Weekly Broker Wrap: Hospitals, Insurers, Banks, Building Materials And Temple & Webster

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

-Caution urged on hospital sector
-Domestic insurer P/E discounts unjustified?
-Domestic bank provisioning on oil too low?
-Low oil prices support building products
-With most benefit attributed to Boral
-Temple & Webster well placed to grow
 

By Eva Brocklehurst

Hospitals

Utilisation has been the main driver of growth in the hospital industry, with Macquarie's analysis signalling the amount of hospital care per person received since 2005 has increased 41%, for those with insurance. Contrary to popular belief, the analysis points to ageing as only a small factor in this.

Are we receiving too much health care? The broker asks the question, given the federal government has initiated a review of the Medical Benefits Scheme fee schedule with a goal to link reimbursement to good clinical practice. Uncertainty exists as to the impact on the industry but Macquarie suspects it could be material and there is little appreciation of the current risk.

Hence, the broker urges caution on the sector until clarity is obtained. Macquarie prefers Healthscope ((HSO)) over Ramsay Health Care ((RHC)) based on valuation, given a larger brownfield pipeline and less exposure to France.

Insurers

Softer premium rates flowed through to margin pressure in 2015 and investor expectations were lowered considerably for 2016. Nevertheless, Credit Suisse observes early signs of a recovery in premium rates. The broker believes a large price/earnings (P/E) discount is no longer justified for domestic insurers Suncorp ((SUN)) and Insurance Australia Group ((IAG)).

IAG offers earnings upside in the broker's opinion, and the potential for a capital return in coming years, while Suncorp offers valuation support and an earnings recovery, albeit delayed versus IAG.

QBE Insurance ((QBE)) enters 2016 with commercial line premium rates softening globally and the broker envisages downside risk to gross written premium, which will continue to pressure margins. From a low base, nonetheless, it offers dividend support as its equity raisings are near an end.

Morgan Stanley considers QBE has the greatest risk/reward outlook, offering the best earnings growth and an undemanding valuation, while IAG struggles for growth but offers resilience and potential P/E expansion. In terms of Suncorp, the broker believes downside earnings risk and weak franchise momentum overhangs the stock and it remains too early to become a buyer.

Banks & Oil

Major banks have around $31bn exposure to the oil & gas industry, Morgan Stanley contends and provisions appear low versus the levels reported by US banks, although the broker acknowledges the nature of the exposures is quite different.

Commonwealth Bank ((CBA)) and ANZ Banking Group ((ANZ)) are the most exposed of the four major banks. The broker's US analysts note Wells Fargo reports energy reserve ratios of 7.0% and energy provision levels are building.

In contrast, none of Australia’s major banks have disclosed stressed exposure or provisioning levels in their oil & gas portfolio. The broker doubts provisioning levels on the mining books would be much above 1.0%. At the very least, Morgan Stanley expects the decline in the oil price will lead to pockets of weakness and higher-than-expected loan losses in FY16.

Building Materials

Credit Suisse looks at the implications of a low oil price environment on the building sector. The two most exposed stocks are Boral ((BLD)) and James Hardie ((JHX)). The broker concludes the current oil price environment is positive for the former and net negative for the latter.

Lower diesel fuel costs which directly reduce costs associated with concrete, asphalt and quarry trucking benefit Boral and, in addition, this should flow through to freight rates for other building products.

The lower cost of gas should also help with the manufacture of James Hardie's key product, fibre cement. The negatives for James Hardie lie in the sharp drop in oil sector employment in the US states of Texas and Oklahoma, key home building markets for the company.

UBS notes US housing is growing at a steady pace, even in Texas, and a lower Australian dollar traditionally favours building materials companies so, while the housing downturn will hurt this is not a typical cycle and companies are well prepared.

The broker finds CSR ((CSR)) significantly exposed to a housing downturn amid ongoing concerns over the future of the Tomago aluminium smelter. UBS highlights news that Fletcher Building ((FBU)) is close to acquiring the Higgins group in New Zealand, which will increase its exposure to construction contracting and mark its entry into asphalt and road surfacing.

Boral's progress in the US, and any comments around cement and concrete pricing, is expected to drive sentiment during reporting season and UBS still believes the stock provides the best overall risk/return investment proposition on a three-year view.

The broker has recently upgraded James Hardie to Neutral from Sell, as the price versus growth trade off appears more reasonable. Reporting season for Adelaide Brighton ((ABC)) is expected to be steady as she goes, with UBS not envisaging much new investment opportunity.

Temple & Webster

Temple & Webster ((TPW)) is Australia’s largest online specialist in furniture and homewares, operating three e-commerce platforms which attracted a combined audience of 12.6m visitors over the year to June 30. Bell Potter has initiated coverage of the stock with a Speculative Buy rating and $1.30 target.

The broker's positive view is predicated on the large growth potential for online penetration of the segment, with the company having a strong competitive position and multiple growth avenues, as well as a data-driven advantage.

The sites' categories have a relatively low level of branded goods and a wide range of unique products which reduce the tendency of consumers to check around for prices, Bell Potter maintains.

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