Weekly Broker Wrap: Insurance, ESG, Banks And Consumer Stocks

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

-NZ market shift from IAG
-NSW CTP reform in train
-Opportunities after Brexit
-GBP fall benefit to Praemium
-Pureprofile undervalued?
 

By Eva Brocklehurst

Insurance

Macquarie has reviewed the New Zealand general insurance market, noting market pressures continue and market share is shifting away from Insurance Australia Group ((IAG)) towards new entrants such as Youi and Ando. New Zealand accounts for around 19.8% of IAG's FY15 gross written premium and around 13.6% for Suncorp ((SUN)).

New Zealand appears to be following the same trajectory for premium rates and margins as Australia, the broker observes. Motor claims cost inflation was singled out as an issue, a function of foreign exchange and low oil prices meaning people are travelling more domestically. On this issue, the broker notes Suncorp has set up a SMART repair shop in Auckland, with intentions of rolling out more in the next few years.

Personal lines premium rate forecasts suggest 5% growth in motor and no growth for home insurance. Commercial lines premium rates are forecast to be down across the board. Macquarie reduces IAG earnings estimates by 1.5% for FY16 and by 1.6% for FY17. Suncorp earnings are reduced by 2.8% for FY16 and by 0.9% for FY17. Suncorp remains the broker's preferred general insurance stock.

The NSW government has released the CTP (green slip) reform position, with a goal to introduce legislation to parliament later in 2016 and the new scheme to come into effect in 2017. The government proposes a hybrid scheme with defined benefits to all those injured in motor accidents regardless of fault with modified common law damages, fault based, for the more seriously injured.

Should the proposals be introduced the increased frequency of claims experienced over recent times should moderate, Macquarie maintains. Until this occurs the broker expects ongoing claims issues to dog the sector.

The broker also observes QBE Insurance ((QBE) and Allianz are taking most of the Zurich share after that company pulled out of the NSW CTP segment on March 1, 2016. While QBE is winning share and there has been pressure on profitability, the broker recognises NSW CTP accounts for only 2.4% of group gross written premium.

Recent data on NSW market share shows IAG has 33.2%, up from 31.1% in December 2015, Suncorp has 23.9%, up from 21.6% and QBE has 23.2%, up from 22.7%.

ESG

Environmental, Social and Governance (ESG) research, which explores sustainability and accountability among ASX stocks and integrates this into the investment process, seems to support outperformance in certain cases, Credit Suisse maintains.

The broker ponders why, given during conferences the question of how and when this research is prioritised is often asked. The conclusion is that ESG probably supports outperformance in a number of ways. It may indicate future value creation, protect existing value, indicate constructive behaviours or predict a future operating environment.

The ESG factors are not widely considered because the information is costly to find and hard to interpret. Yet, Credit Suisse believes taking ESG into account forces its analysts to extend the scope and timeline of their research, which should improve its quality.

Banks

Further to the ESG analysis Credit Suisse identifies the top risks for the commercial banking sector. Immediate concerns relate to social and regulatory risks, particularly the potential for a Royal Commission into banking, and possible class action damages which could follow from successful Australian Securities and Investments Commission (ASIC) litigation alleging rigging of BBSW markets.

This creates a key event catalyst regardless of which party wins the federal election. A more infrequent social risk is the vulnerability of systemically important banks, with their high equity gearing creating solvency issues during periods of financial stress and rendering the prospect of a taxpayer funded bail-out. The broker believes this is essentially an unsolvable risk but also one that is rarely experienced in practice.

What makes the broker's bank analysts happy? Despite cyber security risks, they cite new banking markets such as international wholesale banking/trade finance and new labour sourcing opportunities. Banks are net beneficiaries of technology which has been driving multi decade productivity improvements.

High Conviction Stocks

Morgans believes the surprise outcome of the UK referendum regarding exit from the EU has thrown up opportunities for investors. The broker includes BHP Billiton ((BHP)) and Smartgroup ((SIQ)) in its list this month, removing NextDC ((NXT)), Vitaco Holdings ((VIT)) and CYBG ((CYB)).

BHP is added because of its robust cash flow and with a key driver being the oil price, an important feature given oil demand is largely unresponsive to Brexit. Smartgroup has been significantly de-risked in terms of regulatory change and has a strong track record of organic growth, which is assisted by recent contract wins.

The broker expects any short-term volatility will be alleviated by central bank support but advocates investors be selective with their exposure as risks abound. Morgans considers the Brexit a direct risk to CYBG, with the uncertainty signalling potential declines in UK GDP and credit growth because of higher unemployment and a softening housing market.

Vitaco is removed from the list as the broker envisages few near-term catalysts for the stock to re-rate. Meanwhile, NextDC has performed well over the last few months but, as its inclusion in ASX200 did not occur in the quarterly index re-balancing, that catalyst has passed and it is removed from the list.

Consumer

Morgan Stanley warns that stock specifics, rather than the Australian consumer cycle, will drive shares over coming months. The broker favours those in earnings upgrade cycles such as Domino's Pizza ((DMP)) and JB Hi-Fi ((JBH)) and oversold stocks such as Metcash ((MTS)) and Super Retail ((SUL)).

Woolworths ((WOW)) remains the broker's highest conviction Underweight stock, as ongoing pressure on supermarket earnings are expected. The broker is Equal-weight on Wesfarmers ((WES)), given the strong outlook for Bunnings even though growth at Coles appears to be slowing.

In discretionary retail Morgan Stanley most prefers JB Hi-Fi and least prefers Harvey Norman ((HVN)). JB Hi-Fi appears set to profit from being the last one standing in software while Harvey Norman is most susceptible to a slowing Australian housing outlook.

Praemium

Praemium ((PPS)) has announced a major contract with JBWere for portfolio administration and software, V-Wrap. The contract is estimated to be ultimately worth around $1m per annum as JBWere progressively implements V-Wrap to all wealth management client portfolios.

Bell Potter believes this new blue chip client validates the recent development of capabilities on the platform. The broker currently forecasts the UK business to be loss making for the next three years, yet the resultant weakening in the British pound from the Brexit vote, combined with a weaker rate against the Australian dollar, means smaller operating losses as the business heads towards profitability.

Bell Potter upgrades estimates based on this new contract and a stronger Australian dollar cross rate, offset to some degree by weaker net flows and marking to market estimates. Buy rating is retained. Target lifts to 62c from 56c.

Pureprofile

Shaw and Partners considers marketing technology company Pureprofile ((PPL)) is undervalued for a stock that is already profitable and delivering on its strategies. While the broader market is uncertain, the broker notes the company benefits when research efforts are increased and companies look for deeper insights into marketing their brands.

The stock is trading on a 12-month forward price/earnings ratio of 11 and the broker believes the risks associated with investing in the stock are less than for its small cap peers. Shaw and Partners retains a Buy rating and 79c target.
 

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