Tag Archives: Health Care and Biotech

article 3 months old

Japara Healthcare Adds Beds And Earnings Upside

-Refurbishment needed
-But quality will improve
-Highly accretive due to RADs
 

By Eva Brocklehurst

Japara Healthcare ((JHC)) has expanded into regional Queensland for the first time, taking a further step in its strategy of gaining a foothold nationally. The company has acquired the Profke portfolio of aged care facilities in the favourable demographics of southern Queensland and northern NSW for $79.5m.

Macquarie notes the outlay is consistent with the price the company paid for the Whelan acquisition, although some facilities do require refurbishments which will reduce bed numbers by 62 from the 587 acquired. This pushes up the price up to $152,000 per bed from the $135,000 per bed implied in the acquisition price, ex refundable accommodation deposit (RAD) liabilities.

Although acquisition prices have tracked upwards in recent years and returns on capital are not hugely exciting, transactions such as this are highly accretive because of the funding derived from RADs, Macquarie believes. As the company is likely to benefit from these inflows for some time it is probable there will be more highly accretive acquisitions to come.

Accounting for the reduction in bed count, an expected $10m uplift expected to come from RADs as the portion of bond-paying residents increases, as well as assuming the new earnings per place reach Japara's average, Macquarie calculates a pre-tax return on invested capital of 12.7%. Earnings estimates are raised by 6.8% for FY16 and by 13.1% for FY17.

Once the acquisition is fully integrated Deutsche Bank expects a 17% boost to earnings. Nevertheless, the broker is cautious about the returns generated, given the required investment to refurbish the Queensland facilities and the relatively modest additional RAD uplift. The broker lifts earnings forecasts by 3.0% for FY16 and 4.0% for FY17.

Morgan Stanley is confident earnings from the facilities will grow, even while operating places are reduced as a result of the conversion of some double rooms to single rooms as occupancy was historically low in these rooms. Attracting higher daily payments from better quality facilities will deliver an improved earnings profile, the broker maintains.

A mixture of cash and debt is assumed for funding the acquisition but Morgan Stanley expects any debt will be paid off by June 2016 from the net inflows coming from RADs in the established business.

The Profke portfolio, with facilities are in Noosa, Gympie, Coffs Harbour and South West Rocks, generated earnings of $8.7m with the potential to rise to $9.5m over the next 18 months, according to management's forecasts.

Morgans increases Japara's profit forecasts by 2.8% for FY16 and 10.9% for FY17 as a result of the acquisition. The broker maintains a strong view on the aged care sector, noting a need to find a further 74,000 beds nationally by 2022.

Morgans upgrades its rating on Japara to Add from Hold and the target to $3.06 from $2.78. Japara now has 3,976 aged care beds and 180 independent living units across 43 facilities.

The broker compares this with another listed operator in the same market, Regis Healthcare ((REG)), which has 5,049 beds. Morgans covers that stock with a Hold rating and $6.00 target.

Separately, Japara Healthcare has also purchased a site in Mt Waverley, Victoria, for $6m. The land is to be the location of a new 105 bed facility, with settlement expected in February 2016.

There are three Buy ratings and one Hold for Japara Healthcare on the FNArena database. The consensus target is $3.14, suggesting 4.0% upside to the last share price. Targets range from $2.90 (Deutsche Bank) to $3.50 (Macquarie). The dividend yield on FY16 estimates is 4.0% and on FY17 estimates it rises to 4.6%.
 

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article 3 months old

Weekly Broker Wrap: Economy, Consumers, Supermarkets, Focus List And Health Care

-Income recession more likely
-Retailer confidence improves
-No logic in supermarket space race
-Citi adds Transurban, Veda exits list
-Health care valuations seen stretched


By Eva Brocklehurst

Economy

Australia is in one of those periods when talk of recession is heightened. Commonwealth Bank economists note a weak GDP number, concerns over China's growth and market malaise in other commodity producers has encouraged some to put the odds of a recession as high as one in three. The last recession - technically two consecutive quarters of negative growth - last occurred in the early 1990's.

Some of the arguments appear weak on closer examination and the economists suspect Australia will dodge the bullet again. One major factor is that with official interest rates at record lows, monetary conditions are very stimulatory and it is difficult for the economy to slide into recession in this case. Moreover, the cash rate at 2.0% is well above the near-zero settings in the major economies and can be cut further. The Australian dollar has also fallen to levels which should assist growth and support incomes.

Mining capex peaked in 2012 and the economists do not believe Australia is approaching a "capex cliff". The decline to date has been around 2.0% of GDP and is roughly mid cycle. The economists also note this recent mining construction boom was different, in that it was dominated by LNG. Around half of LNG capex went on imports. So in GDP growth terms there is an automatic 50% offset to falling capex from lower imports.

