The Wrap: Consumer Survey, TPG Merger And Supermarkets

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A survey on the lingering aftereffects of the pandemic; The merged TPG Corp to have strong growth prospects; Managing margins will define FY21 for supermarkets

-A consumer survey clarifies how life is expected to be post-covid-19.
-Plenty on the new TPG Corporation’s plate
-FY21 top-line growth prospects look constrained for supermarkets
-Upside risk to earnings for pathology operators

By Angelique Thakur

Covid-19 and the winds of change

The pandemic has impacted practically all aspects of our lives – from the way we work to what we eat. These shifts have been huge with far-reaching implications for numerous sectors and industries.

JPMorgan recently surveyed over 500 Australians to understand the impact of covid-19 on their lives and what they feel lays in the future.

Almost 50% of the surveyed people do not consider flying an option – either domestically or internationally – even with restrictions easing. 68% said they will not fly internationally until a vaccine is found.

People now prefer to spend holidays either at home or a driving holiday rather than flying. This bolsters JP Morgan’s conviction with respect to its Underweight view on Sydney Airport Holdings ((SYD)) while preferring Ampol ((ALD)), Super Retail Group ((SUL)) and Viva Energy Group ((VEA)) among consumer exposed companies.

Surprisingly, only a small proportion of people expect to visit shopping centres less post covid-19, a big positive for retailer landlords. GPT Group ((GPT)) is JP Morgan’s preferred retail-exposed REIT.

Consumers are moving towards online shopping for food post-covid-19 although have also shown a willingness to eat out more frequently. The broker is Overweight on Coles Group ((COL)) and Metcash ((MTS)).

The number of people working from home (WFH) for at least one day has increased by 50% while the average number of WFH days is expected to increase to 1.3 from 0.9. 

Consumers are also looking to spend more on tech and gardening, which supports JB Hi-Fi's ((JBH)) Overweight rating. JP Morgan is Underweight on Wesfarmers ((WES)) and Harvey Norman Holdings ((HVN)).

TPG Telecom: A force to reckon with

The $15bn merger between TPG Telecom and Vodafone Hutchison Australia has led to the formation of Australia’s third-biggest telecom firm – TPG Corporation ((TPG)). The merger is slated to be finished on July 13.

Goldman Sachs analysts consider the telecom well-positioned to benefit from the ongoing convergence between fixed (TPG Telecom) and mobile (Vodafone Australia), while doing it more efficiently.

The ideal strategy for the behemoth, point out the analysts, is to participate in the current mobile market repair, stabilise subscriber losses and monetise the increase in mobile network capacity.

Deploying fixed wireless, targeting wholesale contracts and reducing future capital requirements are some of the activities that could be taken up and are considered a better alternative by Goldman Sachs to any aggressive price-led strategy which is unlikely to deliver meaningful share gains.

Headwinds from the ongoing pandemic and NBN prompts the broker to forecast an operating income decline of -8% for 2020.

However, this may also be an opportunity to grow operating income by 5% (compounded annual growth rate) across 2020-25, aided by operating expenditure synergies of $134m, roll out of fixed-wireless to offset NBN headwinds and subscriber growth through bundling.

Growth post-2020 is predicted to be strong once the period of the initial investment is followed by improvement in capital efficiency and operating income.

With TPG looking to support market repair, there will only be a limited impact in the branded mobile space even though the company is a formidable opponent for market leaders Optus and Telstra ((TLS)).

The analysts see risks in the wholesale mobile space, in particular for Optus which will lose its iiNet wholesale agreement and maybe even the material amaysim ((AYS)) contract while Vocus ((VOC)), which does not tender in these contracts, will not feel the heat too much.

Spark New Zealand ((SPK)) owns a 10% stake in Hutchison Telecommunications Australia ((HTA)), a holding company owning 25% of TPG Corp, and may be able to monetise this, expects the broker.

Goldman Sachs retains its Neutral rating for TPG.

Auto parts: defensive

Bapcor ((BAP)) enjoys a resilient DIY category along with a defensive auto parts business. The latter will also benefit GUD Holdings ((GUD)) which is a key supplier to Bapcor, explains Citi.

Citi’s preferred pick in the small-cap auto sector is Bapcor with the auto parts sold by it less discretionary as compared to ARB Corp ((ARB)), along with having a clearer long-term growth strategy.

While Citi remains conservative in its estimates, expecting like-for-like sales growth of 3% for the first half of FY21, the broker does acknowledge potential upside if the demand for cars increases, with people avoiding public transport and preferring cars for domestic holidays.

Being one of the top 15 suppliers for Bapcor, GUD Holdings is well placed to benefit from an increase in demand from the trade channel, with its brand commanding a huge market share in the auto aftermarket, highlight Citi analysts.

Even though GUD Holdings has exposure to the DIY category, Citi expects it to benefit less as most of its products in this segment lean more towards the do-it-for-me channel.

Citi forecasts demand will likely increase over the medium term with higher unemployment leading to people holding onto their existing vehicles for longer and rates the company as Buy.

Bapcor is also preferred by Citi with the end of JobKeeper likely to have only a limited impact on its profitability. The company will also benefit from an increase in the use of personal cars.

Investment Platforms: Expecting a strong fourth quarter

While the ASX200 is still nowhere near the pre-pandemic highs, it did recover about 16% in the June quarter.

Heading into FY21, Morgans expects this to translate to higher funds under administration (FUA) levels for both Netwealth Group ((NWL)) and HUB24 ((HUB)).

The broker notes both platform operators are witnessing higher client cash levels currently which, if sustained, are likely to more than offset any hit to the margins on their cash balances due to the RBA cash rate cut in March.

Morgans estimates a rise in cash levels to 8.5% will neutralise the lower cash margin impact for Netwealth Group.

Higher cash levels were seen in the third quarter and are likely in the fourth quarter. These are expected to support revenue for Netwealth Group. Fourth-quarter net inflows are predicted to be around $2.2bn while operating income is estimated at $64.8m by the broker.

HUB24 is expected to report FUA growth of around 15% to $17.4bn for the quarter, driven by investment performance and flows.

Morgans prefers HUB24 (rated Buy) and expects continued flows driving growth in the short-term with scale benefits being realised from FY22. Netwealth Group, while high quality, is considered fully valued and rated as Hold.

Supermarkets: Staples retail favoured over discretionary retail

FY20 was an unexpectedly good year for food and liquor retail but Goldman Sachs expects top-line growth in FY21 to be constrained to 2.4% versus the ten-year average rate of 3.8%, driven by changes in underlying growth factors including population, inflation and temporary consumption shifts.

The opportunity then, according to Goldman analysts, lays in improving margins. They believe there is considerable scope to reduce costs as FY20 contained material cost increases, mostly temporary, like additional staffing to meet the short-term demand spike.

Operating margin expansion for Woolworths ((WOW)) by 20bps and Coles Group ((COL)) by 35bps between FY19 and FY21 does not look unreasonable to the analysts.

Over the long term, Goldman expects physical stores to lose market share to discounters and the online channel, while in the short term consumer behaviour has shifted towards larger basket sizes, more online penetration and more localised shopping.

Staples retail remains the broker's preferred exposure amidst increasing sectoral risks. Discretionary retailers will experience material volatility in sales and profit in FY21, especially in the absence of further fiscal measures beyond September 2020.

The analysts maintain their Buy on Coles Group and Metcash ((MTS)) while having a Neutral stance on Woolworths.

Smaller companies gaining traction in pathology

Approved plasma collection centres (ACC) have shown a modest increase of 8 centres to 6,124 till June from February, with ACCs for Sonic Healthcare ((SHL)) decreasing by -3 while Healius ((HLS)) saw a decrease of -56 centres. The largest increase was seen by 4Cyte which added 54 centres with Australian Clinical Labs (ACL) increasing its count by 6.

Both Sonic Healthcare and Healius appear to be maintaining a more rational approach to centre deployment, comments UBS, which should translate to just a mild increase in rental costs.

However, with smaller operators trying to expand their referral base, this may not be the best strategy, suggests the broker.

Market share, when seen in terms of the number of ACCs, has 4Cyte’s share at about 5% while Australian Clinical Labs stands at circa 16%.

UBS notes upside risk to short term earnings with pathology operators benefiting from a faster recovery in routine testing and ongoing covid-19 PCR screening, but questions the government’s proclivity and willingness to fund uncapped diagnostics in the longer term (assuming a decline in covid-19 cases).

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