In Brief: Fuel Retailers, Residential Property, Gaming & General Insurers

This story features VIVA ENERGY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: VEA

–Higher refining margins lift Australian fuel retailers
–Listing volumes to decline for residential property
–Solid backdrop for gaming industry
–Morgan Stanley prefers QBE Insurance among general insurers
 

By Mark Woodruff

Fuel retailers

Macquarie raises its 2022 earnings forecast for Australian fuel retailers to reflect higher refining margins.

Recent first quarter updates from Viva Energy ((VEA)) and Ampol ((ALD)) also indicate to the broker the second quarter operating environment for domestic fuels is much stronger, after the first quarter was impacted by covid lockdowns. A sluggish mobility recovery, weather impacts and rising oil prices also weighed.

The analyst lifts its 12-month target price for Viva Energy to $2.90 from $2.80 on higher margins for the Geelong refinery and increased aviation volumes. The Outperform rating is maintained, with the share price still considered to be trading at a discount, despite a 15% rally so far this year.

Meanwhile, Macquarie also raises its 2022 EPS forecast for Ampol by 15% on higher margins at refining operations in Lytton. In addition, the broker was impressed by a 5.8% increase in shop income, and an expansion in convenience store gross margins during the first quarter. No target price or rating is proffered due to research restrictions.

Residential property listings in Australia

Goldman Sachs remains Buy-rated on REA Group ((REA)) and News Corp ((NWS)) after reviewing the outlook for residential property listings in Australia.

While data show positive near-term listing trends, the broker expects listings volumes to decline over the next few years. It’s noted that housing turnover and construction tend to fall sharply one to two years after the RBA starts lifting interest rates.

However, should property transactions decline, greater listings volumes may provide an offset. This is due to less off-market sales and more unsold/repeat listings, explain the analysts.

Overall, Goldman Sachs raises its FY22 total listings forecast (residential and commercial) for REA Group to 10% from 8%, which results in a 2% lift in target price to $170. Separately, a strong audience performance is noted for REA India, while Move Inc in the US now has a weaker audience share.

Forecasts are upgraded for News Corp to allow for the amended estimates at 61.6%-owned REA Group, along with the recently completed acquisition of oil price information service, OPIS. As a result, News Corp’s target price is reduced by -2% to $41.30. The analysts highlight continued listings headwinds in the US.

Gaming sector trends

The latest domestic lottery trends suggest to Goldman Sachs a solid backdrop for the gaming industry with strong positive read-through for both Tabcorp ((TAH)) and Jumbo Interactive ((JIN)).

While Powerball sales momentum is strong, Ozlotto appears benign to the analysts, as all the large jackpots came in the month of January.

Meanwhile, the broker points out covid restrictions impacted the start to the year for electronic gambling machines (EGM), though momentum has improved steadily, while in New Zealand recent comments from SkyCity Entertainment Group ((SKC)) suggest April EGM activity is consistent with pre-covid levels.

For Tabcorp, Goldman Sachs anticipates a softer outcome for Gaming Services and Wagering for FY22-24, partly offset by better Lotteries momentum. With the group’s earnings skewed towards the Lottery business, the broker’s target price rises to $6.25 from $6.20.

Overall, the analysts see upside ahead for Lotteries from a shift to higher margin digital, and an upcoming OzLotto game change. In addition, with plans to demerge the Lotteries and Keno business, the standalone business should rerate due its quality and scarcity, as well as incremental ESG interest. A Buy rating is retained.

Consistent with the upgrades for Tabcorp, Goldman Sachs increases its earnings forecasts for Jumbo Interactive across FY22-24 by an average of 3%, given the stronger Lottery momentum. As a result, the broker’s target price rises to $18.00 from $17.40 and the Neutral rating remains.

While remaining generally constructive on Star Entertainment ((SGR)), Goldman Sachs lowers its rating to Neutral from Buy. This is because of ongoing and extended regulatory inquiries in NSW, which may lead to a higher level of costs for compliance and regulation over the near to medium term. The broker’s target price falls to $3.75 from $4.10.

The analysts like management's initiatives around splitting the company in two to create a property company and an operating company. Also, they note the Gaming sector has generally lagged other sectors with respect to reopening tailwinds.

Australian general insurers

Morgan Stanley raises its FY23 earnings estimates for Australian general insurers as higher investment yields are expected from rising interest rates, despite lurking inflation risks and increasing driving activity.

Industry margins will also be impacted by claims inflation from supply chain constraints, adding to the cost pressures for catastrophe insurance and reinsurance.

Nonetheless, the broker raises its target price for Suncorp Group ((SUN)) to $12.50 from $12.10, Insurance Australia Group ((IAG)) to $4.05 from $3.90 and for QBE Insurance ((QBE)) to $15.00 from $14.50.

The analysts prefer QBE (Overweight), which has an opportunity to sustainably improve returns as premiums are rising faster in commercial lines globally, while Suncorp (Equal-weight) and IAG (Underweight) face a tough trade-off between growth, margins and earnings quality.

Given large climate risk exposure in Australia, the broker notes Suncorp and IAG may need to materially raise their respective budgets for catastrophe insurance. Both groups are also thought to face a difficult reinsurance renewal in July.

Along with significant tailwinds from rising interest rates, QBE recently stated its Ukraine exposure is not material, and Morgan Stanley believes its aviation exposure is modest. With US insurance premiums increasing by 6% in the first quarter of 2022, the group is also set to benefit from stronger pricing, which is expected to result in compounding improvement for margins.

Both IAG and Suncorp have higher exposure to personal insurance in Australia and New Zealand, resulting in more subdued pricing trends in FY22 and FY23, explain the analysts.

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