Weekly Reports | May 20 2022
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Weekly Broker Wrap: all eyes on the Federal Election, travel industry takes flight, strong fuel margins.
-Housing initiatives emerge as key election decider, neither major takes stance on inflationary pressures
-Travel industry recovery strengthens, but Australia continues to lag international peers
-Fuel retailers continue to benefit from high margins in a tight supply market
By Danielle Austin
Federal election key to national fiscal outlook
With the Federal election coming this weekend, the consequent result has loomed over the week. While latest polls have the Labor Party as the preferred of the two major parties by a margin of just 5.5%, market analysts are predicting dissatisfaction with major parties will see a decline in primary votes for both Labor and the Coalition which could see preference flows take greater precedence in this election.
With little in the way of concrete policy or reforms to separate the majors, fiscal decisions have come into focus with minimum wage increases and housing policies emerging as key issues in recent weeks. Notably, both major parties have taken a pro-cyclical stance to fiscal policy and neither intends to address inflationary pressures, meaning the market should expect cash rate rises and inflation to persist in the coming two years.
With a decision on a potential increase to the minimum wage from the Fair Work Commission due in June, the Labor Party has backed a 5% increase to the minimum wage to match inflation of 5.1%. A minimum wage increase in line with inflation would be the largest increase in the past decade, with previous minimum wage increases ranging from 1.8-3.5%, and Morgan Stanley analysts highlight that not only would this increase impact on the 20% of jobs directly linked to the minimum wage, but also lift wider wage and inflation expectations. However, as noted by Citi, the government has little influence on award wages despite support from the Labor Party.
Both majors have proposed schemes to support the housing market, with the Labor Party committing to a shared equity scheme that would see the government hold a 30-40% stake in properties for up to 10,000 first home buyers annually, while the Coalition has proposed allowing first home buyers to access up to 40% of their superannuation balances, to a maximum of $50,000, to put towards the purchase of a home. Analysts atiti noted the Coalitions approach will likely further support elevated house prices and boost housing demand, softening the house price declines anticipated over the coming two years.
Australian travel industry
The domestic travel industry outlook has undergone strong recovery in recent months, as pent-up demand coupled with the northern hemisphere summer holiday season and milder than anticipated impacts from the Omicron variant support a rebound for the industry.
Domestic recovery continues to outpace international, with JP Morgan reporting domestic revenues reached 67% of pre-covid levels in March, but Australia Pacific continues to lag behind international recovery levels achieved by other regions as a result of prolonged border closures. The broker notes outbound international travel from Australia has demonstrated a significant increase since mid-February, while inbound travel has seen a slower but steady recovery.
Domestic fuel retailers leveraged to tight market supply and aviation benefits
In a flow-on effect, recovery in the travel industry has also benefitted domestic fuel retailers with exposure to the aviation industry as demand for jet fuel increases. Analysts from Credit Suisse highlights Viva Energy ((VEA)) in particular as a beneficiary of the trend given its greater exposure, with the aviation market in March recovering to 57% of the corresponding pre-covid monthly level.
Market analysts also continue to point to the benefits available to Australian fuel retailers amid European market disruptions and export restrictions from China, suggesting data points to a 1.8 cents per litre increase to ULP-diesel retail fuel margins in the second quarter. With Europe continuing to seek alternatives to Russian imports it has looked to the Asian market for supply, but China’s restrictions on gas and diesel exports are driving an ongoing tight market. Market conditions have driven a sharp spike in refiner margins, supporting earnings growth for retailers, and while Credit Suisse anticipates the current environment will support elevated refiner margins through to the end of the year, this is largely dependent on how demand from Europe and China weakens over the year.
Viva Energy reported total volumes increase of 9% year-on-year in its first quarter, with further recovery in aviation expected to boost commercial volumes through the remainder of the year. The company’s greater exposure to both the aviation industry and refiner margins gives it the edge over competitor Ampol ((ALD)) according to Credit Suisse, for whom Viva Energy remains the sector pick. While Ampol is less leveraged to these trends, with only 17% of the company’s FY19 volumes coming from aviation fuel compared to Viva Energy’s 33%, the broker still expects Ampol will benefit.
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