The Wrap: Domestic Tourism Revival & Engineers Under Pressure

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Weekly Broker Wrap: Domestic tourism; migration; fund managers; E&C; consumer stocks.

– Australians looking for recreation may boost domestic tourism by 7%
– Migration expected to decline in the short term but the bark is worse than the bite
– Colonial First State deal could imply valuation upside for IOOF Holdings, AMP
– Plunging new E&C contracts due to uncertain economic outlook
– Consumer-led recovery in small and mid-cap players to kick off one quarter earlier than expected
– Online marketplace stocks still look expensive, even after the market correction

By Angelique Thakur

Hopes pinned on revival in domestic tourism

Australians made 11m international trips over the last year, spending more than $50bn. Citi analysts expect the current situation with borders closed will have people shifting towards domestic tourism, boosting the sector spending by 7%.

Ardent Leisure ((ALG)) and Village Roadshow ((VRL)) are likely to experience a boost in their theme parks division, though Citi is still cautious about Village Roadshow’s cinema division due to adoption of premium/subscription-based video services during the lockdown.

A portion of the $50bn is also expected to be channelled into retail spending. Citi expects more demand for Coles ((COL)) and Metcash ((MTS)) along with a boost in performance of auto stocks like Super Retail Group ((SUL)), Bapcor ((BAP)) and GUD Holdings ((GUD)).

People are expected to prefer to drive rather than fly. This makes for a gloomy outlook for Flight Centre ((FLT)).

Migration woes with a twist

Even though March 2020 saw positive net migration, a collapse in net overseas migration looks certain with expected incoming migrants reduced by -330,000 for the next 18 months, coupled with reports of -300,000 tourists/temporary residents having left Australia by mid-April, report analysts at UBS.

The Government expects net migration to decline sharply, in excess of -30% in FY20, with an -85% fall in FY21, rebounding by 2021-end if borders are re-opened by end of 2020.

Here, Accent Group ((AX1)) and Myer ((MYR)) will be impacted due to a drop in purchases by international tourists, anticipate Citi analysts.

The situation is not as dire as it appears as the amount Australians spend overseas is almost 50% more than the amount non-residents spend in Australia, assure UBS analysts, and would more than offset any adverse impact from the loss in international travel.

In the medium to long term, given lower covid-19 infection and death rates here in comparison with most countries, UBS feels Australia would remain an attractive destination for migrants in the medium to long term.

Potential upside valuation for IOOF and AMP

The Commonwealth Bank ((CBA)) announced a 55% stake sale in Colonial First State (CFS) to KKR & Co. in a deal worth nearly $1.7bn. For now, the two giants will jointly manage CFS but Credit Suisse analysts expect the bank would give up its holding in future.

The analysts do not consider this move to be a game-changer for the platform industry and anticipate no material impact on Hub24 ((HUB)) or Netwealth Group ((NWL)) in terms of attracting flows.

The Colonial First State deal was valued at $3.3bn and indicates valuation upside for both IOOF Holdings ((IFL)) and AMP ((AMP)), with IOOF’s business doing much better than CFS’s as per 2019 performance, note the analysts. Both stocks are rated as Outperform by Credit Suisse analysts.

Nosedive in new contracts in Engineering & Construction

Bell Potter highlights new contracts awarded to engineers and other providers of services to the construction industry didn’t reach higher than $56m in April (by Decmil Group ((DCG)) and Saunders International ((SND))), indicating a steep -90% fall from the $543m registered in March.

Bell Potter analysts draw a direct relationship with the high economic uncertainty, meaning companies are struggling for survival rather than growth.

Both oil & gas producers along with commodities producers have cut or are planning to opt for material cuts in production. The analysts at Bell Potter expect long lasting project deferrals with contractors likely to see margins materially impacted.

The analysts note the disconnect between the stimulus-propped financial markets and deteriorating economic fundamentals and believe that any rebound in the short-term would be fraught with risk.

Consequently, investors are advised to approach investments in this sector with a long-term mind set, focusing on companies with strong balance sheets and a good track record.

Of the 19 companies in Bell Potter’s E&C Index, only three have maintained guidance and paid interim dividends. A focus on essential services ensuring relatively resilient revenue makes Service Stream ((SSM)) Bell Potter’s favourite choice.

A consumer-led recovery

With Australia faring better than expected in dealing with covid-19, Goldman Sachs analysts have expedited their economic recovery forecast and expect a consumer-led recovery to commence during the third quarter, one quarter earlier than anticipated (expected GDP contraction of -10% for the second quarter remains intact).

The analysts are positive about a number of retail players like the Breville Group ((BRG)) with very strong fundamentals, City Chic Collective ((CCX)) playing well in its niche category and GUD Holdings, a defensive option benefited by a fall in new car sales.

The Reject Shop ((TRS)) is another potential candidate due to anticipated strong sales growth with people preferring cheaper goods in the present environment, a new management team on top of a stronger balance sheet.

Online marketplace stocks still not cheap

Leading online marketplace stocks have fallen -26% from all-time highs of January leading one to wonder if they are ripe for the picking.

Analysts at Morgans look at four primarily online businesses and their answer is in the negative, believing that share prices post the correction aren’t appealing enough.

The analysts consider REA Group ((REA)) shares have already having priced in the property market recovery expected in FY21. They thus believe the stock offers only modest upside from the current price.

For Seek ((SEK)), investors have priced in a steep recovery in job ads from early FY21, which the analysts consider overly optimistic. They recommend waiting for the price to fall below $15.

Market forecasts for Carsales ((CAR)) are based on a gradual recovery scenario and the stock appears to offer best value out of the lot while Domain Holdings ((DHG)), assuming a rapid V-shaped recovery in property markets, looks overvalued.

Overall, the analysts feel that while these stocks have retreated from January highs, share prices are still a tad too high.

Morgans urges investors should wait for another share market correction before taking the plunge.

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