Weekly Reports | Apr 23 2021
This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA
Weekly Broker Wrap: CBA and BNPL; online grocery eases; property fixates on home-office; auto, workplace, employment
-CBA enters BNPL to protect market share
-New vehicle sales up 22% in March
-Online marketplaces ripe for consolidation
-Employers with hybrid work strategies could have 20-25% remote employees
By Mark Story
CBA’s BNPL entry
Having taken a stake in the buy now pay later (BNPL) firm Klarna in 2019, Commonwealth Bank ((CBA)) is launching its own BNPL product to the bank’s consumers, which can be used anywhere Mastercard is accepted.
Morgan Stanley believes Commonwealth Bank’s decision to launch a BNPL offering was in part driven by desire to protect its market share with younger customers. The broker notes, CBA has around a 45% market share with 18-24 year olds, which is also a key market for the BNPL sector. Morgan Stanley also suspects by having its own BNPL offering, CBA can protect its customer spending data from being shared with other financial providers.
Then there’s CBA expectation that its BNPL product will appeal to SME merchants rather than larger merchants, which Morgan Stanley suspects could enhance its SME relationships and data. However, unlike Afterpay ((APT)), CBA is a pure payment service and the broker doesn’t think it will have individual marketing agreements with merchants.
Does CBA's BNPL product stack up financially? While CBA's merchant fee is well below Afterpay's, Morgan Stanley expects it to have lower credit and payment processing costs. The broker estimates CBA’s BNPL product will have a net transaction margin (NTM) of around 55bp, which is below Afterpay’s Australian NTM of around 225bp.
However, Morgan Stanley notes Afterpay is above CBA’s NTM on credit card transactors (those who don't pay any interest) due in part to BNPL customers receiving no loyalty fees. It is also due in part, adds the broker to this running on the new Mastercard BNPL interchange tier of around 88bp in Australia, which is above circa 50bp credit card interchange.
Online retail: Time to capitalise on consolidation opportunities
SimilarWeb online traffic data growth slowed in March to 23% year-on-year (March quarter up 29%), with grocery slowing the most, down around 13% year-on-year as panic buying is cycled. Jarden believes moderation reflects a return to stores, with ShopperTrak reporting a 54% week-for-week lift in traffic for week ending April 11th.
Having undertaken a deep dive into Australian marketplaces, the broker believes the key impediments in Australia remain range, price and value proposition, and notes the market is crowded and seems ripe for consolidation.
Jarden believes FY22 could finally see marketplaces in Australia (eBay, Amazon etc.) capitalise on the opportunity to consolidate, with listed investment strategies accelerating operational expenditure (opex) and capital expenditure (capex) on supply chain, online and data, plus increased focus on potential M&A.
Jarden expects the battle for a greater share of the Australian consumers' wallet to increase over the next 12 months. Due to an emerging 'winner takes all' strategy globally, the brokers believes there are clear signs of companies wanting to capitalise on accelerated structural changes post-covid, including online, data and brand trust.
Jarden believe Amazon's new 200,000sqm automated data centre in NSW will be the catalyst, likely coupled with existing entrants like Woolworths ((WOW)) and Wesfarmers ((WES)) expanding further in the endless aisle space.
Based on its estimates of pure-play marketplace capacity in Australia moving to $20b-plus in revenue over the next three years, Jarden expects to see a step-up in online penetration. The broker also expects brands to capitalise on higher trust, focusing on 'right to play' categories (i.e. like Bunnings' 'MarketLink'; Warehouse Group's 'The market') and investment in supply chain by retailers and landlords.
What’s also likely is consolidation of stores and increased focus on value (price, service, and personalisation). The broker believes the gap between winners and losers will increase resulting in margin pressure for some retailers.
Jarden believes companies should be re-rated for reassessing and accelerating investment in data supply chain and new channels/categories. Companies with largest spheres of consumer spend are best positioned, namely Coles ((COL)), Wesfarmers and Woolworths, plus Kogan.com ((KGN)).
While category-killers could potentially become attractive M&A targets, Jarden sees retailers with less sophisticated online, commoditised offers as more at risk, including JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). While supply chain focused REITs should benefit, like Goodman Group ((GMG)) and Charter Hall Group ((CHC)), the broker sees risk to retail-based landlords, like Vicinity Centres ((VCX)) and Scentre Group ((SCG)).
