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In Brief: Banks, Building Products, Gaming & Non-Bank Lenders

Weekly Reports | Jan 28 2022

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

Weekly Broker Wrap, In Brief: Best of the banks; preferred building products; 2022 gaming stocks and non-bank lenders at a discount.

– Business-oriented banks preferred
– Residential-exposed building stocks
– The three best gaming stocks for 2022
– Deeply discounted non-bank lenders

 

By Mark Woodruff

Business-oriented banks preferred

Jarden maintains an Overweight stance on Australian banks with a preference for National Australia Bank ((NAB)). 

While there are headwinds in 2022, the analysts see an improving outlook in 2023. It’s thought that RBA rate rises will lead to increased margins, and these rate rises may arrive earlier than consensus forecasts.

Moreover, the broker has above-consensus credit growth forecasts, even after allowing for downside risk for housing credit (and house prices). The slack is expected to be taken up via increased business credit (and investment).

Hence, business-oriented banks such as the Neutral-rated ANZ Bank ((ANZ)) and NAB (Overweight) are better placed to manage expected margin contraction in FY22, explains Jarden. NAB is favoured for its leading position in SME banking, solid mortgage business and reasonable valuation.

After the upcoming February reporting season, the broker expects headline net interest margins (NIMs) for retail-biased banks will be re-based substantially lower for the the first half of calendar 2022. This should not come as a major surprise to investors, given recent market updates.

While margins are expected to remain under pressure into the second half of 2022, the rate of downward change is likely to moderate. Then, after some time, cash rate hikes in Australia should further bode well for margins, according to the analysts.

After National Bank, Jarden’s order of preference is for Commonwealth Bank ((CBA)), ANZ Bank and Westpac ((WBC)). For the regionals, the Overweight-rated Bank of Queensland ((BOQ)) is preferred to Neutral-rated Bendigo & Adelaide Bank ((BEN)).

Building products exposed to residential construction

After comparing the number of unfinished houses in A&NZ to the limited capacity of the building industry, Citi believes residential detached construction will remain at capacity for multiple years. This conclusion is reached despite falling approvals, slower house price growth and rising mortgage rates. 

As a result, on a one-to-two-year view, the broker has a Buy rating in the materials space for the residentially-exposed CSR ((CSR)) and Fletcher Building ((FBU)).

At first glance, one would think investors should switch to infrastructure/heavy construction material names over residential for exposure to the upswing in one cycle, while the other fades. 

However, the analysts cite a range of factors that continue to delay and flatten the anticipated infrastructure boom, including supply side capacity constraints.

Meanwhile in Australia, the gap between commencements and completions continues to increase for residential. Even in a worse-case scenario, if approvals drop to a pandemic low of 100k homes and completions average all-time highs of 120k homes, Citi estimates it will take three years to clear the potential backlog. A similar scenario exists in New Zealand.

The best gaming stocks for 2022

Goldman Sachs believes the best way to gain 2022 exposure to the A&NZ Gaming sector is via holdings in PointsBet ((PBH)), Star Entertainment Group ((SGR)) and Tabcorp ((TAH)).

PointsBet is well-placed to carve out a niche share of the burgeoning US market, according to the analyst, with further potential upside from M&A interest in the space.

Domestic revenue exposure and an improved balance sheet are the key attractions of Star Entertainment for the broker. It’s felt the domestic consumer will continue supporting the main gaming floor through 2022. 

There’s also potential upside from plans to sell and leaseback a minority stake in its Pyrmont site in Sydney’s Darling Harbour, including three luxury hotels, gaming floors, and a number of upmarket retail sites.

Meanwhile, alongside existing valuation support for Tabcorp, Goldman Sachs sees upside from the planned June 2022 demerger of the lotteries business. Additionally, there’s thought to be FY23 benefits from the OzLotto game change (more jackpots etc), earmarked for the June quarter, which could drive multi-year upside to consensus lottery forecasts.

Non-bank lenders at a discount

Macquarie points out non-bank lenders are currently trading at material discounts of around -55-75% relative to the Australian market. They are also at discounts of circa -10-55% to the major banks, excluding CBA.

In this context, the broker believes downside risks to margins are factored-in to current valuations for mortgage-related non-bank lenders in the Australian market.

Clearly, current sentiment around rising rates has weighed, but should interest rates remain low in the short-to-medium-term as a result of covid impacts, margins are expected to be more resilient than consensus estimates, explains the broker.

Moreover, non-bank lenders are expected to regain their competitiveness as larger banks withdraw their attractive fixed rates, and property prices are set to continue their rise in 2022, with elevated turnover.

Under the broker’s sector coverage, the order of preference is for Pepper Money ((PPM)), Australian Finance Group ((AFG)), Resimac Group ((RMC)) and Liberty Financial Group ((LFG)). All are rated Outperform.

The book growth of these companies has so far benefited from improved digital origination systems and strong operational growth trends. Liberty Financial’s book growth is significantly less than the other three, as management has been more focused on maintaining margins.

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CHARTS

AFG ANZ BEN BOQ CBA CSR FBU LFG NAB PBH PPM RMC SGR TAH WBC

For more info SHARE ANALYSIS: AFG - AUSTRALIAN FINANCE GROUP LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CSR - CSR LIMITED

For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED

For more info SHARE ANALYSIS: LFG - LIBERTY FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: PBH - POINTSBET HOLDINGS LIMITED

For more info SHARE ANALYSIS: PPM - PEPPER MONEY LIMITED

For more info SHARE ANALYSIS: RMC - RESIMAC GROUP LIMITED

For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED

For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION