Weekly broker Wrap: some discretionary retail stocks may positively surprise; plans for Australian gas projects upset by activists & Macquarie's view on the Bank sector.
-Potential upside surprises for some Discretionary Retail stocks
-Activists weigh on plans for large Australian gas projects
-Macquarie retains its Underperform rating on the Bank sector
Potential upside surprises for some Discretionary Retail stocks
For the patient investor, Morgans sees meaningful medium-term upside for share prices in the Discretionary Retail sector, particularly as current sales and earnings expectations remain cautious.
A grinding period of inflationary pressure on the cost of living has weakened consumer demand and exacerbated uncertainty about future trading patterns, notes the broker, in its preview of the upcoming AGM season.
Nonetheless, there is potential for some surprises over the season, which would support Morgans view of real value opportunities.
As international freight and other supply costs may now be in a state of deflation, the analysts predict broadly stable gross earnings margins, despite the impact of a lower Australian dollar.
Over at Jarden, analysts remain cautious on ASX-listed household goods stocks, yet there is potential for an upside earnings surprise in FY24 from the installed electronics base, particularly across IT, small appliances, accessories and gaming.
Replacement cycles in these categories historically range from two to eight years, explains the broker, suggesting a higher installed base should start to positively impact through 2024, given the base surged during the pandemic.
All else being equal, and perhaps with some assistance from a better than forecast housing cycle, the broker suggests the larger replacement cycle could add between 0.5% and 8.6% to sales for
From among these names, the analysts prefer
Looking further out, Jarden believes this scenario could drive share price upside for Neutral-rated Harvey Norman and
Neutral-rated
On
On the flipside, this broker sees positive catalysts for both
Activists weigh on plans for large Australian gas projects
Macquarie highlights increasing permitting and regulatory uncertainty facing offshore oil & gas developers in
Regarding specific offshore activities such as drilling, seismic and pipe installation, the broker highlights environmental plans are now key targets for activists opposed to large gas projects.
By way of reaction, key players are already pivoting overseas with
For both companies, Macquarie sees a pivotal "make or break" year in 2024.
As a result of successful legal challenges to environmental plans at Barossa (Santos) and
The grounds for legal challenges were based on insufficient consultation with traditional owners.
A capex increase and delay to schedule were already anticipated at Barossa, and Macquarie retains its Outperform rating for Santos, with a
Further final investment decisions (FID) won't be contemplated by the industry until clarification on consultation processes, explains Macquarie.
Other key growth projects under challenge, according to the broker, include Dorado, owned by Santos and Underperform-rated
Macquarie retains its Underperform rating on the Bank sector
Despite rapidly rising rates and high consumer indebtedness, Macquarie is surprised by the credit quality and resilience of the Australian banks.
The broader macroeconomic backdrop appears to have improved in recent months, yet the broker retains its Underperform rating for the sector. Ongoing challenges from margin compression on both mortgages and deposits are expected, in addition to expense headwinds.
It's thought the market has not fully allowed for these eventualities.
While Macquarie forecasts FY24 pre-provision earnings for banks will decline by around -3-10% on margin and cost pressures, overall earnings estimates rise on higher-for-longer bond yields.
Five-year swap rates have increased by around 40bps to 4.4%, providing and a FY24 8-11bps tailwind for margins, which will partly offset the negative impacts from competition and deposit switching, explains the broker.
However, these higher overall earnings forecasts are outweighed by the negative impact of higher discount rates on valuations for bank shares under Macquarie's research coverage.
While the analyst reduces its forecast bad and doubtful debts charges for FY23 and FY24, based on current trends and healthy provisions, the risk of higher credit losses remains, given the impacts of higher rates are still yet to fully flow through the economy.
Business losses are considered a key source for concern if the cycle were to worsen. According to data from ASIC, there is an ongoing rise in the number of companies entering administration, though this is largely driven by the construction sector, explains the broker.
Neutral-rated
Target prices for all bank shares under the broker's coverage fall slightly. These new targets can be seen on the FNArena website under the Broker Call Report or via Stock Analysis.
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