In Brief: Healthcare, Travel, Technology, Housing & US Debt Downgrade

This story features MACH7 TECHNOLOGIES LIMITED, and other companies. For more info SHARE ANALYSIS: M7T

Weekly Broker Wrap: upside for radiology software companies; travel and technology picks; US and Aussie housing & US debt downgrade.

-Upside for radiology software players in the US
-Covid transformations for three travel businesses 
-Citi’s picks in the Technology/Internet sector
-US housing sentiment rising, Aussie price momentum slowing 
-Views on the ratings downgrade to US sovereign debt

By Mark Woodruff 

Upside for radiology software players in the US

After undertaking a deep dive into the current state of the US radiology landscape, Wilsons concludes both Pro Medicus (PME)) and Mach7 Technologies ((M7T)) are positioned to take share from market incumbents, though impacts will vary given differing customer bases and product offering.

Along with increasing cloud adoption, consolidation in the US healthcare sector is a key driver of growth, and the broker highlights competition is less meaningful and more complementary between both companies than commonly perceived.

Moreover, having analysed how large non-for-profit hospitals/integrated delivery networks (IDNs) and academic medical centres (AMCs) resource their radiology IT needs and preferences, Wilsons raises its total addressable market (TAM) estimate for enterprise and diagnostic viewer software (on a scan volume basis) by more than 15%.

The broker identifies an overlap of viewer products by the same customer, which means the TAM is greater than the number of annual scans.

AMCs often pay for two viewer software types and may, for example, take on Visage 7 as a diagnostic viewer (Pro Medicus) and Mach7’s eUnity viewer as an enterprise viewer. Sometimes, each viewer performs both functions.

In addition, Wilsons highlights a growing additional piece to the US market pie: radiology reading groups.

These groups form part of the tele-radiology market and are typically privately owned, remotely based, fee-for-service providers which employ radiologists, typically on a consultant/ad-hoc basis to interpret diagnostic imaging scans that are overflow from other providers. 

Radiologists are gravitating to these reading groups given the higher pay and greater flexibility, in terms of work hours and location/ability to work remotely, explains the broker.

Returning to the consolidation trend, the total for deals involving hospital provider/health system merger & acquisition activity in 2023 has increased on the previous corresponding period.

There has been rampant consolidation in the outpatient market segment, note the analysts, where Mach7 has a larger presence. The company is expected to benefit from capturing some of the overflow of diagnostic procedures, which is forcing an increasing number of the large health systems to partner with these outpatient radiology centres. 

Not only is Pro Medicus largely protected from imaging outflows from hospitals to the outpatient market due to the type of institutions it currently services, but also Wilsons notes the company is winning from other trends over the last few years. 

Large IDN’s are acquiring regional hospitals or merging IDNs to create cross-regional partnerships. Also, since 2017, for-profit health systems have been selling hospitals as part of a portfolio realignment strategy to focus on core profitable regions. 

Pro Medicus already largely supplies the bigger acquirers, and by default the targets, and thereby earns extra revenue from its Visage software which is almost exclusively contracted on a pay per view “transaction” model.

Wilsons upgrades its rating for Pro Medicus to Overweight from Market Weight and raises its target to $76.04 from $71.00.

The broker does not currently research Mach7 Technologies though FNArena updates research daily for both Morgans and Shaw and Partners.

Both brokers are Buy-rated (or equivalent) with an average target of $1.48 cents, which suggests around 75% upside to the latest share price.

Covid transformations for three travel businesses 

In new coverage of the Travel sector, Wilsons begins with Outperform ratings for Corporate Travel Management ((CTD)), Flight Centre Travel ((FLT)) and Webjet ((WEB)), noting all three took advantage of downtime during covid to optimise their cost base, undertake acquisitions and invest in future growth.

Due to pent-up demand following covid restrictions there is near-term upside for leisure travel volumes, according to the analysts, who are unconcerned by the impact of the macroeconomic backdrop on travellers as Australia’s unemployment rate remains only half of its long-term average.

The International Air Transport Association (IATA) forecasts the travel recovery will continue through the remainder of 2023, with global passenger traffic forecast to be at 95% of 2019 levels, notes the broker.

While cost of living pressures are weighing on the consumer, Wilsons points out multiple surveys by industry bodies and corporates indicate resilience in the leisure and corporate travel sectors over the near-to-medium term. It’s thought travellers are prioritising travel over other discretionary items.

The longer-term outlook also appears bright, as the IATA expects air travel to double to just over 8bn passengers by 2040 from 2019, a 3.4% average yearly growth rate.

During the pandemic, Corporate Travel Management made two significant acquisitions. 

The Travel & Transport business has significantly bolstered the company’s presence and capability in North America, explains Wilsons, while the pickup of Helloworld Travel’s ((HLO)) Corporate segment has expanded its government presence and introduced other new verticals.

Flight Centre also transitioned its Leisure segment during covid to a diversified business from a mostly store-based presence. It now spans the mass-market, luxury, independent and complementary categories via online and store-based channels. 

