Weekly Reports | Jun 25 2021
This story features ABACUS PROPERTY GROUP, and other companies. For more info SHARE ANALYSIS: ABP
Weekly Broker Wrap: storage; retail; bank fees; debt & expenditure
-Jarden initiates on storage A-REITs envisaging a strategic opportunity
-Australian retailers set for a bumper reporting season
-Upside potential for major bank fee income heading into FY22
-Higher consumer expenditure, funded by higher debt, a sign of optimism
By Eva Brocklehurst
Jarden has initiated coverage on two storage A-REITs based on assessment of the strategic opportunity relative to valuation. The broker has an Overweight rating on Abacus Group ((ABP)) and prefers it to National Storage ((NSR)) with a Neutral rating because of a concentrated storage portfolio and turnaround potential after 3-4 years of restructuring.
This should allow more predictable growth in returns. Still, the broker considers National Storage well-positioned to benefit from the strength in storage demand. National Storage is the only pure listed storage operator in Australia. While Jarden likes the steady 4-4.5% growth in underlying earnings combined with a 4% dividend yield, better value is envisaged elsewhere in the sector.
The broker acknowledges the potential upside risk to National Storage from heightened corporate activity, noting there have been three competing takeover bids in early 2020. For Abacus Property the commercial investment platform does have its challenges but the broker believes the focus on partnerships and proactive asset management provide an attractive risk/reward.
The reason storage has attracted the broker lies with the fact it offers demand fundamentals that benefit from a booming housing market, growth in online retailing and urbanisation. Moreover, listed operators have strong brands, scale and operations. Both companies should be able to boost growth through acquisitions in what is a fragmented industry.
CLSA notes Australian retailers have had an excellent 12 months and have made, in some cases, more profit in the first half of FY21 than they did in all of 2020. The broker sampled 33 companies and notes median sales growth in FY21 in the year to date was 21%.
The broker expects the cash will flow in the upcoming reporting season and retailers will be more willing than ever to return this to shareholders in the form of special dividends and other initiatives. Across 13 retailers in the broker's coverage, FY21 is expected to deliver around $6bn in total dividends, equivalent to a 3.6% fully-franked dividend yield.
In reaction to revised earnings, dividend payout-out assumptions and/or price action the broker reiterates a Buy rating for Adairs ((ADH)) while downgrading Super Retail ((SUL)) to Outperform from Buy. Kathmandu ((KMD)) is downgraded to Sell from Underperform.
Morgan Stanley acknowledges a rebound in activity could produce upside to its forecasts for major bank fees in FY22 but this is unlikely to have a material impact on earnings estimates.
The Reserve Bank of Australia recently revealed 2020 data on Australian bank fees, noting a fall of -6.5% in 2020. Business loans were the largest category of fees and were flat. Fees for merchant services, around 25% of the total, fell by -9% and credit cards/personal loans by -14%.
Morgan Stanley finds it difficult to reconcile major bank disclosures with the RBA data as the latter includes all banks and only Australian fees, yet the decline in major bank fee income, which the broker calculates at around -7.5% in FY20, is broadly consistent with the RBA numbers. The broker calculates the largest falls were at ANZ Bank ((ANZ)) and Westpac ((WBC)).
The broker forecasts major bank fee and commission income to be down -1% in FY21 and to rise by around 2.5% and FY22 and acknowledges the economic recovery and rebound in activity could mean estimates prove conservative, particularly at ANZ Bank.
Morgan Stanley also emphasises that as the banks have simplified their strategies and become less diverse, mortgage growth and margins have become even more important drivers of revenue growth.
In conducting its eighth survey, from May 12 to June 2, UBS notes a decline in savings intentions along with an upbeat household financial outlook. This has driven spending intentions to the highest level in the survey history.
Higher expenditure has been funded by higher debt, a sign of increasing risk appetite. Yet, unlike prior trends, the rise in spending intentions was driven by low-income earners preferring services over goods
in contrast, high income earners have moderated expenditure as well as property purchasing intentions. The survey also indicated that less than 15% of JobKeeper recipients were unemployed after the end of the program.
Low and middle income earners expect higher incomes in the next 12 months and high income earner expectations remain elevated. The broker concludes the labour market will tighten rapidly, expecting unemployment to fall to 4.5% by the end of 2021 and wages inflation lift to 2.7% by the end of 2022.
This dynamic is likely to boost household income and, coupled with the drawdown in savings implied by the survey, could sustain the current boom in spending. UBS assesses consumers are rotating to services expenditure from goods and this should continue once coronavirus-related restrictions are eased in NSW and Victoria.
The most negative implication was for automotive dealers as new car demand fell to a record low, largely, UBS suspects, because of a lack of supply. Consumers intend to buy more used cars and, as a result, spend more on motor vehicle servicing.
A reduction in the likelihood of mortgagees asking for a rate discount is a positive sign for the banks while in utilities consumers expect to use less electricity. A significant share of respondents are looking to change providers, with Origin Energy ((ORG)) the most preferred provider.
More people in the survey also said they were likely to use aged care services for themselves and their parents in the wake of the Royal Commission, which the broker suggests is a positive for the aged care sector.
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For more info SHARE ANALYSIS: ABP - ABACUS PROPERTY GROUP
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For more info SHARE ANALYSIS: ANZ - AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
For more info SHARE ANALYSIS: KMD - KATHMANDU HOLDINGS LIMITED
For more info SHARE ANALYSIS: NSR - NATIONAL STORAGE REIT
For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED
For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION