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The Wrap: Households, Amazon & The Budget

Weekly Reports | Apr 05 2019

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

Weekly Broker Wrap: household leverage; Amazon; and the Commonwealth budget.

-Expenditure likely to slow because of weak income growth, labour market weakening
-Amazon's reliance on shipping from the US suggests to Morgan Stanley limited impact on Australian retailers
-Commonwealth budget stimulus considered unlikely to offset slowing GDP growth

 

By Eva Brocklehurst

Household Leverage

UBS notes households are still leveraging. Even though growth in liabilities dropped to a five-year low of 4.2%, the household debt-to-liabilities ratio lifted to a record high of 199% in the December quarter.

Falling house prices were the main contributors to household wealth, dropping -2.1% quarter on quarter to be down -1.3% year on year. What is critical to this number is that the negative household wealth effect is consistent with an ongoing drag on consumption, as spending slows because of weak income growth.

UBS assesses the lead indicators of the labour market are weakening. Even job vacancies, as measured by the Australian Bureau of Statistics, have slowed to a 2-year low. The impact of peaking construction activity is also starting to be felt. Unemployment is expected to rise. UBS expects the Reserve Bank will shift to an easing bias by May and reduce the cash rate by -25 basis points in both July and August.

Amazon

Morgan Stanley has refreshed its analysis of Amazon's prices and range. While JB Hi-Fi ((JBH)) appears competitive, the supermarkets and Rebel ((SUL)) seem less so. Amazon looks to be highly reliant on shipping from the US or its 'global store', and this limits the current impact on Australian retailers.

While finding Amazon's local item growth difficult to measure, Morgan Stanley suspects the majority of units eligible for Prime delivery are being delivered from the US and this typically means delivery in 9-13 business days and a minimum order of $49, compared with the Prime delivery from Australia of two business days.

The broker observes two possible reasons for this: insufficient Australian warehouse capacity and reluctant Australian suppliers. Hence, the broker believes the current offering is unlikely to be having a significant direct impact on Australian retailers.

Across the products the broker compared, Amazon was significantly more expensive on items that third-party sellers were selling, versus items that were being sold by Amazon Australia or Amazon US. This highlights the importance of Amazon's first party stock levels and range, ultimately determined by its warehouse capacity and the willingness of suppliers.

Budget

The Commonwealth government's 2019 budget provided substantial stimulus in the form of income tax relief. There were immediate tax offsets for single and dual income families while the middle tax bracket was reduced to 30% from 32.5% as of FY25. The prior $25,000 instant tax write-off for small business has been increased to $30,000 and the turnover threshold for qualification increased to $50m from $10m.

Citi notes the nature and timing of the payments is conducive to expenditure in the September quarter and there could be a boost to retail expenditure of 1-1.5% in that quarter. That said, the broker notes the payment is against a backdrop of potentially higher household savings.

Citi expects the vast majority of the government's initiatives that impact household income will be adopted by the Australian Labor Party, if it wins the next election. Citi maintains Buy ratings on Coles ((COL)), Super Retail and Accent Group ((AX1)).

The household tax cuts and hand-outs were much smaller than UBS expected and a significant portion is expected to be saved or used to repay debt. The budget reinforces the broker's view for a sharp slowing in the GDP outlook. UBS forecasts 1.9% GDP growth for 2019. Macquarie considers the tax cuts good news for retailers, as businesses are likely to invest in new IT equipment.

This translates to positive news for JB Hi-Fi, Harvey Norman ((HVN)) and Officeworks ((WES)). Evidence from the past suggests the bulk of the stimulus will be spent quickly on clothing, footwear, department stores, recreational goods and casinos.

Despite the attempts to boost expenditure, Macquarie does not believe this will be enough to offset the structural decline facing bricks & mortar retailers. The broker remains negative on the fundamentals of retail landlords and believes the equity market pricing of retail A-REITs is at fair value. In the listed property sector the broker prefers Mirvac Group ((MGR)), Goodman Group ((GMG)) and Charter Hall ((CHC)).

The infrastructure expenditure forecast from the budget has increased by 33% over the next decade and, with Lendlease ((LLC)) classifying its engineering & services business as non-core, Macquarie believes the expanded infrastructure expenditure may make the division more appealing for a potential purchaser.

Morgan Stanley observes infrastructure expenditure may have been stepped up but extends the cycle rather than boosting it. The headline has been lifted to $100bn of expenditure over 10 years. The broker notes in FY20 the pulse is modest, at $2bn.

Given capacity constraints, this holds activity levels high rather than increases them. The broker finds it positive for job security in exposed sectors but the ability of infrastructure expenditure to absorb additional weakness in other parts of the economy is limited.

There was also a $1.1bn lift in primary care funding announced in the budget and a $309m boost to imaging. JPMorgan suggests Healius ((HLS)) and, to a lesser degree, Sonic Healthcare ((SHL)) should be beneficiaries of the initiatives. A boost of $320m in aged care funding, via a one-off lift to ACFI rates in the June quarter, was pre-announced.

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CHARTS

AX1 CHC COL GMG HLS HVN JBH LLC MGR SHL SUL WES

For more info SHARE ANALYSIS: AX1 - ACCENT GROUP LIMITED

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: HLS - HEALIUS LIMITED

For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED

For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED