The Wrap: Consumer Stocks & Asset Managers

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Weekly Broker Wrap: consumer stocks; health insurers; casinos; and asset managers.

-Ominous signs for Australian retailers as lock-downs gather momentum
-Suspension of non-urgent elective surgery may impact private health insurers
-Longer-term outlook for Australian casinos remains robust
-Minimal balance sheet risk perceived for asset managers
 

By Eva Brocklehurst

Consumer Stocks

In the past couple of weeks a number of Australian consumer companies have cited slowing sales trends. UBS envisages a growing risk to discretionary forecasts for 2020.

While there are a number of variables that make assessing the earnings risk challenging, such as government actions with respect to the closure of non-essential services, the broker assesses the balance sheets are in better shape compared with previous cycles.

JB Hi-Fi ((JBH)), Premier Investments ((PMV)), Woolworths ((WOW)), a2 Milk ((A2M)) and Metcash ((MTS)) are assessed to have the strongest balance sheets.

JPMorgan also reviews retailer balance sheets, noting few companies have maturities in the next 12 months and those that do have made good progress. A2 Milk, Caltex ((CTX)), Domino's Pizza ((DMP)), Viva Energy ((VEA)) and Wesfarmers ((WES)) are deemed best positioned.

The broker also suggests current share prices assume little rental relief from landlords and expectations that fiscal and monetary policy will have little impact. The size and availability of rent relief remains key, in the broker's view.

Banks are providing support to borrowers as part of a social licence and landlords are also expected to provide relief to retailers, with many small enterprises vulnerable to voluntary administration if they don't.

Morgan Stanley notes US store foot traffic is down -80% which is an ominous signal for Australian small retailers. Those which have direct exposure to the US include Lovisa ((LOV)) which has 40 stores in the US, of which 25 are already closed, Kathmandu ((KMD)), where North America accounts for 15-20% of revenue, and City Chic Collective ((CCX)) where the region accounts for 50% of revenue, albeit online only.

This could be a sign of what's to come and potentially affect the broker's entire coverage of Australian retailing stock.

All non-essential shopping in Britain will be temporarily closed for at least three weeks and Morgan Stanley expects Premier Investments and Lovisa will be affected. There are 145 Smiggle stores in the UK and Smiggle UK accounts for 10% of Premier Investment revenue. The business has around $200m of cash on the balance sheet which provides ample liquidity, in the broker's assessment.

Meanwhile, Lovisa has 42 stores in the UK, or 11% of total stores. Morgan Stanley estimates around 30% of Lovisa's global store network is now closed.

Additional restrictions newly implemented in New Zealand on retailers have direct implications for Australia. Food delivery is prohibited except for Meals on Wheels and delivery of food that is not pre-cooked. Liquor stores are also closed unless within certain rules.

Retailers essential to the supply chain for building and construction such as Bunnings are allowed to stay open for trade customers only. The implications are negative for Domino's Pizza, which has closed NZ stores and ceased deliveries. Morgan Stanley notes other retailers have exposures in NZ, including of Harvey Norman ((HVN)), Super Retail ((SUL)) and JB Hi-Fi.

If Australia moves to such restrictions the broker envisages Coles ((COL)), Woolworths and Metcash would experience additional food and liquor sales.

Closing hardware to the general public would be negative for Bunnings Australia, given its trade exposure is around 30%. The Metcash hardware business would also be negatively affected, although trade represents around 65% of sales.

Health Insurance

Non-urgent elective surgery in Australia has been suspended until further notice. Macquarie believes this could have an impact on private health insurer margins. However, there are some customer assistance options that may offset the impact.

The broker assesses an impact of around -10% on industry claims in the fourth quarter of FY20 and first quarter of FY21.

In an investment market with heightened levels of uncertainty, the broker finds safety in nib Holdings ((NHF)) and Medibank Private ((MPL)) in the short term although remains less certain for the longer term. The broker calculates a 5% change to Australian resident health insurance claims growth equates to around 50% change in earnings per share for the two.

Casinos

While there are earnings risks in the short term for Australian casinos, Citi assesses the longer-term outlook is robust. The broker assumes a three-month period of casino closures for both Star Entertainment ((SGR)) and Crown Resorts ((CWN)), resulting in fourth quarter operating earnings losses of $75m and $85m respectively

The cash burn rate for both is low, driven by an ability to stand down employees. The broker forecasts two dividend cuts the Crown and three for Star in the current environment as both should be prioritising balance sheets over yield and keeping gearing at manageable levels. However, Citi is confident in the FY20 earnings outlook and considers both stocks undervalued and upgrades to Buy.

Asset Managers

Citi observes asset managers are down but not out. Risk to earnings is likely skewed to the downside in the sector, given elevated volatility. However, there is minimal balance sheet risk for all firms as they have zero debt and a solid net cash positions.

Magellan Financial ((MFG)) appears best placed in the broker upgrades to Buy. The business has a proven ability in tough markets as well as valuation support. Platinum Asset Management ((PTM)) is also considered attractive in a relative context with net cash reflecting around 11% of market cap.

Pendal Group ((PDL)) has an undemanding valuation as well and remains attractive in terms of diversification, although a recovery in performance fees and organic flows appears some time away to the broker.

Goldman Sachs downgrades estimates for funds management and flows across the sector based on investment returns to date. A sharp recovery in global markets appears unlikely in coming weeks.

The broker retains a Buy rating on Pendal Group, as it is essentially trading at 15-year trough levels, and while a higher cost/income ratio resulted in negative operating leverage in a falling market the reverse will occur as markets recover.

Goldman Sachs also upgrades Magellan Financial to Neutral, envisaging a strong relative performance to date. A Sell rating is retained on Platinum as the relative valuation looks very expensive. The broker envisages value is emerging in Perpetual ((PPT)) and maintains a Neutral rating.

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