The Wrap: Troubled SMEs, a2 Milk & Gaming

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Weekly Wrap: extension of JobKeeper and JobSeeker; many SMEs are not likely to survive the pandemic; a2 Milk growing market share in China's Infant milk formula market

-Extension of JobKeeper and JobSeeker programs reduces downside risk for growth and employment
-Small businesses are finding it increasingly tough to survive this pandemic
-Strong growth seen in a2 Milk’s China infant milk formula market share in the June quarter

By Angelique Thakur

Extension of stimulus measures softens, but doesn't cure

The Australian government announced it would be extending its JobKeeper wage subsidy and JobSeeker unemployment benefit program. The current measures were set to expire in September.

JobKeeper will continue for another six months till March 2021, albeit at a reduced rate.

The payments will decrease to $600 per week from the end of September and further reduce to $500 per week from January 2021. Currently, the rate is $750 per week. There will also be an additional revenue test for eligibility in October and in January.

Morgan Stanley expects costs to drop to -$17bn for the December 2020 and March 2021 quarters from -$70bn for the June and September quarters 2020. Simultaneously, coverage will drop to 1.4m workers in the December 2020 quarter and further to 1m in the March 2021 quarter. Currently, the scheme covers 3.5m workers.

JobSeeker, on the other hand, will drop to $250 a fortnight from the current $550. Workers will still be able to earn $300 with no benefits impacted. This will extend until the year-end at a cost of -$3.8bn and Morgan Stanley believes it may be further extended in the October Budget.

This implies an average of about 2.3m people will be receiving this benefit in the December quarter, similar to the current numbers.

The business eligibility test for JobKeeper has also been tightened. Earlier, the approach automatically qualified all businesses for the full 6-month term based on their projected turnover.

The changes involve quarterly assessment of a business's actual turnover and whether it remains down continuously each quarter when compared with pre-covid levels.

The threshold amounts remain unchanged at -30% for small businesses with an annual turnover of $1bn or less and -50% for large businesses with a turnover of more than $1bn.

UBS comments the extension of JobKeeper and JobSeeker is bigger than expected. It is worth about $20bn and is equal to circa 1% of the annual GDP. Most of it will be concentrated in the last quarter. This reduces the downside risk for growth and employment in the quarter.

Morgan Stanley notes total budget costs are mostly in line with its own forecasts, pegged at -$6bn for JobSeeker and -$15-20bn for JobKeeper.

There have been concerns raised by UBS about the end of JobKeeper driving a second wave of job losses. In fact, ACA Research forecasts if the payments had not been extended, 48% of SMEs may have reduced their employees.

While the extension also reduces the circa –$100bn policy cliff expected in the December quarter, it is still very large at around -$84m or -17% of the quarterly GDP, comments UBS.

Morgan Stanley analysts admit they expected more measures, such as tax cuts, and expected the total package to be circa $40bn. They still expect these measures to be announced in the future along with further measures worth $20bn.

Morgan Stanley does not expect JobKeeper to experience a W-shaped recovery, implying virus evolution leading to a return to national lockdowns remains a key risk.

SMEs: In dire straits

A report by UBS indicates small-medium enterprises (SMEs) in Australia continue to struggle to survive. In June alone, total SME revenue fell -27% year on year with sectors like food, accommodation, arts, recreation and education hit the most.

The stimulus has not been very effective for SMEs, finds ACA research, noting that while many listed companies have benefited from the stimulus, SME revenue has only risen 8% from its mid-April lows.

The research indicates 35% of SMEs are concerned their business may not survive the pandemic.

But it is the ripple effect that has broker UBS worried. In particular, it expects the banks to be hit by a double-whammy.

UBS reports 18% of the SME loan book is in deferral until September/October. This comes to 220,000 business loans with the value of close to circa $60bn.

UBS finds the largest loan exposures are to sectors like property, retail, hospitality, construction etc. This figure, however, only depicts the banks’ direct exposure to SMEs.

The broker remains concerned about what would happen when the circa $100bn of stimulus is removed. An end to wage subsidies, rental relief and loan deferrals could weigh heavily on small businesses (which employ 35% of the workforce).

ACA Research indicates 48% of small businesses could reduce employees if JobKeeper is not extended. This, expects UBS, will compound losses for the banks.

Typically, business confidence is a leading indicator for investment and business credit, and UBS believes SME business credit is likely to continue to stall given the uncertain economic outlook.

A case in point is the last $40bn program, which saw only $1.5bn worth of loans. The government has increased loan guarantees for small businesses but this hasn't really helped matter, comments UBS.

The analysts note SME lending has only increased by less than $5bn since the start of the year and it remains to be seen how much appetite there is for credit from the SME sector.

There are also indications that banks have a reduced appetite for SME loans and require security. This has seen the ease of access to finance trending downwards over time.

a2 Milk: Growing share in China’s infant milk formula market

China constitutes one-third of the global infant milk formula market. UBS notes super-high premium brands formed a record share of top-25 best sellers in the Chinese infant formula market in the June quarter.

This was driven by better prices and consumers demanding higher quality products post covid-19. All-in pricing remained strong driven by premium-isation.

UBS points out international brands now rely on premium-isation, expansion into lower-tier cities and product development to sustain positive growth in China’s infant milk formula.

Unlike the experience in the US and the West, China did not display a very high degree of panic buying in the first quarter. Thus, UBS does not expect any major destocking in the infant milk formula sector in the June quarter. 

One of the major changes has been rising online sales which is positive for the likes of a2 Milk ((A2M)). UBS’s analysis finds Danone to hold 31% share of the top 25-best sellers, with the June quarter marking the first sequential lift in its share since the December quarter of 2018.

On the contrary, a2 Milk's share saw an improvement of 280bps to 15% year on year in the June quarter.

UBS is positive on a2 Milk’s positioning in the China market. It notes the company’s performance in China is its primary share price driver, making up more than 7% of FY19 sales.

The broker also sees a medium-term opportunity for the company to lift its China infant milk formula share to about 8% by FY23 from 4.5% in FY19.

a2 Milk is rated as Buy by UBS.

Australian Gaming: Reporting season ahead 

Morgan Stanley has reviewed Australia’s gaming industry prior to the August reporting season.

Aristocrat Leisure’s ((ALL)) US casinos reopened earlier than expected but have started to close down again due to rising infections. The broker maintains a cautious stance for now.

Driven by continued market share gains, exposure to digital growth and a strong balance sheet, Aristocrat remains Morgan Stanley’s preferred pick and the broker is Overweight.

Crown Resorts ((CWN)) is Morgan Stanley’s preferred casino stock although the broker expects slower recovery due to the second outbreak in Victoria. The broker rates the stock as Overweight.

Star Entertainment Group ((SGR)) faces continued restrictions in Sydney. The broker expects more earnings headwinds in FY21 from increasing competition (with the opening of Crown Barangaroo). 

Morgan Stanley downgrades Star Entertainment to Underweight and prefers Crown Resorts.

Tabcorp Holdings ((TAH)) is expected to incur higher D&A charges due to accounting changes. With the balance sheet stretched and uncertainty on wagering competition, the broker rates the stock as Equal-weight.

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