In Brief: Travel, Telcos, Retail & Global Food Prices

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Weekly Broker Wrap: leisure travel demand strong and corporate improving; challengers in the domestic broadband market; earnings downgrades for discretionary retail & global food prices.

-Leisure travel strong, positive signs for corporate travel
-Wilsons compares Superloop and Aussie Broadband 
-Earnings downgrades for discretionary retailers
-Global food prices easing, but will remain structurally higher

By Mark Woodruff 

Positive signs for corporate travel, as leisure remains elevated

Travel is becoming an increasingly prioritised discretionary spend, suggests Macquarie. 

Despite elevated airfares and constrained international capacity, consumer spending on travel in May remained above 2019 levels, according to the broker’s proprietary High Frequency Consumer Data.

Leisure demand is strong and holding up better than Macquarie previously anticipated, while a corporate travel recovery is expected to take time, with volumes of tickets sold tracking at about 70-80% of 2019 levels.

However, a survey by Morgan Stanley of 92 corporate travel managers with a global spread of operations, indicates encouraging improvement for corporate travel budgets. 

Combined, these managers have an aggregate travel spend of circa US$5bn, and 85% of respondents expect their firm will return to pre-covid expenditure levels in 2023.

While Corporate Travel Management ((CTD)) is assigned a Neutral recommendation by Macquarie, Overweight-rated Morgan Stanley (with a FY24 profit forecast 13% ahead of consensus) points out positives for the company from the survey.

The small-to-medium enterprise (SME) segment of the travel market is leading the recovery at more than 100% of 2019 spend, and 42% of firms with less than US$1bn of revenue have returned to pre-covid levels, up from 32% at last year’s survey.

The corporate market makes up around 30% of Qantas Airways’ ((QAN)) domestic revenue, notes Morgan Stanley, and the company estimates it has circa 80% revenue share in that market. 

This broker is Overweight rated on Qantas and believes that while airfares are elevated, earnings have further potential for growth. It’s felt the survey feedback aligns with management commentary on robust demand and expectations that travel will return to pre-covid levels. 

In terms of capacity in June, North America leads all key regions at 101%, according to aviation analytics company Cirrium, ahead of Asia at 97% and A&NZ and Europe at 96% and 94%, respectively.

For ASX-listed stocks in the Travel sector, Macquarie cautions the key valuation risk stems from a recession, which would reduce demand for both corporate and leisure travel.

Nonetheless, this broker has Outperform ratings for Qantas Airways, Webjet ((WEB)) and Flight Centre Travel ((FLT)).

The leisure businesses for both Webjet and Flight Centre should continue to benefit from stronger than expected consumer spending, according to Macquarie, and Flight Centre’s Corporate segment recovery is also outpacing peers. 

Wilsons compares Superloop and Aussie Broadband 

Incumbents like Telstra ((TLS)) are losing share in domestic broadband as the market becomes gradually commoditised, with price, speed and customer service increasingly important to customers. 

Customers are willing to change/churn for the right price or offering given a lack of quality customer service offerings from the big four telcos, according to Wilsons, and constant efforts to resell additional products.

Along with other ‘challenger brands’, the analysts point out both Aussie Broadband ((ABB)) and Superloop ((SLC)) continue to take market share from Telstra, TPG Telecom ((TPG)), Optus and Vocus Group, which currently have an around 86% share of the broadband market, down from 95% as at June 2019.

Management at Superloop has previously suggested the 'challenger' market could double from around 14% to 30%, which suggests to Wilsons a genuine runway ahead for both Superloop and Aussie Broadband, which have market shares of 2.5% and 7.0%, respectively.

The broker initiates coverage on Superloop with an Overweight rating and 81c target price and assigns a Market Weight rating to Aussie Broadband with a $2.91 target. 

Both companies will need to acquire customers in order to reach their medium-term aspirations, but Superloop is in a stronger position to undertake this given its strong balance sheet, believe the analysts.

In terms of future organic growth, Superloop is stronger on the Wholesale front (the company’s origins), while Aussie is better placed in its Consumer business due to its stronger brand and net promoter score, explains Wilsons.

The Consumer segment has always been the dominant business for Aussie, and then management expanded into Business, Enterprise & Government via the Over the Wire acquisition.

On a purely NBN basis and excluding any potential acquisitions, the broker expects Aussie can easily achieve its FY25 aspiration to be Australia's "4th largest provider of communications and technology services". Evidence of traction with its fibre roll-out is awaited, which is expected to be a catalyst going forward.

Market share for Superloop has grown to 2.5% (as of December 2022) from 1.5% (excluding satellite) at September 2021. The company has made several smaller acquisitions, notes the broker, two of which have given it scale in Residential broadband.

