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The Wrap: Withstanding The Impact

Weekly Reports | Apr 10 2020

Weekly Broker Wrap: household goods; alternative financials; engineers & contractors; agriculture; respiratory care; and health & beauty.

-Harvey Norman, JB Hi-Fi expected to withstand housing and virus-related headwinds
-Government policies potentially underwriting downside risks to alternative credit
-Australian construction/mining disruption likely to be relatively modest
-Australian agriculture conditions improving, demand heightened
-Respiratory care operators prime beneficiaries of the pandemic


By Eva Brocklehurst

Household Goods

UBS expects the coronavirus pandemic will create a significant drag on the housing sector, evidenced by falling house prices, weaker completions and a drop in turnover. This is likely to materialise in a -8% headwind to the household goods sector in FY21.

Harvey Norman ((HVN)) is most exposed to the headwinds, as its growth trajectory correlates most with housing metrics. However, both Harvey Norman and JB Hi-Fi ((JBH)) have liquidity that can sustain a significant decline in like-for-like sales.

The broker upgrades JB Hi-Fi to Buy in line with Harvey Norman, believing the market is capitalising the weakness in both stocks and not factoring in increased share potential as the market consolidates after the pandemic has passed.

Alternative Financials

Shaw and Partners assesses the government's policies surrounding the JobKeeper announcement can potentially underwrite downside risk to credit in a number of books across the alternative financing and financial technology sector.

The policy is potentially akin to the banks using guarantees to take on balance sheet positions against higher risk credit products during the GFC. The broker considers the announcement will underwrite those consumers that have the largest difficulties with credit, lower age groups and lower quintile earnings brackets.

With over 16% of GDP put to work and the Australian Office of Financial Management buying various funding structures the broker considers the sector worth examining.

While those with higher income demographics are likely to have higher levels of savings and borrowing capacity, the policies are geared to the most vulnerable.

The broker also notes credit card balances and personal finance have been reducing over the last few years and debit payments exceeded credit payments for the first time in 2018. However, against assets, lower earning populations have the highest ratio of indebtedness.

The broker lists stocks that have best leverage to this theme and have also substantially sold off, including Afterpay ((APT)), Zip Co ((Z1P)), Money3 ((MNY)), Openpay ((OPY)), FlexiGroup ((FXL)), Credit Corp ((CCP)), Cash Converters ((CCV)), Resimac ((RMC)), MoneyMe ((MME)) and Wisr ((WZR)).

Engineers & Contractors

UBS assumes a modest disruption to Australian construction and mining in the fourth quarter of FY20 and first quarter of FY21. Oil and gas expenditure is expected to be down more than -20-30% and exploration expenditure deferred.

The fall-out from a global recession is expected to negatively affect replenishment of order books and revenue growth, given the reduced business confidence and investment in FY21. The broker acknowledges several risks to base case views, including escalating mobility restrictions, resulting in the suspension of construction and mining operations, a material decline in bulk commodity prices and a prolonged and deep global recession.

Moelis prefers Seven Group ((SVW)), Monadelphous ((MND)) and Worley ((WOR)), which screen attractively relative to re-based frameworks. The broker points out that McMahon Holdings ((MAH)), NRW Holdings ((NWH)) and Perenti Global ((PRN)) have not experienced any material impact on their financial performance to date.

Each company's cash flow and balance sheet are stressed-tested under a range of conservative assumptions. NRW Holdings and Perenti Global remain the most positive under all downside scenarios in terms of free cash flow. All three companies also appear to have sufficient liquidity in the form of existing cash and undrawn facilities.


Goldman Sachs considers the Australian agricultural sector relatively well situated and less affected by the pandemic compared with other sectors, at this stage. Seasonal conditions are improving as the east coast emerges from drought.

Key exposures are fruit & vegetables, poultry, salmon and dairy products. The most upside is offered by Freedom Foods ((FNP)) and Tassal Group ((TGR)), in the broker's opinion. Domestic exposure is preferred over export exposure, with Bega Cheese ((BGA)) and Huon Aquaculture ((HUO)) having the most exposure to exports and international markets.

A weaker consumer environment and higher unemployment rate may affect demand for premium food products. and private-label and staples are likely to outperform. Goldman Sachs also expects promotional intensity to drop sharply as retailers shift to ensuring supply. Stocks most likely to benefit include Inghams Group ((ING)), Costa Group ((CGC)), Freedom Foods, Tassal Group and Bega Cheese.

Respiratory Care

Wilsons observes ResMed ((RMD)) and Fisher & Paykel Healthcare ((FPH)) were immediate beneficiaries of the SARS pandemic, having experienced record demand for respiratory medical devices and consumables.

As the US market enters its most acute phase of coronavirus exposure, Wilsons notes, in the case of Fisher & Paykel, this has drawn nasal high-flow and other solutions outside the intensive care unit at a rate that may have taken years to achieve organically.

In ResMed's case,the patient volumes being triaged into long-term, post-acute settings should encourage expansion of software-as-a-service and give further impetus to what was already happening with respect to ventilation therapy. The broker rates both stocks Overweight.

Health & Beauty

Moelis suggests health & beauty products that are affordable are positioned well to avoid the disruptions caused by the pandemic. While the broker does not rule out the possibility that further government restrictions could lead to the closure of the BWX ((BWX)) plant and the McPherson's ((MCP)) warehouse, given both sell household staples and sanitising products a shutdown is unlikely.

Working from home arrangement also mean that people are consuming more household staple products such as hand wash, kitchen bags and baking paper. Less is being spent on travel, restaurants and beauty services.

Both companies have stable balance sheets and, Moelis notes, with McPherson's there is the potential for M&A as it has actively been looking for acquisitions.

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