Weekly Broker Wrap: Aged Care, Consumer Electronics, Housing, Tourism And El Nino

This story features ESTIA HEALTH LIMITED, and other companies. For more info SHARE ANALYSIS: EHE

-Short-term funding risk in aged care
-Dick Smith woes unlikely to spread
-House building firm despite affordability decline
-Bright outlook for tourism with AUD decline
-Extreme weather supporting electricity demand
 

By Eva Brocklehurst

Aged Care

Operating conditions appear sound in aged care, featuring high occupancy and rising bond inflows supported by a buoyant property market, in Deutsche Bank's observation. Still, funding reforms overshadow the sector. The broker believes the over-run relative to budget estimates makes it a priority for the government to address the issue.

Hence despite other attractive elements in the sector, the broker has downgraded Estia Health ((EHE)) and Regis Healthcare ((REG)) to Hold from Buy and Japara Healthcare ((JHC)) to Sell from Hold. The reflects adjustments to forecasts to allow for the impact of a freeze on aged care funding indexation from early 2016.

UBS also observes the short-term funding risk for residential aged care but suspects the impact on earnings will be contained to 2-3% at the bottom line. The broker believes if the government were to freeze indexation, currently at 1.3%, that would go some way towards addressing the gap. The government's Mid Year Economic and Fiscal Outlook (MYEFO) due next week may present a possible timetable for any changes.

Consumer Electronics

The efforts to clear excess inventory began in earnest late last week at Dick Smith ((DSH)). Deutsche Bank conducted a number of store visits to get some idea of what was being moved and the depth of discounting.

The majority of products were private label accessories, particularly under the MOVE brand. A large amount is aged with the majority of promotions on accessories to suit superseded hardware. The broker has also observed the depth of discounting is more aggressive in New Zealand.

UBS observes a difficult few months in store for Dick Smith but suspects the risks for the sector are overplayed. An irrational competitor with a 6.0% share does create a risk, nevertheless, and UBS suspects a 30 basis point impact to gross margins for JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), which would translate to a 3.0% and 1.0% negative impact on first half earnings respectively.

The issue highlights the strength of the JB Hi-Fi and Harvey Norman brands which suggests to UBS a significant opportunity exists over time to take market share from Dick Smith. The broker retains a Buy rating on Harvey Norman and upgrades JB Hi-Fi to Buy from Neutral.

Housing

Deutsche Bank expects growth in FY16 housing starts of around 6.0%, with NSW and Victoria being the drivers partly offset by weaker conditions in Western Australia. Investor finance now represents 73% of total loan values in Australia versus the historical average of 47%, the broker observes.

In contrast first home buyers represent 12%, down from the peak of 29% in October 2009 and from the historical average of 19%. The broker notes some investors may be first home buyers but this is difficult to quantify with certainty.

Nevertheless, home affordability remains below historical averages for all states except Western Australia and Queensland, although the broker does not believe this is at trough levels in any capital city. Housing is expected to remain robust over 2016, with no change to the official cash rate until December next year.

Beneficiaries of this robust environment, in the broker's view, include CSR ((CSR)), although aluminium is a detractor for the stock, Fletcher Building ((FBU)), given its exposure to robust markets in both New Zealand and Australia and Boral ((BLD)), in a strong position given 30% of its sales relate to Australia housing. Deutsche Bank retains Buy ratings on all three stocks.

Tourism

The Australian dollar depreciation has marked an end to cheap overseas holidays, UBS notes, with international travel prices at a record high. While the level of departures is still 25% above arrivals, net arrivals are the best since 2000, which provides some support to consumption, UBS observes. The broker expects, in a subdued economy tourism, at 6.0% of GDP, is likely to become a bright area in 2016.

UBS also expects the Australian dollar to fall to US68c in 2016 as the US Federal Reserve hikes rates and commodity prices remain soft. A lower Australian dollar is expected to underpin strong growth in tourist arrivals, supported by scheduled increase in international airline capacity of 8-10%.

El Nino

Morgan Stanley's El Nino update suggests, thus far, there is an impact on average electricity pool prices. Year-to-date average pool prices are higher in both NSW and Victoria. AGL Energy ((AGL)) is the most leveraged to pool prices, the broker notes.

That company has argued a structural rather than a cyclical view on prices, based on re-pricing of coal and gas supply contracts. Morgan Stanley, however, suspects a cyclical impact. Low rainfall has curtailed Tasmanian hydro production and hotter southern weather means lower demand-coincident wind production in South Australia.

Extreme weather tends to support electricity demand although, longer term, the analysts envisage declining demand and a dampening of prices amid new entrant renewables.
 

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