Tag Archives: Banks

article 3 months old

Brokers Pick Over Insurers’ Prospects

-Need to pick least overvalued
-Worst likely over for QBE
-Key to IAG is margin delivery
-Key to Suncorp is capital returns

 

By Eva Brocklehurst

General insurance growth trends in Australasia have eased this year, with softer premium rates exposing the fact that volumes are tough to obtain. Industry gross written premium (GWP) growth slowed markedly over FY14 and listed peers fared worst, in JP Morgan's observation, with personal lines the main driver of the weakness.

Of the two largest listed general insurers, Insurance Australia Group's ((IAG)) commercial trends in GWP growth were worse than Suncorp's ((SUN)), suffering weakness from volume losses in Australia. Nevertheless, JP Morgan notes industry profitability remains excellent. UBS expects the quest to restore credible growth at the natural level of market share will define the playing field for general insurance over the next few months. 

UBS notes the share prices of the domestic general insurers did not cave into slowing growth drivers over the reporting season, as investors chose to pay for inflated second half profits, yield and margin certainty. UBS admits underestimating the level of margin expansion in the second half of FY14 and the significance of yield and special dividends. Still, the broker is reluctant to embrace this paradigm altogether as a reason to invest.

Suncorp and IAG may not screen expensively but then, as UBS observes, general insurers do not re-rate much through the cycle. The significant event for these stocks is the turning point in underlying margin, which dictates forward earnings expectations. Furthermore, just to cloud the issue, price/earnings ratios can be deceiving at these cyclical turning points. The challenge, in the broker's view, comes down to picking the least overvalued of the stocks in the sector.

QBE Insurance ((QBE)) has been the test of an investor's patience, but UBS has a Buy rating as the stock looks less pricey than the other domestic general insurers. QBE still needs to prove its case but the balance sheet is recovering. Citi believes QBE's plans to deliver a capital surplus are realistic and provide a degree of comfort that the worst of the reserving issues are over. Valuation looks attractive and cost savings should assist a better FY15 result. Citi maintains QBE as its only Buy rating in the sector. The broker believes the expected turnaround and leverage to rising interest rates will outweigh the negative impact of continued pressure on premium rates.

AMP's ((AMP)) wealth protection issues appear to be stabilising and its favourable business mix, pricing and volume gains are expected to help profit margins in FY15. The company is also gaining traction with its Asian expansion strategy, while AMP Bank continues to add diversity. The main issue for Citi, and the reason the broker has downgraded to Neutral from a Buy rating, is valuation.

Dividend yield makes Suncorp the most topical of the general insurers and UBS believes efforts to improve capital efficiency are commendable, although the broker does not believe special dividends should not be capitalised. The broker considers it unlikely that Suncorp will achieve top line targets in FY15, while another special dividend is now priced into the stock. UBS downgraded Suncorp to Sell during the earnings season. Suncorp's capital returns and strong dividends should continue over the next three years and underpin the stock, in Citi's view. Even so, the broker considers Suncorp fully valued and retains a Neutral rating. FY14 was aided by favourable weather but Citi considers the target of 10% return on equity is a bit of a stretch, albeit achievable.

IAG's recent track record suggests to Citi its FY15 margin guidance of 13.5-15.5% is conservative. The company has reclaimed the title of the largest general insurer in Australia and is now at a stage where further acquisitive growth in either Australia or New Zealand is limited, for competition reasons. The key is how IAG delivers attractive insurance margins over the course of FY15. Citi suspects, in the absence of very favourable spread movements or high levels of reserve releases, it may require benign perils claims to match the FY14 dividend. UBS prefers this insurer's approach to guidance, as it can be quickly re-based to changing conditions compared with the aspirational approach taken by Suncorp.

Nib Holdings ((NHF)) looks overvalued to Citi and remains the broker's only Sell rating in the sector. The forthcoming IPO of Medibank Private could potentially lead to more rapid price discovery for nib. The stock is returning capital, but future special dividends appear set to be funded through re-leveraging. Given the operational issues and high multiples, Citi suspects share price risk is to the downside. Tower ((TWR)) is also set to return further capital and simplify its shareholder register. Citi believes the simplified business can now focus on the opportunity in the direct general insurance market in New Zealand, given its strong brand and relatively low market share compared with the larger two Australian-based insurers.
 

