1. Business Insolvencies Return to Pre-Pandemic Levels
Almost a year since the RBA began raising interest rates from a record low of 0.1%, business insolvencies have returned to pre-pandemic levels.
Data released this week by the Australian Securities and Investments Commission (ASIC) shows 831 companies entered administration during March, the highest monthly figure since July 2019.
This marks the end of a three-year insolvency lull, as government stimulus measures, record low interest rates and temporary protections propped up companies that may have otherwise been forced to close.
ASIC says 5,689 companies collapsed between 1 July 2022 and 2 April 2023, well above the 4,912 insolvencies recorded the entire previous financial year.
The construction sector alone accounts for around 30% of all insolvencies this past year, hit hard by soaring material and labour costs.
Startups and high-growth companies are facing increasing difficulty in raising additional capital, as seen with the closure of 10-minute grocery delivery service Milkrun, which was launched during the pandemic and employed 400 people.
For no-moat, capital-intensive businesses such as Zip, the rush to boost profitability is required given external funding challenges and rising interest costs.
"Despite efforts to cut costs, exit unprofitable business segments, and reduce credit losses, the combination of rising interest rates and impending economic slowdown presents uncertainty about whether Zip (ZIP) can generate sufficient cash flow before its available cash and liquidity runs out," — Morningstar equity analyst Shaun Ler
2. Tech Investor Sentiment Shifts
As Morningstar's Joshua Peach recently explored, the mood has shifted and investors are now demanding a focus on profitability across the technology sector.
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3. RBA’s First Major Overhaul in Decades
Reserve Bank governor Philip Lowe this week expressed hopes to stay in the role for a second term, as the findings of a highly anticipated review into the central bank call for a watering down of responsibilities in the top job.
As Firstlinks editor-at-large Graham Hand explains, the changes include the creation of two Boards: one to set monetary policy and another to oversee operations of the Reserve Bank.
It also called for more regular communication by the RBA, with the governor to hold a press conference after each interest rate decision. The number of interest rate decisions will drop from 11 to 8 per year.
The government has accepted in principle the 51 recommendations made in the review, which is expected to receive bipartisan support.
Governor Lowe has faced criticism for lifting interest rates 10 times in the past 12 months despite signalling during the pandemic that rates would remain on hold until 2024.
The RBA paused in April but hasn’t ruled out another rate hike when it meets in less than two weeks, pending upcoming inflation data and economic forecasts.
4. Bank of Queensland Downgraded
As flagged last week, Bank of Queensland (BOQ) reported disappointing earnings as first half cash profit fell 4% to $256 million.
Margin trajectory was also weaker than expected, as strong competition for new home loans dampened net interest margins (NIM).
NIM measures the difference between the interest a lender receives (from loans) and what it pays (to savers).
Expected lower margins and higher expenses saw BOQ’s fair value estimate lowered by 3.4% to $8.50.
“Operating expenses in the first half disappointed, up 7%, and tracking much higher than our prior 3.5% forecast for the full year,” — Morningstar banking analyst Nathan Zaia
Another round of “one-off” restructuring costs may come in the second half as the new management team works on productivity initiatives.
Still, with a 4-star rating, Bank of Queensland is considered undervalued.
Joshua Peach recently conducted a deep dive into the banking sector, highlighting investment opportunities inside and outside the Big Four banks.
Watch the video below as Zaia explains why ANZ (ANZ) and Westpac (WBC) remain top picks among the Big Four.
Bonus: Undervalued Miner – Whitehaven Coal
Trading at a near-30% discount, Whitehaven Coal (WHC) is the cheapest ASX miner on Morningstar’s coverage list.
Mining analyst Jon Mills says although thermal coal prices have dropped, they remain historically high due to ongoing supply concerns and energy security needs amid the Ukraine war.
This is partly offset by a weaker AUD/USD exchange rate.
“After updating our commodity price assumptions, we think thermal coal miner Whitehaven Coal is the cheapest on our coverage list. It trades at a 29% discount to our AUD 9.80 per share fair value estimate, which we’ve marginally lowered by 2% due to the New South Wales coal reservation scheme,” — Jon Mills
The 4-star rated Whitehaven has a ‘very high’ uncertainty rating due to the risk of persistent coal price declines.
Mills notes that environmental regulation and clean energy adoption could threaten coal, but rising demand in Asia may support prices due to newer coal power infrastructure.
