Day: January 8, 2021

This ASX sector is facing a tough 2021

Downgrade ASX stocks

The ASX bull market continues its golden run into the new year, but there’s one sector at risk of falling out of the race.

The S&P/ASX 200 Index (Index:^AXJO) ended the last trading session of the week with a 0.7% gain with the benchmark adding another 1% in value in 2021.

The nearer-term outlook for ASX stocks is bright. But the analysts at Macquarie Group Ltd (ASX: MQG) don’t quite feel the same way about ASX health insurance stocks.

ASX stocks downgraded by Macquarie

The broker warns that the two listed players in this field are facing a number of headwinds and downgraded the Medibank Private Ltd (ASX: MPL) share price and NIB Holdings Limited (ASX: NHF) share price.

“2021 will be a year of structural pressures for the Private Health Insurance industry,” said the broker.

“Although MPL and NHF will likely fare better than peers we do not expect them to be immune.

“Following a significant re-rating and the tougher outlook, the sector no longer appears undervalued.”

Claims are on the rise

There are three main areas of concern highlighted by Macquarie. First is the claims catchup. Health Insurers experienced a lower level of claims during the months of COVID-19 lockdowns last year.

Industry data indicated that the rebound in claims could happen sooner than what the two companies have been guiding.

Another headwind driving the downgrade

The other issue is the level of “participation”, which reflects the number of people holding private health insurance.

The participation rate jumped in the June quarter of last year as customers retained cover during the peak of the pandemic. At the same time, new customers were also added during the period.

“Our analysis also showed as COVID-19 risks subsided across most of the country, normal industry participation declines (~20-30bps per qtr) recommenced,” explained Macquarie.

“Looking forward, participation declines could accelerate as economic stimulus rolls off, although it is unlikely to be a material step down.”

No insurance against politics

Lastly, the next federal election could prove to be a headwind for the sector. Opposition leader Anthony Albanese is rallying his party for a possible election that he thinks could come later this year.

While Albanese has publicly dumped Labor’s so called “retiree tax” policy, he said nothing about capping private health insurance premiums.

The cap was dangled to the electorate at the last election, and he could use this carrot again to restrict premium increases to 2% a year.

Foolish takeaway

Macquarie believes it is “highly likely” that Federal Labor will have a similar policy this year. The federal election must be called before 21st May 2022.

The broker cut its recommendation on the Medibank share price to “underperform” from “neutral”, and NIB share price to “neutral” from “outperform”.

Macquarie’s 12-month price target on Medibank and NIB is $2.70 and $6.10 a share, respectively.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended NIB Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Leading broker names the ASX healthcare shares to buy in 2021

increase in asx medical software share price represented by doctor making excited hands up gesture

Analysts at Bell Potter have been busy finding ASX shares from several industries that they believe are best placed to have a strong 2021.

On this occasion, I’m going to look at the healthcare sector. Here are a couple of shares they rate highly:

AVITA Medical Inc (ASX: AVH)

The first healthcare share that Bell Potter rates highly is AVITA Medical. It notes that the medical device company’s shares have fallen heavily after sales of its Recell spray on skin technology suffered during the pandemic. However, it feels this is a buying opportunity, especially with its sales starting to recover now. Bell Potter has a speculative buy rating and $15.00 price target on its shares.

It commented: “As the US economy returns to normal levels of activity as is anticipated over the course of 2021, revenues are expected to continue to increase rapidly. There are no competing innovative therapies to the Recell technology in the treatment of burns.”

It also notes that management is looking to expand Recell’s use into other lucrative markets.

“The company is proceeding with its program to expand into adjacent markets for the treatment of vitiligo, soft tissue injury (trauma wounds) and paediatric burns. Clinical trials are under way in all three indications with the highest levels of interest in the vitiligo indication. We expect an approval in this indication in later calendar year 2022 or early 2023.”

Starpharma Holdings Limited (ASX: SPL)

Another healthcare share the broker likes is dendrimer product developer, Starpharma. Bell Potter has a speculative buy rating and $2.20 price target on its shares.

Its analysts commented: “It’s already generating revenue through its VivaGel franchise and is also working on improved formulations of leading cancer drugs both internally and with external partners including AstraZeneca.”

The broker also notes that Starpharma has a COVID-19 product which has a lot of potential.

It explained: “COVID-19 has taken centre stage for the company, with the rapid development and reformulation of the active used in its VivaGel products into an anti-viral nasal spray called Viraleze for COVID-19 and other viral infections. The company is leveraging its huge dataset on safety/toxicology on the active to fast track the path to market, with the product expected to be on market in Europe in 1QCY21, less than 12 months since the company first started working on it.”

“Market research indicates the product has wide appeal with its broad anti-viral capabilities, one of the key driving factors of enthusiasm around the product and we expect it will be complementary to other prevention strategies like vaccines & PPE (such as masks) in the fight against COVID-19,” the broker added.

