In Brief: Supermarkets, Pandemic Benefits & Global Growth

Weekly Reports | Aug 05 2022

In Brief: Supermarkets and their landlords; pandemic lifts the Australian economy & global growth concerns.

Weekly broker wrap:

-Alternate ways for investors to benefit from food inflation
-The pandemic’s gift to the Australian economy
-Will the eurozone join the US in a technical recession?

By Mark Woodruff

Alternate ways for investors to benefit from food inflation

June data from the Australian Bureau of Statistics show food inflation was more than 5% for June, with the rate of increase accelerating.

Brokers suggest investors may capture benefits of this rising inflation by holding either ASX-listed supermarkets or their landlords.

Jarden remains overweight the grocers and continues to see upside to FY23 consensus forecasts.

Apart from rising food prices, the supermarkets will benefit from lower consumer confidence and more eating at home, and the analysts see a scenario in which the Australian grocery market can grow at greater than 6% year-on-year through FY23.

This rate of growth is well ahead of FY23 consensus revenue growth estimates for Coles Group ((COL)), Woolworths Group ((WOW)) and Metcash ((MTS)) of 4.9%, 4.7% and 1.8%, respectively, which suggests to Jarden the most potential upside for Overweight-rated Metcash. 

Having recently upgraded forecasts for Australian supermarket stocks, Citi now points to an alternative approach. Investors may also gain exposure via landlords such as Buy-rated Shopping Centres Australasia Property ((SCP)) and Charter Hall Retail REIT ((CQR)), which the broker rates as Neutral.

Both companies have a strong weighting to food sales through grocery-based anchors such as supermarkets.

Retail inflation is supporting continued revenue growth from retail tenants, explain the analysts, and landlords receive delayed benefits via stronger total occupancy cost ratios on rental renewals and increased turnover rent clause growth.

Moreover, Citi points out increased turnover is captured in base rent reviews and an overall stronger shopping centre performance, which benefits surrounding specialty stores.

Jarden feels the share market is not only making zero allowance for market growth for the major supermarkets, but also implying a significant moderation in market share to discounters.

However, the broker feels a swing to discounters is unlikely given relative pricing, the scale of the majors and supply chain issues facing Aldi. In fact, the return of the value shopper is more likely to see private label penetration lift at the majors.

While a rise in private label sales would lower the average selling price metric, an improved gross margin would provide an offset, predicts Jarden. It’s thought Woolworths would navigate a more value conscious consumer best, given its higher online share and data capabilities to enable effective promotions.

The pandemic’s gift to the Australian economy

Following a weak decade of economic performance, some structural shifts brought on by the pandemic should stand Australia in good stead, according to ANZ Bank.

If inflation is sustained at higher levels in Australia, the bank expects higher levels of employment and investment, resulting in stronger economic growth.

The dramatic policy response during the pandemic might have spurred on inflation, but it also changed the baseline, notes ANZ. 

Already, capital expenditure plans for the year ahead are the highest in nearly thirty years. Unemployment is also the lowest in five decades, while consumer spending has risen 9% above pre-pandemic levels.

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