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article 3 months old

Weekly Broker Wrap: Portfolio Strategy, Indices, Financials And Oil

-Credit Suisse long on IIN
-More index weight on IT, energy
-Less weight materials, miners
-Business credit growth improves
-Upside to oil prices likely
 

By Eva Brocklehurst

Credit Suisse has reviewed its portfolio strategy and placed iiNet ((IIN)) into the Long portfolio. The company's recent earnings result confirmed the stock should benefit from many of the investment themes that prevail at present. Cash flow is strong and double digit dividend growth is expected. Debt financed accretive acquisitions remain a potential driver. To make room for iiNet the broker is removing Fortescue Metals ((FMG)). That stock has lost 21% ex dividends since November last year and, while management has stated that credit investors still like the company, it is clear to Credit Suisse that equity investors do not. The stock is cheap vis-a-vis commodity price forecasts but further sluggish activity in China suggests its price may be capped in the shorter term.

Credit Suisse acknowledges a value and growth bias exists in its portfolio. The average valuation of stocks in the Long portfolio is cheaper than those in the Short portfolio. Despite this, growth out to FY16 is expected to be stronger for the Long portfolio.

***

WilsonHTM forecasts three additions to the ASX 200 and 14 for the ASX 300 at the September quarterly re-balancing of the indices. Higher weights for IT and energy sectors compare with lower weights in materials and the removal of several miners from the Small Ordinaries. Potential changes include a removal of Insurance Australia Group ((IAG)) or Westfield Corp ((WFD)) from the ASX20/50. JP Morgan concurs, considering it likely that one of these two will be dropped.

Both JP Morgan and WilsonHTM expect the three stocks removed from the ASX 200 will be The Reject Shop ((TRS)), Buru Energy ((BRU)) and NRW Holdings ((NWH)). Liquefied Natural Gas ((LNG)), Asaleo Care ((AHY)) and Technology One ((TNE)) are likely additions in WilsonHTM's view while JP Morgan includes APN News & Media ((APN)), nib Holdings ((NHF)) and Amcom ((AMM)) as well.

WilsonHTM's potential additions to the ASX 300 include LNG, AHY, TNE, Growthpoint ((GOZ)), Equity Trustees ((EQT)), Prime Media ((PRT)), iSentia ((ISD)) Austal ((ASB)), MyNetFone ((MYF)), Burson Group ((BAP)), Mantra Group ((MTR)), Metals X ((MLX)) and Infomedia ((IFM)). To this list JP Morgan adds nib, 3P Learning ((3PL)), Ashley Services ((ASH)), Speedcast ((SDA)) and Donaco International ((DNA)).

JP Morgan lists Bathurst Resources ((BRL)), Red Fork Energy ((RFE)), Ausenco ((AAX)), Codan ((CDA)), St Barbara ((SBM)), Mighty River Power ((MYT)), Boart Longyear ((BLY)), Aspen Group ((APZ)), OrotonGroup ((ORL)) and Maverick Drilling ((MAD)) as likely to be dropped.

BHP Billiton's ((BHP)) de-merger proposal for selected assets, targeted for mid 2015, has an estimated market cap around $13-16bn which Wilson HTM considers easily large enough to qualify for ASX 20 selection.

JP Morgan's market timing model continues to favour the financials ex A-REITs over resources, both currently and over the longer-term, as economic survey data suggest credit growth is likely to expand a further 5.1%. The model's back tests showed a return of 20.1% per annum over the last 20 years with annualised volatility of 20%, outperforming buy-and-hold strategies in either resources or financials.

***

Credit Suisse observes domestic business credit growth is starting to tick up. From the latest major bank disclosures the broker deduces credit exposure growth was relatively stronger for Westpac ((WBC)), with an apparent spike in liquid assets. The Reserve Bank stated that business credit growth picked up in the June quarter, but part of the increase was accounted for by the number of banks providing bridging finance for the Westfield restructure.

The broker notes commercial bank net interest margins are holding up well, driven by consumer banking. Asset quality continues to improve but stress remains evident in agri-business portfolios. Corporate and institutional revenue appears to be struggling, notably from financial market income and funds management margins. The broker also believes the decline in bad debt charges may have now run its course, with problem single exposures more visibly affecting headline outcomes at these low levels.

***

What is wrong with oil? Prices fell to a 20-month low in August as the recent conflicts in Ukraine and Iraq resulted in Saudi Arabia increasing production to head off a perceived shortfall, which did not happen. As a result the market is out balance. Morgans expects prices will improve once the Saudi Arabian production levels are cut in the second half of the year. The analysts forecast 17% upside to current prices. Those companies with increasing oil-linked production should continue to outperform. The broker lists Santos ((STO)), which has maintained full year guidance, Oil Search ((OSH)), which has ramped up PNG LNG to full production, and Woodside Petroleum ((WPL)) for its near-term yield, as stocks which should benefit. Beach Energy ((BPT)) and Senex Energy ((SXY)) are considered solid plays on the back of production and news flow in FY15.
 

