In Brief: E-commerce, Preferred Retail, Labour Supply & Banks

This story features KOGAN.COM LIMITED, and other companies. For more info SHARE ANALYSIS: KGN

In Brief: Ecommerce stock picks, preferred retail shares, improvements to labour supply delayed & bank mortgage market competition.

Weekly broker wrap: 

-Discretionary e-Commerce stocks: Short term pain, long term gain
-Barrenjoey’s preferred retail exposures
-Australia’s labour supply improvements facing delays
-Competition in the mortgage market

By Mark Woodruff

Short term pain, long term gain for discretionary e-commerce providers

While Canaccord Genuity acknowledges short-term risks and potential share price volatility for discretionary e-commerce retailers, a structural shift is responsible for the broker’s bullish long-term outlook. The vast majority of the $332bn yearly retail spend in Australia is yet to migrate online.

In the meantime, these e-commerce retailers face a difficult FY23 due to lower consumer sentiment and a reallocation of spending to travel and services from durable goods, notes Canaccord. Those sourcing products globally are also expected to be negatively impacted by a lower Australian dollar.

While the broker incorporates a lower growth rate and margin profile for most stocks under its coverage of the discretionary e-commerce retail sector, most of these changes have already been captured by current share prices, which have fallen by -70% on average from 2020/21 peaks.

It’s felt efficient retailers with a low cost-of-doing-business (CODB) should weather the storm. Those with a strong balance sheet may even take advantage of the downturn, while the analysts expect a wash-out of low-quality/high-cost providers.

The broker reduces its rating for Kogan.com ((KGN)) to Hold from Buy and slashes its 12-month target price to $4.00 from $6.00. Lower forecasts for Australia’s largest listed e-commerce player incorporate lower private-label sales and lower margins, as well as lower growth for the marketplace business.

Even though the target price for Buy-rated Temple & Webster ((TPW)) falls to $5.20 from $8.50, Canaccord notes the company is the most well-capitalised ASX-listed e-commerce stock, with the best unit economics relative to peers.

Happily, 95% of Redbubble’s ((RBL)) revenue is sourced offshore, which tempers the broker’s lower FY23 and FY24 revenue forecasts, which still result in a $2.00 target, down from $3.00.

Forecasts for Marley Spoon ((MMM)) are relatively unchanged and Canaccord provides upbeat commentary around current high levels of growth and the substitution benefit of its Dinnerly meal-kits for customers wanting to reduce non-discretionary spending in a downturn. However, the application of a higher cost of capital to future cash flows lowers the target to $1.00 from $2.00 and the rating eases to Speculative Buy from Buy.

A higher cost of capital also weighs upon Toys 'R' Us ANZ ((TOY)) and the broker’s target falls to $0.14 from $0.16. While a meaningful increase in market share is expected, the inventory-heavy business model and competitive gross margins are expected to slow growth.

Regardless of economic conditions, Canaccord believes revenue for Australia’s largest tutoring platform Cluey ((CLU)) will grow. However, higher costs to fund growth are incorporated into forecasts, which reduces the Buy-rated broker's target price to $1.20 from $1.70.

Barrenjoey’s preferred retail exposures

Barrenjoey’s July retail survey suggests consumers are becoming more cautious due to cost of living pressures. 

The survey revealed grocery prices remain the major cost of living issue, with petrol closing the gap fast.

Interestingly, some consumers may be in for a further surprise, as surveyed mortgage holders expect interest rates to increase by around 160 basis points over the coming year, whereas Barrenjoey notes money markets are pricing-in 235bps.

Despite the prospect of higher interest rates, the broker highlights renovation intentions are unchanged, and surprisingly, consumers see house prices at a higher level in 12 months. Also, an inclination to travel for work is adding to strong overall travel intentions.

As consumers resume overseas travel, Barrenjoey expects a net headwind for retail sales, as Australians spend more abroad than foreign tourists spend in Australia.

After taking these survey results into account, Barrenjoey  prefers supermarket-linked shares over discretionary or non-food retail stocks.

Preferred exposures are Metcash ((MTS)), Woolworths Group ((WOW)), Nick Scali ((NCK)), Lovisa Holdings ((LOV)), Dusk Group ((DSK)) and Universal Store ((UNI)). Least preferred are Treasury Wine Estates ((TWE)), JB Hi-Fi ((JBH)), Endeavour Group ((EDV)) and Kogan.com ((KGN)).

Overall, the broker believes consensus FY23 expectations for consumer stocks are too high, due to a weakening macroeconomic backdrop and elevated earnings bases. Stocks considered to have the most earnings risk (in descending order) are Kogan.com, JB Hi-Fi, Treasury Wine Estates, Domino’s Pizza Enterprises ((DMP)) and Harvey Norman ((HVN)).

Australia’s labour supply improvements facing delays

Critical skills shortages across the economy continue to drive increased demand for offshore labour and skilled visas. 

However, Jarden expects a slower rebound in migration will delay new labour supply and maintain downward pressure on the unemployment rate.

Australia’s migration and population growth is likely to disappoint, according to the broker, unless material changes or reforms are made to Australia’s migration and visa system.

Readers may recall the government’s introduction of the priority skills list during covid. While the list has seen faster processing for some occupations, Jarden finds it has also resulted in broader delays and reduced the reliability of the overall system.

Visa processing turnaround times of 2-4 weeks prior to covid have now blown out to 6-8 months, note the analysts, due to a range of factors including labour shortages, new and inexperienced staff, manual processing and backlogs.

More positively, business travel is coming back strongly, while student and working holiday visas have also recently jumped after limits on working hours were lifted, points out Jarden.

Competition in the mortgage market

Jarden’s new ranking tool, that tracks mortgage broker sentiment in the Australian mortgage market, finds Macquarie Group ((MQG)) is a clear standout on most measures, while Bendigo & Adelaide Bank ((BEN)) is performing best among the smaller lenders.

The Jarden Mortgage Competition Tracker is used in conjunction with a range of other independent data to create an aggregate view of competition in the market.

ANZ Bank ((ANZ)) remains the laggard and rates below average in all categories, according to the analysts. While turnaround times have improved, they remain above peer averages and the bank’s mortgage broker net promoter score (NPS) is low by comparison to the larger lenders.

Macquarie Bank maintains a more than two-year lead over larger lenders in most categories, and is a clear winner on NPS, with National Australia Bank ((NAB)) and CommBank ((CBA)) close behind.

Recent mortgage broker feedback to Jarden suggested NAB’s pricing had been out of market, which now shows up in the Competition Tracker results, while Westpac ((WBC)) exhibits improved (lower) pricing. CommBank is considered to maintain a strong overall position.

In the very competitive smaller-lender part of the market, the Competition Tracker reveals Bendigo & Adelaide Bank and ING Group have been the best performers, though Suncorp Group ((SUN)) is rapidly improving.

For non-bank lenders in general, Jarden sees shorter turnaround times and a better NPS performance compared to the major banks.

ABS data show the non-majors and non-Authorsised Deposit-taking Institutions (ADI) have recently been taking market share, while the broker observes a decline in fixed rate lending has seen major bank share of new lending fall by around -3% over the last year.

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