The Wrap: A-REITs, BNPL And Aged Care

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Weekly Broker Wrap: fiscal stimulus; A-REITs; food & beverage; BNPL; and aged care.

-Supermarket, food and electronics sales may derive boost from fiscal stimulus package
-Short-term uplift in sales not enough to counter structural headwinds for landlords in regional shopping centres
-Asaleo Care, Freedom Foods likely to benefit from recent stockpiling
-Surge in unemployment likely to drive bad debts higher for Zip Co and Afterpay
-Aged care sector likely to be materially impacted if coronavirus outbreak escalates
 

By Eva Brocklehurst

Fiscal Stimulus

In response to the growing risk of coronavirus on the economy the Commonwealth Government has responded with a stimulus package designed to get consumers spending and circumvent a rise in unemployment.

The $17.6bn package includes a $750 payment to pensioners and others on government payments, along with apprenticeship support, wage subsidies for small business and instant asset write-offs for business.

Citi calculates the stimulus may boost retail sales in supermarkets, food and electronics by 1-2% in the June quarter. The broker is not convinced the asset write-offs will benefit retailers much.

The broker expects very limited benefit for soft goods such as apparel and footwear while retailers such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)) may experience a spike in IT sales. The broker also suspects, given uncertainty is at an early stage, a portion of the hand-out will be saved.

JPMorgan notes that small-medium enterprises tend to run relatively high wage costs relative to sales, as they are largely concentrated in the services sector. Hence, in assessing the degree of support from the package, the broker finds it reasonable, given the fall in service consumption that could be expected.

JPMorgan still believes, ultimately, any such redistribution of income from government/business sectors to households gets saved and this will not help economic growth in the immediate term, although it may limit labour market damage.

Morgan Stanley still envisages the potential for a second, broader stimulus at the May budget. The broker considers the initial fiscal response should stabilise the economy, although a recession is still possible.

The broker considers the most important role of government at this stage is to support the labour market, as this is where severe second-round impacts can occur and stymie an eventual recovery. Further measures are expected from the state governments, albeit on a smaller scale.

The broker also expects the Reserve Bank of Australia will cut the cash rate again in April to the effective lower bound (0.25%), with an increasing probability that quantitative easing will be implemented.

A-REITs

Macquarie notes a limited direct benefit for the listed property sector (A-REITs) from the fiscal stimulus. The broker expects around half of the consumer support will be spent quickly, although experience with 2019 tax rebates suggests the initial boost was subdued.

If the entire fiscal package for consumers is spent in retail, this would equate to a 1.4% uplift to 12-month annual retail sales but Macquarie suspects this is unlikely outcome. The broker continues to believe a short-term uplift in sales is not enough to change the structural headwinds that landlords in regional shopping centres face.

The broker prefers those stocks with high rental income and strong balance sheets in the sector, such as Dexus ((DXS)), Charter Hall Retail ((CQR)) and Investec Australia Property ((IAP)).

Food & Beverage

Amongst Citi's coverage of Australian food and beverage stocks, a2 Milk ((A2M)) stands out as it has strong partnerships that should lead to more reliable supply to China. Asaleo Care ((AHY)) and Freedom Foods ((FNP)) may also benefit from recent supermarkets stockpiling, that should also reduce the level of promotional discounting in these categories.

Those with relatively higher gearing include Blackmores ((BKL)) and Freedom Foods, although Citi points out these are not particularly high compared with companies in other industries.

Most of the de-rating from this latest correction has been in Freedom Foods and Treasury Wine Estates ((TWE)). Citi expects the former to re-rate with increased capacity utilisation, while more clarity is needed around the coronavirus impact on Treasury Wine sales before it can re-rate.

BNPL

UBS updates global growth forecasts to allow for several scenarios. For the Buy Now Pay Later segment operators Zip Co ((Z1P)) and Afterpay ((APT)) the impact from the coronavirus varies under each scenario but includes a near-term spike in bad debts, a reduction in near-term underlying sales and higher receivables days.

Moreover, in the case of Zip there is likely to be the risk that its UK launch is delayed. While both businesses can rapidly alter credit, a surge in the unemployment rate is likely to drive bad debts higher.

The broker notes receivables turnover for Afterpay is higher than for Zip but the fact that Zip conducts formal credit checks could be beneficial. Moreover, Zip asks applicants about their employment status, considered an advantage. For Afterpay, its high level of equity funding and naturally high receivables turnover means near-term funding risks are likely to be low under all scenarios.

Aged Care

Given a 10% mortality rate in the cohort aged 70 years and over from coronavirus, which is more than 80% of residential aged care, UBS expects the sector will be materially affected if the outbreak escalates.

The main issues that may emerge are a material drop in sector occupancy on a predominantly fixed staff cost base and accelerated outflows in refundable accommodation deposits, as increased turnover is aggravated by locking down facilities.

There may also be significant staff resourcing issues as infection rates escalate. In the absence of any government intervention, the broker suspects the financial viability of a substantial portion of the sector could be at risk. Given the uncertainty and a difficult to predict impact on earnings the broker retains forecast valuations for major listed aged care operators.

That said, should a severe scenario eventuate there is a much greater risk for breaches to debt covenants. In this circumstance, the substantial liabilities of the sector are likely to result in some form of bank and/or government liquidity support.

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