In Brief: Online Retail, Healthcare, US Bankruptcies & Wealth Managers

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This story has been re-published to correct the spelling of Capitol Health.

Jarden’s preferred exposures to online retail, the improving outlook for diagnostic imaging, Jarden's preferred exposures to online retail, the improving outlook for diagnostic imaging, US bankruptcies & wealth manager bias.

–The trend for online retail penetration in Australia
–A favourable outlook for Australian diagnostic imaging
–Year-to-date bankruptcy filings in the US
–Behavioural science and technology solutions for wealth managers

By Mark Woodruff

Australian online penetration trends and Jarden’s current top exposures

Australia ranks outside the top-ten countries for online retail penetration, according to research by Insider Intelligence. While US penetration is accelerating by comparison to pre-covid levels, Australia is only increasing in line with the prior trend.

Jarden expects this situation will change and Australian online penetration will reaccelerate, in large part driven by Amazon.

Online traffic trends in March showed spending on travel was strong, according to Similarweb data, though expenditure on housing-related goods was soft, assesses the broker, while grocery shopping returned to in store.

These trends are consistent with recent trading updates by retail companies on the ASX, observes Jarden.

Along with travel-related spending, the analysts note category killers like BCF and Rebel, housed within Super Retail ((SUL)), and Kathmandu, part of KMD Brands ((KMD)), also outperformed.

Overall, spending softened due mainly to falls in fashion and recreation, while services remained solid, explains the broker after reviewing data from Commbank ((CBA)) research.

In March, online traffic fell by -5% year-on-year across the 54 brands Jarden tracks, which is broadly in line with the three-month run-rate.

Amazon stood out among marketplace traffic, points out the broker, with a more than 25% year-on-year rise in a sub sector that declined by -3%, led by Kogan.com ((KGN)) and Temple & Webster ((TPW)). The latter is not technically a market place, yet is considered to have similar characteristics.

Looking forward, Jarden is now less positive on household goods and pure play online. A consumer spending cliff is still anticipated in the short term and three “buckets” of businesses are preferred.

The broker likes companies with exposure to consumers that can spend, those which are defensive with pricing power, and businesses with a growing moat and return on invested capital (ROIC).

The last category, according to Jarden, includes the likes of Flight Centre Travel ((FLT)), Wesfarmers ((WES)), Woolworths Group ((WOW)) and the Reject Shop ((TRS)).

The Reject Shop is also exposed to consumers that can spend, along with Domino’s Pizza Enterprises ((DMP)), Universal Store ((UNI)), Accent Group ((AX1)), Premier Investments ((PMV)) and Treasury Wine Estates ((TWE)).

Treasury Wine also slots into the broker's category of ASX-listed companies that are defensive with pricing power, along with Woolworths Group, Wesfarmers and Costa Group ((CGC)).

In a comparison of Australian online trends to the US, Jarden sees scope for relative grocery outperformance in Australia and weakness for online household goods, which is consistent with the broker’s outlook for each sector.

At odds with the broker’s view of the travel sector in Australia, online travel trends in the US suggest there may be some risk to the downside.

A favourable industry outlook for Australian diagnostic imaging

Relative to other diagnostic services in Australia, Macquarie sees a more favourable industry outlook for diagnostic imaging, which supports strong benefits and revenue growth in FY24 and FY25.

This industry preference is partly due to a positive contribution from indexation, given last week’s announcement by the Australian Government regarding changes to the Medicare Benefits Schedule.

Annual fee indexation of 3.6% will be applied to diagnostic imaging services from July 1, when Macquarie had been forecasting around 2% for FY24.

Along with this surprise upside, the analyst also anticipates positive contributions from mix (as has occurred in recent years) and an assumed recovery towards trend in utilsation/services per capita, along with benefits from an increasing population and ageing.

In aggregate, all these factors/assumptions by the broker provide forecast benefits growth in FY24 and FY25 of around 12% and 9%, respectively. This growth compares to the 7% recorded over the period FY10-FY19.

