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The Wrap: Households, Telcos & Healthcare
BY EVA BROCKLEHURST - 10/08/2018 | VIEW MORE ARTICLES FROM FNARENA NEWS

Household Comfort

More households are feeling strapped for cash, dipping into savings to cover the rising cost of living expenses. This was the most notable aspect of the ME Household Financial Comfort report, which is based on a survey of 1500 households. Households that typically spend all of their income or more increased three points to 11% during the six months to June.

The report found the cost of necessities continues to be the major financial concern for households, with more than half reporting it as their biggest financial worry. Consistent with ABS wage data, the report signals nearly half of all households still have the same income compared with a year ago while 24% reported reductions in income and 34% a rise.

Housing stress remains prevalent and 45% of households were reported to be contributing more than 30% of disposable income towards mortgages in the past six months. Of households with debt, there was increase in the number expecting they will not be able to meet the required minimum payment on the debt.

The main winners in the report were self-employed, in trade or as professional freelancers, reporting the highest level of comfort and the largest increase in any workforce segment. Financial comfort also increased in South Australia more than any other state or territory.

The losers comprised young singles and couples under 30 years with no children and the overall comfort of this cohort decreased by -11% to a record low. The "empty nesters", those 50 years old and over, also reported a record low in financial comfort.

Many remain concerned about current finances, expressing an -8% drop in comfort regarding their expected standard of living for retirement. Recent changes to superannuation appear to be significantly impacting this sector. Students also reported a substantial decline in financial comfort of -15%.

Oz Immigration

Immigration has been a driver of Australian growth but debate is growing regarding the ability of housing and infrastructure to keep pace. Morgan Stanley notes, while a 21,000 fall in permanent visas was recently announced, temporary programs continue to grow. A 2018 Lowy Institute poll found that for the first time a majority of Australians, 54%, now believe the pace of immigration is too high.

The Productivity Commission review has noted that high rates of immigration have put upward pressure on land and housing prices. Many investors the broker consulted believed immigration was slowing but this appears to be only relating to permanent visas and, looking more closely, an acceleration in temporary visas is seen concentrated in areas that have been growth segments for the Australian economy.

Telcos

Recent results from Optus and Vodafone are broadly supportive of UBS estimates, which factor in deteriorating mobile momentum for Telstra ((TLS)) in the second half. The results suggest Telstra subscriber growth could fall to levels below its competitors. UBS factors in Telstra mobile revenue is falling -4% in the second half versus Optus and Vodafone growth of around 7%.

UBS estimates that industry growth will be minimal for mobiles in FY18 and operating earnings for the industry are likely to decline. The broker also notes Optus is on track for a commercial 5G launch in 2019.

Morgans suggests FY19, in terms of the NBN, will be as bad as it gets from a competitive perspective. Over the last few months NBN plan prices have stabilised while mobile competition is more severe. The broker suggests mobile operators are taking the battle to TPG Telecom ((TPM)) before its network launches.

While many investors are fearful that TPG's mobile offering will severely damage the market, Morgans is more convinced it is a last mile NBN bypass and, as a more mature network, will be more damaging for Vodafone than Telstra.

Morgans has a Hold rating for TPG. The broker also notes consumer-facing telcos have been battered by competition while business-facing telcos have outperformed. Morgans has Add ratings on Telstra, Over The Wire ((OTW)), Superloop ((SLC)) and SpeedCast ((SDA)).

NextDC ((NXT)) appears likely to beat expectations for FY18 and FY19 but the broker believes it needs to sign several large customer contracts to accelerate utilisation of generation 2 & 3 facilities. Vocus ((VOC)) is the least preferred telco, with a Hold rating, given ongoing operating uncertainty and the risk of another write-down.

Healthcare

Credit Suisse finds the healthcare sector expensive and delivering to expectations is key to maintaining multiples in the upcoming reporting season. On an aggregate basis the sector is trading on 24.7x 12-month forward EPS, 10% above its two-year average. CSL ((CSL)) and Cochlear ((COH)) are trading at the greatest premiums, at 80% and 115% respectively.

While Credit Suisse envisages a low-risk to these companies meeting FY18 expectations, if FY19 guidance is too conservative the market may react to negatively, given the strong re-rating these stocks have experienced in the recent months. Attention will also be on guidance for FY19 from Healthscope ((HSO)) and Ramsay Health Care ((RHC)) which downgraded guidance in May and June respectively.

If the latter provides high single-digit EPS guidance for FY19 the broker suggests this could be difficult to achieve. Credit Suisse envisages downside risk to Ansell ((ANN)) and Primary Health Care ((PRY)). For the former, concerns centre on the ability to achieve the top end of organic sales growth targets while the latter is earnings outlook remains challenging amid headwinds in the medical centres division.

Japan

Japan's population began falling in 2010 and the country has the world's most aged society, with 27% of the population over 65. Projections suggest the population will decline to below 80m by 2066 and to around 50m in 2115, from 127m today. The International Monetary Fund has identified 2018 is a new point of "no return" the Japanese demographics. This dilemma has been elevated to the highest priority and government reforms intend to transform economic policy.

ANZ analysts note the intention to create a digital society is banking on Japan's technological strength and, in this respect, Japan may be the only major economy that does not fear the rise of technology but welcomes it. The two main programs include extending the digital revolution into all areas of society to improve ageing and environmental sustainability, developing data-driven approaches to health care, transport and finance.

There is also a focus on labour market reforms to make childcare, tertiary education and flexible employment more accessible to provide more work for women and older people and boost productivity. ANZ analysts suggest the renaissance has so far been heavily dependent on the Bank of Japan's extraordinary monetary stimulus policy, which is now running into limits, and the new policies require much greater coordination across government and industry.

Iran

As the US starts to implement sanctions on Iran, CIBC considers some of the choices ahead for the oil producer. Support has been demonstrated by other countries importing the bulk of Iranian crude and some are expected to apply for exemptions from the US in order to transact with Iran. During the 2010 sanctions, 20 countries receive waivers for limited oil imports from Iran.

CIBC expects China to consider new to source Iranian exports irrespective of US sanctions and even attempt to increase share. For some buyers of Iran's oil, the inability to transact with US banks will preclude the notion of maintaining the status quo. A lack of clarity is considered enough to stoke uncertainty and keep investors guessing. CIBC suggests insuring vessels will be the biggest challenge facing buyers as oil sanctions roll-out on November 4.

The EU, Russia and China are expected to provide coverage, but it much higher costs. The analysts do not believe Iran is likely to negotiate terms with the US, as actions in the last few weeks have indicated a preferred choice for a more dangerous option. The Bab el-Mandeb Strait affects the oil and product flows to Europe and Asia and presents a critical choke point for the flow of crude and products.

The other choke point for global oil flow is the Strait of Hormuz, carrying crude and condensates in addition to fuel oil, clean products and LNG. Fresh reports are being received of a show of naval presence by Iran in the Persian Gulf amid threats to disrupt global oil flows.



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The content of this information does in no way reflect the opinions of FN Arena, or of its journalists. In fact we don't have any opinion about the stock market, its value, future direction or individual shares. FN Arena solely reports about what the main experts in the market note, believe and comment on. By doing so we believe we provide intelligent investors with a valuable tool that helps them in making up their own minds, reading market trends and getting a feel for what is happening beneath the surface. This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. FN Arena employs very experienced journalists who base their work on information believed to be reliable and accurate, though no guarantee is given that the daily report is accurate or complete. Investors should contact their personal adviser before making any investment decision.

 

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