Weekly Reports | Apr 09 2021
This story features AUCKLAND INTERNATIONAL AIRPORT LIMITED, and other companies. For more info SHARE ANALYSIS: AIA
Weekly Broker Wrap: Housing rebound; travel bubble; listed property; Woolworths gains, ag investments
-National house prices up 2.8% in March
-Auction clearance rates hit record 83%
-Melbourne CBD assets under greatest pressure
-Woolworths sustains market share gains over Coles
By Mark Story
Housing recovery: A tailwind to economic growth
Having delivered the strongest monthly price growth since 1988, national house prices were up 2.8% in March from February, which underscores broad-based strength across loan demand, construction and turnover; and all are expected to provide a tailwind to broader economic recovery.
While detached house prices continue to lead the strength (3.1% for the month, and 6.0% for the year), price growth from apartments this month was also solid (1.9% for the month, and 1.1% for the year). By state, strength was led by Sydney (up 3.7% for the month), with Melbourne and Brisbane prices increasing 2.4% for the month and Perth 1.8%.
Auction clearance rates have also climbed to record levels (83% nationally last week), suggesting a very strong demand environment that should be supportive to prices over coming months.
Underlying strength was also evident across all other parts of the housing market, with building approvals up 21.6% in March from February, bouncing back from a homebuilder induced lull in January to be up 20.1% for the year. While detached approvals were at a record rate of 169,000 (annually), apartments lagged, down -26% for the year.
While loan approvals paused in February (down -0.4% for the month), they still remained strong versus a year ago (up 49% for the year). What this implies, adds Morgan Stanley, is upside for credit growth from here, with the share of investor loans increasing from its current low level.
The boom in price growth is also seeing housing sales/turnover rise, with sales over the last 12 months up 13% (despite the impact of covid) and Mar-21 sales up 43% year-on-year. While listings are also starting to lift, Jarden notes that demand is outstripping supply and stock on market (total listings) has fallen to around the lowest levels in 10 years.
While the buoyant housing market should see listings rise further, Jarden’s channel checks suggest the rapid pace of price growth has become a key hurdle for vendors who generally need to sell before buying, and are increasingly concerned about being locked out of the market.
Structural shifts in demand
While the end of HomeBuilder is likely to see a modest slump in dwelling approvals, Jarden expects structural shifts in demand to drive a more sustainable rise in detached housing. Historically, detached housing has had a 'speed limit' of around 120,000 per year due to the availability of land and capacity constraints. However, Jarden expects structural changes in demand to see detached housing stabilise around 130,000 by early 2022.
Key drivers Jarden expects to underscore these structural changes include a shift in consumer preferences for detached homes over units, and migration from Sydney and Melbourne to other capital cities and regional areas.
Supporting these shifts, adds Jarden, are improved affordability, and access to land outside Sydney and Melbourne. In contrast, Jarden only sees a moderate recovery for 'other' dwellings due to lower migration, lack of foreign students reducing demand, limited investor demand, no foreign buyers in the near term, and lingering concerns around building quality.
The broker forecasts dwelling starts lifting to 190,000 in 2021, after 178,000 in 2020, with spending on renovations also set to rise given surging alterations and additions (A&A) loans and approvals.
While the current recovery is now the fastest on record, with prices up 8.2% since the September 2020 trough, what differentiates this recovery from prior recoveries, notes Jarden, is price growth which isn't just playing out in the two largest cities. By comparison, this time around the strongest growth is in regional areas.
The wealth effect
Jarden sees the current housing boom as a key driver of the broader economic recovery over 2021, with rising house prices (and wealth) supporting consumer spending and dwelling investment and creating a positive backdrop for housing-exposed equities.
Morgan Stanley expects the ‘wealth effect’ resulting from stronger house prices to support spending and make households more comfortable in drawing down savings rates. The broker also expects the ‘wealth effect’ to support construction activity and employment, particularly given the focus of stimulus on new houses – which currently comprise 28% of housing loans, easily the highest share on record.
Strong housing data has increased discussion of a policy response to slow the strength, but Morgan Stanley believes this remains some way off. The broker doesn’t expect an interest rate response to housing strength, and as in the previous cycle expects macro-prudential measures to be the preferred tools to be used.
While Jarden continues to expect national prices to rise 20%-plus over the next 1-3 years, the broker echoes Morgan Stanley’s reservation about macroprudential tightening happening any time soon.
Aviation: Trans-Tasman bubble a positive catalyst
Long-awaited overseas travel is set to start soon with the New Zealand government announcing the start of quarantine-free Trans-Tasman travel – from Australia in to New Zealand – from April 19. [At the time of writing, the new case in NZ had not been revealed, and any change to the bubble plan not yet known – Ed]
A pre-flight covid test or proof of vaccination will not be required to enter NZ, and travelers from Australia will be traveling through a “green-zone” at the airport to avoid interaction with any international travelers from other destinations.
