Person 3

The Silver Haired Economy Vue provided a total return of +5.58% over the last year (1 June 2017 to 31 May 2018). This compares with +9.63% for ASX 200 and +11.62% for MSCI AC World Index [all data in AUD].

A number of our financial sector stock picks have faced headwinds from a combination of pressure on margins in retirement as well as funds management businesses with fund outflows. However, the long term outlook for the companies look favourable which should get reflected in the relevant stock prices.

Vue Company Updates

HCA Healthcare Inc (HCA-US)

HCA Healthcare, Inc. is a US based health care services company, which owns and operates hospitals, freestanding surgery centres & emergency rooms, comprehensive rehab & physical therapy centres and urgent care centres.

HCA continues to enjoy a strong market leadership positioning and has among the highest market share in the inpatient segment, relative to other for-profit hospital operators. This is likely to help HCA weather rate and utilisation pressures in future as the US delivery system transitions away from a fee-for-service model to value-based reimbursement systems. HCA continues to invest heavily to protect and grow market share. It spent US$2.7 billion in 2016, US$3 billion in 2017 and is expected to spend ~US$3.5 billion in 2018.

HCA reported 1Q FY 2018 results in early May posting a solid set of numbers slightly ahead of market expectations. Total revenues for the quarter grew +7.5% year-on-year to reach US$11.4 billion and net income came in at US$1.1 billion (up from US$659 million in 1Q FY 2017). The net income numbers were partially also helped by a lower tax rate and divestment of facilities in Oklahoma. Management reiterated guidance for FY 2018.

Legal & General Group Plc (LGEN-GB)

Legal & General Group is a UK based company in the business of providing insurance, pension and savings and investment products. Legal & General is one of the financial sector stocks with a high degree of exposure to the silver haired economy. As of end of 2017, the company generated ~88% of total revenues from the LGIM (Legal & General Investment Management) and LGR (Legal & General Retirement) businesses. Both these business lines’ products and services are targeted directly at the ageing economy – managing pension schemes and defined benefit plans as well as creating pension de-risking solutions for defined benefit plans.

Legal & General reported a strong FY 2017 report in March posting a +32% growth in operating profit of £2.05 billion and earnings per share of £0.3187 (up +50% over FY 2016). Stripping out one-off gains like US taxes and mortality benefits, EPS growth was still a robust +9% year-on-year. Specifically, in the context of the ageing demographic theme, Legal & General conducted transactions worth £6.4 billion in LGR, including 15 pension de-risking transactions in the US. The company sold £1 billion of lifetime mortgages, where it is also the market leader with a share of 33%. Market share in the retirement solutions business reached 42% in the UK with assets hitting £463 billion, up +12% from previous year. Given its progressive dividend policy, dividend increased +7% year-over-year to reach 15.35p per share.

LGEN also benefitted from tailwinds from a longevity release of £332 million in 2017, and management expects similar numbers in 2018 and 2019. Based on management guidance, this is likely to improve earnings and cash flows between £300 - £350 million next year. The extra cash flows are likely to support dividend growth over the next few years.

Medical Properties Trust (MPW-US)

Medical Properties Trust, Inc. is a self-advised real estate investment trust, which invests in and owns net-leased healthcare facilities across the US and selective foreign countries. MPW specialises in acute care, community and rehabilitation hospitals, providing operators access to capital for facility improvements, technology upgrades, staff additions and new construction through long-term net leases of real estate assets. It focuses exclusively on providing capital to acute care facilities of all kinds through long-term triple-net leases.

MPW reported 1Q FY 2018 earnings in May, where normalised FFO (funds from operations) met consensus expectations. Company management has been trying to reduce its operator concentration and working on potential JV transactions. This is important for MPW in that it can help de-leverage the company especially in light of higher interest rates. Management has reaffirmed FY2018 guidance of achieving normalised FFO of US$1.42 - US$1.46 per share (up from US$1.07 in 2017). However, this excludes impact form any M&A/JV transactions that could help reduce the debt burden of the company (which is very likely). In 1Q FY 2018, MPW finished the construction of a 40-bed rehab hospital in Arizona. The company also entered into a 15-year lease agreement in March with a JV formed by Vibra Healthcare and Ernest Health for a long-term acute care hospital in Idaho.

Principal Financial Group (PFG-US)

The Principal Financial Group, Inc. is a global financial services company, offering a wide range of products and services to both retail and institutional audiences. The company offers different products via different business lines and subsidiaries – Retirement & Income solutions business, US Insurance solutions business, Principal Global Investors (funds management) and Principal International.

PFG has a superior business mix relative to peers which is likely to enable the company earn more stable higher free cash flows and a higher ROE (return on equity). Its business mix is less capital intensive and has less dependence on balance sheet compared with other insurers. As of 2017, its US insurance business accounted for only ~18% of total operating profits. More than two-thirds of the earnings are generated from fee earning businesses like funds management, Principal International and RIS (Retirement & Income Solutions). The PGI and Principal International businesses are growing robustly; a trend likely to continue in the near future.

The market is concerned about the outflows and margin pressure in the retirement business and the pressure on fee income due to challenges in the funds management industry. The stock price reflects the concerns and is trading at an attractive valuation. Management is likely to deploy US$900 million in 2018, and there is a possibility of additional share buybacks and dividends.

Prudential Financial Inc. (PRU-US)

Prudential Financial, Inc. offers a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services to individual and institutional customers through proprietary and third-party distribution networks. Prudential reported 1Q FY 2018 earnings in May beating consensus by a wide margin (EPS of US$3.08 vs consensus of US$2.99). While PRU suffered net outflows in the annuity business, margins were robust. In the retirement business, full service pension business results were strong but were dragged down by weakness in the institutional business. Margins across retirement and group insurance were also strong. Notwithstanding the challenges faced by some of the business segments in the short term, the longer-term outlook for PRU remains promising.

The Japan business is likely to deliver strong growth along with inflows in the investment management and retirement businesses. The company generates strong free cash flows, even after paying out dividends, which retains the possibility of returning additional capital to shareholders via buybacks.

Learn more about Macrovue’s Silver Haired Economy investment portfolio.


Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances.

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