The Wrap: Broadening Impact

Weekly Reports | Apr 03 2020

Weekly Broker Wrap: stimulus; transport; retail; diagnostic services; fund managers; and diversified financials.

-Third stimulus package could procure lower peak in unemployment
-Increasingly restrictive measures to weigh on discretionary retailers
-Volume declines likely for diagnostic services, despite extra Medicare funding
-Morgans observes strong relative performance for Magellan Financial

 

By Eva Brocklehurst

Oz Stimulus

The third tranche of the Australian government's stimulus package is very large, JPMorgan notes. The JobKeeper scheme pledges $130bn in wage subsidies which covers, potentially, half the labour force, for six months.

The broker suggests the scheme will function mostly as an enhanced welfare net without much impact on hours of actual work or employment. Given the large transfer to households, JPMorgan adds an additional 1.2 percentage points to growth estimates, which should gain traction after the health restrictions are over.

The government's broadening of welfare payments and dispensing of the notion of mutual obligation has recognised that it would be pointless for a displaced worker to look for a job when industry is locked down.

This should arguably reduce the measured labour force participation, JPMorgan assesses, which then could take up to -5 percentage points of the measured unemployment rate.

Transport

Uncertainty is the buzz word among market operators. Now that activity is grinding down in many industries, the spotlight has fallen on the duration of the crisis. In light of this, Goldman Sachs re-bases estimates for the transport industry, assuming a broad U-shaped recovery.

The broker adds Brambles ((BXB)) to its conviction Buy list and upgrades Aurizon ((AZJ)) to Buy from Sell, given highly defensive earnings. Qube Holdings ((QUB)) is also still a Buy on valuation grounds.

A Neutral rating is retained for Qantas ((QAN)) while Air New Zealand ((AIZ)) is reduced to Sell. Coverage for Virgin Australia ((VAH)) resumes with a Sell rating, given increased equity risk if the crisis draws out.

Retail

Rising unemployment and wage subsidies for many that remain employed will reduce capacity for discretionary expenditure. Reductions in the household savings rate will support staples rather than discretionary items. This is the outlook JPMorgan outlines for the retail sector.

The broker assumes discretionary retailers either close or experience subdued demand, which will weigh on sales in May-July, and to a lesser extent into August-October.

Cash flow will be under pressure because companies have to pay out leave amid reduced earnings. Capital expenditure will also reduce as growth ambitions falter. The main winners will be those involved in food preparation/storage and working from home.

The broker includes Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Super Retail ((SUL)) and Wesfarmers ((WES)) in this group. Long-term, the winners will be those with a strong online offering, and those that survive intact, given the consolidation that is likely to occur.

Macquarie agrees increasingly restrictive measures by governments will weigh on discretionary retailers. The sector is down -39% since February 20 versus the market drop of -30% and staples -12%.

All companies are likely to move into loss for the months affected, although on a rolling 12-month basis Macquarie expects they will still be profitable. This reduces the immediate risk to the balance sheets.

The broker retains a more positive outlook for Coles ((COL)) and Woolworths ((WOW)) versus Metcash ((MTS)) while preferring Domino's Pizza ((DMP)) and Coca-Cola Amatil ((CCL)) over Treasury Wine ((TWE)) in food & beverages. Wesfarmers, JB Hi-Fi and Harvey Norman are preferred over Flight Centre ((FLT)) in discretionary retail.

Macquarie also reduces estimates for the dividends of large consumer stocks because of the economic uncertainty. The broker expects boards will take a conservative approach to their balance sheets.

While confident in the medium-term outlook, this is likely to be a primary consideration when setting dividend policy. The broker reduces second half dividend estimates for Wesfarmers, JB Hi-Fi, Harvey Norman, Domino's Pizza, Treasury Wine and Coca-Cola Amatil.

Diagnostic Services

The Commonwealth government has announced $669m in funding to expand Medicare-subsidised telehealth services for all Australians. In addition, the GP bulk billing incentive will be doubled and an incentive payment provided to keep practices open to provide face-to-face services.

The expansion of these services should provide some cushioning for the lost revenues that are expected for both Sonic Healthcare ((SHL)) and Healius ((HLS)). However, UBS suspects, with both companies obtaining the vast majority of earnings from pathology and imaging, a -30% decline in volume from routine work is likely over the next three months.

Wilsons assesses Integral Diagnostics ((IDX)) is in the best position to maintain its share of procedure volumes. While the broker acknowledges a negative outlook for the diagnostic imaging sector, as many of these procedures are elective and not critical, Integral Diagnostics should be able to sustain a short-term disruption to earnings.

The broker considers the business better position compared with other radiology providers such as Capitol Health ((CAJ)). This is because it has several features that may offer some protection against the impact of the coronavirus crisis.


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