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When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Avita Medical Limited and Starpharma Holdings Limited. The Motley Fool Australia has recommended Avita Medical Limited and Starpharma Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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These ASX dividend shares have 10% and 4% yields

large block letters depicting four percent representing high yield asx dividend shares

With interest rates unlikely to improve from their record lows any time soon, it’s very fortunate that the Australian share market has dividend shares offering investors very generous yields.

Two ASX shares dividend shares with above-average yields are listed below. Here’s what you need to know about them:

Fortescue Metals Group Limited (ASX: FMG)

The first dividend share with a generous yield is one of the world’s leading iron ore producers, Fortescue.

Over the last few years the mining giant’s shares have generated staggering returns for investors. This has been underpinned by its significant cost reductions, an increase in its grades, production growth, and favourable iron ore prices.

In respect to the latter, the spot iron ore price climbed to a whopping US$170.60 a tonne last week. This compares incredibly favourably to Fortescue’s current C1 costs of US$12.74 per wet metric tonne.

Given the margins the company is enjoying and its strong balance sheet, it has been tipped to reward shareholders with bumper dividends in FY 2021.

Macquarie, for example, is forecasting a fully franked $2.61 per share dividend over the next 12 months. Based on the current Fortescue share price, this equates to a sizeable 10% dividend yield.

Rural Funds Group (ASX: RFF)

Another dividend share with a generous forward yield is Rural Funds. It is an agricultural property-focused real estate investment trust (REIT) which owns a diversified portfolio of high quality assets. These assets are leased to experienced agricultural operators such as wine giant Treasury Wine Estates Ltd (ASX: TWE) on very long leases.

At the end of FY 2020, the company owned 61 properties with a combined value of $1 billion and a weighted average lease expiry (WALE) of 10.9 years. From these leases, it was generating adjusted funds from operations (AFFO) of 11.7 cents per share.

Thanks to fixed rental increases, the company intends to grow its distribution by its 4% per annum target rate in FY 2021. This will mean an 11.28 cents per share distribution for shareholders. Based on the latest Rural Funds share price, this represents a 4.3% yield.

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Returns As of 6th October 2020

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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4 reasons why the CBA (ASX:CBA) share price could be a buy

CBA

There are a few reasons why the Commonwealth Bank of Australia (ASX: CBA) share price could be a buy.

Recent financial results

CBA said that its FY20 result reflected the impact of COVID-19 on customers and the economy, however the bank said its performance remained strong due to disciplined execution of the strategy and it continued to improve its balance sheet.

FY20 statutory net profit after tax (NPAT) dropped 12.4% to $9.63 billion and cash NPAT declined 11.3% to $7.3 billion. The loan impairment expense increased by $1.3 billion to $2.5 billion as the loan loss rate increased to 33 basis points. The net interest margin (NIM) declined by another 2 basis points to 2.07% because of the impact of lower interest rates.

The common equity tier 1 (CET1) capital ratio was 11.6%, which was above APRA’s unquestionably strong benchmark of 10.5%.

In terms of the amount of COVID-19 related loan deferrals, at 31 July 2020 there were 135,000 home loans being deferred representing 8% of total accounts (down from 154,000 at the peak) and there were 59,000 business loans still being deferred which represented 15% of total balances, down from 86,000 at the peak. At the end of October, the number of home loan deferrals had reduced to 45,600.

The latest financial result was the FY21 first quarter trading update which showed that CBA generated $1.9 billion of statutory NPAT and $1.8 billion of cash profit, down 16% on the prior corresponding period. CBA said that income was stable, but expenses (excluding customer remediation) were up 2%.

In that latest quarter, the CET1 ratio continued to strengthen as it grew 20 basis points to 11.8%.

What are the reasons that the CBA share price could be a buy?

Rhett Kessler from the Pengana Australian Equities Fund, of Pengana Capital Group Ltd (ASX: PCG), thinks that the banks have a positive outlook.

The first reason is that there’s accelerating home loan growth supported by low interest rates and first homeowner support. Indeed, at the moment the official Australian interest rate set by the Reserve Bank of Australia is just 0.25% right now.

The second reason, or group of reasons, is that there’s a supportive federal budget, improving housing finance approvals and house prices are holding up better than expected.

The third reason was that there has been a meaningful reduction in loan deferrals.

The final reason is that there is lower than anticipated loss provisioning.

Those factors were key for causing Pengana to increase the exposure to the major banks.

Valuation

According to the ASX, CBA currently has a market capitalisation of $150 billion with the CBA share price just over $85.

Looking at the (externally provided) earnings estimates for CBA shares, it’s valued at 21x FY21’s estimated earnings. Looking further ahead, it’s valued at 18x FY23’s estimated earnings.

There are also estimates for the dividends that CBA may pay shareholders. In FY21 it could pay an annual dividend of $2.75 per share, equating to a grossed-up dividend yield of 4.6% at the current share price. In FY23 it’s projected to pay a dividend of $3.23 per share, equating to a grossed-up dividend yield of 5.4%.

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When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

*Returns as of 6/8/2020

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 4 reasons why the CBA (ASX:CBA) share price could be a buy appeared first on The Motley Fool Australia.

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