Weekly Reports | Jun 12 2020
This story features JAMES HARDIE INDUSTRIES PLC, and other companies. For more info SHARE ANALYSIS: JHX
While construction activity in Australia remains weak, competition is heating up in the infant formula market, and child care gets some help.
-Construction activity in Australia weak
-Competition heating up in infant formula market
-An enduring shift towards online shopping
-Child care relief package to end in July
By Angelique Thakur
James Hardie: The Rock of Gibraltar
Uncertainty is the major feature of construction markets at present. Individual building sector companies have reported a mixed impact on construction since the beginning of the pandemic.
Goldman Sachs highlights the slowdown in residential activity in Australia and New Zealand since the onset of the pandemic. This has sparked fears of a glut in the housing market with the analysts expecting vacancies and rents to track ahead of population growth.
Another factor that will impact residential housing is the weak outlook for migration and population growth. The government’s recently announced housing stimulus, while definitely helpful, is too small to drive meaningful growth within the sector, comment the analysts.
It is the same story in the non-residential segment with analysts expecting an increase in office and retail vacancy rates, exacerbated by employees working from home and small and medium sized businesses facing solvency issues.
In such a volatile scenario, when it comes to building material players, Goldman Sachs prefers structurally strong companies like James Hardie Industries ((JHX)) with a solid market position and potential to expand margins and gain market share.
GWA Group, supplier of kitchen and bathroom fixtures, has exposure to the repair and remodel segment, which is less volatile but still affected by the weakness in housing and construction.
Boral is considered well placed with exposure to the well-shielded east coast infrastructure pipeline and the US residential market (expected to recover ahead of the Australian market). However, downgrades in the last two years along with uncertainty on the operational and strategic fronts prompt the broker to remain cautious.
Goldman Sachs has resumed coverage on CSR ((CSR)) with a Sell rating due to exposure to residential construction activity and a worsening aluminium outlook.
The crisis ‘May’ not be over yet
May saw Engineering and Construction contracts awarded worth $279m, a huge improvement from the $56m recorded in April.
Civmec ((CVL)) was the clear winner with contracts worth $165m, reaping the benefits of its domestic manufacturing capability, while other players remained mired in supply chain issues.
However, players like Adbri, Boral and Fletcher Building ((FBU)) warn of an impending decline in construction activity stemming from restriction-induced issues, report Bell Potter analysts.
This is reiterated by Service Stream ((SSM)), Saunders International ((SND)) and Lycopodium ((LYL)). Lycopodium and Service Stream noted project delays, while Saunders International’s supply chain has been hit, affecting productivity.
The Master Builders Association of Victoria has called for a tackling of productivity issues which, if left unchecked, could lead to a -$6bn annual decline in activity across the building and construction sector.
The views above do not surprise the experts at Bell Potter given we are witnessing the largest GDP decline since the Great Depression. They believe a cyclical industry like Engineering & Construction is bound to be impacted.
With economies reopening globally and (as yet) no major spike in infections in the USA, investors are growing increasingly hopeful of a V-shaped recovery. This is further supported by the unprecedented stimulus measures.
While these measures have buoyed asset and commodity prices, the experts warn they could prove to be a double-edged sword, limiting future growth capacity of the economy due to high debt levels.
Bell Potter analysts suggest the focus should be on suburban roads and small-scale public infrastructure projects, which can be planned and commissioned relatively quickly. This, they feel, will have more impact than homebuilding measures.
Such projects will have opportunities for BSA ((BSA)), Cimic Group ((CIM)), Decmil Group ((DCG)), Downer EDI ((DOW)), Maca ((MLD)), NRW Holdings ((NWH)), Saunders International, SRG Global ((SRG)) and Southern Cross Electrical Engineering ((SXE)).
Infant formula market: Cranking it up
Citi analysts point to surplus inventory levels of infant formula in both China and Australia. The analysts suspect a change in supply routes between Australia and China may be the reason for the excess stocks.
With flights between the two countries disrupted due to the pandemic, a huge proportion of stock was sent via sea, but time taken through this route was longer (about a month) and a lot of the stock arrived post-stockpiling.
The broker is convinced this is temporary and expects any impact to be confined to the fourth quarter with strong third quarter sales and pre-sales activity of the 6.18 shopping festival (held in China) mopping up the excess supply.
The other notable update is the launch of an organic A2 infant formula in Australia by Aptamil under its Essensis series. This comes hot on the heels of Bellamy’s Beta Genica-8 launch (in May).
Citi analysts note the new formula is of a superior quality and feel that with two new entrants having better formulations and using a2 Milk’s ((A2M)) largest channel – cross-border e-commerce – the company needs to lift its game.
Shift towards online shopping
Covid-19 has led us to change our ways in a lot of areas and shopping is no exception. An analysis conducted by Bell Potter observes a notable shift towards online shopping which may well prove to be an enduring one.
The team point to a steep increase in website traffic for a number of discretionary retail players during the pandemic. The Athlete’s Foot ((AX1)) saw visits up by more than 40% during April/May, while site visits to Skechers, Platypus and HypeDC were comparable to levels seen only during the Christmas season.
It was the same with Breville Group ((BRG)) with site traffic levels up 16% in May (month-on-month) while City Chic Collective’s ((CCX)) Australia and New Zealand traffic was up 57% (month-on-month). In the apparel segment, Peter Alexander’s ((PMV)) May visits were double the March levels.
Domino’s Pizza Enterprises ((DMP)) saw steady growth in Australia with site traffic growth hitting about 20% month-on-month. Domino’s noted a strong increase in pizza consumption in Japan outside the Christmas holiday season.
JB Hi-Fi ((JBH)) falls in the category of a destination store business yet saw visits increase in April while tempering somewhat in May. Lovisa Holdings ((LOV)), reliant on impulse purchases, is more dependent on foot traffic and, unsurprisingly, the online channel formed only a small component of sales.
Childcare Industry: Back to the basics
The covid-19-hit childcare industry was given temporary additional assistance in the form of a relief package (Early Childhood Education and Care Relief Package). This is set to end on July 12 with a return to the Child Care Subsidy (CCS) along with continued support to unemployed families.
Operators will be entitled to a transition payment that will replace JobKeeper from July 20. This will be equal to 50% of what they were receiving under the current relief package.
While the package was of immense help, strengthening the ability of landlords’ (REITs) tenants to remain financially viable, the shift back to CCS is a lot better, notes Canaccord Genuity.
This move is also supported by Goldman Sachs which notes the relief package incentivised centres to lower occupancy levels so as to reduce costs and improve profitability.
This will not be profitable under the current circumstances, which see demand for childcare increasing. Goldman Sachs comments increasing occupancy will put financial stress on operators under the relief package, while a return to CCS will enable operators to remain viable and increase daily occupancies.
Canaccord expects government funding to increase by circa 22% in the third quarter to almost $3bn versus $2.5bn in the second quarter.
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