Weekly Broker Wrap: Oz Insurers, Techs, Advertising, Papers And Solar

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

-Insurer challengers resilient
-Global advertising robust
-But big clients review accounts
-Questions re print advertising
-AGL, ORG need to respond to solar
 

By Eva Brocklehurst

Australian Insurers

As Insurance Australia Group ((IAG)) and Suncorp ((SUN)) have quantified natural peril losses for FY15, UBS suspects it will turn out to be the worst year for weather events in a decade. The broker disagrees with emerging bullish views which believe pricing in general insurance will firm up and the challenger brands will fall by the wayside. Despite appealing valuations, UBS retains a cautious outlook until margins re-base to more sustainable levels.

Since 2010/11 the challenger brands have been able to grow without operational strain or financial cost associated with significant weather events. 2014/15 was the test. UBS estimates Youi incurred around $110m in gross catastrophe losses in FY14, with $40m retained and $70m passed on to reinsurers. While this will hurt it is unlikely to undermine the business model, in the broker’s view. Concerns around the challengers’ service levels are overstated, UBS maintains, as Auto & General and Hollard continued to deliver premium growth of 15-20% over 2010/11, despite elevated levels of complaints to the financial ombudsman over that period.

Techs, Media & Telcos

Bell Potter has updated its key picks in the emerging tech space with Integrated Research ((IRI)), Empired ((EPD)) and Appen ((APX)) the top three. The broker now has two Sell rated stocks in the segment – Technology One ((TNE)), as it now looks expensive, and Vocus Communications ((VOC)), for which the first half showed slowing growth in the core data business. The broker hastens to add that neither of these Sell ratings suggest there is anything fundamentally wrong with these businesses. The ratings are driven by valuation.

Advertising & Newspapers

Citi has reviewed the commentary from over 40 global advertisers and concluded that the outlook is robust, although agencies are under pressure from clients with a number of large accounts being reviewed. Traditional media owners are also pressured by changing consumer behaviour. Of note, promotion levels are declining in the US although price increases are managing to pass through.

A number of companies spoke positively about European improvement, France in particular. Citi suspects, if Europe follows the US, the first quarter of 2016 could be a key one for advertising. In the US, traditional media benefited from early stages of the recovery and then reverted back to trend after a year as structural developments came to the fore. This is a factor the broker suggests should not be ignored in Europe. Mindful of these structural risks Citi takes a selective approach to Europe, preferring to play any recovery via those media owners where expectations are lower and/or valuations are not extreme.

Newspaper circulation data in Australia in the first quarter reveals a slowing of the decline in print. Citi notes this is now the sixth such quarter in a row. Despite this, declines are still double digit in some cases. The rate of decline was lower for Fairfax Media ((FXJ)) and Seven West Media ((SWM)) but up slightly for News Corp ((NWS)). The pace of digital subscription uptake has slowed.

Metro newspaper circulation is down 8.3% on a weighted average, the fourth consecutive quarter of single digit falls. Weekend editions performed slightly better than weekday editions. The reduced pace of circulation decline offers some hope but also raises further questions over the ability of newspapers to attract advertising in the long run, Citi maintains. The broker remains cautious about print publishers but rates News Corp a Buy, because of the digital and TV assets, and retains Neutral ratings for Fairfax and Seven West.

Household Solar

There is a large opportunity for household solar and batteries, in Morgan Stanley’s view. From a survey of around 1,600 households in the National Electricity Market (NEM) the broker found a strong level of interest in such product, with a clear $10,000 price point and 10-year pay-back period. Around 1.1m households in the NEM already have solar panels which could be retrofitted with batteries. As yet, there are no clear winners in this market.

Morgan Stanley downgrades its utilities view to Cautious from In-Line. Australia’s solar resource, high retail tariffs and early adopter culture means it is one of the forerunners in the global shift from centralised electricity. The broker expects debates round tariff structures, stranded assets and pool prices. Moreover, the broker estimates AGL Energy ((AGL)) and Origin Energy ((ORG)) could each witness earnings reductions of $30-40m in FY17, rising to $90-100m in FY20, absent a competitive response to this issue.

Early indications are that Tesla, the manufacturer of the PowerWall product expected to arrive in early 2016, will ignite the sector and this will lead to rapid take up of the batteries. What could go wrong? Morgan Stanley suspects Tesla may not be able to supply all Australian demand, potentially delaying take up. Technical issues, or a lower Australian dollar making the product more expensive, could also delay take up.
 

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