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article 3 months old

Upside For Westpac

By Nick Linton-Ffrost

Last week's break above 34.25 implies a move towards 36.00 for Westpac ((WBC)) over the next 3-4 weeks once the line break is confirmed.

Before opening longs we recommend waiting for a higher low to form above 34.00. Such a move should confirm the line break and provide enough edge on the trade.

A few days trading below 34.00 negates our view.

Trading tactics

Wait for buy signals between 34.00 and 34.50 over the next week.



Another trading idea from

Fifth Wave | fwtc.com.au                                               

FW generates over 150 Trading Alerts on the ASX100 each year. We are a subscription service specialising in short term technical strategies based on 27years experience.

 AFSL 319830 | Disclaimer

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).

Technical limitations

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article 3 months old

Weekly Broker Wrap: LNG Strikes, Telcos, Banks And Iron Ore M&A

-Industrial debate over shorter rosters
-Tensions as LNG projects reach start up
-ISPs subscriber growth rates slow
-Citi downshifts on Oz banks
-Morgans likes a BCI merger with IOH
 

By Eva Brocklehurst

Risk of industrial action on the Curtis Island LNG terminal at Gladstone, QLD, have diminished, with the majority of workers voting for the enterprise bargaining agreement (EBA), the third attempt to approve a new EBA. This majority was only 54%, with more than 3,100 workers voting no and raising a question about productivity. Credit Suisse is curious that 474 more workers voted last week compared with the initial vote in May. Employer Bechtel stated back in February that the labour force had peaked and the broker observes the construction work on train one at BG's QCLNG is effectively completed. So why the extra staff? QCLNG is seven months late so the broker speculates pressure might be increasing regarding getting the job done.

There may be more action to come. Productivity is an issue that will not dissipate and Credit Suisse observes Chevron's Gorgon project is next in line for EBA renewal in December. Other project managers may not get away as lightly as Bechtel has done. There is a campaign among workers for a roster of 20 days on, 10 days off. This compares with the four weeks on, one week off in Gorgon's current agreement. Wheatstone (Chevron) and Ichthys (Total) project EBA renewals are also due down the track. There is debate as to the financial impact of shorter rosters on new projects, as higher productivity could offset higher associated costs from more staff, but Credit Suisse believes changing mid project would be a disaster. The broker suspects Big Oil needs to be sure that Australian EBAs will run for the entire construction phase of the project.

UBS attributes some of the recent price weakness in Santos ((STO)) and Origin Energy ((ORG)) to the EBA unrest. Overall, the strike had minimal impact on construction and the broker estimates 2-3 days of lost productivity. The market was concerned that extended strike action could impact on completion of the three big Gladstone LNG projects. QCLNG, viewed as a setting a benchmark, is on track for first production at the end of the year, while GLNG and APLNG are looking to be starting up mid 2015.

***

Citi has reviewed the implications for internet service providers (ISPs) such as iiNet ((IIN)) and TPG Telecom ((TPM)) based on Telstra's ((TLS)) reporting of subscriber numbers. Telstra's wholesale broadband subscriber base rose in the second half, implying continued growth among ISPs. Netting out the latest Optus ((SGT)) figures and M2 Communications' ((MTU)) recent update leaves subscriber growth distributed amongst IIN, TPM and smaller ISPs suggesting the slowest net growth rate in two years. Citi notes as background that a major portion of on-net growth - areas where ISPs have their own infrastructure - is going to TPM and IIN. MTU appears to be dominating off-net growth - where ISPs do not have infrastructure - that is mainly in regional areas. The broker takes comfort in the implication that no ISP has gone backwards. Telstra also continues to gain market share in copper broadband connections, now back above 50%.

***

Citi suggests the bull run in Australian banks is coming to an end. The broker has downgraded Commonwealth Bank ((CBA)) to Neutral from Buy, leaving Macquarie Group ((MQG)) as the only Buy rated bank in the broker's coverage. As competition re-emerges, pricing for risk is re-established and credit cost improvement slows, the major banks are likely to face significant challenges to maintain returns. Major bank average return on equity (ROE) is expected to decline to 12% from the the current 25-year peak levels of 16%. This is still well above the banks' current 10% cost of capital. Over the longer term, Citi expects to encounter different ROE outcomes from the major banks, as their differences are revealed and heightened in terms of geographic mix, products and relative starting capital positions.

