Weekly Reports | May 24 2024
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 warns Australian banks seem grossly 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.
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