The Wrap: Economic Recovery, Health Insurance And Domestic Tourism

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Weekly Broker Wrap: Stock picks for economic recovery; health insurance; domestic tourism.

– Australia has managed the pandemic exceptionally well, ASX200 has underperformed
– Macquarie analysts expect a U-shaped recovery
– APRA data highlight some worrying trends in private health insurance
– Social distancing norms may lead to higher road congestion and motor risk
– Demand for packaging in consumer staples depends on end-use
– Domestic tourism expected to pick up creating a domino effect on other businesses

By Angelique Thakur

The disconnect between the economy and ASX200

Australia has surpassed expectations in managing the pandemic, emerging as one of eight countries in the First Movers Covid Group.

With restrictions easing in stages, restaurant bookings are starting to see a small uptick while consumer activity is rising in supermarkets. Mobility is huffing and puffing back to life and traffic seems to be recovering, albeit somewhat erratically.

The JPMorgan team expects the Australian economy to grow at 7.1% in 2021 as compared to the US’s 6.2% and Europe’s 6.9%. However, contrasting this is the ASX200’s performance which has lagged behind the MSCI Developed Markets Index by -6.7% over the last three months.

The team attributes Australia’s underperformance to a number of factors. The first is the huge amount of capital raised, $14.9bn up until last week, which is thrice that of the US while 3.6 times of the UK. The increase in leverage was enough to spook investors.

The saving grace is these raisings have mostly been precautionary or growth oriented and not panic induced, the team assures.

The exuberance seen in capital raisings was matched only by huge dividend cuts, calculated at -27% year-to-date. This is the single most damaging factor affecting the performance of the index, Suggests JPMorgan.

Consumer Stocks: U or V?

The Macquarie team of consumer company analysts expects a U-shaped recovery and believes the Australian economy will first shrink before recovering, mainly due to higher unemployment, second-wave fears and a cautious approach in general.

In such a scenario, Macquarie expects consumer staples to win the game which means the likes of Woolworths ((WOW)) and Coles ((COL)), but also Domino’s Pizza ((DMP)), which is in the discretionary sector but is arguably a “staple”, along with Harvey Norman ((HVN)) and Wesfarmers ((WES)).

Macquarie highlights Harvey Norman has a defensive portfolio while for Wesfarmers the staple-like Bunnings and economical Kmart stand out.

Amongst retail REITs, Charter Hall Retail ((CQR)) and Shopping Centres Australasia ((SCP)) are preferred due to their exposure to staples. Small-cap retail has Baby Bunting Group ((BBN)) given the staple-like nature of baby goods.

In case the team’s base case scenario proves incorrect and Australia somehow experiences a V-shaped recovery, the analysts highlight under such scenario the pendulum of positive share market momentum will decisively swing in favour of Treasury Wine Estates ((TWE)), Flight Centre ((FLT)), JB Hi-Fi ((JBH)) and Coca-Cola Amatil ((CCL)).

Other stocks to note under the V-shaped recovery scenario include Breville Group ((BRG)), Super Retail ((SUL)), Lovisa Holdings ((LOV)), Nick Scali ((NCK)) and Premier Investments ((PMV)).

The V-shape would equally preference Vicinity Centres ((VCX)), Aventus Group ((AVN)), GPT ((GPT)) and Stockland ((SGP)) in the REITs sector.

One sub-sector best not to be forgotten include the gaming-related exposures that would also benefit from the V-shape: Crown Resorts ((CWN)) and Star Entertainment Group ((SGR)).

Lower benefits per episode and a worrying trend

The Australian Prudential Regulation Authority (APRA) released private hospital data for the quarter ending March. Volumes growth stood at 1.8% (12-month rolling basis), higher than the December quarter’s 1.1%, although benefits growth at 4% was lower than 4.2% during the previous quarter. This indicates lower benefits per episode, comment Macquarie analysts.

The regulator noted private health insurance (PHI) participation fell about -0.02%, translating to only 43.8% of the population having hospital coverage.

What is worrying is this decline has mainly comes from the 25-29 year age group and highlights young (and healthy) Australians leaving the insurance pool. UBS analysts fear this trend may be exacerbated by the current economic downturn.

Goldman Sachs analysts highlight ageing of the policyholder base due to the decrease in young participants.

PHI industry data saw premium growth lag behind claims growth, with a decline in net margins to the tune of -104 basis points quarter-on-quarter.

Total benefits paid decreased year on year to 1% from 3.7% last quarter, in which general benefit utilisation showed a marked decrease due to the lockdown. This category was utilised by a broad-based age group, different from hospital benefits which were skewed towards the elderly population.

Goldman Sachs analysts also point towards a sharp pullback in extras utilisation during the period.

Overall, the private health insurance industry saw lower profits driven by lower revenue growth. Macquarie expects the second half to be better with a decrease in claims anticipated due to the impact of covid-19.

While both Medibank Private ((MPL)) and nib Holdings ((NHF)) are considered “safe”, Macquarie sees little upside potential given the current valuations and is Neutral on both. UBS supports this view while Goldman Sachs has a negative outlook on the two stocks.

