Weekly reports | 10:00 AM
Weekly broker recap: increased business risk and stress, short term upside for regional banks, telecom infrastructure retains premium, classifieds comparison.
– Insolvencies on the horizon amid growing risk and stress for businesses
-Regional banks should benefit in the short term from the rise in rates
-Recent sales suggest higher rates not weighing on telecom infrastructure premiums
-Positive outlook for auto ads, job ads expected to normalize
By Danielle Austin
Slow acceleration of insolvency proceedings increases business risk and stress
CreditorWatch has demonstrated increased insolvency risk for certain industries as the Australian Taxation Office and many financiers are scrapping grace periods for late-paying businesses, exposing those that have been trading unprofitably since 2020. In addition, CreditorWatch pointed out that amid rising rates, the cost of debt is only going up.
Analysis from CreditorWatch found that nearly every industry saw an increase in the number of businesses overdue with payments of 60 days or more, and while construction remained the sector with the highest number of overdues, the index CreditorWatch June Business Risk Index found the highest risk levels in the Food & Beverage and Arts & Entertainment sectors.
Information from Jarden revealed that business insolvencies have increased slightly, still remaining well below normal levels, but comments from insolvency and restructuring partners suggest that business stress is increasing. These insolvency counselors noted that they had experienced an increase in client engagement as over-indebtedness, cost pressures, supply chain constraints, labor issues and rising rates all aggravated business stress.
With bankruptcies introduced by the Australian Taxation Office largely subdued over the past two years, analysts had predicted a surge in activity after the election, but the acceleration has been slower than expected. Jarden now expects the ATO to step up collection and enforcement of overdue deposits over the next year, noting that collectible debts in FY21 are up 50% from pre-covid levels and should now have increased by another 25%.
The threat of insolvency remains a key issue in the construction industry, with the sector already approaching pre-covid levels and set to rise. Jarden noted that most of this insolvency activity comes from small businesses with less than $1 million in liabilities, but with many contractors taking out credit insurance given the outlook, risk may be transferred to insurers. .
The broker also pointed out that homebuyers are likely most at risk of having their projects unfinished, given that they are more likely to be unable to finance higher cost construction and less likely to commit. lawsuits if builders back out of unprofitable contracts. Jarden sees a growing risk that pipeline work will not be completed. Outside of the construction sector, Jarden pointed to manufacturing, technology, senior care, transportation and discretionary retail as key sectors at risk of insolvency.
Regional banks react to rate hikes
Morgan Stanley focused on the impact of rising interest rates on regional banks covered by its coverage. Morgan Stanley analysts expect a rapid and aggressive rate hike cycle to benefit regional banks in the near term, but lead to increased competition in mortgages and deposits next year.
The broker finds Bendigo & Adelaide Bank ((BEN)) better positioned for upcoming rate hikes than its counterpart Bank of Queensland ((BOQ)). It was pointed out that rate-insensitive deposits make up 20% of Bendelaide’s total funding, but only 10% of Bank of Queensland’s funding, likely giving the former a bigger benefit from rate hikes. While the broker has raised its guidance for Bendelaid’s fiscal year 23 to 13 basis points, it expects any advantage from Bank of Queensland to be more than offset by the competition.
That said, Morgan Stanley expects both regional banks to post system-above growth in FY23 and FY24. Morgan Stanley notes that Bank of Queensland (for which the broker is rated overweight with a target price of $8.10) offers a longer-term path to improved profitability, but likes the company’s clear strategy and roadmap, while Bendigo & Adelaide (rated at equal weight, with a target price of 10, $00) offers greater leverage than rising rates – greater confidence in the benefits of emerging margins and cost improvements would lead to a more positive outlook from the broker.
Interest rates do not deter telecom infrastructure premiums
JP Morgan analysis suggests the premium demanded in the sale of Spark New Zealand’s stake in TowerCo highlights continued demand for telecoms infrastructure despite the current rising rate environment, and spells a positive for Telstra ((TLS)) and its potential to monetize InfraCo in the coming months.
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