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The Wrap: Property, Retailers & Fund Managers

Weekly Reports | Apr 24 2020

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Weekly Broker Wrap: property, retailers, fund managers, banks, and engineering & construction.

-Negative impact likely on office sector as Australian jobless rate surges
-Unprecedented demand in supermarkets & liquor retailing
-Other retailers are benefiting, too, from online
-Benchmark comparisons important for fund managers as crisis passes
-Engineering & construction appears resilient amid limited mining disruption

 

By Eva Brocklehurst

Property

Traditionally a higher jobless rate has coincided with weaker growth in rental across the office, retail and industrial sectors, amid heightened vacancies, Morgan Stanley notes. The broker expects Australian unemployment will increase to 9% in 2020 before settling at 7.9% by December.

The broker's analysis suggests Sydney office vacancies could increase to more than 10% as unemployment rises. Bond yields and the spread created by distribution yields, an historical driver of A-REITs, is less relevant in the short-term because of rental income uncertainty.

The main impact from the upward trajectory of unemployment is the risk that it traditionally holds for real estate rentals and demand. Hence, Morgan Stanley believes there could be a negative impact on office property for providers such as Dexus Property ((DXS)), GPT Group ((GPT)), Stockland ((SGP)) and Mirvac ((MGR)).

Retailers

Australian retail sales were up 9.8% year on year in March, an acceleration versus February. Overall, UBS expects retail sales will normalise after April as stockpiling abates, the full impact of the decline in shopping centre traffic becomes evident and headwinds from housing kick in.

The broker retains a preference for grocery and high-quality discretionary names such as JB Hi-Fi ((JBH)) and Premier Investments ((PMV)). UBS also notes retailer balance sheets are solid, with the former two along with Harvey Norman ((HVN)) having the strongest balance sheets. Retailers with higher leverage include Myer ((MYR)) and Super Retail ((SUL)).

Macquarie highlights unprecedented demand in supermarkets and liquor retailing from the retail sales data, while electronics, hardware & garden sales are elevated too. Online sales are up 150-180% for many food & liquor categories, industry feedback indicates.

The broker points out Woolworths ((WOW)) is planning to double online sales capacity. Although supermarket expenditure has peaked, Macquarie believes there will be a sustained positive impact on the top line over 2020 and 2021 as a result of the pandemic and economic slowdown.

Goldman Sachs has anecdotal evidence to suggest that estimates of extremely high sales in March prompted by stockpiling, followed by relatively strong sales from increased at-home consumption, will remain of benefit to supermarkets.

Data from offshore has indicated trends in the food sector that should be similar in Australia. The British Retail Consortium's March sales estimate indicates food sales were up 13.4% while US Catalina data on grocery sales suggests growth of 28% in the first week of March and 78% and 60% in the subsequent two weeks respectively.

Australians are still spending, not just in supermarkets. Citi notes do-it-yourself categories and online are growing and overall retail is expected to hold onto its share of GDP.

Trading conditions remain difficult but the broker points out households have limited alternatives in directing discretionary expenditure. Automotive, baby goods, hardware, electronics, pharmacy and sporting goods are all experiencing better sales growth. Even with this expenditure households are still saving more as well, on the broker's calculations.

Moreover, online growth is unlikely to reverse and could account for 20% of non-food retail by 2022, up from 14% today. Citi favours Baby Bunting ((BBN)), Beacon Lighting ((BCN)), Harvey Norman and Super Retail.

While the timing of a consumer recovery is difficult to predict, Morgan Stanley expects a return to more normal conditions by the second half of FY21. Most apparel retailers have announced store closures for at least one month and there is a possibility of little or no revenue, unless there is a strong online offering such as that provided by City Chic Collective ((CCX)), Premier Investments and Accent Group ((AX1)).

The former two and Kathmandu ((KMD)), which recently raised capital, are considered relatively better positioned in terms of liquidity. While cutting estimates across the board for FY20 and FY21 Morgan Stanley believes, with average share price declines of -40-45% from their peak, this is factored into consensus expectations.

Over the next several months the broker cannot rule out further capital raisings and negative revisions to earnings estimates. The lowest risk is assessed for City Chic, as around 66% of revenue is online, and for Baby Bunting and The Reject Shop ((TRS)), as stores are still open.

Fund Managers

Ord Minnett assesses Magellan Financial ((MFG)), downgraded to Hold, and Hyperion are the best performing global managers under coverage, with a strong foundation for retail flows to grow after the crisis has passed. This creates significant potential in performance fees if sustained.

The best performing affiliates among the Pinnacle Investments' ((PNI)) portfolio are Hyperion and ResCap Global, in the broker's view. The records versus benchmarks become of particular importance as the crisis passes, when advisers look to allocate funds to managers, and are less so in the midst of the crisis as retail flows typically dry up.

The broker asserts Pacific Current ((PAC)) has resilient revenue streams while Platinum Asset Management ((PTM)) has a cheap price/earnings ratio that is offset by a troubling recent performance record.

Banks

Morgans anticipates significant collective provisioning in the upcoming first half results of the major banks under the recently introduced AASB9 accounting standard for the classification of financial instruments. Credit impairment forecasts are now front-loaded, which has resulted in significant reductions to the broker's FY20 cash earnings forecasts along with increases to the outer years.

Morgans believes assumptions around the duration of the lock-down in Australia are likely to influence the forward-looking macro economic scenarios that banks will consider. While impaired assets will increase over the next six months the increase should be contained because banks are offering debt moratoriums of up to six months for a range of customers.

Engineers & Construction

The engineering & construction sector seems more resilient than Goldman Sachs previously expected, as quarterly reports signal limited disruption across Australia's mining industry. Some impact is expected from coronavirus restrictions over coming months and the broker moderates near-term assumptions.

Goldman Sachs continues to recommend investors target production exposure within mining services and reiterates a Buy rating on Seven Group ((SVW)) and Orica ((ORI)). The broker also upgrades Emeco ((EHL)) to Buy, given a similar theme.

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CHARTS

AX1 BBN BCN CCX DXS EHL GPT HVN JBH KMD MFG MGR MYR ORI PAC PMV PNI PTM SGP SUL SVW TRS WOW

For more info SHARE ANALYSIS: AX1 - ACCENT GROUP LIMITED

For more info SHARE ANALYSIS: BBN - BABY BUNTING GROUP LIMITED

For more info SHARE ANALYSIS: BCN - BEACON MINERALS LIMITED

For more info SHARE ANALYSIS: CCX - CITY CHIC COLLECTIVE LIMITED

For more info SHARE ANALYSIS: DXS - DEXUS

For more info SHARE ANALYSIS: EHL - EMECO HOLDINGS LIMITED

For more info SHARE ANALYSIS: GPT - GPT GROUP

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: KMD - KMD BRANDS LIMITED

For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED

For more info SHARE ANALYSIS: ORI - ORICA LIMITED

For more info SHARE ANALYSIS: PAC - PACIFIC CURRENT GROUP LIMITED

For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED

For more info SHARE ANALYSIS: PTM - PLATINUM ASSET MANAGEMENT LIMITED

For more info SHARE ANALYSIS: SGP - STOCKLAND

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

For more info SHARE ANALYSIS: SVW - SEVEN GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: TRS - REJECT SHOP LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED