Weekly Reports | Jul 26 2019
Weekly Broker Wrap: debt collectors; banks; consumers; and housing construction.
-Debt collection industry flush with funds
-Open banking likely to put pressure on industry returns
-Consumers, generally, expect income and expenditure to grow
-Significant weakness still ahead for building material providers
By Eva Brocklehurst
The Australian Competition and Consumer Commission has started proceedings against debt collection industry participant Panthera Finance. JPMorgan highlights debt collection practices as critically important, given the agency either represents or technically owns the debt originated by customers.
While the balances in this particular case are small, the potential damage to reputation caused by an adverse ruling could affect future dynamics of the purchased debt ledger (PDL) market. Proceedings were lodged on July 23 and the allegations involve complaints over the last two years about the company's activities.
Canaccord Genuity finds, when it comes to future returns in the debt collection industry, access to capital is the key determinant. And they're flush. Credit Corp ((CCP)) has recently procured $140m from a capital raising and Collection House ((CLH)) has Balbec Capital willing to fund its book.
However, for the former, the broker suspects forecasts are optimistic and investors may be disappointed if they assume the US earnings trajectory will be anything but slow.
Collection House, meanwhile, has bought numerous legacy books and ramped up its investment in New Zealand. While there is an overhang from a dissident shareholder selling down, the asset mix and earnings outlook appear markedly better.
Pioneer Credit ((PNC)) appears to have turned around. Canaccord Genuity is keen to learn how this occurred, as well as receive an update on corporate activity when the company reports.
The broker also notes private equity is taking up distressed books across the broader financial services sector. As an example, one firm which has been eyeing a $10m receivables book has revealed that there were 16 bidders for the asset.
Macquarie believes major banks are likely to continue losing market share. Open banking, where third parties can build application services around the financial institution, is likely to put pressure on industry returns, with the greatest threat to the banks' attractive revenue pool, such as FX, payments and insurance.
Participants in the market with large customer bases and brand trust are the ones likely to benefit from open data, the broker adds. While this may also offer opportunities for incumbents to leverage investment in technology and customer reach, open data is currently viewed more as a compliance exercise.
As technology is increasingly important, scale benefits become even more critical and Macquarie believes smaller banks will find it increasingly hard to compete. Credit availability may have improved from a trough earlier in the year but, overall, borrowing capacity remains lower versus 2018.
Responsible lending rules are expected to be finalised later this year by the Australian Securities and Investments Commission, which should provide clarity on expense assessment. However, if ASIC leaves scope for interpretation, the gap in credit assessment is likely to remain, and this disadvantages the major banks. Macquarie considers the market share losses are partially attributed to pricing and partially to the credit assessment process of the major banks.
Ultimately, the regulator is expected to require banks to include transaction data verification as part of their assessment process and this will increase the cost of assessment across the industry.
The retailing industry is being challenged by stretched household balance sheets, low wages growth, new entrants and cost inflation. Yet despite some stress being shown in the retail portfolios of the banks, the loss rates remain close to cyclical lows.
Conditions could deteriorate, JPMorgan suspects, although tax breaks, rate cuts and a bottoming of the housing market should provide some relief. Regardless, the broker estimates Australian retail exposures comprised around just 1% of total bank exposures so the impact appears manageable.
UBS assesses consumer perception of household finances will be the key determinant of expenditure. From the survey of 1200 Australian consumers, conducted before the federal election, around 8% were positive about the outlook for household finances for the next 12 months. The results were weakest in Queensland and Victoria.
While consumers were more negative regarding the outlook for wealth, which UBS believes reflects weaker house prices, some positive effect is expected since the Reserve Bank reduced official rates in June and July. Consumers were, largely, optimistic, expecting incomes and expenditure to grow.
Respondents also expect to travel more in the next year, which the broker considers is a positive for Flight Centre ((FLT)), Webjet ((WEB)) and Qantas ((QAN)). However if the Australian dollar falls -10%, around 35% of respondents will travel less or not at all.
Increased expenditure on hardware and online shopping is also likely to benefit Wesfarmers ((WES)). Despite higher electricity prices, less than one fifth said they will consider switching suppliers in the next year, which UBS believes is a positive for AGL Energy ((AGL)) and Origin Energy ((ORG)).
While falling expenditure on electronics and apparel was expected, respondents have also said they would cut back on services and dining at shopping centres. This is seen as a negative for Scentre Group ((SCG)) and Vicinity Centres ((VCX)) and a positive convenience-based centres such as Charter Hall Retail ((CQR)) and SCA Property ((SCP)).
Growth in food aggregators points to downside risks for Domino's Pizza ((DMP)) market share. The survey also highlighted an opportunity for Viva Energy ((VEA)), where there is potential to re-gain share in fuel via improved prices, but a greater challenge in non-fuel business for Caltex ((CTX)).
In online business, results of the survey were positive for incumbent retailers with local websites being the best positioned in the next 12 months. Furthermore, online penetration growth in electronics is growing more slowly than expected, which is a marginal positive for JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), UBS suggests.
Respondents were asked which online portal websites they use. While recognising the survey was narrow and did not capture important metrics such as engagement and time on site, UBS has confirmed the dominance of REA Group ((REA)), Seek ((SEK)) and Carsales.com ((CAR)) in their respective verticals.
While the survey showed REA Group held a national lead over Domain Holdings ((DHG)), its dominance stems from geographies outside NSW. Hence, if Domain can use the Nine Entertainment ((NEC)) network to grow share in other markets, the revenue opportunity could be substantial.
Australia's unprecedented housing boom was dominated by apartments and this segment is now leading the decline. Morgan Stanley observes this segment is also less materials-intensive.
While the declines in detached housing are more modest, the broker's analysis shows that there is still significant weakness ahead for building materials providers. The worst of the downturn is expected to hit in FY20, while forecasts indicate activity will not trough until late FY21.
Residential-exposed building materials stocks enjoyed a post-election bounce which the broker suspects came too early. An Underweight rating is reiterated for CSR ((CSR)), which has the greatest residential exposure.
The broker continues to favour those stocks with exposure to Australian infrastructure construction and/or offshore earnings such as James Hardie ((JHX)), Boral ((BLD)) and Reliance Worldwide ((RWC)).
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