Among hospital operators, Ramsay Health Care ((RHC)) is the popular choice with analysts at both Macquarie and UBS expecting the stock to perform well in the softer environment expected ahead.

Viability agreements, resumption of elective procedures, backlog of cases and a strong balance sheet all work in the stock’s favour.

Social distancing and motor insurance

The NSW government recently outlined capacity restrictions on public transport even as more people get ready to return to work. These capacity constraints will ensure adherence to social distancing, but will also turn more people towards cars and/or bicycles, expect JP Morgan analysts.

A sudden increase in the use of cars, the analysts highlight, could stretch road capacity and lead to a sudden spike in motor related risk (following a period of low claims). In the medium term, this may lead to an increase in claims costs.

The analysts also point towards the interesting possibility of insurers targeting new growth options like providing coverage to cyclists.

Packaging and consumer staples

Amidst the pandemic-led uncertainty, supply of consumer staple products remains an essential service and so does their packaging. Or so it would appear.

Experts at Goldman Sachs point out demand has differed even within the consumer staples category with products for in-home consumption preferred over the ones for out-of-home consumption.

In-house consumables include household food and beverages and have been aided in no small measure by panic buying and stockpiling. This also extended to cleaning and disinfectant products.

On the other hand, products exposed to out-of-home consumption have struggled and with limited out-of-home activities expected in the future, their demand is expected to remain muted.

In line with these conclusions, Goldman Sachs experts prefer Pact Group Holdings ((PGH)), believing its portfolio resilience is underappreciated, while recommending a move away from Amcor ((AMC)) stating the stock does not offer much in terms of valuation upside (Sell).

Orora ((ORA)) is currently rated Neutral.

And then there was light…

With intrastate travel to restart from this week in some states, Canaccord Genuity analysts are excited about reopening of domestic tourism. They see ample scope for short stays and experience-driven services, sure to have a domino effect on related businesses.

Australia has a large domestic tourism market ripe for the picking with people having limited domestic destination choices (international travel ban). The experts highlight domestic outbound travel was way ahead of international inbound travel in 2019, with Australians spending $64.9bn versus $45.3bn spent by inbound travellers.

Even if half of this outbound spending is spent within Australia in 2021, it would replace 75% of the spending lost from international inbound travel, they calculate.

Flights are the only limiting factor here and may restrict domestic tourism recovery in some regional areas, the analysts fear.

Surprise, surprise! Opportunities galore!

Shaw and Partners’ analysts have sat down and brainstormed about which themes and stocks will benefit most if the economic recovery from this year’s pandemic and lockdowns proves quicker than generally expected.

On Shaw’s assessment, the share market themes that stand to benefit most from such a positive surprise are Travel, Retail and Basic Services, Wellbeing, Gaming/Real Estate and Agribusiness.

Investors looking for concrete stock picking ideas have no reason to despair. Shaw and Partners has done the hard work.

Among travel stocks, the selection consists of Corporate Travel Management ((CTD)), Flight Centre, Helloworld Travel ((HLO)), Qantas ((QAN)), IDP Education ((IEL)), Sydney Airport ((SYD)), Webjet ((WEB)), and Apollo Tourism & Leisure ((ATL)).

In retail and basic services, Shaw has selected Adairs ((ADH)), AMA Group ((AMA)), AP Eagers ((APE)), ARB Corp ((ARB)), Aurizon Holdings ((AZJ)), Bapcor ((BAP)), Baby Bunting, Bingo Industries ((BIN)), G8 Education ((GEM)), GUD Holdings ((GUD)), Nick Scali, Premier Investments, Super Retail Group, Transurban ((TCL)), and Treasury Wine Estates.

The wellbeing theme has equally generated a sizable list of beneficiaries: a2 Milk ((A2M)), Blackmores ((BKL)), BWX ((BWX)), Clover Corp ((CLV)), Integral Diagnostics ((IDX)), McPherson’s ((MCP)), Monash IVF Group ((MVF)), 1300 Smiles ((ONT)), Palla Pharma ((PAL)), Probiotec ((PBP)), Pacific Smiles ((PSQ)), Ramsay Health Care, and Virtus Health ((VRT)).

Among gaming and real estate stocks, Shaw has come up with the following list: Aristocrat Leisure ((ALL)), Crown Resorts, Domain Holdings ((DHG)), ALE Property Group ((LEP)), Redcap Hotel Group ((RDC)), REA Group ((REA)), Scentre Group ((SCG)), Stockland, Star Entertainment Group, Tabcorp ((TAH)), and Vicinity Centres.

Lastly, anyone looking for agribusiness exposure might find inspiration in: a2 Milk, Bega Cheese ((BGA)), Bubs Australia ((BUB)), Costa Group ((CGC)), Freedom Foods Group ((FNP)), Graincorp ((GNC)), Huon Aquaculture ((HUO)), Ridley Corp ((RIC)), and Tassal Group ((TGR)).

Shaw’s core portfolio holds shares in Sydney Airport and Flight Centre as a hedge in case the global travel industry does open up quicker than most of us are expecting.

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