News SummaryDJ Australian Equities Roundup -- Market Talk17 Mar 2022 15:14:254 Views0338 GMT - Business conditions will remain turbulent in global transport industries as substantial increase in fuel prices add to other inflationary pressures, says Forsyth Barr. Airlines are likely the most exposed due to lower pricing power, while freight companies operating in the parcel, pallet and container markets are able to mitigate margin risks, the New Zealand broker says. "Congestion remains a major issue for sea freight, meaning elevated rates will likely continue at least in the short term, though anecdotal feedback suggests demand is softening on certain trade lanes," it says. Among New Zealand transport stock, it prefers Freightways and Mainfreight over Auckland Airport, Air New Zealand, Port of Tauranga and Napier Port. (stephen.wright@wsj.com)

0324 GMT - While FY 2022 has been a difficult year for Australian insurer Suncorp amid a streak of bad weather, its underlying business trends appear to have been solid, says Morgans. The broker notes strong top-line growth in the company's insurance and banking units. At the same time, Suncorp looks well-positioned to reap the rewards of its efficiency program in FY 2023. Despite Suncorp having raised its natural hazard allowance for FY 2022 amid flooding in Queensland and New South Wales, Morgans makes no changes to outer year earnings, but does cut the stock's target price 0.4% to A$13.14. Suncorp rises 0.6% to A$11.19. (alice.uribe@wsj.com)

0139 GMT - Suncorp's underlying performance should improve over the next 18 months even as the insurer increases its estimate of FY 2022 natural hazard costs to a potentially conservative A$1.1 billion from A$1.075 billion, Citi says. This assumes that there will be sufficient positives, including higher interest rates and earn through of rate rises, to offset the potential for a further boost in reinsurance costs and hazards allowances, it says. The investment bank trims its FY 2022 EPS forecast by 1.8%, but makes no change to its estimates for FY 2023 reinsurance expense or underlying margins. Citi retains its buy rating and A$13.60 target price. Suncorp rises 1.3% to A$11.26. (alice.uribe@wsj.com)

0105 GMT - Westpac's 1Q FY 2022 trading update included a positive outcome on expenses, but it will need to do more before its FY 2024 cost reduction target can be seen as realistic, Morgan Stanley says. The investment bank forecasts Westpac's expenses to fall a further 2% quarter-over-quarter in 2Q FY 2022, taking the half-on-half decline to 7.5% in 1H FY 2022. "We then expect a more modest decrease of 2.5% h-o-h in 2H FY 2022." A key driver of lower expenses in FY 2022, according to MS, is that costs allocated under Westpac's strategy to fix issues in its business are expected to fall from A$600 million in 2H FY 2021 to A$450 million in 2H FY 2022. (alice.uribe@wsj.com)

2234 GMT - Suncorp looked to have more reinsurance cover for the remainder of fiscal 2022 than peer IAG, but the difference no longer looks as material, says Morgan Stanley. Suncorp Wednesday said it had increased its FY 2022 catastrophe cost expectations by A$25 million to A$1.1 billion, and now expects the flooding in QLD and NSW to be four separate catastrophe events. MS says this has deleted some of Suncorp's aggregate reinsurance cover for the rest of FY 2022, adding that it reckons Suncorp and IAG are both at risk of elevated catastrophe budget increases for FY 2023. "This could further increase cost of capital for both insurers," says MS. (alice.uribe@wsj.com)

2312 GMT - Air New Zealand shouldn't need to delay its capital raising again as the faster reopening of New Zealand's border to tourism is one of the final pieces of good news it needed, says Macquarie. It sees the airline, half owned by the New Zealand government, as overvalued and thinks the sale of new shares (which the airline promised by end-March) will be a "more attractive entry point to play in the reopening of NZ to the world." Air New Zealand will need to raise NZ$1.1 billion-NZ$1.2 billion (about 70%-75% of current market capitalization) to help heal the pandemic hit to its balance sheet, Macquarie reckons. (stephen.wright@wsj.com)

2256 GMT - EML Payments' agreement to provide the payments platform for employee-benefit provider Up Group in Spain provides a base from which the ASX-listed firm can enter other geographies in the A$88 billion industry, UBS says. The move doesn't alter UBS's buy recommendation or A$4.55 target price, but the investment bank nonetheless sees it as an important development that could be significant over the medium term. EML, which could customize its current Australian platform for the project, has potential to partner with Up Group elsewhere and sign up other employee-benefit firms, UBS says. The stock last traded at A$2.35. (stuart.condie@wsj.com; @StuartLCondie)

2245 GMT - Clover Corp.'s 1H result was soft but the stock still doesn't look cheap despite it falling 17% so far in 2022, UBS says. The natural oils refiner and seller fell short of UBS's revenue and profit forecasts, with margins hit by significant raw-material and freight cost inflation. The investment bank notes that a pick-up in orders so far in 2H may be partly driven by customers pulling forward orders to hedge against supply-chain risks, and doesn't see revenues returning to FY 2020 levels until FY 2024. It maintains a neutral rating on the stock and cuts target price by 24% to A$1.40. Shares last traded at A$1.43. (stuart.condie@wsj.com; @StuartLCondie)

2245 GMT - Morgan Stanley now expects the RBA to raise official interest rates in August, saying the economy is in an upswing and will tolerate higher borrowing costs. While the economy is more sensitive to higher rates overall due to increased debt levels, buffers built up over the past two years--including a large build-up in savings and wealth across households and corporates--will significantly mitigate the impact of initial rate hikes, it says. The wealth impacts of rate hikes are most powerful in this environment, so a much sharper reversal in house prices is a key downside risk, the bank adds. ( james.glynn@wsj.com ; @JamesGlynnWSJ )

2239 GMT - The jury is out as to whether Westpac's customer and risk program and associated executive appointment will de-risk the Australian lender, says Bell Potter. It notes that Westpac's Customer Outcomes and Risk Excellence Program is designed to transform the company's culture and risk management. "It remains to be seen if this is a wise move in de-risking the bank's overall change and investment thesis," says BP. It notes that Westpac on Wednesday appointed Yianna Papanikolaou to the new position of Chief Transformation Officer, with her responsibilities including major change and investment programs and accountability for the CORE. BP raises Westpac's target price 4.2% to A$25.00, mainly due to positive six-month movements in the present value of cash flows, it says. Westpac was last up 0.9% at A$23.69. (alice.uribe@wsj.com)

2237 GMT - There is a creep forward in economists' views on the timing of the RBA's first interest rate hike. Morgan Stanley is the latest to join the camp that sees the first hike in August (from November) this year, arguing the bar for an increase will be reached earlier than expected. Inflation outcomes continue to surprise to the upside globally, and central banks are responding hawkishly. Domestic labor costs are rising. Expect RBA communication to become more hawkish, it adds. ( james.glynn@wsj.com ; @JamesGlynnWSJ )

2235 GMT - While higher petrol prices present the risk of reduced traffic on Transurban's toll roads, Macquarie says there is scant evidence of this. Petrol prices are up around 50% on year, and are 40% higher than the year before Covid-19 curbed mobility and hurt road traffic. "Beyond Transurban's statements, recent academic research suggests elasticity across the broader network of -0.04," Macquarie says. The research found that discretionary trips outside peak traffic hours and those planned for the weekend were the ones impacted. "Reality is such lower sensitivity means the current increase is less than 2% impact on traffic," Macquarie says. "This will be swamped by broader recovery." (david.winning@wsj.com; @dwinningWSJ)

2234 GMT - Chalice Mining has begun drilling in the Julimar state forest but likely needs full access to the area to rev up its stock, Macquarie says. Access to the forest is still partially restricted to existing tracks and, consequently, Chalice has yet to adequately drill test the Hartog prospect from its preferred drilling locations. "Securing access to enable drilling of the core target zones at Hartog and Baudin presents a key near-term catalyst," Macquarie says. "Drilling success in the state forest area has the potential to transform our base-case development scenario for Chalice." It retains an outperform call on the stock. (david.winning@wsj.com; @dwinningWSJ)

1830 GMT - Lendlease should consider changing its payout ratio to achieve targets that including A$3 billion of additional capital deployed by FY 2026, Macquarie says. Lendlease currently has a 40-60% payout ratio. "If it was to reduce the dividend, it would need to still pay out the trust, which is typically between 10-30% of EPS," Macquarie says. "Therefore, we believe a 10-30% payout ratio could be appropriate moving forward, as it would allow leverage to remain below 20%." (david.winning@wsj.com; @dwinningWSJ)

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