***

BC Iron's ((BCI)) plan to acquire Iron Ore Holdings ((IOH)) is making more sense to Morgans the longer the broker dwells on the idea. If the company can gain access to additional infrastructure through Fortescue Metals ((FMG)) for Iron Valley and via Aquila Resources ((AQA)) for West Pilbara, BC Iron could become a significant player in Western Australia's iron ore sector. The broker's interest in the stock is driven by its potential production growth, rather than iron ore markets. Within 12 months the company will ramp up to 11mtpa, which about equals that of Atlas Iron ((AGO)), and could be over 20mtpa within the next few years if a joint venture deal with Aquila eventuates. This would make BC Iron the fourth largest producer after Fortescue. The broker suggests this represents formidable upside if investors have the patience for the events to play out.
 

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article 3 months old

Weekly Broker Wrap: Oz Retail, Focus Lists, Banks And Agriculture

-Oz retailer growth via offshore sourcing
-Morgans adds Seek to high convictions
-Goldman adds Fonterra to mid cap focus
-Banks may remain expensive
-Better outlook for east coast grain
 

By Eva Brocklehurst

Australian retailers need new avenues for profit growth. This is the conclusion Citi has come to after analysing the sophistication of each major retailer's product sources. Wesfarmers ((WES)) is the most advanced in offshore sourcing. The broker estimates Myer ((MYR)), Specialty Fashion ((SFH)) and Super Retail ((SUL)) could achieve double digit earnings upside if they increase their offshore direct sources.

Retailers may lobby for lower wages but Citi contends they should focus on lower cost-of-goods sold (COGS). COGS represents at least 40% of costs and often up to 80%. Australian retailers over-rely on China and still use agents or wholesalers. Citi believe there is margin upside in expanding sources to include Indonesia, India, Bangladesh and Vietnam. In many categories a retailer can also cut out the middle man. Profit margins can be expanded in two ways, by increasing private label sales and increasing direct sourcing from overseas factories. Citi notes Myer and Super Retail have clear plans to expand offshore sources. The broker advisers that while there is margin upside, investors should be aware of the currency and inventory risks, which will of course rise with increased offshore sourcing.

***

Large cap stocks continue to dominate Morgans' high conviction list, which is returning an average annualised 35% return for positions sold in the last 12 months. The broker adds Seek ((SEK)) to this list as a preferred strategic exposure to disruptive technologies via the online services industry. The broker thinks the stock has potential to re-rate significantly after the August reporting season, given modest expectations for FY15.

Overall, the broker believes equities look fairly priced. The US market is trading around 8.0% ahead of fundamentals but Morgans considers this not uncommon during periods of economic recovery. That said, the broker warns that volumes and volatility are unusually low, which suggests markets are vulnerable to disappointment. The Australian market is finally growing after averaging an earnings contraction of 2% over the past four years. Morgans is confident the upswing will endure but thinks expectations for FY15 need to be tempered.

Goldman Sachs has added Fonterra Shareholders Fund ((FSF)) to its small & mid cap focus list. The broker's analysis suggests an extended period of surplus global milk production because of above-trend supply growth. This flows into lower New Zealand farm gate prices and higher margins for the company's ingredients and consumer brands. In July key performers in the list were FlexiGroup ((FXL)), Super Retail and Skilled ((SKE)), which delivered excess returns of 13.4%, 6.7% and 6.4% respectively. The key detractors on the list in July were Austbrokers ((AUB)), SG Fleet ((SGF)) and Alacer Gold ((AQG)), delivering negative returns of 12.2%, 6.9% and 6.9% respectively.

***

UBS expects another strong result from Commonwealth Bank ((CBA)) in FY14. Revenue growth is solid, costs are under control and asset quality is benign. The broker observes that over the last few results briefings, the bank has been at pains to illustrate the strength of its capital position. This is significant, as UBS suspects the Financial Systems Inquiry is likely to require banks to materially increase their CET-1 capital ratios to reduce taxpayer exposure to failure.

The broker expects Bendigo & Adelaide Bank ((BEN)) to deliver a 12% rise in FY14 cash profit. Although lending growth has been subdued, improving deposit pricing should underpin margin expansion. Overall, the broker believes the outlook for the banking sector remains robust and trends are positive. Valuations look stretched but given a benign outlook for interest rates, banks may remain expensive for some time. The FSI outcome, due in November, remains the biggest issue they face.

***

The Australian Bureau of Meteorology has downgraded the chance of an El Nino developing this summer to 50% from 70%. This is a positive development in Bell Potter's view for those stocks exposed to east coast grain volumes such as Ruralco ((RHL)) and Graincorp ((GNC)), as well as farming operations that have water as a cost, such as Select Harvests ((SHV)) and Webster ((WBA)). Pricing risk lies to the upside for Webster in the broker's opinion, as average US walnut export values are up 10% in the year to date. Webster is a counter-seasonal supplier and likely to benefit from higher export prices. Webster has rallied 27% from its recent low and plans to plant 900 hectares of new orchards over the next three years.

Live cattle export volumes are now up 65% year on year and this is a positive earnings driver for Ruralco. The southern hemisphere grape crush among top producers looks to be down 5-6% which is a positive for Australian Vintage ((AVG)), in the broker's analysis.
 

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article 3 months old

Suncorp Approaching Support


Bottom Line 06/08/14

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $13.70 / $13.12 / $12.60
Resistance Levels: $14.36

Technical Discussion

Suncorp Group Limited ((SUN)) is a Queensland-based financial services company offering retail and business banking, insurance, superannuation and investment products in Australia and New Zealand. In July 2013, the Company announced the completion of the Non-core portfolio sale to Goldman Sachs.  For the six months ending 31st of December, 2013 revenues increased to A$8.25B.  Net income decreased 5% to A$548M.  The company pays a dividend of 3.9%.  Broker/analyst consensus is currently “Hold”.

Reasons to be ready to buy:
→ There is scope for special dividends to be paid of around $300m in FY14 and FY15.
→ Double digit returns on new life products over the next year is feasible.
→ Australian interest rates will be kept low as unemployment rises, therefore higher yielding stocks will remain in demand.
→ Recent restructuring has provided a stronger balance sheet, improved efficiency which should flow through to higher earnings.

SUN was taking on a line of resistance during our last review with the ideal situation being for price to break up through it with a degree of attitude.  We really couldn’t have asked for too much more in that regard with strong impulsive price action continuing up to the recent pivot high.  Like the broader market a retracement has been unfolding over the past week or so though it doesn’t detract from the bullish case put forward.  Also, it’s worth remembering that old resistance becomes new support.  More often than not price will come back down to retest new support before heading higher again which is what I am looking for here.  Over the short term there is scope for slightly lower levels to be tagged although as long as $13.60 isn’t penetrated there is still room for optimism over the coming months.  The main problem I have here is that bearish divergence is evident on both the daily and weekly time frames which is a headwind to overcome.  Neither chart shows a textbook example of divergence though it is technically in position and therefore cannot be ignored.  All we can do for the moment is see how the current retracement unfolds and look for buying demand returning at the line of support.

Trading Strategy

“…The strategy here is to buy following a break above the line of resistance at $13.76…”   We are now holding long positions with the trailing stop very aggressively moved up to $13.78.  We do run the risk of being stopped out during a small retracement though with world equity markets taking a turn for the worse we want to limit risk as much as possible.  Let’s not forget, we can always re- enter at a later stage if the patterns permit.  If you aren’t already holding positions a little patience is required.  Should price hit support and reverse you could jump on at those slightly lower levels.  Conversely, should price get on with the job then buy following a break above the recent pivot high at $14.36 with the initial stop just beneath support.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Weekly Broker Wrap: Gold, Banks, Travel, IVF And Discretionary Retail

-Russia ups gold purchases
-NAB likely to adopt IFRS 9 early
-AVG sells Yaldara, ELD sells Charlton
-Aussies increasingly heading overseas
-PRY becomes VRT competitor
-Costs a headwind for retailers
 

By Eva Brocklehurst

Central banks were buyers of gold in the first half of 2014. Macquarie notes sellers were few and far between. Three countries - Russia, Iraq and Kazakhstan - accounted for most of the purchases. Central banks and international financial institutions, as well as sovereign wealth funds, have historically been the most important holders of gold. Those that report to the International Monetary Fund reported holdings of just over 29,000 tonnes of gold as of June 2014. This understates total holdings as it does not count the gold held by some central banks which do not report, nor any gold held by sovereign wealth funds.

