In Brief: Travel, Supermarkets, Builders, Insurance Brokers

Weekly Reports | Apr 01 2022

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.

Macquarie notes its preferred supermarket retailers remain Coles Group ((COL)) and Metcash ((MTS)) before Woolworths Group ((WOW)), preferring lower price-to-earnings ratio exposures.

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.


The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE

MEMBER LOGIN