Weekly Broker Wrap: Oz Utilities, Insurers, High Yielders, Techs And CBA

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

-Carbon tax repeal impacts on AGL, ORG
-Insurer margins likely stable for now
-Morgans' pick of high yielders
-Credit Suisse's top fund managers
-Key tech/telco picks for Bell Potter
-More modest wealth growth for CBA?
 

By Eva Brocklehurst

BA-Merrill Lynch thinks the market may have misunderstood the full impact of the repeal of the carbon tax. An 8-10% decline in power bills and loss of transitional assistance for AGL Energy's ((AGK)) Loy Yang A power station may be the case but attention should also be given to AGL's wind contracts and Origin Energy's ((ORG)) Darling Downs power station. Without the carbon tax both these assets will suffer a $30-35m earnings hit on an annualised basis. The declines in revenue from both these assets outweigh the decline in expenditure, in the broker's analysis.

For AGL, the repeal of the tax is unhelpful on two fronts. AGL is entitled to around $250m per year in transitional assistance to offset Loy Yang A's above-market average emissions intensity. The subsidy provides around $100m/year of earnings benefit to the merchant segment which would disappear without the carbon tax. The broker factors this into the earnings decline for the company's wholesale electricity division and as the wind portfolio revenue will be affected by the repeal, Merrills now forecasts a further downgrade by 2.6% to FY15 profits to capture this impact. Origin's Darling Downs will soon operate a peak power station but all else remaining constant, it becomes a net loser with the cessation of the carbon tax. AGL's Southern Hydro and Origin's Mortlake will also be affected but Merrills assumes the impact here is immaterial on a net basis.

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Growth in insurers' Gross Written Premium (GWP) is slowing. Credit Suisse expects minimal increases across personal and commercial lines. This does not mean margins will necessarily deteriorate, as the reduction of input costs along with lower reinsurance rates should allow margins to be maintained for now. A favourable reinsurance environment should also allow insurers to buy additional cover and protect earnings. This ultimately reduces downside dividend risk for Insurance Australia Group ((IAG)) and Suncorp ((SUN)) in the broker's view.

Suncorp may offer a market-leading dividend yield but QBE Insurance ((QBE)) remains Credit Suisse's preferred pick. QBE is trading at a significant discount and while macro factors are working against the insurer, there is significant upside on delivery of an improved earnings base. The broker envisages more downside risk to local commercial line premiums than personal lines, which increases the downside for IAG. As a result of the acquisition of the Wesfarmers ((WES)) underwriting business, IAG's exposure to commercial lines has increased to 27% of GWP versus 20%. Moreover, IAG has withdrawn from the Queensland CTP – green slip – market and Suncorp has jointed the ACT green slip market, creating a GWP drag for IAG and an opportunity for Suncorp.

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Morgans continues to favour higher yielding equities while the cash rate remains flat. Some stocks the broker has screened for attractive growth and yield characteristics include AGL Energy, Henderson Group ((HGG)), Orora ((ORA)), Perpetual ((PPT)) and Primary Health Care ((PRY)). The broker considers these stocks should generate a 10% shareholder return in FY15 and earnings growth of at least 10%, and they have total debt/earnings ratio of less than two times with above-market earnings growth forecast for FY15 and FY16.

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Credit Suisse has reviewed Australian fund managers and favours stocks that offer reasonable value but strong earnings growth. The top three are Henderson, Perpetual and BT Investment Management ((BTT)). Henderson's current valuation looks conservative, given the growth trajectory of funds under management, in the broker's view. Perpetual, meanwhile, offers the highest earnings growth for the sector over the next two years. Credit Suisse suggests it inexpensive as it is trading below the historical price/earnings premium. BT Investment is trading at a 3.0% discount to Australian fund managers and Credit Suisse thinks the recently-acquired JO Hambro business should continue to attract positive net inflows with further upside potential if the expansion into the US and Asia is successful.

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Bell Potter anticipates Altium ((ALU)), Empired ((EPD)) and Mobile Embrace ((MBE)) will be key performers in the technology/telco sector in the upcoming reporting season. The drivers for Altium and Empired are strong results and a positive outlook, while the broker looks for Mobile Embrace to meet or exceed guidance. Good results are expected from My Net Fone ((MNF)), PS&C ((PSZ)) and Vocus Communications ((VOC)), with all three having some re-rating potential. The greatest re-rating potential is for PS&C, in the broker's opinion, given the other two have incurred some re-rating in the lead up to the results already.

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The implications from Commonwealth Bank's ((CBA)) review of open advice from its financial planning divisions is likely to be modest, in Morgan Stanley's opinion. The bank has not quantified the potential cost of compensation but media reports suggest it could reach $250m, of which $52m has already been paid. This equates to just 0.1% of the bank's market capitalisation or five basis points of CET1 capital. The broker assumes any compensation and costs will be included in cash profit and has added $100m to expense forecasts for each of FY15, FY16 and FY17. This reduces cash earnings per share by 1% in those years. There is some risk that the damage to the bank's reputation leads to more modest growth in wealth management but as this divisions accounts for just 9.0% of operating earnings the broker does not expect a material impact on banking revenue.
 

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