I. Sector Landscape
Aided by expansionary fiscal and monetary policies, output has rebounded in most economies, especially those with the most progressive vaccination rollout programs. Households have continued to build financial buffers, indicated by the elevated savings rate. In real estate, Investors continue to drive the market by hitting a record high value of new investor loan commitments clocking $11.7 billion in March 2022, a pivotal contributor to the rise in the value of new housing commitments.
Lending Activities to Support Housing Market
Update on Housing Finance: In March 2022, the total housing advanced by 1.6% to $33.3 billion, following a dip of 3.5% in February 2022, after recording a high of $33.9 billion in January 2022. Investor housing surged by 2.9% to $11.7 billion, and owner-occupied housing increased marginally by 0.9% to $21.6 billion.
Value of External Refinancing: In March 2022, the value of external refinancing for total housing, on seasonally adjusted terms, edged up by 4.6% MoM and 28.2% PcP and the value for owner-occupied housing advanced by 4.0%, slowing down from an increase of 11.5% witnessed last month.
Essential Statistics in the Financial and Managed Funds Industry
Statistics on Authorised Deposit-taking Institutions (ADIs): Total residents’ assets advanced by $34.2 billion or 0.7% in March 2022, primarily driven by increased loans and finance leases. Cash and deposits, including the RBA exchange settlement account balance, edged by $5.9 billion or 1.3%. Lending to non-financial businesses advanced by $10.9 billion or 1.3% in March 2022, with credit card lending slipping by $0.1 billion or 0.3% over the month.
Statistics on Managed Funds: In December 2021 quarter, the total managed funds industry advanced by $86.1 billion (+2.0% QoQ) to $4,477 billion funds under management. Consolidated assets of managed funds institutions edged up by $89.1 billion (+2.5% QoQ) to $3,605 billion. Total unconsolidated assets of superannuation funds advanced by $93.4 billion (+2.7% QoQ) to $3,524 billion.
Index Performance:
The ASX 200 Financials (GIC) and ASX 200 REIT (GIC) posted 25 months return of ~+56.86% and ~+46.69%, respectively, compared to ~+39.30% by the ASX 200 Index. Increasing consumer spending, surged housing demand, decent investment avenues, improved net flows, and resilient economic parameters sought by the RBA have contributed to the sector's growth.
Figure 4: The ASX 200 Financials (GIC) and ASX 200 REIT (GIC) outperformed the ASX 200 Index in the past 25 months by ~17.56% and ~7.39%, respectively:
Source: REFINITIV as of 05 May 2022
Key Risks and Challenges
Total unconsolidated assets of life insurance corporations crunched by $2.7 billion, down by 2.1% to $126.3 billion during December 2021 quarter. In March 2022, the value of total new loan commitments for business construction slipped by 23.6%, illustrating a typically volatile series. The total dwelling unit commencements declined by 13.5% to 50,200 dwellings in December 2021 quarter. On 03 May 2022, the RBA board decided to increase the cash-rate target by 25 bps to 35 bps; additionally, the RBA increased the interest rate on exchange settlement balances from 0% to 25bps. The recent disruption from the geopolitical stress between Russia and Ukraine may affect the global investment links of various managed funds.
Outlook
Positive Economic Growth Outlook: The central forecast for Australian GDP is to grow by 4.25% over 2022 and 2% over 2023. Household and business financial positions are generally good, accompanied by an upswing in business investment.
Increase in Total Residents’ Deposits: The total residents’ deposits increased by $23.8 billion, up by 0.9% in March 2022, primarily driven by Household deposits which edged up by $17.7 billion or 1.4%, emerging from the trend of continued growth in household savings.
Inflation to Stabilise by mid-2024: The central forecast for CY22 is for headline inflation at around 6% to stabilise underlying inflation to approximately 4.75% by mid-2024. The headline and underlying inflation are expected to moderate to about 3%.
Private New Capital Expenditure: In December 2021 quarter, the new private capital expenditure on buildings and structures stood at $17.45 billion, up by 2.2% QoQ or 11.2% PcP. Capital expenditure estimate for buildings and structures stood at $79.4 billion in FY22, 1% higher than the previous estimate.
Improved Total Construction Work Done: For the December 2021 quarter, the total construction work was clocked at $53.46 billion, up by 2.9% PcP. The value of work done on the building and residential increased by +2.0% and +0.6%, respectively.
II. Investment theme and stocks under discussion (SUN, WPR, MQG)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple method.
1. ASX: SUN (Suncorp Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$14.24 billion)
SUN is engaged in providing insurance, banking & wealth products to its customers.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 17.01% on 05 May 2022. Moreover, the stock might trade at a slight premium compared to its peers’ median Price/Book Value (NTM trading multiple) given growth in loans and deposit portfolio. For valuation, peers such as Insurance Australia Group Ltd (ASX: IAG), NobleOak Life Ltd (ASX: NOL), Steadfast Group Ltd (ASX: SDF), and others are considered. Given the diversified business operations in the financials space, improving lending rates, controlled cost measures, current trading levels and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $11.450, up by ~1.507% as on 05 May 2022. In addition, the stock has delivered an annualised dividend yield of 6.29%.
SUN Daily Technical Chart (Source: REFINITIV)
2. ASX: WPR (Waypoint REIT)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.75 billion)
WPR is engaged in operating a high-quality property portfolio in Australia. The company is a stapled entity constituting one share in Waypoint REIT Limited and one unit in Waypoint REIT Trust and its controlled entities.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 16.79% on 05 May 2022. However, the stock might trade at a slight discount compared to its peers’ average Price/Book Value (NTM trading multiple), given the construction slowdown and curtailed dwelling approvals. For valuation, peers such as Charter Hall Retail REIT (ASX: CQR), BWP Trust (ASX: BWP), Vicinity Centres (ASX: VCX), and others are considered. Given the decent financial position, improving expense ratio, proper liquidity framework, current trading levels and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $2.520, up by ~2.024% on 05 May 2022. In addition, the stock has delivered an annualised dividend yield of 5.34%.
WPR Daily Technical Chart (Source: REFINITIV)
3. ASX: MQG (Macquarie Group Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$78.54 billion)
MQG is engaged in asset management, retail & business banking, wealth management, leasing & asset financing, market access, and commodity trading.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 8.85% on 05 May 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average Price/Book Value (NTM trading multiple), given the recovery expectations in international markets. For valuation, peers such as EQT Holdings Ltd (ASX: EQT), Perpetual Ltd (ASX: PPT), Magellan Financial Group Ltd (ASX: MFG), and others are considered. Given the decent liquidity position & capital management, rising bottom line, increasing customer deposits, current trading levels and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $202.660, down by ~1.011% as on 05 May 2022. In addition, the stock has delivered an annualised dividend yield of 2.96%.
MQG Daily Technical Chart (Source: REFINITIV)
Comparative Price Chart:
Source: REFINITIV as of 05 May 2022
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Note: All the recommendations and the calculations are based on the closing price of May 5, 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.
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