Weekly Reports | Apr 01 2022
This story features QANTAS AIRWAYS LIMITED, and other companies. For more info SHARE ANALYSIS: QAN
Weekly Broker Wrap, In Brief: Structural change impacts travel, inflation drives up grocery shelf prices, construction pressures continue, insurance brokers face regulatory review.
-Corporate travel exposure best suited to weather structural industry change
-Momentum in supermarket inflation likely in the March quarter
-Small builders most at risk of insolvency amid continuation of construction industry pressures
-Australian insurance broker revenue unlikely to be impacted by government review
By Danielle Austin
Toughest months ahead for travel
As both international and domestic travel resume, the travel management industry is facing structural change that is likely to impact on earnings ability. Capacity has been impacted, costs of travel are likely to increase although demand is likely to remain strong, and travel agent commission fees have declined from some airlines.
The Australian Federation of Travel Agents has suggested that the next six months will the most challenging for the travel industry, with agents likely to be tasked with processing the estimated $6bn in travel credits currently held by Australian customers, offering little revenue for agencies.
Domestic supply is currently diminished, with an estimated 26 aircrafts lost to the Tiger exit impacting available domestic supply, although market analysts expect the exit of the low-cost airline will drive a higher average ticket price even if capacity is rebuilt by other airlines. Short-term, the apparently demand-led scaling back of scheduled third quarter domestic capacity by both Qantas ((QAN)) and Virgin could see airlines reduce ticket prices to entice consumers, and international capacity looks likely to be lower as some airlines opt not to reintroduce services to Australia.
Elevated oil pricing is also likely to impact the travel industry, driving an estimated 7% increase to ticket costs at current spot prices. Despite this, the market largely expects a rise in flight costs won’t be a huge deterrent to customers given prolonged border closures and housing savings on holiday spend in recent years.
Jarden prefers travel management picks with better exposure to corporate travel bookings over leisure, noting Corporate Travel Management ((CTD)) as its top pick given its insulation against structural change and upside potential through acquisition.
Further supermarket inflation on the cards
Elevated supermarket shelf prices have left little doubt as to the current inflationary environment, with the industry suggesting shelf price inflation currently sits at 3-4% amid widespread price hikes from suppliers. Experts assume costs are largely passed through to the customer, noting the passing through of costs will help supermarkets offset some expected volume loss as the workforce shifts back to working in offices and at-home meals decline. The ABS demonstrated a slowing of food inflation in the December quarter, but market analysts are predicting a significant rise will be evident in the March quarter.
Macquarie notes the inflationary environment post extended lockdowns offers a unique coupling of events with little historical comparison. Increased inflation would normally drive an uptake of at-home consumption and outperformance of staple retailers amid tightening of discretionary spending, but the period of extended restrictions may dampen this impact.
Insolvencies to rise as construction industry remains tough
The construction industry continues to grapple with the trifecta of issues that is rising costs, a tight labour market, and elevated demand, and industry experts are predicting a rise in insolvencies is on the horizon, particularly for small builders and contractors. While pressures are being felt industry-wide, certain geographical areas have been harder hit than others, with south east Queensland highlighted as particularly susceptible to pressures as recent flood events drive labour to emergency works and weather causes additional delays.
Jarden analysts are predicting a continuation of cost inflation for the industry, estimating costs have risen 6% year-to-date on the back of 20-30% cost increases last year. Longevity of elevated costs has seen the sector adapt to the pressures of supply constraint, allowing impacts to be less meaningful now, and costs are largely being passed through by way of trade and retail pricing.
The analysts also note a tight labour market continues to impact on tough industry conditions, and is driving a significant increase in the prices commanded by in-demand trades by as much as 30-40%.
Project delays continue, with delays in residential construction of 50% the new industry normal. The current solid pipeline of work for the industry, coupled with ongoing delays, will likely support strong construction activity into 2023.
According to the broker, a resurgence in activity from the Australian Taxation Office is likely to increase insolvencies in the industry, noting a surprisingly low number of business failures to date. With smaller builders lacking the leverage of a strong balance sheet seemingly most at risk, the analysts note risk is likely not widespread.
Australian insurance brokers face regulatory review
While a comparison of global broker commission and fee revenue may suggest Australian insurance brokers are over-earning compared to peers, broker Macquarie argues its analysis shows domestic brokers are charging less than industry average. With the Australian government having commissioned a review of the quality of the financial advice given by domestic brokers, Macquarie warns share prices may suffer during the regulatory process. While Macquarie experts expect increased disclosure from insurance brokers will be a likely recommendation from the review, it does not expect it to drive any material earnings impact.
On analysis of the major insurance brokers in different geographies, global commission rates were found to be around 10.1%, while Australia/New Zealand rates were around 18.4%. Macquarie analysts argue these figures don’t account for differing product and customer segment mixes. According to the broker, Australian insurance brokers:
-Are more likely to own underwriting agencies.
-Are differently exposed to authorised representatives where a different fee structure is implemented.
-Are less likely to place more reinsurance.
-Are less likely to have large fee-paying customers.
-Disclose wholesale commissions and taxes different, making comparison difficult.
Further, Macquarie notes the insurance brokers in its coverage, Steadfast Group ((SDF)), AUB Group ((AUB)) and PSC Insurance Group ((PSI)) are charging less than domestic industry averages. Of these, Steadfast retains the highest commission rates, which the broker finds justifiable given its geographical footprint and tech offerings.
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For more info SHARE ANALYSIS: AUB - AUB GROUP LIMITED
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For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED
For more info SHARE ANALYSIS: MTS - METCASH LIMITED
For more info SHARE ANALYSIS: PSI - PSC INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED
For more info SHARE ANALYSIS: SDF - STEADFAST GROUP LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED