In Brief: Retail, Travel, Top Dividends, Banks & Telstra

This story features WESFARMERS LIMITED, and other companies. For more info SHARE ANALYSIS: WES

Weekly Broker Wrap: new technology may lift some discretionary retailers; positive dynamics for the travel sector; the best ASX stocks for dividends; overvalued Australian banks & Telstra’s trading update.

-Upside for discretionary retailers with exposure to technology
-The travel data favouring Webjet (and others in the sector)
-Top ten stocks for grossed up dividend yield
-Goldman Sachs maintains Australian banks are overvalued
-Telstra’s less than ideal trading update

By Mark Woodruff

Upside for discretionary retailers with exposure to technology

Macquarie sees upside for ASX-listed, technology-exposed discretionary retailers over the next two years as AI-ready PCs come to market, and as other consumer electronic devices reach the end of their expected lifetimes following the 2020 covid spending splurge.

For the uninitiated, the key difference in next-generation PCs/laptops relative to the current technology is the integrated neural processing unit (NPU) in the central processing unit. NPUs provide the capability to handle AI-related tasks locally, as opposed to relying solely on a connection to the cloud.

Macquarie has taken heed of commentary at the recent Wesfarmers ((WES)) investor day, when management stated, "as a leading retailer of technology with 59% of our (Officeworks) sales coming from our technology business, we are uniquely positioned to help our customers digitise.”

Further comments included “we anticipate significant hardware innovation will lead our customers to consider upgrading to the latest generation of devices. And we expect when upgrading their device that our customers will look for new and improved accessories to match, such as headphones and wearables."

Accordingly, the broker expects strong sales in the Australian-focused businesses of not only Wesfarmers, but also JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), and raises earnings forecasts by 0.5%, 4.5%, and 3.7%, respectively.

JB Hi-Fi is the most exposed of the discretionary retailers to a shortened upgrade cycle for computers, explains Macquarie, with this category accounting for around 20% of revenue.

Should this next-generation AI upgrade cycle deliver on promise, the analyst anticipates (as per Wesfarmers’ indication) further upside to forecasts thanks to increasing sales of phones, wearables and connected devices. 

The broker upgrades both JB Hi-Fi and Harvey Norman to Outperform from Neutral and raises their 12-month targets to $63 (from $61) and to $5.30 (from $5.10), respectively.

For Wesfarmers, Macquarie’s target rises to $65.20 from $64.60 while the Neutral rating is retained.

The travel data favouring Webjet (and others in the sector)

International traffic is growing and has overtaken domestic traffic in Australia, notes Citi, with recent data also indicating average international fares in the March quarter were around -13% lower year-on-year. International passenger levels on the East Coast are now close to 100% of FY19 levels, with Melbourne surpassing FY19 on a regular basis.

Indeed, international travel is now growing faster than domestic in most parts of the world. For Webjet, ((WEB)) this means the length of stay of each accommodation booking is also growing, and Hotel revenue per available room (RevPar) globally not only remains elevated, but continues to grow, explains the broker.

In another positive for Webjet, the analysts point out the Olympic Games in Paris kick-off on July 26 this year, on the very continent where Webjet has its largest exposure and generates a higher relative margin.

More generally, and relevant to Citi’s coverage across the Travel sector on the ASX, the broker notes international volumes globally are continuing to strengthen on softer airfares, and the US in particular is experiencing a corporate travel recovery, which may precede an Australian one.

Regarding the US corporate recovery, the broker’s industry feedback indicates double-digit growth in volumes over recent months, and the annualisation of this strength would likely boost the US divisions of both Flight Centre Travel ((FLT)) and Corporate Travel Management ((CTD)).

When Citi released the above research points at the start of the week, the broker was anticipating upside risk for earnings forecasts in the Travel sector.

A few days later and the broker’s research was looking prescient when Webjet released record FY24 results. When, subsequently, six of seven covering brokers in the FNArena database updated research, the average target price increased to $10.27 from $9.43, suggesting around 15% upside to yesterday’s closing price of $8.92.

Bookings and total transaction value (TTV) growth of 35% was well ahead of expectations, and the analysts at Morgan Stanley now increase forecasts for Webjet as a result of momentum tracking around 10% higher than initial management guidance.

The performance of WebBeds was a standout, in stockbroker Morgans' view, particularly the segment's industry leading margins and strong operating cashflow. So far in FY25, growth for WebBeds has accelerated, while the Webjet online travel agent (OTA) has slowed.

The analysts believe the key to unlocking the true value of WebBeds is management's current investigation into a potential demerger of the B2B and B2C divisions. It's felt WebBeds would then trade on a (higher) global B2B marketplace multiple.

Citi’s preferred exposures across the Retail sector are the Buy-rated Webjet and Flight Centre Travel, followed by Qantas Airways ((QAN)) and Corporate Travel Management, which are both assigned Neutral recommendations.

Flight Centre also bobs up in the ensuing article which lists companies with a relatively higher chance of bringing into play capital management initiatives.

Top ten stocks for grossed up dividend yield

While balance sheet capacity is important when determining the likelihood of management deploying capital management initiatives, other factors can also be important, such as potential investment in growth opportunities, explains Macquarie.

Capital returns to shareholders are also a way for management to utilise franking credit balances, which the broker has been monitoring via company annual reports for over 19 years.

The analyst’s list of companies that may act on their franking credits balance and undertake capital management in 2024 are: Bendigo & Adelaide Bank ((BEN)), Beach Petroleum ((BPT)), Flight Centre Travel, G8 Education ((GEM)), Gold Road Resources ((GOR)), G.U.D. Holdings ((GUD)), Helia Group ((HLI)), Jumbo Interactive ((JIN)), Karoon Energy ((KAR)), New Hope Corp ((NHC)), Pepper Money ((PPM)), Rio Tinto ((RIO)), Regis Resources ((RRL)), Westpac Bank ((WBC)) and Woolworths Group ((WOW)).

Recognising that stocks with high grossed up dividend yields may be attractive to certain investors, the broker also highlights the top ten in this category under research coverage.

Ranging from 26-10% grossed up dividends in descending order, Macquarie lists: Mount Gibson ((MGX)), McMillan Shakespeare ((MMS)), Autosports Group ((ASG)), Coronado Global Resources ((CRN)), New Hope, Helia Group, ARN Media ((A1N)), Resimac Group ((RMC)), Rio Tinto, and Pepper Money.

Goldman Sachs warns Australian banks are overvalued

The valuations for Australian banks are at extremes, Goldman Sachs has warned. The broker highlights the spread between fully franked yields and the 10-year bond yield, currently at its lowest level in nearly 15 years, is flashing warning signs. 

While the recent bank reporting season did show the pace of deterioration in bank fundamentals appears to be slowing, the broker’s analysis suggests no material improvement in fundamentals is forthcoming.

Just one measure is indicating some support for current valuations, suspects the broker. Even though the bank sector has re-rated significantly over the past year, a comparison between the banks’ price earnings ratios and non-bank industrials shows a discount of -5% below longer-run historic averages.

Goldman believes this measure underestimates the relative deterioration in sector fundamentals. 

The analysts compare banks and non-bank industrials across EPS growth, return on equity (ROE) and franking. On these measures, banks are trading at near-to-record-expensive levels, explains the broker.

Goldman Sachs has downgraded Westpac to Sell from Neutral (unchanged target of $24.10). The broker also points to execution, cost and timing risks relating to the bank's technology simplification.

By comparison to the other major banks, Westpac’s balance sheet is the most overweight to domestic housing, which the broker expects will be more growth constrained than commercial lending over the medium-term.

Goldman Sachs also downgraded its rating for National Australia Bank ((NAB)) to Neutral from Buy with an unchanged $34.04 target price. Other ratings are: ANZ Bank ((ANZ)) and Judo Bank ((JDO)) both on Buy, Bendigo & Adelaide Bank on Neutral, and CommBank and Bank of Queensland ((BOQ)) on Sell.

For more on the banks, see also this week's: https://fnarena.com/index.php/2024/05/23/australian-banks-post-first-half-results-sugar-hit/

Telstra’s less than ideal trading update

The week has not progressed as planned for shareholders in Telstra ((TLS)) with two brokers in the FNArena database downgrading ratings following the telco's trading update.

Macquarie downgraded to Neutral from Outperform, noting a less positive outlook for mobile markets and challenges in the enterprise segment.

Over at Morgans, the rating was lowered to Reduce from Hold. Formerly, management was looking to unlock the value of mis-priced assets from inside the conglomerate, bemoaned the broker, justifying a higher price earnings multiple.

Not only has the company back-pedalled on this front, but also management announced the reversal of the post-paid mobile CPI-based price rise mechanism for FY25.

Australia's number one telco will cut -9% off its total workforce to reduce fixed costs by around -$250m per year as the decline in Enterprise division revenue has accelerated, explained Morgan Stanley.

This broker pointed out software companies globally are displacing traditional telcos for telephony and connectivity.

In the final wash-up, the average target price for Telstra Group in the FNArena database fell to $4.00 from $4.38 prior to the trading update, which suggest a little under 16% upside to yesterday’s $3.46 closing share price.

To access views by several other brokers please refer to the Australian Broker Call Report or Consensus Forecasts/Stock Analysis on the FNArena website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms