The Wrap: Utilities, Consumers & Digital Media

Weekly Reports | Jul 05 2019

Weekly Broker Wrap: utilities; Buy Now Pay Later; consumer stocks; and digital media.

-Minimal impact so far from default market offer on major electricity providers
-Visa announces instalment payment initiative
-Tailwinds improve for retailers, albeit modestly
-Real estate, job and vehicle sales listings remain weak


By Eva Brocklehurst


The government's default market offer (DMO) came into effect on July 1 2019, which means retail offers in the electricity market are now comparable. JPMorgan concludes that the difference in the offers from the big four electricity providers - AGL Energy ((AGL)), Origin Energy ((ORG)), Alinta and EnergyAustralia - is very small.

Tier-2 retailers have the highest offers but also the lowest in each state. These offers, in many cases, come with conditions. While the new default offer effectively acts as a market price it is also used as a reference for benchmarking all offers.

Credit Suisse upgrades its ratings for both AGL Energy and Origin Energy, to Neutral and Outperform respectively, as both have underperformed peers and the market. While the broker continues to envisage downside to electricity prices from renewables and government intervention, the rally over the last 12 months shows a subdued impact so far.

The introduction of the DMO illustrates that retailers have retained a freedom to re-price their back books, introducing doubt that wholesale price reductions will be passed through in full. For existing customers on discounts, the broker estimates that the two companies have retained $30-55m in costs.

In Origin Energy's case it has been re-directed to other customers. Moreover, best offers from the large retailers are now higher than in April or May, indicating an easing back in competition, although the broker suspects this may not be consistent.

Buy Now Pay Later

Shaw and Partners notes it has taken more than five years for Visa to respond to the new operators that have launched customer-centric products for instalments, lay-by and payments. Visa has announced an initiative for merchants and financial institutions to utilise existing Visa payment structures and cards for instalments.

The company has flagged instalment payment growth is above system and options in each country will vary, based on issuer and merchant. Shaw and Partners suggests the opening up one of the largest payment systems in the world increases the potential for competition globally.

Furthermore, and increase in competition would likely manifest through lower checkout merchant fees, and this may put pressure on those returning greater merchant-derived fees. The broker points out that Visa does not take on credit risk and does not originate. Therefore banks and financial institutions are the key counterparties.

In this respect, a product such as payment instalments does not solve origination difficulties for the major financial institutions, and origination remains the key issue in the industry.

Shaw and Partners points out digital payments are growing at over 10% per annum and instalments at 15%. Moreover, the broker highlights, it took Qantas ((QAN)) 15 years, along with assets and infrastructure, to build its frequent-flier customers to the level that it took Afterpay Touch ((APT)) and Zip Co ((Z1P)) three years to build their customer bases.

Consumer Stocks

Despite appearances, UBS finds no evidence yet of an uptick in discretionary expenditure following the federal election. However, with the broker recently upgrading house price forecasts to stable and taking into account the tax cuts to occur over FY20 along with recent rate cuts, a net 0.5% tailwind to household goods sales is calculated for FY20.

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