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The Wrap: BNPL; Beef, Aged Care; Tighter Lending; Lucky Australia

Weekly Reports | Mar 05 2021

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Weekly Broker Wrap: BNPL rankings; investor interest in beef; Aged Care RC; APRA to tighten lending; happy Aussies

-Greater clarity into the BNPL sector
-Sustainability drives beef innovation
-Disjointed blue-print for aged care reform
-Macroprudential measures ahead
-Aussies love the great outdoors

By Mark Story

Tracking customer momentum: BNPL

Within a new dataset, which will be updated monthly, Macquarie tracks the number and average score of ratings across Google Play and Apple App store to gain further colour on Buy Now, Pay Later (BNPL) customer usage and sentiment.

Given that customer growth and market share are a key focus metric within the BNPL sector, Macquarie will continue to track these statistics as a proxy for any changes in market share, growth and sentiment across the BNPL landscape.

Macquarie’s snapshot tracks the number of ratings on Google Play store and Apple’s app store over Australia and US. The broker uses these snapshots as proxies for BNPL market share and customer growth on BNPL apps across each region.

Afterpay ((APT)) currently has a leading position in both Australian and US markets, with the highest average ranking amongst apps of 4.9 stars (out of 5) consistently across Australia, the US and the UK (Clearpay).

Macquarie notes that comment-weighted average stars of BNPL apps saw a month-on-month decline in both Australia and US versus the previous month, with the largest declines coming through from Sezzle ((SZL)) in the US and Humm ((HUM)) in Australia.

Based on Macquarie data, Afterpay is gaining share in US, but losing in Australia. Macquarie tracking concludes that while seasonality may impact month-by-month change and limits interpretability, a 5% uplift in the US implies around 81% annualised growth in BNPL customers in the US and a 3% lift implies circa 37% in Australia.

For Afterpay specifically, its run-rate implies annualised growth of 92% in US and around 24% in Australia.

Overall, growth in BNPL customer proxy in the US is up 5.1% month-on-month versus Australia which was up 2.7%. The highest growth in the US was experienced by Klarna up 10.6%, which is currently ranked 3rd by number of ratings at around 16% versus Affirm (35%) and Afterpay (39%).

Macquarie has an Outperform rating on Humm, a Neutral rating on Afterpay and an Underperform rating on Zip Co ((Z1P)).

Beef industry: Sustainability awareness drives innovation 

Within its recently-released Beef Quarterly Q1 2021 report, titled New Drivers in Cattle Innovation, Rabobank highlights how an injection of new investor interest in the livestock sector, together with increasing awareness for the need to improve sustainability, is driving innovation in the global beef industry.

The report reveals that increasing investment is flowing into animal protein supply chains from entrepreneurs, venture capital, and established agri companies. Unlike ten years ago, when most investments were made in cropping, the report notes signs of investor interest shifting towards animal protein and an increased focus on opportunities for innovation in larger livestock supply chains. 

The report also highlights social and environmental factors as the other main catalyst driving increased innovation within beef supply chains. 

Several innovations identified within the report that are expected to have the largest impact on the industry include, maximising the potential of genetics, genomics and breeding; improved nutrition and feed additives; improved monitoring and data analysis and better landscape management. 

For Australia, the Q1 Beef Quarterly says, restocking and herd-rebuilding activities continue to dominate the market, while producer demand is expected to remain strong through the first quarter of the year before easing into quarter two. 

Producers' reluctance to sell cattle, along with limited cattle supply, had seen slaughter levels plummet, the report said.  For quarter four 2020, Australia's cattle slaughter was down -27 per cent year on year at 1.56 million. 

While carcass weights had lifted, due to improved seasonal conditions and a larger proportion of feed cattle in the mix, this had not been enough to offset the reduced numbers, with Q4 2020 production down -22 per cent on the Q4 2019 to 477,000 metric tons.

From a global perspective, the report says trade agreements and recovery from covid shape as key watch factors for global beef industry participants over coming months. 

Aged care final report: Upside risk to its current estimates and consensus.

The Final report of the Aged Care Royal Commission, tabled 1 March 2021, includes148 recommendations – covering system redesign, funding, safety and quality – designed to deliver high quality care, highlighting key recommendations relevant in the near-term for listed providers. In its initial response, the government announced a new $452m funding package (including a $190m one-off residential care payment) and its intention to outline transformation plans at the May-21 Budget.

Overall, UBS had expected to see a more definitive reform agenda (including quantum and funding methodology) and is surprised at the level of division between Commissioners Pagone and Briggs, with around 30% of recommendations involving disagreement.

The job of government now, adds UBS, is to synthesise this disjointed blueprint and deliver a comprehensive, long term reform package in around two months. UBS has left forecasts unchanged ahead of the government's implementation plan in May-21, and notes that if under $30bn of refundable accommodation deposits (RADs) are phased out, the need for recapitalisations across the sector would be widespread.

On commenting on the final report, Jarden notes that funding recommendations are above its base case expectations, and if implemented, would see upside risk to its current estimates and consensus. Jarden argues that recommendations 110 and 112, if accepted, would deliver much needed sustainable funding to operators which it believes the government will likely address at the May 2021 budget.

Firstly, the broker claims that Recommendation 110 looks to negate negative operating “jaws” for providing care. That’s because indexation will be calculated off a weighted average of minimum wage increases for aged care employees until such time as the Pricing Authority has commenced independent determination of prices for residential care. Jarden's base case was indexation at 2%, however, if linked to minimum increases it is likely to be around 3%.

If Recommendation 112 was accepted and implemented on 1 July 2021, Jarden estimates implied incremental funding to Estia Health ((EHE)) of $21.6m, Japara Healthcare ((JHC)) of $14.5m and Regis Healthcare ((REG)) of $23.6m under this scenario.

While Jarden is making no earnings adjustments to its forecasts, given the uncertainty of the recommendations being implemented by federal government, it notes that given the two funding recommendations aim to offset rising costs and create a sustainable environment for providers, the broker believes there is a high probability the recommendations will be accepted.

In summary, Jarden’s first take on the final report's recommendations and the government's temporary responses is incrementally positive for the funding environment for providers and the viability of earnings. The broker has Buy ratings on Estia Health and Japara Healthcare with 12-month target prices of $3.20 and $1.33, respectively. It has an Overweight rating on Regis Healthcare with a 12- month target price of $2.83.

Macro prudential measures: Tightening in store, but not just yet

Given the upside risk to its forecast for a rise of close to 10% in Australian house prices this year, ANZ Bank expects macroprudential restrictions later this year, with the regulator’s focus targeted at high debt-to income loans.

What’s sparked debate over the potential for moves by Australian regulators, explains ANZ was the re-introduction of macroprudential policies in New Zealand. Due to concern about its overheating housing market, last month, the Reserve Bank of New Zealand announced the re-instatement of pre-pandemic loan to value ratio (LVR) restrictions, with a further tightening set to occur in May.

In response to its concerns about the risk a sharp correction in the housing market poses for financial stability, the RBNZ announced that from 1 March 2021, LVR restrictions for owner-occupiers will be reinstated to a maximum of 20% of new lending at LVRs above 80%. LVR restrictions for investors will be reinstated to a maximum of 5% of new lending at LVRs above 70%.

From 1 May LVR restrictions for owner-occupiers will remain at a maximum of 20% of new lending at LVRs above 80%, while LVR restrictions for investors will be further raised to a maximum of 5% of new lending at LVRs above 60%.

While there is considerable momentum emerging in the local housing market, ANZ notes that the situation in Australia is quite different, with the rate of growth in house prices, investor lending and overall housing credit currently much lower in Australia than New Zealand.

But given that overall housing credit in New Zealand grew 6.6% compared with 3.5% in Australia in the year to January, ANZ concludes that macroprudential measures seem a way off in Australia. Adding further substance to that conclusion, the bank notes that New Zealand’s credit growth has been outpacing Australia’s since late 2015.

By its own admission, as a member of the Council of Financial Regulators, the RBA has consistently explained that it does not target house prices, but rather focusses on lending standards.

While house prices and credit growth in Australia are expected to accelerate over coming months, ANZ doesn’t expect the RBA to be too surprised by this. The RBA’s own researchers concluded that a permanent -100bp reduction in the cash rate would lift real housing prices by 30% over about three years.

With the RBA planning to keep the cash rate low until at least 2024, the message of low rates for a long time is expected to provide strong and sustained support to house prices and lending. Alongside this, ANZ expects to see some relaxation of lending standards, with next instalment of APRA data, due in early March, likely to show further easing.

ANZ expects that the while debt-to-income ratios have remained stable over the past year or so, high LVRs have been creeping up. In the September quarter, loans with LVRs above 90% accounted for around 10.6% of the total, up from 9.5% a year earlier. Similarly, the proportion of loans with LVRs between 80% and 90% has ticked up slightly.

But over time, it seems inevitable from ANZ’s perspective, especially given an extended period of very low rates, that hard macroprudential restrictions will be announced. APRA has previously been reluctant to introduce LVR limits, so the bank suspects the focus of this round of macroprudential controls could be debt-to-income ratios, and/or targeted investor lending measures if lending for housing investment continues to accelerate at its recent pace.

With the risks growing that the housing market will be showing signs of overheating by the second half of the year, it is then that the ANZ expects the regulators to step in, initially with a soft touch, but later with a firmer hand.

NAB Special report: Australia rated highly as a great place to live

Despite challenges faced over the past year, the vast majority (94%) of the 2000 people asked in an NAB Special Report to explore life in the Lucky Country said that Australia is a great place to live. For most Australians, (72%), what makes Australia a great place to live is access to open spaces, beaches, and parks.

Australia’s relative success in containing outbreaks of covid, plus safety and security came in second, with substantially more people in agreement compare with last year (68% versus 58% in 2020).

Australia’s level of taxes (10%), lack of congestion and travel time to get to work (13%), level of migrant intake or immigration (15%), and access to affordable and quality child care (19%) were identified as positive drivers of liveability by the least number of Australians.

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