The Wrap: Broadening Impact

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Weekly Broker Wrap: stimulus; transport; retail; diagnostic services; fund managers; and diversified financials.

-Third stimulus package could procure lower peak in unemployment
-Increasingly restrictive measures to weigh on discretionary retailers
-Volume declines likely for diagnostic services, despite extra Medicare funding
-Morgans observes strong relative performance for Magellan Financial
 

By Eva Brocklehurst

Oz Stimulus

The third tranche of the Australian government's stimulus package is very large, JPMorgan notes. The JobKeeper scheme pledges $130bn in wage subsidies which covers, potentially, half the labour force, for six months.

The broker suggests the scheme will function mostly as an enhanced welfare net without much impact on hours of actual work or employment. Given the large transfer to households, JPMorgan adds an additional 1.2 percentage points to growth estimates, which should gain traction after the health restrictions are over.

The government's broadening of welfare payments and dispensing of the notion of mutual obligation has recognised that it would be pointless for a displaced worker to look for a job when industry is locked down.

This should arguably reduce the measured labour force participation, JPMorgan assesses, which then could take up to -5 percentage points off the measured unemployment rate.

Transport

Uncertainty is the buzz word among market operators. Now that activity is grinding down in many industries, the spotlight has fallen on the duration of the crisis. In light of this, Goldman Sachs re-bases estimates for the transport industry, assuming a broad U-shaped recovery.

The broker adds Brambles ((BXB)) to its conviction Buy list and upgrades Aurizon Holdings ((AZJ)) to Buy from Sell, given highly defensive earnings. Qube Holdings ((QUB)) is also still a Buy on valuation grounds.

A Neutral rating is retained for Qantas ((QAN)) while Air New Zealand ((AIZ)) is reduced to Sell. Coverage for Virgin Australia ((VAH)) resumes with a Sell rating, given increased equity risk if the crisis draws out.

Retail

Rising unemployment and wage subsidies for many that remain employed will reduce capacity for discretionary expenditure. Reductions in the household savings rate will support staples rather than discretionary items. This is the outlook JPMorgan outlines for the retail sector.

The broker assumes discretionary retailers either close or experience subdued demand, which will weigh on sales in May-July, and to a lesser extent into August-October.

Cash flow will be under pressure because companies have to pay out leave amid reduced earnings. Capital expenditure will also reduce as growth ambitions falter. The main winners will be those involved in food preparation/storage and working from home.

The broker includes Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Super Retail ((SUL)) and Wesfarmers ((WES)) in this group. Long-term, the winners will be those with a strong online offering, and those that survive intact, given the consolidation that is likely to occur.

Macquarie agrees increasingly restrictive measures by governments will weigh on discretionary retailers. The sector is down -39% since February 20 versus the market drop of -30% and staples -12%.

All companies are likely to move into loss for the months affected, although on a rolling 12-month basis Macquarie expects they will still be profitable. This reduces the immediate risk to the balance sheets.

The broker retains a more positive outlook for Coles ((COL)) and Woolworths ((WOW)) versus Metcash ((MTS)) while preferring Domino's Pizza ((DMP)) and Coca-Cola Amatil ((CCL)) over Treasury Wine ((TWE)) in food & beverages. Wesfarmers, JB Hi-Fi and Harvey Norman are preferred over Flight Centre ((FLT)) in discretionary retail.

Macquarie also reduces estimates for the dividends of large consumer stocks because of the economic uncertainty. The broker expects boards will take a conservative approach to their balance sheets.

While confident in the medium-term outlook, this is likely to be a primary consideration when setting dividend policy. The broker reduces second half dividend estimates for Wesfarmers, JB Hi-Fi, Harvey Norman, Domino's Pizza, Treasury Wine and Coca-Cola Amatil.

Diagnostic Services

The Commonwealth government has announced $669m in funding to expand Medicare-subsidised telehealth services for all Australians. In addition, the GP bulk billing incentive will be doubled and an incentive payment provided to keep practices open to provide face-to-face services.

The expansion of these services should provide some cushioning for the lost revenues that are expected for both Sonic Healthcare ((SHL)) and Healius ((HLS)). However, UBS suspects, with both companies obtaining the vast majority of earnings from pathology and imaging, a -30% decline in volume from routine work is likely over the next three months.

Wilsons assesses Integral Diagnostics ((IDX)) is in the best position to maintain its share of procedure volumes. While the broker acknowledges a negative outlook for the diagnostic imaging sector, as many of these procedures are elective and not critical, Integral Diagnostics should be able to sustain a short-term disruption to earnings.

The broker considers the business better position compared with other radiology providers such as Capitol Health ((CAJ)). This is because it has several features that may offer some protection against the impact of the coronavirus crisis.

The company targets higher modality services such as CT and MRI scans and is less dependent on GP referrals. There is also a loyal base of radiologists who are shareholders of the business. Cash reserves and undrawn debt facilities should allow the company to maintain sufficient liquidity.

Fund Managers

As major share market indices across the world drop sharply Morgans marks to market its forecasts for Magellan Financial ((MFG)), Pendal Group ((PDL)) and Pinnacle Investment ((PNI)).

Magellan Financial is considered to have a strong relative performance. Global funds were down around -1.5% in March, a strong performance versus benchmarks, and the infrastructure fund down -17%.

The broker estimates closing funds under management as of March 20 were $90bn, down -8.2% in the month. While performance fees are likely to be larger with a positive absolute performance, the broker points out Magellan Financial still has a portion of funds that generate performance fees on a relative basis alone.

Morgans assesses Pendal Group the cheapest manager, although its performance across a number of key funds is well below benchmarks. The broker believes risk for JO Hambro is to the downside, given the relative short-term underperformance in two large UK funds. The broker suspects the share price could easily rally when confidence returns.

Meanwhile, Pinnacle Investment has been most affected and the near-term outlook for flows is subdued. While envisaging long-term value in the stock, Morgans believes any recovery in the share price may be relatively slow.

Diversified Financials

UBS notes on a rolling 12-month basis financial adviser numbers continue to decline rapidly. Over the year to February 2020, total adviser numbers decreased by -15.1%, mostly stemming from major financial institutions.

The broker expects the impact of the coronavirus crisis will undermine the improvement seen in the December quarter trends and compound declines in assets under management.

With fee pressure unlikely to abate, UBS envisages significant revenue and profit pressure for traditional platform players over 2020.

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