Jarden also expects an improving revenue profile as diagnostic imaging volumes continue to rise, based on the surgical backlog and less covid disruption.

This broker’s industry feedback suggests the 3.6% indexation will be well received by industry operators, who have not previously had indexation match inflation.

The indexation rate appears to be less generous for pathology, observes the analyst, as it applies to only six specific codes that were denied indexation in the prior year.

Macquarie assumes indexation will apply to around 90% (Jarden 95%) of industry benefits (excluding nuclear medicine) and provide growth of circa 3.3%.

The difference between this 3.3% and the prior assumption of 2% results in a 1.3% forecast revenue uplift for companies with Australian diagnostic imaging exposure under the broker’s coverage.

Jarden incorporates a lesser 0.9% revenue upgrade to Australian imaging revenues across its ASX coverage.

Within Macquarie’s coverage, Integral Diagnostics ((IDX)) has the greatest leverage to Australian diagnostic imaging, followed by Healius ((HLS)), and both companies are rated Outperform. Sonic Healthcare ((SHL)) has the least leverage and an Underperform recommendation.

Jarden confirms and quantifies this ranking of exposure to Australian diagnostic imaging. Integral Diagnostics, Healius and Sonic Healthcare have exposures of 87%, 25% and 10%, respectively, while a wider sector coverage than Macquarie includes Capitol Health ((CAJ)), which has 100% exposure.

Macquarie raises its 12-month target prices as follows: Integral Diagnostics to $3.50 from $3.30; Healius to $4.10 from $4.00 and Sonic Healthcare to $32 from $31.50.

Jarden’s ratings and target price increases are: Capitol Health (Neutral) to 30c from 29c; Integral Diagnostics (Overweight) to $3.13 from $3.04; Healius (Underweight) to $2.71 from $2.66, while Neutral-rated Sonic Healthcare’s target rises to $31.54 from $31.43.

Year-to-date bankruptcy filings in the US

Bankruptcy filings in the US so far this year are at their highest level than any comparable period in the past twelve years as companies battle elevated interest rates and persistently high inflation.

According to data from S&P Global Market Intelligence, the tally of US corporate bankruptcy fillings with more than US$1bn in liabilities is also on the rise in 2023.

As of April 4, six companies feature on the billion-dollar bankruptcy list, the highest year-to-date total since 2018, though these bankruptcies represent 3.1% of overall bankruptcies, which is broadly in line with many prior years.

Most corporate bankruptcy filings in recent years reported liabilities in the range of US$1m to US$100m, notes S&P Global Market Intelligence.

As of April 4, 56.7% of filings have fallen within this range, while 10.8% of the compiled filings reported liabilities in the range of US$100m to US$500m.

Note: bankruptcy figures include public companies or private companies with public debt with a minimum of US$2m in assets or liabilities at the time of filing.

Behavioural science and technology solutions for wealth managers

Recent financial shocks induced by covid and rising interest rates have left wealth managers unhappy with the flexibility of existing software systems used to assess the suitability of client portfolios.

As a result of this dissatisfaction, research by financial well-being experts Oxford Risk suggests nearly four out of five wealth managers expect a rise in technology spending by the industry to address the problem.

Two out of three wealth managers surveyed in the study by Oxford Risk suggest existing systems are too reliant on human judgement and biases when making assessments.

The study was undertaken with wealth managers who collectively manage assets of around EUR565bn across A&NZ, France, Italy, Spain, Ireland and the UK.

Greg Davies, Head of Behavioural Finance at Oxford Risk suggested “Blending technology and behavioural science enables a comprehensive approach to suitability that recognises the complexity of each client, and their emotional needs over time. It can’t just be a tick box exercise.”

It should be noted Oxford Risk is not entirely disinterested in this matter as it provides behavioural tools to wealth managers to help assess financial personality and preferences, as well as changes in investors’ financial situations.

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