Weekly Broker Wrap: Automotive, Utilities, Prostheses List, Grocery And BWX in China

This story features EAGERS AUTOMOTIVE LIMITED, and other companies. For more info SHARE ANALYSIS: APE

-Import changes slightly negative for APE, AHG
-Wholesale electricity tailwind for utilities
-Woolworths sales remain under pressure
-BWX's substantial growth opportunity
 

By Eva Brocklehurst

Automotive

From 2018, consumers will be able to directly import new cars or motorcycles. They will need to meet Australian safety standards, be right-hand drive and less than 12 months old with less than 500,000km on the clock.

The special import duty on used vehicles will also be removed. At present only Japanese and UK cars meet the standard for import but legislation is planned to change this although there is some early opposition to the changes.

Credit Suisse does not expect a material impact on new or used vehicle prices but believes the change will be a negative for AP Eagers ((APE)) and Automotive Holdings ((AHG)), albeit modest as the dealers are predominantly exposed to the mass market.

Fleet providers such as SG Fleet ((SGF)) and Eclipx ((ECX)) are likely to be unaffected. Leasing providers such as McMillan Shakespeare ((MMS)) and Smartgroup ((SIQ)) are also likely to witness few changes, the broker believes, as novated leasing demand is more influenced by new car sales and finance trends while fringe benefits tax is a more significant issue.

Utilities

The improving outlook for wholesale electricity prices represents a key tailwind for utilities in 2016, Deutsche Bank maintains. Regulated utilities such as Spark Infrastructure ((SKI)), DUET ((DUE)) and AusNet Services ((AST)) face significant final determinations in their Victorian electricity distribution networks.

The broker believes the sector will outperform on earnings growth, sustained low bond rates and improving wholesale electricity prices. APA ((APA)), AGL Energy ((AGL)) and Spark Infra are considered best leveraged to this theme and remain the broker's preferred exposures.

Prostheses List

The federal minister has promised to prioritise prostheses pricing reform and Deutsche Bank regards this a s a medium-term positive, as it should reduce affordability pressures that are driving increased churn for insurers and policy downgrades.

In the near term the earnings impact could be negative for the insurers if the government ensures savings are passed onto consumers through lower premium rises.

Public hospitals are able to shop around for prostheses but the private health insurance industry is required to pay a fixed price to private hospitals based on the prostheses list, and these prices are considered well above domestic and international benchmarks.

Goldman Sachs expects any near-term financial impact on funds such as Medibank Private ((MPL)) and nib Holdings ((NHF)) will be small, if impacting at all. There will be a negative impact on medical device company gross profits in Australia and, in turn, they may seek to reduce any volume rebates they currently pay to hospitals.

Goldman downgrades earnings forecasts by 3.0% for Healthscope ((HSO)) and by 2.0% for Ramsay Health Care ((RHC)). UBS notes both these private hospital operators have previously insisted they would be relatively unaffected by cuts to the prostheses list but at this point makes precautionary reductions to estimates.

Grocery

Competition among grocery stores in Australia has reached new heights, Goldman Sachs maintains, as Woolworths ((WOW)) attempts to resurrect its sales with investment in price, service and inventory.

The broker notes Coles ((WES)) and Metcash ((MTS)) have responded with their own initiatives, keeping any resurgence at Woolworths at bay. Aldi's market share growth, meanwhile, appears to be coming at the expense of Woolworths and Metcash.

The broker compares the Woolworths sales decline with Tesco in the UK, where competition led to a fall in margins, earnings and a sharp decline in the share price. There are some mitigating factors for Woolworths compared with Tesco, the broker acknowledges, given its greater market share and Australia's low population density.

Goldman also revises earnings estimates down for both Woolworths and Wesfarmers in the light of softening food statistics. Margins are forecast to decline at Woolworths and remain flat for Coles.

BWX

Natural skin care product manufacturer BWX ((BWX)) delivered a substantial increaese in interim earnings, up 62%, which for brokers underscores the company's strong potential.

Bell Potter observes the flagship Sukin brand continues to deliver exceptional domestic sale growth and is now poised for a material opportunity in the Chinese market. The broker retains a Buy rating and $3.90 target.

Moelis notes the gross profit margin expanded by 410 basis points as the company transitions from low margin, low volume third party manufacturing. BWX is now net cash. The broker retains a Buy rating and $4.65 target.

Exports commenced in FY16 and this is expected to be the main driver of offshore revenue. The company owns the formulations for all five of its brands Moelis believes the stock is another way to play the growing consumer demand for high quality Australian goods in China.
 

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