In Brief: Telcos; Cyber Insurance; House Prices

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            [3] => ((IAG))
            [4] => ((QBE))
            [5] => ((SDF))
            [6] => ((REA))
            [7] => ((DHG))
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This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Weekly Broker Wrap: underemployment; Jarden initiates on telcos; the cyber insurance market; and house prices.

-Unemployment not what it seems
-Jarden upbeat on the telco sector
-Macquarie investigates cyber insurance demand
-House price growth set to moderate?

By Greg Peel

Behind the Unemployment Numbers

In October 2023 a “massive” 3.12 million Australians were unemployed or underemployed (20.1% of the workforce) – the highest figure for three years since October 2020, according to the latest Roy Morgan employment series data.

“Real” unemployment, which combines the unemployed and underemployed, was down -0.3% to 9.9% – or an estimated 1,542,000 Australians in October. Adding these two figures from the official ABS data equates to 10.0%.

Underemployed refers to those with a job, but wanting more hours. Note that for the ABS to count someone as employed, they need only work for one hour a week.

There were more people looking for part-time jobs (up 92,000 to 936,000) but many fewer people looking for full-time jobs (down -114,000 to 606,000) compared to a month ago.

In addition, there were a further 1,577,000 Australians (up 248,000) now underemployed – a record high figure, exceeding the previous record of 1,562,000 in September 2022.

Australia’s workforce, defined by Roy Morgan as anyone 14 years or older either in work or looking for work, increased by over 670,000 from a year ago to a record high over 15.5 million people.

The workforce in October was 15,501,000 (up a large 182,000 from September, and up a “massive” 671,000 from a year ago) – comprised of 13,959,000 employed Australians (up 204,000 from a month ago) and 1,542,000 unemployed Australians looking for work (down -22,000).

Compared to early March 2020, before the nationwide lockdown, in October 2023 there were almost one million more Australians either unemployed or underemployed even though overall employment (13,958,000) is over one million higher than it was pre-covid (12,872,000).

Jarden Initiates Coverage Of Telcos

Jarden has initiated research coverage of Telstra ((TLS)), for which it has ascribed a Buy rating and $4.30 target price on a forecast 15.8% total shareholder return (capital gain plus dividends).

Jarden has initiated coverage of TPG Telecom ((TPG)) with an Overweight rating and $5.40 target on a forecast 4.5% total shareholder return, and generally holds a positive sector view.

Note that Jarden has a five-tier rating system, whereby Overweight sits between Hold and Buy.

Jarden’s view is shaped by industry returns, which are improving, albeit out of necessity. Only Telstra is currently generating a return on invested capital (ROIC) near the range of what is sustainable in the broker’s view. Therefore, Jarden believes there is a strong incentive for all players to act rationally near term.

This should drive significant earnings per share growth on a three-year view, Jarden forecasts, for Telstra (10.8% compound annual growth rate) and TPG (9.1% CAGR).

Jarden’s top pick Telstra is currently trading at a more attractive equity free cash flow yield of a forecast 5.3% for FY24 and 5.9% for FY25, compared to TPG’s 0.4% and 5.3%.

In Jarden’s view, the best way to assess the outlook for the telecommunications sector is to understand where the current return on invested capital or 'ROIC' sits and to assess its future direction. To do this the broker has taken a “deep dive” into four key issues impacting industry returns: (1) mobile competition; (2) population growth; (3) costs/inflation; and (4) the evolution of telco infrastructure ownership and capital structure.

Returns have been negatively impacted over the past decade by: (1) the NBN rollout; (2) a period of elevated price-based competition in mobile over FY16-FY19; and (3) covid's negative impact.

Jarden highlights three possible near-term catalysts: (1) Telstra’s investor day on November 14, noting a likely focus on InfraCo Fixed (the infrastructure the company would like to sell) and possibly commentary on the outlook beyond the current T25 strategy; (2) TPG's potential sale of Enterprise, Government & Wholesale businesses/assets to Vocus; and (3) a possible regional network sharing/roaming deal for TPG.

