Weekly Broker Wrap: Drones, Electric Vehicles, OncoSil, Insurance, Think Childcare And Banks

This story features ONCOSIL MEDICAL LIMITED, and other companies. For more info SHARE ANALYSIS: OSL

-Broad applications opening up for drones
-Limited copper use in electric vehicles
-Optimism for OncoSil's treatment device
-Major insurers unable to match market growth
-Think Childcare growth impresses
-Bank margins likely to narrow
 

By Eva Brocklehurst

Drones

Drones and the footage from the cameras they carry have become familiar to many, yet Goldman Sachs suspects these unmanned aerial vehicles have only scratched the surface of their commercial potential. Drone technology, like the internet and GPS before it, is migrating from military roots to encompass a broad array of applications.

Once regulations governing expanded use are in place the broker expects demand to be unlocked in industries such as construction, agriculture, energy and mining. Drones offer three main benefits – efficiency, cost reductions and safety. Police and fire services are already tapping observational capabilities.

Goldman estimates the combined market for drones could reach a cumulative US$100bn by 2020, rivalling the size of the helicopter market. This could have impacts on areas such as insurance, camera and component manufacturers.

Electric Vehicles

As China's demand for copper shifts down a notch, Macquarie observes a new growth area for the metal is needed and electric vehicles have attracted some attention in this regard. While the broker believes demand from this sector will grow strongly it is a small absolute volume in copper usage.

Electric vehicle growth will be hard pressed to offset the slowdown from other major copper consuming sectors such as construction and consumer products. There are also some uncertainties on electric vehicle development in China because of lower petrol prices and poor profitability among power-charging facility operators. Macquarie expects more government support is needed for the market to reach its targets and the impact on copper demand is still likely to be minimal.

Oncosil Medical

The medical device company, OncoSil Medical ((OSL)) is expected to gain CE Mark approval shortly for its product which treats pancreatic cancer. A small clinical trial of the device along with chemotherapy has indicated an extension in overall progression free survival versus the standard of care for the cancer. The company has also applied for the CE Mark in hepatocellular cancer with the approval process ongoing.

Bell Potter notes OncoSil is now funded to drive commercialisation in Europe and commence a clinical study in the US. Pending the award of the CE Mark the broker expects first commercial revenues in 2016 and initiates coverage of the stock with a Buy rating and 30c target.

Insurance

UBS refreshes its views on premium growth and market share across motor and home & contents insurance. Although Suncorp ((SUN)) and Insurance Australia Group ((IAG)) are managing the margin/volume trade-off well, first half results signalled to the broker how challenging it is to get the balance right.

Both companies have begun modestly raising rates again, with premium rates lifted by 1-3%. This means the major providers were unable to match market growth rates. APRA statistics indicate the industry premium growth returned to 5.1% for motor and 3.9% for home & contents.

Challenger brands continue to erode market share, growing at 17% in motor and 26% in home & contents. Youi, Hollard, A&G and Progressive now account for 10% of the personal lines market form 3.7% five years ago. While the broker suspects it will prove increasingly difficult to maintain this trajectory off a higher base, 15-20% growth could be sustained over 2016.

Think Childcare

Think Childcare ((TNK)) is providing child care services in Australia, with a growth profile that has impressed Canaccord Genuity. The broker expects a four-year earnings growth rate of 13.6%. The company has a portfolio of 32 long day care centres, the majority being in Victoria.

The company is an operator not a consolidator and targets underperforming centres with the intention of improving occupancy. The broker takes a positive stance on the stock with its strong track record and supportive industry drivers. The 2016 dividend yield is forecast to be 6.3% and the broker initiates coverage with a Buy rating and $1.56 target.

Banks

Goldman Sachs suggests that even if the Australian cash rate is unchanged at 2.0%, bank margins in FY17 will fall about four basis points, driven by the higher wholesale funding costs, partially offset by mortgage re-pricing.

The broker has recently reinstated a view that the Reserve Bank of Australia will cut the cash rate two more times in 2016, to 1.5%. If correct, and even if the banks hold onto 10 basis points of mortgage re-pricing per each 25 basis point reduction in the cash rate, Goldman expects margins will still fall.

Perversely, While ANZ Bank ((ANZ)) has the highest loan-to-deposit ratio of the domestic sector, and this appears negative when assessing balance sheet structure, it also means it would be less affected by lower cash rates. Moreover, it is the only bank in Goldman's coverage that should provide material positive leverage to rising US base rates, as ANZ has an estimated $50bn in Asian free funds largely linked to US rates.

Within the sector, Deutsche Bank observes ANZ has also experienced the largest increase in short selling recently. Short positions have risen in March and are now at 2.0% of issued shares on average, the broker observes, compared with 1.4% three months ago and 0.8% a year ago.

National Australia Bank ((NAB)) is the least shorted of the banks while both Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) have experienced higher short selling activity in recent years.

The broker suspects some of the increase in short selling has been driven by offshore fears regarding bank exposure to the housing market — fears which have overstated the risks to the banks. ANZ has the highest level of foreign ownership of the banks, at 26% versus a peer average of 22%. It also has the highest level of institutional ownership at 56% while Commonwealth Bank ((CBA)) has the lowest at 47%, Deutsche Bank observes.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms