Weekly Reports | Jun 05 2020
Financials; automotive; consumer stocks; retail rents; and waste management.
-Shape of the economic recovery will dictate the outlook for bank shares
-ARB could benefit from new vehicle demand in the US
-Higher volumes in discretionary expenditure than previously anticipated
-Morgan Stanley suggests -15% reductions in retail rents could be a "fair compromise"
By Eva Brocklehurst
The relaxation of restrictions on movement is an important first step in the recovery of bank share prices but for Shaw and Partners the more significant issue is how quickly the economy recovers. The indicators of change are GDP, unemployment rates and real estate prices.
Bell Potter notes the pandemic has presented higher credit impairment charges that have also forced banks to either defer or materially lower dividends. Nevertheless, underlying performances continue to be sound and balance sheets are stronger than ever before.
Impairment charges are projected to increase to $29bn over the next three years for the major banks which compares to the equivalent figure in the GFC of $27bn. The broker assesses some writing back of provisions is inevitable once the pandemic is over, with post-GFC data indicating write-back rates of at least 15-20% for the majors.
While all the major banks have similarities in escalating bad debts, low income growth and rising costs-to-income ratios as well as stretched capital positions, some are worse than others, Shaw asserts.
ANZ Bank ((ANZ)) has the greatest exposure to retail and wholesale trade, accommodation, hospitality and unsecured consumer lending. Westpac ((WBC)) has reported the greatest income decline over the past two years for continuing operations, stemming from its insurance and funds management businesses.
Shaw considers Commonwealth Bank ((CBA)) and National Australia Bank ((NAB)) are the best picks among the majors, assessing the latter is not the "mistake-ridden enterprise" it was for much of the past 20 years.
Meanwhile, Macquarie Group's ((MQG)) fortunes rely on markets improving. Hence, a recovery in bank share prices should outpace that of Macquarie Group over the next few years, although the next few months are less problematic for this more diversified financial institution.
Bell Potter believes it prudent to stick with quality stocks that are resilient and capable of seeking out opportunities in a crisis, so Macquarie Group is its top-rated financial. The business model is built upon annuity-style and market-facing activities while being efficient with capital and flexible. As for the majors, the broker does not believe investor should go past Commonwealth Bank, given its earnings quality and consistency.
Citi has surveyed US automotive demand, with the results indicating increased expectations of vehicle ownership as an outcome of the pandemic crisis. The broker believes ARB Corp ((ARB)) could benefit from the potential increase in demand for new vehicles, as US exports and original equipment manufacturers accounted for around 14% of its FY19 sales.
Consumers are also planning to buy more vehicles in those US states that have higher penetration of pick-up trucks. This is a positive, given ARB's US partnership with Ford.
Whilst Bapcor ((BAP)) and GUD Holdings ((GUD)) do not have significant exposure to new car sales, an increase in used car sales could also be of benefit as these are typically serviced at independent workshops that are Bapcor customers or likely consume GUD parts.
The broker prefers the latter two stocks to ARB in the current environment in terms of valuation. Moreover, consumers are holding onto existing vehicles longer and ARB is more exposed to new car sales.
Macquarie now has a more positive outlook for discretionary expenditure after visiting Harvey Norman ((HVN)) and Nick Scali ((NCK)) stores. Almost all categories in consumer electronics and home appliances are growing, with margins the best they've been for a long time.
The broker had originally expected additional costs from the pandemic would outweigh the reduction in promotional activity but volumes are high enough to be compensatory. Macquarie also concedes it underestimated the large positive affect JobKeeper and early superannuation access would have on discretionary expenditure.
The broker upgrades JB Hi-Fi ((JBH)) to Outperform, envisaging potential for a surprise to the upside at the FY20 results. The broker also lifts estimates for Woolworths ((WOW)) on the back of easing restrictions for licensed venues and an improved discretionary outlook.
UBS acknowledges consumers appear to have returned in greater numbers than previously anticipated, with channel checks suggesting double-digit revenue growth in household goods and leisure. Apparel and footwear have also improved and there has been modest lift in engagement with travel. Grocery remains above trend is although has moderated for the March highs.
However, the main challenges centre on which stocks retain value as share prices respond to the data. Specifically, which stocks are beginning to price in a V-shaped recovery, which the broker does not believe is necessarily a fait accompli.