Citi regards the opening up of borders between Australia and NZ as a positive catalyst for the revenue recovery for airport names under coverage, including Auckland International Airport ((AIA)) and Sydney Airport ((SYD)). However, the broker expects the share price impact to be limited given a Trans-Tasman bubble has been talked about in the press since mid to late 2020.
Despite the announcement of quarantine-free travel, uncertainties remain with the government flagging potential for disruptions in case of community transmission of cases. While major airlines flying between Australia and NZ (Air New Zealand and Qantas) have announced plans to resume services, some other airlines (like Virgin) have flagged that they may not put in capacity on these routes immediately.
From April 19, dozens of additional Qantas ((QAN)) services will resume from Australia’s major capitals to Auckland, Christchurch, Wellington and Queenstown. New routes from Gold Coast, Sunshine Coast, Adelaide and Hobart are also to be added.
Qantas and Jetstar expect to initially fly 122 services on 15 routes, carrying around 52,000 passengers. On its first half earnings call, Qantas had stated that it targets a significant increase in NZ flights starting July, and that the company has maintained aircraft readiness and base level of technical/cabin crew which should enable a low cost restart.
By comparison, Air New Zealand ((AIZ)) will re-commence travel to nine destinations in Australia, with initial capacity at approximately 70% of pre-covid levels. Air NZ had previously guided to a monthly cash burn rate of -NZ$45-55m in the second half. However, the company believes its cash burn will improve and has suspended its cash burn guidance.
Given the strong pent-up demand on the (Trans-Tasman) route, Goldman Sachs expects ticket prices to be higher than usual due to a limited initial supply. Pre-covid NZ accounted for around 13% of international passengers for Qantas, and with additional (Trans-Tasman) routes and capacity, presenting an upside to pre-covid levels, Goldman reiterates a Buy rating on Qantas.
The broke believes Qantas represents a strong recovery investment, if the Australian covid vaccination program has the effect of reducing community transmission of the virus and limits the need for domestic border closures.
By comparison, Goldman has a Sell rating on Air NZ. Despite the solid recovery in domestic travel, the broker thinks the company is not structured to deliver profitability until a material recovery in international travel is achieved. Trans-Tasman travel represented around 20% of the Air NZ’s passenger revenue pre-covid. While the travel bubble would reduce the Kiwi airline’s losses, the broker expects the carrier to remain loss-making even under a bubble scenario.
Jarden believes the travel bubble announcement is an important milestone in the normalisation of Air NZ’s operating environment, with positive news flow likely to support market expectations that the Kiwi airline completes its capital raise by 31 June 2021 (in-line with guidance).
The broker believes the completion of this capital raise is the minimum necessary first step in building confidence in the recovery of Air NZ’s investment case. While the company has suspended its cash burn guidance, Jarden expects Air NZ will need around NZ$1.2bn of new equity to recapitalise its balance sheet.
The broker’s published forecasts assumed that the bubble would open up at the start of July, as such this news likely provides a modest incremental uplift to Air NZ’s FY21 earnings. That said, Jarden expects the airline to face stiff competition from Qantas on Trans-Tasman routes and continues to expect the company to be heavily loss-making in that year.
Jarden’s current forecast is for Air NZ to deliver a loss of -NZ$489m and to remain loss-making until long haul markets reopen.
Assuming an even split across aeronautical and non-aeronautical revenue, Citi estimates that Trans-Tasman travel contributed around 40% of pre-covid revenue for Auckland International Airport and around 10% of revenue for Sydney Airport. As a result, the broker expects the recently announced travel bubble to be more meaningful for Auckland International than its Sydney counterpart.
Citi also notes that around 55% of travelers between Australia and NZ went through Auckland in calendar year 2019, versus 40% through Sydney. While pent-up demand for visiting friends and family reasons is likely to be a meaningful driver of near term passenger numbers, Citi believes the overall impact on the airports is dependent on the quantum of recovery in travel.
Citi suspects uncertainties around future covid outbreaks, capacity and ticket costs may impact the willingness to travel. Over the near term the broker believes this is positive for Auckland International Airport, given it may ease potential covenant pressure which was flagged in February.
Despite the announced bubble, Citi remains Neutral rated on both airports, and believe uncertainty remains on the path of the recovery and on longer-term impacts to travel. By comparison, Goldman Sachs has Buy-rating on Sydney Airport and expects the company to be a major beneficiary of the Australian domestic vaccine strategy, if it facilitates relaxation of border restrictions.
