Modest Market Boost From Change Of Aust Govt

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This story features MYER HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: MYR
The company is included in ASX300 and ALL-ORDS

-Coalition win a muted boost to confidence
-Repeal of resource tax positive for big miners
-Building, energy benefit from repeal of carbon tax
-Back to business as usual for novated leasing
 

By Eva Brocklehurst

Australia's much anticipated federal election is finally over and, as widely forecast, there's a change of government to the Liberal National coalition. What does this mean for some of the more policy sensitive stocks? The overarching belief is that Coalition victories are more favourably received by the stock market in the three months following the election. UBS suggests that, given the relatively full valuation of the market and good performance over the last couple months, a large and sustained post-election bounce is unlikely. Upside in the medium term requires improvement in business confidence and, over the longer term, productivity improvement is a catalyst. BA-Merrill Lynch observes that the stocks which would benefit from an improvement in consumer or business confidence are not cheap, while a cyclical recovery is priced in already. These include David Jones ((DJS)), Myer ((MYR)), Harvey Norman ((HVN)) and Woolworths ((WOW)).

The various surveys of business confidence will be looked at in the future to gauge any improvement on that score. The Coalition has only a modestly tighter fiscal agenda than the outgoing government and brokers do not see any impact for business from the budget expectations. The election outcome should result in an improvement in business confidence, in BA-Merrill Lynch's view, and the Reserve Bank will likely keep the cash rate on hold while it determines whether the expected improvement is sustained. This should, in turn, provide support for the Australian dollar and could be a positive for fixed income investors. The broker notes investors may find opportunities in owning bonds again, taking advantage of recent selling.

Are there outright winners? The new government plans to abolish the Mineral Resources Rent Tax. UBS thinks this heralds a small positive for Rio Tinto ((RIO)), BHP Billiton ((BHP)) and Fortescue Metals ((FMG)), although the tax collection has been limited and will collect even less based on UBS commodity forecasts. The removal of the tax would add 2.5% to Deutsche Bank's valuation of BHP and Rio Tinto, while Whitehaven Coal's ((WHC)) valuation would be 1% higher. The broker thinks there's no impact for Fortescue, Atlas Iron ((AGO)) and Mt Gibson ((MGX)), as under the accelerated depreciation schedule that the analysts use, these companies were not considered liable for any mining tax.

More significant perhaps is the abolition of the carbon price. A key beneficiary is Transpacific Industries ((TPI)), in Deutsche Bank's opinion. The carbon price affects the company's post collection landfill business, increasing the cost of dumping landfill at these relatively large sites. Market share would have been lost to smaller competitors which fall under the threshold. The repeal of the tax should also benefit Qantas ((QAN)), Boral ((BLD)), CSR ((CSR)), Adelaide Brighton ((ABC)), AGL Energy ((AGK)) and Origin Energy ((ORG)) in UBS' view. For Deutsche Bank the removal is a positive for these stocks with the exception of AGL Energy, where it is negative in the near term as Loy Yang A loses free permits.

Deutsche Bank thinks there's a small positive in terms of the removal of carbon costs on LNG exports for the likes of Woodside ((WPL)), adding 1% upside to FY15 estimates, and Santos ((STO)), adding 0.5%. Caltex ((CTX)) would benefit a little more, adding 2% to the broker's FY15 estimates, given the carbon costs incurred at the refining operations cannot be passed on. The removal of the carbon tax would generally add around 1% to the broker's valuations for mining stocks.There is quite a large impact on the valuation for Alumina ((AWC)), up 11%. 

The planned scaling back of the National Broadband Network is neutral for Telstra ((TLS)), in the opinions of both UBS and Deutsche Bank. The Coalition intends to honour the contractual commitments to suppliers and other partners of NBN Co, including Telstra. Other areas of impact are health care and gaming. UBS notes budget constraints limit new policy initiatives on the health front but the broker estimates that up to a 5% premium is warranted for the reduction in volatility for health care stocks such as Ramsay Health Care ((RHC)), Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)).

Deutsche Bank analysts view the Coalition's gambling and tourism policies as positive for the casinos and equipment manufacturers such as Crown ((CWN)), Echo Entertainment ((EGP)) and Aristocrat Leisure ((ALL)) and neutral for wagering operators such as Tabcorp ((TAH)) and Tatts ((TTS)). Both Bluescope ((BSL)) and Arrium ((ARI)) have received federal funding and free permits under the former government's Steel Transformation Plan, which was designed to help them deal with the carbon tax impact. The Coalition intends to discontinue the plan at the same time as removing the carbon tax. Deutsche Bank notes it is unclear what will happen to the funds the companies have already received under the plan. 

There is a hurdle for the new government's policies and that is any obstacles that may form in the Senate. The new make-up of the Senate will not be in place until July 2014. There is a predicted rise in the numbers of independents but the final outcome will not be known for several weeks. The other main platform of the new government – the paid parental leave scheme, to be paid by major employers — is seen as offset by company tax cuts of around 1.5%, although UBS notes there will be slightly less franking credits in the new system. Some other winners from the new government could be contractors and infrastructure providers with plans to focus on infrastructure. Merrills observes the additional $5bn commitment by the Coalition to roads is a positive but not a game changer, particularly given government spending has often been delayed in the past,

Merrills believes the election outcome will have little impact on the Australian stock market, as the policy changes likely to affect individual companies have been known for some time. The new government is considered no panacea for cyclical domestic stocks. A number of companies thought a change of government might be a catalyst for better operating conditions but Merrills is more cautious and does not expect a sustained improvement. Major headwinds stay the same for domestically exposed stocks. The broker cites, in particular, the transition from the mining boom and household de-leveraging.

Finally, McMillan Shakespeare ((MMS)), the leading player in the novated leasing market. This was the most publicised stock to benefit from the change to the Coalition, as Labor's proposed changes to the Fringe Benefits Tax treatment of novated leases will not go ahead. The novated leasing market is more than 50% of the company's earnings. Now the situation is resolved Goldman Sachs has upgraded FY14, FY15 and FY16 forecasts for earnings by 1%, 9% and 10% respectively, the rebound in novated lease volumes offset by slightly lower float income. Goldman suspects there will be some pent up demand from vehicle purchasers, who deferred their decisions, but equally there may be prospective car lessees who used other means to buy vehicles in the meantime. McMillan Shakespeare is therefore expected to experience a modest fall in FY14 volumes. Goldman expects a short-term fall in margin rising from the underutilised call centre during the last two months.

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