It’s not only property-related stocks that are feeling the pressure from stressed-out ASX big banks who are tightening loan approvals and restricting access to credit, which is exacerbating the ongoing housing downturn.
The partial closing of the credit floodgates is hitting small business franchisees as well as many are suddenly cut off from getting bank loans, according to a report in the Australian Financial Review.
I have read other anecdotal reports of small businesses facing a credit squeeze and this could present a significant challenge for a number of large-cap ASX stocks that depend on franchisees for growth.
While the Domino’s share price and Flight Centre share price have been under pressure recently, these stocks are still up by 18% and 4% since the start of 2018, respectively. This compares to the 3% drop in the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.
The AFR report quoted the boss of privately-owned Foodco (the owner of Muffin Break and Jamaica Blue), which had been swept up in the parliamentary inquiry into franchising along with Domino’s and Retail Food Group Limited (ASX: RFG).
Foodco said that inquiries from prospective franchisees have halved over 2017-18 and blames tighter bank funding and the parliamentary inquiry for the sharp drop-off.
RFG’s share price has taken a big beating with the stock crashing 85% since January although its problems extend beyond these two issues.
The more important question for ASX investors is how much of an impact does tighter bank lending have on the businesses of Domino’s and Flight Centre as this potential risk factor has not been priced into their respective share prices.
Domino’s may have more to lose to as it’s targeting to deliver earnings before interest and tax (EBIT) growth of up to 33% in FY19 and it is banking on new store rollouts to drive that growth.
The good news here is that most of the new stores are overseas, although, it’s hard to imagine any franchisor not feeling the impact if banks are withdrawing support for the sector.
Banks have suffered their own major derating with sector heavyweights like Commonwealth Bank of Australia (ASX: CBA) share price and National Australia Bank Ltd. (ASX: NAB) share price taking a big hit.
Margins in the sector are under pressure and the banks are trying to lower the risks to their lending book. It makes sense that they would look to cut their exposure to franchisees given the issues confronting the sector.
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Motley Fool contributor Brendon Lau owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.