The Wrap: Retailers, Supermarkets & Property

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Weekly Broker Wrap: retailers; supermarkets; and property.

-Severe instability for retailers in the months ahead
-Supermarket sales strength to persist beyond pandemic
-Rental receipts likely to be affected by relief negotiations
 

By Eva Brocklehurst

Retail

Discretionary retailers have come through March and April relatively unscathed but Morgan Stanley remains wary of severe dislocation ahead. A significant economic contraction is expected in the June quarter, likely to be more severe than the worst quarter during the GFC and 1991-92 recession.

The earnings profiles of many businesses carry considerable uncertainty. The broker assumes Bunnings ((WES)) is relatively resilient although anticipates mid single-digit sales declines in the first half of FY21.

Super Retail ((SUL)) is also expected to be more challenged in the second half of FY20 and experience a relatively benign profile through FY21, benefiting from pent-up demand following the bushfires and social isolation.

The re-opening of stores has already started and is expected to continue throughout May. Macquarie notes the JobKeeper funds will start to filter through and ease the cash burden for retailers which have high wage costs.

The exact timing and nature of activity getting back to normal is still uncertain and activity levels in China signal demand is likely to remain subdued even after restrictions are lifted.

Macquarie expects most listed retailers will manage this rocky patch until at least September, and expects further government announcements. Online sales are expected to experience a step-change but the current surge in online is likely to taper off.

The main risk to Macquarie's view is the prospect of a second wave of coronavirus cases. Baby Bunting ((BBN)), Breville Group ((BRG)) and Super Retail are expected to be more resilient over the short term while Premier Investments ((PMV)), Lovisa ((LOV)) and Nick Scali ((NCK)) are likely to have more upside emerging after the restrictions are lifted.

The broker suspects it will be difficult for companies to provide earnings estimates until the issue of rents is clarified and initial trading updates are likely to focus on revenue and net cash positions.

Wilsons expects City Chic Collective ((CCV)) will face the least earnings downside from the period of lock-down and Nick Scali the greatest impact, should stores be required to extend closure dates well into May.

City Chic is the broker's only Overweight rating in the sector because of its strong and growing online business in Australia and North America. The broker assesses Breville has the most liquidity in its coverage, benefiting from holding short-term debt that is largely undrawn.

In typical trading circumstances, Wilsons believes Mosaic ((MOZ)), City Chic and Adairs ((ADH)) could face further scrutiny and covenant testing from lenders given current liquidity. However, recent feedback suggests lenders are choosing to look through current trading conditions.

While the market accepts the impact of the pandemic is temporary, UBS believes pockets of mispricing exist. The broker concludes from its assessment that Treasury Wine Estates ((TWE)), Adairs, Domino's Pizza ((DMP)) Premier Investments, Costa Group ((CGC)), a2 Milk ((A2M)) and Super Retail will be beneficiaries once the pandemic has passed and the market has not priced this in fully.

Supermarkets

UBS updates forecasts to reflect recent data and now forecasts sales growth in the June quarter of 9% for supermarkets. Grocery upgrades are more pronounced for Coles ((COL)), outpacing Woolworths ((WOW)).

However, these upgrades are offset by downgrades to the Coles convenience business, which the broker now expects to post a loss in the second half. UBS also believes operating leverage, particularly in the June quarter, will be significantly lower versus history, reflecting a material step up in operating costs, stemming from in-store labour and logistics.

JPMorgan assesses the pandemic will support supermarket sales growth in 2021 as well, as cafes, restaurants and takeaway are slow to get back to previous conditions because of softer consumer spending.

Household products are also expected to benefit as working from home could continue at a higher rate. Still, it will not be all plain sailing as population growth could be around -100 basis points lower and unemployment could drive trading down to entry-level private-label items and reduced pack sizes.

Higher costs are also likely. The broker does upgrade Metcash ((MTS)) to Overweight from Neutral following weakness in the share price after the equity raising.

Property

In the wake of Wesfarmers commencing a strategic review of Target, and noting the company in 2019 flagged its intention to shrink the floor space by -20%, Morgan Stanley attempts to locate those stores that may be in line for closure or a reduction in size.

Wesfarmers has not disclosed those stores that are at risk but Morgan Stanley identifies 43 shopping malls that have both a Target and Kmart, the two discount department store chains the company owns.

Scentre Group ((SCG)) has 23 malls with both stores and Target's leases across the portfolio have 8.5 years duration remaining on average. The two stores in the Mirvac Group ((MGR)) stable mature in 2026 and 2027.

Of Stockland Group's ((SGP)) four Target leases in malls that overlap with the Kmart, Glendale matures in 2021 and Hervey Bay in January 2023, so the broker assesses there is some near-term exposure to closures.

Lease expiry details are not provided by Vicinity Centres ((VCX)), which has 10 such shopping centres, and GPT Group ((GPT)), where there are two. Complicating matters, while Target takes up 6.6% of Scentre Group's floor area, Morgan Stanley estimates it makes up just 2% of the group's rent.

In theory, major tenants departing a shopping mall could bring about a lucrative outcome as landlords can cut the space up to allow for higher rentals per unit.

JPMorgan expects retail rental receipts will be severely affected by the relief negotiations caused by the pandemic in 2020 and while stabilising in 2021 will be below 2019 levels. The broker assumes retail rents stabilise at around 87% of 2019 rents in 2021.

Adopting revised property rental assumptions drives downgrades to the broker's estimates for earnings per share for the A-REIT sector. The broker's preferred A-REITs exposures are Mirvac, GPT, Stockland and Vicinity Centres.

In the small/mid cap sector the broker prefers Growthpoint Properties ((GOZ)), Abacus Property ((ABP)), Centuria Industrial ((CIP)), Centuria Capital ((CNI)), Charter Hall Social Infrastructure ((CQE)) and Hotel Property Industries ((HPI)), which has been upgraded to Overweight. The broker has downgraded Carindale Property ((CDP)) to Neutral and ALE Property ((LEP)) to Underweight.

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