Why is this important to know? Annual flows in and out of the central banks are relatively small given their holdings, but can have a big impact on the gold market and the price. Extrapolating the purchases forward to the second half of the year, Macquarie estimates total net purchases of 226 tonnes, higher than 2013 but below 2012. The shift to higher purchases this year is largely Russian inspired and given that country's FX reserves have fallen, Macquarie suspects this might reflect a preference for gold over government bonds in the current political environment. The fact that gold has managed to rise in price this year should calm some nerves about its long-term outlook, in the broker's view.

***

The new IFRS 9 provisioning standard for bank credit reporting is now on the table. This will come into effect on January 1, 2018. The most important aspect is a move to an expected loss-provisioning model from an incurred loss-provisioning model that is currently in place. This will, in turn, require more timely recognition of credit losses and early adoption of the new standard is permitted. JP Morgan expects annual provisioning charges will rise with a deteriorating credit environment, as opposed to banks building buffers in so-called good times.

The broker expects National Australia Bank ((NAB)) will be the most likely of the big four to adopt this provision early, as it has $550m in its general reserve for credit losses, versus major bank peer average of $170m. A move to IFRS 9 accounting by the major banks in the long run may result in early recognition of credit losses, but may not assist with smoothing out volatility in bad debt charges. Beyond expecting that NAB may be an early adopter of this accounting practice, the broker believes there are limited implications for sector valuations.

***

In agricultural news, Australian Vintage ((AVG)) has announced the sale of the Yaldara winery and brand for $15.5m, while also executing a two-year processing agreement for its Barossa grapes. On face value the transaction is around 5% earnings accretive on an annualised FY15 basis, in Bell Potter's view. Meanwhile, Elders ((ELD)) has announced the sale of the Charlton feedlot for $10.1m which will provide a handy profit of $4m. A positive for the rural sector is that export markets for live cattle remain strong, with mid year reports indicating the number of head for 2013/14 is up 25% and export volume expectations for 2014/15 have been raised 11.4%.

***

Bell Potter has examined how holiday travel expenditure and disposable income is shaping up after the federal budget knocked consumer confidence earlier this year. Holiday travel expenditure, including domestic and outbound, as a percentage of disposable income has been virtually unchanged at around 6.5% over the past eight years. This is consistent with the broker's view that Australians are prepared to spend money on a holiday regardless of circumstances. There is a clear shift in the numbers towards outbound travel and away from domestic - outbound has tripled the growth in domestic expenditure over the same timeframe - and the broker expects this trend to continue. In periods of material economic disruption outbound travel tends to slow. Bell Potter notes this impact tends to be transitory and periods of weakness are followed by a strong recovery.

The implications for stocks in the sector means the trends are positive for Cover-More ((CVO)). Cover-More remains the purest way to play the outbound travel theme in Bell Potter's view. Flight Centre ((FLT)) is also a likely positive beneficiary of any recovery in the household sector, given the sale of outbound travel remains the single largest driver of earnings. The trend shift from domestic has negative implications for Webjet ((WEB)),Virgin Australia ((VAH)) and Wotif.com ((WTF)). The latter has been a major loser in the shift to outbound travel at the expense of domestic.

***

Primary Health Care ((PRY)) has debuted as a provider of IVF services, opening a clinic in Sydney and offering bulk billing. The offer of bulk billing should be able grow the market, given lower economic quartiles are under-penetrated because of the cost of the service. The model is in its early stages and UBS makes no adjustments to forecasts but, since a referral to an IVF specialist ultimately comes via a GP, believes Primary will have an opportunity to capture referrals from its own clinics in NSW. A risk for established IVF providers is that Primary-owned GP clinic referrals could now go "internal". At present the risk is contained to less than 2% for IVF competitor Virtus Health ((VRT)) volumes as Primary's GP base is concentrated in NSW.

***

BA-Merrill Lynch expects fixed cost increases will continue to be an obstacle for discretionary retailers. In the past three years, earnings for this group have declined by 21% and the key driver of the decline was fixed cost growth. The broker expects fixed cost growth to moderate slightly in FY15 but still impose a 3.2% headwind. Margins also risk coming under severe pressure. The broker expects discretionary retailers will be dealing with Australian dollar buying rates that will be up to 10% below FY14 levels and this will put upward pressure on pricing. Price rises could be hard to pass through if sales are subdued. Even if gross margins remain flat, retailers will not enjoy the earnings benefit from gross margin expansion that they have sustained in recent years.
 

