Weekly Broker Wrap: Casinos, Consumers, Insurers, Travel And Pulse Health

This story features INSURANCE AUSTRALIA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: IAG

-Casino demand grows in Asia
-Oz consumers want an experience
-Christmas spending plans are weak
-Few positives in home, motor insurance
-Better times ahead for corporate travel
-Pulse Health set for game changer
 

By Eva Brocklehurst

Citi is upbeat about the Macau market after its investor conference, with all presenters signalling strong demand is still out there. Despite a decline in gross gambling revenue and wage inflation, Citi cites 98-100% occupancy at major properties in the September quarter as the main reason for a recent deceleration in mass market growth. The operators also reiterate a view that Macau remains a supply-driven market and growth should turn positive when new hotel property comes on board in mid 2015.

Goldman Sachs has outlined some themes it expects will shape the global gaming industry longer term. Demand in Asia is being fueled by more Chinese from the mainland travelling abroad, with construction of large casinos set to serve sophisticated customers. New jurisdictions are opening up and regulation is evolving in newer markets. The broker identifies those best positioned to capture the growth potential are operators that have access to less mature markets, along with more capacity, financial strength and operating efficiency. The leaders in the market that are able to capture the potential include ASX-listed Crown Resorts ((CWN)), rated as a Buy. Goldman Sachs expects Asia, by 2018, will account for nearly 50% of the global casino market compared with 40% currently, and gross gaming revenue will grow at 9% compound until 2018, versus just 2% for the saturated US market.

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Consumer spending is improving and services that provide an experience are best placed compared with traditional retailing. The improvement in sentiment is likely to be modest, in Morgans' view, as weaker income growth and aversion to borrowing has characterised the period since the global financial crisis. Households are now spending more on services such as sporting and cultural activities, hobbies and tourism. Department stores are expected to remain under pressure while household goods will obtain some relief from the upswing in housing construction. The aging population provides opportunities for operators in the health sphere, in Morgans' view, while education is also expected to benefit from stronger consumer spending over the longer term.

The November Westpac-Melbourne Institute survey of consumer sentiment included an additional question on Christmas spending plans. Breaking down the numbers reveals Western Australia, Victoria and Queensland have the most restrained consumers, planning to spend less on the whole, but spending plans in NSW have been marked down sharply against 2013. Those most inclined to reduce spending are the 50-54 and 35-44 age groups, recording their weakest readings since the survey question was first asked in 2009. Moreover, men have sharply downgraded spending plans while women are only marginally more restrained.

Those with mortgages are significantly more subdued and, interestingly, a more restrained view was heavily concentrated among those with annual incomes over $100,000. In summary, Westpac senior economist, Matthew Hassan, notes sentiment is not nearly as bleak as it was in 2008 and remains comparable with 2011, but there is a clear intention to economise.

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The latest data on home and motor insurance trends provides few positives in Credit Suisse's view. Premium rates have continued to slow and top line growth will come under pressure for both Insurance Australia ((IAG)) and Suncorp ((SUN)) as personal lines present 60% of their gross written premium. The data show average premium rates in motor insurance were flat in the September quarter, implying a decline of 0.4% over the year, versus a 3.1% average rate increase in the prior comparable period. In home building the average premium rate gain was 0.6% in the quarter while a negative 0.1% for contents, implying an average premium increase over the year to date of 4%. Credit Suisse prefers AMP ((AMP)) over the general insurers in the current climate and QBE Insurance ((QBE)) over the pure domestic players.

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Domestic airfares are improving, slowly. The latest data shows business class fares rose 11.7% in November, while full economy fares eased 1.3%. Restricted economy fares rose 5.0% and discount fares fell 5.6%. Bell Potter cites the data as evidence of a better period ahead for the Australian corporate travel segment, which has suffered from both declining domestic airfares and client activity levels over the past two years. Two stocks best leveraged to benefit from this theme are Corporate Travel ((CTD)) and, to a lesser extent, Flight Centre ((FLT)). Bell Potter remains positive on the outbound segment, despite the fragile consumer environment.

The broker views the shift to international from domestic as structural and the slowing of outbound growth rates as temporary. Cover-More ((CVO)) and Flight Centre are considered the best stocks for the inevitable recovery and the broker also likes SeaLink Travel ((SLK)), despite its domestic focus, as it has sole operator status on the bulk of its routes.

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Bell Potter likes Pulse Health ((PHG)), which will lease a new specialist surgical hospital on Queensland's Gold Coast. The hospital is expected to open late in 2015 and contribute earnings of $2m within three years of opening. This will be the first larger scale facility to be operated by Pulse Health in an urban area and may be a game changer, in Bell Potter's view. The company mainly operates specialist rehab hospitals and smaller regional hospitals. The investment in the new hospital will be funded from cash and debt. The broker expects the company will also pursue further acquisition opportunities. The investment is not expected to affect the company's ability to pay dividends in FY15.
 

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