Rudi’s View: Navigating Covid Legacies

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In this week's Weekly Insights:

-Navigating Covid Legacies
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-Ask FNArena
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By Rudi Filapek-Vandyck

Four and a half years after the final covid-driven societal lockdowns ended in NSW and Victoria, unforeseen consequences and impacts are still depressing share prices and forcing companies to temper expectations or –heaven forbid!– issue a profit warning.

Companies still impacted today include Ansell ((ANN)), CSL ((CSL)), Dexus ((DXS)), and Sonic Healthcare ((SHL)).

Investors will be keeping a close watch during the upcoming August results season for any signals the era of covid shackles has definitively (and finally) passed for impacted sectors and companies.

The Recreational Boom

One company that has almost literally seen hell and heaven post 2020 is New Zealand-headquartered Tourism Holdings Rentals ((THL)).

With a market capitalisation of only $400m-plus, this company is a small cap, thus not on every investors’ radar, but that hasn’t stopped management at the wheel from building the world’s largest rental business for campervans and other recreational vehicles.

At first, closing borders and locking down societies threatened its corporate survival only to see an outbreak in sales occurring once countries re-opened, but the past two years have yet again put the share price under pressure as sales have plateaued.

In more recent times, management had been forced to issue a profit warning for the running financial year, which pushed the share price to a post-covid low, but shareholders might be relieved a consortium of BGH Capital (private equity) and the Trouchet family (founders of Apollo Motorhome Holidays) is interested in acquiring the company in full.

One of the seemingly lasting effects from the covid pandemic is a greater desire to travel and holiday locally, surrounded by Mother Nature. Sales for recreational vehicles are still booming, but so forceful was the initial jump in post-lockdown sales that growth in the subsequent years has been rather tepid in percentage terms.

For management at New Zealand’s largest tourism operator this has proved too much of a challenge to overcome. On current forecasts, earnings per share next year (FY26) will still not match the company’s all-time record booked in FY23.

And that is a problem for a share market looking for growth during a time when smaller cap companies are not exactly in high demand.

Changes In People’s Priorities

Recent surveys into changing consumer habits around the world are revealing a glaring discrepancy between consumer sentiment, which tends to be more cautious if not negative, and household spending, which is holding up amidst numerous challenges.

Consumers are looking for bargains and trading down, but only for selected non-priorities. They can be seen splurging elsewhere on luxury, holidays and personal experiences.

In Australia, despite the RBA lowering the cash rate twice already this year, and signalling there will likely be more cuts forthcoming (just not this month), consumer spending remains the weakest link for the domestic economy.

Investors would have noticed through subdued and expectations tempering market updates from retailers such as Accent Group ((AX1)), KMD Brands ((KMD)), Myer ((MYR)), and Super Retail ((SUL)).

There’s also anecdotal evidence those with a mortgage prefer to keep paying their financial institution rather than use rate relief for expenses elsewhere. Have populations become more risk-conscious? Or are we reading too much into this during a time when inflation spiked and caused havoc for many a household budget?

The answer might well lay somewhere in between and become a lot clearer in the year(s) ahead when both interest rates and inflation should be lower than today, though with Trump’s reign in Washington still destined for 3.5 more years, life might not be that straightforward, and neither our collective response.

What hasn’t changed post pandemic is increased attention for wellness, fitness and health. While working from home has seen its peak, it is increasingly becoming apparent society is not reverting back to how it was pre 2020.

Put simply: working from home is here to stay, even if the number of hours spent at home while working for the boss has been on a down-trend since the end of lockdowns.

One look at share prices for Dexus and Centuria Office REIT ((COF)) instantly reveals the number one victim of this newly established phenomenon: offices.

The sector’s landlords have been under the pump relentlessly since covid. While REITs generally have landed back in investors’ favour on the prospect of RBA and other central banks lowering interest rates, Dexus shares are still only half the price achieved in 2019. For the much smaller Centuria Office REIT the decline from early 2020 is still close to two-thirds.

Share price weakness for Cromwell Property Group ((CMW)) has been as savage as for the Centuria pure-play office landlord, as more than half of Cromwell’s international commercial real estate portfolio consists of office assets. Mirvac Group ((MGR)) shares have been impacted too, as well as shares in Abacus Group ((ABG)).

Management at Dexus has responded through a strategy to become more diversified, but the bigger question for all office landlords, both locally and overseas, is when has the downtrend (finally) run its course? The follow-up question then likely would be: how much growth should investors count on post market bottom?

I checked with FNArena’s consensus forecasts (see Stock Analysis) and it appears while some sector analysts, both here and overseas, are prepared to call the bottom is in for offices, there’s no excitement about what is likely to follow next. Current forecasts are for meagre advances only in expected FY26 payouts for loyal shareholders.

Mind you: the likes of Centuria Office REIT are currently offering an above-normal 8.6% yield, which will look attractive to some investors. This might be even more so given recent sector updates suggest most share prices might have rallied too far too quickly, even in the face of ongoing RBA loosening and an anticipation of acceleration in growth ahead for the sector generally.

Macquarie’s sector update on Monday included rating downgrades for nine of 24 REITs under coverage. UBS’s coverage of the sector only shows seven Buy ratings out of 23. Analysts at Morgans explicitly acknowledged the apparent sizeable valuation discounts for REITs owning industrial and/or office assets, but still, this broker is not keen to jump onto them (preferring a Hold rating instead).

Assuming August doesn’t unearth any big surprises, positive or negative, office REITs might well be the prime example of longer-lasting unforeseen changes caused by the 2020 pandemic.

The one silver lining is valuations are at a sizable discount and thus unlikely to weaken significantly further, while income-seeking investors with a longer horizon in mind are able to enjoy oversized payouts.

The Health Recovery For Healthcare

The number one sector that covid transformed from a long-lasting market leader into a persistent laggard is, of course, healthcare.

Who would’ve thunk it? The biggest and most prominent health scare in our lifetime has left companies including Ramsay Health Care ((RHC)) and Sonic Healthcare with too many enduring headwinds to overcome.

If you haven’t particularly paid attention, don’t look up their share prices lest you don’t care about hurting your eyeballs. Consider these companies were many an investor’s portfolio favourite for years on end. In particular Ramsay Health Care had been nominated by many for post-covid catch up, but that simply never eventuated.

Management at the international private hospitals operator is now selling off parts of the business in order to pay down debt and stop the operational downtrend. Sonic Healthcare is reportedly deeply investing in AI to juice up its radiology and pathology operations, but investors have been bitten a number of times and now prefer a wait-and-see approach.

Margins need not to stabilise, they need to expand, and not through babysteps either.

A similar task awaits management at what was not so long ago Australia’s number one index constituent that could do no wrong, but covid has changed all that and more for biotech CSL.

Those investors who only watch share prices might be surprised to read CSL’s revenues, margins and earnings per share have all been put back on a positive growth trajectory over the past years.

The share price, however, is back where it was in 2019 when the company’s horizon seemed cloudless and investor sentiment near indestructable. The pandemic has given birth to vaccine skepticism and nowhere has this become more apparent than in Trump’s USA with Robert Kennedy Jr as the Secretary of Health and Human Services.

There’s also the constant threat of US import tariffs, even if CSL is arguably more American already than it is Australian (ignoring its corporate origin and Melbourne headquarters) with many of its products and services crucial for the US healthcare system.

Similar as with the Office landlords mentioned earlier, vaccination rates in the US, even under Robert Kennedy Jr and the MAGA movement, will stop declining at some point. As I wrote myself in May (link below), the constant decline in vaccinations is predominantly an American phenomenon, which is not replicated elsewhere (not in the same magnitude).

The one key difference is CSL is growing at an above market pace, double digits when the average EPS for corporate Australia in FY25 will be negative on current forecasts. Next year looks poised for continuation (assuming no disappointment in August).

But for now there simply remains too much uncertainty. Will Trump hit the company with import tariffs regardless? What exactly is the status of flu vaccines? Is margin recovery still work-in-progress? Why has management decided to cut into its R&D labour force?

It remains anyone’s guess how much of these questions can and will be resolved in August, not only for CSL but for the local healthcare sector in general. It’s not as if shares in Australian Clinical Labs ((ACL)), Integral Diagnostics ((IDX)), Nanosonics ((NAN)) or even Cochlear ((COH)) have offered shareholders a lot to smile about in recent years.

One of the key questions hanging over the August results season is: is it still too early to jump onto lagging healthcare stocks?

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My report on CSL in May: https://fnarena.com/index.php/2025/05/08/rudis-view-csl-nextdc/

Paying subscribers have 24/7 access to my curated lists, including All-Weather Performers at: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

FNArena Talks

Interview for Philip Muscatello’s Shares For Beginners about the ins and outs of All-Weathers and the portfolio over the decade past:

https://www.sharesforbeginners.com/blog/fnarena-all-weather

YouTube: https://youtu.be/m33cYbtJsDs?si=MQTAW8YgI2oNjKc4

Spotify: https://open.spotify.com/episode/43A2QQWyfGdHYgixBalJo7?si=dd99905f27554381

Apple Podcasts: https://podcasts.apple.com/au/podcast/all-weather-portfolio-rudi-filapek-vandyck-fnarena/id1451778025?i=1000715348354

Ask FNArena

With fiscal 2025 in the rear view and the August results season only weeks away, FNArena is preparing for an online live event, allowing subscribers and investors to ask questions about what to expect, individual companies, specific strategies, et cetera.

Yours truly will do his best to prepare and answer as many questions as possible. No date has been set as yet, but we’re aiming for the final week of July.

Questions can be send in beforehand via Editor@fnarena.com. More details to follow.

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Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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(This story was written on Monday, 14th July 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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