The Wrap: Hospitals, Amazon And Henderson

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

Weekly Broker Wrap: IVF monitor; Australian hospital stocks; Amazon in Australia; Henderson merger; Pointerra; Skydive the Beach.

-Ramsay's Australian hospital growth expected to remain ahead of the industry
-Distribution advantages for incumbents likely to be weakened with Amazon's advance
-Shaw and Partners: Henderson merger with Janus creates much-needed scale
 

By Eva Brocklehurst

IVF

UBS has launched a monthly monitor of Australian IVF cycle data. Monitoring the industry cycle remains a key input into the broker's investment thesis for relevant listed stocks. The industry cycled tough comparables in the first half and this is expected to moderate in the second half.

While the industry is likely approaching a trough in the cycle, UBS envisages a risk growth remains depressed over the final four months of FY17. Victoria continues to lead growth along with South Australia.

Virtus Health ((VRT)) is expected to find the final four months particularly challenging in terms of its domestic growth prospects and there are potential headwinds as it resets its low-cost business. Despite the stock now representing solid value, the broker believes there are are few positive catalysts and easier comparables will not be cycled until July. UBS has a Neutral rating and $5.55 target.

Australian Hospitals

Credit Suisse observes the financial performance of Healthscope ((HSO)) and Ramsay Health Care ((RHC)) has varied in recent years. From FY12, Ramsay has achieved Australian hospital revenue growth around 4% ahead of Healthscope and earnings growth 5% above. The majority of the difference is attributable to relative operating theatre additions.

While capacity expansion has historically been the key driver of differences in growth rates, the broker expects less variation over the next three years as Healthscope opens a number of brownfield projects.

There is a risk on the downside if weakness persists for Healthscope and Credit Suisse retains a Neutral rating with a $2.45 target. The broker upgrades Ramsay to Outperform from Neutral as the share price has underperformed over the past month. The target is $74.50.

Tariff reductions in the UK and France as well as a stronger AUD/GBP present headwinds for FY18 earnings growth. The broker expects the company's Australian hospital growth to remain ahead of the industry in the near to medium term.

Amazon

Australian retailers are taking the probability of Amazon entering Australia seriously. Pricing is expected to become more competitive, while short lead-time purchases are likely to switch to online and shopping centre traffic is likely to contract. Credit Suisse observes there are opportunities for globally competitive retailers to increase their distribution using Amazon's Market Place. In contrast, distribution advantages held by incumbents are likely to be weakened.

Amazon customers have a high engagement with electrical, homewares, sporting goods, clothing and children's toys. There is less impact for big, bulky and limited distribution products. Those companies that have high gross margins and costs of doing business are vulnerable, in the broker's opinion.

Credit Suisse has performed a risk analysis which shows upper quartile risk for Myer ((MYR)) and third quartile risk for Harvey Norman ((HVN)), JB Hi-Fi ((JBH)) and Super Retail ((SUL)). The broker notes Amazon's disruptive impact on retailing tends to occur when the business reaches a critical retail share.

In Australia, Credit Suisse expects the disruptive effects will be felt when Amazon exceeds a 5% share of retail in a product category. A five year time frame is envisaged for these scenarios, consistent with a maturity profile in Australia that is half the time of that in the US.

There are some mitigating factors, the broker observes. For example, the impact on Harvey Norman group earnings is mitigated by the company's big and bulky product range and business outside of Australia. For Premier Investments ((PMV)), which stables a range of clothing brands, the impact of Amazon is mitigated by the expansion of its Smiggle stationery business ex Australia.

Henderson

Shaw and Partners considers the highly complimentary nature of the Henderson Group ((HGG)) and the Janus businesses creates much-needed scale to compete in a difficult global funds management environment. The asset base of the combined entity is US$324bn and a full spectrum of investment capabilities is represented.

Expected annual cost savings of at least US$110m over three years appears light, in Shaw's view, given this only represents about 9% of the combined cost base. The analysts do not have the same optimism regarding revenue synergies as the company and do not incorporate these into forecasts.

Following what appeared to be an end to an impressive growth trajectory in 2016, the merger looks increasingly attractive. Shaw reduced its forecast for earnings per share by -20-30% after the 2016 results and accretion is now significantly more attractive than when the deal was originally announced in October. There are headwinds in terms of overcoming investor sentiment about certain asset classes and underperforming funds and Shaw retains a Hold rating and $3.90 target for Henderson.

Pointerra

Pointerra ((3DP)) provides a cloud-based solution to manage, visualise and share 3D geospatial imaging data. Target customers include the mining, oil & gas, construction and government sectors as well as providers of laser scanning equipment and 3D data analytics and design software. 3D geospatial data sets can be very large which makes storage, processing and sharing very cumbersome.

This platform allows users such as engineers, architects and planners to store and retrieve these datasets much more easily, and substantially faster.

TMT Analytics points out the company does not provide data analytics software or 3D scanning hardware, nor does it capture 3D data itself. Rather, the service is a highly scalable hosting and management of 3D data in the cloud. The analysts consider the stock to be a global platform play in 3D geospatial data with very high operating margin potential.

Substantial upside is expected for the share price and TMT Analytics initiates coverage with a Buy recommendation and $0.08 target. Positive operating earnings (EBITDA) is forecast by FY19. Current cash flow and current cash position are expected to enable the company to break even because of the low cost base.

Skydive The Beach

Skydive the Beach Group (SKB)), an adventure tourism business, is the largest provider of tandem skydiving in Australasia. The company is expected to benefit from inbound tourism tailwinds, together with an increase in demand for skydiving and adventure tourism. In addition, the company has been making strategic acquisitions and Canaccord Genuity notes these have added materially to earnings per share.

The broker initiates on the stock with a Buy recommendation and a target of $0.74. Currently the tandem skydiving market represents around 80% of revenue and has experienced strong growth over the past 10 years, as in consumers increasingly focus their spending on experiences.

The company is well positioned, as it is the largest operator in Australia with 18 "drop zones". Scale, diversification and growing brand awareness are helping to deliver strong double-digit organic growth and the broker expects this to continue.

The company acquired Queensland's Raging Thunder tourism company last year which broadens its offering. Canaccord Genuity estimates more than 60% of the company's customers are international travellers and of these around 25% have come from Asian countries. Inbound tourism from Asian countries into Australia and New Zealand grew by 12.8% and 19.2% respectively in 2016.

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