Jarden is Underweight Coles, JB Hi-Fi, and Harvey Norman, and Overweight Wesfarmers, Woolworths, Kogan, and Temple and Webster Group Limited ((TPW)).
Residential property: Home office a number one priority
Within National Australia Bank’s ((NAB)) recently released Residential Property Report, nine out of ten property experts believe having a study or designated work area is the now most important factor for home buyers, particularly for those in NSW and Victoria. Access to good local shopping, restaurants and other amenities was the next most important property consideration, especially for those in Victoria.
Based on the responses from 330 property professionals Australia wide, the bank’s report notes covid-related work flexibility has also precipitated a change in perceptions around buying in regional areas, with around 85% of property professionals identifying this as a key consideration for homebuyers (43% NSW to a low of 12% in WA).
This has been reflected in pricing data with some regional areas (notably popular coastal areas) outperforming the broader market.
Buying a house rather than an apartment has also become more important, (according to 63% of respondents), which the bank suspects reflects out-performance of detached house prices relative to apartments, plus changing lifestyle preferences. Covid has also seen a re-evaluation of the home and apartment sizes, plus land for homebuyers, with bigger increasingly viewed as better.
Despite a significant increase in people working remotely due to covid, just over one in two property experts still believed having good public transport was important for homebuyers: with 23% saying it was ‘much more importan't, and 28% saying it was ‘moderately more important’.
Auto parts: More Aussies doing road trips
Citi’s analysis of the March 2021 new vehicle sales data (up in March 2021 by 22%) and industry feedback suggests ARB Corp ((ARB)) is well placed to benefit from strong demand for SUVs, 4x4s and off-road accessories.
Citi’s proprietary ARB sales index increased by 24% in March 2021 (February 21: 12%), making it the fifth consecutive month of double-digit growth driven by strong growth in upper large SUVs (up 53%), large SUVs (up 28%) and 4x4s (up 24%).
The broker notes, 4×4 sales benefited from the strong demand for Toyota Hilux (up 45%), Mitshubishi Triton (up 41%) and Ford Ranger (up 26%). Relative to March 2019, the ARB sales index was up 6%.
Citi also expects elevated demand for car services prior to Easter 2021 to benefit Bapcor ((BAP)) and GUD Holdings ((GUD)). Bapcor’s CEO recently indicated in a public interview that elevated demand for car services has been driven by customers both servicing their vehicles prior to road trips and customising their new/existing vehicles.
Citi believes increased demand for used cars – with Moody’s Analytics Used Vehicle Price index peaking 40% higher in March 2021 – as positive for Bapcor and GUD. Both companies target cars that are five-plus years old, and older cars more likely to be serviced at independent workshops.
Despite stronger trading conditions over CY21, Citi thinks the market may under-appreciate ARB's longer-term growth potential, noting export sales should be supported by the company’s recent acquisition of Truckman in the UK, and that the company has reduced its dividend payout to invest in future growth.
Citi maintains a Buy rating on ARB and FY22 to FY23 earnings per share (EPS) reduces by -1%, each accounting for the increase in shares following the underwriting of interim dividend. The target price increases to $45.95 from $45.15.
Given that Bapcor continues to have a number of longer-term growth strategies such as international expansion, procurement efficiencies and private label, Citi opens a positive Catalyst Watch on the company. The broker believes Bapcor is the top pick in the small-cap auto sector, and maintains a Buy rating (target price $9.35).
While covid-induced consumer mobility changes and acquisitions are likely to mask key challenges, Citi also maintains a Buy rating and target price of $14.90 on GUD Holdings.
Hybrid work environments: Three key beneficiaries
While over 60% of CIOs haven’t yet figured out post-covid return-to-work layouts, Morgan Stanley's US AlphaWise IT survey suggests there are significant tails winds in store for those companies that are accelerating multi-year IT investments supporting hybrid work environments.
Key takeaways from Morgan Stanley's US Insight note on a new workplace suggest employers adopting hybrid work strategy could have between 20-25% office employees working from home (pre-covid around 5%). When asked about tech investments to "future proof" offices, 56% of CIOs favoured more video conferencing rooms for collaboration and increased investment in wireless access and client devices, while 70% expected less printing, (by 5% average).
While this is a US survey, Morgan Stanley believes the insights apply globally, and favours three ASX-listed stocks Audinate Group ((AD8)), Nitro Software ((NTO)), and Bigtincan Holdings ((BTH)) for that global exposure.
Audinate delivered record second quarter 2021 revenues on the back of corporate and higher education, and in Morgan Stanley’s view the company is a clear beneficiary of a multi-year corporate conferencing investment cycle.
While Morgan Stanley expects Audinate’s medium-term growth trajectory to continue to be supported by technology upgrades – to enable whatever a new normal looks like – the broker sees some opportunity cost, as Dante still lacks widespread video adoption and product in market.
Morgan Stanley is Overweight Audinate and has a price target of $10.00 (25% upside).
Meantime, Morgan Stanley expects the digitisation of paper processes to persist for Nitro Software. The broker sees Nitro’s proposition as supported by remote working, less office space, productivity, and sustainability efforts.
Morgan Stanley’s annual recurring revenue (ARR) forecasts of a 40% (CY20-23) compound annual growth rate (CAGR) for Nitro Software reflect the broker’s conviction that PDF productivity (US$5.5bn) and eSigning (US$28bn) are very large total addressable markets (TAMs) and still early in the adoption curve.
The broker also notes Nitro Software operates in a rational competitive environment versus market leaders, with limited sensitivity to challenger offerings. Morgan Stanley is also Overweight Nitro Software and has a price target of $3.70 (30% upside).
Morgan Stanley believes a focus on better enabling remote work should at least be incrementally positive for Bigtincan Holdings, especially as high-cost sales teams are changing the way they work. With investors having pushed back on how wide Bigtincan competitive moat is – and hence implications for longer-term growth – the broker’s channel checks indicate that the company is a leader in a fast-growing TAM with access to capital to scale.
In short, Morgan Stanley thinks Bigtincan can sustain elevated growth rates as sales teams become more distributed, and is Overweight, with $1.50 price target (44% upside).
Employment: Part-time outpaces full-time
Beating all expectations, Westpac’s ((WBC)) latest Labour Force survey reveals employment level in March was back above where it was pre-covid. Total employment rose 70,700 in March, firmly above Westpac’s estimate of 32,000. This strong jobs gain was enough to push the unemployment rate down to 5.6%, despite participation rising 0.2ppts to a record 66.3%, driving a 34,600 lift in the labour force.
Westpac data reveals job gains were concentrated exclusively in part-time employment, which advanced 91,500 and more than offset a 20,800 fall in full-time jobs. This drove part-time employment up almost 77,000 (up 1.9% for year) compared to a year ago, while full time is 2,500 (no change) below March 2020.
Despite a record high in participation in March, female unemployment is lower than male unemployment. Westpac notes, the outperformance in female employment (both full-time and part-time) is not explained by growth in industries that have a higher share of female employment, but rather a broader underperformance in male employment (in particular full-time employment).
Some of the fall in full-time, and rise in part-time, would be associated with employees moving between full-time and part-time classification as their hours worked changed. However, Westpac notes this does not change the overall picture that the recovery in part-time employment continues to outpace the recovery in full-time employment.
The employment recovery in NSW and Victoria has lagged the recovery seen across the rest of the nation, which suggests to Westpac there may be more scope for catch-up across these two states.
While better than expected employment data doesn’t mean that there will be no job losses due to the ending of JobKeeper, Westpac believes the strong recovery in hours worked suggests the labour market is in a much more robust position than the bank thought even just a month ago. However, Westpac suspects there will be pockets of stress in some sectors.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED
For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED
For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED
For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED
For more info SHARE ANALYSIS: BTH - BIGTINCAN HOLDINGS LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP
For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED
For more info SHARE ANALYSIS: GMG - GOODMAN GROUP
For more info SHARE ANALYSIS: GUD - G.U.D. HOLDINGS LIMITED
For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: KGN - KOGAN.COM LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: NTO - NITRO SOFTWARE LIMITED
For more info SHARE ANALYSIS: SCG - SCENTRE GROUP
For more info SHARE ANALYSIS: TPW - TEMPLE & WEBSTER GROUP LIMITED
For more info SHARE ANALYSIS: VCX - VICINITY CENTRES
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED