Editor’s Note

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.

It 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 5689 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.

But startups and high-growth companies now face increasing difficulty in raising additional capital from investors, as was seen last week with the closure of 10-minute grocery delivery service Milkrun, which was launched during the peak of the pandemic and employed 400 people.

As Morningstar’s Joshua Peach recently explored, the mood has shifted and investors are now demanding a focus on profitability across the technology sector.

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 impeding 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 says.

Read on for Morningstar’s ASX stock of the week, plus, a bank stock gets downgraded.

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 calls 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 the operations of the Reserve Bank.

It called for more regular communication by the RBA, with the governor to hold a press conference after each interest rate decision. And there will be fewer interest rate decisions, down from 11 to eight each 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 they 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 next week’s quarterly inflation data and updated economic forecasts.

Bank of Queensland downgraded


As flagged last week, Bank of Queensland (BOQ) followed through with some disappointing earnings results on Thursday 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) – a key indicator of bank profitability. NIM measures the difference between the interest a lender receives (interest paid by borrowers on loans) and what it pays (interest paid to customers for their savings).

Expected lower margins and higher expenses saw Bank of Queensland’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 says.

“Another bout of “one-off” restructuring costs appears possible in the second half, as the new management teams works on what it stated is a material productivity initiative.”

Still, with a 4-star rating, Bank of Queensland is undervalued.

My colleague Joshua Peach conducted a deep dive into the banking sector, identifying investing opportunities both outside the Big Four Banks, and within.

Or watch the video below as Zaia explains why ANZ (ANZ) and Westpac (WBC) remain our top picks among the Big Four Banks.

Undervalued miner: Whitehaven Coal


Trading at a near-30% discount, Whitehaven Coal (WHC) has become the cheapest ASX miner on our coverage list.

Mining analyst Jon Mills says although thermal coal prices have fallen, they remain high compared with historical levels on supply concerns as the war in Ukraine reinforces the need for energy security.

However, they are offset by a weaker AUD/USD rate, he notes.

“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,” Mills says.

4-star Whitehaven has an uncertainty rating of ‘very high’, which Mills says reflects the potential of a persistent fall in coal prices.

“Thermal coal use may decline as environmental awareness and regulations increase. Increasing adoption and falling costs of alternative energy sources, such as solar and wind, can threaten coal-fired electricity generation.”

However, he says rising consumption in Asia will likely support demand for high quality thermal coal, with a substantial amount of high capital intensity, low emission coal power fleets within the region still young in their operational lifecycle.