The Budget And The Stock Market

This story features SONIC HEALTHCARE LIMITED, and other companies. For more info SHARE ANALYSIS: SHL

– Minimal GDP/RBA impact
– Healthcare not a winner
– Infra not a loser
– Retail ups and downs

By Greg Peel

It could have been worse – that’s the general summation from stock market analysts. This is a typical response, of course, given Treasurers like to talk tough and then deliver something a little less painful to appear benevolent. Investors also need to take into consideration, as is the case in stock trading in general, that stock prices had already moved on anticipated pain before last night’s budget speech.

“If the reported drop in consumer sentiment associated with Budget speculation is reversed,” offers Citi, “then we don’t see any major implications from the Budget for the RBA and the equity market”. Macquarie suggests the overall view is one of short term negative but medium term positive for both the Australian economy and the equity market.

JP Morgan suggests “this is a reasonable outcome for stocks,” noting the cut in the corporate tax rate is a positive even if high income earners have to wear a debt levy for a while. GDP expectations should not take a meaningful hit, suggests JPM, given the balance of well-flagged tightening measures and the offset of high-multiplier infrastructure spending.

We must also be aware at this stage that the bill still has to pass through the Senate and may yet be watered down, assuming Labor, the Greens and the Pups all land on the same page.

Drilling down into sectors, it is clear the biggest loser is healthcare, and indeed perhaps more so than was feared. Having said that, uncertainty remains as to just how the consumer will respond to the new regime, and how healthcare providers will respond to the response. To that end, there is disparity among broker views. Infrastructure is a winner, although perhaps not as much as was hoped, making winners out of engineers & contractors to varying degrees. Retailers should find the carbon tax repeal offsetting the extent of middle class welfare cuts. Biotechs and education providers might see a boost.

Let’s start with healthcare. This is not the forum to list all the changes – no doubt readers will assess their individual impact from an avalanche of available media commentary.

The problem for healthcare analysts is that no real data exist on consumer price-sensitivity. Will the new (reasonably modest) medical co-payment measures and PBS changes force the sick to resign to dying at home rather than seeing a doctor? Will it simply make the snifflers and hypochondriacs think twice? Whatever the case, analysts agree the new budget measures are probably a bit worse than feared and will have their greatest impact from FY16. The impact on Primary Health Care ((PRY)), Sonic Healthcare ((SHL)) and Sigma Pharmaceutical ((SIP)) will by no means be positive, but analysts disagree on just how negative the outcome might be.

Macquarie believes the impact to Pathology and GP volumes could be “material” given the non-urgent nature of a fair portion of these services, and especially to those providers who currently bulk-bill.

BA-Merrill Lynch suggests net-negative impacts for all of PRY, SHL and SIP, mostly PRY and SHL, but while PRY is a majority bulk-biller, SHL already charges co-payments and thus will be less affected.

Goldman Sachs agrees PRY is the most exposed and also sees SHL impacted given its leading position in Australia, but believes SIP and fellow pharma wholesaler Australian Pharmaceutical Industries ((API)) will suffer little impact.

CLSA calculates volumes would have to decline by around 4% for medical centre and pathology services for PRY and SHL revenues to be revenue negative but notes that when PRY introduced GP co-payments at selected medical centres in FY10, a 5.3% decline resulted.

Citi, on the other hand, suggests the new co-payments are “probably neutral” for PRY and SHL, but will depend on any moves by the two to waive part of the co-payment in order to gain market share. The other new healthcare measures will “likely have only a modest impact,” says Citi, on PRY, SHL and SIP.

So the jury’s out on the healthcare sector. Watch this space. But there are also winners, with Macquarie noting private hospitals and insurers will win. This puts Ramsay Healthcare ((RHC)) in the frame, for one. The new Medical Research Future Fund may also be positive, Merrills suggests tenuously, for the likes of CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)), and Mesoblast ((MSB)).

CLSA believes new charges won’t impact on IVF providers such as Virtus ((VRT)) given the highly discretionary nature of the spend, while Macquarie suggests IVF providers “appear to have a small win”.

The market may be a little disappointed by the lack of new initiatives on infrastructure in the budget, says Morgan Stanley, although Citi notes that of all the budget initiatives, the $11.6bn infra increase seems to represent a substantial rise on previous projections. Whatever the case, all brokers agree it’s a shot in the arm for (parts of) the engineering & construction sector.

CIMB suggests Transurban ((TCL)) comes out with the most to gain. Just about everyone else believes Leighton Holdings ((LEI)) is the biggest winner followed by Lend Lease ((LLC)), with benefits also flowing to Downer EDI ((DOW)), Transfield ((TSE)), UGL ((UGL)), Monadelphous ((MND)) and RCR Tomlinson ((RCR)).

With regard to retail, CIMB does not believe the budget places a significant burden on the consumer. The reversal of the carbon tax in FY15 should more than offset the negatives, the broker suggests, although the cuts do look more significant from FY16. CIMB retains its Overweight rating on the consumer discretionary sector and its Add ratings on JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Dick Smith ((DSH)) and Myer ((MYR)).

If the potential $6.7bn decline in consumption expenditure is spread proportionately across discretionary subsectors, posits Macquarie, the biggest impact will be felt in clothing & footwear, furnishings and household appliances. On the other hand, the supermarkets might benefit if consumers respond by eating at home more.

The broker thus believes the budget is a negative for JBH and HVN but a positive for Metcash ((MTS)). The negative for clothing & footwear, and thus discount department stores, and the positive for supermarkets, splits Woolworths ((WOW)) and Wesfarmers ((WES)) down the middle.

Macquarie goes to the next step and assesses the impact on shopping centre landlords. Sales at more discretionary-weighted sectors are likely to be impacted while food-based centres might actually benefit. Thus on the negative list are Westfield Group ((WDC)), Westfield Retail Trust ((WRT)), CFS retail property ((CFX)) and GPT Group ((GPT)), on the positive list are Charter Hall Retail ((CQR)) and Shopping Centres Australasia ((SCP), while Federation Centres ((FDC)), Stockland ((SGP)) and Mirvac ((MGR)) sit somewhere in the middle.

So that’s the rub. We must consider that analysts have only had since yesterday afternoon’s lock-up to recalibrate their views, and much appears to depend on just how the consumer will ultimately respond. Certainly there were no McMillan Shakespeare-type clangers.

Over to the Senate…
 

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