Cyber Insurance

Just over a year ago, Australia’s Attorney General introduced legislation to increase the maximum penalty for serious (or repeated) breaches of privacy laws from $2.2m to the greater of $50m, three times any benefit obtained from the misuse of data; or 30% of adjusted turnover in the breach period.

This was prompted by significant cyber breaches suffered by Medibank Private ((MPL)) and Optus (owned and listed in Singapore).

Fines are typically covered by cyber insurance, Macquarie notes, but the backdating of these rules could lead to further repricing.

The cost of cyber insurance is a determinant of whether a company will purchase cover or just take the risk, assuming the aforementioned breaches prompted companies to test/upgrade their cybersecurity systems (another cost).

If it’s not bad enough to be hacked, noting Medibank shares lost -24% of their value post-breach, an extra $50m fine on top would really sting.

A survey conducted by Macquarie found 73% of ASX200 companies purchased cyber insurance in FY23, up from 68% in FY22. Insurance prices have flattened over the last 12 months, but the backdating of fines could lead to a further 12-24 months of repricing going forward, Macquarie suggests.

Conversation in the market focused on new entrants to the Australian cyber market in the coming 6-12 months. Allianz' partnership with Coalition (the global insurance company, not the party) was front of mind. Insurance Australia Group’s ((IAG)) new "Cylo" offering, Arch (another global insurer) now providing excess cover, and QBE Insurance ((QBE)) staffing up onshore were all points of interest.

Macquarie is not aware of any new entrants over the last 12 months. Steadfast Group’s ((SDF)) underwriting agency (Emergence) gained the most share over the prior 12 months.

It was also consistently mentioned that Lloyds was pushing harder for share than APRA-regulated entities despite the lack of clarity around rate adequacy and aggregation risk.

Macquarie found industries holding customer bank data, or with some technology skills represented on the board, were more likely to purchase cover. Conversely, companies holding customer/employee health data were less likely to purchase cyber insurance, which the broker puts down to price.

“Critical infrastructure”, notes Macquarie, was not a good predictor of purchasing cyber insurance.

Cyber is a growing product in the Australian insurance market and both QBE and IAG have flagged their intention to underwrite more going forward. However, a lack of clarity around claims profiles and a changing regulatory environment makes this a riskier proposition than most insurance investors in Australia may have an appetite for, Macquarie believes.

House Prices To Moderate?

Jarden has hosted a panel with three leading real estate agents from Sydney, Melbourne and Brisbane.

All the agents have seen prices rise to around record highs, but generally they noted the market remains relatively finely balanced between stock being limited and a small but relatively strong pool of buyers.

The strongest part of the market is the $3m-plus segment, with the lower end softer given challenging affordability.

Put simply, wealthy buyers remain active, as do buyers accessing the bank of mum & dad, whereas less-wealthy buyers are struggling with price and rate hikes. Foreign buyers are seen as less of a driver than the media makes them out to be, Jarden notes, albeit recent Chinese migrants are certainly active at the top end ($15m-plus).

Investors have been a key source of selling, with two of the agents seeing "more property appraisals from landlords than ever before", suggesting a further rise in sales ahead. This was particularly prevalent in Victoria, where many owners are selling holiday homes and investment properties ahead of material land tax increases.

The bottom line is listings are expected to pick up next year, leading to moderation in price growth.

The feedback generally aligned with Jarden’s own views, albeit the outlook for listings/sales heading into 2024 was at the margin more positive. Given limited supply, the broker sees higher listings as a key catalyst to turn more positive on the outlook for housing cyclicals.

The agents reported no major changes in their spending across both the major online platforms, REA Group ((REA)) and Domain Holdings Group ((DHG)), albeit with rising costs, Domain is becoming harder to justify in some instances.

While all the agents had absorbed the recent platform price rises, they noted they were all looking to do more off/pre-market sales, albeit generally targeted at premium properties.

All three agents viewed REA as offering them a superior return on investment, suggesting a risk for Domain, Jarden notes, if agents are forced to select only one portal.

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