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article 3 months old

Genworth Performs Well At First Half Debut

-Will the strong H1 repeat in H2?
-Potential for earnings upgrades, returns
-Underpinned by pay-out ratio, div yield
 

By Eva Brocklehurst

Genworth Mortgage Insurance Australia ((GMA)) beat expectations with its maiden first half profit as a listed entity. A better claims experience has led management to upgrade FY14 guidance by around 8% relative to the prospectus. Lower claims and improved pricing had a positive impact on profitability with a commensurate reduction in the claims, or loss, ratio outlook versus the prospectus.

Macquarie is impressed with the lower average pay-out on claims. The company continues to benefit from the current environment of low interest rates and house price appreciation. A higher proportion of claims were paid in respect of the 20% quota share reinsurance. As Genworth's direct book pay-out falls so does the average paid claim. One of the negative aspects of the first half for Macquarie was a deterioration in the primary delinquency rate, to 36 basis points in the second quarter from 34 basis points in the first quarter. The broker acknowledges there is some seasonality involved, as the first half typically reveals higher net new delinquencies after Christmas and the summer holidays. Another aspect that Macquarie found fault with was that net new delinquencies increased 5.3% over the prior year's comparison.

In Macquarie's opinion the company is well placed to deliver earnings upgrades and announce a capital return in the future. This could be enhanced through changes to the conservative capital structure. Management has flagged opportunities to move lower down the credit curve and potentially reinvest cash to lengthen debt duration. Current forecasts do not factor in any capital returns but Macquarie remains confident the company can improve capital efficiency in the next two years. June 2016 is the first call date on existing debt.

CIMB upgrades FY14 and FY15 profit forecasts by 5.8% and 3.3% respectively. Having done that, the broker suspects the strong outcome in the first half is unlikely to be repeated, and the company will struggle to boost its return on equity to much above its cost of capital. To address this, the company is expected to review options regarding investments, gearing and reinsurance. The broker suspects the trough in losses for this cycle was reached in the first half, and rising delinquencies and slower house price momentum could weigh going forward. Still, Genworth's capital position is healthy and the flexibility from reinsurance and gearing should allow future increases in the pay-out ratio. CIMB maintains a Hold rating.

The first half dividend was also ahead of Goldman Sachs' expectations, at 2.8c versus 2.1c. The capital position remains strong and the broker raises forecasts for FY14 by 6%. Goldman continues to believe Genworth will benefit from an improving returns trajectory, as previously implemented price increases flow through and lower returning cohorts roll off. The stock remains attractive and the broker reiterates a Buy rating.

The better claims experience drove a ratio of 19.6% in the first half. This was much better than brokers expected. Management has pulled back the expected FY14 claims ratio to 25-30%, from the prospectus forecast of 30.2%, but Goldman believes the company is erring on the conservative side. Even at the bottom end of guidance the second half claims ratio would be 30%.

Moreover, the reasons management provided as to why the claims ratio may move higher in the second half also imply a degree of conservatism. The unemployment rate has ticked higher but Goldman believes the main thrust of this uptick is a rise in the workforce participation rate and this should have no implications for delinquency rates. House price increases are slowing, and the broker concedes they are unlikely to grow to the extent of the first half, but house prices remain supportive. Goldman forecasts the claims ratio to be more like 25% for FY14, noting that every 1% shift in this ratio alters underlying profit by nearly 1.5%.

UBS remains concerned about an external macro shock and how the company will respond in a rising interest rate environment. As long as earnings revisions are underpinned by positive claims trends Genworth could trade through book value. The broker observes softer premium growth could be an issue, although the company appears confident that major client activities will underpin growth and a skew back to higher loan-to-valuation ratio lending.  Head room on the pay-out ratio, at 60% versus the 50-70% target, and a strong dividend yield underpin a positive outlook and UBS remains content with a Buy rating.

On FNArena's database there are two Buy ratings and one Hold. The consensus target is $3.65, suggesting 2.7% upside to the last share price. The dividend yield on FY14 and FY15 is 5.1% and 7.2% respectively.
 

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article 3 months old

Bounce Back For Veda?

By Michael Gable 

Our market finally staged a break-out last week. Up until then, it had been trading in a 3-month range. Now that there appears to be some direction, we should expect the market to push higher into reporting season. In terms of the ASX200, we would be eyeing levels up towards 5700. In today’s report, we take a detailed look at Veda Group ((VED)).
 


Since peaking in March, you will notice that VED has had a rough time, dropping over 20%. It looked oversold in early June but it struggled to bounce higher, finding lower levels in July. It bounced impressively last week and we could be seeing the beginning of a recovery. It is early days, so more conservative investors would like to at least see a “higher high” which means we need to see it up at $2.10 to be comfortable that the trend is turning.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Has IAG Peaked?

-Pulling further costs out
-FY14 margin likely the peak
-Premium growth slowing
-Subdued Asian contribution
 

By Eva Brocklehurst

Benign weather meant the second half of FY14 was favourable for Insurance Australia Group ((IAG)). The general insurer announced a new Australasian operating model which, with the incorporation of the underwriting business formerly owned by Wesfarmers ((WES)), means an extra $90 million in expected annualised savings will be realised within two years, adding to the $140m in pre-tax synergies previously identified.

Companies impress when they show that, once revenue pressure mounts, they can pull costs out of the business. Credit Suisse observes this is common for financial services companies at present. The $90m pre-tax saving is technically equivalent to 90 basis points of additional insurance margin in FY15 but the broker does not assume that the savings will actually deliver an improved margins, rather they will assist in maintaining the margin and preventing a decline.

IAG has upgraded its expected FY14 insurance margin to 18.0-18.3%, well ahead of prior guidance of 14.5-16.5%. Most brokers think this will be a peak, if indeed it is achieved. A lack of natural peril claims and falling credit spreads are the primary reasons for margin improvement. Citi thinks the cost savings should help in FY15 but there is a risk these savings are ultimately whittled away by competition. JP Morgan had expected margins would peak in FY15 but it seems the trend became more favourable earlier. UBS suspects the current environment is the best it can be for a general insurer. The company is approaching FY15 in good shape and remains the broker's preferred domestic general insurer. JP Morgan observes the added $90m is a large increase in expected savings. If the company is indeed expecting more benefits from restructuring, the broker is comforted by the fact that some proportion is visible to shareholders.

UBS is troubled by the elephant in the room - the question of top line growth, or lack thereof. Market dynamics suggest further expansion would be difficult. UBS estimates IAG can deliver a 14.4% margin in FY15, assuming total underlying margins actually reduce because of the acquisition mix and more aggressive pricing, with excess reserve releases providing the tailwind. Credit Suisse observes the spread gains the insurer has obtained show that not only have base government bond yields fallen in the past six months, but so have spreads. The investment margin impact on FY15 is currently 50 basis points on the broker's calculations and, in a soft environment for premium rates, this needs to be funded internally. 

Brokers observe the growth in premium is slowing, in both commercial and home insurance. FY14 has also been affected by the removal of the fire service levy in Victoria. Having previously downgraded gross written premium (GWP) guidance to 3-5% from 5-7% in FY14, IAG is now guiding to just 3%. Credit Suisse observes this implies GWP growth of less than 2% in the second half. As is the case with most financial services companies in Australia, IAG faces a low growth environment in the coming years and Credit Suisse believes this is why the company has decided on cost reductions as a means to assist earnings.

In a low premium rate environment IAG has limited opportunities and squeezing further growth from the existing customer base becomes harder. Moreover, an increased exposure to commercial lines after the Wesfarmers insurance division acquisition increases downside risk in Credit Suisse's view. The broker retains an Underperform call. Macquarie warns that IAG's share price now reflects a favourable claims environment and having pre-released its results, the company is not in a position to surprise the market at the upcoming reporting season. Macquarie has eased its recommendation to Neutral from Outperform as a result. CIMB also believes further upside will be more difficult to achieve and finds it hard to envisage catalysts for the stock, with business margins arguably at cyclical highs amid a soft earnings growth profile.

IAG expects natural peril claims of around $550m in FY14, implying $220m in the second half which is $100m below the second half allowance. The company has acquired standalone reinsurance protection for the combined Australasian underwriting business, which comprises a main catastrophe cover for up to $1.35bn, including one pre-paid reinstatement, with IAG retaining the first $50m of each loss. As a result, IAG's maximum event retention has increased to $225m for FY15, from $175m. Credit Suisse observes, with a lack of premium rate increases now being achieved in the market, the increased natural peril allowance as a result of the additional risk will need to be financed by cost savings elsewhere.

The company has stated it is confident of improved returns from the Asian operations over the medium to longer term. Acknowledging it may be implying too much from the statement, Credit Suisse suspects this suggests near-term expectations remain low regarding an earnings contribution from Asia. This is consistent with the broker's broader view about the increased challenges in the Asian market.

There are no Buy ratings on the FNArena database, rather six Hold and two Sell. Targets range from $5.48 to $6.20 and the consensus is $5.85, suggesting 5.9% downside to the last share price. The dividend yield on FY14 and FY15 forecasts is 5.4% and 4.8% respectively.
 

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