Weekly Broker Wrap: Supermarkets, GPs, Housing, Steel, Insurers, Banking

This story features CUSCAL LIMITED, and other companies. For more info SHARE ANALYSIS: CCL

-Grocery weak for CCL, GFF
-Health insurers engaging GP sector
-JP Morgan downgrades steel sector
-Bell Potter positive on insurers
-Banks: higher capital vs funding tailwind
 

By Eva Brocklehurst

Deutsche Bank's supermarket pricing study suggests grocery price trends have improved over the past three months. A continuing factor has been inflation in fresh products. The broker concedes food and liquor sales are not immune to the current weakness in consumer sentiment but inflation is likely to be the main driver for supermarkets, so the trend bodes well for the upcoming first quarter sales figures.

The broker's data suggests Coca-Cola Amatil ((CCL)) refrained from aggressive price promotions and, as a result, experienced positive year-on-year price improvements in the September quarter. This is in line with management's commentary after the first half result, revealing it was working on balancing the trade off between price realisation and volume growth. As a result, Deutsche Bank suspects CCL has experienced weak volumes in the grocery channel. Promotional activity in supermarkets' proprietary bread over the quarter has continued to erode price gains made over the year. The broker's channel checks suggest the selling of bread at 85c has been strong, which is not helpful for Goodman Fielder ((GFF)).

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UBS observes, just as major ASX-listed hospital operators were undervalued five years ago relative to their strategic value, so national GP operators are in the same camp now. Taking a 5-10 year view on the evolution of the Australian healthcare sector the broker points to the growing engagement between private health insurers and general practice. Consistent with offshore developments, the broker expects GPs will evolve a more strategic role in the provision of integrated care, particularly for the chronically ill. Add to this a trend to consumer-driven care, where patients monitor personal health indicators and seek GP advice.

These trends signal to UBS that the geographical footprints of GP operators such as Sonic Healthcare ((SHL)), Healthscope ((HSO)) and Primary Health Care ((PRY)) become more significant. Previously the corporate function was simply administration but it now involves coordinating services. With the changes already underway, UBS envisages a transformation in GP-health insurer links, anticipating there will be valuation uplift for GPs. The broker takes the preliminary step of raising its GP valuation component in these stocks by 20%.

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The magnitude of the Australian housing recovery improved in the first half of this year. Citi notes Sydney housing remains the highlight, favouring companies which can leverage the whole value chain in construction products. The broker reiterates a Buy call on GWA ((GWA)) but expects the housing recovery will only positively impact the company from the first half of FY15. Peet ((PPC)) in contrast should benefit more immediately from improved activity, given its early stage exposure.

Detached housing looks to be responding to the low interest rate environment, creating lower risk for building product companies compared with construction materials in the near term. A slowing in in resource capex has caught up with the engineering sector but Citi expects a recovery in infrastructure spending will support top line growth from FY16 onwards. Given this backdrop the broker's preferred pick is Lend Lease ((LLC)) with its exposure to long-term infrastructure investment.

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Australian steel spreads widened in the September quarter as a result of resilient steel prices, continued weakness in iron ore prices and a declining Australian dollar. JP Morgan expects this will be the case until early in 2015, when spreads will start to narrow. The broker has downgraded earnings estimates across the steel sector. For BlueScope ((BSL)) and Sims Metal Management ((SGM)) the downgrades primarily relate to moderating steel prices and spread forecasts. For Arrium ((ARI)), the deeper cuts are largely because of downgrades to iron ore price assumptions.

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Bell Potter remains positive on the general insurers. The Bureau of Meteorology anticipates at least double the risk of an El Nino weather event by the end of the year. This would result in drier than usual weather on the eastern seaboard. These events tend to correlate to a net beneficial impact on insurers. The threat of bushfire activity in such periods is a key risk but the actual damage tends to be smaller than for storm or flood related events, given lower average land and building values in rural areas. Meanwhile, commercial premium growth expectations are considered achievable. Discounting in the first half crimped top line growth but Bell Potter believes this was anticipated, and more than offset, by better margins.

The broker forecasts returns to remain stable, as lower market gains are offset by lower claims expense, although Insurance Australia Group ((IAG)) is expected to experience a small decline in returns, given a higher proportion of equities/alternative investments in its portfolio. The greatest upside potential belongs to QBE Insurance ((QBE)), given its investments are shorter in duration, while its claims liabilities are longer. The broker has Buy ratings for all three stocks in the sector IAG, QBE and Suncorp ((SUN)), reflecting the defensive nature of the industry.

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Credit Suisse observes trends in personal and corporate insolvency are benign or improving across each of Australian banks' key markets. In relation to Australian corporates, the Reserve Bank recently stated that indicators of business stress improved over the past six months and failure rates are well below recent peaks in 2012. In Australia, in the September quarter, the number of aggregate personal insolvencies increased 8% sequentially while bankruptcies increased 14%.

As the Murray review of the Australian banking sector looms, JP Morgan highlights the case for higher capital measures, but drags to profitability from higher capital requirements are likely to be fully offset by the funding tailwind being received by the major banks, via lower interest rates, or by equivalent change in mortgage discounting behaviour from the sector. Wholesale funding costs continued to decline in the September quarter and major banks have looked to increase their net issuance. This environment provides the backdrop for the Murray inquiry's outcome, expected in November. JP Morgan's base case is for a 17% total capital ratio by 2018, in part achieved through issuance of an additional $70bn in tier 2 sub debt at a cost of $1bn to the system.

The broker does not believe this is as challenging as first thought, if it is accompanied by the introduction of senior unsecured bail-in debt akin to the moves in Europe. With major bank share prices now trading at a 10% discount to fair value the broker looks to the upcoming G20 meeting in November to obtain further clarity on whether senior unsecured bail-in debt is being recommended globally.
 

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