In Brief: Shape, Netwealth & Wesfarmers

This story features SHAPE AUSTRALIA CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: SHA

Retail management adapts for macro headwinds and a challenged consumer, while Netwealth catches tailwinds

-Order backlog a boon for Shape Australia
-Netwealth’s riding the structural growth levers
-Wesfarmers flexes its muscles to gain market share

By Danielle Ecuyer

Quote of the week comes from …drumroll……

“The global economy is entering a new era marked by higher fiscal spending, increased capital investment, and stronger economic growth,” said Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management. “The overall outlook remains optimistic with investment levels picking up and rates normalizing. While inflation is expected to be slightly higher than pre-pandemic levels, the starting point for inflation is lower than in last year’s forecasts, leading to modestly lower long-term inflation assumptions.”

Shape stays in shape

Commercial builder and construction company Shape Australia Corp ((SHA)) reported a positive trading update, which Moelis views as a sign of management’s operational execution despite a challenging macro backdrop, including delays in project commencements.

Year-to-date, Shape has won $350m in projects, a 20% increase on the previous corresponding period, with a 5% rise in the order backlog to $480.3m. FY24 concluded with a backlog of $457.4m.

From a macro perspective, management noted “continuing pricing pressures are impacting client budgets,” though the order backlog supports the medium-term outlook.

Shape’s modular division achieved $10.9m in project wins, with year-to-date wins of $29.7m. The broker notes this division is also experiencing commencement delays.

New capabilities in the Design & Build division are expected to be validated by “a major project win for an undisclosed ASX-listed client,” with construction scheduled to begin in early 2025.

Moelis believes this contract win demonstrates the potential for future large contracts in this emerging division. Following the update, the analyst lifts EPS forecasts by 2% for FY25/FY26.

The stock is rated Buy, with a $3.24 target price and a forecast dividend yield of 6% for FY25.

Netwealth, shame about the valuation

Wilsons wins the title of the week for In Brief with “A Multi-Lever Momentum Story” following Netwealth Group’s ((NWL)) AGM update.

Operationally, Netwealth reported custodial funds under administration (FUA) growth to $98.6bn as of 18 November, an increase of 12.5% since the end of FY24. The analyst notes net flows for the last six weeks have moderated from the notably strong 1Q25.

Including a 2% rise due to market movements, Wilsons estimates net inflows of over $1bn in the last six weeks. Inflows can be “lumpy,” the analyst explains, with an acceleration expected in late 2024 to achieve an estimated 2Q25 result of $3.2bn in net fund flows, a 25% increase year-on-year but a -17% decline from 1Q25.

With forced migrations from competitors like MLC Wrap, CFS FirstWrap, and BT Asgard, Netwealth is benefiting from positive tailwinds, buoyant markets, and increased value and volume in FUA.

Pooled cash growth has “re-accelerated,” driven partly by the beginning of the global interest rate easing cycle, as funds are reinvested into riskier assets as short-term maturity deposits roll off.

Wilsons raises the target price to $30.33, noting the momentum across earnings drivers and the quality of earnings justify an “above-average” valuation.

Alas, much of the future earnings growth is already seen as discounted at current stock price levels. Netwealth thus remains stuck on a Market Weight rating.

Are Wesfarmers’ earnings under the pump?

Goldman Sachs revealed insights into the retail environment from its latest channel checks. As competition from Amazon and Temu grows, an increasing number of incumbent retailers are exploring vertical marketplaces to complement their first-party (direct-to-consumer) retail strategies.

The broker highlights Wesfarmers ((WES)) and JB Hi-Fi ((JBH)) as examples of retailers leveraging eCommerce platforms, with optionality for Coles Group ((COL)).

The outlook for the Australian consumer remains “pessimistic,” with a focus on “value” and “down-trading” across most categories. Retailers are launching peak-period promotions earlier, focusing on sales and market share. Events like Click Frenzy (11-17 November) and Black Friday/Cyber Monday (19 Novembe-r2 December) precede traditional Boxing Day sales.

Technology and health and beauty are seeing mid-single-digit growth driven by replacement and innovation cycles. Home improvement, furniture, and department stores are facing challenges due to a weak housing market and increased online competition.

Retailers are increasingly using AI to mitigate profit margin pressures from heightened promotions, though consumer adoption of AI tools remains slower than expected.

Goldman views Wesfarmers as a market share winner and retains a Hold-equivalent rating. Bunnings continues to gain market share, while Metcash Holdings‘ ((MTS)) hardware DIT business is losing ground.

Kmart’s own-label strategy with Anko defends against competitive pressures by offering quality products at great prices through an omni-channel approach. Big W and Myer ((MYR)) face pressure as Wesfarmers’ Target and Kmart operate 446 stores combined, the broker explains.

In health and beauty, there is a shift from “prestige” to “masstige,” with duplicate brands like MCo Beauty achieving $500m in sales over five years and becoming exclusive to Woolworths Group ((WOW)). Wesfarmers’ Priceline is believed to be performing well, benefiting from a strategic shift to health/beauty and price reductions initiated in 2H24 to increase market share.

Sector analysts at Jarden remain cautious about Wesfarmers’ earnings outlook and see risks to EPS estimates. The stock is rated Sell-equivalent, with a $61 target price.

Goldman Sachs holds a Hold-equivalent rating, with a $69.50 target price, citing resilience in Bunnings’ earnings and future growth opportunities.

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