Like Citi, Goldman Sachs is Neutral-rated on Auckland International Airport and believes the airport’s profitability remains tied to a recovery in international passenger movements, currently -97% below pre-covid levels. The broker also notes that the airport remains tied to the NZ government’s conservative border closure policies. The company has limited cash burn (-NZ$10m/mth) and solid available liquidity (NZ$1.6bn).
Meantime, Jarden estimates a quarantine-free bubble could lure between 4.4m and 5.5m passengers, or 10% to 37% of pre-covid. This size would require a 6-25% lift in seat capacity (a limited issue, given spare long-haul capacity) after allowing for improved load factors, and the broker has already assumed the low end of the bubble in its base case (starting July).
This is the key driver of Jarden lifting Auckland International Airport’s monthly earnings (EBITDA) forecast from around NZ$14m in FY21 to circa NZ$30m in FY22 and removing its need for further equity support. The broker maintains a Neutral rating and target price of NZ$7.10, based on high quality leverage to international travel resuming, but tempered by limited spot valuation upside.
Listed property: Pressure on CBD assets continues
Having recently toured office and retail assets in Sydney and Melbourne, Macquarie noted the emergence of two distinctly different narratives. While retail is being characterised by a ‘shop local’ theme and continually improving footfall, vacancies remain a key headwind for office with enquiries and incentives both on the increase.
After touring two CBD assets (QVB, Melbourne Central), two prime regional assets (Westfield Bondi Junction & Westfield Doncaster) and two suburban malls (Westfield Eastgardens & The Glen), Macquarie concluded CBD assets remain under the most pressure, particularly in Melbourne.
For example, Melbourne Central (ex short term pop-ups) is around 8% vacant (by number of tenancies) and footfall is around 50% below pre-covid levels. But conditions are more positive for the suburban assets where footfall was said to be up to 90-100% of pre-covid levels.
Off a low base, Macquarie is witnessing some momentum on leasing outcomes, and is seeing some evidence of a stabilisation and even improvement in leasing spreads from December 2020 levels (which averaged around 13%). Occupancy is starting to increase at Melbourne Central, QVB, Eastgardens and Doncaster – albeit vacancy remains significantly above historical averages (between 2-8% by number of tenants ex short-term leasing).
While landlords are cautious over the roll-off in stimulus – with Vicinity Centres ((VCX)) believing occupancy of 98% could fall to 95% – Macquarie believes the above anecdotes provided some cautious optimism that it will not cause a significant vacancy increase.
Fallout for retail
The rebound in footfall/sales in large suburban malls may be stronger than the broker’s expectations and could be a positive for operational metrics in the upcoming quarterly update season. For example, Macquarie notes that Scentre Group ((SCG)) is likely in a better position versus large cap peers, given more limited CBD exposure.
Nevertheless, Macquarie also notes cashflows remain under pressure given challenging leasing conditions – including the elevated levels of vacancy, extended downtime and over-renting – and defensive capital expenditure becoming more prevalent (e.g. Eastgardens). Macquarie suspects there is also potential for a redistribution of sales away from consumer durables towards entertainment/travel.
The broker maintains an Underperform rating on Scentre Group and prefers local shopping centres/large format retail, and has Outperforms on Homeco Daily Needs ((HDN)), Sca Property Group ((SCP)), Charter Hall Retail ((CQR)), and Aventus Group ((AVN)).
Office enquiries and incentives ticking up
Having toured two Sydney office assets (Australia Square and 8 Chifley) and one Melbourne office asset (Olderfleet), Macquarie confirmed that consistent with industry feedback, both are experiencing an uptick in enquiry from SMEs. The broker suspects the uptick could be driven by a delay in decision making over 2020.
However, overall Macquarie observed that leasing conditions remain difficult. As a case in point, Melbourne incentives were said to be around 30% for a typical renewal/new deal and circa 35% for pre-commitment markets. In Sydney, Mirvac Group ((MGR)) noted a market vacancy of 12% could peak at around 13-14%, with market incentives of around 30% rising to approximately 35%.
Macquarie also witnessed an increase in the prevalence of expansion and contraction rights in current leasing deals, which provides tenants with greater flexibility given uncertainty around space requirements.
The feedback on rising incentives and vacancy was in line with Macquarie’s prior expectations, with the marginal negative being contraction rights becoming more prevalent. The broker suspects there could be upside risk to demand given the comments surrounding an increase in enquiry.
Macquarie’s preferences are for Dexus Priorty ((DXS)) and Mirvac with Outperform ratings on both stocks due to balance sheet deployment and apartment development upside respectively.
Supermarkets: Woolworths margin gains
With rates of growth in food expenditure normalising towards pre-covid levels, Credit Suisse expects to see a permanent reallocation of household income towards food retail, due in part to a permanent consumer behavioural change. The broker models trend growth in food retail on the basis of 3.5% per annum growth from a 2019 base, plus a 2.5% step-change in the trend.
