SLOW HOUSING SECTOR TO HIT BUNNINGS
HARDWARE chain Bunnings could be on the edge of an earnings slump as the slowdown in the housing market takes a deep toll, leading analysts say.
Waning confidence in the housing sector and tighter lending requirements among banks are tempering Australia’s love affair with home renovations, according to Morgan Stanley.
Analysts at the investment bank said the market could be underestimating the hit to Bunnings’ bottom line from a spluttering housing sector.
And less favourable weather the past quarter may have put even further pressure on sales, the analysts, led by Thomas Kierath, have said in a report for investors.
Lending to homeowners wishing to renovate their homes was also on the slide, meaning less demand for tradesmen, tools and hardware as those plans remained on the drawing board, they said.
It comes as investors apply more scrutiny to Bunnings, with the hardware chain set to generate more than half of parent group Wesfarmers’ earnings once grocery heavyweight Coles is spun out of the conglomerate later this financial year.
“Bunnings’ strong trading is likely to slow (from the past quarter) as comparables become more difficult, weather is less favourable, and the housing cycle slows,’’ Mr Kierath said.
Historically, changes in auction clearance rates tended to be correlated with Bunnings’ like-for-like sales growth in Australia and New Zealand, he said.
“Australia’s average auction clearance rate began sliding in July 2017, and growth in lending for renovations turned negative in January 2018,” he said.
“Over the fourth quarter of 2018 the auction clearance rate is down 13 percentage points year on year, a deterioration from the third quarter 2018’s down 10 percentage points.
“We expect continued softening in the housing market to affect Bunnings … we think the market is too optimistic on Bunnings’ valuation.”
The average national auction clearance rate has remained in the low-to-mid 50 per cent range for nine consecutive weeks, with the number of properties going under the hammer falling.
Morgan Stanley said lending for housing alterations and additions had fallen sharply since last August, with latest monthly figures showing a decline of 20 per cent in May.