurance Australia Goup ((IAG) have suggested there is little impact on profits from the smaller brands.

CIMB thinks the increasing price competition has meant there is limited scope for margin improvement for both insurers and if the competitor brands continue to grow top lines and build share they may end up exerting more pressure on margins. Margin growth in motor insurance aside, the broker still thinks the current benign claims environment is highly favourable for both listed insurers.

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UBS has highlighted Reserve Bank research that shows the value of approved foreign investment in housing rebounded recently and is now at a record 13% of total turnover, up sharply from a trend around 8%. Firstly, a clarification of Australia's foreign investment laws is in order to understand the foreign investment focus. These laws seek to channel activity into new dwellings and to promote local construction. Foreign investors and temporary residents require Foreign Investment Review Board approval prior to buying property, and many purchase planned or newly constructed premises. The exceptions lie where foreign owned companies can buy established property for Australian-based staff and temporary residents can buy one established home, provided it is a principal place of residence.

With this backdrop in mind, UBS notes the key to the RBA data is that 78% of foreign approvals for new housing occur in NSW and Victoria, particularly the higher density inner city areas of Sydney and Melbourne. Moreover, demand has risen despite the relatively more expensive valuation in these areas. UBS expects this uptrend in foreigner investment will continue and house prices will grow solidly, albeit moderating in pace to around 7% in 2014 after 10% last year. In terms of listed companies, Lend Lease ((LLC)) and Mirvac ((MGR)) are best placed to capture foreign demand. UBS estimates that the NSW/Victorian medium-high density projects account for an average of 5% of earnings for Lend Lease and 17% for Mirvac over FY14-16.

UBS tracks global junior and mid-tier miner equity raisings in order to obtain an outlook on exploration, given a typical lag of several months that exists between fund raising and subsequent exploration activity. Overall, activity is subdued and well below historical levels but some improvement was witnessed in June. UBS finds there is little visibility around the timing of a turnaround in minerals and retains a Sell rating for ALS ((ALQ)), albeit the broker is attracted to the company's industry position, scale and track record. Boart Longyear ((BLY)) is also rated Sell, as the broker expects ongoing balance sheet pressure amidst a subdued market. UBS would need to see several months of improvement in equity raising trends to upgrade its current bearish stance on the outlook for minerals exploration activity.

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Deutsche Bank's supermarket pricing study suggests an improving trend over the June quarter, with inflation in both fresh and long life products. The broker's index follows prices of seven discrete baskets of around 100 goods across the three major supermarket formats. Fresh produce inflation has been the main driver of price increases but a modest inflation in groceries appeared six months ago and is continuing to build, now running at levels more consistent with the long-term trend.

Deutsche Bank's industry feedback suggests the impact of the federal budget on supermarkets has been slight. The inflation trend is broadly consistent across the chains but IGA stores were weaker, a sign Metcash's ((MTS)) price investment is impacting on the Supa IGA store which participates in the study. The broker notes inflation is difficult to measure because of complexities around promotion but using a fixed basket of goods understates the drag from promotional substitution and hence Deutsche Bank thinks it is a good indicator of the trend.
 

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