Weekly Broker Wrap: Insurers, Banks, Utilities, Online Portals And iSelect

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

-Insurer growth lacklustre
-More re-pricing from banks?
-Yield and growth in utilities?
-REA Group winning online
-ISelect now has cash
 

By Eva Brocklehurst

General Insurers

Macquarie has reviewed the general insurers under its coverage, ranking them in terms of premium growth, margin pressure and key issues such as currency and cost cutting. The broker’s top pick is QBE Insurance ((QBE)) which enjoys positive currency and interest rate tailwinds relative to its peers. The capital re-build is complete and the company is focused on core business.

Next up is Suncorp ((SUN)), which has earnings momentum and the best expense ratio, well placed to access newly privatised markets in coming years. After that comes Insurance Australia Group ((IAG)), which appears to be constrained in terms of premium growth. Multiples are full and without the prospect of imminent capital returns. While insurance margins are the highest of the three this suggests to Macquarie a greater vulnerability to challenger brands.

UBS finds compelling reasons to be a seller of general insurers. The broker expects gross written premium to track sideways, with downside risks. Questions could be raised at the results around margin sustainability and the answers may only become clearer as FY16 progresses.

The broker considers many of the events of recent months have been a distraction and looks for answers as to why IAG needed to free up $1bn in capital through a deal with Berkshire Hathaway.

The broker is mildly optimistic that QBE will have fewer complicated issues this time around, with a positive message on dividends likely. The next 12 months are considered critical for Suncorp’s investment case, largely because of the broker’s more conservative view on general insurer margins as rate pressures flow through.

Banks

UBS has downgraded earnings forecasts for FY17 for the major banks in the wake of statements from APRA which provide more clarity on the capital shortfalls. Three of the four have re-priced investment property loans in order to slow credit growth to below the APRA macro prudential thresholds.

This suggests the banks are moving to pass on some of the costs of higher capital requirements to customers and UBS considers this a smart move. The broker expects the spread between owner-occupier and investor mortgages to widen further as the banks continue to re-price these loans.

The broker also considers it likely the banks will look to rights issues to improve capital requirements. This may be an opportunity to increase exposure to the banks and participate in re-pricing upside.

Utilities

UBS likes regulated utilities which offer yield and growth potential. On this basis the broker prefers APA Group ((APA)) and upgrades to Buy from Neutral. The stock offers the best quality in terms of distributions and these are more than covered by free cash flow. DUET ((DUE)) and Ausnet ((AST)) are best in terms of up-front returns. DUET is rated Buy, with good yield and growth prospects on the back of the proposed acquisition of Energy Developments ((ENE)).

Ausnet and Spark Infrastructure ((SKI)) are rated Neutral. The broker considers the grossed up distribution yield of 8.0% is factored into Ausnet’s price. Spark Infrastructure ranks poorly on distribution coverage and is the least attractive on an enterprise value/regulated asset basis despite strong growth forecasts.

Portals

Citi reviews online usage metrics across the desktop and mobile sectors in order to determine winners in the battle between REA Group ((REA)) and Fairfax Media‘s ((FXJ)) Domain portal. The broker looks closely at relative share, given the importance placed on being No 1 in online classified verticals.

Data from the Nielsen ratings shows Domain is closing the gap in terms of unique audience but on total page views the gap is actually increasing, which the broker considers is a better measure of engagement. This gap is widening despite Domain’s push into new markets.

Mobile adds impact for both players and the gap appears constant. Mobile is driving increased engagement by consumers with the portals and is this is not unique to property. The discovery process appears to be via desk top mid week but reverting to mobile on the weekend. Nevertheless, it appears REA Group is retaining its number one position across online.

Citi rates REA Group as Buy and Fairfax as Neutral. Domain has a solid position in Sydney and Melbourne, supported by legacy print classifieds, and remains positioned for growth, which the broker considers is priced into the Fairfax valuation.

iSelect

ISelect ((ISU)) has agreed on a cash settlement for its outstanding NIA Health loan facility. Bell Potter welcomes the agreement and makes minor upgrades to forecasts because of changes in interest rate assumptions. The broker also adds a 15% premium to valuation to account for the prospect of capital management initiatives. As a result the price target is raised to $2.10 from $1.65. A Buy rating is retained.

The broker likes the agreement as the company can focus on its underlying business now the distraction has been removed. ISelect will have more than $100m in net cash on the balance sheet after settlement of the NIA deal.
 

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