In Brief: Non-Banks, Infrastructure, Consumer Sentiment, Retailers

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Weekly broker wrap: non-bank inflationary pressures; transport infrastructure costs rise; retailers face defensive consumers but resilient discount-seeking consumers.

-Non-bank financiers face headwinds in an inflationary environment
-Mega infrastructure projects at risk on budget blow-outs
-“Defensive” consumer sentiment likely to weigh on discretionary retailers
-Grocers likely more resilient than international peers to discounter resurgence

By Danielle Austin

Non-bank lending institutions issue guidance downgrades

The non-banking financial sector looks to face a more difficult operating environment amid current inflationary pressures, according to analysts from Credit Suisse. The analysts note increasing pressure on net interest margins, less certainty around credit origination, and likely higher rates of bad debt are all driving increased caution from investors.

These same pressures have seen non-bank lenders Liberty Financial Group ((LFG)) and Pepper Money ((PPM)) both issue earnings guidance downgrades through to FY24, with Liberty Financial reducing guidance between -4% and -29% and Pepper Money between -21% and -33% across the outlook range.

The broker notes that while it does hold a constructive outlook on the sector, both lenders are coming off recent record earnings, coupled with short-term headwinds, guidance downgrades, and a lack of apparent catalysts in the near-term. Considering Liberty Financial, the broker finds these factors largely offset each other, and downgrades to a Neutral rating from Outperform on the lender, but for Pepper Money Credit Suisse sees more risk to the upside and maintains an Outperform rating.

Public works may be reconsidered as inflation blows out project costs

Committed transport infrastructure projects across Australia could be at risk if predictions made by Citi prove to be true. The broker has highlighted infrastructure projects committed to in an effort to stimulate economic growth at then cheaper money may now be at risk as the environment for infrastructure projects looks far less favourable and as project costs rise.

As recently as late 2021, Infrastructure Australia estimated public infrastructure investment would exceed $218bn over the next five years, peaking in 2023, with an estimated 80% of this work to come from mega-projects, 80% of spend to be committed to transport works and 40% of spend to be allocated to projects across New South Wales.

Citi analysts noted while infrastructure spending remains elevated across State Budgets, the actual volume of work appears to be reducing as inflation drives higher project costs. It was noted that transport projects in particular could be on the chopping block if state governments look to reconsider the need and timing of mega-projects, with projects such as water security and energy likely to be prioritised. The analysts expect maintenance to instead be a higher priority of infrastructure programs.

The prediction won’t come as welcome news to stocks with exposure to transport infrastructure projects, and Citi highlights Boral ((BLD)) in particular at risk given its exposure to New South Wales transport infrastructure and downgrades to a Sell rating on the stock. The broker suggests declining levels of public infrastructure will likely see construction material demand decline in a follow-on effect.

Consumer sentiment likely to drive declines in discretionary spending

Broker JP Morgan has described consumers as having a more “defensive” mindset according to results from its latest consumer survey. The broker anticipates the current economic environment will encourage consumers to start reducing discretionary spending, despite recent record high savings.

The prediction has seen the JP Morgan analysts reduce earnings forecasts for discretionary retailers Harvey Norman Holdings ((HVN)), JB Hi-Fi ((JBH)), Premier Investments ((PMV)) and Super Retail Group ((SUL)), as well as for Coles Group ((COL)) and Woolworths Group ((WOW)) as consumers cite rising grocery costs as the most prevalent cost-of-living concern currently.

Duopolistic domestic grocery market likely more resilient than international peers

While internationally, discount retailers look to be a likely beneficiary of the current inflationary environment, analysts from Jarden expect the duopolistic nature of Australia’s grocery sector will support market resilience.

The broker notes low sales growth of 3.6% is expected across the grocery sector in FY23, and that it does expect Aldi to gain some market share as consumers seek out discount retailers in the inflationary environment. Analysts from Jarden also highlight upside potential for food retail sales, as inflation will likely drive a resurgence in eating at home that could contribute as much as a 400 basis point upside for retailers.

Coles Group ((COL)), Woolworths Group ((WOW)) and Metcash ((MTS)) remain key picks for Jarden in the grocery sector, alongside Domino’s Pizza ((DMP)), Treasury Wine Estates ((TWE)) and Costa Group ((CGC)) given their exposure to similar trends.

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