Financial Services - Overall: Mark-to-market and sector earnings changes

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
18 July 2021, 1:30 PM
Sectors Covered:
Insurance, Diversified Financials

  • We update our Insurance/Diversified Financials sector earnings on a mark-to-market and a broad review of our earnings assumptions.
  • We make a range of earnings changes across our coverage universe (see full details overleaf).
  • Our Sector ADD calls are Insurance Australia Group (ASX:IAG), Tyro Payments (ASX:TYR), QBE Insurance (ASX:QBE), Austock Group (ASX:GDG), Kina Securities (ASX:KSL), MoneyMe (ASX:MME), Link Administration Hldgs (ASX:LNK), Challenger Limited (ASX:CGF), Perpetual Limited (ASX:PPT) and Zip Co Limited (ASX:Z1P) (in order of preference). ASX is our only Reduce recommendation currently

Summary of investment market movements

Key investment market movements for the half year ended June 2021 were: 1) Australian and major global equities indices rose by 8%-12% for the half, including +4%-8% in the June quarter; 2) AUD, USD, GBP 3-year bond yields all up ~11bps30bps for the half; 3) domestic A rated bond spreads up marginally (2bps); and 4) the AUD declining against the GBP and USD (1%-3%), but being flatter against the NZD.

Result period thoughts

General insurers: IAG and SUN will have weather affected second halves, but we expect QBE to deliver further attritional claims ratio improvement on the back of strong premium rate increases.

Private health insurers: We expect solid core Health Insurance results due to a favourable claims environment, although NHF will likely still see some pressures in ancillary businesses.

BNPL: Growth still expected to be strong, albeit both players will produce FY21F NPAT losses. The market has APT becoming NPAT positive into FY22, so getting comfort on achieving this earnings trajectory is a key focus.

Other stocks: We expect LNK management to reaffirm LNK’s earnings have bottomed in FY21, while consensus has TYR producing its first positive full year EBITDA result in FY21.

Earnings changes

We make a range of earnings changes across our coverage universe (see full details overleaf). With numerous stocks providing recent market updates (eg, IAG, SUN, CGF, MPL, TYR), we think most likely negative result items have been flagged, although earnings visibility for several stocks (eg, QBE, LNK) remains poor, in our view.

The Health Insurers are the best upside earnings risk candidates, in our view, but we note MPL has already declared it will return A$105m of COVID-19 benefits to customers, through premium relief by September 2021.

Investment view

We move LNK to an ADD recommendation in this note. This call is based on the LNK business, ex PEXA, trading on only ~10x FY22F PE (MorgansE), LNK’s balance sheet having meaningfully de-geared post receiving PEXA IPO proceeds (leverage now ~2x) and LNK’s earnings being well positioned to benefit from a global macro recovery. We also move MPL and CPU back to Hold calls on valuation grounds (previously ADD), with both stocks up ~20-25% since March.

Our Sector ADD calls are IAG, TYR, QBE, GDG, KSL, MME, LNK, CGF, PPT and Z1P (in order of preference). ASX is our only Reduce recommendation currently (trading on what we see as an expensive ~31x FY22F PE multiple).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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