In Brief: Banks, Energy, Retail, Childcare

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Weekly broker wrap: banks peak, energy declines, retail resilient, childcare outlook improves. 

-Remaining upside for the banking majors looks limited and largely priced in
-Brokers lower oil and gas price forecasts despite demand remaining elevated
-Retail spending slump likely overstated
-Childcare sector readies for biggest year post-pandemic 

By Danielle Austin

Upside limited for banks which look to peak in first half 

Ahead of the domestic banking reporting season, Jarden anticipates strong first half results across the sector but remains Underweight on the industry’s outlook. The broker is predicting a robust first half, estimating earnings will be up 19% half-on-half, underpinned by strong 17-27 basis point margin expansion. 

The broker also expects net interest margins likely neared a peak in the first half, despite anticipating banks will report material margin increases over the half. Jarden anticipates declining house prices, moderating volume growth, and a likely end to the rate hike cycle will impact on bank growth over the remainder of the fiscal year. Of the majors, Jarden prefers National Bank ((NAB)), then ANZ Bank ((ANZ)), Westpac  ((WBC)) and Commonwealth Bank ((CBA)). 

Macquarie similarly sees banks as positioned to deliver their strongest profit growth in over a decade, but sees downside risk to second half earnings beyond the first half. The broker highlighted that remaining upside for banks appears to be largely priced into stocks at this point, and feels longer-term leverage to higher rates has been overstated.  

Anticipating that persistent inflation and higher rates will drive lower asset prices, higher costs, and impairment risk, Macquarie expects banks will largely underperform the market throughout 2023. Macquarie’s order of preference for the majors is ANZ, NAB, Westpac, and CBA. 

Oil and gas prices to decline, east coast investment could suffer 

While Jarden anticipates oil and gas prices will decline over 2023, it expects macro conditions to continue to support elevated prices. Europe looks to continue its move away from reliance on Russian energy, which, alongside a rebound in demand from Asia and a post-covid China, should see demand remain high over the coming year.

The broker assumes average gas pricing falls -27% year-on-year to US$25/mmbtu, and average oil pricing falls -14% year-on-year to US$99/bbl.

UBS has similarly cut its oil and gas price assumptions. The broker reduced its gas pricing -15-50%, noting storage levels in Europe are stronger than had been anticipated and risk of gas shortages over 2023 and 2024 materially reduced off the back of successful initiatives to reduce demand and a milder winter. The broker’s 2023 forecast oil prices declines to $90 per barrel, from $95 per barrel. 

Of the large caps, both brokers indicated a preference for Santos ((STO)). Jarden remains concerned about significant downside risk to consensus earnings forecasts for Woodside Energy, while UBS expects Beach Energy ((BPT)) can deliver strong free cash flow growth into 2024 and sees value in the stock at current levels despite delays to the company’s first gas. 

Jarden also expects the recently proposed price provisions to be front of mind for east coast gas investors in coming months. Jarden expects the provision, and associated price cap, could likely lead to investment deferral, in turn increasing risk of supply shortfalls from 2024.  

Impact of interest rate rollover on retail trading likely ‘overstated’

The market continues to wait on the impact of increasing cost of living to filter through to retail trading, but Citi warns impacts may have been overstated. While trading has remained robust, concerns around a significant decline in trading conditions in the coming year persist, largely due to consumers indicating an intention to tighten household spending, according to consumer data collected throughout 2022. 

While the impact of reduced household spending on retail is yet to emerge, the impact of rates on household spending remains front of mind. Citi anticipates one in ten households will be impacted as low fixed interest rates roll over into current higher rates over the second half. However, the broker highlights only 40% of these households are more vulnerable low to middle income earners, or around 4% of all Australian households. Further, the broker expects even these households are better placed to face higher interest rates than may be expected given high levels of saving. 

Given these trends, Citi anticipates the impact of rising rates on domestic retail spending capacity to equate to -$65bn in FY23 and -$18bn in FY24.

Following the recent peak holiday trading period, Morgans is anticipating positive results releases from fashion and household retailers. Similar to Citi, Morgans does anticipate some softening of consumer spending in the coming year, but also expects impacts may have been previously overstated, particularly in the case of a potential easing of inflation and rate hikes ahead. 

Childcare faces biggest year post-pandemic as re-enrolments track up 

With the childcare sector’s outlook improving, Canaccord Genuity expects 2023 to prove the industry’s strongest year post-pandemic, with increased government funding set to support occupancy growth over the second half of the year.

The broker believes re-enrolments for 2023 are tracking ahead year-on-year. Data suggests demand for day-care services has continued to grow at 4.5% per annum since before the pandemic, a combination of growth in the number of children needing to access day-care services and in the number of hours of day-care services required per child, a trend which Canaccord Genuity expects continued through 2022. 

While occupancy trends appear positive, staff shortages and difficulty in hiring new staff continue to pose risk. With four childcare stocks in its coverage, Canaccord Genuity is Buy rated on both G8 Education ((GEM)) and Embark Education ((EVO)). A recent update from G8 Education showed occupancy was up year-on-year, and the broker sees higher enquiry levels and re-enrolments to be a positive for further occupancy growth through the year.

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