In another positive, Wilsons explains that by having staff offshore (predominantly in Sri Lanka), management has both flexibility in operations and the ability to pull cost levers should price competition intensify.

The National Broadband Network (NBN) accounts for around 98% of all services in the broadband market.

While the December 2022 quarter was the first ever quarter where the total amount of NBN services fell, Wilsons expects a return to growth in the coming years on the easing in border restrictions and the numbers of international students returning to more normalised levels.

The broker does, however, maintain a watching brief on the rise in competing technologies. For example, some consumers are using their 4G phones to save costs on home internet.

Should the attraction of customers to 5G networks over broadband grow, Aussie Broadband and Superloop should be able to compete through white-labelling mobile services from Telstra, Optus or Vodafone, explain the analysts, albeit increased pricing pressure may result from not owning their own networks.

Earnings downgrades for discretionary retailers 

Savings buffers for consumers have largely been erased after 14 consecutive months of CPI readings above 5%, with the cost of essentials such as groceries fuel and rent increasing relentlessly. 

Something had to give, as evidenced by recent profit warnings in the Discretionary Retail sector, suggested Morgans last week.

As a result of this backdrop, the broker lowered its earnings estimates for all discretionary retailers under its research coverage to reflect the likelihood of ongoing consumer stress.

This week, Canaccord Genuity also downgraded target prices for the majority of discretionary retailers it covers, noting a combination of sales weakness and ongoing wage pressure dynamics.

However, Morgans highlighted there may be a moderation of inflation in the months ahead, limiting the number of potential interest rate rises. When these rises are over, it’s thought consumer sentiment may start to improve and investors can begin to focus on an upcoming recovery.

Interestingly, Canaccord noted the recent emergence of a more mission-driven customer, as evidenced by a mix of low passer-by traffic yet relatively strong sales conversion.

The only Buy-rated companies under this broker’s coverage are Dusk Group ((DSK)) and Lovisa Holdings ((LOV)). A pullback in the latter’s share price is thought to represent an attractive entry point for investors.

Add-rated Morgans also highlighted Lovisa and expected outperformance based on its resilient customers and strong competitiveness. It’s noted revenue growth is far more reliant on network expansion than like-for-like sales. 

To illustrate this point, 24% of the broker’s 32% forecast growth in FY23 sales is driven by the increased number of stores.

The analysts also have an Add rating for Beacon Lighting ((BLX)), Super Retail Group ((SUL)) and Universal Store ((UNI)).

Morgans also downgraded its ratings for JB Hi-Fi ((JBH)) and The Reject Shop ((TRS)) to Hold from Add.

Shares in JB Hi-Fi have significantly outperformed the Discretionary Retail sector over the past three months, observes the broker. Shares are also trading at close to fair value when risks around consumer spending are considered, as well as the lack of significant store rollout potential.

For The Reject Shop, the analyst suggests its core customers are likely to be undergoing greater stress on household budgets than that of other retailers. 

To access the recent target price changes please refer to the FNArena website under stock analysis or to the Broker Call and the Broker Call *Extra* Reports.

Stocks with lower targets that are not mentioned above for Morgans are: Accent Group ((AX1)) and Baby Bunting ((BBN)). Adairs ((ADH)) was not impacted, but only because of a material fall in target just prior to the broker’s latest research.

For Canaccord, Collins Foods ((CKF)), Adairs and KMD Brands ((KMD)) also received lower target prices this week.

Food prices are declining but will remain structurally higher

While global food prices will continue to decline over the rest of 2023 and into 2024, they are expected to remain 25% higher than during the pre-pandemic decade.

Oxford Economics forecasts global food prices, as measured by the World Bank food price index, will decline by -7.7% in 2023 and -4.8% in 2024.

The three largest components of this index, comprising just over 10% each, are palm oil, maize and soybean meal.

Near-term food prices would be falling to a greater extent, but crop yields are falling as farmers are reducing fertiliser use, because fertiliser prices remain much higher than prior to covid, explains Oxford.

Moreover, trade restrictions (e.g. tariffs and export bans) remain much more prevalent than pre-pandemic, notes Oxford, and will be another drag on price normalisation. 

Such government policies can hinder food supply in the medium term, as distorted price signals don't allow global markets to adjust.

While supply shouldn't pose a threat to prices, Oxford notes differences among regions and crops will persist. Also, inventories as a ratio of total demand declined in 2022 but remained a long way from putting upward pressure on prices for the most important crops.

Over the longer term, climate change is expected to result in upward pressure on food prices. 

The Intergovernmental Panel on Climate Change (IPCC) forecasts a 7.6% median increase in cereals prices by 2050 due to more common extreme weather events, rising temperatures and an increasing occurrence of droughts.

In addition, countries have been putting in place favourable incentive schemes for biofuels production, which will result in changing crop allocations and an extra source of demand for soybeans and maize.

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