In Brief: Retail Stocks, Supermarkets, Platform Providers, BNPL & The Australian Economy

Weekly Reports | 10:00 AM

Weekly Broker Wrap: preferred retail stocks, the favoured supermarket, platform providers, new BNPL entrant & the Australian economy. 

-Retail stocks for a higher cost environment 
-Time to buy Woolworths?
-Term deposit rates lift cash margins for platform providers
-Apple’s move into BNPL
-Impact of rising interest rates on the Australian economy

 By Mark Woodruff

Retail stocks for a higher cost environment 

Following discussions with a leading freight forwarder, Jarden extends its timeline for ongoing supply chain pressures into 2024. 

Furthermore, the broker assesses upside risk to its peak Australian inflation rate forecast of 6% year-on-year. Having originally anticipated a decline back toward 3% over 2023, higher-for-longer inflation is now anticipated.

The next three to four months will be challenging, suggest the analysts, as impacts on global shipping from backlogs caused by China’s covid-zero policy and lockdowns are digested.

While supply chain challenges are unlikely to ease, at least global shipping freight costs have stabilised, notes the broker. However, surging energy costs have resulted in higher fuel surcharges for both ocean cargo and road freight.

As a result of higher transportation costs going forward, Jarden suggests importers will have to adjust margins where possible. Thus, retail companies with either defensive characteristics or pricing power are preferred including Coles Group ((COL)), Metcash ((MTS)), Woolworths Group ((WOW)), Endeavour Group ((EDV)), Costa Group ((CGC)) and Treasury Wine Estates ((TWE)).

The broker also likes Qube Holdings ((QUB)) within its Transport sector coverage, as the protracted demand environment is likely to be supportive for freight and container volumes. Additionally, the company’s near-term earnings margins are expected to be insulated by a variety of covid-19 and cost-related surcharges.

Time to buy Woolworths?

Industry-wide checks by Goldman Sachs reveal that recent price hikes have not caused any drop-off in supermarket volumes, and only a limited shift to value by consumers.

This solid undertone adds to the allure of Woolworths, after a recent share price fall, suggests the broker. This at a time when the group has its lowest valuation premium versus Coles since the latter was spun out from Wesfarmers ((WES)) in 2018.

Key suppliers and industry participants generally agree Woolworths is the superior operator by a sizeable margin, and Goldman Sachs notes the company is also a stand-out in the online channel in terms of market share. 

The broker feels several years will elapse before Coles even has the capabilities to compete online, especially where the volume of its consumer data and advancement in data analytics are concerned. Woolworths and Wesfarmers have jumped ahead in this regard by setting up Woolies X and OneDigital, respectively, as central digital divisions.

Nonetheless, consumers have a greater value perception of Coles, according to the analysts, which may insulate the company’s growth should consumers trade down. 

Goldman Sachs has a Buy rating for Woolworths, with material potential upside to its $41.70 target price, while Coles is Neutral-rated with a $17.20 target. 

Term deposit rates lift cash margins for platform providers

Citi expects increased earnings from higher cash rates for the platform deposits of Netwealth ((NWL)) and Hub24 ((HUB)) will trump any downside from ongoing flow weakness related to current market volatility. This comes as term deposit rates have increased by around 50 basis points in recent months.