Weekly broker Wrap: some discretionary retail stocks may positively surprise; plans for Australian gas projects upset by activists & Macquarie's view on the Bank sector.

-Potential upside surprises for some Discretionary Retail stocks
-Activists weigh on plans for large Australian gas projects
-Macquarie retains its Underperform rating on the Bank sector

Potential upside surprises for some Discretionary Retail stocks

For the patient investor, Morgans sees meaningful medium-term upside for share prices in the Discretionary Retail sector, particularly as current sales and earnings expectations remain cautious. 

A grinding period of inflationary pressure on the cost of living has weakened consumer demand and exacerbated uncertainty about future trading patterns, notes the broker, in its preview of the upcoming AGM season.

Nonetheless, there is potential for some surprises over the season, which would support Morgans view of real value opportunities.

As international freight and other supply costs may now be in a state of deflation, the analysts predict broadly stable gross earnings margins, despite the impact of a lower Australian dollar.

Over at Jarden, analysts remain cautious on ASX-listed household goods stocks, yet there is potential for an upside earnings surprise in FY24 from the installed electronics base, particularly across IT, small appliances, accessories and gaming.

Replacement cycles in these categories historically range from two to eight years, explains the broker, suggesting a higher installed base should start to positively impact through 2024, given the base surged during the pandemic.

All else being equal, and perhaps with some assistance from a better than forecast housing cycle, the broker suggests the larger replacement cycle could add between 0.5% and 8.6% to sales for JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and the A&NZ operations of Breville Group ((BRG)) over 2024-28. 

From among these names, the analysts prefer Breville Group, which will likely benefit to an even greater extent from the replacement cycle in the US, along with the advantages of subscription services, new markets and new product development into 2024/25.

Looking further out, Jarden believes this scenario could drive share price upside for Neutral-rated Harvey Norman and JB Hi-Fi (Underweight) by around 7% and 3%, respectively. 

Neutral-rated Breville Group is the broker's preferred exposure followed by Harvey Norman and then JB Hi-Fi.

On JB Hi-Fi, Morgans sees an upcoming negative catalyst arising at its AGM on October 26. It's thought FY24 sales momentum is stalling in the wake of the post-pandemic surge, as consumer spending on electronics and electrical products moderates.

On the flipside, this broker sees positive catalysts for both Baby Bunting ((BBN), due to a moderating rate of sales decline, and for Domino's Pizza Enterprises ((DMP)) on continued positive growth at the group level.

Activists weigh on plans for large Australian gas projects 

Macquarie highlights increasing permitting and regulatory uncertainty facing offshore oil & gas developers in Australia. It's thought permitting has become unworkable, with activist legal challenges causing significant delays and likely capex overruns.

Regarding specific offshore activities such as drilling, seismic and pipe installation, the broker highlights environmental plans are now key targets for activists opposed to large gas projects.

By way of reaction, key players are already pivoting overseas with Woodside Energy ((WDS)) active in Mexico, Senegal and the US, while Santos ((STO)) is also targeting the US, along with Papua and New Guinea.

For both companies, Macquarie sees a pivotal "make or break" year in 2024.

As a result of successful legal challenges to environmental plans at Barossa (Santos) and Scarborough (Woodside), the analyst defers its project start-up forecasts to the second half of 2025 and the first half of 2027, respectively.

The grounds for legal challenges were based on insufficient consultation with traditional owners.

A capex increase and delay to schedule were already anticipated at Barossa, and Macquarie retains its Outperform rating for Santos, with a $9.60 target, down from $9.90. A Neutral rating and $36 target are retained for Woodside.

Further final investment decisions (FID) won't be contemplated by the industry until clarification on consultation processes, explains Macquarie.

Other key growth projects under challenge, according to the broker, include Dorado, owned by Santos and Underperform-rated Carnarvon Energy ((CVN)), Browse (Woodside) and Neutral-rated Cooper Energy's ((COE)) Otway Phase 3.

Macquarie retains its Underperform rating on the Bank sector

Despite rapidly rising rates and high consumer indebtedness, Macquarie is surprised by the credit quality and resilience of the Australian banks.

The broader macroeconomic backdrop appears to have improved in recent months, yet the broker retains its Underperform rating for the sector. Ongoing challenges from margin compression on both mortgages and deposits are expected, in addition to expense headwinds. 

It's thought the market has not fully allowed for these eventualities.

While Macquarie forecasts FY24 pre-provision earnings for banks will decline by around -3-10% on margin and cost pressures, overall earnings estimates rise on higher-for-longer bond yields.

Five-year swap rates have increased by around 40bps to 4.4%, providing and a FY24 8-11bps tailwind for margins, which will partly offset the negative impacts from competition and deposit switching, explains the broker.

However, these higher overall earnings forecasts are outweighed by the negative impact of higher discount rates on valuations for bank shares under Macquarie's research coverage.

While the analyst reduces its forecast bad and doubtful debts charges for FY23 and FY24, based on current trends and healthy provisions, the risk of higher credit losses remains, given the impacts of higher rates are still yet to fully flow through the economy.

Business losses are considered a key source for concern if the cycle were to worsen. According to data from ASIC, there is an ongoing rise in the number of companies entering administration, though this is largely driven by the construction sector, explains the broker.

Neutral-rated National Australia Bank is Macquarie's preferred exposure to banks, partly because it has a larger SME exposure compared to peers. The number of personal business-related bankruptcies (as a proxy for SMEs) has remained low compared to pre-covid levels.

Target prices for all bank shares under the broker's coverage fall slightly. These new targets can be seen on the FNArena website under the Broker Call Report or via Stock Analysis.

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