Additionally, new client wins in the Corporate segment contributed $5.8bn in total transaction value (TTV) capacity between the second half of FY20 to FY22.

Webjet has also achieved group bookings and TTV in FY23 in excess of its pre-covid highs. The analysts point to impressive growth in the WebBeds business following a covid-period transformation. 

Management simplified the technology stack, optimised the cost base and expanded the domestic offering across regions, while also adding new tools such as the automated upselling software Roomdex.

Citi’s picks in the Technology/Internet sector

Citi expects strong results and trading updates for the Technology/Internet sector via a combination of ongoing market penetration, pricing power and cost-out initiatives.

On a stock basis, Carsales ((CAR)), NextDC ((NXT)) and Xero ((XRO) are the top picks and the broker increases price targets for all three.

While only slightly ahead of FY23 consensus forecasts for most of its stocks under coverage in the sector, Citi has a more bullish view than the market heading into FY24.

The Dealer segment for Carsales (the No 1 pick) should benefit as new car supply improves, while the broker anticipates plenty of growth drivers for Trader Interactive and Webmotors.

The analysts like NextDC for its defensive exposure and inflation-linked price-escalators along with reasons outlined in last week’s article that covered favoured stocks exposed to the artificial intelligence thematic: https://www.fnarena.com/index.php/2023/07/28/in-brief-reits-ai-aussie-adversity-stock-picks/

Regarding Xero, Citi still sees potential upside risk from efficiency initiatives, despite the recent share price rally.

Earlier in the week, Citi also upgraded its ratings for Fineos Corp ((FCL)) to Buy from Neutral and Zip Co ((ZIP)) to Neutral from Sell, while effecting a downgrade for Domain Holdings Australia ((DHG)) to Neutral from Buy.

Fineos is increasing it contract wins and the broker sees the recent Guardian Life contract as key to unlocking further Policy & Billing contracts, while Zip Co has made stronger-than-expected progress on expanding gross profit margins and reducing costs.

While the risk-reward payoff is not compelling, Citi expects Domain will benefit via a Sydney/Melbourne-led house price recovery.

Improving US Housing activity, slowing Aussie house price momentum

Leading into the August reporting season, UBS is overweight US-exposed building materials stocks relative to A&NZ and the EMEA region due to strength in both sentiment and activity for the US housing market.

While the new construction market in the US is the standout, UBS is also optimistic on the repair and remodel (R&R) market, though cautions activity is often more discretionary and can be delayed.

Buy-rated James Hardie Industries ((JHX)) and Reliance Worldwide ((RWC)) are leveraged to a rapidly improving/less worse US outlook, yet the analysts prefer the former.

EMEA remains a significant risk for Reliance, in the broker’s view, and US exposure to powerful big-box channel partners will potentially undermine margins due to rebates/lower prices, while new housing is an important driver of earnings for James Hardie.

Back in Australia, Morgan Stanley observes slowing momentum for national house prices in July as tight existing supply eases and affordability worsens, while new construction trends are poor and may lead to labour market weakness.

This broker also points to a lack of momentum in June data, with Building approvals declining by -7.7% month-on-month, driven entirely by a -16.2% decline in apartments, while housing finance figures registered a -1% decline, indicating a muted appetite for loans.

Morgan Stanley now forecasts an ongoing slowing of house price momentum in Australia, with declines resuming over the second half of this year. At the same time, the new construction cycle is expected to weaken, with weaker building approvals set to feed through to actual activity levels over the same time period.

In Australia, UBS still prefers Buy-rated CSR ((CSR)) given pricing power and a strong property portfolio. Boral ((BLD) and Adbri ((ABC)) are assigned Neutral ratings as risk remains from ongoing cost pressures over the next 12 months.

The broker’s forecast for Brickworks ((BKW)) increases largely due to a lift in the broker’s valuation of the company’s property holdings and 26.1 % stake in W H Soul Pattinson ((SOL)).

Across its coverage of the Australian Buildings Materials sector, UBS raises its 12-month targets for all stocks mentioned. 

Readers may access these new targets on the FNArena website under stock analysis or the Broker Call Report.

Views on the ratings downgrade to US sovereign debt

The Fitch Ratings’ downgrade of US sovereign credit has no bearing on either the near-term outlook or any impact on the functioning of the US Treasury market, according to Oxford Economics.

What’s more, fellow rating agency DBRS Morningstar only last week confirmed the country’s long-term foreign and local currency issued ratings at AAA.

These ratings reflected the agency’s view of considerable credit strengths, including the scale, diversification and resilience of the US economy, the strength of the country’s governing institutions, as well as the reserve currency status of the US dollar, explained the agency at the time.

By contrast, the Fitch decision to cut the US long-term foreign currency issuer default rating to AA+ from AAA was based upon an expected fiscal deterioration over the next three years, a growing government debt burden and an erosion of governance.

The timing to downgrade the US credit rating is odd as the economy is doing better than Oxford Economics or consensus anticipated, with a declining chance of a recession in the next 12 months.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms