The Wrap: Aldi, Dairy, Packaging & Insurers

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Weekly Broker Wrap: Aldi; dairy; Zenitas Healthcare; paper & packaging; general insurers.

-Aldi making life difficult for incumbent supermarkets
-Bell Potter speculates on a merger of MGC and BGA
-Strong growth prospects for Zenitas Healthcare
-Macquarie retains solid outlook for paper & packaging sector
-But envisages margin pressures for general insurers
 

By Eva Brocklehurst

Aldi

Morgan Stanley has gained greater conviction in its Underweight views on Woolworths ((WOW)) and Wesfarmers ((WES)), especially as they relate to the respective supermarket businesses. This view is underscored by the belief that Aldi's 2.0 stores will be a game-changer, as they will allocate significantly more space to fresh products, to 25% from 15%.

Margins tend to be higher in fresh food, which means the success of Aldi's refurbishment provides more dollars to invest in price. To date, Aldi has completed 54 refurbishments and plans to refurbish its entire store chain by 2020. Based on the broker's analysis the impact of refurbishment provides 25-30 basis points of share gains to Aldi per year to FY20. Morgan Stanley suspects life will become more difficult for the supermarkets.

Dairy

Bell Potter speculates on a merger between MG Unit Trust (Murray Goulburn) ((MGC)) and Bega Cheese ((BGA)). Murray Goulburn has announced a strategic review which would encompass its corporate structure. The company has stated it has received a number of approaches and has asked its advisor to seek more detailed proposals.

To the broker, this is a sign the company is willing to entertain a sale of the business and commence what could be the largest consolidation event in dairy history, since the 3-way bidding war for Warrnambool Cheese & Butter in 2013. Bell Potter suspects Bega Cheese would be in the mix to acquire Murray Goulburn, or part thereof.

At a high level, the broker envisages potential for material synergies in combining the two. Even if Bega Cheese was not able to secure the entire business, the broker envisages scope for asset and brand disposals if any of the other large domestic processors should acquire Murray Goulburn, or if Murray Goulburn were to seek selective asset disposals.

Zenitas Healthcare

Zenitas Healthcare ((ZNT)) has surprised the market with a strong assessment of organic growth prospects. Underlying FY17 earnings were ahead of prospectus, when eliminating the high-risk and low-margin discontinued elements of the Caring Choice business.

Wilsons looks forward to the next phase of integrating the Nextt and Dimple acquisitions. The company has objectives in community-based care as well as traditional acquisitions in the pipeline.

The company is targeting underlying EBITDA of $13-13.5m, suggesting organic growth of 7.5-10%. Zenitas has also confirmed its intention to pay its inaugural dividend in respect of the first half of FY18. The tax rate going forward is expected to be significantly higher than FY17, as the company no longer expects to be able to use majority of the prior year tax losses.

Importantly, Wilsons notes the underlying business should generate over $6m in free cash after dividends and maintenance capital expenditure. Wilsons has a Buy rating and $1.44 target.

Bell Potter also retains a Buy rating, with a $1.52 target. The broker notes the company will seek bolt-on acquisitions across all three areas of business, particularly in primary care, in order to capitalise on revenue synergies within the extensive allied health business network nationally.

Paper & Packaging

FY17 results were solid for the packaging industry, Macquarie observes. Orora ((ORA)) stood out, reflecting robust wine demand and market share gains in fibre amid benefits from higher-priced recycled paper exports. The broker also notes the balance sheet remains its strong shape.

Amcor ((AMC)) provided a confident outlook for FY18 and Macquarie observes guidance is robust for the flexibles division. The company is focused on acquisitions in the US, intent on sourcing reasonably priced, accretive deals across US flexibles, closures and specialty containers.

Meanwhile, Pact Group ((PGH)) experienced weakness in cyclical areas including vitamins and dairy. On the positive side, there has been some re-stocking of vitamin C recent months which points to a more stable revenue outlook for Australia in FY18.

General Insurers

Macquarie has a negative outlook for the Australian general insurance sector, retaining Underperform rating is for both Insurance Australia Group ((IAG)) and Suncorp ((SUN)). The broker believes Suncorp underlying margins will take a step down in FY18 as reinsurance changes and the reforms to Queensland CTP flow through.

The broker's analysis suggests the Queensland CTP scheme changes will result in a -50 basis points headwind to margins. A -30 basis points headwind to margins from the reinsurance allowance change and a further -20 basis points reduction by changing the attachment point on aggregate reinsurance cover are also included in expectations.

Macquarie forecasts Suncorp to grow FY18 gross written premium (GWP) by only 1.5%. In the case of IAG the broker expects top-line growth to moderate in FY18 amid GWP growth of 2.0%. This includes further divestments of the Swann business as well as continued remediation of the business division.

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