The Wrap: Insurers, Telcos, Asset Managers

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This story features WOOLWORTHS GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Weekly Broker Wrap: supermarkets; general insurance; health insurance; telcos; asset managers; and industrial earnings.

-Loyalty drops to fourth as a driver of shopping decisions in UBS survey
-Market share of major general insurers continues to slip
-Better claims performance for health insurers expected to persist
-Mooted NBN changes signal disadvantage to providers with lower-tier customers
-Asset managers and wholesale banks are under pressure and need to define a growth agenda – Morgan Stanley
 

By Eva Brocklehurst

Supermarkets

A UBS survey of 1100 shoppers in February was positive for Woolworths Group ((WOW)), slightly positive for IGA, supplied by Metcash ((MTS)), and negative for Coles Group ((COL)) & Aldi.

Convenience and price remain the driver of consumption. Woolworths performed the best across price measures, ahead of Coles, albeit slightly, for the first time since the studies began. Loyalty dropped to fourth as the driver of shopping decisions, which surprised UBS, particularly given the heightened investment in tailored offers and the use of customer data.

Woolworths appears to have accelerated its market share gains, at the expense of Coles. UBS envisages upside to second half growth estimates for Woolworths and downside for Coles.

Meanwhile, IGA market share trends were up modestly and the broker envisages accelerated store refurbishment and more consistent pricing as catalysts for future growth. UBS retains a Buy rating on Woolworths and Metcash and a Sell rating for Coles.

General Insurance

UBS finds the consistent slippage of market share for both Insurance Australia Group ((IAG)) and Suncorp Group ((SUN)) presents a confronting longer-term view. The broker has retained an overweight position on the sector, noting a high level of momentum in personal line rates across motor & home, despite overall gross written premium (GWP) growth being below the challenger brands.

This should add modest upward pressure to the widening of margins over the next 12 months that is being driven predominantly by a hardening of commercial rates. Still, obvious questions about vulnerability remain, UBS acknowledges, should a meaningful disruptor emerge at some point.

A sceptical view of challengers has been based on the probability they would not be able to sustain high growth and deliver acceptable profitability at the same time, and would have greater volatility when costs from catastrophic events were elevated. However, UBS calculates that both the absolute level of challenger loss ratios and the change relative to the first half of FY18 counter this view. Challengers have acquired 4.1% market share over the past five years and now write $2bn in GWP.

Health Insurance

Macquarie's analysis shows industry headwinds are mounting for health insurers, as participation continues to contract and the potential for a 2% cap to pricing under a Labor government nears. The broker maintains a Neutral rating for both nib Holdings ((NHF)) and Medibank Private ((MPL)) heading into the May federal election.

Current valuations remain supportive but the broker does not believe the margin risks are completely priced in. Moreover, the analysis shows that Medibank Private achieved claims growth per policyholder that was around -270 basis points below industry averages in the first half and nib Holdings was lower by -230 basis points.

Both companies are confident claims outperformance will persist in the medium term owing to chronic disease management, the acquisition of healthier lives and more facilities to take claims out of the hospital setting. Should a 2% average cap to price be imposed, Macquarie believes those insurers and hospitals with scale will outperform.

Telcos

Press reports have suggested that the NBN is preparing for further changes to wholesale pricing. Credit Suisse estimates that monthly NBN access costs for 12Mbps customers could effectively increase 8.5% following the changes, primarily because of the removal of dimension-based discounts.

The 12Mbps plan cost to the retail services provider would also be much closer to the cost of the 50Mbps wholesale bundle, despite being a lower speed tier with less bandwidth provision. The broker suggests this will disadvantage those providers that have a greater proportion of lower-tier customers and illustrates the NBN strategy of heavily pushing the adoption of 50Mbps plans.

Given both TPG Telecom ((TPM)) and Vocus Group ((VOC)) have a greater proportion of customers and lower-speed plans the broker continues to expect this dynamic will increase the access costs for these companies. Nevertheless, the proposed changes appear to be appropriately factored into Credit Suisse estimates and these are unchanged.

Asset Managers

Morgan Stanley believes the asset management sector is ex growth. Valuations are at historical lows and, globally, traditional asset managers have de-rated around -25% since the beginning of 2018. The broker envisages an alternative path to attractive pockets of growth in emerging markets/China and private markets. However, companies must be able to afford the requisite investment over a multi-year horizon.

Defining a growth agenda is now seen as imperative and is likely to become a differentiator among stocks, Morgan Stanley asserts. Asset managers and wholesale banks are under increasing investor pressure, facing falling margins. The broker believes they need to respond to the commoditisation of market/benchmark returns caused by passive investment.

The broker asserts, while costs can be higher, more possibilities now exist to restructure consistently challenged businesses. Management needs to decide on strategies in China as well, as its markets open up. A growing pool of externally managed assets under management is an opportunity for foreign asset managers.

Morgan Stanley also notes, in the battle to adapt and leverage new technology, established firms with capital, as well as new entrants, are seeking to out-compete slow-moving incumbents.

Those who become winners will have leveraged their data advantage in providing new client solutions, the broker deduces. Hence, those with the weaker starting point are increasingly being disadvantaged. They will have to balance demands to defend core markets with a need to follow the money and find long-term growth.

Morgan Stanley believes asset managers need to restructure core active business as that revenue pool is set to shrink at around -9% annually. They need to be ready to compete at a lower price point and plan to take out -30% of core costs, critical to funding growth and ensuring survival in active investment.

Industrial Earnings

As policy responses are firmly in the reactive camp, Morgan Stanley expects continued pressure on earnings for the industrial sector. When breaking down the outlook for the ASX200's three super-sectors, financials, resources and industrials, the broker's model suggests an earnings recession is likely for the non-resource sectors as domestic factors hold sway.

Prior earnings recessions have been predominantly linked to the resource/global growth cycle. However, Morgan Stanley believes the domestic-led nature of the next episode of earnings weakness will increase the depth and length of the downturn.

The broker assesses the ASX200 is heavily discounting the ultimate earnings risk linked to the current financial de-leveraging being experienced in the economy and by consumers.

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