The one real risk, the economists contend, is an "income" recession. The evidence includes real gross domestic income per capita, which has been falling for some time. Income weakness brings a focus on cost containment as households and businesses defer spending. This also encourages the pursuit of yield and capital gain. Asset price inflation creates "bubble" risks and the composition of balance sheets becomes riskier. Exposure to economic shocks or policy changes is increased.

Consumers

Citi observes improved confidence among Australian retailers over the past 18 months. In analysing the FY15 results the broker observes more stores are being opened but, on average, earnings margins are flat. The stronger store growth is in hard goods, consistent with faster industry-wide growth. While three quarters of retailers revealed positive like-for-like sales growth, only 20 out of 37 surveyed reported earnings margin expansion.

There is early evidence of rising operating costs and some need to invest in IT, stores or staff to maintain sales momentum. The falling Australian dollar has been dealt with well, the broker contends, and currency hedges have helped, as has reduced tariffs in clothing and footwear.

Supermarkets

Australian consumers are increasingly buying groceries online, yet online penetration in this area is only 2.3%. Morgan Stanley observes this stems from the fact it has been more expensive to buy online, especially as delivery costs have been onerous. However, delivery costs are falling and this is improving participation rates. The broker forecasts online food retail penetration to rise to 3.3% by FY18, but still below the current UK penetration rate of 5.8%.

The problem is store-based retailing has far higher fixed costs, such that the impact of consumers switching online is a headwind to supermarket profitability, as margins are diluted. Margins that the supermarkets generate from online sales are likely to be significantly lower than store margins. Morgan Stanley's online food models indicate Coles ((WES)) and Woolworths ((WOW)), combined, have 74% share compared with a 66% share of the broader market.

The shift online is a boost to revenue for the pair because, generally, the independents, Aldi and Costco do not operate online. Hence, the broker argues, in this context, that supermarket space expansion should be below population growth to reflect the growth in online.

Buy Ideas

Citi has added Transurban ((TCL)) to its Australasia focus list. Veda Group ((VED)) has been removed. The broker, having recently upgraded to Buy, considers the long-term potential of Transurban is intact and the current share price offers an attractive discount to valuation. The stock offers compound growth of 9.5% in distributions over the next three years. While retaining a Buy rating for Veda the broker notes the company has received a bid from Equifax at $2.70 a share, hence its its removal from the list.

Citi's focus list contains 10-15 stocks which are Buy rated and have sizeable liquidity and market capitalisation. The lists includes Aristocrat Leisure ((ALL)), ANZ Bank ((ANZ)), Challenger ((CGF)), Iluka ((ILU)), Incitec Pivot ((IPL)), QBE Insurance ((QBE)), REA Group ((REA)), Spotless Group ((SPO)), Stockland ((SGP)), Tatts Group ((TTS)) and Transurban.

Health Care

Fundamentals in the Australian health care sector no longer support stretched valuations, in Morgan Stanley's view. FY15 results were generally weaker than expected and the FY16 growth outlook is soft. CSL ((CSL)) provides growth guidance of 5.0%, in line with the broker's estimates, but the consensus outlook appears to ignore the slowdown in the core franchise. Morgan Stanley finds unit growth weak for Cochlear ((COH)) as N6 upgrades in FY15 provide tough comparables for FY16.

Ramsay Health Care ((RHC)) disappointed with its outlook for FY16 and FY15 ended a string of beating expectations, the broker observes. Meanwhile, Healthscope ((HSO)) delivered on its prospects but, again, disappointed in terms of margins. No guidance on its negotiations with the hospitals was provided. Sonic Healthcare ((SHL)) still has lingering issues with pathology while Morgan Stanley is still awaiting the FY16 outlook and a visible strategy from Primary Health Care ((PRY)). Ansell ((ANN)) has signalled the FX headwinds are worse than initially expected and the broker estimates underlying growth of 2-8% in FY16.

ResMed ((RMD)) appears more positive to the broker, having laid out a robust FY16 platform. Small caps such as Monash IVF ((MVF)) and Virtus Health ((VRT)) disappointed. Their multiples are accommodating a "no growth" scenario but Morgan Stanley observes, if Medicare Benefits Schedule data turns positive, then both will outperform. For Sigma Pharmaceuticals ((SIP)) and Australian Pharmaceutical Industries ((API)) the regulatory risk may be understood but the broker believes challenges remain.

 

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Weekly Broker Wrap: Dairy, Strategy, Pathology, Tourism, Oil And Banks

-Dairies benefit as milk prices surge
-What is attractive as risk aversion fades?
-PRY more sensitive to pathology growth
-Tourism benefit flows to retail
-Discretionary retail benefit from lower oil
-Pressure continues on major banks
 

By Eva Brocklehurst

Dairy

The global dairy price index has risen 48% since the beginning of August. Macquarie believes the main driver of the price response at recent auctions is a significant reduction in Fonterra's offer volumes. These have fallen because of changes to product mix and more product being sold outside the auction marketplace. There is also a 2-3% reduction in forecasts for New Zealand's milk collection.

Macquarie believes Fonterra's reduction in its 12-month offer quantities for a third time last week amplifies worries about a shortage in global supply. Buyers that are only able to access the auction platform are being squeezed, the broker suggests, and may be bidding up the price to cover forward requirements.

A further recovery in dairy prices is good news for NZ farmers and could ease unit holder concerns about Fonterra providing further support to farmers. The problem for Fonterra, the broker maintains, is that the pass-through benefits of lower costs are eroded as input prices rise and this translates to lower earnings. Macquarie's preferred play on the dairy recovery story is Murray Goulburn ((MGC)), with a target of $2.70.

Movements in global dairy ingredient prices have a high correlation to Australian farm gate milk prices. Bell Potter notes Murray Goulburn, Australian Dairy Farms ((AHF)) and Bega Cheese ((BGA)) are positively correlated to rising dairy prices. Average forward curve prices in Australian dollars are implying gains of 10-11% for whole milk powder and butter, while skimmed milk powder is likely to be flat in FY16.

Strategy

Goldman Sachs adds Blackmores ((BKL)), Costa Group ((CGC)) and M2 Telecommunications ((MTU)) to its small and mid cap focus list. In September to date the list has performed in line with the ASX small ordinaries accumulation index. Over the past 12 months the list is up 1.8% while that index is down 10.6%.

Key performers in September have been Ebos Group ((EBO)), amaysim Australia ((AYS)) and Tassal Group ((TGR)), outperforming by 7.5%, 4.2% and 4.0% respectively. Detractors were Genworth Mortgage Insurance ((GMA)), Austbrokers ((AUB)) and Dick Smith ((DSH)), underperforming by 6.2%, 5.4% and 4.6% respectively.

Australia's equity market is down around 15% from its April 27 peak and has performed more in line with emerging rather than developed markets, UBS observes. This is probably because of Australia's relatively high commodity exposure and associated economic links to China. However, some of the apparent correlation may be countered by the banking sector, which has corrected under its own specific issues.

Taking out resources and banks the market appears closer aligned to the developed market, with pressure coming just in the last six weeks. UBS expects market growth to be around the low single digits in FY16 but it could rebound in the next few months on fading risk aversion in relation to China and the US Federal Reserve.

Stocks that have emerged with value and appear attractive to UBS include AMP ((AMP)), ANZ Bank ((ANZ)), Harvey Norman ((HVN)), Incitec Pivot ((IPL)), Lend Lease ((LLC)), Macquarie Group ((MQG)), Mirvac ((MGR)), Perpetual ((PPT)), Qantas ((QAN)), ResMed ((RMD)), Stockland ((SGP)) and Westpac ((WBC)).

Pathology

Credit Suisse is shifting attention for cost inflation to the main drivers of pathology volume growth. Long term, the correlation with Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)) in terms of pathology revenue growth and Medicare pathology outlays growth is high.

The broker notes utilisation was the major contributor over the past five years, accounting for about half of the growth in pathology. This includes increased disease prevalence/test offering and collections. This is followed by population growth. The growth in the aged population is not a material driver.

Calculation of valuation sensitivity to utilisation growth suggests the risk to Primary Health Care is greater because of its higher weighting to pathology earnings. Tempering the broker's enthusiasm is the outcome of the Medical Benefits Schedule review, which could mean removal of certain pathology items. Sonic Healthcare presents as a better investment option in the broker's view because of a more geographically diverse business model.

Tourism

One of the brighter spots in Australia's economy is tourism, as it benefits for the steady move lower of the Australian dollar. Year on year growth in overseas departures has halved to around 3.5% in the first half of 2015, UBS observes. Arrivals have picked up, to be up 6.0% year on year. The broker expects this income from tourism should contribute more than 25 basis points to GDP growth over the past year.

UBS also notes that upswings in tourism contribute to improvements in retail sales, reflecting not only more inbound tourists but also more locals choosing to holiday domestically. The broker expects an increasingly positive impact on the tourism sector from the Australian dollar's decline with support for retail spending, non-mining capex and GDP growth over time.

Oil

Oil price declines should detract from global headline inflation around 0.5-1.5 percentage points in 2015-16, Commonwealth Bank analysts maintain. Australia is a net energy exporter and lower oil prices may lead to lower coal and LNG prices. The analysts calculate the negative terms of trade effect is equal to around 0.5% of GDP. 

The most positive impact is expected to come for those companies which are large consumers of energy, such as manufacturing, electrical and transport. The other positive impact is the boost to household spending. Oil prices are expected to remain at low levels over the next two years. At this stage, firms in the domestic market have not signalled a major intent to pass on lower oil prices to consumers and the analysts suspect lower prices will be absorbed in margins.

The analysts calculate the income gain for householders should equate to around 0.3% of household income from the drop over the past year in average petrol prices. There is also a second round benefit if lower transport costs are passed on. Discretionary retailers are also usually the first to benefit from a sizeable fall in petrol prices.

