In Brief: AI Winners, Travel, Property & Banks 

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Weekly Broker Wrap: two ASX companies receiving an AI boost; chargebacks for travel firms; residentially exposed REITs & the banking environment in New Zealand.

-Two ASX-listed companies receiving a boost from AI
-Travel firms confronted by surging growth in chargebacks
-Further downside for residentially exposed REITs?
-The banking environment in New Zealand 

By Mark Woodruff 

Two ASX-listed companies receiving a boost from AI

Artificial intelligence (AI) and generative AI are likely to increase hyperscaler and enterprise compute demands, which is positive for NextDC ((NXT)), while Megaport ((MP1)) would benefit via enterprises seeking cloud connectivity. 

Barrenjoey initiates coverage on data centre owner and operator NextDC with an Overweight rating, and disruptive network-as-a-service (NaaS) provider Megaport is assigned a Neutral recommendation.

While NextDC is rated highly, the analysts suggest FY24 downgrade risk could result in investors achieving a cheaper entry point. 

The broker explains NextDC’s data centres include more mature infrastructure-like assets with steadily growing earnings, as well as assets still requiring capital/capex that are either in ramp-up mode or are yet to be completed.

Enterprises use NextDC to co-locate storage and compute as well as for connectivity (e.g. to cloud service providers). Hyperscalers also sometimes prefer NextDC’s data centres over their own for reasons including land/power availability and customer proximity, explain the analysts.

In the case of Megaport, competition is with traditional telecommunications companies and the public internet for the provision of cloud connectivity to enterprises, on a more flexible, timely and potentially cheaper basis.

Industry feedback confirms Megaport has a strong product fit as well as a first mover and scale advantage, while Barrenjoey’s own research indicates favourable unit economics, an imminent inflection to positive free cash flow (FCF) and potential to achieve the rule of forty (Ro40) by FY26/27.

Ro40 is a high-level success indicator for software companies stipulating the combination of growth rate and profit margin should be more than 40% in order to prove viability.

Recently, sales momentum has been disrupted for Megaport, though if revenue re-accelerates Barrenjoey sees significant leverage post FCF breakeven. A 12-month target of $7.50 target is set, with upside to a valuation of $10 should management exceed the broker’s FCF/Ro40 forecasts.

Turning to NextDC, Barrenjoey points to strong historic data centre returns, and three long-term demand waves, co-location, cloud, and AI, which could support similar returns on ramping data centres.

While this company’s earnings multiple appears expensive, the metric overlooks built-but-not-yet contracted capacity, and other growth options such as land, as well as planned-but-unfunded capacity, explains the broker.

For a comparison to Barrenjoey’s $14.50 target price, FNArena's daily monitoring consists of six brokers which actively cover NextDC. They have an average target of $13.77, with five Buy recommendations and Ord Minnett’s Hold rating.

Six brokers also cover Megaport and have an average target of $9.22 compared to Barrenjoey’s $7.50. Again, five brokers are Buy-rated, apart from Macquarie’s Neutral recommendation.

Travel firms confronted by surging growth in chargebacks

Perceived difficulties in obtaining refunds and increasing traveler awareness of chargebacks has resulted in 71% of travel companies experiencing growth in chargebacks over recent years.

Travel payments company Outpayce, a subsidiary of Spanish-based Amadeus IT Group, notes disputes are surging at a rate of around 30% year-on-year, according to a global study of airlines and travel agents.

Chargebacks are when credit card holders dispute a transaction by raising a ‘chargeback’ via the bank that issued their card, which initiates a standard dispute process. 

If the travel merchant is unable to provide evidence to contest the chargeback in a timely manner, the funds are automatically returned to the cardholder.

The ease of raising a chargeback through a mobile banking app has also contributed to recent recent popularity, explains Outpayce.

Moreover, travel firms are experiencing a lack of success when contesting claims, according to the research. Just a quarter see more than 60% of disputes awarded in their favour, while nearly half of the firms surveyed see less than 40% of the chargebacks they choose to challenge granted in their favour.

Travel firms are finding it hard to handle the volume of disputes, and solving the problem for airlines in particular has been a major focus for Outpayce over recent months.

Further downside for residentially exposed REITs?

Sales agents at detached home builders across Australia expecting near-term improvement in the sales environment are in the minority (10%), given uncertainty in the cash rate outlook and generally weak sentiment from buyers.

A survey of around 30 sales agents by Macquarie focused on enquiries at display homes, conversion rates, new sales volumes and prices, as well as pricing by land developers.

Responses were largely consistent with data from the Housing Industry Association (HIA) showing new home sales over the past three months have only marginally improved, following a sharp decline over the second half of 2022.

Access to credit was cited by 77% of respondents to the survey as the key reason for subdued sales, and 50% remain cautious of any material improvement in the sales environment until there is clarity on where the cash rate will peak.

Enquiries at display homes are continuing to trend lower with most builders noting conversion rates have moderated and were taking longer, while the majority also noted pricing by land developers was declining as they offered incentives/rebates for sales.

Macquarie observes share prices for both Stockland ((SGP)) and Mirvac Group ((MGR)) have strongly re-rated since October 2022, which tallies nicely with multiples historically troughing three-to-five months prior to the nadir for median dwelling prices.

While dwelling prices reached a bottom in February this year, a further four 25bps rate hikes by the RBA since the beginning of February has taken the wind out of the residential stock recovery in the near term, explains the analyst.

Strategists at Macquarie are forecasting a 25bps hike in each of August and September, taking the cash rate to 4.60%, before the first rate cut in the second quarter of 2024. Based on this schedule, downside for multiples of residentially exposed REITs on the ASX is expected through the second half of 2023.

Nonetheless, long-term fundamentals are strong, suggests the broker, given migration and low residential vacancy, and the broker retains its Neutral ratings for Stockland, Mirvac Group, and Lendlease Group ((LLC)).

The banking environment in New Zealand 

Analysts at Jarden noted a remarkably similar macroeconomic environment to that of Australia on a recent trip to New Zealand and returned more positive on the near-term outlook and the potential risks for Australian banks.

Given a small and open economy, the country is often viewed as an “early warning indicator” for Australia by the broker.

It may be the exception that proves the rule this time around, as Jarden notes New Zealand began interest rate hikes seven months before Australia but is three months behind in feeling the impacts.

The Reserve Bank of New Zealand hiked earlier and faster than the RBA, with the cash rate now around 1.5% above Australia’s. Despite this differential, the average outstanding mortgage rate in Australia is now above the rate in New Zealand.

While house prices have fallen more than double Australian house prices, both countries have experienced similar gains of around 20% since December 2019.

Australian households have felt the effect of 60% of interest rate hikes (assuming the broker’s 4.6% terminal rate), whilst New Zealand has felt the impact of only 50% of its 5.5% cash rate.

By way of explanation, Jarden notes New Zealand has a largely fixed mortgage market and slower pass-through of rate hikes to households. Also, the country’s net migration rebound lagged Australia by around 12 months, and the housing market appears to be only bottoming now (around February in Australia).

While there was plenty of concern about the outlook for the country during the trip, the analysts only observed signs of disquiet around the highly interest rate sensitive sectors such as discretionary retail and construction. Feedback on the latter suggest the sector is facing similar pressures to Australia, with surging costs, construction delays and now evaporating demand.

In short, the New Zealand housing market is finding a floor, unemployment is low, and migration is rebounding, according to Jarden. While mortgage competition is hot, it’s thought muted deposit competition will be supportive of bank margins.

While acknowledging the country is only halfway through the impact of higher interest rates, the broker points out signs of household or business financial stress are limited.

Borrowing capacity is down by -30%, suggesting the market is not out of the woods, yet Jarden doesn’t see any smoking gun and the risk of systemic stress seems low.

Taking all the above into account, the broker retains its 12-month target price of $24.40 and Overweight rating for ANZ Bank ((ANZ)), which has the largest New Zealand exposure of the big four banks in Australia. Note: in the broker’s five-tiered ranking system, Overweight is one notch below Buy.

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