Vaccine Success Creates New Market Dynamic

This story features MOSAIC BRANDS LIMITED, and other companies. For more info SHARE ANALYSIS: MOZ

A successful rollout of covid vaccines has turned share market dynamics on its head in 2021, offering new dangers and opportunities for astute investors

-Covid benefiaries are at risk of turning into vaccine losers in 2021, and vice versa
-Mosaic Brands one example of a successful turnaround story this year
-Some extraordinary price movements likely to follow as the vaccine rollout story unfolds

By Nikhil Gangaram

Nothing drags down a market like uncertainty. So when the Australian government injected (pun intended) a further $1.9bn into its covid-19 vaccine rollout, investors gave a collective cheer.

Barring any unforeseen speed bumps, a successful vaccine rollout will be unequivocally positive for an economy that could see last year’s global pandemic fade away in the rear vision mirror.

Although Australia might be in the slow lane when it comes to vaccination, a successful rollout could see a 'reopening' rebound gain significant traction in the stock market. Many sectors and companies shot down by the pandemic will be cheering for a successful vaccine rollout and return to normalcy.

But things are seldom that simple in the share market. Already last year’s covid winners have turned into this year’s ‘vaccine victims’.

Let’s explore why a vaccine can be a cure for some and a curse for others on the ASX.

Positive side-effects

Given the manic-depressive nature assigned to the stock market, the initial chaos of the global pandemic resulted in a range of sectors and companies getting heavily sold down.

The doom and gloom saw equities in retail, travel and REITs, among others, get punished. Many of the companies in these sectors spent the better part of last year assuring investors their balance sheet was equipped to handle the pandemic.

With multiple vaccines being rolled out in 2021, and the government and Reserve Bank pumping more stimulus into the economy, the hardest-hit sectors could be gearing up to post a strong recovery.

Given the broad nature of the sectors and companies that could benefit greatly from a successful vaccine rollout, it would be prudent to focus on one example of how things could potentially play out.

The proverbial canary in the coalmine here would be the ASX-listed retailer Mosaic Brands ((MOZ)).

Mosaic owns brands such as Millers, Noni B, Katies, Rockmans, Rivers and other names adored by the older population. Given members of the older population are first in line to receive the vaccine, the outlook for Mosaic could be a peek into what a future recovery could look like.

A market update from Mosaic in mid-May highlighted a shift in behaviour of its core demographic of over-50 consumers. Having been newly vaccinated, the update noted that many older shoppers have regained confidence to emerge from their cocoons and go out into the broader community.

In late May, Mosaic followed up with a further update on the company’s outlook. For the 12 months ending June, Mosaic expects to deliver earnings before interest, tax, depreciation and amortisation of $48m. In addition, the company noted momentum will continue to build on the back of the vaccine rollout. Management expects Mosaic will return to consistent profitability for fiscal 2022 and beyond.

Rewind to the height of the pandemic, Mosaic was on its knees relying on scraps of JobKeeper to keep its remaining stores operating whilst auditors cast doubt on the company’s ability to continue.

The retailer lost -$45.8m (EBITDA) in 2020 and crashed to a net loss of -$170.5m. In the process, Mosaic closed more than 200 stores, slashed costs and refinanced its debt facilities.

So, if Mosaic is an example of stocks that are benefiting from a vaccine rollout, we could expect other retailers, travel stocks and REIT’s to equally emerge fitter and stronger.

Negative side-effects

On the flip-side to the recovery rebound, investors could be quick to dump their shares in companies that have come to define the pandemic economy.

With the inability to travel, consumers expressed themselves by flocking to e-commerce companies. As a result, online retailers like Temple & Webster ((TPW)) and more obscure brands such as Marley Spoon ((MMM)) and Redbubble ((RBL)) saw their share prices skyrocket.

Given their seemingly overnight success, many of these ‘pandemic plays’ are now under the pump to continue and accelerate their growth.

However, a vaccine rollout could cause terrible side-effects as these covid-beneficiaries push to make sure they keep as many of their new, and existing customers as they can.

One example of a company that has quickly migrated from ‘covid winner’ to ‘vaccine loser’ has been Kogan ((KGN)).

Since October, the Kogan share price has plummeted more than -60%, hitting a 12 month low of $8.70 in late May. The share price punishment unfolded as it became clear this online retailer is experiencing significant growing pains after flying high in 2021.

After buying too much stock and incurring higher warehousing costs, Kogan was forced to issue a profit-warning, quickly followed up by a second downgrade.

Kogan expects operational earnings (EBITDA) for the year ending June 30 to land between $58m and $63m. The revised guidance was between -$7m and -$12m below consensus forecasts of around $70m in EBITDA.

As a result, Kogan could be the ‘poster boy’ for pandemic plays that fail to meet the exuberant growth figures they easily notched up last year.

Don’t bury your head in the sand 

A prudent investor would err on the side of caution in believing the fabulous growth stories that the pandemic delivered last year. However, it's equally important to remain open-minded on what the future entails.

Although a number of sectors have been priced on an overly-pessimistic view, there are long-term implications that will result from the pandemic. New trends such as working from home have been established, whilst others such as e-commerce have been accelerated. Nor is it prudent to think that all impacted sectors will see a quick return to pre-covid highs. 

Instead, the prudent investor should be prepared for a rebasing in valuation as Australia accelerates its vaccine rollout. Regardless of how this process plays out exactly, there will be some extraordinary price movements to come.

Regarding the two opposing examples mentioned, Mosaic Brands is no longer covered by any of the seven stockbrokers monitored daily by FNArena.

But we can report that Wilsons is currently rating the stock as a Buy with a $3.00 price target. Wilsons holds a positive view on recent acquisitions, and is anticipating ongoing online penetration.

As far as Kogan is concerned, both Credit Suisse ($17.93) and UBS ($15.10) have valuations and price targets that are significantly above today’s share price.

Yet only UBS has a Buy-equivalent rating on the stock of Outperform, with Credit Suisse on Neutral.

Commentary by both brokers implies investors are likely to remain cautious for a while, meaning it might take some time before Kogan shares can trend back to a full valuation, and that’s assuming current headwinds are only temporary and management knows how to execute well.

Other brokers who cover Kogan include Jarden and Canaccord Genuity. The former downgraded to Neutral from Overweight in April with a revised price target of $12.27.

The latter is more optimistic, rating the stock a Buy with an $18.00 target.
 

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