Banks

Recent commentary from the Australian Prudential Regulation Authority (APRA) chairman has suggested major banks still have some work to do to achieve the financial system enquiry's recommendations to be unquestionably strong.

JP Morgan does not believe this will translate into another round of capital raising, but does expect continued dividend reinvestment plan (DRP) support will be required. The more challenging task is to meet the broader benchmarks.

The leverage ratio, created as a simple metric by which regulators could assess appropriate balance sheets size, is recommended as a minimum range of 3-5%. Australia's major banks are currently at around 5.0%, lagging their top quartile global rivals which average a 6.0% ratio. JP Morgan expects returns on equity will remain under pressure, as the majors rely on further re-pricing initiatives to sustain returns.
 

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article 3 months old

More Impediments To ResMed’s ASV Program

-Risk of death higher in study
-No functional benefit from ASV
-Increasing competition in OSA
 

By Eva Brocklehurst

Further negative news regarding ResMed's ((RMD)) study data, published in the New England Journal of Medicine recently, has disappointed brokers and thrown a spanner in the development works for the sleep disorder product specialist.

The company has already acknowledged its phase III SERVE-HF clinical trial missed its end point. The risk of cardiac death is greater in patients using the Adaptive Servo-Ventilation (ASV) product and ResMed had to issue changes to its recommendation. The trial was conducted on heart failure patients with co-existent central sleep apnea (CSA). The adverse results were unexpected and the mechanisms unknown at this stage.

The preliminary findings signalled risk of cardiac death was 34% higher with the device and that the risk of death/life-saving intervention was also higher. Now, the article suggests a much broader negative outcome, that the risk of death from any cause is 28% higher in this patient group.

No symptomatic or functional benefit was found for the device. Independent experts have raised issues regarding the mechanism of harm or cause of the increased risk - which is yet to be clarified - and stated that auto-set devices should not be used in heart failure patients, a narrower recommendation than the one that ensued from ResMed on the preliminary findings.

Macquarie finds the sub-group analyses in the data were interesting and could suggest, if teased out, a narrowing of the at-risk population. The broker acknowledges that sub-group analyses carry little clinical weight. In the absence of any quantifiable benefit it means, even if sub-groups are not at risk, there is still no reason to use ASV.

The authors can choose to follow up further variables in the data but the broker suspects these sub-group findings will be unlikely to change clinical behaviour. Furthermore, the analysts at Macquarie believe that until the mechanism of harm is made clear, it is difficult to be confident about which patients are at risk.

Citi points out that a lack of evidence of an effect, even in the healthier patients in the trial, is not evidence of no effect. There is no evidence to suggest there is increased risk of cardiovascular death for patients with CSA without symptomatic chronic heart failure. 

Citi emphasises that the OSA (obstructive sleep apnea) market for ResMed's products, outside of this particular pathophysiology, is unlikely to be affected by the news. Nevertheless, a great deal of care needs to be taken when treating those with CSA/Cheyne-Stokes Respiration (CSR) in heart failure patients.

That said, the broker is unconvinced that the treatment of CSA/CSR in the diastolic heart failure population with ASV represents a good target for significant further investment. Outside of the medical issues, Macquarie also remains concerned about the impact on earnings. There are multiple large upcoming studies but there is not guarantee these will give positive outcomes.

Away from the issues with the SERVE-HF data, and in the wake of the FY15 results, brokers drew attention to increasing competitor offerings versus the company's AS10 generator which are lined up for FY16. FY15 results revealed a 53% rise in ResMed's flow generator sales with masks returning to positive with a 6.0% gain. Still, pricing pressure and market share losses are not unlikely with heightened competition.

Deutsche Bank took the opportunity to downgrade to Sell from Hold on the back of the potential for more competitive intensity, while Morgan Stanley upgraded to Overweight from Equal-weight, believing ResMed's underlying business remains quite strong.

In total, FNArena's database has four Buy ratings, two Hold and two Sell. The consensus target is $8.53, suggesting 16.2% upside to the last share price.
 

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Mayne Pharma Peps Up FY16 Outlook

-Strong second half improvement
-More products under direct control
-Large number in regulatory pipeline
 

By Eva Brocklehurst

Mayne Pharma's ((MYX)) recent story has all been about the Doryx brand. A transition in ownership of a US distributor impacted negatively on the first half and then, from May this year, Mayne Pharma acquired the brand, enabling a full product margin.

Mayne's earnings, excluding US Doryx, increased 7.0% in FY15. Directly distributed revenue increased to 72% from 56%, after the company brought additional products in house over FY15. This is in line with the stated intention of controlling earnings and capturing a greater portion of revenue. The company has reaffirmed guidance for a US$2.7m contribution per month from Doryx for FY16.

UBS expects Mayne Pharma can double its earnings in FY16, given the fourth quarter's momentum and the disclosure on the Doryx performance. The broker maintains a Buy rating with a $1.30 target. The main risks to the outlook are the litigation by third parties against patents held by Mayne Pharma, which may lead to increased competition, and new products which may face patent challenges.

The company will also launch a generic BAC tablet in the US and expects to launch Tikosyn in FY16. There are now 35 products targeted for US sales, worth over US$7bn, of which 17 are pending approval from the Food & Drug Administration. In Australia, at least 20 products are in the pipeline. Six have been approved and will launch in FY16, while seven are awaiting approval from the Therapeutic Goods Administration.

Mayne Pharma provided no formal guidance. The company's operating cash flow was lower than in the prior year, primarily because of the cost of establishing a specialty brands division in the US. A US$65m investment will be made to expand US manufacturing capacity at Greenville as well as a $11m investment in a machine for the Salisbury plant.

The year has transformed the company. Hence, Credit Suisse has an Outperform rating and $1.25 target. The broker believes Mayne Pharma is now better placed to deliver a material uplift to earnings in FY16 and beyond. It will also benefit from the full year contribution of the Doryx franchise. Internalising previous third-party distribution also appears likely to generate increased US generics growth.

The stock offers a compelling long-term investment for Moelis, supporting a Buy rating and $1.32 target. The broker understands that current script sales for Doryx are ahead of the company's forecasts to date, which underpins assumptions.The second half is more indicative of the future, Moelis maintains. Earnings rose 49% versus the first half as a number of products, which underperformed at the start of the year, improved substantially.
 

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article 3 months old

Sonic Healthcare Returns To Growth

-FY16 outlook still dependent on FX
-Funding risk cannot be ignored
-Renewed focus on acquisitions
 

By Eva Brocklehurst

Sonic Healthcare ((SHL)) has shelved a challenging year, providing an outlook for FY16 considered the best for some time. Guidance for earnings is in the range of $850-875m, at spot FX rates, which most brokers find reasonable and achievable. The risk is unexpected cuts to government funding.

The outlook for FY16 may be fine but as JP Morgan highlights, it does rely on cheap debt to fund the recent acquisition of Swiss Medisupport as well a currency tailwind that is dependent on the US business rebounding. The broker finds it hard to strip out the FX volatility from the divisions, although does note Germany is growing strongly and the negatives are mainly coming from Australia and the US.

While management highlights the stability of funding across jurisdictions, as reimbursement is never expected to change - until it does - JP Morgan believes this risk cannot be ignored.

Weak Australian trading and increased collection centre costs were a drag on otherwise solid EU trading, UBS observes. The broker also claims the company's track record on guidance could be criticised as overly optimistic. Sonic Healthcare downgraded its FY15 guidance three weeks ahead of the actual result.

Be that as it may, UBS acknowledges the company has made an attempt to break with its past by providing a more comprehensive analysis of expected revenue. On the back of the details now provided UBS rates guidance as robust and achievable.

Credit Suisse downgrades estimates by 3-4% over the forecast period. The broker expects favourable FX, a recovery in US earnings and a full year's contribution from Medisupport will improve the earnings profile. The offset is modest Australian earnings growth and a full year's impact of the reduction to vitamin D fees. Moreover, higher expenses, tax rates as well as larger minorities payments will limit the degree of leverage for growth in FY16.

Margins were behind the sluggish growth, not sales, Macquarie asserts. Cost headwinds such as fee cuts in Australia, escalating domestic collection centre costs and restructuring charges in the US hampered the results but the broker has become more upbeat regarding the outlook. Several regulatory issues that plagued the company in the past year have now played out. Meanwhile, Macquarie believes plenty of synergy is still to flow from recent acquisitions.

Challenging market conditions were well flagged, in Morgans' view. The broker remains confident of a solid recovery and a return to more stable earnings growth, given the organic volumes across all regions are improving and the US is returning to growth. Then there is the uplift from Medisupport and the UK JV. Moreover, the broker calculates there is around $200m in head room for future acquisitions.

On the back of this renewed enthusiasm for acquisitions, and the pull back in the share price after the FY15 downgrade, Citi upgrades to Buy from Neutral. The broker likes the earnings growth profile, meaningful acquisitions offshore and the upside risk from changes in Australian collection centre rent regulations.

Australian pathology has reasonable growth of 5.0% and the broker believes the business is better than what is implied by Medicare outlays, suggesting there are some market share gains being made. Citi contends re-regulation of collection centres would benefit both Primary Health Care ((PRY)) and Sonic Healthcare as it would entrench their market dominance.

The stock is not cheap enough yet for Deutsche Bank. The broker accepts the company should recover in FY16, on the back of a rebound in the US and contribution from the Swiss acquisition. However, the Australian Medical Benefits Schedule review requires caution, while proposed lab fee cuts in the US also raise some concerns. Deutsche Bank would consider buying the stock when funding fears are fully reflected in the price. Until then the broker maintains a Hold rating.

FNArena's database contains five Buy ratings and three Hold. The consensus target is $21.99, signalling 5.5% upside to the last share price. Targets range from $20.47 (JP Morgan) to $24.00 (Macquarie).
 

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Everybody Loves CSL

In this week's Weekly Highlights:

- Domestic Reporting Season Thus Far
- Death To The Death Cross
- Everybody Loves CSL
- Rudi On TV

Domestic Reporting Season Thus Far

FNArena is offering two options to stay on track with the current reporting season in Australia. Every Monday we publish a story titled "Weekly Recommendation, Target Price, Earnings Forecast Changes" and every afternoon we publish a day-by-day update under the title "FNArena Reporting Season Monitor August 2015".

Thus far, it appears the underlying current this month is actually quite positive, despite high volatility, share price weakness and some notable sell-offs suggesting otherwise.

What stood out in particular last week were rather large upgrades to profit estimates, with companies including Transurban, REA Group, Magellan Financial, AGL Energy and Fairfax Media all enjoying double-digit increases.

Observations made by the stockbrokers we monitor:

UBS strategists David Cassidy and Dean Dusanic note disappointments have come primarily from large cap stocks and in particular from those with overseas profits, indicating the market might have underestimated the impact from the weaker euro plus this might also indicate soft global trading conditions.

In addition, some domestically oriented companies, including JB Hi-Fi, Echo Entertainment, Mirvac and Fairfax Media, managed to surprise in a positive manner. UBS thinks Housing and NSW more generally are clearly sweet spots relative to the broader domestic economic backdrop.

Strategists Tony Brennan and Mark Tomlins at Citi take a more negative view, observing while around one third of the stocks Citi analysts cover have so far suffered from significant downgrades to profit estimates, none of the companies under coverage that have reported so far have forced analysts to significantly upgrade estimates.

Citi sees pressures broadening in Australia with some large sectors that used to be fairly resilient (telecoms and insurance) now showing stress signals too. Broader growth challenges put pressure on FY16 profit estimates, note the analysts, while creating doubt for prospects in FY17.

Citi strategists still believe the ASX200 remains poised to surge beyond 6000 in the twelve months ahead, but growth forecasts need to stay high enough to facilitate such outlook, the strategists maintain. The coming two weeks shall be of key importance.

Death To The Death Cross

The favourite pastime for highly annoyed market strategists in the US, so it seems, is debunking the myth that the appearance of a "Death Cross" is signalling the end of the equities bull market.

For those not familiar with the technical set-up behind this trend indicator: a Death Cross occurs when a short term trend indicator crosses below a long term trend indicator. Usually, the 50 days moving average and the 200 days moving average are used, but various alternatives can be swapped instead. The opposite movement is called a Golden Cross.

When looking at various trend lines for individual stocks listed on the ASX, investors will note such crosses appear quite regularly. For example: price charts for all Big Four Banks clearly show a Death Cross over the past two months. And share price performance has been dismal since, helped by three of the Big Four announcing some form of capital raising. But does a Death Cross mean much more than that?

A quick summary of the multitude in reports that have been published in recent weeks and days (I haven't read them all, mind you) is: it doesn't. In fact, the Death Cross does not deserve its ominous name. Apparently, US equities have generated only 13 of such crosses since 1990 and only three of these were real money savers, such as prior to the bear market of 2008. The ten other crosses turned out nothing but a short term blip. Stuff for short term traders. Nothing more sinister than that.

However, I did report in recent weeks about deteriorating internals for US equities and within this context the occurrence, public debate and investor angst about this latest ominous sounding technical signal is simply adding to other signals that command caution from common sense driven investors.

Within this framework I note the team of technical analysts at UBS (I have quoted them before) reported last week technical warning signals for US equities' health are increasing. Short term, the team suggests, markets looks oversold and thus a bounce should be expected, but their expectation remains for the S&P500 "to start a real breakdown campaign into later August and into September".

Particularly September into mid-October will be very weak for the US market, predicts the team and this, would you believe, would fall perfectly in line with the historical pattern wherein September announces trouble and October forms a bottom prior to ending the year on a higher note as the Santa Rally forgives all and everything.

Only a few more weeks now...

Everybody Loves CSL

Most investors have a short memory. CSL ((CSL)) shares earlier this month briefly crossed the $100 mark and this has brought out all kinds of tributes and reflections about how well managed this company is and how good it has been to loyal shareholders.

Certainly, most readers of my reflections and analyses know the stock is constantly on my radar and it forms part of that select group of stocks in the Australian share market I label "All-Weather Performers".

Despite all the accolades that are being printed and re-published these days, investors are quick in forgetting it wasn't that long ago that CSL shares weren't overly popular and there was a very good reason for it too: the share price wasn't going anywhere in a hurry.

It was in those early post-GFC years that BRRMedia ran a popular Friday Afternoon Round Table discussion over the internet and many among you were regular viewers. I was one of the regular guests on the show and one of my recurring habits in those days was to quarrel with stockbrokers who habitually sang a love serenade for the company, having directed their clients' funds into the stock.

My view at that time was that, although CSL was a high quality company, the macro-headwinds such as a strong Aussie dollar, were simply too strong for the share price to perform. Hence the quarrels.

Looked from one angle, my view was absolutely correct. Anyone can pop up a price chart today to see the CSL share price went absolutely nowhere between 2009 and mid-2012. However, this is only one way to look at this.

Another way to look at CSL in those years is by considering company management was making all the right moves, and profits and dividends continued to grow each year. Once those headwinds disappeared in 2012, there was no stopping the share price.

I am simplifying the story, but only a little bit. Since 2012 CSL shares have risen from circa $30 to circa $96, having briefly traded above $101, and that alone is a remarkable performance. One does not need to go back to the turn of the millennium, or further back into the nineties.

The alternative view therefore is that if you get set during times of macro-duress or temporary headwinds, you don't have to worry about getting in on time later on. In defense of myself, my research into "All-Weather Performers" was still relatively immature at the time and I was probably a little too focused on the fact that a high PE stock such as CSL didn't offer enough yield to stick around and wait for the turnaround that seemingly never arrived.

Besides, isn't Harry Hindsight a wonderful companion?

The reason why I am digging back into the past is because CSL might well have arrived at a similar pause in its admirable long term growth story. The FY15 report did not trigger any ahhs or wows from stockbroking analysts and instead the likes of Morgan Stanley are now digging in their heels, telling everyone who cares to listen, the shares look well-well-well-overvalued. Morgan Stanley has a twelve month price target of $84.99, suggesting near double-digit losses could be on the horizon while the prospective dividend yield is only 2%.

Indeed, many analysts covering the company agree the underlying growth prospects look a bit soft for the year ahead. Were CSL a "normal" company listed on the ASX, one would probably be best advised to adopt a more cautious approach for the time being. After all, we've all seen what has happened to stocks like Ansell and FlexiGroup earlier this month, but CSL, of course, is not "normal", it's an "All-Weather Stock", even if most experts, investors and analysts do not use the same label when they mention the company.

The market's collective memory has not forgotten about what happened in 2012 after the shares had a sideways adventure for a few years. Besides, the high quality management at CSL already seems to have secured a new growth engine from FY17 onwards through the acquisition of Novartis flu vaccine business. Combine with great confidence in management's capabilities and I think it's more than likely the market is not going to drop CSL shares in a hurry.

For investors the story is now the same as back in 2010. It may well be that the shares remain locked into a sideways pattern for a while. It still doesn't pay a great deal in "yield", but it continues to hold a lot of promise and of future potential.

If there's one lesson to be learnt from history, it is that during such times when CSL shares are taking a breather, that's when true opportunity arises for investors.

(Note CSL is -of course- included in my research on All-Weather Performers, see further below. It is also included in the FNArena/Pulse Markets All-Weather Model Portfolio.)

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves

(This story was written on Monday, 17 August 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of July available. Just send an email to the address above if you are interested.

article 3 months old

Ansell To Remain Limp

By Michael Gable 

We are half way through reporting season and so far there have been a few disappointments. Companies such as Ansell (ANN) suffered very large falls for missing market expectations. Often it can be hard to find value out there so we have had a closer look at this stock to determine whether there is an opportunity or not.
 


The drop in the share price last week saw ANN breach uptrend support, but it managed to quickly recover some of that. You will notice though that ANN is sitting on the wrong side of the uptrend line so it needs to continue moving higher this week otherwise it is vulnerable to a further drop. We can see support further down near $18 so the risk at the moment remains down to that level.


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

Sirtex Remains A Long-Term Prospect

-Await AGM update on dose sales
-Treatment expansion expected over time
-SIR-Spheres added to 2 new guidelines
 

By Eva Brocklehurst

Sirtex Medical ((SRX)) is making progress with sales of its liver cancer treatment, revealing a 69% increase in net profit in FY15 which beat expectations. Volume growth in terms of doses rose 20%, in line with historical averages. Investment in manufacturing is now complete and the company has tripled its capability on that front.

Despite the lack of level 1 clinical data on the benefits of SIR-Spheres for the treatment of metastatic colorectal cancer (mCRC), the company has still achieved substantial growth in dose volumes in terms of its liver-directed treatment. Views on the timing around elevating SIR-Spheres further up the chain in standard of care have been extended to 2017, once overall survival data has been released as part of the global FOXFIRE study.

The last year has been critical for the company, with a series of important outcomes from its clinical trial programs. Bell Potter notes clinical opinion regarding SIR-Spheres remains divided in the US, with some oncologists refraining from rating the liver-directed therapies in the absence of systemic benefits. For this reason Bell Potter declines to upgrade revenue projections at this point in time. Moelis, too, pushes out its potential earnings uplift to reflect this delay to broader acceptance.

Brokers await the next major update on dose sales at the AGM. A peer review of SIRFLOX will also be published later this year and should provide an important insight into the intentions of key opinion leaders in the US. Bell Potter maintains a Hold rating and $31.71 target while Moelis believes its Buy case is reaffirmed with the financial results and retains a $40.65 target.