As a result, Credit Suisse expects food retail to account for 12.0% of household income in the March 2021 quarter, compared with 11.6% of household income in the March 2019 quarter.
JP Morgan expects Woolworths((WOW)) to sustain market share gains at the expense of Coles ((COL)) due to the tailwinds of local, which could last longer than expected, plus online, and a structural growth opportunity.
Due to sustainable competitive advantages and market share gains in Food, plus other key drivers, including leveraging the Food and Everyday Needs ecosystem, and a Big W turnaround, the broker is moving to an Overweight rating and a price target of $45 on Woolworths.
Also adding to JPMorgans re-rating of Woolworths is the Endeavour Group separation in June 2021, most likely via a demerger. The broker expects this to increase shareholder demand from ESG-focused investors and the potential for capital management (plus $2bn franking credits in FY20).
While the duration of the local tailwind is uncertain, JPMorgan believes that if it continues to last longer and is more ‘sticky’ than originally envisaged, then movements in online are shaping to be a structural change.
Coles could accelerate online investment at the expense of dividends, however JPMorgan suspects this is unlikely, making ongoing market share losses more likely, and maintains its Neutral rating on the stock.
While the Ocado launch in FY23 is key for Coles, the broker notes that it needs to invest in remedial action now to improve its offer. Meantime, Woolworths is gaining share during the ‘land-grab' phase of online in food retail.
Due to concerns about market share losses in Food, JPMorgan maintains a Neutral rating on Coles and has reduced its price target to $16.50.
JPMorgan’s earnings per share (EPS) revisions for Coles and Woolworths are 0.3%, and 0.9%; and 0.6%, and -1.2% for FY21/FY22 respectively, due to modest adjustments in the second half. The broker’s adjustments recognise that Coles like-for-like sales were too pessimistic previously, and for FY22 onwards across like-for-like sales growth (increased Woolworths, reduced Coles), increased Woolworths Food earnings (EBIT) margins and Coles capital expenditure.
For Coles supermarkets, Credit Suisse is forecasting like-for-like sales of -4.5% year-on-year in the March quarter. For Woolworths supermarkets the broker is forecasting like-for-like sales up 1.5% year-on-year in the March quarter. From a 2019 base, the broker forecast Coles supermarkets up 8% and Woolworths supermarkets up 12%.
Agriculture: Feed additives underwhelming impact
While an expanding number of novel feed additive programs and products could generate significant value for companies like GrainCorp ((GNC)), Nufarm ((NUF)) and Ridley Corporation ((RIC)), it’s still early days for commercialisation. As a result, Wilsons has heavily risk-adjusted its valuation assessments of initiatives to address sustainability concerns across global agriculture production.
What’s driving the market for need feed additives are growing concerns regarding food security, sustainability and climate change. Growing support from major feed producers and food retailers, who are increasingly willing to accept higher prices for sustainable agricultural products, is further supporting their emerging commercial viability.
But while Wilsons has identified ten programs aimed at delivering product efficiency, the broker notes that the key challenge is commercialisation, both in terms of producing commercial volumes at an appropriate cost of production, and convincing customers to make large changes to their feed diets and processes.
While the traction of some programs appears limited, key developments highlighted by Wilsons include Veramaris (not listed), which expects its initial production to cover the equivalent of around 9% of total farmed aquaculture requirements.
Then there’s AlgaPrime, for which Corbion (Dutch-listed) recently reported a change in pricing to a level comparable with fish oil, achieved through a reduction in production costs, which would substantially improve its competitiveness against plant-based sources of omega-3 (eg. canola).
Looking more closely at the programs aligned to Wilsons' research coverage, the broker highlights the following opportunities.
Firstly, Wilsons continues to value Nufarm’s omega-3 franchise at $0.44 per share ($2.19 p/share unrisked) versus the broker’s estimate of book value at around $0.24 p/share. Given that the challenges associated with covid may impact the achievement of short-term targets, Wilsons suspects Nufarm may be forced to alter its production ramp-up plans.
Secondly, given its early stage of commercialisation and modest book value (ie. invested around $3m for a 20% shareholding), there’s nil value from FutureFeed in the GrainCorp target price. Wilsons believes the target for first commercial sales in the fourth quarter of 2021 seems optimistic, especially given there’s currently no commercial-scale aquaculture for Asparagopsis.
Thirdly, Wilsons continues to value Ridley’s Novacq franchise at $0.08 per share, broadly consistent with book value. Wilsons believes the introduction of mechanical and solar drying processes is helping Ridley to scale its production of Novacq.
But the broker notes that lower cost of production will likely be needed to engage more effectively with international customers.
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