Moelis maintains that despite the high trading multiple, the stock is a long-term investment opportunity with significant growth potential. The balance sheet remains strong and cash conversion is 100%. Clinical investment has declined 7.0% as large studies are progressed. Going forward, Moelis anticipates lower investment on an absolute and percentage-of-revenue basis. Amortisation of the $25m capitalised clinical investment balance began in June and this will be undertaken over eight years.

The company will continue to drive a dual marketing and sales strategy, targeting new oncologists and penetrating existing treatment centres. Driving higher doses per centre is an easier way of growing in the near term, as physicians are already familiar with the product. Management remains confident that further analysis of the data will mean the treatment is adopted earlier in the mCRC disease progression.

Macquarie observes further price increases in the company's key market are likely to be difficult to obtain. Moreover, the trajectory of unit growth has slowed. Growth was 26% in the first half of FY15 versus 14% in the second half. As the SIRFLOX results were presented only in June, Macquarie also awaits the AGM update in October for a unit sales update.

UBS retains a positive outlook on the stock and flags the addition of the product to two new clinical guidelines. To the European Society for Medical Oncology treatment list for mCRC in patients who have failed to respond to available therapy and in the Taiwanese guidelines for the most common type of liver cancer - Hepatocellular carcinoma.

Goldman Sachs also maintains its optimism, expecting dose sales growth to accelerate as SIR-Spheres becomes recognised as a valuable treatment in liver cancer. The broker's forecast is for a 3-year dose sales compound growth rate of 22% over FY15-18, based on ongoing growth in the last recourse (salvage) option, which is around 30% penetrated, as well as for treatment of other types of liver metastases over time. Goldman Sachs has a Buy rating and $39 target.

Morgans retains a more sceptical prognosis, while acknowledging the solid earnings outcome. While accepting SIR-Spheres clearly works in the liver, the broker expects the results of the SIRFLOX study to have limited impact on driving adoption in a systemic disease such as first-line mCRC. Morgans does not expect treatment guidelines will change, with physicians remaining hesitant to prescribe and payment systems resistant to reimbursement.

FNArena's database has two Buy ratings, Macquarie & UBS, who both have $40.00 targets. The odd one out is Morgans, which has a Reduce (Sell) rating and a $17.56 target. The consensus target is therefore $32.52, which suggests 1.8% downside to the last share price. This compares with $29.05 ahead of the results.
 

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article 3 months old

AirXpanders Advances Towards US Approval

-Major advance in technology
-US FDA approval in the wings
-Addressable market increasing
 

By Eva Brocklehurst

AirXpanders ((AXP)) has developed a major improvement in the technology used in breast reconstruction after cancer. AeroForm is already approved and sold in the Australian market and the company is planning to file for US approval in the current quarter.

The company has completed a trial to support its application to the US Food & Drug Administration and approval is expected early next year to support the commercial launch of AeroForm. Canaccord Genuity initiates coverage on the stock with a Buy rating and target of $1.25.

The company's device, or expander, is a temporary implant which is used to stretch the skin and chest muscles to allow the placement of a permanent implant. This prepares the site for women who have had breast cancer and are having reconstruction post a mastectomy.

The company's product is superior to existing expanders which currently require several visits to the clinic for saline injections. AeroForm replaces saline expanders with a gas (carbon dioxide) that can be compressed in side a small canister in the expander and deliver frequent, small doses by the patient using a wireless controller.

The ability to control or manage the expansion process is thus less traumatic for the patient and also allows clinicians to focus on other aspects that require their expertise rather than conducting routine injections of saline.

AirXpanders is expected to break even in 2017. Canaccord Genuity bases US market forecasts on estimated current sales of expanders. Reports show 4,694 breast reconstructions that used an expander and implant were performed in the US in 2014. The US addressable market is calculated to be US$369m in 2016. In comparison, the Australian addressable market is calculated to be $7.0m.

AeroForm was approved by Australia's Therapeutic Goods Administration in October 2013 and add to the government prostheses list in November last year, with reimbursement of $2,450 per expander. The company has recently increased its sales team ready for a national roll out amid strong initial interest from plastic surgeons.

Breast cancer is the third most common cancer in Australia and the broker estimates the current Australian market for tissue expanders is around 3,000 units per year. AeroForm has received the CE Mark of approval from European countries in the EU but this does not provide for any reimbursement. AirXpanders is not planning to launch product in Europe until it is established in the US.

The broker assumes the company will achieve a peak market share of 30% in 2021 and that manufacturing margins will increase to 80% by 2018, as a result of transferring the bulk of manufacturing to low-cost Costa Rica, while realising scale benefits. Currently, manufacturing is performed in California, with the facility able to manufacture 3,000-4,000 units per annum. Production in Costa Rica is expected to be underway by early next year.
 

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